Skip to main content

First comes the reassurance, then the penny drops

Soooo!

GS says that the extraction costs for Bakken fields (fracking oil) are in the low $40s.... at most.  Well that sounds not right.  First off, this stuff is deep, so deep that at times radioactive waters are extracted at the same time -- the oil has to be heated out of the rock, and then cleaned from all the chemicals used to extract and make it more viscous.  All together this is not a simple process, or inexpensive.

GS is the same gang that says that oil extraction in Libya (where the stuff is almost lying on the ground) is very expensive, but the "North American deep and expensive wells costs are around $40" is their new song -- why?

The reason is that GS is well aware that lots of investors (in the junk bonds they issued over the past few years) are starting to either (a) read the prospectus they were given, and (b) are just starting to panic -- and are thinking the worse case scenario.  Now, I am certain that GS is not lying (hey they know how to be "economical with the truth", but that's not lying) so investors will think (or hope) that its not "their junk bond that's in trouble" maybe its even time to buy some more as "other investors" panic and sell at a discount.

Now, I'm not an E&P guy -- my interest is marginal but there are a number of truism that you must follow for valuations:

  1. Fracking is an expensive process
  2. The wells are deep and require lots of horizontal drilling
  3. Chemicals have to be used to "loosen" the oil from the rock
  4. The oil is considered "synthetic" and sells for less than "light and sweet" from the Gulf
  5. Frackers (not the best term) have used massive amounts of debt (leverage) so as to improve their returns
Dont' forget that GS are the guys who were confident that gold was on its way to sub $1,000 from $1,200 -- of course gold is still around $1,227, so that was not the best call in the world, but within the standard of investment banks absolutely within the standard of protecting their market.  They are probably right there are ways of calculating the extraction cost of Bakken fields at around $40 -- my guess is that you have to make some aggressive assumptions on production yields...

Anyway, this morning WTI went as low as $62.00 -- the ride continues!



Comments

Post a Comment

Popular posts from this blog

what people get wrong about tariffs

 The issue is simple. What percentage of the economy is dependent on tariff goods? The truth, is that the US economy is far more closed than people understand. People genuinely believe that all manufacturing has ceased to exist in the United States all given to China on the altar of woke policy the truth can be further from That statement. Only about 15% of US GDP is related to foreign trade. Of that amount, slightly more than half is from Canada in Mexico. And half of that is energy. What that means, is that about 7% of US GDP is tariff dependent. The proof in the pudding, is how little money tariff generates. People think that 30 or 50 billion is a lot it’s not in an economy that has $3 trillion. The impact on the US economy will be less visible but not absent. Inflation hasn’t occurred yet first because tests have hardly started to bite, but more importantly it’s such a small percent of the economy. Now certain things are critical. The rare earth metals from China were critical....
Post a Comment
Read more

The end of Tesla?

 it takes a special kind of idiot, to think that he can antagonize his entire customer base, and think that it will not impact his business. When Elon Musk went to work for Donald Trump, and created the doge department, he antagonized every liberal, and these people represent 90% of his client base.That’s not a brilliant move. Now Elon Musk is worth hundreds of billions of dollar, so he shouldn’t care a great deal, however, he needs to care because of several other issues. The cyber truck has been a disaster, most have had to be recalled because of defective glue, it’s not a truck, it’s not a car, it’s noisy, relatively uncomfortable, but great as a development platform. What Tesla has learned in making car manufacturing more seamless is truly amazing. The problem was that Elon Musk was so pissed with the Democrats, and with Joe Biden, in particular because of some slight, which were just plain stupid too. By the way, that he decided to support with hundreds of millions of dollar, ...
Post a Comment
Read more

Demographics

 I am preparing a kind of family tree for our children so that they know where they came from.  In my family I am the only survivor, although my brother and sister died recently they were both in their seventies (a story I told already).    It was a fun process, but it provided more than that.  First, I married relatively young I was 26 when I married and nearly 30 when our first child was born.   I was looking at my ancestors.  On my mother's side, she had 6 siblings, Four died before the age of 30, two in war, and two from illnesses.  Only she and a single sister survived.   The two boys had a child each but they died in WWII, and the other sister died as an infant.   what is interesting is that every one of my mother's siblings had children in their early 20s.   I know that my mom was hardly 20 when my brother was born.    What is remarkable is that among our friends, we are the only ones to have fou...
Post a Comment
Read more