Shilling : “Oil is headed for $10 to $20 a barrel.”

If crude’s slump back to a six-year low looks bad, it’s even worse when you reflect that summer is supposed to be peak season for oil.

U.S. crude futures have lost 30 percent since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986.

It even surpasses the decline of 2011, when prices fell as much as 21 percent over the summer as the U.S. and other large oil-importing nations released 60 million barrels of oil from emergency stockpiles to make up for the disruption of Libyan exports during the uprising against Muammar Qaddafi.

WTI, the U.S. benchmark, fell to a six-year low of $41.35 a barrel Friday. It may slide further, according to Citigroup Inc.

“Summer is when refineries are all running hard, so actual demand for crude is as good as it gets,” Seth Kleinman, London-based head of energy strategy at Citigroup Inc., said by e-mail.

OPEC’s biggest members are pumping near record levels to defend their market share and U.S. production is withstanding the collapse in prices and drilling. The oil market is still clearly oversupplied and “it will get more so as refiners go into maintenance,” Kleinman said.

Oil demand usually climbs in the summer as U.S. vacation driving boosts purchases of gasoline and Middle Eastern nations turn up air-conditioning.

Crude has sunk this year even U.S. gasoline demand expanded, stimulated by a growing economy and low prices. Total gasoline supplied to the U.S. market rose to an eight-year high of 9.7 million barrels a day last month, according to U.S. Department of Energy data.

Crude could fall to $10 a barrel as the Organization of Petroleum Exporting Countries engages in a “price war” with rival producers, testing who will cut output first, Gary Shilling, president of A. Gary Shilling Co., said in an interview on Bloomberg Television on Friday.

“OPEC is basically saying we’re not going to cut production, we’re going to see who can stand lower prices longest,” Shilling said. “Oil is headed for $10 to $20 a barrel.”

Protect your portfolio offshore

Iran Targets 45 Oil Projects To Boost Output : Bloomberg

Crude Reserves

Iran has selected 45 oil and gas projects to show international companies at a conference in London in December when new oil contract models will be discussed ahead of exploration auctions to double the country’s crude output.

The projects, including oil and gas exploration, will be discussed along with details of a new oil contract model at the Dec. 14-16 conference, Mehdi Hosseini, chairman of Iran’s oil contracts restructuring committee, said in an interview in Tehran. Iran hopes to boost crude production to 5.7 million barrels a day, he said.

The Persian Gulf nation’s output was 2.85 million barrels a day in July, according to estimates compiled by Bloomberg. Oil producers such as BP Plc and Royal Dutch Shell Plc have expressed interest in developing Iran’s reserves, the world’s fourth-biggest, when sanctions are removed following last month’s nuclear agreement with world powers.

“We will define projects in the oil and gas sector as much as feasible and necessary since we believe this sector will bring wealth and economic development,” Hosseini said. “As far as this conference is concerned, we have defined around 45 projects which include exploratory blocs at varying development costs.”

Iran may give companies two to three months to decide whether to bid on the projects, he said. “The exact length will be decided by the time of the conference.” Shortly after that, Iran will call for bids, he said.

“We consulted with almost all medium and major oil companies over our contractual contents and projects. And the feedbacks have been positive,” he said.

New Contract

Iran will adopt “risk service contract” models which will offer investors payback in the form of cash or oil allocation, he said. They won’t be allowed to claim ownership of the country’s energy reserves, he said.

“They would resemble production sharing but with different characteristics,” he said. “The international oil company, or the investing company, would be accepting certain risks in view of which it would be entitled to a portion of the oil thus produced. Or the reward of that risk is a share/portion of the oil.”

Iran’s production costs are $8 to $10 a barrel so, “our projects will be attractive to investors,” Hosseini said. Falling oil prices are in Iran’s interest at this point because high prices encouraged uneconomical fields, he said.

“The drop in prices from $100 a barrel to around $50 a barrel now is only in the short run,” Hosseini said. “Looking at the international oil industry over the long-run, the demand will rise and so will the prices.”

Production Boost

Pending the end of sanctions, Iran wants to boost oil production to about 15 percent of the Organization of Petroleum Exporting Countries’ output, or more than 4 million barrels a day, he said. “As OPEC’s share increases so does our share and we will need to build capacity. As a preliminary goal in the short run we plan to produce 5 million barrels a day and then go from that to 5.7 million barrels a day.”

Iran’s oil reserves are estimated at 157.8 billion barrels by BP Plc. That’s enough to supply China for more than 40 years. Iran can boost oil production by 500,000 barrels a day within one week after international sanctions are lifted, Oil Minister Bijan Namdar Zanganeh said in an interview with state TV earlier this month. Sanctions against Iran’s oil industry should be lifted by late November, he said.

Move Your Portfolio Offshore

Natural Gas Drillers Can’t Catch a Break : Bloomberg News

Natural gas drillers who flocked to liquids-rich basins in search of better profits just can’t seem to catch a break.

