Range Resources Razzle-Dazzles Investors

devil detailsAt a UBS Global Oil & Gas Conference 5/21/2013, Range Resources gave a sunshine and rainbows presentation of what they expect out of the natural gas shale plays.   Overall, according to Range, everything is wonderful; Range and investors will make lots and lots of money.    But, as they say, the devil is in the details or this case the devil is in the fine print.

READING THE FINE PRINT

Range Resources Presentation – UBS Global Oil & Gas Conference 5/21/2013  – Page 2, Forward Looking Statements, 2nd paragraph

range resources fine print1. “The SEC permits oil and gas companies, in filings made with the SEC, to disclose proven reserves, which are estimates that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions as well as the option to disclose probable and possible reserves.  Range has elected not to disclose the Company’s probable and possible reserves in its filings with the SEC.”

Keep in mind there is a BIG difference between PROVEN RESERVES and RESERVES.

Recoverable Reserves: A term used in natural resource industries to describe the amount of resources identified in a reserve that is technologically or economically feasible to extract.

Recoverable reserves are also often called PROVEN reserves.

Reserves:  An estimate of the amount of oil or natural gas reserves that MAY be available for extraction (also known as UNPROVEN or PROBABLE reserves)

Total Reserves = Proven + Probable (unproven)

2. “Range uses certain broader terms such as “resource potential,” or “unproven resource potential,” “upside” and “EURs per well” or other descriptions of volumes of resources potentially recoverable through additional drilling or recovery techniques that may include probable and possible reserves as defined by the SEC’s guidelines.”

EUR-Estimated Ultimate Recovery: A production method commonly used in the oil and gas industry. Estimated ultimate recovery (EUR) is an approximation of the quantity of oil or gas that is potentially recoverable or has already been recovered from a reserve or well.

Use of terms like potential, probable and EUR fall in the category of UNPROVEN, meaning these are guesstimates, extremely speculative, and more often than not far off the mark of what can actually be PROVEN.

Natural Gas Industry likes to throw around the 100 years of reserves in their talking points, yet we know the PROVEN reserve estimates are far below that, 6 years for the Marcellus per Department of Energy.

3.  “Range has not attempted to distinguish probable and possible reserves from these broader classifications. These estimates are by their nature more speculative than estimates of proved, probable and possible reserves and accordingly are subject to substantially greater risk of being actually realized.”

Range is admitting to using pie-in-the-sky numbers.

4. “Unproved resource potential refers to Range’s internal estimates of hydrocarbon quantities that may be potentially discovered through explortory drilling or recovered reserves with the meaning of the Society of Petroleum Engineer’s Petroleum Resource Management System and does not include proven reserves.”

Range is using their own internal numbers for the pie-in-the-sky UNPROVEN estimates.

5. “Area wide unproven, unrisked resource potential has not been fully risked by Range’s management.”

Not been fully risked?  Why not?

OVERVIEW

Throughout the presentation, Ranges uses the fuzzy terms like potential, reserves, EUR etc.  to make the shiny look even more shiny.

Although Range does disclose it uses INTERNAL fuzzy numbers in the Forward Looking Statements, the numbers used in the presentation are designed to dazzle investors who do not take the time to read the fine print let alone understand it.

Source data for the internal fuzzy numbers is not disclosed, so what is it based on?  How did Range come up with the numbers?  Is it a case of GIGO?   (Garbage-In-Garbage-Out)

Why the pie-in-the-sky presentations?  A typical Marcellus well costs approximately $5-7 million.  A well pad may have multiple wells, so multiply the cost number by number of wells on a pad for total costs.

Then multiply that by Range’s proposed future expansion.

Next add in the additional costs for gathering lines, compressor stations, metering stations, glycol dehydration plants, other related infrastructure and expenses.

Numbers get pretty big.  Where does Range (and other natural gas corporations) expect to get their money?  From investors, like banks.

How do you convince investors to invest?  Razzle-Dazzle.

The Big QUESTION is will investors fall for the razzle-dazzle or will they read and understand the fine print?

When speaking about oil & gas deals back in 2012, Ralph Eads III, of Jefferies explained:

“Typically, we represent sellers, so I want to persuade buyers that gas prices are going to be as high as possible,” Mr. Eads said. “The buyers are big boys — they are giant companies with thousands of gas economists who know way more than I know. Caveat emptor.”

