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N.D. oil output jumps even as flaring rule changes loom

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By Ernest Scheyder

(Reuters) – North Dakota’s daily oil production jumped 5 percent in July to an all-time high, though the number was lower than expected as producers worked to meet aggressive flaring-reduction targets, state regulators said on Friday.

The production numbers, which have been steadily rising for years, highlight the massive investments Hess Corp, Whiting Petroleum Corp and other companies are making to develop the state’s oil-rich Bakken and Three Forks shale formations and others.

Despite the positive production data, shares of top North Dakota oil producers fell with the broader market.

The investments have brought thousands of new workers to North Dakota, as well as billions in infrastructure and real estate investment, making the state the fastest-growing economy in the United States.

North Dakota’s oil wells produced 34.4 million barrels in July, up from 32.8 million barrels in June, the North Dakota Department of Mineral Resources said. That averaged 1.1 million barrels a day.

Natural gas production in the state hit 1.3 billion cubic feet per day, also an all-time high. The percentage of natural gas flared in the state fell to 26 percent in July from 30 percent in June.

In an effort to curb flaring, the wasteful burning of natural gas, state regulators issued strict goals earlier this year with key benchmarks for flaring percentages each month. For Oct. 1, for instance, the state’s oil producers cannot flare more than 74 percent of natural gas produced. If they do, they face fines.

The industry has effectively reached that goal, but it did so by posting a jump in July oil production that was only about half what had been expected, Lynn Helms, the director of the state Department of Mineral Resources, said in a presentation to reporters.

“The industry is taking this dead serious,” Helms said of the flaring goal.

The number of rigs operating in the state as of Friday stood at 198, up from 193 in August but 9 percent below the all-time high, according to state data.

“The industry understands that there is no better place to make money than the core of the Bakken and Three Forks formations” in North Dakota, Helms said.

Helms vowed to keep drilling permit approvals going in order to continue development, though he acknowledged that oilfield service companies are having a hard time completing wells due to the speed at which drilling is occurring.

Shares of top Bakken oil producers fell across the board on Friday along with the broader stock market.

Shares of Continental Resources Inc fell the most after the company, the largest North Dakota oil company, said its president had quit. The stock was down $1.93, or 2.5 percent, at $73.86 a share on the New York Stock Exchange.

(Reporting by Ernest Scheyder; Editing by Chizu Nomiyama and Jonathan Oatis)


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After Eric Cantor’s Exit, House Turns Sympathetic Ear From Big Business to Oil and Gas

Congress returns next week for a mere 12 scheduled legislative days before the November midterm elections, but in that brief reappearance, the House’s new leadership team will be tested. If nothing is done, the federal government will run out of money on Oct. 1, and the federal Export-Import Bank — which underwrites American private-sector exports — will exhaust its charter.

With both issues, the departure of Mr. Cantor, the former House majority leader defeated in a June Republican primary, and the rise of Representative Steve Scalise of Louisiana, the newest member of the Republican leadership, will be felt. Mr. Scalise, the new House majority whip, brings with him a capacity to deal with the House’s most ardent conservatives, which could help to keep the government open ahead of the elections.

But Mr. Cantor was the man who could translate the wishes of Big Business to the conservatives. Without him, the Export-Import Bank and its business supporters have lost their most persuasive advocate. Asked who in the new leadership can talk to business interests and Wall Street, Mr. Scalise said, “I have no idea.”

Mr. Cantor, once the bridge to those interests, crossed to the other side. He joined Moelis & Company, a small investment bank, as vice chairman and managing director with a pay package worth $3.4 million over the next two years.

Without him, House Republicans are left with a comparatively inexperienced leadership team. In his 24th year in Congress, Speaker John A. Boehner of Ohio has broad legislative experience and the skills of a political survivor. Below him, the new House majority leader, Representative Kevin McCarthy, is in his fourth term and Mr. Scalise his third.

In official rankings, Representative Patrick T. McHenry of North Carolina, Mr. Scalise’s chief deputy, is the second-most senior member of leadership, just nudging out a fellow fifth-termer, the Republican Conference chairwoman, Representative Cathy McMorris Rodgers of Washington.

Besides the speaker, no member of the House Republican leadership was in Congress for the attacks of Sept. 11, 2001, or the invasion of Iraq. The top six Republican leaders have served a collective 64 years in the House. The top three Democratic leaders have served 80.

“This is unique,” said Norman J. Ornstein, a congressional scholar at the American Enterprise Institute. “You now have a sizable number in leadership who were not there when the parties routinely worked together or who have a significant understanding of operating in divided governance. The only thing they’ve seen is tribalism.”

What is more, with so little time in Washington, the new leadership team has yet to develop deep connections to the K Street lobbying world or the elders in either political party.

Mr. Scalise said his degree is in computer science, an interest he maintains, but what animates him most is the oil and gas industry that has long been central to the Louisiana economy.

“Build the Keystone pipeline, open up the outer continental shelf, bring in billions of dollars to the Treasury to help us balance the budget, look at the E.P.A. and what it’s trying to do to shut down energy production in America,” he said. “This is real stuff that’s happening in the country, and it’s not just Louisiana.”

