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Expo/Industry events for the next few months

Marcellus Utica Midstream
January 26-28
David L. Lawrence Convention Center
Pittsburgh, PA


Utica Upstream
April 6, 2016
Pro Football Hall of Fame
Canton, OH

Upstream PA 2016
April 19, 2016
Penn Stater Inn
State College, PA

Latest facts and a rumor from the Marcellus and Utica Shale

  • Gulfport Looks for Tough 2016. (Thank You, Dan Shingler, Crain’s)  Oklahoma-based Gulfport Energy Corp. is one of the biggest drillers in the Utica, with more than 200 wells. Only Chesapeake Energy has more.

    The company is pleased with its well results, its lease holdings and its trends of increasing drilling efficiency. It has flexible contracts with pipelines that can get much of its gas to markets that pay far more than many Utica shale drillers get for their gas on other lines.

    Still, to hear Gulfport CEO Michael Moore tell it, it sounds a little like having the best boat on a day when no boat should be on the water — which is why Moore says the company is more or less battening its hatches, for the foreseeable future, on its Utica operations.

    “Even though we’re generating positive returns, we made the decision to curtail production, not necessarily because if we curtailed some of our production we could alleviate the nation’s oversupply of gas,” Moore says, half joking. He’s joking about having any OPEC-like power over natural gas prices, but not about the decision the company made in November to cut its Utica production by 15%.

    The cuts will continue in the coming year, too, Moore said during an interview on a trip to Cleveland early this month.

    “We made a decision to shut-in all of our (well) completion activities in the first quarter of next year,” he said.

    “So we are making a conscious decision to slow activity, but we have the luxury of doing that.”

    Yes, he means his company has the luxury of not producing its primary product and not selling it to customers.

    If that sounds like a strange business model, it’s the nature of the oil and gas business today — a business, by the way, in which Gulfport lost $388.2 million, or $3.59 per share, in the third quarter ended Sept. 30.

    So where’s the luxury coming from?

    From the fact that, operationally, Gulfport is making money, has a strong balance sheet and continues to drill wells faster, cheaper and with better results, Moore said.

    That quarterly loss included a nearly $600 million writedown of Gulfport’s oil and gas properties — a consequence of the gas and oil beneath those properties losing value when prices dropped.Moore’s company, like just about all drillers, is tightening its belt — and will probably keep it tight through next year, since he’s not expecting any improvement in oil and gas prices until at least 2017.

    But Gulfport’s better positioned than most to weather the storm, Moore believes.

    For one thing, he said, it’s not leveraged; it hasn’t even drawn on its main $120 million credit facility, of which KeyBank is a major participant.

    Molecular economics

    It also has a better way to get its “molecules out of the basin,” than a lot of other Utica drillers, Moore said, meaning that it can get its gas out of the Utica region, where there is a severe glut of gas, to other markets where prices are just low, not abysmal.

    Moore said his company has been able to sell its gas for $1.80 per mcf or more through 2015.

    That’s as much as a buck more than other drillers, including smaller Ohio drillers have been getting, according to the Ohio Oil and Gas Association, which has reported seeing its members sell gas for less than $1 per mcf in 2015.

    “It’s brutal,” OOGA executive vice president Shawn Bennett said of the situation, over and over again throughout 2015, including recently.

    Moore said Gulfport was able to negotiate for space on the Utica’s new pipelines early — long before they were up and running.

    By getting in early with substantial acreage, the company was able to negotiate terms under which it would promise to ship all of its gas through certain lines.

    However, it did not commit to providing the pipelines with specific volumes.

    “Everybody that came after us pretty much had to commit volume, so they’re now in a situation where they have to deliver these volumes or they’re going to pay for that space” on the pipeline, Moore said.

    “We don’t have that overhang.”

    That’s a huge deal.

    Utica drillers in the play’s wet gas areas are in a sticky situation, Bennett said, because prices for ethane, the chief liquid found with Utica gas, have plummeted.

    That means drillers who have wet gas can end up producing gas and ethane at a loss, he said.

    They have to pay to separate their gas and ethane before the gas can be put in a pipeline, and that separation costs more than the ethane is worth.

    To top it all off for Gulfport, Moore said most of the company’s acreage sits above dry gas.

