Same Story, Same Outcome

Jim Brown
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Iran and the six UN nations met in Almaty and no agreement was reached other than to meet again in the future. Despite an attractive offer to drop some sanctions against Iran the meeting ended just like every other meeting over the last 12 years and that is with no changes.

Nobody actually expected any progress despite the sweetened offer by the P5+1 nations. Iran has too much national pride built into the nuclear issue to back down now. Also, the Iranian presidential election is in June and the candidates are posturing and political tensions inside Iran are growing. The odds of any change in the official stance before the elections is near zero. If anything the official posture could take a harder line to capitalize on the national unity over the nuclear issue. After the election a change could come as part of a plan to improve economic conditions in Iran and therefore strengthen the presidential winner.

While various Iranians attending the meeting were talking up the "success" an Iranian diplomat said there was no real progress.

The two sides agreed to hold expert-level talks in Istanbul on March 18th to discuss the proposals and then return to Almaty on April 5th where Western diplomats made clear they wanted to see a substantive response from Iran. I predict they will be disappointed and the meeting will either be cancelled or the Iranians will do what they have done for the last 12 years and try to change the topic and delay talk on the critical points.

In this week's meeting the P5+1 nations offered to ease a ban on trade in gold and other metals and relax an import embargo on Iranian petrochemical products. In exchange Iran was told it would have to halt enrichment to 20%, halt operations at Fordo and "constrain the ability to quickly resume operations at the Fordo underground facility." The Iranian chief negotiator, Saeed Jalili, appeared to rule out shutting down the Fordo facility. He also said multiple times after the meeting that Iran must have the capability for 20% enrichment. Clearly it does not sound like any progress was made in this successful meeting.

On Wednesday in Vienna an IAEA official said Iran was technically ready to sharply increase the higher-grade enrichment. "Iran can triple 20% production in the blink of an eye" according to a diplomat at the meeting. The IAEA believes Iran can produce enough highly enriched uranium using the new equipment for an additional bomb every six weeks. If they have already begun using that equipment as many suspect they could already have enough uranium for multiple bombs and every time they have a "successful" meeting and schedule another one six weeks later that gives them fuel for another bomb. Their idea of a successful meeting is delaying conversation for another six weeks or more.

Israeli Prime Minister Benjamin Netanyahu called upon the six nations to threaten military action if there was not an abrupt change in the Iranian process.

Crude Inventories

The EIA reported a 1.1 million barrel gain in crude inventories for the week ended on Feb-22nd. The key point was a spike in refinery utilization from 82.9% to 85.1% and the increase in petroleum demand by +268,000 bpd. That boosted demand to 18.68 mbpd and +2% over year ago levels.

Crude inventories at 377.5 million barrels are only 10 million below the 22 year high set back in May 2012. They are currently 9.5% over year ago levels.

Gasoline inventories declined by -1.9 million barrels despite the higher refinery utilization and a production increase of +275,000 bpd. Imports also rose by +70,000 bpd to 575,000 bpd.

Distillate inventories rose by +600,000 barrels for the first gain in five weeks. Distillate demand declined by -306,000 bpd or 2.7 million barrels. This was likely due to the massive flight cancellations due to winter storms over the last four weeks. Those storms also shutdown highways and roads and kept trucks off the highways. That resulted in a temporary reduction in diesel demand but that will return as the storms pass.

This time of year the inventory levels of crude normally rise as refineries are taken offline for maintenance and they are building up crude levels for the driving season ahead.

Inventory Snapshot

Oil Inventory Chart

Gasoline Inventory Chart

Distillate Inventory Chart

Continental Resources

After the close on Wednesday Continental (CLR) reported adjusted earnings of $1.04 per share, an increase of 18% over the 88 cents in Q4-2011. Full year earnings rose to $4.07 ($739.4 million) from $2.41 per share, an increase of +72%. Production increased by 42% to 106,831 bpd. Continental guided to February production of 120,000 bpd.

Crude oil represented 72% of Continental's production. The company received $84.99 per crude barrel in Q4 an $4.82 per Mcf of gas. Cost of production was $5.90 per Boe. At the end of the quarter Continental had 122 wells drilling, completing or waiting on completion compared to 62 at the end of 2011. Proved reserves rose +54% to 785 million Boe. Continental increased its holdings in the Bakken to 1,140,000 net acres, up +25% from the year ago quarter.

The company drilled 259 gross Bakken wells in 2012 using an average of 21 rigs. The average was 12 wells per rig compared with only 7 wells per rig in 2011. Better understanding of the formations, better use of multipad technology and more capable rigs were responsible for the improvement. Continental plans to complete 558 gross wells (226 net) in the Bakken in 2013.

Approximately 77% of expected crude production for 2013 is hedged along with 33% of expected gas production. Continental has significantly upgraded its rail takeaway capacity from the Bakken. More than 72% of its Bakken production was shipped by rail compared to 41% in January 2012. This allowed them to receive more for their oil when it was sold in high demand areas.

Shares of Continental rose more than $2 in afterhours.

Continental Chart

Whiting Petroleum

Whiting reported earnings after the close of 83 cents, compared to estimates of 73 cents. Revenue rose +15.7% to $577 million and beat estimates of $536 million. At the end of Q4 Whiting was the number one oil producer in North Dakota at 66,155 bpd. Proved reserves rose +13% to 378.8 Mmboe and the reserve replacement ratio rose +246%. More than 86% of Whiting production was liquids. Average daily production was 86,055 Boe. That is a 22% increase over the year ago quarter.

Whiting has a total of 9,661 gross future drilling locations. More than 50% are in the Bakken and 25% in the Redtail Niodrara play. In 2012 they completed 192.9 net wells compared to projections for 160 wells. The development budget for 2013 is $2.2 billion.

Days per well in the Sanish field declined from 35 days to 17 days. Wells in other locations in North Dakota declined from 38 days to 18.5 days per well. Whiting has nine pad capable rigs drilling in North Dakota and 24 rigs total on all leases. They worked hard to reduce the total time on well from spud to first production in 2012. The average days fell from 90.8 to 67.1 days from spud to production.

Shares of Whiting declined fractionally in late trading after the earnings.

Whiting Chart