Pickering: A conspiracy among gas drillers or those who write about them?


Following is a commentary from Dan Pickering, Chief Energy Strategist of TPH Asset Management, an arm of the energy merchant bank Tudor, Pickering, Holt & Co.

I had to sigh this weekend as I began to receive emails and phone calls regarding the New York Times article entitled “Insiders Sound an Alarm Amid a Natural Gas Rush.” I encourage you to read this article and its companions.

I don’t agree with many of the conclusions that are drawn, but it does serve to illustrate what critics of the energy industry are saying. And there is no doubt that the author (and evidently the New York Times) are indeed critics.

Having spent most of my professional career writing about energy issues, I understand and appreciate the power of the pen. Writing persuasively and interestingly can make a difference. In a world where the news cycle is 24/7 and people are swamped with information, anecdotes are king. The Times article wields cherry-picked anecdotes like a samurai with a sword.

One snippet is as follows:

“Money is pouring in” from investors even though shale gas is “inherently unprofitable”, an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February email. “Reminds you of dot-coms”.

Wow. That is good stuff. Captivating. Entertaining. But is it the truth? Or is it an opinion?

I’m not sure that PNC actually has any dedicated energy analysts (I couldn’t find any on their website). So perhaps that cool quote came from a high net worth broker? Maybe he/she is a genius with reams of analysis on shale gas decline. Or maybe the observations are based on reading blogs and internet postings. One can’t tell from the anecdote.

Which should I trust more? – the February 2011 $4.7+ billion purchase of Fayetteville shale gas assets by BHP Billiton or the February 2011 anecdotes from an unnamed broker of unknown quality. Follow the money is usually a good credo.

The New York Times also captured the eye-opening and alarming comments of Deborah Rogers, a member of the advisory committee of the Federal Reserve Bank of Dallas.

Her research indicated Barnett shale wells were declining faster than expected. Fascinating. A Dallas Fed adviser has spotted an important issue. But is it the truth? Or is it an opinion? Would I be just as fascinated if the article quoted Deborah Rogers, proprietor of Deborah’s Farmstead, a small Fort Worth family dairy that produces goat cheese? That’s her bio from the 2008 Dallas Fed press release.

Maybe Ms. Rogers is a closet petroleum engineer and excellent decline curve analyst. Maybe not. But 2011 Barnett shale gas production is at higher levels than 2009, with rigcount down by two thirds. That is not an anecdote seized by a newspaper reporter, it is a wellhead fact.

The Times article does make one statement that is dead on. The article says “these companies have been making predictions based on limited data and a certain amount of guesswork, since shale is a relatively new practice.”

Indeed, natural gas comes from reservoirs 1-4 miles deep in the earth. It seeps out through pore spaces so tiny they can’t be viewed with the naked eye. As such, almost everything about shale gas is an estimate. It is only natural that individuals inside and outside the industry are skeptical, curious, questioning and uncertain – as the anecdotes in their emails prove.

The debate is healthy. Early estimates about various shale plays were too conservative in some instances and too aggressive in others. The Western Barnett turned out disappointing. The Marcellus is better than people initially thought. That isn’t fraud or deception, it’s the oilpatch.

It is this author’s opinion that recovery per well in gas shales will be closer to industry forecasts than the dire predictions of gas shale skeptics. But we can’t know for sure. Real money is made BEFORE estimates turn into facts. Just like the stock market.

Gas shale drilling has been wildly successful – just look at the quadrupling of US shale gas production in the past 5 years. Right now, this is the same hollow success of long-distance telephone carriers – volumes way up, prices way down.

Even as oil prices returned to triple digits, an oversupply of gas has cratered gas prices. I believe that most new drilling for shale gas is uneconomic or marginally economic at current $4?-4.50/mcf prices. So does the industry! The gassy Haynesville shale rigcount is down by ~30% from the peak. It will fall further during 2011 and 2012 as leasehold drilling requirements are fulfilled.

