May 29, 2014
- Missed the “shale gale” the first time? Here’s your next chance
- A looming shakeout in the energy patch — and how to avoid it
- Buried within the worthless GDP number, a disturbing detail
- Are the Chinese secretly buying Treasuries?
- Backyard gold stash goes up for auction… armed federal bureaucrats, continued… cellphone minutes as currency fueling the dollar’s demise… and more!
“The oil is there, it’s coming out of the ground, and you ought to be benefiting,” says our resident oil field geologist Byron King.
It was January 2012 when Byron first offered up his “Re-Made in America” thesis to our readers — at the very moment the so-called “shale gale” began sweeping the nation with maximum force. Fast-forward a little over two years and U.S. crude production has recovered to levels last seen in 1989…
“A lot of people made a lot of money by investing early in these ideas,” he says now. Longtime readers got in on MarkWest Energy Partners (MWE) in 2009. They’re sitting on gains of 226% and counting.
“If you weren’t investing in oil and gas during the first part of the energy revolution, don’t kick yourself too hard,” Byron says sympathetically.
You didn’t latch onto shale drilling and fracking back then? “That’s OK. After all, it involves pretty complicated science and technology. Not all that many oil and oil service companies know how to do it and do it well.
“Also, in fairness, it was hard to pick the truth out of the hype early on. I recall people saying with a straight face that the Bakken is another Saudi Arabia under North Dakota. At the time, I thought: Huh? You’re kidding me, right? Saudi under the Badlands? I’ve been to Saudi. I know what’s over there. Give me a break.”
Yet… look how the Bakken has boosted U.S. crude production over the last seven years…
“Hype or no,” says Byron, “some investors were waiting for more proof of the underlying idea. How can anybody make a lot of money drilling into nearly impermeable sands and shale? Aren’t there all manner of problems with drilling sideways and fracking and such? To anyone who studied petroleum geology before… oh… 2005, it just didn’t make much sense.”
But if you have followed drilling and fracking technology since 2005 — and Byron’s followed the energy biz for nigh four decades — it makes plenty of sense.
“So can latecomers to the shale gale ever make up for lost time?” he asks rhetorically.
You bet.
“You can still get in on something like the ground floor,” says Byron. “Indeed, there’s a new U.S. energy play about to emerge in Colorado, and you can still get in on it.”
Another member of our energy team, Matt Insley, tipped us off here in our virtual pages early last month. Located northeast of Denver, extending well into the Nebraska panhandle, it’s called the Denver-Julesburg Basin, or DJ for short — although Matt’s preferred term is “Baby Bakken.”
The DJ Basin is on track to produce 700,000 barrels per day within the next decade — propelling Colorado to the No. 3 oil-producing state, behind North Dakota and Texas. “This play alone,” says Byron, “gives you another opportunity to climb onboard the fracking revolution.”
But you’re well advised to look before you leap.
“The U.S. shale patch is facing a shakeout,” Bloomberg News reports this week, “as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.”
Bloomberg crunched the numbers on 61 shale drillers for the last four years. The debt they’ve taken on? It’s nearly doubled. The revenue they have to show for it? Up only 5.6%. Ouch.
“Several of these names are spending cash faster than they’re making it,” says Byron. “When interest rates rise — and they will — we’ll see who’s swimming without any trunks.”
Adds Matt: “Overleveraged, poorly run companies with acreage on the outskirts of prime drilling areas are going to go bankrupt.”
It all comes back to the “well-pad economics” Matt has mentioned here before — the cost to build a well compared against the expected total production.
“Well-run, focused companies cracking the code in the best locations can make good money,” he sums up.
[Ed. note: We’ve tasked Matt and Byron with identifying the companies that will not only survive but thrive during any shakeout in the shale patch.
As Byron indicated above, it’s still early days in this newest chapter. Indeed, the potential is similar to the earliest days of the Texas oil boom more than a century ago: A few hundred dollars can turn into several hundred thousand in mere weeks — but only if you play it right. We give you expert guidance to help get started when you click here.]
Major U.S. stock indexes are inching their way into the green. As we write, the S&P has ventured back into record territory, at 1,914.
Traders are shrugging off the big economic number of the morning, despite delivering a big fat disappointment…
The U.S. economy shrank during the first quarter, if the Commerce Department’s latest guess on GDP is to be believed.
Its first guess last month was a teensy annualized increase of 0.1%. Now it’s a flat-out decline of 1.0% — the first decrease since the third quarter of 2011.
Our contempt for GDP as a useful economic measurement knows no bounds, but the internals often turn up something interesting. The big drag on the number is inventory — businesses are doing little to add to it, which doesn’t say much about their confidence that consumers will buy their wares, does it?
The bond rally from yesterday is carrying over into today: The yield on a 10-year Treasury note sits at 2.41%, the lowest in 11 months.
Maybe the Chinese are driving up Treasury prices with a secret buying binge.
Noted technician John Murphy posted an intriguing chart yesterday tracking both the rate on 10-year Treasury paper and yuan…
“It’s generally believed,” writes Mr. Murphy, “that the Chinese central bank deliberately weakened the yuan by building up their reserves of U.S. dollars (by buying dollars).”
