Will Wildcatter’s ‘Naked’ Gamble on Oil Prices Pay Off? Continental Resources CEO Hamm Sells Hedges, Betting on Quick Rebound in Crude

By ERIN AILWORTH, GREGORY ZUCKERMAN and DANIEL GILBERT WSJ
Dec. 9, 2014 12:35 p.m. ET

Harold Hamm ’s willingness to make risky bets helped him build Continental Resources Inc. into the one of the biggest oil producers in North Dakota’s Bakken Shale and a symbol of the U.S. energy boom. But his latest gamble—a quick rebound in crude prices—is rubbing some investors and analysts the wrong way.

Mr. Hamm, who founded Continental and owns 68% of its shares, announced in early November that the company had cashed in almost all of its financial hedges that guaranteed it could sell millions of barrels of oil for about $100 apiece. The company said it had realized $433 million in cash from selling the hedges, some of which ran through 2016.

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“We feel like we’re at the bottom rung here on prices and we’ll see them recover pretty drastically, pretty quick,” Mr. Hamm said on a Nov. 5 call with analysts. He said the Organization of the Petroleum Exporting Countries was pushing down oil prices to slow America’s expanding energy output.

Now, removing the hedges, known in the industry as “going naked,” looks misguided even to some of the company’s fans, after the recent tumble for oil prices. The benchmark price for U.S. oil has continued to slide, falling from $81 in late October to $63.82 on Tuesday.

If Continental had kept the contracts that insured it against lower crude prices, it could have reaped $52 million more for its oil in November, according to a Wall Street Journal review of company disclosures. And it might have received $75 million more this month, assuming current conditions continue.

The Journal’s calculation of about $127 million in forgone revenue is similar to projections by several Wall Street analysts, and those projections would continue to rise in the coming months if oil prices remain below $96 a barrel.

ENLARGE
The company said it disagreed with the Journal’s figures but wouldn’t provide its own, except to say that after figuring in revenue it received for selling its hedges, it expects the “net negative effect” to be $25 million to $30 million in November and December. It sold nearly $1.2 billion of oil and gas in the third quarter and reported net income of $533 million.

“It was a bad move with terrible timing,” said Gregg Jacobson, a portfolio manager at Caymus Capital Partners LP, a $200 million Houston hedge fund manager that had about 4.5% of its portfolio in Continental shares as of the end of the third quarter. Though he thinks the hedging sale will prompt some investors to view the company as unusually risky, Mr. Jacobson said he remains a supporter because of its executives’ skill in finding and drilling for oil.

“In the long run, the stock will respond to how they perform in the field,” he said.

While shares of many U.S. energy producers have had double-digit percentage declines since oil prices began falling in late June, Continental’s stock has been hammered. Its shares, which closed up 7.2% at $36.18 on Tuesday, have fallen by more than half since the end of August, and more than 25% since Mr. Hamm disclosed on Nov. 5 that the company had sold the hedges.

Mr. Hamm said in an interview that he still believes his bet could pay off but that it might take as many as two years to tell. “You can’t condemn that as a bad decision,” he said. “You haven’t seen it play out.”

Companies like Continental can react quickly to market changes, he said, which gives them an advantage over OPEC’s members. The cartel is discounting “the resiliency of U.S. producers,” he said, adding that investors “need to look at Continental long-term.”

A wildcatter—he has called himself an “explorationist”—Mr. Hamm started the company that would become Continental in 1967 and first struck oil in 1971 in Oklahoma. More than two decades ago, he began focusing on exploring the then-little-known Williston Basin, which stretches from South Dakota to the Canadian province of Saskatchewan. Over time, his company became a leader in the Bakken formation in North Dakota, which has become one of the biggest oil fields in the U.S.

Continental produced nearly 35 million barrels of oil last year, almost four times what it was producing five years earlier. That growth has helped push U.S. oil output to more than 9 million barrels of crude a day, up from 5 million in 2008.

