Marcellus disappoints

An important report from Oil Drum, published at the Business Insider, explains that the Marcellus shale play will not break even when natural gas is selling at less than $7/Mcf, as the result of faster than expected decline rates for the wells.  Why then do companies continue to drill?  The report says:

Returning to the broader subject of shale plays in general, why do operators keep drilling while their own over-production has depressed the price of natural gas by half of its value since January 2010? It seems fairly clear at this time that the land is the play, and not the gas. The extremely high prices for land in all of these plays has produced a commodity market more attractive than the natural gas produced.

Foreign companies invest in U.S. shale plays for different reasons but the most often-stated reason is to learn about the technology that they may be able use to their advantage in future shale plays around the world. It is possible that some companies enter into joint ventures with U.S. shale operators for strategic reasons based on fears of future resource scarcity particularly as China expands its efforts to control everything from petroleum and minerals to rare earth metals around the world.

Read more: http://www.businessinsider.com/marcellus-shale-disappointment-2010-10#ixzz144mz6QDy

But with currently reported natural gas futures at $3.84, it does not seem like this play is going to be viable.  Indeed, the report explains that while debt for Marcellus-focused companies has gone up and reserves have increased somewhat, shareholders’ equity has dropped dramatically.   To add insult to injury, the states of Pennsylvania and New York are placing moratoriums on new drilling in the play for fear of the new fracking technology that is used to exploit these wells, and in the case of Pennsylvania, because of a dispute between the republican legislature and the democrat Governor Edward Rendell over the drilling tax; of course, it’s the democrat who is insisting on a higher rate and has thus issued the moratorium.  I wonder if Governor Rendell has read the Oil Drum report showing that the drilling is largely unprofitable in the region.  This is no golden goose.  But I suppose a brass goose can also be strangled by taxes.

As a result of this, I’ve decided to sell 50% 75% 100% (update 11 Nov) of my holdings in Enerplus (ERF.un: TSX; ERF: NY) which has a large Marcellus shale operation.  This follows an excellent run for Enerplus, which still has many other great holdings.  Along with Marcellus, Enerplus recently acquired some lands on the US side of the Bakken.  I am uncomfortable with their large stake in the US with Obama at the helm–he illegally shut down  drilling in the Gulf and he and the other democrats in the US intend to destroy the US-based energy industry, all while subsidizing Brazil and Soros.  I will probably sink the funds that are now freed up into Pengrowth Energy and Penn West Energy, which are both listed as Action-List Buys by TD Newcrest.  These can also be bought on the New York Stock exchange and they can thus add to my US dollar carry trade.

The bad news for Marcellus shale may turn out to be good news for conventional natural gas plays in Canada, and it would come at an excellent moment.  The shale plays in the US have put great pressure on the prices causing a glut of available gas. I am maintaining my shares of Perpetual Energy (PMT:TSX) which dropped about 7% immediately after being trashed on BNN by Eric Nuttall of Sprott Asset Management (hat tip: Devon Shire), who said it is due for a dividend cut if natural gas prices don’t improve soon.  Some think that dividend cut is already factored into the current price. I’m looking to buy in at $3.85-4.00. Nuttall, a cognoscente of the Canadian oil industry, claims that no managed funds own Perpetual, only retail investors because of its high dividend yield.  Ouch!  He excused himself for previously recommending Terra Energy (TT:TSX), a natural gas weighted junior (which I started buying recently).  So Nuttall is not inerrant. 

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The Obama Dollar

I wrote back in January that Obama budget deficit would lead to inflation.  Now finally financial writers are calling it the Obama dollar.

In personal finances, debt is not a good thing unless properly managed.  Advisers distinguish between good and bad debt.  Bad debt is spent on consumer goods and services (Christmas gifts, food, vacations, etc.).  Good debt is used to buy appreciating assets like a house or investments which will produce positive cash flow (e.g., Crescent Point Energy Corporation, which pays 23 cents per share Canadian per month).

I lamented that Obama called his profligate budget an “investment”.  But there is no question that government debt is bad debt.  It is used neither to purchase appreciating assets nor cash-producing investments; rather government debt is spent on programs and make-work projects that will never have a profitable rate of return.  1.4 trillion dollars was borrowed in the 2009 budget year and it has led to inflation of the US currency as I predicted in January.  Let’s consider the difference in Canadian dollar:  On Jan 23, the Canadian dollar traded at 1.234 to the US Dollar; now today it is at 1.03 per US.  This is a drop of nearly 17%.  But it is not as though Canadian currency is not also being inflated by low interest rates.  In Canada, most investments, including stocks and real estate, have nearly completely recovered from the downturn.  Housing is now completely recovered in much of Canada, and this has financial writers worried about a bubble in housing prices.