    As a result, Gulfport has the luxury of not having to drill or complete wells at all, until prices are higher and profits are greater.

    “We can make pure economic decisions on our levels of activities that are appropriate to today’s commodity price environment,” Moore said.

    All of these factors are some of the reasons that analysts mostly have faith in Gulfport. Its stock has fallen with the energy sector — from $75 per share in April 2014 to $22.48 per share on Tuesday, Dec. 8 — about where it was at the end of 2010, just before Gulfport entered the Utica boom.

    But, according to Yahoo Finance, nine of the 10 analysts who follow the stock currently recommend buying it.

    Going forward, many observers expect a shakeout in the energy industry. Some companies just won’t have the balance sheets or the operating flexibility to survive, but Gulfport does not plan to be one of them, Moore said.

    Some of those struggling companies might be driven into the arms of healthier acquirers, like Gulfport. Moore doesn’t rule that out in the long term, but right now he said valuations are still too high.

    The market needs some discipline on the part of creditors before they’ll come down, he predicted.

    Gulfport is keeping its drill bits sharp and is waiting for higher gas prices to support more drilling.

    It will maintain no more than four drilling rigs in the Utica, down from eight in 2014, but it will drill only opportunistically and even then won’t complete wells in the first quarter and bring them online.

    “In 2016, we’re planning for the worst, I suppose, which is that there is no recovery,” Moore said.
  • Magnum Hunter files Chapter 11.  Another US producer has filed for bankruptcy. Magnum Hunter Resources has followed dozens of its North American peers that commenced Chapter 11 cases this year. The Irving, Texas-based company listed debts of more than $1.1 billion in its Chapter 11 filing in Delaware on Tuesday. The 37 E&P Chapter 11 cases filed so far this year involve approximately $14.1 billion in debt, as low oil prices continue to impact operations.

    Magnum Hunter Resources and certain of its wholly owned subsidiaries filed for Chapter 11 bankruptcy protection "to facilitate the restructuring of their consolidated balance sheet through a prearranged restructuring plan."

    The company has also entered into a restructuring support agreement with lenders that hold a total of approximately 75% in principal amount of the company's funded debt claims.

    Gary C. Evans, CEO of Magnum Hunter, said, "At a very challenging time for the entire energy industry, when many of our competitors have been forced to either file for bankruptcy without a plan to emerge in place or continue to attempt to restructure with creditors without an 'end game,' our global restructuring accomplishment is definitely an outlier."

    In an October 2015 presentation the company said it had "transformed itself into a pure-play, Appalachian-focused E&P with a highly desirable Utica and Marcellus acreage position in the core of the plays." However, the company had halted drilling operations in both of these pays at the beginning of this year due to the fall of commodity prices.
  • Halliburton – Baker Hughes Has More Delays.  Unresolved problems convincing the U.S. Department of Justice their $26 billion merger is the best thing since fracking and horizontal drilling, oilfield services companies Halliburton and Baker Hughes extended the time period for closing their merger to April.

    The companies said in a release Tuesday Justice told them it "does not believe the remedies offered to date are sufficient to address the DOJ's concerns, but acknowledged that they would assess further proposals and look forward to continued cooperation from the parties in their continuing investigation."

    "Both companies strongly believe the divestiture package, which recently was significantly enhanced to address the DOJ’s specific competitive concerns, is more than sufficient to address concerns raised by competition authorities, including the DOJ," according to the statement.

    An extension of the review was supposed to end Tuesday, but Monday, the New York Post reported Halliburton wouldn't agree to another extension unless regulators gave the company specific guidance concerning the assets it must sell to secure deal approval.

    The DOJ is reportedly requiring Halliburton to sell $7.5 billion in assets to a single buyer to get deal approval, Kallanish Energy reports. Thus, only conglomerates like General Electric or Siemens are seen as having the financial acumen to afford such an acquisition.
  • The Exporting Ban Could Be Lifted.  House Republicans announced a deal late Tuesday between the GOP-led Congress and the White House on a trillion-dollar, year-end tax and spending package to fund the government through fiscal year 2016.

    Part of the massive package is the lifting of the 40-year-old ban on exporting crude oil. The export ban was imposed during energy shortages of the 1970s, but has been declared outdated by industry allies. Environmentalists say lifting it would amount to a giant windfall for the oil industry.

