Painted Pony – Update/ NR

Painted Pony Petroleum (PPY-TSE)

Proving out the plan, on route to 20,500 boe/d in 2015 Investment highlights:

Painted Pony released Q1 results yesterday that were largely in line with expectations. More importantly the release contained a positive operational update that left us with three key takeaways:
1. The recent step change in Montney well rates
resulting from a switch in completion methods
is not only continuing, it appears to be getting
even better.
2. PPY appears well on pace to reach its 2015
production target of 20,500 boe/d in 2015
(annual average), in our view. This represents
an increase in production per share of ~55%
this year and another ~55% per share in 2015.
3. On our updated numbers PPY is no longer
expensive on cash flow multiples; in fact, it is
trading at a discount to its peers, despite the
growth profile, and extensive running room in
the Montney. Historically PPY has traded at
~15x EV/DACF, but on our increased
estimates it is now trading at just 6.5x 2015E
EV/DACF versus its gas weighted peers at
7.3x.
In our view, the above highlights are significant developments for Painted Pony. Despite the strength in PPY’s share price in recent months, we believe the stock is poised to move
significantly higher, as the company continues to execute on its aggressive growth plan. Painted Pony remains our  favorite pick in the natural gas space.

Painted Pony Petroleum Ltd.- Time To Mount Up

PPY : TSX : C$6.50
BUY 
Target: C$14.00

COMPANY DESCRIPTION:
Painted Pony Petroleum is a junior oil & gas explorer focused primarily on the Montney in northeast British
Columbia.

Energy — Oil and Gas, Exploration and Production
2014 CAPITAL PROGRAM ANNOUNCED
Investment recommendation
Painted Pony announced its 2014 capital program, with plansto spend $149M next year focused largely on its Montney development in NEBC. The budget was slightly less than we had previously forecast, and is likely reflective of caution on behalf of management to natural gas pricing, despite the recent run-up. 2014 production guidance was not given which is not a surprise as this is typically not provided by the Company with its annual budget.

PPY expects Q4/13 production to a 9,100 boe/d, which was lower than our forecasts and may put
the stock under some pressure in trading .
In our view, PPY’s 2014 capital budget announcement was largely a
non-event. We believe PPY will need to show meaningful production
growth through 2014 for its share price to be rewarded in the market.
We continue to believe however that PPY remains a prime candidate for
takeout, or for a JV-related capital injection, particularly as west coast
LNG activity heats up through 2014 as we expect it will, and that its
asset base is considerably undervalued in this context . PPY is rated BUY
with a C$14.00 target (down from C$15.00), which is NAV based.

Investment highlights
 Capital program. PPY announced a 2014 capital budget of $149M,
which was slightly less than the $165M we had been forecasting. As
a result, we have modestly lowered our production and cash flow
estimates for next year .
 Drilling plans in the Montney. As expected, the bulk of PPY’s budget
will be focused on the continual development of its Montney
property in NEBC. PPY plans to drill 18 (17 net) Montney
horizontals next year, with a particular focus on the Blair and
Townsend blocks . The Townsend area is where PPY is
seeing significantly higher liquids rates, and we will be watching for
higher liquids yields in the new year to boost well economics.

Painted Pony – Ride To Profits

PPY : TSX : C$6.63
BUY 
Target: C$15.00

Energy — Oil and Gas, Exploration and Production
MONTNEY MOLECULES AT A DISCOUNT

Investment recommendation
PPY released two new Montney test rates, one from each of the Lower and Upper Montney zones at Daiber. Both wells were producing north of 10mmcf/d during the final hour of testing. In our view, the Upper Montney well carries more weight, as it is the first Upper Montney well from the Daiber pad, but both wells further delineate PPY’s Montney position in the area and should boost production levels as we head into year end.