Seven years ago, as shale output surged and gas futures tumbled more than 60 percent, producers abandoned reservoirs that only yielded gas and moved rigs to wells that also contained ethane, propane and other so-called natural gas liquids, or NGLs. These NGL prices were tied to oil futures, which climbed in 2009 as the economy recovered. It was a strategy that worked well — for a while.

Drillers fled natural gas for oil and liquids as commodities collapsed.
Drillers fled natural gas for oil and liquids as commodities collapsed.

Those days are over. Oil has plunged 56 percent from a year ago, and propane at the Mont Belvieu hub in Texas has tumbled 64 percent. The spread between NGL prices and natural gas shrank 9.2 percent last week to $7.02 a barrel, the lowest in at least two years, squeezing producers’ profits.

The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers' profits.
The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers’ profits.

The culprit is a repeat offender: shale production. This time, the boom in oil output from reservoirs like the Bakken in North Dakota has created a glut of NGLs, and the market is poised to remain well supplied. To survive, gas producers will have to focus on the lowest-cost wells.

Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.
Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.

“Drillers are going to have to retreat to where the sweet spots are,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “At these price levels, the rig count isn’t going to move higher.”


Protect your portfolio

Forbes Predicts Chesapeake Running Out Of Options

The Dim Outlook For Chesapeake Energy

The highly leveraged shale gas champion is burning cash, selling assets and running out of options. 

Chesapeake Energy CHK +1.8% is in pretty bad shape. Shares are down 67% in the past 12 months, to $8.70 today. The last time Chesapeake traded at such a low range was in 2003. Its equity market cap is less than $6 billion. Think this looks like a bargain? Only if you’re really bullish on oil and gas prices. On the contrary, if oil and gas stays low for a couple more years it is hard to see how Chesapeake’s equity is worth anything at all.

Chesapeake’s earnings report last week provided no comfort. The company started 2015 with $4.1 billion in cash. It ended the first half with $2 billion. That’s half its cash evaporated in six months. During that time Chesapeake did not buy or sell any assets. It reduced its capex levels by about 40% over last year. So that cash burn rate pretty well represents the sorry state of its underlying business.

This highly leveraged company is becoming even more leveraged. In the first half, total debt net of unrestricted cash increased from $7.4 billion to $9.5 billion. As profitability has collapsed, net debt has risen to more than 6 times annualized Ebitda. In normal conditions 4x is considered rich. This is worrisome for a company that will need to refinance $5 billion in debt over the next five years.

Part of the problem is a huge glut of gas and liquids in the Utica and Marcellus, where there’s not enough pipeline capacity to evacuate it all out to market. Chesapeake has curtailed production in both regions. But that won’t solve the bigger problem. According to analyst Kevin Kaiser at Hedgeye, Chesapeake is caught in a “midstream stranglehold.” It is contractually obligated to pay fees to pipeline giant Williams Companies for its dedicated capacity. Most of Williams’ contracts with Chesapeake are on a “cost of service” mechanism, which guarantees Williams a return on its investment in building out pipelines. Chesapeake has to pay a certain amount whether it uses all the pipeline capacity or not. The less it uses, the higher Chesapeake ends up paying per unit of volume.

It’s a set-up that would work in a world of higher commodity prices and ever increasing volumes. According to Chesapeake’s February 2012 investor presentation, when the company entered into these pipeline contracts it was anticipating that in 2015 it would be enjoying $6 per mcf natural gas and $100 oil and annual ebitda of more than $10 billion. Instead, this year’s ebitda will be more like $2 billion.

According to Kaiser’s analysis, Chesapeake’s midstream pipeline expenses, at about $1.70 per mcf (or the oil equivalent) are the highest in the entire industry. In the Midcon region Chesapeake was paying 64 cents per mcf to move gas in 2012. But because gas prices have gone so low, it stopped drilling there. Now it’s paying an estimated $1.20 per mcf to move gas there. All told, Chesapeake’s payments to Williams amount to about $1.9 billion a year, according to its quarterly report. “It will take multiple years to play out, but we believe that CHK equity is ultimately a zero,” wrote Kaiser in his June report.

Chesapeake would love to renegotiate contracts with Williams, but the pipeline giant has very little incentive to play ball. Williams paid more than $8 billion to acquire its control of Access, the pipeline division that Chesapeake spun off in exchange for more than $4 billion in emergency cash back in 2012. Many of Chesapeake’s contracts with Williams carry terms of more than a decade.

Alan Armstrong, CEO of Williams, said on his quarterly conference call that he’s open to “win-win” solutions with Chesapeake. “In terms of restructuring, certainly, they take the lead on that and we try to provide support and find win-win ways where they can add volumes that help offset some of those obligations.”
Chesapeake could gain some traction by selling off assets where it’s stuck in tough contracts with Williams, or making joint ventures with other operators that can add their volumes to fill out Williams’ pipes.