Enter the Financial Times, which speculates the Chinese are plowing those dollars into Treasuries but doing so in Europe, the better to disguise the transactions.
“Who knows?” Murphy writes. “That makes as much sense as anything I’ve heard recently to explain the continuing drop in bond yields and continuing rally in Treasury bond prices.”
Judging from the chart, it makes more sense than the Internet chatter about the Federal Reserve buying Treasuries via Belgium…
Gold has moved little in the last 24 hours; at last check, the bid was $1,258.
The Saddle Ridge gold stash is moving quickly.
Three months ago, word got out that a couple from northern California had stumbled upon $10 million in 19th-century gold coins while they were out walking the dog on their property. Remarkably, the couple has hung onto their anonymity this whole time.
The stash — mostly $20 U.S. Double Eagles — went on sale Tuesday, with many of the pieces on sale at the collectibles section of Amazon. Sales quickly topped $1 million, and as of late last night had nearly crested $4 million, according to dealer Don Kagin, who’s midwifing the sale.
A small sampling of the Saddle Ridge hoard…
The couple “plan to keep a few of the coins themselves and use the money from the rest to pay off bills and donate to local charities,” according to the New York Daily News.
The origins of the coins remain a mystery. Rumors swirled with the original news reports, but none panned out. The most intriguing was that the coins might have been stolen from the San Francisco Mint in 1899 — in which case they would still be federal property.
Kagin, the dealer, offered copious evidence that was not true — starting with the fact many of the coins had been heavily circulated. The Mint would have melted them down and reissued them.
That said, one of the charities that will benefit from the couple’s generosity is… the Old San Francisco Mint, which operated from 1874-1937 and is undergoing restoration. Indeed, a few of the coins were auctioned at the site Tuesday night.
“The reason for GDP going up when the government wastes money is because GDP is a lie and always has been,” writes a reader with an especially timely note following up on a recent email thread.
“The first time I studied economics, I did a double take because in their example, if you get injured in a car crash, the GDP goes up because of the hospital bill. When a wrecker tows away what is left of your car, GDP goes up again. If you die, your funeral costs increase GDP. If a family member collects on your life insurance, GDP goes up again. Instead of being a productive member of society, you are now dead and buried, so your productivity has gone to zero, but you have made a big increase in GDP.
“When Dubya sent out $600 stimulus payments and you took yours to Wal-Mart, you bought something that was made in China and cost $550 at the docks and $600 on the shelf. The only part of the money that went to American production was the $50 from the dock to the shelf, but you increased GDP by $600. This made Dubya look a lot better than he really was.
“If you want to know what really happened in the economy, you have to ignore government spending and concentrate on gross private product, the other component of GDP.”
“You forgot health care,” a reader writes after we took note of an estimate that the cost of government regulations work out to $14,000 per household — an expense second only to housing.
“My family’s health care nut per annum,” the reader writes, “is upward of $30,000, and has been for a number of years due to a lovely program called Romneycare. That’s just premium and deductible costs!”
The 5: Yikes… and now everyone in the country gets to enjoy the same “benefit”?
Fortunately, we’ve assembled a guide to help insulate you from the worst effects of the so-called Affordable Care Act. Learn how to get a free copy here.
“About the airline pilot who was surprised by an armed Social Security employee,” a reader writes: “The employee was probably an agent with the Office of the Inspector General of Social Security.
“They investigate stolen Social Security checks, identity fraud, people that murder their relatives to collect their checks and various not-so-nice characters that abuse the system or the recipients. They also assist the FBI, Homeland Security, the White House and other agencies in investigations.
“I wouldn’t know about them if my wife hadn’t worked for Social Security for 33 years.”
The 5: And as we noted 10 days ago, many federal agencies have inspector general offices. Few, however, were authorized to carry guns and make arrests until the Homeland Security Act of 2002. There’s a gift that keeps on giving…
“Dethrone the dollar?” reads the subject line of a curious email…
“Seems obvious in a world where every state-sanctioned unit of value is electronic, arbitrary and virtual.
“The dollar has become an unnecessary intermediate step between any two currencies that are also bits in digital memory banks. Currencies can float against each other, just as easily as they float against the dollar. The required currency swap lines are being gradually created among all players, and not just the dollar-hostile countries.
“Before electronic transactions became ubiquitous, and under Bretton Woods, the intermediate dollar link made sense, but its displacement will likely accelerate as that dependency becomes increasingly archaic. These days, digital devices can easily provide currency cross figures — between the pfennig and the peso (theoretical currencies), for example.
“Mobile minutes have seen adoption as a unit of trade in some areas of Africa. The very idea of money as something tangible now appears to be a historical artifact. This is different than the idea of value, which can be technology, cattle, metal, land, a commodity, a tailored suit or a relationship (among other things). Some of these things can be marked to market, providing a currency value at a point in time, but value is not the same as money anymore.
“Like almost all obsolete technologies, the dollar will likely fade away over time. Consider that some people still use VHS.
“In time, all dollars will try to return to their source — the U.S. I look forward to observing that process, preferably from a safe distance.”
The 5: Hmmm…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. If the reader’s message resonates with you at all and you don’t have the means to achieve the “safe distance” he speaks of, you might want to check this out.