Cheap prices, falling gas-focused drilling, a recovering economy, eventual LNG exports — this is why industry executives are getting more bullish on the gas macro. However, even with optimism growing, most E&P companies are still hedging 2012 gas production at $5/mcf and/or selling down gas properties to fund oil drilling. Midstream companies are building gas pipelines like crazy. Several new LNG export projects are underway.

These actions by a myriad of companies, hundreds of executives and thousands of employees indicate the industry believes in both the short-term and long-term viability of shales. They are speaking with their capital budgets, their bonus pool, their acquisition budgets…not with their keyboards and chatroom postings. If there is any conspiracy or hidden agenda, it’s amongst those writing articles, not drilling gas shale.

For the record, our alternative investment strategies have essentially no directional investment in gas shale producers. As an investment thesis, I believe US natural gas is trapped in limbo between yesterday’s news and a recovery story. Oil is the hot ticket and I’ll be writing about the recent SPR news over the next day or two.

Dan Pickering is the Head of Asset Management and the Chief Energy Strategist at TPH Asset Management, LLC (“TPHAM”) which is an operating company of Tudor, Pickering, Holt & Co., LLC, separate from Tudor, Pickering, Holt & Co. Securities, Inc. (“TPHCSI”) and is not associated with the research division at TPHCSI. Mr. Pickering is a registered representative of TPHCSI. The views expressed herein by Mr. Pickering do not constitute research, investment advice or trade recommendations and may not represent the views and/or opinions of TPHAM’s portfolio managers or the research division at TPHCSI.
Dan Pickering

6 Responses

  1. bg says:

    The rule is the market rules. I would hate to see export LNG and just a few years ago there were 20+ FERC permit applications and lots of investment $$ to construct LNG import terminals in the US. Tell me the shale gas market did not turned that around. Pickens has been right all along in that the truck fleets and a large percentage of personal cars should be on CNG right now. The balance of trade from importing energy is murdering us and our currency. So what if there is less than a 100 year supply–it is the only feasible bridge fuel supply out there.

  2. Energy Moron says:

    “Indeed, natural gas comes from reservoirs 1/4 miles deep in the earth.”

    Wrong, typical depths are about 1 to 2 miles.

    “That isn’t fraud or deception, it’s the oilpatch.”

    Oh please, Tony Hayward proclaimed at Davos a little over a year ago that there is 100 years of gas in the US.

    I have read the potential gas report myself and am not impressed.

    Can you please give drill bit proof of the 100 year number? Please?

    And for the EIA estimates?

    Do you know what the number is? Can you reconcile the EIA numbers with hard performance?

    Now, the NYT is on my bad list since obviously they are doing everything possible to ensure climate change is NOT abated since the end conclusion of what they are doing are more coal fired plants. Like the White Stallion one which will use coal from Obama’s home state (anybody who thinks money doesn’t trump the environment in Obama’s policy is smoking something).

    Where is my personal money in my house?

    I generate 9 mWH from solar, have converted electric things like the dryer (I cannot convince the females around it is evil so I have to live with it) to natural gas, and cook in outdoor kitchen. Usewise I use about 6 mWH/Y of electricity and about the same equivalent of clean burning natural gas.

    All of these made up numbers and things (the worst was the fugative gas thing from Cornell) is actually hurting the environment.

    Obama’s home state will profit from the White Stallion coal plant near Houston.

    Think about it…

  3. lestersmithhouston@gmail.com says:

    Thanks for a fair article. Much appreciated. Lester Smith

  4. Alan says:

    It is not hard to see that gas prices in other countries are sometimes double the price in the US and would drive people to believe that exportiing gas via LNG could be very profitable.

    There is no conspiracy – there are just companies who see an opportunity.

  5. Landon says:

    True. That’s why he said usually.
    Nice nit-picky comment about a short, off topic statement that has nothing to do with the main point of the article.

  6. Rob A. says:

    “Follow the money is usually a good credo.”

    While you very well may be correct, following the money while assuming that other investors know something you don’t has been the source of many bubbles and crashes.