    "It puts the United States in the driver’s seat of energy policy worldwide," Representative Joe Barton (Republican-Texas) said. The change -- still subject to Senate and House approval -- "is a huge victory," he said.

    Limits on U.S. oil exports would be lifted immediately, according to the bill released early Wednesday by the House Appropriations Committee. It would allow the president to impose restrictions on exports for national-security reasons and in case of a shortage.

    Sources said the bargain would allow five-year extensions of wind and solar tax credits and a two-year extension of the U.S. Land and Water Conservation Fund.

    If Congress approves the deal and President Obama signs it, it would end trade limits established to counter the energy-supply shortages of the 1970s.

    White House Press Secretary Josh Earnest has said Obama opposes legislation ending the crude-export restrictions, though he hasn’t ruled out allowing repeal as part of a broader spending measure.

    Some refiners, such as PBF Energy of Parsippany, New Jersey, and Monroe Energy, the Marcus Hook, Pennsylvania subsidiary of Delta Air Lines, have said they may be harmed by repeal of the export ban.

    Producers including ConocoPhillips and Continental Resources have lobbied for it, as the industry deals with a global oil glut and the associated price plunge.
  • Why the Exporting Ban Could Change Everything. (Thank you, CNBC) The end of the 40-year-old ban on crude oil exports should have little immediate impact on the U.S. oil industry, but longer term it's likely to help U.S. shale producers and give the United States more clout in a cut-throat, global energy arena.

    The United States currently generates about 9.2 million barrels of oil a day, about half of which is shale production. But the U.S. also imported about 7 million barrels a day this year, so with the world awash in crude, there is not likely to be much demand for U.S. exports.

    The U.S. is on the verge of ending the restriction, after congressional negotiators late Tuesday included removing the ban in a deal on a $1.15 trillion spending bill, along with such provisions as the extension of tax breaks on solar and wind energy. And while an end to the ban wouldn't have a massive immediate effect on oil markets, it could drastically alter some parts of the domestic and global energy industry in the longer term.

    "It's definitely an improvement, but it's not like the be-all and end-all that's going to stop the bleeding in the oil patch," said Andrew Lipow, president of Lipow Oil Associates. "This is a small thing compared to Iran coming back to the market with a million barrels a day. … This reduces an artificial logistics impediment."

    While new oil exports likely would not amount to much immediately, they would provide another challenge to already fractured OPEC. The Organization of the Petroleum Exporting Countries has been allowing market forces to set prices for the past year, abandoning its previous policy of manipulating prices through the use of output quotas. That policy has cut into some U.S. production, but the world is still overproducing by more than 1 million barrels a day, and Iran could start reintroducing barrels to the market early in the new year.

    "It's just more oil being introduced into a wildly oversupplied market," said John Kilduff, partner with Again Capital. "At times this could be problematic for OPEC and Russia because of the intense market share battle that's already underway. This could hurt them on the edges." The U.S. is the third-biggest oil producer after Russia and Saudi Arabia.

    OPEC secretary general Abdalla El-Badri said Wednesday that there would be no market impact from U.S. exports because the U.S. is an importing country.

    However, exporting U.S. crude could alleviate some imbalances in the world oil market. For instance, the U.S. has already approved limited exports of U.S. light sweet crude to Mexico. Mexico uses the lighter grade in its refineries, while it exports heavier crudes to the U.S. Gulf Coast refineries. Those exports now could be unlimited.

    "Venezuela is likely to snap up some of these barrels, too, to mix with their heavy crude to make a more marketable blend," said Kilduff.

    "You're not going to dramatically change your refiner estimates, but directionally, refiners lose a source of captive supply, and then I think the U.S. producers have to ultimately be a winner because they're less trapped. They have more potential buyers of product." -Dan Pickering, co-president, Tudor Pickering

    The immediate impact of the news has been to narrow the spread between West Texas Intermediate crude and more expensive Brent oil, the international benchmark. In the case of the March futures contract, WTI was trading above Brent early Wednesday.

    "It's potentially a new day for the oil markets as it relates to global movement," said Dan Pickering, co-president of Tudor Pickering. "The (West Texas Intermediate) market has been pretty influential before. It's an even more transparent process now. So I think that where before you didn't have to worry about U.S. volumes, now they do. It's more influential a little on the margin. Flexibility translates to influence and there's more flexibility."

