Iran Heating Up

Jim Brown
 
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As crude futures were closing on Friday the president announced he had a telephone call with Iran's new president over their nuclear future. A phone call is a long way from removing sanctions but it should negatively impact crude prices on Monday.

With Iran talk is cheap. Actually it is very cheap because they believe as long as they can keep the P5+1 nations talking they can avoid having their nuclear facilities bombed. Their strategy for the last decade has been the nuclear rope-a-dope and the U.S. and IAEA just keep falling for the same old trick. Schedule meetings months in advance. Show up to talk about nuclear issues only to find that Iran wants to talk about something else for hours on end. Bring up the nuclear issues and suddenly the time has expired and Iran wants to schedule a new meeting months into the future.

The U.N. has punished Iran for this stalling by passing sanction after sanction and crippled Iran's oil sales and their economy. Iran has lost over $100 billion in oil revenues and inflation is 25% or higher. The new Iranian president has been tasked with ending these sanctions. He can talk nice all he wants but as everyone in the U.N. says "actions will speak louder than words."

I strongly believe that Iran has no actions to backup their talk. They have bulldozed buildings the IAEA wanted to inspect. They hauled off the topsoil and then blacktopped the entire area. Any evidence of nuclear trigger testing is long gone. They are rapidly increasing their uranium enrichment process with the addition of thousands of new high technology centrifuges. They claim they do not want nuclear weapons and are only enriching to fuel their one operating reactor. However, their capabilities far exceeded the fuel threshold of that reactor several years ago. In other words their talk of cooperation does not match their actions.

Iran is a sponsor of terrorism around the world. Their Revolutionary Guard is fighting for Assad in Syria. Iran supplies Hezbollah with money and weapons to stir up trouble all across the Middle East. The head of the U.S. Border Patrol was asked what where his biggest fears. He said the border crossing by Hezbollah personnel from Mexico. We have not had a major follow up attack since 9/11 but they are infiltrating our borders and it is only a matter of time before they accomplish their task and Iran is their sponsor.

When President Obama announced he had spoken with President Hassan Rouhani it was the first time for the two countries to be in direct contact in more than 30 years. This was a big deal for Rouhani because it elevated his standing in the Middle East. There was some kickback by Iranian hardliners that the call was a "strange and useless action" but at least it opens the door for future developments. We will see if the tone has really changed when talks resume with the P5+1 nations. The next round of talks with the IAEA will be on Oct 28th.

Colorado Floods

Colorado producers said it may take weeks to determine the damage from the floods. An estimates 12% of the states production is offline and it could be a long time before it comes back. State workers are being hampered by wet conditions as the areas continue to be hit by heavy rains. Many areas are still inaccessible and it could be another two weeks before water recedes enough to survey the damage.

Anadarko (APC) and Noble Energy (NBL) were the hardest hit. About 1,300 wells are still shut. That is down from 1,900 immediately after the flood. Anadarko has more than 600 Wattenberg wells shut in because of flooding out of 5,800 they have in the field. The company said the vast majority of the infrastructure was intact and power to the wells was a major factor.

Noble still has 433 wells shut down after 325 have been put back online. Encana (ECA) has 77 wells still shut out of the 397 that were closed during the worst of the flooding.

Mississippi Lime Shrinking

The Mississippian Lime (ML) play is losing explorers at a rapid pace. The ML is suffering from the same fate as the other shale plays only at a higher rate. When these shale plays are discovered the geography is mapped out over thousands of square miles. However, until a large number of drillers start punching holes it is hard to determine where the oil is actually plentiful. This is called the fairway or the sweet spot.

As wells are drilled in the ML it appears the fairway is relatively small and those explorers that rushed in and bought up large positions are now having second thoughts. Just being in the geological formation does not mean there is oil available in commercial quantities.

Royal Dutch Shell (RDS.A) confirmed it was leaving the area despite having accumulated more than 600,000 acres. The company said after a "strategic review" the assets do not meet its targets. They are going to try and sell their acreage position but that could be difficult. They have only 45 producing wells on those acres so there is some proof of production but a relatively small amount considering the money they spent. Ironically Shell's acreage is considered part of the core in the ML.