Louisianians foresee a new moment for their state and its congressional history, from Russell and Huey Long to John Breaux and Hale Boggs. Robert L. Livingston resigned in scandal in 1998 just days before he was set to take over the House speakership. Now, as a prominent Washington lobbyist, he said he was advising Mr. Scalise on policy and leadership issues.

“He doesn’t ask for it,” Mr. Livingston said of his advice. “I volunteer it.”

Another former House member from Louisiana, Jim McCrery, was once the top Republican on the Ways and Means Committee. Now, as a senior tax lobbyist in Washington, he said he had spoken with the new majority leader on a broad overhaul of the tax code.

“Louisiana over the years has managed to have a delegation that is stronger than its numbers,” Mr. McCrery said. “We’re still a long way away from being where we used to be, but it’s a good start.”

Louisiana’s gain has been New York’s loss. Representative Peter T. King, one of the last in New York’s shrinking Republican delegation, said Mr. McCarthy had been developing contacts with Wall Street and the Big Business community. But it is a measure of business’s relative lack of influence that Mr. McCarthy turned against reauthorizing the Export-Import Bank shortly after Mr. Cantor’s defeat.

The U.S. Chamber of Commerce, the National Association of Manufacturers and other business groups have mounted an all-out campaign to save the bank, arguing that its loans and loan guarantees to foreign customers of American exporters are vital to the country’s competitiveness in a global economy. But conservative activists have denounced the bank as corporate welfare, an argument Mr. Cantor was willing to rebut but his successor has avoided.

With Mr. Cantor gone, the coalition supporting the bank has opted for a bottom-up campaign, sending home-district manufacturers to lobby rank-and-file members and largely bypassing Republican leaders.

“We need a durable solution to this issue,” said Tony Fratto, a former Bush administration official organizing the campaign.

The new leadership team at one point turned to Mr. McHenry, the chief deputy whip, as the possible point person with Wall Street. He does serve on the House Financial Services Committee, but as the sixth man in leadership, he can wield only so much influence.

“Obviously Eric was the conduit on a number of these issues,” Mr. King said. “It’s going to be a challenge.”




100 pairs of work socks headed to oil field

Jeff Bahr | Aberdeen News

Hannah LaJoie wasn’t interested in winning a 5K Fun Run/Walk on Saturday morning. She cared a lot more about being honored for her flamboyant socks.

Hannah, 10, sported a colorful look in the “Run Your Socks Off” 5K event, organized by North Highland United Methodist Church.

You can be sure her legs weren’t cold. Hannah was wearing eight pairs of socks, which created a wild rainbow effect. She also had four pair of socks elsewhere on her body.

Why was Hannah wearing the wacky attire?

“Well, because I love wearing crazy socks,” said the Warner student.

Over the summer, the Boys and Girls Club had a crazy socks day and Hannah took that event. She describes herself as “really competitive.”

So Hannah was happy after Saturday’s run when she and her 4-year-old sister, Kenna Wolberg, were honored for their socks. They were the two young people who won sock awards.

More importantly, though, a lot of people in the North Dakota oil fields will be wearing better socks because of the event.

The entry fee for the fun run was a pair of work socks, each of which will be shipped to folks in the Bakken oil basin. “We collected close to 100 pair,” said the Rev. Lou Whitmer, pastor of North Highland.

About 50 people covered the 5K course. The event was a project of the Bakken Oil Rush Ministry, which is organized by United Methodist churches in the Dakotas.

Whitmer knew that several members of the church like to run, so the run seemed like “a fun way to do a mission program,” she said.

Many of the participants dressed for the occasion. Fashion choices ran from argyle to stripes galore. Participants ranged from Michael Hartung, who’s run four marathons, to babies in strollers.

Ten-year-old twins Zachary and Nathan Palmer joined their mother, Lesleann, at the fun run/walk. Lesleann was there because of her best friend, Amber Huff, who invited her. “I knew she wouldn’t turn down a chance to do a run,” Huff said.

Also taking part was Huff’s sister, Miranda Telin, and her parents, Al and Kristie Scherbenske, who go to church at North Highland. They told Telin about the event “and I thought it was a good fundraising effort for people in North Dakota,” she said.

Two of the participants, De Basham and Dar Retzer, recently saw a missionary from the Bakken area speak at First United Methodist. The speaker lives in Williston, where her rent is $2,500 a month.

Hannah and Kenna participated with their grandmother, LeAnn Conn.

The run/walk was just the start of a busy day for the Sarah and Nathan Miller family. Later in the day, their three sons had soccer games. Sarah ran the 5K course Saturday because she likes to run. She was on the cross country team at Edmunds Central, when her name was Sarah Miles. “Run Your Socks Off” was her third 5K, the second one this year.

The 5K was successful enough that North Highland will have another fundraiser next September.

“It was really fun to have the community support along with the people of the church,” Whitmer said. “And it was a beautiful day and lots of energy.”




Leader of Bakken drug ring gets 20 years prison

A federal judge sentenced the leader of an interstate drug ring to 20 years in prison Friday for his role in a major trafficking operation that stretched from western Washington to the Bakken oil fields of the Northern Plains.