Though Continental has become a leader of the U.S. energy boom, it is unusual. Institutional and activist investors have curbed some of the risk-taking of wildcatters at other energy outfits, and few companies of Continental’s size remain controlled by their founders.

Continental said it had 5.2 million barrels insured in November and December at an average price of about $100.

When oil prices are falling, hedges—contracts that many energy companies buy to protect against declining prices by guaranteeing a minimum price for the oil and gas they produce—become much more valuable. Continental notes that several of its competitors aren’t hedged, including Apache Corp. , which has no hedges on the books in 2015. Apache said it does have some production insured through the end of this year.

Mr. Hamm isn’t the first energy executive to abandon hedges. Under the leadership of former CEO Aubrey McClendon , Chesapeake Energy Corp. dropped its natural-gas hedges in 2011, leaving it exposed to a dismal gas market and dealing with a cash crunch the following year.

‘It was a bad move with terrible timing… In the long run, the stock will respond to how they perform in the field’
—Gregg Jacobson, a portfolio manager at Caymus Capital Partners
Continental isn’t likely to face a liquidity crisis—its debt is smaller than many of its competitors at about 1.7 times its cash flow, according to S&P Capital IQ. And the company has $1.75 billion in unused credit, recent financial filings show.

“They’ve built such a good balance sheet, they have the luxury of making this gamble,” said Jason Wangler, an analyst for Wunderlich Securities, who called the move a speculative bet. “They left money on the table in the short term.”

Mr. Hamm, he said, is “the guy you’re investing in, as much as the company.”

Since selling Continental’s hedges, Mr. Hamm has lost about $4.4 billion of his personal fortune as Continental’s shares have fallen—a loss that could be compounded by Mr. Hamm’s divorce. A judge recently awarded the former Mrs. Hamm, Sue Ann Arnall, a nearly $1 billion settlement; she appealed that decision on Friday. Mr. Hamm now owns about $9.2 billion of company stock.

Some investors say Continental’s primary acreage in the Bakken and elsewhere renders the hedging decision less important in the long-term.

“Cash flow next year will be lower and more volatile, assuming prices stay under pressure,” said Joe Chin, an analyst at Obermeyer Wood Investment Counsel LLLP, an Aspen, Colo., firm that owned 340,000 Continental shares at the end of the third quarter. “But we remain confident about management’s ability to deploy capital.”

Write to Erin Ailworth at Erin.Ailworth@wsj.com, Gregory Zuckerman at gregory.zuckerman@wsj.com and Daniel Gilbert at daniel.gilbert@wsj.com

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Shell Venture Starts Fracking Giant Russian Shale Oil Formation

Shell Venture Starts Fracking Giant Russian Shale Oil Formation
By Stephen Bierman
January 13, 2014 5:56 AM EST

Royal Dutch Shell Plc (RDSA) and OAO Gazprom Neft began a drilling campaign to assess the potential of Siberia’s Bazhenov formation, reckoned to be one of the world’s largest deposits of shale oil.
Salym Petroleum Development, the venture between Shell and Gazprom Neft, has started drilling the first of five horizontal wells over the next two years that will employ multi-fracturing technology, according to a statement today.
The Bazhenov layer, which underlies Siberia’s existing oil fields, has attracted Shell and Exxon Mobil Corp. (XOM) because it’s similar to the Bakken shale in the U.S., where advances in drilling technology started a production boom. Exxon will also start a $300 million pilot project drilling in a different part of the Bazhenov with OAO Rosneft (ROSN) this year.
“This is a big theme for Russia,” according to Ildar Davletshin, an oil and gas analyst at Renaissance Capital in Moscow. “Bazhenov holds as much resources as has been produced in Russia to date. The question is what portion of it can be recovered and at what cost.”
The first horizontal well follows three years of study on the prospect, which included three vertical wells, 3D seismic, coring and well logging in the Upper Salym area, according to the Salym statement.
“Bazhenov development is an important element of our growth strategy,” Oleg Karpushin, head of Salym Petroleum Development, said in the statement. “We hope that the pilot project will allow us and our shareholders to make a decision about moving to a large-scale development of the Bazhenov formation in the Salym fields.”
To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net
To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net
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Mexico’s President Signs Energy Overhaul Into Law

