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By TMFKitKat
May 19, 2009

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The oil/gas investment sector is something I have given a lot of thought to lately. I have only just started researching companies that have both. After looking at several natural gas companies only [XTO, CHK, XEC], it is looking like natural gas is too affected by local events to make for an entirely comfortable investment. Don't get me wrong, oil is not immune to boom and bust but it appears that a recovery of price is a better bet in oil than in natural gas

Profits on both are closely tied to ease of production. I was amazed to find the costs of getting oil subsea was 7X higher than easier fields in Egypt. This was for Apache.

I have not yet seen figures for the difference between shale production and some of the easier older fields here in the San Juan Basin. But I have read comments that a large part of US reserves is now in shale, older fields are declining and LNG can be more cheaply brought to market than shale right now. This was also from Apache --from the CEO

The Future for oil and for gas

No not that T Gardner

Tom Gardner - Simmons & Co.

I wanted to get your view on the oil markets. You may have been one of the few that really saw the weak environment coming to any degree. So, going forward what do you think? When would we see a recovery?

G. Steven Farris

Well, and I really mean this, we do look at our business long term. So in terms of, is it going to be six months? We've got an awful lot of pain in the economy and I think you could linger it where we are for some time. Having said that, if you also think that we're still producing, or consuming, as a world 83 million barrels of oil a day and you think of how much capital is going to come out of this business.

I don't know if it's two years from now or three years from now but, regrettably, I think we're going to see the same thing that we saw at $140 oil. I mean, I really do. I don't think you can stop that 83 million barrels a day on a dime.

Tom Gardner - Simmons & Co.

Yes. Your thoughts on LNG, are prices likely to stay low enough domestically to keep it in Asia and Europe to a large degree?

G. Steven Farris

I think the United States is facing some LNG imports in 2010. If you think about some of the very big guys in the world that have LNG coming on during that timeframe, I think it's possible that you could see bigger quantities of LNG starting to test these markets in the U.S.

Tom Gardner - Simmons & Co.

Does that portend for a gas price recovery in your view domestically in 2010?

G. Steven Farris

I think we're - my honest opinion and it is I think we better run to get our cost down on the gas side. I think we - people don't recognize that we've gone from a nine-year reserve life to a 100-year reserve life. And I think that's going to be indicative of prices going forward. I think, in this country, I think the guy that wins is the guy that can do it the cheapest and do it the most efficiently.

--- he is wrong about 100 years, but does make some good points

Not a revelation that the guy who does it cheapest wins in natural gas [and oil too for that matter]. But in shale who does it cheap and how much can they make at current prices and is there some reason to expect natural gas prices to rise to the point that shale extraction becomes very profitable and stays there? Hard questions. The addition of the shale reserves has made investment in a purely natural gas company difficult. Which is why my current research is into combination companies with a preference for a bit more oil than gas

I have started a spreadsheet of gross margins, PV10 and reserves. I have not gotten far. Interestingly integrated upstream/downstream big boyz like Exxon, BP and COP have pretty amazing reserves. Its all the other baggage they carry like refineries and filling stations that make them unattractive. They also have some of the lowest production costs

Check the reserves for BP and Exxon compared to a few of the smaller companies.

[See post for table.]

Anyway just a long winded way of saying natural gas companies may not have served their cause by uncovering the reserves in shale. The glut of gas and high cost of production may make it difficult to make much of a living without an unprecedented sustained increase in the price and that has not happened yet as far as I can see. Granted I have only been at this a few years so don't know much. Don't know what the impetus to a higher price would be except the usual suspects --weather and supplies. A massive shut-in by producers can curb supplies but the weather is [no matter what the weather guys say] long-term unpredictable.

Wish the Exxons and BPs had less "other" business and were more just E&P. Wish we all could have had shares in Saudi ARAMCO

Suncor and CNQ are interesting. But the cost of production is too high to make them predictable investments at current oil prices. I have not finished looking at them and don't have any idea of when they become more attractive. Suncor has big reserves but almost all in sands.

This a rather overlong look at Apache. Welcome any comments or insights here or there. Intend to cover Suncor then CNQ. Am looking for more candidates--heavier in oil than natural gas if anyone has any suggestions