Chesapeake has already tightened its belt a lot. CEO Doug Lawler has cut costs, slashed capex and improved drilling efficiency. Last month he announced that Chesapeake would suspend its dividend, saving $240 million a year.

Lawler will have to keep trying to sell off whatever acreage is attractive to buyers. In October 2014 Chesapeake sold acreage in the Marcellus and Utica to Southwestern Energy SWN +5.92% for $5.4 billion. At the beginning of the third quarter Chesapeake sold assets in Oklahoma to private equity backed FourPoint Energy for $1 billion. Lawler will need to orchestrate a lot more asset sales to make ends meet. The company says it has ample liquidity thanks to an untapped $4 billion revolving line of credit. That line may well shrink when banks do their fall borrowing base redeterminations.

Why not try to sell the whole thing? Please. Chesapeake’s big equity holders, Southeastern Asset Management and Carl Icahn (each with about 10% stakes), would like to convince the market that’s possible, but who would want to buy a business with such poor underlying performance and lots of overhead when they can just cherrypick off the decent pieces? If you’re a deep pocketed oil and gas major you’d be better off acquiring any number of healthier operators. Cowen & Company analyst Charles Robertson, Jr. notes that Cimarex Energy XEC +2.5%, with its low leverage and world-class position in the Permian Basin is “one of the easiest acquisition targets” for the majors.

Further complicating Chesapeake’s outlook is the ongoing legal trouble related to alleged underpayment of royalties. In the first half Chesapeake agreed to pay a $119 million settlement in a class action brought by Oklahoma landowners who said the company bilked them on royalty payments. Chesapeake says that litigation over similar allegations continues in Texas, Louisiana, Ohio, Pennsylvania and Arkansas and that the Dept. of Justice has subpoenaed information relating to Chesapeake’s royalty payments. The company says “losses are reasonably possible” but that “we are currently unable to estimate an amount or range of loss.” What potential acquirer would want to take on that open-ended liability?

This is a company that hasn’t been able to live within its cashflow at any time in the past decade, even when oil prices were above $100. It has generated more than $16 billion in cash from asset sales since 2012, but is more highly leveraged than ever. Unless oil and gas prices recover significantly in the months ahead Chesapeake will continue to sell assets and shrink smaller and smaller until it eventually runs out of cash and runs out of options.

Protect Your Portfolio by going offshore :

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Trading Alerts : Sell Side Success August 5 a.m.

Happy And Satisfied Guy Holding Up A Bunch Of Money 1


Chesapeake ( CHK) $7.27 down .68

Linn Energy ( LINN)  $3.13 down .31

On Deck ( ONDK)  $9.75 down .72

Lumber Liquidators ( LL) $1375 down $4.61


Portfolio Management : Engagement Process for Jack A. Bass Managed Accounts

The Engagement Agreement authorizes us to officially act on your  behalf and also provides for protection of confidentiality in regards to the dissemination and distribution of your sensitive financial information.Generally you will name Jack A. Bass as a person allowed to trade your portfolio – BUT without any authority to remove funds from your account.You retain full control.

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Barron’s Energy Review : A Whole Lot of Shorting Going On

Chesapeake Energy: A Whole Lot of Shorting Going On

Sterne Agee CRT’s Tim Rezvan is feeling bullish about Chesapeake Energy (CHK), which he upgraded on June 29. One of the reasons: The latest short interest data. He explains:

Daniel Acker/Bloomberg News

Largest Increases in Short Interest Among Coverage Names:PetroQuest Energy (PQ), Cheasapeake, Noble Energy(NBL). The largest increase in short interest came from PetroQuest Energy, which had a 16.1% increase to 7.2 million shares (11.0% of shares outstanding, 5.0 days to cover). Other large increases were seen in Chesapeake Energy, which had a 14.1% increase to 185 million shares (27.8% of shares outstanding, 8.1 days to cover), and Noble Energy, which had a 10.3% increase to 17.9 million shares (4.6% of shares outstanding, 4.1 days to cover).

June 30 Data Likely Represents Peak of Bear Case Fervor for Chesapeake Shares. Our June 29 upgrade of Chesapeake shares to Buy from Underperform reflected what we believed was oversold conditions, and month-end short interest data validates this thesis. Short interest in Chesapeake shares increased 14% to 185 million shares from mid-June to the end of June (+163% from the end of February). We expect profit-taking from shorts to provide further support to Chesapeake shares into 2Q earnings

Here’s a chart of the short interest in Chesapeake, which as the analysts note is just massive:

Shares of Chesapeake Energy have tumbled 3.4% to $10.98 at 9:57 a.m. today, while Noble Energy has fallen 0.3% to $38.94, and Petroquest Energy has gained 1.7% to $1.75.

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