Wall Street Journal

LATIN AMERICA NEWS

Mexico’s President Signs Energy Overhaul Into Law

Legislation Ends Monopoly of State-Owned Petróleos Mexicanos

By

JUAN MONTES
Dec. 20, 2013 3:06 p.m. ET
MEXICO CITY—Mexican President Enrique Peña Nieto signed into law Friday a bill that ends the monopoly of state-owned Petróleos Mexicanos in oil and gas, opening new horizons for private-sector investment in the world’s ninth-largest oil producer.

The energy bill, Mr. Peña Nieto’s wager to lift stagnant oil production and unleash economic growth, was passed by lawmakers in just 10 days. Congress gave final approval on Thursday of last week after two days of debates, and a required majority of state legislatures, 26 of the country’s 31, approved the constitutional amendment by this week.

“This year, we Mexicans have decided to overcome myths and taboos in order to take a large stride toward the future,” Mr. Peña Nieto said in a speech at the National Palace.

Mr. Peña Nieto became the first president in more than 50 years to propose and pass in Congress changes to the constitution on the subject of oil. The last one was Adolfo López Mateos in 1960, and that was to reinforce a state monopoly set up in 1938 when former President Lázaro Cárdenas expropriated the oil industry and turned oil into a nationalist symbol of Mexican sovereignty.

Under the changes, Mexico’s oil market will go from being run by a single player, state-firm Petróleos Mexicanos, or Pemex, to a competitive one in which private oil and gas firms will be allowed to explore for and produce hydrocarbons. Pemex will continue to be state-owned, with preferential rights to bid for oil blocks.

The process of implementing the law kicks off immediately. Pemex has three months to choose which of its existing exploration and production areas it wants to retain for itself and demonstrate that it has the capacity to exploit them. The Energy Ministry will have up to six months to approve Pemex’s choice.

The Energy Ministry will then launch the first bidding rounds for new areas of exploration for oil and gas, mainly in deep water and shale gas, which could happen in the last quarter of next year or in 2015.

The government will be able to become a partner with private firms in these new areas through different types of contracts, including licenses and deals to share the oil production. Pemex also will be able to award the new contracts, which go beyond the restrictive service contracts that the state firm always has used to farm out exploration and production work. Private firms will also be allowed to own and operate oil refineries.

The energy overhaul also liberalizes the generation, distribution and sale of electricity, opening up the state-owned utility CFE to direct competition.

The bill amends three key articles of the Mexican constitution—25, 27 and 28—which form the legal core of the country’s nationalistic oil laws. Constitutional changes are accompanied by several temporary dispositions detailing points that secondary legislation must contain. Congress has until the end of April pass the legislation.

Write to Juan Montes at juan.montes@wsj.com

Large swathes of UK to be opened up for shale drilling

Telegraph.co.uk

Wednesday 18 December 2013

Large swathes of UK to be opened up for shale drilling, with communities where fracking takes place to receive £100,000, even if no gas is produced

A gas ring on a domestic stove powered by natural gas is seen alight on January 3. 2005, Manchester, England

A shale gas boom has transformed US energy markets, sending gas prices to record low levels Photo: Getty Images
Emily Gosden

By , Energy Editor

7:00AM GMT 10 Dec 20

large swathes of Britain will be opened up for shale gas drilling under plans due to be announced next week, with local communities promised £100,000 in benefits for every well subjected to fracking – even if no gas is produced.

Ministers are preparing to identify thousands of square miles of land across the country that they believe are rich in shale and should be explored by gas companies.

Michael Fallon, the energy minister, will say the government is “widening the search for shale” and has warned that households “right across the south” should prepare for fracking near their homes.

The identification of provisional “licensing areas” is likely to reignite controversy over fracking, the process of pumping water, sand and chemicals into the ground at high pressure to extract gas trapped in rocks.

