Financial Sarcasm Roundup for 06/01/15

I had a really good time at the Commonwealth Club's 84th annual California Book Awards tonight.  The free booze and hot babes on hand put me in such good spirits that it's difficult to switch back to sarcasm mode for this article.  I said difficult, not impossible.

Ellen Pao is still pursuing her former employer through the courts.  I feel for anyone who suffers unjustly at the hands of an employer's asymmetrical power.  I've been there myself.  I think the easier route for successful VC women is to start their own investment firms and leave the good old boys' clubs far behind.  I'm all about women making big bucks on their own, especially if they spend it on dinner and drinks with yours truly.

The hotel business thinks it has a bright future.  I think they're wearing rose-colored glasses.  Disposable income drives leisure travel spending.  Corporate earnings drive business travel spending.  Both of those drivers will be imperiled in the next recession.  Straight-line growth projections only work in an economic expansion's first couple of years.  A lot of franchised downscale hotel operators and Chinese investors are going to get their rear ends handed to them.

US oil frackers are at some kind of crossroads.  Saudi Arabia is not turning off its pumping spree and many more highly leveraged US drillers are due to implode.  I think any fracking company is crazy to pump more or buy out a competitor unless it has a year's worth of cash, very little debt, and a plan to shut down high-cost wells.  I am of course giving frackers too much credit for foresight.  A lot of inexperienced fly-by-night operators will become very familiar with bankruptcy court, and probably divorce court.

I don't plan to write a book for submission to the next California Book Awards.  If I did, it would be about the stupid investors who went whole hog into hotels and fracking.  The sequel would be about hot finance babes who should partner with me on early-stage ventures, plus other exciting ventures of an intimate nature.  I am sure these literary works would sell like hotcakes because I am clearly the greatest writer in human history.

Frac Sand Plays Getting Harder To Find

Frac sand is indispensable to natural gas producers using horizontal fracturing to reach deposits.  The frac sand sector will likely mirror the natural gas sector it supplies with proppant.  Natural gas prices crashed in 2012 as US exploration and production exploded.  Frac sand producers will probably follow the same path.  Only the lowest-cost producers will survive.

Stocks in this sector include Hi-Crush Partners (HCLP) and US Silica Holdings (SLCA), while other frac sand producers appear to be privately held.  The determinant of value for any mineral producer is the difference between the long-term average market price of its product and its cash cost of production.  I can't find any public source for the current market price of uncoated silica and other forms of frac sand.  The USGS page on silica has multi-year reports on the broad "sand and gravel" genre but nothing specific to frac sand.  Maybe the price in in the minerals yearbook; I'm not excited enough to look.  This is a very young sector that only recently attracted special attention.

Check out Hi-Crush Partners' 10-K from March 2013.  Calculating their cost of production means parsing Item 7 MDA.  Dividing their cost of production ($18.5M for 2012) by their annual production of 1.49M tons gives us a cost of $12.41/ton.  They reduced the amount of royalties they must pay so costs for 2013 will likely be lower.  Check out US Silica Holdings' 10-K from February 2013.  I honestly can't find their cash cost of production for frac sand from reading their Item 7 MDA.

My search for hard asset hedges against hyperinflation will not extend to frac sand.  The sector is too small and is a hostage to natural gas prices.  The production figures for the sector aren't readily available and neither is the market price for this commodity.  Someone with deep industry experience in specialty sand and gravel products might be able to make some money here.  It won't be me.

Full disclosure:  No positions in any companies mentioned at this time.

Shale Gas Fracking or Coal Gasification

America has long been rich in hydrocarbon energy.  That's great for Joe Six Pack and his fellow energy hogs who forget to turn off a light when they leave a room.  The country's remaining reserves of coal and natural gas are still plentiful but are more expensive to extract than ever.  Choosing between gas and coal is not easy.

The US Potential Gas Committee has published estimates of natural gas reserves for decades using rigorous peer-reviewed methods.  The Committee estimated that the US's recoverable gas reserves stood at 2.38 Tcf at the end of 2012 with no caveat for expected production timelines or market prices.  The New York Times's "Drilling Down" series exposed the hype some shale gas enthusiasts had pushed on the public.  Large US gas reserves are not necessarily cheap or easy to obtain.

Shale gas may be cheaper and cleaner to burn than coal but that does not mean its extraction is without cost. Methane is still a greenhouse gas and its uncontrolled escape exposes the atmosphere to global warming.  That's why monitoring orphan gas leakage from wells and pipelines is important for the energy sector.

I will go out on a limb to suggest that the risk of groundwater contamination from fracking is overblown.  The GAO-12-732 found no evidence of aquifer contamination from fracking.  Oil companies already know how to purge contaminated water from a well by plugging it at the bottom and creating air pressure that sucks contaminants out of a compromised bore hole.  The scene in the documentary film Gasland of a water faucet lighting on fire displayed the results of biogenic methane gas unrelated to oil and gas exploration.

Fracking's impact on surface topology also appears to be negligible.  A fracking well's surface footprint is 5-7 acres for each well pad, but horizontal drilling means several wells can fit on a single well pad to save space.  Surface traffic into rural areas will increase as trucks bring in large amounts of water to sustain fracking, but refer again to that GAO-12-732 study above which was inconclusive on the impact of surface disturbance.  The GAO's 2013 High Risk Report concluded that the management of oil and gas royalties from production on federal lands needs improvement because of uncertainty over monitoring and revenue collection.  It all comes down to money, folks.  Uncle Sam will ignore fracking's potentially unknown impact on surface degradation if it gets a more accurate account of the enormous revenue it generates.

Trucking in all that water means someone else doesn't get to use it.  The "water wars" of the Western states have always been pretty intense between environmentalists and farmers.  Introducing fracking wells' need for water may end those wars unexpectedly because energy companies are rich enough to outbid other parties.

Fracking may have some common cause with the geothermal energy sector.  Injecting water into deep wells does induce seismic activity.  LBL's Earth Sciences Division has studied induced seismicity for years in the context of energy exploration.  It would be great if the geothermal sector could partner with the oil and gas sector by sharing data on deep well injection because they could probably learn from each other.  Both sectors should also peruse the USGS Earthquake Hazards Program data to see where their drilling is likely to raise their costs if they get hit with lawsuits from earthquake victims.

If you don't like the headaches involved with shale gas, you won't like the coal sector either.  The current Administration seems determined to make life difficult for the coal sector with increased regulatory attention.  Goal gasification in situ may provide a favorable solution.  The heat transfer to the surface generates electricity and the carbon byproduct stays locked in the Earth's crust away from the atmosphere.  DOE's support for the FutureGen coal plant conversion project shows that the Administration is willing to back a demonstrated carbon capture technology for the coal sector.  One big potential drawback to coal gasification is the uncertain means of turning off the thermal reaction underground.  I recently had a conversation with a former energy company executive who mentioned some underground coal mine fires in Pennsylvania that have burned for decades and then migrated to consume other deposits.  He had the same concern about extracting methane hydrates from Arctic tundra and the frozen ocean floor.  Taking out too much at once may cause an unpredictable reaction.

California is set to play a big role in satisfying America's future energy needs.  The Monterey Shale Formation may be the biggest oil-bearing formation in the US.  Getting energy out will be hard because of its complex geology.  I predict it's going to happen anyway.  Ignore the political noise and focus on the money.  America is going to build clean coal plants, lay the Keystone-Xcel pipeline, and frack California's shale.  The energy companies that line up first will be minting money for years.  

The Haiku of Finance for 03/06/13

Why use gas fracking?
Seems like waste of energy
Carbon frack instead