U.S. District Judge Susan Watters said Robert Farrell Armstrong, of Moses Lake, Wash., preyed upon addicts in the Montana-North Dakota oil patch to build up a network of drug couriers, dealers and armed enforcers.

Armstrong, also known as “Dr. Bob,” was arrested in October as part of a law enforcement crackdown aimed at the Bakken oil region’s proliferating market for illicit drugs. Authorities have struggled to curb rising crime rates in once-quiet rural communities as people flocked there to take part in the region’s new prosperity.

Armstrong, 50, pleaded guilty in January to a single count of possession of methamphetamine with intent to distribute. He’s the 13th defendant sentenced in the case. Five more defendants have pleaded guilty and are awaiting sentencing, and another is scheduled to go to trial in November.

Authorities say the Sidney-based drug ring moved as much as a pound of meth a week before it was busted up last year.

“You’re an old criminal, Mr. Armstrong, and you’ve been doing this a long time,” Watters said. “The community needs to be protected from you.”

Before hearing his sentence, Armstrong asked Watters for mercy and apologized to the court for the damage he had caused to his family and people in Montana.

He said his judgment had been clouded by living for many years as a drug addict and he has been sober now for almost a year. “I believe prison is going to be good for me,” Armstrong said at one point.

Similar drug rings have been broken up in neighboring North Dakota. Along with meth and heroin, the criminals moving into the oil patch have brought weapons and a willingness to engage in violence, authorities say.

Armstrong came to the region in 2012 from Washington, where he had a string of drug and assault convictions stretching over three decades, according to Assistant U.S. Attorney Joe Thaggard.

In Montana’s oil patch, Armstrong set up shop in in a trailer along the Yellowstone River and oversaw a “massive, well organized scheme” that brought in large volumes of almost-pure meth from Washington state for distribution, Thaggard said.

Other Montana cities and towns where the ring distributed meth were Fairview, Billings, Big Timber, Columbus, Livingston and Bozeman, authorities said.

Armstrong’s network included couriers to get the drugs from Washington, dealers to sell it in Montana, and enforcers — some with firearms — to collect on overdue drug debts, said Jeff Nedens, an agent with the Montana Division of Criminal Investigation.

Nedens said Armstrong also traded meth for guns with at least one customer.

Under Armstrong’s plea agreement, prosecutors agreed to dismiss additional drug conspiracy, distribution, and firearms charges.

Armstrong’s public defender, Anthony Gallagher, asked Waters for a 10-year sentence. Gallagher argued that prosecutors overstated Armstrong’s leadership role in the trafficking ring and his criminal history.

He pointed out that Armstrong and at least one other co-defendant had been supplied with meth from the same source – a supplier in western Washington identified in court only as “George.”

“This was the classic case of a group involved collectively in a criminal enterprise,” the defense attorney wrote in a pre-sentencing memorandum. “All or almost all were independent contractors working in concert to obtain methamphetamine.”

Watters said she was not convinced.

Armstrong “was in fact the person who recruited these people in eastern Montana to distribute these drugs, to go on these drug runs,” the judge said. “The defendant was the connection between George and all of these people.”

Nedens said George and other unspecified individuals remain under investigation.

Prosecutors have racked up 105 indictments since the Bakken drug crackdown began about two years ago, U.S. Attorney Michael Cotter said this week. Another 100 indictments, all on federal narcotics charges, are expected in the next 12 months, Cotter said.




Hotel that would house 300-plus Bakken workers deemed too big for tiny town

BISMARCK, N.D. — The Billings County Commission decided at its meeting Tuesday that an extended-stay hotel for more than 300 oil patch workers is too big for the tiny town of Fryburg, near Medora.

The commission agreed with its planning and zoning board, which recommended denial at a meeting two weeks ago, partly because the county volunteer fire and sheriff’s department isn’t geared up for that size facility.

The developers of the proposed Morgan Lodge planned to add a four-story hotel onto the former Fryburg school, using the school for a restaurant and dining facility and meeting space.

Fryburg residents have been opposed to all those workers in town and told county officials they think the project is too big for them to handle. They also said there isn’t enough oil activity in Billings County to warrant the scale of the hotel, and the planned sewage waste system was too close to local residences.

Margie Lindbo, of Fryburg, said she and other residents are pleased with the county’s decision to go along with the zoning board.

“We’re very happy,” she said.

She said the developers have said they are looking at other land around Fryburg, so whether the county’s refusal is final remains to be seen.

“Time will tell,” Lindbo said.




5 Tax Changes Small Business Owners Need to Prepare For

Though it still may be barbecue and beach season, the end of 2014 will be here before you know it. For consumers, this means holiday shopping and New Year’s resolutions. But for business owners, it also means getting financial ducks in a row in preparation for the upcoming tax season.

There are many new and pending changes for the upcoming tax season, and some of them will be particularly important for small businesses. Based on conversations with tax experts, here are a few upcoming issues you may want to speak with your financial adviser about as you look toward year-end tax planning.

