I often sit and wonder at how poorly the world understands the energy business. For something so absolutely critical to our daily lives, the level of ignorance is an aberration even in an ocean of poorly understood phenomenon. Some think we can switch energy sources overnight. Some think Saudi Arabia produces all the oil, but that US shale fields will soon displace every other source on the planet. Some think halting a few pipelines will derail 95 million barrels per day of consumption. We all take for granted cheap energy in such a wildly incomprehensible manner that it scarcely seems possible – to deprive the world of fossil fuels for a single day would create havoc if unimaginable proportions (especially in winter), yet people line the streets screaming their hatred for the stuff. How do we get in these states?
Then corporate earnings season rolls around, and I remember why. The energy industry largely does it to itself. The very people that produce oil and gas crank out periodic jets of hyperbolic garbage (or, in industry parlance, Investor Relations presentations) that take any encouraging sign of possible earnings potential and twist and extrapolate it into science fiction-grade speculation. This fodder becomes The Truth About Energy for analysts and also for anyone that relies on the output of the capital markets machine.
Here’s a simple, beautifully crafted example of subtlety and exquisite wording that conveys one message, but doesn’t really mean it, and if you think it does, please refer to the 5-page legal disclaimer that’s in size 2 font, which will assure you that it is not to be believed whatsoever unless a very unique set of stars aligns.
Range Resources is a major US shale producer with vast holdings in the Shangri-la of shale gas fields, the Marcellus. In their fourth quarter conference call, their chief operating officer explained in fairly clear terms how great the future might just be, being supported by a resource base of near mythical proportions. “I would also like to highlight a wet area pad in Southwest Pennsylvania that we brought online during the fourth quarter. It was a four-well pad averaging 9,265-foot laterals completed with an average of 46 stages per well. The average peak 24-hour production rate to sales under constrained conditions was 35.1 million cubic feet equivalent per day per well. The seven-day average to sales, again under constrained conditions, was 28.4 million cubic feet equivalent per day per well.” A few sentences later, with the listening audience quivering as though in the presence of a divine entity, the COO calmly told the throngs that “We literally have thousands of these opportunities going forward.”
Now what? Do we take this stuff literally? I don’t really know if the COO knows the difference between “literally” and “figuratively” but let’s assume he does because I’m sure he’s paid a lot of money and that his degrees aren’t home made. Let’s call his “thousands” two thousand, the minimum number that makes that statement true. Two thousand of these opportunities, as described, would be 2,000 times 28.4 million cubic feet per day per well (I’m being kind and taking his lesser IP), which would be, hmmm, a modest 56.8 bcf/d, or an incremental 80 percent of all US natural gas production. When one considers that the US natural gas market is balanced within 2-4 bcf/d, if this played out as implied Range alone would crater the market in a most spectacular fashion. (For reference, Range’s fourth quarter production was 2 bcf/d; to imply that bizarre level of production capability is like a football player promising to deliver 200 touchdowns per game.)
Calm down, that’s not what he meant, I can hear defenders snorting derisively. But that’s the problem. He didn’t say it exactly, he used fairly technical information to imply something substantial, and only through the graces of the aforementioned disclaimer would he wander into that territory. And, he was only getting wound up. On page 9 of the conference call, he again states that Range literally has thousands of these opportunities (and continues to do throughout the call), but raises the stakes by claiming that “I think I can say with confidence that the team is going to far exceed those average numbers that you see in the press release.” So I guess he didn’t mean it; he was being conservative.
If they came close to their “capability”, natural gas prices would go to zero, because the market couldn’t begin to absorb such a quantity of gas. This fairly basic conclusion should in theory throw a monkey wrench into their plans, but nope, there’s no mention of any real world impacts of actually achieving what they imply they can.
No one seems to cotton on to this madness. No one casts a critical eye at the gibberish; they just assume it’s true because the slides look impressive and irrefutable. What does happen though is that unfortunately a few key metrics get picked up, such as that Range can turn on a well pad and get 30 mmcf/d per well out of it, thousands of times, and so can a bunch of other companies, and it is obvious beyond any reasonable doubt that the US will be awash in natural gas for a hundred years. That’s the takeaway message, and for the general public that’s about all you need to know.
I don’t mean to pick on Range; they do have a phenomenal asset with some great wells. Every popular play induces this sort of behaviour. Here in Canada any little company that can scoop up Montney or Duvernay acreage without breaking the bank announces hundreds of locations, as though the whole region was homogenous. It’s what you do when promotions drive stock prices. They are simply playing the game that must be played in order to participate in modern capital markets. One does not get far by being humble or modest or conservative. Those are unforgivable sins, because they mean you will be ignored.
And sadly that brings us back to why no one understands anything about energy. It is a very complicated business that’s hard to explain, and vested interests mercilessly exploit that conundrum. All we can do is to keep a critical eye, and understand the filters through which information flows.
Read more insightful analysis from Terry Etam here