From the mouths of babes: Shale skeptic anime mashup

In the past year you may have come across some videos on the Web where two animated creatures (looking a bit like Hello Kitty) talk about everything from dueling cell phone platforms to the soul-crushing reality of journalism.

They’re the product of XtraNormal, an online platform that lets anyone make a short animation on any topic they like (the company was profiled on NPR today).

Naturally, folks in the energy industry have taken a notice, with one unknown author posting a piece on the enigma of investing in oil and gas exploration firms.

The view on E&P investing is somewhat bearish, however.

The discussion — between an investor wanting to buy some E&P stocks and an experienced investor — essentially casts doubt on the sustainability of the companies (presumably onshore natural gas drillers). In short, the experienced investor says that the companies don’t actually make money on production but rather increase their net asset value by doing more and more drilling, regardless of the costs of acquiring acreage.

“Why does the cost of acreage not matter?” the newbie asks.

“Because investors will pay for the acreage, and all the company has to do is drill the highly profitable wells,” the old hand replies.

“So as long as investors keep funding companies with equity and debt they can continue to drill high return wells that do not make money but create upside to NAV?” the newbie asks.

“Now you understand perfectly,” the other responds.

Does the thesis sound familiar? It should if you’ve followed the work of Art Berman.

2 Comments

  1. A guy

    Please make the stupid stop. Acreage cost is negligible due to the value of the production. Any moron can see that a $1 million or even $10 per acre raw investment is a pittance to a well that can produce a decent gas or oil flow.

    #1
  2. Energy Moron

    Howdy Neighbor:

    Berman?

    http://petroleumtruthreport.blogspot.com/2009/04/haynesville-sizzle-might-fizzle.html

    He wrote:

    “I used standard rate-versus-time methods to determine estimated ultimately recoverable reserves (EUR) for 14 horizontally drilled wells that had sufficient production history to project a decline rate. Production was extrapolated using a hyperbolic decline, and an economic limit of 1.0 MMcf/month. The wells had an average EUR of 1.5 Bcf….”

    Official production through 11/1/2010 of 16 wells shown in the figure in the link above (note that in La if a second well is drilled the
    production per section is reported publically so it is really 27 wells…)

    http://sonlite.dnr.state.la.us

    79 BCF as of 11/1/2010, or about 2.9 BCF per well.

    Berman ain’t even in the ballpark.

    #2