The Affordable Care Act. The ACA should be at the forefront of a business’s tax planning agenda, especially if the business is over or close to the 50-employee threshold, said Timothy Todd, CPA and assistant professor of law at Liberty University School of Law. With the administration beginning to enforce the mandate in 2015, now is the time to plan, Todd said. For some employers, the mandate has been pushed out to 2016, so discuss this with your tax adviser if you’re unsure how you’ll be affected.

Corporate tax rates. Mike Trabold, director of compliance risk atpayroll processing company Paychex, noted that one key issue in upcoming tax-reform proposals is corporate tax rates. Companies that are structured as corporations currently pay a higher tax rate than LLCs, partnerships and other tax-efficient business structures. Trabold said that if tax rates are lowered for corporations,small businesses that are structured a different way wouldn’t get the same tax advantages unless there were a parallel amendment to personal tax rates.

Deduction eliminations and limit reductions.Small business owners will find that some tax credits they once depended on have expired or have been greatly reduced, saidJohn Hewitt, CEO of Liberty Tax Service. Section 179 allows business owners to deduct the entire cost of certain assets, such as equipment and furniture, in the year of purchase rather than over a longer period of time. In the 2013 tax year, the deduction limit was $500,000, but this year, it has dropped significantly to $25,000. Bonus depreciation, whereby businesses could claim a 50-percent deduction for qualified property they placed into service in the tax year, ended in 2013. The work opportunity tax credit, which had given employers a credit of up to $9,600 for hiring veterans and other workers in specific categories, is also gone, as is the energy tax incentive that helped employers go green by giving deductions for eco-friendly business features such as lighting.

Net investment income tax. The 3.8 percent tax on net investment income became effective in 2013, but it may surprise you if you are being affected for the first time in 2014. Todd explained that the tax applies to high-income individuals with investment income. Common scenarios where this new tax may be implicated is if you have rental income, a stock portfolio or other “passive” income.

Tax extenders. The proposed “tax extenders” bill is an effort to renew $85 billion in temporary tax breaks for individuals and businesses. Although Reuters reported that the bill is stalled in the Senate until after the congressional elections in November, any decisions that follow may affect the 2015 tax season, Trabold said. Whether your business has been taking advantage of any of the 50 tax breaks included in the bill or not, it’s important to be prepared either way.

So what can you do now to make things easier when tax preparation season rolls around in a few months? The first thing you’ll want to do is to make sure your records are up-to-date and that your financial documents are organized and easily accessible for tax season, especially for any potential deductions.

“Save everything,” Todd said. “A lot of deductions require extra substantiation, such as meals, entertainment expenses and use of a personal vehicle. There’s been a spate of tax court cases lately that has disallowed business deductions due to lack of record keeping. If your business is audited, this is low-hanging fruit for the IRS to disallow.”

Another smart tax-prep move is to take advantage of technology that will make organization and record-keeping easier for yoursmall business. Jonathan Barsade, CEO of sales tax solutions provider Exactor, advised seeking a tax solution that is comprehensive, low-maintenance and easy to use.

“Modern technologies can automate the entire [tax] process for the small business owner, from the point of calculating the taxes at the time of the transaction, through the final generating and filing of the tax returns,” Barsade told Business News Daily.”There is no reason why a small business owner should spend any more than an hour each month on all of their tax compliance needs. The earlier the business owner proceeds towards automation, the less time they will need to work in tax season, which means more time remaining to focus on your business.”

Most importantly, keep these and other tax issues on your radar by following financial news and checking in regularly with your accountant or tax adviser.

“Tax code changes regularly, and this year is no exception,” Hewitt said. “A tax adviser will help ensure that your [documents] are organized and that your business is taking advantage of any tax savings that may be available. Depending on your situation, you may want to purchase new equipment, defer income or even hire personnel before the end of the year for tax savings purposes. A tax adviser can look at the business and help answer those questions.”

“Things can change very quickly,” Trabold added. “[Certain tax reforms] could be a real benefit to a small business, and you wouldn’t want to lose an opportunity because you didn’t move on it quickly enough. Keep an eye on the changing winds, and be ready to act if necessary.”




Small business, big mistake: Classifying employees as independent contractors

When I started my company in 2006, my intent was to have only independent contractors for the first five years, with the goal of minimizing overhead. My plan was to re-evaluate growth, goals, expenses and income in 2011 to determine whether I should start onboarding employees.

However, as with most small businesses, there’s always something that doesn’t go according to plan — at all.

This was one of those things.

At the conclusion of a long-term project with one of my customers, an independent contractor who had been providing onsite support for the project filed for unemployment benefits. What the what? I was left with that perplexed Scooby Doo look on my face.

How can my former independent contractor file for unemployment when our duly signed, attorney-approved agreement clearly states “independent contractor?” When I received a notice from the Department of Labor, Licensing and Regulation, I thought it would be resolved quickly one I sent them the signed agreement.

 Well, it wasn’t. My next notice included a case number for an audit of the work and compensation history not just for that individual, but for my records on every person I had hired in the three years leading up to that.

During the audit, DLLR officials reviewed my payroll information and compared workers to see if those who had been doing similar work were identifying it the same way on their income tax returns. They also wanted to know whether each contractor had an online presence (they asked me for Web site addresses) and whether each individual had been doing work onsite for my company in Maryland.

