Documentary Analysis: Frack Nation

The oil & gas industry has fracked thousands of wells over the past 50+ years safely and without incident.  Often times the mainstream media, looking to break headlines in the 24/7 news cycle, will report allegations of environmental damage from fracking without a lot of facts to back it up.  Then after they have scarred the public and enticed government officials to act…………they move on to the next story.  A new documentary, Frack Nation, premiered last night on AXS.tv.  The documentary had a number of objectives for creating the film:Frack Nation 2

  • Research the facts about fracking oil & gas wells.
  • Interview Land Owners, Government Officials, and Scientists for their subject matter expert (SME) opinion on fracking.
  • Present an alternative point of view from the popular anti-fracking movie, GasLand.

I watched the documentary and found it to be both informative and genuinely attempting to obtain the truth.  I encourage you to view the film and make your own opinion as well.  Below represents the summary points I picked up from this quality documentary:

  • Frack Nation was funded with over $200K in donations by individuals around the world (26 countries in total) that contributed money on the entrepreneurial website KickStarter.com.  (We here at MlpReport.com think this is super cool and only ads credibility to the film.)
  • Farmers and land owners are financially impacted when Pennsylvania and New York enforce bans on fracking for land where owners want (and financial need) oil & gas drilling to occur.
  • A family that claimed Cabot Oil & Gas contaminated their water was found to have perfectly safe water by the the State of Pennsylvania and the EPA.  Frack Nation obtained a video from the EPA, via the Freedom of Information Act, displaying the family irate that the EPA found their water to be safe (you would expect them to be pleased with that result right?).
  • Anti-fracking reports would lead you to believe that fracking is unregulated.  Frack Nation interviews an engineer from Range Resources and they display the files and the volume of permits, environmental testing, and State/Federal regulations they must comply with for a single well.
  • Frack Nation presents lots of inconsistencies about the GasLand documentery, the motivations of the GasLand Director (Josh Fox), and the validity of the facts he presents.  Frack Nation attempted to interview Mr. Fox both in public and private, but he refused to answer their questions.
  • GasLand displays a water faucet in Pennsylvania catching on fire, allegedly due to methane contamination from fracking.  Frack Nation interviews other land owners that point out water wells have always produced methane.
  • Gasland uses lots of scary words describing the chemicals that oil companies use to frack wells.  Frack Nation interviews a biologist at the University of California Berkley to determine if these scary words are actually toxic to humans.  That SME on all things biology explains those are simply fancy words, you could use the same descriptions for toxins in cauliflower.  While cauliflower is toxic to the taste buds, its poses no danger to the body.  #BOOM

Random Side Note:

The channel hosting the Frack Nation premiere, AXS.tv, is Mark Cuban’s reincarnation of his HDNet Channel.  I did not even know I had this channel on DirecTv, and was interested in viewing content for the first time.  I was a bit disappointed when the same promotional video on Justin Timberlake dance moves ran during every commercial period and the best programming AXS.tv seemed to offer was Dan Rather reporting.  In a world where content is king AXS.tv picked a winner by premiering Frack Nation, but their regular programming seems lacking.

Uinta Basin: Valuation Reset

On November 1, Canadian E&P Crescent Point Energy announced an $861 million acquisition of Ute Energy’s Central Basin (CB) assets in Utah.  This represents Crescents first entry into the basin, and really its first entry deep into the US.  This transaction provides a good valuation reset for other operators in the area:  $BBG, $BRY, and $NFX.  Current Ute production is 7,800 boepd, and when you back out the $700 per acre placed on the acreage, they are paying $124K per producing barrel. 

Crescent Point Energy Operating Areas

Crescent is an E&P that falls under the radar since it only trades on the Toronto Stock Exchange, and has typically only operated in Canada.  However, it pays a hefty $.23 cents per month dividend, which at today’s price of $39.62 produces an annual yield of 6.9%.  The company has low leverage as well with just 10% debt-cap.  The bountiful dividend and monthly payout (think compounded re-investments [12 instead of typical 4]) are attractive, but the Canadians take out 15% for dividend taxes and you end up paying higher commissions to buy on the TSX.  Still, not a bad stock to add to the shopping list if the dividend where to creep higher. 

