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January 2019 - Prediction Time

  

Prediction Time for 2019

 

At the beginning of the year I like to write an opinion regarding where we think the industry will be domestically for a calendar year and where the advantage may be from an investment standpoint. We've been MOSTLY accurate (taking out 2014) and in the past, have felt confident we can make a decent prediction with some caveats.

 

To recap 2018, our prediction in the beginning of the year was very close to actual. What we didn’t expect was the significant downturn in Q4 in the markets, which in turn with a bit of oversupply, to drive the markets down everywhere. We did, however, predict the low on West Texas Intermediate (WTI) correctly. Also, we didn’t expect natural gas go to $4.50...even though it was very short lived and completely predictable it would come back down to earth.


So let’s talk about what we saw in 2018 on the world market:


  • The US has become the strongest player on the world oil market.  The US controls both imports and exports in their hemisphere and what they will and can take from the Middle East.
  • Large US producers created several periods of oversupply due to technology enhancement on new and re-entered wells...the same technology that helped the US become #1.
  • China's economy did not make any significant gains due to internal and external factors, therefore not attributing to any significant demand for hydrocarbons on the world market. 
  • The spot price of Midland WTI dropped significantly compared to WTI from other areas, some differences I heard as much as $17 less! 

 

This year, we anticipate the following:


  •  Although optimistic budgets were set by most large exploration companies in Q3 2018, we expect rig count to be declining throughout Q1 2019 and pick up in late Q2. 
  • OPEC+ members will keep playing “ball”. They really have no choice.
  • Neither China nor India will develop enough new demand to outpace supply based on their current overall economic conditions. This was the case last year and we even expect some contraction.
  • Midland WTI pricing will stay suppressed until Q3 when pipelines are in place to move product.
  • LNG export market will increase, but not at a pace to significantly affect price.
     

Of course, there are possible factors that could fluctuate prices rapidly:


  •  Wall St. types are predicting growth but with volatility especially Q1. This will create a little chaos with WTI and natural gas pricing. Hedge funders may get killed trading (we don’t play that game here).
  •  Possible Middle East tensions disrupting oil flow (like almost any year)
  • Iran Sanctions (and how they are applied)
  • Trump Factor (again, the wild card)

 

So, what does this mean for the direct oil and gas investor today? It's a year of volatility up close but with slight uphill trend, which means that both buy and sell side will stay in balance as it did much in 2018.  We are anticipating no fire sales of leases, production, or equipment nor any soaring prices of operating expenses or leases either. 


It's the long game, which I feel will pay significant dividends for the direct investor in the next 2-5 years. 

 

We’re predicting no lower than $42 WTI/ $2.10 natural gas and no higher than $65 WTI/$3.10 natural gas for 2019 (for extended periods).

 

Happy New Year!

 

John Mink, CEO

November 2018

And the Winner is: USA! 


The US has become the strongest player on the world oil market. 


The biggest reasons for this declaration are due to improvements in completion technology (fracking shale) helping to release more reserves, lifting of the crude oil export ban in 2015, the SURPRISING fiscal responsibility of large producers after the 2014 crash, and the fall or distaste of oil-producing countries’ product due to their corruption. 


The US has been the largest producer of oil for the past 2 months and its companies deliver on product promised. This has helped maintain a stable hydrocarbon global economic environment for those who “play nice”.


So, what’s does this mean to upstream investors like yourself?


It means that we can anticipate oil prices to stay relatively stable as well as expenses for drilling, testing, and completion for the foreseeable future. In this market, you will see very few “fire sales” and price gouging will be kept at minimum unless you’re selling over 1000 bopd leases. Some predictable circumstances for seasonal oil price fluctuation or increased field costs are delayed pipeline development in West Texas, weather (Texas had it’s rainiest October ever, halting almost all field activities in areas), and labor shortages. 


Being stable is being happy...and allows everyone to sleep peacefully. If you want this feeling from your investments, check out our opportunities page.


John Mink

May 2018

  

Alert...Crude is Staying Up!


Over the past month, we’ve been watching the West Texas Intermediate Crude Oil (WTI) prices, just like you, go up 10%.  It’s up +20% for the year. we’ve been trying to determine if this is a simple rise due to the season, physical oil stock manipulation, geopolitical events, or if there’s more to this. We predicted in January that the low would be $50 and the high would be $70 for WTI for the year.