Of course, I thought I had done my due diligence in the beginning to develop an understanding of what constitutes an employee versus an independent contractor. Ultimately, though, reading through the Internal Revenue Service’s checklist and trying to sort through my state’s guidelines on my own didn’t prove sufficient.

So, if you’re structuring a company like mine and you aren’t sure, call the IRS and talk it through. Explain the type of work an individual will be doing and ask for some guidance.

After going through this, I’ve done consulting work for my clients to help them make better hiring decisions. For instance, I had a customer who was offering their independent contractors full benefits, and another whose contractors were working onsite and had no other customers they were claiming work for on their taxes. I’ve been able to guide them in the right direction and help them avoid potential audits.

So, make sure you are identifying and verifying these details with your contractors:

• Does your contractor do similar work for others and identify that on their tax forms?

• Does the contractor have a Web site?

• Has the contractor provided you with a complete W-9 tax form?

• Are you giving the contractor control to handle tasks with little direction from you?

If you are unsure about any of these items, I suggest you seriously consider making the individual an employee — or at the very least, pick up the phone and seek some guidance.



Is Foam About To Transform The Oil Recovery Business?

The best way to get oil out of the ground may be to pump in foam.

Scientists pumped foam into an experimental rig that mimicked the flow paths deep underground and found the foam was more effective than more commonly used materials, such as water and gas.

Oil rarely sits in a pool underground waiting to be pumped out to energy-hungry surface dwellers. Often, it lives in formations of rock and sand and hides in small cracks and crevices that have proved devilishly difficult to tap. Drillers pump various substances downhole to loosen and either push or carry oil to the surface.

Sibani Lisa Biswal, associate professor of chemical and biomolecular engineering at Rice University, created the experimental formations—they look something like children’s ant farms—to see how well foam stacks up against other materials in removing as much oil as possible.

The formations are not much bigger than a postage stamp and include wide channels, and large and small cracks. By pushing various fluids, including foam, into test formations, the researchers can visualize the ways by which foam is able to remove oil from hard-to-reach places.

They can also measure the fluid’s pressure gradient to see how it changes as it navigates the landscape.

Paths of less resistance

The findings are strongly in foam’s favor. Foam dislodged all but 25.1 percent of oil from low-permeability regions after four minutes of pushing it through a test rig, versus 53 percent for water and gas and 98.3 percent for water flooding. This demonstrated efficient use of injected fluid with foam to recover oil.

The less-viscous fluids appear to displace oil in high-permeability regions while blowing right by the smaller cracks that retain their treasure. But foam offers mobility control, which means a higher resistance to flow near large pores.

“The foam’s lamellae (the borders between individual bubbles) add extra resistance to the flow,” Biswal says. “Water and gas don’t have that ability, so it’s easy for them to find paths of least resistance and move straight through. Because foam acts like a more viscous fluid, it’s better able to plug high-permeable regions and penetrate into less-permeable regions.”

Foam tends to dry out as it progresses through the model, says graduate student Charles Conn, lead author of the paper that is published in the journal Lab on a Chip. “The bubbles don’t actually break. It’s more that the liquid drains away and leaves them behind.”

Drying has two effects: It slows the progress of the foam even further and allows surfactant from the lamellae to drain into low-permeability zones, where it forces oil out. Foam may also cut the sheer amount of material that may have to be sent downhole.

One of the challenges will always be to get the foam to the underground formation intact. “It’s nice to know that foam can do these things, but if you can’t generate foam in the reservoir, then it’s not going to be useful,” Conn says. “If you lose the foam, it collapses into slugs of gas and liquid. You really want foam that can regenerate as it moves through the pores.”

Biswal says her lab plans to test foam on core samples that more closely mimic the environment underground.

George Hirasaki, professor emeritus of chemical and biomolecular engineering and Kun Ma, a Rice alumnus, are coauthors of the paper.

The Department of Energy, the Abu Dhabi National Oil Co., the Abu Dhabi Oil R&D Sub-Committee, the Abu Dhabi Co. for Onshore Oil Operations, the Zakum Development Co., the Abu Dhabi Marine Operating Co. and the Petroleum Institute of the United Arab Emirates supported the research.




Energy Investing 101: Identifying the Top Independent Oil & Gas Stocks

Three to five years ago, investing in the American shale boom was pretty easy. You could print out a list of energy companies, pin them to a wall, then throw darts blindfolded, and the companies you landed on would likely trounce the S&P 500. Today, though, it’s not as simple, and investors who want to make good decisions in this space will need to do some more digging.

Here’s the nice part: Understanding an oil and gas producer isn’t that difficult. There are, of course, the financial metrics we all know and love as well as stock valuations, but there are some more specific keys you should consider when looking specifically at independent oil & gas producers. Let’s take a deeper dive into this industry to find out how you can make better basic investing decisions in the independent oil & gas space.

Who are we talking about, here?
Unlike integrated oil and gas companies, independents exclusively produce oil and gas, That means no downstream assets like refiners or retail arms. In some ways, it makes them much easier to understand, because you don’t have to sift through multiple business segments to identify the primary driver of profitability for the company. 