Bottom line on Uinta: 

  • Valuation has been reset with this M&A deal
  • Interesting to see if CB shale oil / horizontal drilling can become economic
  • Look for other larger independents to enter the play if successfull

Certified in “SIC” Management

$OXY CEO, Stephen I. Chasen

Every CEO should be required to obtain the “SIC” certification in management.  SIC stands for Stephen I. Chasen (SIC), Occidental Petroleum’s long term finance man, and since May 2011 it’s CEO.  Basically if a CEO is SIC certified he lays out a clear and precise strategy for investors, he reports honestly on the progress (both good & bad), and he holds his employees accountable for meeting targets.  Here are some highlights from his no non-sense statements from Thursday’s conference call:

SIC:  “If for some reason our investment plans do not result in successful stock market results over the next few months, we will return more of our retained earnings to our shareholders……we intend to raise dividends next year at a rate that will maximize returns to shareholders.”

Translation:  $OXY will appreciate in the next 3 months or we are sending shareholders more cash via dividends.  This is bullish for long term holders of $OXY.

SIC:  “If I do not see the proper returns in the coming quarters our strategy will change.”

Translation:  Stockholders will make money by either the stock appreciation or higher dividends.  Once the stock appreciates we will return to investing more capital in the business.

SIC:  “More capital discourages prudent spending……..half the shareholders think I should spend $20 billion CAPEX, the other half think I should spend $2 billion……..If they (Operations) do not get their operating cost down, which is what I am most focused on, because that translates immediately into profits, then we will continue to tighten there and their will continue to be changes in management…….especially in the Permian.  If they do not do it soon there is going to to be wide spread changes in the organization.”

Translation:  I am cutting rigs to prove to the operations team that I am serious about cutting costs. Every BU better lower costs, or they will be fired and we will get someone in there that can lower the costs.  #BOOM  #ACCOUNTABILITY

SIC:  “Oil guys can only work on one thing at a time.  So if you tell them you want volume growth, then volume growth will show up.  But if you tell them you also want something else, only volume growth will show up.”

Translation:  Like all humans, only one BHAG (Big Hairy Audacious Goal) at a time is all my managers can handle.

SIC:  “If the relative performance does not improve we will return more money to the stockholders.”

Translation:  I repeat, stockholders are # 1 priority for this company.

Their is probably another 10 examples I could share, but I think you get the point.  SIC takes his job as a steward of the stockholders money seriously, he holds his management accountable for short-medium term goals, and he is smart enough to change his strategy if market conditions warrant.  The $OXY conference calls never disappoint, but this one was classic.

Also, it’s interesting to note this was the first CC for the new CFO Cynthia L. Walker.  The 35 year old Mrs. Walker is a former Goldman Sachs managing director (from H town office) and became an executive vice president and CFO on Aug 6.  Besides reading from her prepared remarks, Mrs. Walker was otherwise silent on the Q&A portion of the call.  M&A is obviously in her wheel house, but SIC made clear on the call no significant M&A is in $OXY’s foreseeable future.  Makes you wonder if the debits and credits will keep this CFO interested.

Black Gold near Sin City?

Could it be that miles below sin city is a vault full of black gold?  Noble Energy announced on Thursday that they believe a significant oil resource resides in north eastern Nevada.  Noble has acquired 350,000 net acres in the tight oil play at less than $200 per acre.  In the investor presentation Noble points out this play was overlooked and under explored by the industry.  Noble plans initial production in late 2014, ramping up to grow production to 50,000 bpdoe. 

It is refreshing to know that Noble was not out chasing the hottest new play.  They were taking their geologic knowledge and applying it to a new play.  This demonstrates the entrepreneurial spirit that is embedded in the oil & gas industry, and a reminder for us all that it’s better to lead than to follow, it’s better to be lucky than to good. 

Increased exploration from companies like Noble, and consistent improvement in technology, will eventually make America energy independent.  Not too mention creating value for shareholders, additional American jobs, and increased taxes paid to the government.  I love big oil.