Sandridge Energy (SD) is the most active driller in the ML but they recently cancelled plans to ramp up to 45 rigs and are currently operating only 22. The company said it was no longer interested in holding acreage by drilling and a lot of their 1.9 million acres will remain undrilled and the leases may be left to expire. In a recent presentation Sandridge only highlighted exploration plans for 615,000 acres in six counties with about 3,000 potential drilling locations out of the 1.9 million leased.

Encana (ECA) tried for nearly a year to find partners for a ML joint venture on their 320,000 net acres. They were unsuccessful and they eventually put their acreage up for sale after test wells with mixed results.

Apache has accumulated 580,000 acres but their early enthusiasm appears to have cooled. Apache thought the area had strong potential with "stacked plays" where there were multiple formations at different levels that could be tapped including the ML, Cherokee and Upper Pennsylvanian. They have been relatively quiet on the ML in recent months after highlighting 7,200 potential drilling locations.

One analysts suggested there could be as much as 3 million acres of ML leases in Kansas that will see their leases expire. With acquisition costs averaging $150 an acre that is a hit to the big players but not as big a hit as drilling a bunch of $8-$12 million wells that don't produce.

The early warning signs the play may not have been as lucrative as everyone hoped was the rush to joint venture the accumulated acreage. When explorers think they have found a highly prolific field they try to keep it to themselves as long as possible. In the ML the early producers raced to do joint ventures with other companies in order to reduce their exposure to the play rather than increase it. Devon Energy partnered with Sinopec for $500 million. Sandrige partnered with Repsol and Atinum in two different transactions worth $1.5 billion. Chesapeake received $1 billion from Sinopec for an interest in the ML. These companies recovered their initial investments in the land and now they can make drilling decisions based on potential results rather than the hope they can recover their initial investment. They de-risked the play.

Eagle Ford

While the ML is struggling to find respect the Eagle Ford is turning into a monster play. When PetroHawk drilled the first horizontal well in the Eagle Ford in 2008 the production was only 358 bpd. Only 26 drilling permits were issued that year. In 2012 there were 4,141 permits issued. In May the total production hit a record 580,000 bpd. That was a 58% year over year gain. The Eagle Ford has helped Texas production to 2.6 mbpd, up +600,000 bpd from 2012 levels.

Bentek Energy believes the Eagle Ford could hit 1.6 mbpd by 2016. I have written several times about the declining production in the Bakken and the potential peak in 2015. Production from the Bakken has only increased +83,000 bpd since January 1st while Texas production has increased +280,000 bpd with much of that coming from the Eagle Ford. The Eagle Ford covers 20,000 square miles or 12.8 million acres and it has the potential for a decade of continued growth.

A plus for the Eagle Ford is its proximity to refiners in Corpus Christi and Houston. They are just a short pipeline run away and that is a boon for Texas refiners. The Eagle Ford crude is exceptionally light and highly desirable.

Lastly the wells are cheap relative to the Bakken. An Eagle Ford well runs about $6 million and they are relatively quick and easy to drill. EOG, the biggest landowner in the play with 630,000 acres has seen well costs decline from $9 million in 2009 to $6 million in 2013. Consultant firm Wood Mackenzie said the industry will invest $28 billion in the Eagle Ford in 2013.

Market

The equity market continued its slow fade last week as the Washington headlines heated up. This is going to be a critical week where action in the House and Senate is going to be rapid fire and the potential is very high for a short term government shutdown. I have confidence lawmakers will work something out but both sides are heavily entrenched in their positions.

The following week will see the early debate on the debt ceiling and it promises to produce even more volatility since the new budget will be worthless without the ability to raise the debt limit. The defunding of Obamacare will turn into a one-year delay effort and that will have the democrats dumping all over the republicans and the fight will be vicious.

I still believe the Washington induced volatility will cause some market declines over the next two weeks. Look to buy stocks cheaper over the next two weeks.

Jim Brown

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