Chesapeake gets a Valuation

LNG prices set records

“How to invest in 2021: (1) is this company/stonk a meme?; (2) if not, can it become one?” - Turner Novak


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CHESAPEAKE CH11.

  • Management’s proposal was $4.1BN

  • Creditors proposed $7BN

  • The Judge (this week): $5.1BN

For context, management’s original proposal (from Oct.) assumed 2021 WTI of $42.

Today, it’s at $52 - the curve has moved materially since the proposal.

A higher price makes sense.

Oct. Plan Forecasts (Docket 1622)

H/t to @WAR527 for pointing out the news:

When Chesapeake filed, oil / gas prices were grim.

It’s only appropriate that they are set to emerge into a market w/ record LNG prices…


LNG.

Much of the Northern Hemisphere has seen extremely cold weather in the past few days.

Extreme to the extent that gas & electricity prices - around the world - have surged.

Today’s electricity spot prices in Japan set records.

Spain saw local gas price records in the past couple days.

In Asia, LNG prices have hit levels that are 10x higher than last year’s lows.

All of this has culminated in a shortage of LNG *tankers*

Weather aside, increasing renewables - often by replacing coal - in an electricity mix (which many Western countries are doing) means that more gas is needed in extreme events.

That’s good news for gas… at least this week -


OTHER NEWS.

Oil / sports aside, this was one of the stranger forecasts we’ve seen.

At the time it was made (Dec. 21st), none of the forecast seemed like a possibility (the event was at the Capitol, on Jan. 6th) to us.

*But some of it happened*.

The forecast was made by an Israeli analyst, Arieh Kovler.

A few details were eerily on-point.

We’re not endorsing this analyst - we don’t know much about him.

But, when someone can see the future (even w/ partial accuracy), we pay attention -


That’s it for this week - Matt’s a Packer’s shareholder, so we’re rooting for Green Bay - catch y’all next week -

OPEC Kicks Off 2021

“A reminder that OPEC+ has switched to monthly (full) ministerial meetings in early 2021” - Javier Blas


Editor’s note: We’re a day early this week - OPEC+ is meeting later this afternoon. It looks to be light week for oil…


OPEC+ MEETS AGAIN.

Later today, OPEC+ is meeting in Vienna, where there is a (small) risk that they will choose to ease production cuts.

The conflict:

  • Saudi & others want to err on the side of caution

  • Russia wants to ease cuts (produce more)

Crude is up slightly, on the market expectation that cuts will be held.

As it currently stands, the cartel is holding back ~7MM BOPD to compensate for the decline in demand caused by COVID.

Regardless of what happens later today, expect that OPEC+ will be in Q1’s headlines.

The group now plans to meet monthly.

If cuts are held later today, we’ll revisit in ~4 weeks time -


OTHER NEWS.


Hope y’all enjoyed the holidays - we’ll be back on Tuesday the 12th -

Magnolia Asset Review

“One can hope for $75 oil, but I think one has to plan for a lower price” – Stephen Chazen


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PDF Version: Google Drive Link

MAGNOLIA (MGY).

MGY is an Eagle Ford / Austin Chalk E&P company headquartered in Houston:

  • The company focuses Karnes County & the Giddings Field

  • Magnolia is the result of a TPG SPAC that combined with EnerVest assets

  • MGY is led by Stephen Chazen, OXY’s former CEO

From MGY’s most recent 10-Q:

  • 27,016 bbl/d

  • 54,306 boe/d

  • 50% oil cut

MGY’s latest reserve report lists 1,630 gross wells:

  • They own ~24,000 acres in Karnes County & ~440,000 acres in the Giddings Field

  • The majority of their wells are non-op (w/ EOG being the operator on ~75%)

  • We identified ~52% of MGY’s production via data from public filings

The 30,000-foot view is straightforward:

  • Cheap wells

  • Very good management

  • Low debt load (undrawn revolver + $400MM in notes due in ’26)

  • Emerging play w/ significant acreage to drill out


KARNES COUNTY.

Historically, Karnes County has been Magnolia’s core operating area.

We built out type curve parameters (using ’19 & ’20 vintage wells) with ShaleProfile‘s state-level data, and the breakeven numbers look pretty good:

Our next step was to compare Magnolia’s Karnes County well productivity to its peers:

Contact Enno at ShaleProfile for a trial

It’s clear as day that Magnolia figured out how to drill Karnes County

So, why move on from that play?

*Low Inventory*

Contact Tom at FLOW for a demo

Magnolia has been drilling much denser than its peers.  Despite the downspacing risk, their rock has handled the high well density.

That said, MGY would not be doing this / taking this risk if they had more drilling locations in Karnes.

So, Magnolia has started drilling out their other play


GIDDINGS FIELD.

Like Karnes, we built out type curve parameters using ShaleProfile‘s state-level data.

This time, we broke out type curves by vintage:

Data from ShaleProfile

For anyone who’s been following US Shale, a major known issue is that much of the good rock has been drilled.

Vintage well performance has – in many cases – gotten worse over time.

Magnolia’s new Giddings Field play is showing the opposite trend.

Their 2019 wells were garbage.

But the 2020 wells look good.

MGY Giddings Field Cum Prod:

Data from ShaleProfile


CONCLUSION.

Magnolia is the first US Shale E&P that we’ve looked at closely in 2020 where *the assets support the capital structure*.

