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The Next Big Thing

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Terrel L. Shields

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Arkansas
Oil is triple its price months ago. Gasoline is up by double in the same time. This is a bubble. And it is driven by the same forces and the same investment bankers who gambled with your mortgage packaged in a neat little hedge fund.
http://www.ourfuture.org/blog-entry/lets-hear-debate-oil-speculators
And they will go down like a rock sooner or later. But that doesn't mean gasoline prices will. This madness is spending huge sums of money on companies who are funded by hedges and taking very large acreage positions all across America. These positions in land are basically bets being placed and backed by companies who are totally funded by the same folks who backed Enron and who backed CDOs of mortgages.

Here is the problem. The "old" oilmen are mostly gone. Speculators during the 1973-86 boom consisted of promoters who sold deals to individuals. No such small fry operations survives today. They create an energy hedge fund instead. Then they fund a company to buy leases which are then flipped to an oil company.

How do they know where to lease? They watch where Chesapeake is buying or where Devon is buying. Once Chesapeake Energy secures their first acre, they descend upon that county and region by the hordes. They have no scientific basis for leasing. They know CHK will buy them out for a profit. But sooner or later, CHK is gonna leave a bunch of them holding the bag and then the caterwauling will begin....hedge down, Wall street bank on the ropes again...Uncle Sam will bail the bank and blame the big oil companies that had nothing to do with it.

Yours truly apparently started a stampede in a Texas county after remarks I posted on a Royalty Owners site asking about activity in that area after a landowner called me that he had 2 companies bidding for his land. This in an area of very little activity. Suddenly the courthouses were full.

Obviously to old oil heads like me and intutive in most people if they give pause to think. What basis do people have to buy a lease? Well, in the old days a geologist developed an idea and once the company decided it was good, they sought out leases and followed up with more intensive research. Sometimes, they decide at the last minute to not proceed but usually, they have committed only a few thousand acres and a few $10s of thousands of dollars.

Today, long before the newbie geologists who work for oil companies now have had time to even get a clue, the company has accumulated 30,000 to perhaps a full 1,000,000 acres of land at prices to $500 an acre or more....all funded by investor money.

They aren't looking for 'real' deals. They are rarely even looking for oil. Its all about gas. And the reason is that these are "resource" plays. The gist is that improved technology of horizontal drilling which allows a company to auger sideways in a formation exposing long sections of that formation to the borehole are producing gas economically that could not be produced economically by drilling a vertical hole. Since this is trapped in formations that have little native porosity, huge fracturing (frack) jobs crack the formations open for more gas. The gas is barely economic and many wells make less than the cost to drill back. The few good ones have to pay for the less productive ones. The trick is that about 95% of wells will produce something...

The classic strat or structural trap of a sand formation is rarely pursued. Yet that is where the money is.

A friend of mine who has a small company told me today that they have a harder time making money now with geologically defensible prospects than 20 years ago. No one is interested in a traditional oil prospect. They want a "resource" play - tight sand or shale gas.

There is a huge amount of money chasing a very little gas on the continent. The only big finds will be off shore or Alaska. When the mullets finally figure out the resource plays don't pay off well, they are going to flee...flee so fast that they will take these hedge funded companies down like a rock.
 

Terrel L. Shields

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BTW, as an aside to my own post..rather than merely edit it. Investment banks are creating the same sort of financial instruments that did so well for them in Mortgages. Today, a company secures land, drills enough "resource" wells to evaluation the reserves, then sells those future reserves into an MLP Master Limited Partnership. They sell shares to the Rubes..mostly Germans and Chinese. They manage the partnership for a fee, but no longer own the reserves. They "cashed out" those values for big money. The investor takes all the risk. What risk?
One- The reserves are inflated (Shell got sued over that recently)
Two - The price might fall. (what goes up can come down)
Tres - The cost to drill and develop may increase (its been doing that steadily for several years)

Boom - Bust - Boom again - really big bust...and we ain't talkin' Dolly Parton here.
 

Ray Miller

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Feb 20, 2002
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Wisconsin
Having known men and women personally like John King “King World Wide Resources”, Jim Laws “Champlain Oil” L.L. Combs “Longview Farm”/Long Bell Lumber Co. a few more in Kansas, Colorado, Missouri, Okalahoma, Texas and others over the years your summation make sense to me. I have seen it go up and I have seen it go down. I seen them get rich and I seen them broke.

I think your right, this will equal the dot.com bust and the real estate bust together.
 

Terrel L. Shields

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May 2, 2002
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Certified General Appraiser
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Arkansas
Can you imagine the alarm bells had house prices doubled in 6 months? The Analysts who say, "it's different this time." are as wrong as they were for the "new paradigm" of the dot com business model...as wrong as they were that CDO's were 'safe' investments and hedged correctly.

So its just about timing...and timing has a lot to do with the success of an Indian Rain Dance. Yes, prices needed to rise to cover the cost of drilling, etc. But when oil prices are more than 8 times the price of natural gas, the bubble is full blown.
 

JT1974

Senior Member
Joined
Dec 16, 2006
Professional Status
Certified General Appraiser
State
Wisconsin
I see a silver lining to all of this.

One of the best things to come from the dot com bubble was the millions of miles of fiber optic cable that was laid by companies like Global Crossing and others who spent $Billions laying the infrastructure for the "new economy". This would have never been possible if not for the bubble environment that attracted heaps of silly money for these companies to do with as they wish.

After the dot com bubble popped, we were still left with millions of miles of fiber optic cables that now provides broadband access to most of the people in the USA. Companies can come and go but the physical infrastructure remains and is bought for pennies on the dollar by new companies that use it to provide a service to the public.

The same thing is happening now in the oil business. Basically, there is silly money sloshing around building rigs, pipelines, wells, developing shale and oil sands, etc. None of this would have ever been possible without the bubble and all the crazy money that it brings. The good thing is that when the oil bubble finally pops, the infrastructure will remain and will be bought for pennies on the dollar by new companies (or perhaps Big Oil). This will help us in the long run because the nation's oil & gas infrastructure will be in better shape than it was just a few short years ago.
 

Jerry Dell

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Jan 28, 2002
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Certified General Appraiser
State
Alabama
If you live long enough, history repeats itself.
 

Terrel L. Shields

Elite Member
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May 2, 2002
Professional Status
Certified General Appraiser
State
Arkansas
If you live long enough, history repeats itself.
In the long run, we'll all be dead...-Keynes

In the long run its not gonna matter for any of us :)
 

Blueprint

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Aug 25, 2005
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Oregon
It's really just good entertainment. How the entertainment will be diminished down the road remains a question. It could be positive, it could be negative. Either way, it's the newest ride, generously being offered to the masses. It's a good teacher of reality for the masses, yet not for the few.
 
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