  

We checked my “go to” numbers that tell me right away if there will be a “correction” coming; weekly physical WTI stock and rig count. For the past 2 years, a lowering of WTI stock (usually in Cushing, OK) correlates to the prices goes up, in which follows an increase in rig count. This, in turn, drives the price down. It’s been a predictable cycle. But right now, there are no big increases in rig count and WTI stocks are relatively stable (although the Permian is in oversupply and taking an average of a $13 hit to WTI due to transportation).


We also looked at futures and general trading activity compared for the past year. Both categories are up from last year and futures price is not going crazy as one would expect from previous years. Looks like there are actually grown-ups in the room!


Finally, we’ve been reviewing what we see on the ground. Oilfield services availability is getting tight (no price increase yet...but coming). Lease pricing and activity is up.  Price for ideal production purchases (30/60 produced vs remaining, shallow decline curve) is up at least $10k per barrel of oil a day (BOPD) from January. And not least, investor interest in working interest programs is up. 


Now the question is “why” and the answer is simple...demand is up! 


Both worldwide and domestic demand from consumer and industrial markets has been steadily rising for 6 months. Not only is the US economy on the upswing, so are the other open economies throughout the world. Contributing factors such as improved economic relations with China and Saudi Arabia key drivers, but not as much as good ol’ American Optimism.


On a lesser note, the US and other free market oil producing countries are supplying the world with reliable product, which keeps rogue or government-controlled oil countries (I call them Klep-tocracies) in the dark. 


We predict that going forward for the remaining year, we are estimating the bottom price from $58 and the top price to $82 for WTI (would not be surprised if it goes to $90 in December). 


Saying that...there should be a 4-week bubble for oilfield service prices to catch up to the price increase for the past 3 months. All our programs work at $50 oil.  


So in short, invest now while there still an in-balance for better returns.


John Mink, CEO

December 2017


Prediction Time for 2018


At the beginning of the year I like to write an opinion regarding where we think the industry will be domestically for a calendar year and where the advantage may be from an investment standpoint.We've been MOSTLY accurate (taking out 2014) and in the past, have felt confident we can make a decent prediction with some caveats.


To recap 2017, there were some significant moves and non-moves made in the oil and gas market. It mostly has to do with the realization on a world-wide basis that oil is not scarce and exploration and production costs do matter to the bottom line.


   · OPEC and non-OPEC allies played very well with each other this year.  We thought, based on history, one of the allies would go over-quota and start a price war again.  Really didn't happen.


   · Large US producers did not get overzealous and over-produce with small spikes in market price.


   · US is now exporting more product than ever, due to the US's ability to deliver product on an honest basis and build-up of infrastructure (even though it may be more $ per barrel than dealing with other factions)


   · China's economy did not make any significant gains, therefore not attributing to any significant demand for hydrocarbons on the world market.


This year, we anticipate the following:


   · OPEC and non-OPEC members have agreed to continue production cuts through 2018.  Since they kept to the game plan in 2017, we give them the benefit of the doubt for 2018


   · Although US corporate tax cuts are significant, industrial growth will follow a little slower than most expect due to the strength of the dollar.


   · Neither China nor India will develop enough new demand to outpace supply based on their current overall economic conditions.


   · Large US producers will stay the course and mostly develop what's in reserves (PDP) and stay onshore.  ANWR will not affect price for years to come (as an Alaskan I'm thrilled it's now open to possible exploration and production).


   · "Cheaper" oil on the market from questionable sources will keep US oil export demand steady


 

Of course, there are possible factors that could increase prices rapidly:


   · How many US dollars will be "re-patriated" back into the economy from overseas accounts and IF it correlates to rapid industrial growth.


   · Foreign investments have dramatically increased in 2017 into US oil and gas assets (and other industries) and may increase in 2018. Knik Energy has seen an increase of 55% more in funding from 2016 from clients living abroad with accounts in the US. This may start bringing up domestic prices on programs, including the ones we offer.


   · Possible Middle East tensions disrupting oil flow (like almost any year)


So, what does this mean for the direct oil and gas investor today? It's a year of stability with slight uphill trend, which means that both buy and sell side will stay in balance as it did much in 2017. 

It's the long game, which I feel will pay significant dividends for the direct investor in the next 2-5 years.


I'm predicting no lower than $50 WTI/ $2.80 natural gas and no higher than $70 WTI/$3.30 natural gas for 2018.