I am still shorting the US dollar (it means that I gave borrowed US to purchase Canadian-based Barrick Gold (ABX: NY), Enerplus (ERF: NY), and Daylight Resources Trust (DAY.UN: Toronto).

Writers and analysts often refer to the Federal Reserve Bank “printing” money.  Actually they don’t have to literally print money, because the central bank has the ability to create money without printing it.  This is done especially well when the Federal Reserve buys US treasury notes.  The dollar is called a “fiat” currency, because money can be made from nothing and out of paper and ink.  Eventually, however, printed money flow will have to increase in order to keep up with prices.  But until then, inflation remains an invisible monster which devours people’s savings and cuts into how much they can earn.

The Carter years (1979-1981) were formative for me, as I graduated from high school in 1981.  I remember them like yesterday, and I remember its high inflation and how Reagan implemented so-called Reagonomics, reining in profligate Federal Spending.  Reagan halted an out of control Congress and put America back on track.  Being a beneficiary after my mother’s death in 1977, I remember my own Social Security check being cut.  Unfortunately, Obama was apparently too busy taking drugs during those years (marijuana and cocaine when he could afford it) and so has returned us to the pre-Reagan economic policies and ideas; but he has, in collusion with the Democrat Congress, implemented economic policies which are even worse than what we had during the Carter malaise.

I met a man from Singapore whose father lived in want much of his childhood and therefore as an old man hoarded enough rice for many years.  In like manner, I am afraid of inflation, because that’s what I saw as a child, and I have been preparing for this moment since I first heard about the Obama budget.  I fear inflation as much as any other investment risk, perhaps more.  The so-called safe haven of the dollar is a complete myth, all the more so when it is the Obama dollar.

Shorting the US dollar

A Canadian friend told me that he was thinking about taking a long position in GE.  It was at an all time low and evidently oversold at the time (under $7).  I warned him that stocks held in US currency were risky for Canadians because they would have to buy US currency at a high price but that, with the Obama government overspending and all, the US dollar was going to lose its value quickly.

GE hit its low in early March, and let’s say that my friend bought at $6.66, its closing price on March 6.  On that day, he would have paid about CDN $1.27 for every US $1.  So 100 shares would have cost him $6679.99 (which is inclusive of the $19.99 commission), or CDN $8483.59.  GE today is selling at $16.52 today.  If you add the three quarterly dividends (ex dividend date 17 Sept, 17 June, 17 March), he would be looking at a total of $16.82 per share or a phenomenal 152% rate of return.  But what is that today in Canadian funds?  $16820 = $17755 (1.056)  That is today in Canada, his investment has 109% rate of return, which is still wonderful, but as a result of the diminished power of the US dollar, much less than 152%.  But in the likely event that the US dollar continues to plummet, his return on investment will continue suffer in Canadian value.

I’ve taken short positions against the dollar by borrowing US funds to buy Canadian oil and gold companies (erf, abx: NY) .  Also, I will convert every penny of US funds that come in into Canadian until the currencies reach par.

Yesterday I learned that many investors are beginning to use the US dollar as the new “carry trade currency”.  I didn’t know what that meant so I looked it up.  It is a reference to borrowing currency that has a low interest rate, changing into a foreign currency and making investments in that currency (such as GICs or buying stocks).  Well, I guess my investment strategy is a trend rather than idiosyncratic.  I was basing this strategy on the fundamental conviction that US dollar, despite the current deflationary tendency, would suffer because of the Obama budget deficit.

Links:

Dollar is the ‘New Peso’

Is the Dollar Set to Become the new yen?

Sino-US Relations (Updated)

Obama has slapped a 35% tariff on Chinese tires. They are retaliating with other small measures. Obama better be careful. If he angers the Chinese too much they may decide to stop buying US debt: the Chinese are one of the major financiers of the US government’s 1.8 trillion dollar deficit this year. The one who depends on another’s money is not ultimately in control of the relationship.

Update:
The following video is available from Techticker:
Vodpod videos no longer available.

more about “Obama Playing with Fire U.S. Will Los…“, posted with vodpod

Pento says that we need China’s contribution to our debt, and if they don’t buy it, we will be in trouble. This is exactly my point here, where I say that if we don’t borrow the money for the US budget deficit, we will be looking at hyper-inflation.

I have personally taken positions against the dollar by borrowing US currency to invest in a Canadian Oil Company (ERF) and a Caribbean utility company in Grand Caymen (CUP.U, Toronto).