OTHER FACTORS TO CONSIDER

In order to get the investment money, a natural gas corporation has to keep producing.  Based on 2011 figures, it has been shown that the average productive life of a Barnett Shale well is 7.5 years. From those early production results it looked as though these Marcellus wells may share that same short lifespan. The trend points to a 60-percent drop in production over the first 3 years, with further declines of 8 percent per year after that. Using that model, a Marcellus well’s average productive life would be 8 years.

Other models have put the average Marcellus well lifespan at 3 years, with anything longer being designated as a “sweet spot”, which are far and few between.

Whether its 8 years or 3 years, in terms of oil and gas drilling, the lifespan is very short, and with the pressure from investors to produce, this means more and more drilling and that takes more and more money.

Market prices for natural gas dropped considerably, the industry likes to blame the warm winter of 2011-2012, and ignore the over-production of gas which caused a glut.  Over-production was encouraged by the investor pressures to continue to produce.

With the drop in market prices, and the industry still needing money to continue to meet investor expectations, the next big rush was to drill for Natural Gas Liquids (NGLs).   In a relatively short time, the NGL market was also glutted, prices dropped.

Onto drilling for shale oil in the Utica!  According to an April 2013 article in Bloomburg, the shale oil dream isn’t all it was “fracked up” to be.

U.S. drillers that set up rigs amid the rolling farmland of eastern Ohio on projections underground shale held $500 billion of oil are packing up.

Four of the biggest stakeholders in untapped deposits known as the Utica Shale have put up all or part of their acreage for sale, as prices fall by a third in some cases. Chesapeake Energy Corp. of Oklahoma City, the biggest U.S. shale lease owner, last week offered up 94,200 acres (38,121 hectares). EnerVest Ltd. and Devon Energy Corp.  are selling as early results show lower production than their predictions.

“The results were somewhat disappointing,” said Philip Weiss, an analyst with Argus Research in New York. Early data show “it’s not as good as we thought it was going to be.”

EXPORTS, THE BRASS RING?

The industry hype is now all about natural gas exports.  On current world market conditions, it is assumed exporting natural gas would produce greater financial returns.   Foreign countries would be paying more for the natural gas than what current domestic markets are willing to pay.

At the moment, because natural gas is “cheap”, the industry is pushing for homeowners to convert their homes to use natural gas.  A number of bills are in various state legislatures to encourage the expansion of natural gas pipelines to communities which are “underserved”, with the talking point that natural gas is “cheap” and will save the homeowner money.

Econ 101: if your supply outstrips your demand, the only way to raise prices is to reduce your supply — something gas companies can’t easily do because their contracts on wells often require them to keep drilling to maintain the lease — or increase the demand. And since the demand for natural gas in the U.S. seems to be more or less maxed out, the best way to do that is to ship the gas to other countries where the price of natural gas is much, much higher.

If exports do prove to be the big brass ring, kiss cheap domestic natural gas good-bye.

In the short term, higher natural gas prices, either in the foreign or domestic areas will mean higher profits.   In the long term, higher natural gas prices will encourage people, communities, and even countries to look to other energy sources.

Harken back to then 1973-1974 OPEC oil embargo.  We had long lines at the pumps, and domestic supplies cost more.    However, one of the unintended consequences of the embargo was to bring the energy issue to the forefront, and look to sources other than oil, and ways to boost energy efficiency.

Interest and research into solar and wind increased.   Weatherization of existing homes to reduce heat loss were encouraged, new homes were built with an eye towards energy efficiency.  Many energy efficient products were introduced to the market, and vehicle gas mileage increased.

Unfortunately, the OPEC embargo did not last long enough for all of these to firmly take root in the American psyche and the political will towards energy efficiency and independence waned considerably.

According to industry talking points, natural gas is cheap and supposedly will make us energy independent.   How will exporting our natural gas make us energy independent if the natural gas is not staying in the US?  As pointed out, the prices will rise and natural gas will no longer be cheap.

Given the growing resistance towards the current drilling practices by the industry, and the very real expectation of rising domestic energy costs, the desire for real and sustainable energy sources continues to gain momentum.

The political will towards real and sustainable energy is still not there, and that has to change.

©2013 by Dory Hippauf

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