We ran a PDP forecast - discounting it at 10% - and compared it to their most recent reserve report.

For the wells they operate (we backed-out non-op), we actually agree with their PDP reserve audit!

  • For this analysis, we ran a prod forecast using 3rd party data, covering 297 operated wells owned by MGY

  • We ID’d 28kboe or 52% of MGY’s Q3 net production via data from public filings – Q3 prod was 54kboe

  • We attribute the difference to Magnolia’s extensive non-op portfolio - they own WI in 1630 wells

We did not see *that* coming [btw, their auditor is Miller and Lents].

The main risk in Magnolia is the development of the Giddings Field.

Right now, it looks good.

But MGY’s market cap is almost $2BN

…and WTI is in backwardation.

To catch up to *that valuation*, either Giddings needs to hit big (they have 400k+ acres to play with), or crude prices needs to rise.

Or both -


That’s it for this week - we’ll be back in the New Year - enjoy the Christmas / Winter Holiday break - catch y’all in 2021 -

The Demand Question

“You may not be interested in war, but war is interested in you” - Leon Trotsky


Holiday Schedule: We’re back for a 2nd time this week, on Thursday. After that, we’ll be off until Jan 5th.


OIL DEMAND.

We start off, where we left off - OPEC+ & Oil Demand:

  • Vaccine roll-out timing (?)

  • Increasing lock-downs

  • OPEC+ & restraint (production cuts)

We’ll start off w/ the Good:

  • US products consumption remains (relatively) strong

  • China’s crude oil throughput sets records in November

The Not-So-Good is about the EU / UK:

The ironic concern is for Oil is that the Dutch may “succeed” in getting cases down to near-zero.

Obviously, at a *steep* economic cost.

With the indirect consequence that other countries may try the same -


OPEC.

Contradictions abound in Oil Markets:

From OPEC’s latest MOMR:

OPEC has steadily pulled back its 2021 demand forecast in recent months.

We highlighted “Europe” in the above chart, bc we think *that* is where the uncertainty (downside oil consumption uncertainty) lies.

OPEC also postponed its technical meetings - which were scheduled to begin tomorrow - to early January.

In light of the changing Covid-policy roll-outs that we discussed above (especially in Europe), the postponements makes sense -


OTHER NEWS.


That’s it for today - we’ll be back on Thursday - catch y’all then -

The Conundrum

Moderna, OPEC, & a 3rd wave

“Standard individual-scale policy approaches such as isolation, contact tracing and monitoring are rapidly (computationally) overwhelmed in the face of mass infection, & thus also cannot be relied upon to stop a pandemic” - a note dated *Jan 26th, 2020*


***Editor’s note: we’re a day early this week, & we’ll be taking next week off.***


CONUNDRUM.

The are two - starkly - conflicting political economic stories.

We’re having a hard time weighing them.

They are:

  • The Good - the vaccines look like they work

  • The Bad - *both* (1) herd immunity & (2) the policy combination of isolation, contact tracing, monitoring have not worked

**The vaccines appear to be faster & better than forecasts**

THE BAD.

A third policy has appeared to “work” - that policy can be characterized as being incredibly “harsh” with *initial* lockdowns, followed by strict travel bans.

By “harsh”, we mean locked-down until cases hit zero (or zero in most regions).

This is relevant, bc the UK & EU are about to lift their - relatively - soft lockdowns for a 2nd time.

And holiday travel / celebration is expected (albeit less than normal) across the US, UK, & EU.

It is what-it-is.

  • We’re *not* making political statements

  • We *are* making forecasts

We think the fallout from December celebrations - hitting markets in the 2nd half of Q1 - will be a *Political Economy Dumpster Fire*:

  • Both (a) soft lockdowns & (b) herd immunity have failed

  • Those failures have killed any political will left for hard lockdowns

The primary author of our leading quoted note is Prof Yaneer Bar-Yam.

He co-wrote that note w/ Nassim Taleb.

In January - and it still holds.

On Friday, a podcast interview w/ Yaneer was published.

The - likely, in our mind - event of a 3rd wave (and a subsequent 3rd lockdown) will have consequences for oil markets & their participants, as well as the broader global economy.

Unless the vaccines arrive first -


OPEC.

Yesterday’s OPEC JMMC meeting ended without an agreement to extend production cuts.

The UAE & Kazakhstan don’t appear to support an extension of the current cuts.

Russia also appears to hold that position, but that could be a deception of sorts.

The OPEC ministers meet today at 2pm (Vienna time).

The perfect Q1 storm (ideally, to be avoided) is:

  • OPEC does not extend the cuts

  • The vaccines take months to distribute

  • Normal holiday celebrations inadvertently spread the virus

We do not view this as the most likely outcome, but we also don’t think that the market has digested the probability (we give it 1/4) of these events occurring -


OTHER NEWS.

The #EFT community is running a fundraiser for Oilfield Families In Crisis:

  • The campaign is halfway to its $100K goal

  • “An EXTREMELY generous EFT participant has offered to match the pot up to $100K.  So whatever you donate will in effect be doubled”

  • Additional matching from Dan Pickering & QuickDraw

  • h/t to @EnergyCredit1 for organizing


That’s it for this week - we’ll be back on Dec 15th - enjoy the Cyber Monday Deals -

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