    Pickering said ending the restrictions would have not have succeeded politically if oil were at $100, and if exports were perceived to be something that could hurt consumers.

    "Conceptually, the losers are the refining industry in particular. They had a more captive source of supply that's now less captive. Given where spreads are, there's not that much difference in the near-term numbers. You're not going to dramatically change your refiner estimates, but directionally, refiners lose a source of captive supply, and then I think the U.S. producers have to ultimately be a winner because they're less trapped. They have more potential buyers of product."

    Transporters of crude would also benefit, he said.

    Lipow said the lower Brent price could make it more attractive for East Coast refiners to import African light sweet crude, a negative for North Dakota producers, which now ship crude east by rail. Refiners in turn could be hurt because of the captive cheap oversupply in the U.S. will ultimately find its way to other markets.

    Lipow said refiners in the New Orleans area could import crude oil, into since Louisiana light sweet crude is now more expensive than Brent by $1.75 per barrel.

    Crude oil producers could also look to export oil out of Corpus Christi, Texas, to Mexico and points further south because it would be cheaper to export that crude oil on a foreign-flag vessel than ship it on a Jones Act tanker to Louisiana or the East Coast. The Jones Act is a rule that permits only U.S.-flagged tankers to move U.S. oil between U.S. ports.

    Lipow also said it appears that refineries on the West Coast may be competing with Asian countries for Alaskan North Slope oil.

    In lifting the restrictions, the congressional negotiators included leeway for the White House to restore temporarily the ban in the case of a national security issue or if the supply to the domestic market is impacted.
  • OilPro’s outlook for 2016.  (Thank you, Joseph Triepke)  

    As realists, we have every reason to believe that 2016 will be just as difficult as 2015, if not more so. But in the oil business, the one sure thing is change. Change in 2016 means conditions will stop deteriorating. Here is a run down of some positive inflections we see ahead, the optimist's guide for O&G in 2016:
    • Everything Will Bottom. Oil prices have fallen by $72 since the 2014 peak. That fall magnitude is double the current price of $35, which is below break-even for many new projects. On an absolute basis, little downside remains. Likewise, the 1,135 US land rigs that have gone idle are nearly double the 684 still working. No major US drilling collapse has lasted more than 2 years in O&G, including during the 1980s. Oil service margins are at zero for many PSLs, and leading edge offshore drilling dayrates are also about break-even. This will bankrupt some companies next year, but virtually every economic metric used to measure O&G should trough in 2016, for declines cannot be infinite.
    • Uncertainty Will Fade. 2015 was a year of trying to figure out the new normal. 2016 will be a year of breaking in the new normal. As everything bottoms, a sense of resolve and conviction in direction will return, and survival strategies will hit their stride.
      All Upstream Markets Will Tighten. 2016 will be a year of tightening across the entire O&G value chain. Oil production will decline globally because $320bn of annual E&P investment has been pulled. And zombie iron will be retired en masse from offshore drilling to fracing, tightening excess oil service capacity. Re-balancing in 2016 will set the stage for future growth.
    • Strong Balance Sheets Will Be Rewarded. Anyone remember John Cassidy from the 1980s? New fortunes will be made by well capitalized risk takers over the next few years. 2016 will present extraordinary opportunities for companies that entered the downturn with strong financial positions and are willing to take risks by buying when others are rushing for the exits.
    • Doors Will Open For Innovators. In the quest to lower the cost/barrel, no stone will be left unturned. Entrepreneurs that would have struggled to get a foot in the door at big oil companies in 2014 will find the door wide open in 2016
    • O&G Will Take Market Share. Solar, wind, and coal will all cede market share to crude oil and natural gas next year. Lower for even longer O&G prices will curb investment in alternative energy sources and lead to switching, boosting demand.

For now, pessimism remains a crowded trade. As the ball drops on 2015, the O&G outlook is about as bleak as it's ever been. A recovery is not in the cards for 2016 without some unforeseen black swan event. But while 2016 will still be bad, things will stop getting worse soon. -- Joseph Triepke, Oilpro Managing Director.