The new well results, along with updated rates from Townsend, continue to support our investment thesis for the stock. We
continue to rank PPY BUY and our C$15.00 target price represents a 1.0x multiple of our contingent net asset value (CNAV).
Investment thesis
PPY’s share price has been under pressure as of late, with the stock off ~13% since the start of October. While concerning, we note that operationally the company continues to perform well. Production is on the rise, well results continue to be strong, and the company retains a  very strong balance sheet (no debt as of the end of Q2/13). In our view the share price drop is related to:
1. Negative sentiment related to takeout potential. While we acknowledge there are several producers with Montney assets on the market, we believe that PPY’s Montney position is best positioned to capitalize on LNG related M&A activity. In
addition to its proximity to the coast, and being located on existing and proposed pipelines, PPY’s large contiguous asset
base with a recognized contingent resource of ~4.3 TCF (including 2P reserves) is trading at extremely discounted levels,
in our view. As we review in Exhibit 5, we believe PPY’s share price is building in less than $0.09/mcf of contingent

Paramount Resources Ltd.

Target (1985 film)

Target (1985 film) (Photo credit: Wikipedia)

POU : TSX : C$34.35
BUY 
Target: C$43.00

COMPANY DESCRIPTION:
Paramount has a 35-year history of successful operations in Western Canada. It takes a long-term approach to exploration and development activity of both oil and natural gas, and boasts over 50% insider ownership.Near-term growth is focused in the Deep Basin of Alberta

DOUBLING PRODUCTION AND
TESTING THE MONTNEY LIMITS
Investment recommendation
Paramount’s second quarter results fell short of expectations, reflecting
a higher than anticipated impact from curtailments at Valhalla and shut
in volumes at Karr. It bumped its capital program by $100 million
primarily given middle Montney success at Karr, and now maintains
~200 MMcf/d of net raw gas behind pipe available for its Musreau deep
cut facility. The principal near term operational catalyst in our view
remains the more than doubling of production volumes expected in early
2014, which should include validation of its material Montney gas and
NGL test rates via long term sustained production performance. POU is
forecast to grow into its valuation over time given its production growth,
and trades at a more reasonable 9.7x EV/DACF on annualized Q4/14
estimates. We have maintained our BUY rating and C$43.00 target
based on an unchanged 1.1x multiple to NAV.
Investment highlights
Q2 falls short, but only a bump in the road. Production averaged 20,790 boe/d versus CG/consensus of 22,860/22,922 boe/d. Operating CFPS was $0.21, in line with CG/consensus of $0.22/$0.24.
Advancing commerciality and returns from the Montney. POU continues to test a number of concepts and focuses on cost reductions in its Montney program at Musreau/Resthaven. It recently approved two, ten well pads to be drilled this year and into 2014, which will test multiple concepts, including: 1) orientation differences, 2) interwell spacing, and 3) testing offset wells in the D1 and D2 lobes of the Upper Montney.
Valuation
Paramount currently trades at a 0.9x multiple to CNAV, 11.2x EV/DACF,and $82,700/BOEPD based on our 2014 estimates, versus peer group averages of 0.8x CNAV, 7.1x EV/DACF, and $68,600/BOEPD.

Crew Energy Inc.

Montney, British Columbia Location

Montney, British Columbia Location (Photo credit: Wikipedia)

CR : TSX : C$6.45
BUY 
Target: C$10.00

COMPANY DESCRIPTION:
Crew Energy is an intermediate oil and gas company with a large portfolio of exploration and development opportunities in western Canada. The company has a two-pronged approach to corporate development, supplementing organic growth with strategic acquisitions.
All amounts in C$ unless otherwise noted.