Happy New Year!


John Mink, CEO

November 2017

Alert...Crude is Going Up!


Over the past month, we've seen oil prices rise 15%.  This has to do with many factors.  The biggest one so far this month is the escalation of regional posturing in the Middle East, having both political and real consequences on the flow of oil.  Another factor is the supply/demand is fairly balanced in the US with rig count slightly under.  I won't be surprised if we see $65 oil in a month and holding for the first quarter.


Coincide this with end of year potential tax savings, it could be a good time to get some working interest.  Check out our opportunities page.




October 2017

   

For those looking to directly participate in direct oil and gas ventures for the first time, I suggest reading this article to start. We will be creating a presentation that will be topical but comprehensive (Investing 101) available within the month.

More...

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January 2016


EDITORIAL: "Q and A" TIME  I've had a lot of questions come in (and had some from myself) I wanted to address for the past 10 days. I was trying to figure out a format to best communicate where the industry as a whole has been, where it is, and where they may be going in regards to direct oil and gas investments. So I've decided to do a lot of research and have a one-on-one Q&A with myself (sort of) on a very topical basis.  
(Keep in mind that this my conceived opinion based on numerous sources of information; including, but not limited to: articles, expert opinion, interviews, and personal experience.)  


Q: Why are we at where we are today globally?

Thanks to enhanced exploration and production technology and a weakened global economy, worldwide oil and gas markets, which had been mostly demand-side heavy with heavy speculation activity, became more in line with traditional supply-demand curve economics in early 2015.  
U.S. reaches a point in where they are essentially oil independent thanks to oil shale production.  There is less demand for oil from OPEC. Worldwide, storage is at relative over-capacity.  
Saudis declare pricing war on US oil companies by pushing as much oil on the market in hopes of choking out shale-based oil companies (operating costs much cheaper in SA than U.S.) at  their own perceived short-term detriment in order to drown U.S. oil companies, gain future market share, and keep their country solvent. It hasn't worked. Smart oil companies have learned how to produce more efficiently and reduce operating costs on shale wells in 2015, cut E&P budgets, shedding payroll, and have saved their  dollars for lean times like this. China's economic growth have been exposed as weak, driving down their currency and demand for product.  
Oil is now at $30 a barrel for WTI and Brent.  


Q: Where do you see the industry going as a whole in the short term?

$20 oil is not unrealistic for a short-time period in the first quarter as the dollar remains strong and will get stronger thanks to China. Also, Iran will put another 500MBOPD on the market soon.  
Saudis will continue being stubborn starting in 2016.  They are now indicating an IPO to keep their current strategy on pace.  They've already lost billions (if not a trillion).  OPEC's next meeting is in June.  I don't think their strategy is going to change between now and then.  
Non- disciplined shale producers whose economic model is to turn and burn Bakken and Eagleford shale wells will go bankrupt in first half of year.  Most other companies will be able to ride   the storm out for another 6 months, but will be cutting back E&P budgets and personnel even more. Since we're at max storage and speculators are on the sidelines, expect the prices not to jump significantly even if there's substantial Middle East conflict (we've seen plenty between Syria, Libya, Iran, and SA with no lasting effect in 2015)

Q: Are we looking at the 80s all over again

Yes and no. Yes, we are seeing some of the same circumstances (high supply, limited demand) but now we see U.S. oil companies have the ability to ride it out better due to their long-term funding reserves.

Q: When will prices go up?

Who really knows? All I know is that I'm not declaring the bottom today and I don't expect to see $100 oil anytime soon. I'm starting to go grey and lose hair trying to predict something that is  out of my control.

Q: So, where do things stand today for direct investors?

If you like to purchase producing assets, the supply is tight especially with the smaller producers (Under $20MM). There are no fire sales out there but you can make purchases between $25K-$30K per BOPD pretty quickly at 100%WI. If you want to pay less, you'll have to hold out and take your chances. I don't recommend doing so.  It's pretty much the same scenario it's been since 2010, just point of entry is lower.  
If you like to invest in new drills and reworks, it's a good time.  The service costs (drilling, completion, re-entries) are effectively bottomed out (most drillers will work at cost just to keep their employees on payroll) and really cannot go any further down.  The service companies still in business will have the best experience, personnel, and are available. In turn, economic break-even will be longer than what they were for the past 4 years. I'm setting pro-forma oil pricing at $25 oil until I see circumstances change and urge patience!  