The thing is, hundreds of independents are publicly listed on major U.S. exchanges. They can vary in size from having a market capitalization of only a couple million dollars all the way up to ConcoPhillips (NYSE: COP  ) , which today is valued close to $100 billion. Unlike other groups within the energy space like Big Oil and offshore rigs, there are simply too many companies to list them all, or even pick a dozen or so without missing out on some great investing opportunities. 

Five key points to consider
In all honesty, there is a bunch of noise that can distract you when trying to identify what is important. So many investors today are worried if companies are in the top shale producing regions, but what good does knowing which shale plays are the best if a company has holdings in a poor part of that formation that barely produces anything? At the same time, there are other companies that don’t even operate in shale that can be just as lucrative investments. If you are looking to buy companies on a truly long-term, buy-and-hold strategy, then you need to focus on other keys that are much more important than geography.

To help filter out the noise, here are five key points you should dig into when you are doing your homework. To mention every company would be a little exhausting, so instead — to give you a little leg up on your research — I will supply three leaders and three laggards for each of the five points below that have a market capitalizations of more than $500 million.

1. Production potential: Go beyond just proved reserves
One of the major misconceptions about the term “proved reserves” is that many assume its the amount of oil in a reservoir. Actually, it is the amount of oil & gas in that reservoir that a company estimates can be extracted with a reasonable rate of return based on prices set by the Securities and Exchange Commission. This means the total proved reserves for a particular formation can change as prices vary, or if technology makes it cheaper to access that formation. Here is a great visual explanation of this from the U.S. Energy Information Administration.

Source: U.S. Energy Information Admininstration.

To get a better understanding of how much resource potential a company has, it’s better to look at what is known as the 3P resources. This means proved, probable, and possible resources. This data gives a little more clarity to how much oil and gas a company can extract if prices were to change, or if technology improves. Not every company provides this information, but if they do, it can be found in its 10-K.

Another thing to consider when looking at reserves — and production — is how much of those reserves are in oil, gas, or natural gas liquids. Generally speaking, companies that have higher reserves and production in oil will generally have higher profit margins, because oil has a greater value on the market, but this isn’t always the case.

2. Reserves to production ratio
The total amount of oil and gas that a company can access isn’t that valuable of information if not taken in context, though. That is where the reserves to production ratio comes into play. The reserves to production ratio is the total amount of reserves a company has on its books divided by its total production, which is typically measured in years. 

This is a very crude metric because it assumes two things that are highly unlikely: First, that current proved reserves will remain constant, which also implies that oil and gas prices will remain constant and no new technology will make more oil in place attainable, and second, that production will remain constant over this entire period. Any oil and gas produce worth their salt will look to both increase reserves and production, so the reserve-to-production ratio is only a snapshot of the current situation. If you want to get a little more involved you can do some quick calculations to compare production to 3P reserves or technically recoverable resources as well.

Company Reserve to Production Ratio % of Reserves That Are Oil/Liquids
Antero Resources  35.8 years 1%
PDC Energy   29.6 years 41%
Continental Resources  21.8 years 66%
SM Energy 6.7 years 37%
Kosmos Energy  5.9 years 96%
W&T Offshore 5.6 years 56%

Source: S&P Capital IQ, author’s calculations.

3. Reserve replacement costs
One important factor to note is that not all reserves are created equal. Certain sources of oil are simply more expensive to access than others, and the ability to access these sources as cheaply as possible can be a major determinant of the future profitability of a producer. We can evaluate this by looking at reserve replacement costs, which is defined as the amount spent on exploration, development, and acquisitions (net of divestitures) divided by the total amount of reserve revisions, extensions, new finds, and acquisitions.

According to the most recent annual survey from Ernst & Young, the average reserve replacement cost in the industry was $20.30 per barrel of oil equivalent. As you can see in the table below, these costs can be heavily influenced by whether a company is bringing on reserves of oil or gas.

Company Reserve Replacement Costs % of Reserve Additions That Was Oil/Liquids
Antero Resources $3.84 0%
Cabot Oil & Gas  $4.56 1%
Range Resources  $4.97 24%
Newfield Exploration $34.47 100%
Pioneer Natural Resources $128.19 76%
Encana  $129.28 100%

Source: Ernst & Young.

4. Production costs vs. production mix
Not only does a company need to be able to secure its future on the cheap, but investors like us want to find the great operators that are able to produce oil and gas today at a decent price. This is where production costs come into play. Production costs are very similar to operational expenses on an income statement, but without depletion and amortization expenses, since they are a non-cash expense. Most companies will report their production costs on a per barrel of oil equivalent or per thousand cubic feet of gas equivalent for its total production. 

Here’s the catch when looking at these costs, though: The value for oil is considerably higher than that of natural gas. Looking at a survey of independent oil and gas producers, the production cost per barrel compared to the percentage of production that is oil looks a little something like this:

Source: Ernst & Young, Company 10-Ks and 40-Fs, and S&P Capital IQ, author’s calculations.

Therefore, a company that produces a higher amount of oil can be forgiven for having higher production costs, but not too much. So, when you are looking at production costs, be sure to take it into context with the production mix. The companies in the table below are rated and presented based on their production costs per barrel, and the percentage of their production that was liquids.