IT’S ALL ABOUT THE MONTNEY


Investment recommendation
Crew released first quarter results which met our estimates but fell slightly shy of consensus on both production and cash flow. We believe the market will look beyond the quarter given the resumption in production levels which in our view clearly positions Crew to meet its average and annual guidance targets. Most importantly, it released an independent resource assessment on its 292 net sections of Montney rights in NEBC which in our view clearly validates management’s strategic shift towards resource capture in the play. We are maintaining our BUY rating and C$10.00 target price based on an unchanged 1.0x multiple to NAV and reflecting a 2013 EV/DACF multiple of 8.5 times.
Investment highlights
Q1 in line with CG, a bit light versus consensus. Q1 production averaged 25,961 boe/d, generally in line with our 26,267 boe/d estimate but modestly below consensus of 26,765 boe/d. Operating CFPS was $0.28, also in line with our $0.28 but below consensus of $0.30. More importantly, Crew has resumed production levels with an average of 28,000 boe/d in April and is on track to meet its annual average and exit
rate guidance targets.
All about the Montney, tremendous value upside potential in both oil and gas windows of the play. Sproule Associates estimated 33.7 Tcf of gas in place and 7 billion barrels of oil in place (over four times larger than ARC Resource’s recent TPIIP estimate). Precedent strategic gas transactions suggest its 2.3 Tcf of contingent resources could be valued between $0.15 to $0.35/Mcf, implying $2.80 to $6.60 per share to Crew.
Valuation
Crew currently trades at a 0.6x multiple to CNAV, 6.2x EV/DACF multiple, and $42,400/BOEPD based on our 2013 estimates, versus peer group averages of 0.7x CNAV, 7.8x EV/DACF, and $64,100/BOEPD.

ARC Resources Ltd.

Montney Cemetary

Montney Cemetary (Photo credit: tuchodi)

ARX : TSX : C$23.91
BUY 
Target: C$27.50

COMPANY DESCRIPTION:
ARC Resources is an intermediate sized dividend paying Canadian E&P company. ARC’s shares trade on the Toronto Stock Exchange under the symbol “ARX”. All amounts in C$ unless otherwise noted.

TOWER OF MONTNEY OIL
ARC released its fourth quarter and year-end results and its year-end reserve and resource update. It solidly beat Q4 consensus and our estimates given continued strong performance at Dawson and flush volumes at Pembina. Beyond the solid operational results, the highlight of its release for us was

1) 41.3 mmboes of positive technical reserve revisions owing to strong well performance mainly in the NEBC Montney at Sunrise and Dawson as we had anticipated and

2) 1.5 billion barrels of oil in place recognized on its Tower Montney lands.

We have updated our NAVPS estimate to $27.69 and commensurately increased our 12- month target to C$27.50 (from C$26.50) and maintain our BUY rating on the stock. Our target price is based on an unchanged 1.0x multiple to NAVPS and reflects a 2013E EV/DACF multiple of 12.0 times.
Investment highlights
Q4 production and cash flow beat. Q4 volumes of 95,725 boe/d beat our 91,563 boe/d and consensus of 92,659 boe/d. CFPS of $0.64 was
commensurately ahead of our $0.58 and consensus of $0.57.
41.3 mmboes of positive technical revisions anchored its 6% increase in total reserves growth YoY. Upward revised reserve bookings at Sunrise
(average up to ~8 Bcf per well) and Dawson (also up versus the average 6.5 Bcf per well last year) provided the bulk of the increase.
A towering oil opportunity. GLJ estimates 1.5 billion barrels of oil in place on its 43 sections with Upper Montney oil potential; reserves and
contingent resources at year end imply only a 1% recovery factor.
Valuation
ARC currently trades at a 0.9x multiple to CNAV, 10.8x EV/DACF, and $90,600/BOEPD based on our 2013 estimates, versus peer group averages of 0.8x CNAV, 9.8x EV/DACF, and $76,000/BOEPD.

Fracking On California Agenda

Occidental Petroleum logo

Occidental Petroleum logo (Photo credit: Wikipedia)

Even as it seeks to be the greenest U.S. state, California stands a good chance of emerging as the nation’s top oil producer in the next decade, helping America toward what once seemed an unlikely goal of energy independence.

The catalyst is the U.S. Bureau of Land Management’s sale last week of 15 leases covering about 18,000 acres of the Monterey Shale, a geologic formation whose sweet spots stretch from east of San Francisco more than 200 miles south to Monterey County. The auction was dominated by Los Angeles-based Occidental Petroleum Corp. (OXY) and smaller companies betting on a coming boom. Yesterday California regulators issued a draft of new rules to sharpen their oversight of the surge in fracking.