Q: What can you conclude at this time overall?

I can tell you that I've had a huge upswing of inquiries in opportunities in the past 2 weeks. Since most investors who contact me are seasoned direct oil investors, I'll conclude that they see this (as I do) as an opportunity to take advantage of under-balanced oil price and development costs. This looks very similar to the last residential real estate cycle.  
All I know is that I'll have no sympathy for those who complain they missed the boat who are sitting on cash and waiting for the bottom.
John Mink, CEO

Conventional vs Non-Conventional Plays - August 2013

  

Many have asked us what we prefer concerning conventional vs. non-conventional oil and gas plays.
 

The best place to start is defining the 2 terms. Doing some research, there is no standard definition that either oil companies or even governmental entities can wholly accept.  From a technology standpoint, it'ss even more ambiguous as methodologies for exploration, drilling, and completion of wells are interchangeable based on geographical and geological factors.
 

I like to think of the difference between conventional vs non-conventional as where known oil or gas sources could not be accessed in the past economically without technology advances introduced in the early 90s.  Shales and heavy oil sands are the best examples of source material for non-conventional plays.  For instance, people have been drilling vertical wells just above the Eagleford Shale into the Austin Chalk for decades.  The Eagleford was the known source rock for the Austin for decades but no one could take advantage of going directly to the source without advances in hydraulic fracturing and horizontal drilling techniques.
 

Since we deal with mostly US plays, we will base our definition of non-conventional starting with onshore shale and conventional as just about everything else onshore.
 

To get to the point, I recommend to almost all of my clients to avoid non-conventional plays as long-term investments for the following reasons:
 

Cost of Entry:  Non-conventional plays require much larger acreage purchases of leases (typical spacing of shale wells is 80 acres) and even larger budgets for exploration, reporting, development, and operating expenses.  For example, a single well into shale (Eagleford or Bakken) will cost millions of dollars due to the depths, the horizontal aspect, and the multi-stage fraccing.  Typical wells can run from $8-$12 million USD.  A conventional vertical well drilled to the same depths into conventional sands will cost 1/10 that cost at most.


Operator Availability: All of the Big Boys have booked services for drilling, completion, and multi-stage fracking months in advance.  In most cases, you can find an operator to drill vertical wells no more than a month out at most as there's more of them available.


Drilling through Production Timeline– Non-conventional wells can take upwards to a year to drill, complete, and perform multi-stage fraccing (up to 20 stages in some cases).  Typical conventional wells can be up within a month.  Both are assuming no unforeseen delays due to weather, operator availability, tangibles availability, loss due to theft or breakdown, etc.  I've seen shale wells take up to 2 years before coming online.


Decline Rates: Typical decline rates of non-conventional plays are dramatic.  You could IP at 400 BOPD and be at 20 BOPD in 2 years.  Your investment must be made back within the first 6 months or you're underwater.  Conventional plays have much less dramatic decline rates where payout can be made out in a year and keep producing monthly checks for significantly longer.


Ongoing Development: With most non-conventional programs, I’ve seen the need for the continuous cash calls to keep drilling to stay on top of profits.  Clients who have invested in shale though other sources have told me stories about the endless cycle of checks coming in and going out.  To them, it has become a headache to manage.  These individuals were looking for investments and keeping their day jobs, not to create another job for themselves.  Typically, most conventional plays allow for greater time spacing for lease development to keep production numbers the same.


Market Price Differential : Some conventional oil and gas is lower in gravity, therefore receiving less than market value. Bakken oil typically sells for less than $20 below WTI due to transportation, lower gravity, storage, and refining capacity.   
 

In short, non-conventional plays are for the more aggressive investors with deep pockets and patience.  If this is your game, I can find deals for you. Don't get me wrong...you can make a great deal in returns but the margins are typically lower, thus making it more risky if the price of crude dips below today's prices even 30%.  Conventional plays offer an opportunity to enter deals at a lower price level and see checks come back to you quicker without the constant need for cash calls.
 

I recommend, sponsor, and put my money in the conventional plays.
 

John Mink, CEO Knik Energy  

Disclaimer

All above editorials are opinion based on the author's interpretation of current events and situations only.  They are not to confused with pure factual knowledge nor may be permanent.  Do you own due diligence before making any investment decisions based on such editorials and opinions.