The Government will today attempt to smooth the way for the plans by confirming a package of benefits for local communities, including the £100,000 upfront payment for any fracking – even if the process is unsuccessful and no gas is produced.

If fracking is successful, communities will then be handed one per cent of revenues the company makes from selling gas – which could see them reap benefits of up to £10 million.

Ministers hope the benefits will help assuage fears of Conservative MPs with constituencies in the south of England who are worried at public hostility to fracking, amid concerns about the impact on the landscape and environment.

The Treasury will on Tuesday publish draft legislation to introduce tax breaks for shale gas companies – announced in the Autumn Statement last week – in an attempt to entice international gas companies to fund drilling in the UK.

“The UK is sitting on significant amounts of shale and the potential prize for energy security and investment is huge. This gives companies the huge incentive to step up the search for shale and find out what is recoverable,” Mr Fallon said.

“Recent reports have tackled public concerns about water contamination and usage, as well as confirming that the risks to public health are low. We have robust regulation in place and now is the the time to press ahead.”

The Chancellor last week said that shale gas could bring “thousands of jobs, billions of pounds of business investment, and lower energy bills”.

However, only a relatively small proportion of Britain – about 7,300 square miles – has so far been licensed for oil and gas drilling. This includes parts of Cheshire, Lancashire, Yorkshire, Surrey and Sussex, where drilling for oil at Balcombe by Cuadrilla this summer caused fierce protests.

In May ministers commissioned consultants AMEC to carry out a “strategic environment assessment” of a huge area of Britain to help the Government assess which other areas are suitable to open up for drilling.

Campaign group Greenpeace, which opposes fracking, says that the areas being assessed cover some 32,000 square miles.

The plans set out this month will drastically increase the area available for potential fracking.

Oil and gas companies will then compete for rights to drill in the areas in a “licensing round” next year.

Once they have drilling rights from the government, companies would still then have to seek a further series of permits from government as well as access from landowners and planning permission before any fracking could take place.

A British Geological Survey study earlier this year revealed that shale gas trapped in the rocks under northern England and Wales alone could be enough to fuel the UK for more than 40 years. However, much of this area cannot be explored because it has not yet been licensed for drilling.

The Future Of Shale Development Worldwide, In Three Charts

world shale map

You may have seen the above map showing worldwide shale basins. It seems like a lot of other nations could replicate America’s shale boom if they only put their minds to it.

But while Mother Earth may have generously distributed her deposits of unconventional resources, she and Man have also conspired to make them not all equally accessible.

Scott Gruber at AllianceBernstein has created three annotated charts showing the amount of known shale reserves for all major countries, and the barriers to companies’ ability to drill there.

Check it out:

Europe, who arguably needs it most as it faces an energy cost crisis, has put in place the greatest restrictions to accessing its reserves.

  world shale scene

Latin America, led by Argentina, will likely be runner-up to the North American boom. 

world shale scene

Asia, especially China, has great potential, but, for now at least, the rocks there are a bit more difficult to drill.