Enlarge image Green California to Vie With Texas as U.S. Oil Heartland

Green California to Vie With Texas as U.S. Oil Heartland

Green California to Vie With Texas as U.S. Oil Heartland

Occidental Petroleum Corp. via Bloomberg

The auction was dominated by Los Angeles-based Occidental Petroleum Corp. and smaller companies betting on a coming boom.

The auction was dominated by Los Angeles-based Occidental Petroleum Corp. and smaller companies betting on a coming boom. Source: Occidental Petroleum Corp. via Bloomberg

While shale developments have been most associated with natural gas, the ribbed-shaped Monterey could hold 15.4 billion barrels of oil, according to the federal Energy Information Administration. That amounts to 64 percent of all estimated U.S. shale oil reserves and double the combined reserves of North Dakota’s Bakken Shale and Texas’ Eagle Ford Shale, where energy companies are spending billions to ramp up output.

The leap in technology known as hydraulic fracturing, or fracking, has already found trillions of cubic feet of gas and billions of barrels of oil around the nation. The Monterey’s prospects coupled with a favorable oil price means “that renaissance is coming to California,” says Phil McPherson, a former energy analyst who is now chief financial officer of Citadel Exploration Inc. (COIL), a California-focused oil company.

Occidental, the largest onshore crude producer in the continental U.S., declined to comment about its interests in the Monterey shale.

Chevron’s Birthplace

The economic lure is obvious. The Golden State’s unemployment rate sits at 10.1 percent, third highest in the nation. It faces enormous underfunded public employee pension obligations and has racked up state budget shortfalls of $500 billion in the past four years.

It also has history on its side. California, where oil was first drilled in 1865, was once an oil and gas powerhouse and its largest oil company, Chevron Corp. (CVX), was carved out of the 1911 breakup of John D. Rockefeller’s Standard Oil. California is still the nation’s No. 3 ranked oil producer though production has declined steadily since peaking in 1985.

Yet California also has a strong environmental lobby that tends to view oil and gas development with suspicion amid the state’s recent efforts to reshape itself into a green energy leader.

The state has adopted its own low-carbon fuel standards and laid out a program to have renewables — wind, solar, hydroelectric and geothermal power — provide a third of the state’s energy needs by 2020. Last month it started the nation’s largest cap-and-trade program when it auctioned its first emission allowances for greenhouse gases.

Environmental Pushback

“There’s a strident environmental community that’s always very concerned about the possibility of ecological damage,” says Amy Myers Jaffe, executive director for energy and sustainability at the University of California-Davis. “It’s going to be a much more intense operating environment” for companies drilling in sensitive areas.

The pushback has already begun. In August, the Center for Biological Diversity notified the Bureau of Land Management by letter, as required by federal law, that it intends to sue under the federal Endangered Species act to stop further lease sales unless BLM agrees to consult with federal wildlife managers on potential fracking impacts.

The Tucson, Arizona-based environmental group argues that BLM isn’t taking into account how the evolution of newer fracking methods pose threats to species such as the California condor and the San Joaquin kit fox.

Long History

“A fracking boom could push some of California’s most beloved endangered species over the edge,” Brendan Cummings, the Center’s public lands director said in a statement at the time.

BLM, in a letter to the Center in October, said consultation isn’t necessary because fracking has been “occurring under existing regulations on public lands in California for decades” and impacts to endangered species “are lower in California than in other areas of the country.”

A form of fracking has been used in California for 60 years with no allegations of fouled water or environmental harm, said Tupper Hull, spokesman for the Western States Petroleum Association, an industry trade group.

“The potential economic benefits are enormous,” he said. “If you look at what has happened nationally, it is one of the most encouraging trends that we’ve seen of late.”