Company Produciton Costs Per Barrel Equivalent % Production That Was Oil/Liquids
EQT Corp $2.07 <1%
Rosetta Resources  $8.05 61%
Goodrich Petroleum $5.44 27%
Breitburn Energy Partners  $23.71 55%
ConocoPhillips $24.56 54%
Legacy Reserves $29.67 65%

Source: Ernst & Young, S&P Capital IQ, and Company 10-Ks and 40-Fs, author’s calculations.

5. Operational cash flow coverage of capital expenditures
This last metric is becoming more and more important as the shale boom isn’t the fresh new thing it once was. Many of the companies in this space have grown production by massive amounts in the past couple of years, but very few have generated the operational cash flow to cover their capital expenses and have been forced to raise capital through debt and equity issuances or through asset sales. According to the U.S. Energy Information Administration, capital expenditures at oil and gas producers currently outpaces operational cash flow by about $110 billion, and that number will likely rise if oil prices remain stagnant.

Source: U.S. Energy Information Administration.

Don’t let anyone convince you otherwise — this is an unsustainable path for companies and should make investors worry about the value of their shares. If this trend continues, companies will be forced to continually issue new debt at higher and higher interest rates, issue value-diluting shares, or be forced to sell off assets that would likely be a part of a longer term future.

For an individual investor, this doesn’t have to be the case, because we can pick the companies that are a much more solid footing when it comes to cash generation. This is a very easy thing to look for: Simply look at a company’s cash flow — on an annualized basis to remove any seasonal swings — and divide that by the company’s annual capital expenditures. Any figure greater than 1 is a very good sign, because it is covering all of its expenses with something left over for other needs such as future plans, paying off debt, or even giving a little back to shareholders.

Company Operational Cash Flow Coverage of Capital Expenditures (%)
Kosmos Energy 169.9%
Legacy Reserves 123.7%
Marathon Oil 118.3%
Diamondback Energy 16.6%
Parsley Energy 8.8%
Magnum Hunter Resources  7.2%

Source: S&P Capital IQ, author’s calculations.

What a Fool believes
The oil and gas industry has been a lucrative one for more than a century now, and even though we are making great strides in developing alternative energy, we will likely need oil and gas for decades into the future. Oil and gas producers can be incredibly lucrative investments to play this trend, and having a better understanding of this industry will help you make better stock choices. Looking into these five things won’t guarantee you will find the perfect stock for your portfolio, but it should help you separate some of the wheat from the chaff when it comes to independent oil & gas companies. Because unless we see another boom like we have over the past few years, it will take more than a dartboard to make a good investment. 

Other subjects in the Energy Investing 101 series

Integrated oil & gas, aka Big Oil

Offshore rigs

Oil & gas royalty trusts

Do you know this energy tax “loophole”?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you’ll learn about the simple strategy to take advantage of a little-known IRS rule.




Refracking brings ‘vintage’ oil and gas wells to life

By Anna Driver and Ernest Scheyder

HOUSTON/WILLISTON NORTH DAKOTA (Reuters) – A fracking boom isn’t enough for U.S. oil and gas producers – they’re now starting the re-fracking boom.

Wells sunk as little as three years ago are being fracked again, the latest innovation in the technology-driven shale oil revolution. Hydraulic fracturing, which has upended global energy markets by lifting U.S. crude oil output to a 25-year high, has been troubled by quick declines in oil and gas output.

The development highlights how producers must constantly invest and tinker, both to raise overall oil recovery rates that can be as low as 5 percent and to limit steep drops in production suffered by wells drilled into tight oil deposits.

Canada’s Encana Corp invested $2 million to refrack two wells in Louisiana’s Haynesville shale formation earlier this year, after seeing its production in the area dip 27 percent from 2012 levels.

    “There were a significant number of wells that we considered unstimulated,” said David Martinez, Encana’s senior manager for Haynesville development.

    Using minuscule plastic balls, known as diverting agents, pumped at high speeds with water into the old wells, most of which are three to five years old, Encana blocked some the older fractures, or cracks.

    “The thought is that the diverting agent will go to the cracks with the least amount of pressure,” bypassing cracks with higher pressure and boosting the pressure of the entire well so output climbs, Martinez said.

    He said the process can’t be as precisely controlled as an initial round of hydraulic fracturing, in which water, chemicals and sand into are blasted into rock to unlock oil and gas.

Fracking has been used on about 1 million wells bored since 2007, and oil and gas companies now fracture as many as 35,000 wells each year, according to FracFocus, the national fracking chemical registry.

    Refracking cost Encana about $1 million per well, compared with about $12 million for wells it drilled in 2012. Encana is no longer drilling new wells in the Haynesville formation, executives said.

    Since it isn’t clear how long the benefits of a refracking last, Encana plans to collect more data when it refracks five more Haynesville wells this quarter, Martinez said.

    If those prove fruitful it may consider expanding the practice to its holdings in the Denver-Julesburg Basin of Colorado and the Eagle Ford formation in Texas.