world shale scene

Bloomberg: Fracking Boom Pushes U.S. Oil Output to 25-Year High

U.S. crude production rose to the highest level in a quarter-century as a shale drilling boom in states such as Texas and North Dakota cut the need for foreign oil and pushed the country closer to energy independence.
The U.S. pumped 8.075 million barrels a day in the week ended Dec. 6, a gain of 0.8 percent, or 64,000 barrels a day, the Energy Information Administration said today. It’s the most since October 1988.
“You can’t swing a cat without hitting a barrel of oil in North America,” said Stephen Schork, president of the Schork Group Inc., an energy consulting firm in Villanova, Pennsylvania. “It’s amazing how quickly things can change.”
U.S. oil output grew 18 percent in the past 12 months, the fastest pace on record, boosting fuel exports and reducing reliance on imports, according to the EIA. The boom will make the country the world’s largest producer by 2015, five years sooner than last year’s forecast, the International Energy Agency in Paris said last month.
Imported crude and petroleum products will dip to 28 percent of domestic demand next year, the lowest since 1985 and down from a peak of 60 percent in 2005, the EIA said yesterday in its Short-Term Energy Outlook. Refined product exports have advanced 16 percent so far this year, EIA data show.
West Texas Intermediate oil for January delivery dropped $1.07, or 1.1 percent, to settle at $97.44 a barrel on the New York Mercantile Exchange. WTI traded at a discount of $12.26 a barrel to Brent crude, the European benchmark.
Rising Output
Advances in horizontal drilling and hydraulic fracturing, or fracking, have boosted output from dense rock formations such as the Bakken shale in North Dakota and the Eagle Ford in Texas. The techniques allow producers to bore sideways through the richest layers, and then use explosives followed by a high-pressure stream of water, sand and chemicals to crack open the deposit and free the trapped oil and gas.
Production in Texas has increased 21 percent from the end of 2012 through September, EIA data show. North Dakota likewise rose 21 percent, Wyoming is up 14 percent and Oklahoma added 19 percent, Colorado gained 11 percent and New Mexico advanced 12 percent, EIA records show.
Domestic oil output will average 8.54 million barrels a day next year, according to the EIA, the statistical arm of the Energy Department.
The surge in supplies has led domestic producers such as Harold Hamm, the chairman and chief executive officer of Oklahoma City-based Continental Resources Inc., to push the U.S. to lift restrictions on U.S. oil exports, which were imposed by Congress following the 1973 Arab oil embargo. Crude sent to Canada, which is allowed under license, rose to 99,000 barrels a day in September, EIA data show.
Taking into account all energy sources, including natural gas, petroleum, nuclear and renewables, the U.S. met 86 percent of its needs in the first eight months of 2013, on pace to be the highest annual rate since 1986, EIA data show.
To contact the reporters on this story: Christine Harvey in New York at charvey32@bloomberg.net; Asjylyn Loder in New York at aloder@bloomberg.net
To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net
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Daniel Yergin: Why OPEC No Longer Calls the Shots

  • The Wall Street Journal
  • OPINION
  • October 14, 2013, 7:26 p.m. ET

Daniel Yergin: Why OPEC No Longer Calls the Shots

The oil embargo 40 years ago spurred an energy revolution. World production is 50% higher today than in 1973.

  • DANIEL YERGIN

Forty years ago, on Oct. 17, 1973, the world experienced its first “oil shock” as Arab exporters declared an embargo on shipments to Western countries. The OPEC embargo was prompted by America’s military support for Israel, which was repelling a coordinated surprise attack by Arab countries that had begun on Oct. 6, the sacred Jewish holiday of Yom Kippur.

With prices quadrupling in the next few months, the oil crisis set off an upheaval in global politics and the world economy. It also challenged America’s position in the world, polarized its politics at home and shook the country’s confidence.

Yet the crisis meant even more because it was the birth of the modern era of energy. Although the OPEC embargo seemed to provide proof that the world was running short of oil resources, the move by Arab exporters did the opposite: It provided massive incentive to develop new oil fields outside of the Middle East—what became known as “non-OPEC,” led by drilling in the North Sea and Alaska.

The Prudhoe Bay oil field was discovered in Alaska five years before the crisis. Yet opposition by environmentalists had prevented approval for a pipeline to bring the oil down from the North Slope—very much a “prequel” to the current battle over the Keystone XL pipeline. Only in the immediate aftermath of the embargo did a shaken Congress approve a pipeline that eventually added at its peak as much as two million barrels a day to the domestic supply.

image

image

© Corbis

A Connecticut filling station in 1974 amid the oil embargo.

The push to find alternatives to oil boosted nuclear power and coal as secure domestic sources of electric power. The 1973 crisis spawned the modern wind and solar industries, too. By 1975, 5,000 people were flooding into Washington, D.C., for a conference on solar energy, which had been until then only “a subject for eco-freaks,” as one writer noted at the time.