Fertile Region

The recently leased acreage also cuts through scenic southern Monterey County and across lands in San Benito and Fresno counties that hold vineyards and fertile vegetable farms. Monterey County alone grows $8 billion in produce annually.

Fracking, which mixes small amounts of chemical lubricants and biocides into a high-pressure water stream to break apart dense rock, has been linked to ground water contamination in some states. It is also a water-intensive process that can consume as many as 6 million gallons per completed well. Both issues worry landowners and environmentalists in a state where water resources are jealously coveted.

“We’re concerned that not enough regulation is in place to provide for the security of our water supply,” said Paula Getzelman, whose family owns Tre Gatti Vineyards in southern Monterey County. Beyond fears of fouling the water, landowners are concerned about how fracking might deplete water needed for irrigation. Getzelman said she wants to ensure the safety of the region’s water, “whatever that requires.”

Geologic Sensitivities

Another issue is the formation’s complex geology, which oil analysts say will challenge drillers because it isn’t as homogeneous as the Bakken or the Eagle Ford.

“The ground moves around a lot, unlike in South Texas or North Dakota,” says Jaffe. “So you have these breaks in the geology that make it harder to drill” while raising costs.

Also resonant in California is the issue of whether deep underground wells used by the industry to dispose of fracking waste water leads to earthquakes. Some scientists believe swarms of small tremors in Ohio, Texas and elsewhere are linked to waste-water fracking activities, including 12 earthquakes centered within a mile (1.6 kilometers) of an injection well in Youngstown, Ohio, according to a state report that prompted new regulations.

Tremor Troubles

A report this year from the National Research Council concluded that “fracturing has a low risk for inducing earthquakes that can be felt by people, but underground injection of wastewater produced by hydraulic fracturing and other energy technologies has a higher risk of causing such earthquakes.”

California is among the nation’s most seismically active states. San Francisco was struck by a destructive earthquake in 1989 and Los Angeles suffered one five years later.

To address some of these concerns, California regulators yesterday released a draft of new fracking regulations that require producers to disclose their plans for drilling, post information about chemicals used and regularly test wells for safety compliance. The approval process for the regulations will continue in 2013.

While the Monterey’s economic lift to California will ultimately depend on what oil and gas companies find and produce, a look at the experience of North Dakota’s development of the Bakken Shale is indicative. In 2005, North Dakota produced about 3,000 barrels of oil a day.

Since drilling in the Bakken began in 2007 that has climbed to more than 728,000 barrels a day, moving North Dakota ahead of California and Alaska as the No. 2 producer in the U.S. (Texas is first.) Unemployment at 3.1 percent is the lowest in the nation.

Revenue Potential

The Bakken boom has created 18,000 direct jobs and 46,000 indirect jobs in the oil and gas support industry, according to the North Dakota Energy Forum, an industry-sponsored tracking group. Petroleum production and extraction revenues exceed $750 million a year and have given the state treasury a $1 billion surplus.

California doesn’t have an oil and gas severance tax, though for years it has contemplated a 10 percent levy. With state output of about 535,000 barrels a day, and based on historical average oil prices, such a tax would raise about $1.4 billion in annual revenues according to the Center for Labor Research and Education at the University of California-Berkeley. A huge find in the Monterey could boost that number significantly.

Jobs Engine

As has been demonstrated by North Dakota, where the average oil worker earns about $90,000 a year, the jobs engine is undeniable.

“The number one way to create jobs in the United States is in the oil industry,” says McPherson. “That applies to California the same as anywhere else.”

California has another imperative. No out-of-state pipelines serve the state, making it critical that it produce enough oil to feed the 14 refineries that blend the state’s mandated lower-emission gasoline.

As a result, California is uniquely vulnerable to high gasoline prices, and more security of supply may provide Californians with some relief, according to Severin Borenstein, Director of the Energy Institute at the University of California-Berkeley’s Haas School of Business. State prices reached an all-time peak of $4.67 a gallon on October 9, according to data from AAA, after a refinery fire and other outages pushed prices up.