  • China Misses Shale Goals. (Thank you, Bloomberg) China is on track to miss its shale gas production target for this year as its biggest producers throttle back output amid weakening demand growth and a collapse in energy prices.

    PetroChina Co., the country’s largest oil and gas company, may produce about 1.6 billion cubic meters of the unconventional gas this year, lagging behind its stated target of 2.6 billion cubic meters, according to people with direct knowledge of the matter.

    China Petroleum & Chemical Corp., the nation’s second-biggest oil and gas producer, may pump around 3.5 billion cubic meters of the fuel, according to the people, who asked not to be identified because the information isn’t public. The explorer plans to complete an expansion project this month that will boost capacity to 5 billion cubic meters a year.

    ‘Oversupplied Market’

    “We’ve seen very limited growth in the domestic market and an oversupply in terms of imports, that’s led to lower-than-expected production this year,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said by phone. “Shale gas is going to get cut when we’ve got an oversupplied market and companies focus on the lower end of the cost curve.”

    PetroChina is holding back shale gas expansion at Sichuan in southwest China partly because they’re already struggling to sell conventional gas, which is cheaper to produce, according to the people. Sinopec, as China Petroleum is known, will keep some of its newly added capacity at its Fuling field idle because of a lack of buyers, according to the people.

    Sinopec announced on Oct. 15 that proved shale gas reserves at Fuling increased by 273.9 billion cubic meters to 380.6 billion cubic meters, making it the world’s second-largest shale gas field outside North America. The country’s total proven shale gas reserves are estimated at 500 billion cubic meters, according to the Chinese Academy of Engineering.

    Goal Cut

    In November 2014, China reduced its goal for shale gas production to 30 billion cubic meters by the end of the decade, or about a third of an earlier estimate, citing difficult geology, lack of infrastructure and limited exploration rights. ConocoPhillips ended talks with PetroChina on a shale gas development in Sichuan after a two-year study. Royal Dutch Shell Plc gave similar indications when it said in July it’s evaluating drilling results in Sichuan, which have shown “mixed results.”

    The economic imperative to reduce output conflicts with China’s goal to limit fossil-fuel consumption and clean its environment. The country is seeking to limit coal consumption to about 4.2 billion metric tons by 2020, reducing the fuel’s share of its energy generation to less than 62 percent. Natural gas use, which accounts for about 6 percent now, is targeted to climb to more than 10 percent of total energy consumption by 2020.

    China’s manufacturing index slipped to the weakest level in more than three years in November as six interest-rate cuts in the past year failed to spur a recovery. The country’s economic expansion this year is struggling to reach the government’s target of about 7 percent, with Bloomberg’s monthly gross domestic product tracker at 6.57 percent in October.

    “They will definitely miss this year’s target and possibly next year target as well” for shale gas, said Gordon Kwan, a Hong Kong-based analyst at Nomura Holdings Inc. “This is because of the very weak industrial and manufacturing activity and the fact that the overall economy is slowing down. There’s no point in producing the gas when there’s no demand.”

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Rig Count

  • Baker Hughes Rig Count the week of December 18, 2015
  • PA
    • Marcellus 25 down 4
    • Utica 1 unchanged
  • Ohio
    • Utica 15 unchanged
  • WV
    • Marcellus 16 up 3
  • TX
    • Eagle Ford – 77 up 1
    • Permian Basin  171 up 1
  • NM
    • Permian Basin – 35 up 1
  • ND
    • Williston – 58 unchanged
  • CO
    • Niobrara – 22 up 1
  • TOTAL U.S. Land Rig Count 685 down 1

PA Permits for December 10, to December 17, 2015

       County            Township     E&P Companies

1.    Bradford            Herrick         SWN
2.    Butler               Oakland        Rex
3.    Lycoming          Lewis           Range
4.    Lycoming          Lewis           Range
5.    Susquehanna    Brooklyn       Cabot
6.    Tioga                Liberty          SWN
7.    Tioga                Liberty          SWN

OH Permits – weeks ending December 12, 2015

       County      Township    E&P Companies

1.    Belmont     Wheeling    Ascent Resources
2.    Jefferson    Knox          Chesapeake

Joe Barone 610.764.1232
Vera Anderson 570.337.7149

Northeast Supply Enhancement