That same year, Congress passed the first Corporate Average Fuel Economy standards, which required auto makers to double fuel efficiency—from 13.5 miles per gallon to 27 miles per gallon—ultimately saving about two millions barrels of oil per day. (The standards were raised in 2012 to 54.5 miles per gallon by 2025). France launched a “war on energy waste,” and Japan, short of resources and fearing that its economic miracle was at risk, began a drive for energy efficiency. Despite enormous growth in the U.S. economy since 1973, oil consumption today is up less than 7%.

The crisis also set the stage for the emergence of new importers that have growing weight in the global oil market. In 1973, most oil was consumed in the developed economies of North America, Western Europe and Japan—two thirds as late as 2000. But now oil consumption is flat or falling in those economies, and virtually all growth in demand is in developing economies, now better known as “emerging markets.” They represent half of world oil consumption today, and their share will continue to increase. Exporting countries will increasingly reorient themselves to those markets. Last month, China overtook the U.S. as the world’s largest net importer of oil.

A lasting lesson of the crisis years is the power of markets and their ability to adjust to disruptions, if government allows them to. The iconic images of the 1970s—gas lines and angry motorists—are trotted out whenever some new disruption happens. Yet those gas lines weren’t the result of markets. They were the largely self-inflicted result of government interference in markets with price controls and supply allocation. Today, the oil market is much more transparent owing to the development of futures markets.

The 1970s were also years of natural-gas shortages, which turned into a bitter political issue, particularly within the Democratic Party. Many at the time attributed these shortages to geology, but they too were the result of regulation and price controls. What solved the shortages wasn’t more controls but their elimination, which resulted in an oversupply that became known as the “gas bubble.” Today, abundant natural gas is the default fuel for new electricity generation. The lesson is that markets and price signals can work very efficiently, and surprisingly swiftly, even in crises, if they are allowed to.

There will be future energy disruptions because there is still much political risk around oil. In 2013, the Middle East is still in turmoil, but the alignments are different. In 1973, Iran was one of America’s strongest allies in the Middle East. Tehran didn’t participate in the embargo and pushed oil into the market. But since the 1979 Islamic revolution, Washington and Tehran have been adversaries. Meanwhile, Saudi Arabia, which was at the center of the 1973 embargo, is now America’s strongest Arab ally.

The real lesson of the shock of 1973 and the second oil shock set off by the overthrow of Iran’s shah in 1979 is that they provided incentives—and imperatives—to develop new resources. Today, total world oil production is 50% greater than in 1973. Exploration in the North Sea and Alaska was only the beginning. In the early 1990s, offshore production expanded farther out into the Gulf of Mexico, opening up deep water as a new oil frontier. In the late 1990s, Canadian oil sands embarked on an era of growth that today makes them a larger source of oil than Libya before its 2011 civil war.

Most recent is the development of “tight oil,” the spinoff from shale gas, which has increased U.S. oil output by more than 50% since 2008. This boom in domestic output increases energy supply, and combined with shale gas has a much wider economic impact in jobs, investment and household income. As these tight-oil supplies increase, and as the U.S. auto fleet becomes more efficient, oil imports have declined. Imports reached 60% of domestic consumption in 2005, but they are now down to 35%—the same level as in 1973.

As the U.S. imports less oil it also produces more to the benefit of energy security. There are several million barrels of oil now missing from the world oil market, owing to sanctions on Iranian oil, disappointments in Iraqi production, and disruptions to varying degrees in Libya, South Sudan, Nigeria and Yemen. The shortfall is being partly made up by Saudi Arabia, which is producing at its highest level.

But the growth in U.S. oil output has been crucial in compensating for the missing barrels. Without it, the world would be looking at higher oil prices, there would be talk of a possible new oil crisis, and no doubt Americans would once again start seeing images of those gas lines and angry motorists from 1973.

Mr. Yergin, vice chairman of IHS, is the author of “The Quest: Energy, Security, and the Remaking of the Modern World” (Penguin Press, 2012).

A version of this article appeared October 15, 2013, on page A19 in the U.S. edition of The Wall Street Journal, with the headline: Why OPEC No Longer Calls the Shots.

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