Slowing Production

In years past, oil and gas companies operating in California have complained of regulatory foot-dragging that they said was aimed at slowing fossil-fuel production.

In perhaps a sign of the economic times, Governor Jerry Brown, a Democrat, dismissed the state’s top two oil regulators last year after permits for new drilling and wastewater wells had slowed to a trickle. Producers including Occidental say approvals have quickened, allowing them to continue their drilling programs after a slowdown. Also buoying the Monterey’s prospects: a bill in the California legislature that would have put a moratorium on fracking failed to gain traction this year.

“You certainly won’t see enthusiasm in Napa and Sonoma, some of the bluer parts of the state,” says Berkeley’s Borenstein. “But many areas have been more depressed economically, so I think many people would welcome it.”

Painted Pony Petroleum Update Q3

 

Nov. 23

Painted Pony Petroleum* (PPY : TSX-V : $10.32)
Painted Pony Petroleum reported Q3/12 results along with some recent flow tests from its Montney wells in the
greater Blair area.

For the quarter the company averaged 6,327 boe/d and increase of 56% from the year previously. Fund flows from operations totalled $8.5 million or $0.12 per diluted share. The company exited the quarter with no debt, a positive working capital position of $20.3 million and an undrawn demand credit facility of $100 million.

PPY has recently commenced completion and production testing operations on three 100% working interest horizontal Montney wells in the greater Blair area. An upper Montney well at c-B11-F/94-B-16 is currently flowing in-line to the non-operated third party Blair gas processing
facility. Over the past seven days, this well has flowed at an average wellhead rate of 10.4 MMcf/d and at an average flowing casing pressure of 1,857 psi. The company also commented that the most recent 24-hour rate averaged 12.2 MMcf/d at an average flowing casing pressure of 1,520 psi. PPY is encouraged by the early results from the well, as they are comparable to the initial rates reported from the Blair 41-F upper Montney well located approximately 2.7 kilometres north of c-B11-F and the Blair 8-F upper Montney well situated 4.5 kilometres west.

Together, the company believes these three wells delineate a region of high gas deliverability from the upper Montney zone along the southeastern portion of its Blair block.

New Progress Energy Bid ? Exxon and Shell Compete For Montney Shale Gas

English: To create this SVG-format logo, I too...

English: To create this SVG-format logo, I took the EPS file at Brandsoftheworld.com, ran it through pstoedit, and then did the following modifications using Inkscape and Notepad: fixed priority (center of “O” in “Exxon”), centered on a correctly sized grid, and made markup simpler and more readable. Used in Exxon. Source: http://static.seekingalpha.com/wp-content/seekingalpha/images/thumb-Exxon_01.jpg Category:Oil company logos (Photo credit: Wikipedia)

 

August 8

Market expectations are fuelled by Progress’s bid circular. It suggests Progress was put in play by a “multinational oil company” with which it had a series of discussions. The multinational was ultimately outbid by Petronas, which already had a joint venture with Progress on some of its Montney lands in northeastern B.C.

Analysts see Exxon Mobil Corp. and/or its Canadian affiliate, Imperial Oil Ltd., as the likely unsuccessful suitor because Progress’s Montney position would bolster its resource in the Horn River, also in B.C., and because Progress is working on an attractive plan to build an LNG facility on Lelu Island near Prince Rupert.

 

“I had Exxon No. 1 on my list,” said Edward Kallio, director of gas consulting at Ziff Energy Group in Calgary. Exxon has signalled it is interested in LNG in Canada and buying Progress would accelerate its plans by two years, Mr. Kallio said.

Shell’s regulatory filing to the National Energy Board is also fuelling speculation. The oil major has partnered with Japan’s Mitsubishi Corp., Korea Gas Corp. and PetroChina to build the LNG Canada terminal, also based near Kitimat.

In the filing, Shell says it plans to build a four-train facility to ship more than three billion cubic feet per day gas, with startup of the first train in 2019 and subsequent trains kicking in soon after. That’s bigger than first thought. The gas would be sold worldwide, including in Asia. Supplies would come from existing resources, open-market purchases and “production from future acquisitions.”