    Another Haynesville operator, Dallas-based Exco Resources Inc, said it boosted output from a 2010 refracked test well by 1.3 million cubic feet of gas per day. It didn’t say how much gas it was producing before the refracking. Average initial production from new wells Exco drilled in the second quarter was 12.9 million cubic feet per day.

Some of Exco’s Haynesville wells after four years were producing about a fifth of what they did in their first year, with output declining 69 percent that first year alone, according to the company.

Exco believes the technology can be applied to 400 of its so-called “vintage” wells that were drilled several years ago using what is now outdated technology.

    The company is planning a refracking campaign for 2015, Hal Hickey, Exco’s president, told investors on a July 30 conference call.

    “We’ve been at the forefront” in the Haynesville, he said.

    Marathon Oil Corp is now targeting some of its older wells in the Bakken field in North Dakota and using the latest technology, including re-fracturing, to increase crude output.

Marathon owns or has a stake in about 2,300 wells in the Bakken, though it won’t say how many wells are in production.

    When horizontal drilling was just starting to take off in the Bakken in 2007 and 2008, “(well) completion technology was quite different than it is today,” said Lance Robertson, Marathon Oil’s vice president of North American production operations.

    For example, some early Bakken wells were readied for production by using a single frack stage, or a single section that creates multiple fissures in rock, and about half a million pounds of sand. Now companies use an average of 30 to 35 frack stages and as much as 6 million pounds of sand per well, Robertson said.

    “We go back in and use the best available technology,” Robertson said in an interview.

    Marathon’s refracked wells have so far exceeded the company’s expectations, delivering returns that are large enough to merit additional investment, the company said.

    About 100 of Marathon’s Bakken wells are good candidates to be fracked for a second time, executives said.

So far, refracking has not prompted companies to book higher reserves, said Allen Gilmer, chief executive of DrillingInfo, a well analytics company.

Marshall Watson, a petroleum engineering professor at Texas Tech University, cautions that refracking needs to be better understood before it becomes commonplace.

    “Refracks can work in isolated cases,” Watson said. “Sometimes they do, and sometimes they don’t.”

Yet as refracking gets fresh attention, concern lingers about disposal of frack wastewater, particularly in areas that suffer from drought.

In Colorado, home of the Denver-Julesburg Basin, where almost 2,900 wells have been developed since 2011, water demand for hydraulic fracturing is forecast to double to 6 billion gallons by 2015, more than twice the annual use of the city of Boulder, according to Ceres, a nonprofit group that tracks environmental records of publicly traded companies.

“It sort of shows how much we don’t know about fracking and why it fails sometimes,” said Andrew Logan, the director of the oil and gas program at Ceres. “This has the potential to severely stress water supplies beyond even currently strained levels.”

    The oil industry, however, says the effects of fracking are known and don’t pose a danger.

    “Hydraulic fracturing is a safe, proven technology that has been used for over 60 years to increase production of oil and natural gas – changing America’s energy trajectory from scarcity to abundance,” said Zachary Cikanek, a spokesman for the American Petroleum Institute in Washington.

For now, the energy industry is hoping this initial bump in the number of wells refracked presages a fresh boom whereby unconventional wells are given a jump start every few years to keep oil and gas – and profits – flowing.




American Indian tribes wants money for wasted Bakken gas

Tribal leaders from an American Indian reservation near Bakken proposed a new royalty fee for natural gas that is burned before it can be sold.

The Mandan, Hidatsa and Arikara tribes, known collectively as the Three Affiliated Tribes, sent its six-page plan to oil companies operating in the Fort Berthold Reservation, AP said Tuesday.

The plan calls for companies to pay royalties for flaring natural gas to make up for lost revenue when the used gas isn’t brought to market.

Oil production on the tribes’ reservation account for about a third of North Dakota’s daily output.

Tribal officials didn’t comment on the proposal.

Industry officials are questioning if the tribe can impose the fees and warned that increased royalties could slow production on the reservation.

In 2008, the tribes signed a tax agreement giving the government of North Dakota regulatory power over oil production on reservation lands.

State officials said they were unaware of the proposal and didn’t comment, the AP said.

Flaring gas is used during testing to determine pressure, flow and composition of product from a well.

Flares are also used as a safety mechanism to reduce the risk of fires and explosions.

In 2013, the Three Tribes broke ground on the first oil refinery ever built on an American Indian reservation.

The tribes partnered with Minneapolis-based Park Construction Co.

The refinery has a 20,000 barrels per day capacity and is expected to be operational in late 2015 or early 2016.



McComb OKs sewer extension for expected boom

MCCOMB, Miss. (AP) – The city of McComb will build a 10,000-foot sewer line to the planned Gateway Industrial Park where an oilfield worker camp and other businesses are expected to be located.

The Enterprise-Journal reports ( the sewer line will connect to the city’s west lagoon.

The cost of the project is estimated at $2.2 million. Pike County supervisors have unofficially pledged $1.6 million from bond proceeds to cover 73 percent of the project if McComb pays the remaining $600,000.

Pike County will buy and develop industrial park land, selling part of it for housing for oilfield workers. The site totals 110 acres off Interstate 55.

Officials are expecting an oil boom that will result in a large population increase and more traffic and the city and county need infrastructure to handle it.



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