Shell, which announced its regulatory filing on the same day Progress announced the higher bid, has also been talked about as a Progress suitor. Other names that have surfaced include: Norway’s Statoil ASA; British Gas, which has talked about building an LNG plant in Prince Rupert; Chevron Corp. and other Asian companies looking to secure supplies.

The consolidation means some relief for B.C. gas producers, which are struggling with low prices, and is encouraging for the province’s LNG export hopes. The less encouraging news is that the potential buyers are all foreign companies, suggesting control of the nascent business is already slipping abroad.

BP Writes Down Shale Gas Acreage By $2.8 B : Storage Figures Into Values

English: Point of Ayr Gas Terminal This termin...

English: Point of Ayr Gas Terminal This terminal, owned by BHP Billiton Petroleum, processes gas extracted by the Liverpool Bay platforms via a 33 km subsea pipeline. The gas is then supplied to the Powergen combined cycle gas turbine (CCGT) power station, which went into operation at Connah’s Quay in July 1996. (Photo credit: Wikipedia)

August 5

Marius Kloppers is right to take his lumps.

The BHP Billiton chief executive has waived his 2012 bonus after the mining giant took a $2.8 billion writedown on some of its U.S. shale gas acreage. The hit looks small when compared with BHP’s $170 billion market cap, and wasn’t unexpected. But BHP paid almost $5 billion for the asset just 18 months ago. That’s embarrassing for a company that trades on its reputation as a canny operator.

In February last year, BHP’s purchase of 487,000 acres of Fayetteville shale reserves from Chesapeake Energy was seen as a breakthrough after a string of failed mega-deals. BHP is one of the few big miners to own a substantial petroleum business. Gaining a foothold in the U.S. shale revolution seemed to make good strategic sense.

The $4.75 billion price tag looked stretched from the outset. When the deal was announced it was already clear that booming shale production was creating a gas glut that would threaten the profitability of wells that mainly produce gas. At the time, U.S. gas prices stood at about $4.50 per million British Thermal Units, down by a quarter from 2010 highs. They plunged to below $2 per mbtu earlier this year. Even at today’s price of about $3 per mbtu, drillers are still losing money.

BHP’s decision to write down the Chesapeake assets suggests it doesn’t see the glut easing anytime soon. Like other gas drillers, it is shifting its focus to the more oil-rich shale deposits it acquired when it bought U.S. driller Petrohawk for $12 billion in July last year. That bigger, more ambitious purchase is not affected by the writedowns.

BHP is hardly the only company to fess up to overpaying for shale. Shell, BG and Encana Energy all took impairments in the second quarter. The 1.9 percent rise in BHP’s London-listed shares following the announcement suggests investors expected Kloppers to bite the bullet.

Still, the timing isn’t ideal. Rising costs and cooling demand mean BHP and other big miners are under pressure to return more cash or else explain how multi-billion dollar growth projects can still make attractive returns. In January, Deutsche Bank estimated that BHP would have to spend about $50 billion to achieve a near-fourfold increase in shale output by the end of the decade. The writedowns will make it harder for Kloppers to make his case.

Storage: The theoretical working storage is about 4,400 Bcf (though demonstrated capacity is close to 4,100 Bcf), and we are sitting on 3,217 Bcf as of July 27. Back in January, pundits were making prediction that an overfill scenario would take a mini-miracle to avoid. The latest EIA forecast points to a 4,000 Bcf storage peak scenario. Depending on weather going forward, it is very likely that we will come close to the 4,100 number that produces a scare much like 2009, when price dropped 42% in a month. One difference between stocks/bonds and hard commodities such as natural gas is that the prices are still largely representative of exchanges of physical goods. What this means is that if we approach the storage peak season in late October/early November with a level close to the physical storage limit, there is a danger that producers can scramble to offload gas causing a short-term panic.

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