Thursday, April 10, 2008

Howard Weil Conference Recap

I just returned from the Howard Weil conference in New Orleans and here are my impressions of the annual event.

Bulls Rampage – And why not? How can things get any better for the industry? Oil is at $110 and natural gas at $10.00. OPEC is disciplined, and the slowdown in the economy is apparently not having an effect on demand yet. We even got a bullish inventory report on oil on Wednesday morning.

Shale Plays Gone Wild – Maybe Joe Francis can send a camera crew next year to film top oil company executives ranting about Shale Plays. Although shale plays have been the place to be the last few years for an exploration and production company, this year they were even more hyped than usual. The Marcellus and the Haynesville Shale are hot new areas for Shale Gas, and any company who had any acreage here was touting it. One executive joked at the beginning of his presentation that he had to apologize since his company had no shale plays to exploit. When Range Resources finished its formal presentation, and headed to the break out session, I think about 100 investors rushed out of the room to attend, leaving only a handful of investors to hear Energy Partners, the next presenter.

My Fellow Investors - So there I was sitting in the main ballroom of the Sheraton New Orleans Hotel at the Howard Weil conference listening as the speaker drones on in the background boasting about how his operations are the lowest cost in the industry. I mean how many exploration and production companies can be the lowest cost? I look around the room. It is cavernous and filled with hundreds of bland homogeneous institutional investors. For those of you who have never sat in a room full of institutional investors, it is a real treat. Ninety percent of them are male, and this is particularly true at conferences in the Energy sector. Almost all are under 40, and most walk around with that peculiar mixture of arrogance and self-entitlement etched onto their face. This sense of entitlement is stoked by the sell side handlers, the institutional salesmen whose job it is to cater to the whims and ego of the largest accounts. All of these investors think they are geniuses because they have been able to pick stocks successfully in the largest Energy bull market since oil was discovered at Spindletop. This mistaken sense of success is also fed by access given to top management at these conferences.

As I move to a break out session some 26-year-old kid is pestering an executive of one of the company’s present about their capital allocation policy – raise your dividend, buy back your stock the kid urges. Now I’ve shaken hands with this executive at past meetings, his arms are like iron bars, and the calluses on his hands almost drew blood from my palm when he clasped my hand. He looks like he could snap this kid in two if he wanted, but he takes the high road, instead and parries him with some well-chosen words. What he really wanted to say was, "No you idiot, we are still a cyclical business and I have to save some powder for those bad times that will one day be here." Where does a 26-year-old kid get off telling an executive who has been in the business for 25 years how to run an oil service company? Does his spreadsheet even have a place for a single digit oil price? Or would it create some sort of circular error in excel? I prayed that this annoying little twit was not at my dinner that night, and my prayers were answered.

Food Fest – Two great dinners. One at Arnaud’s with Peabody Energy (BTU) and one at Galatoires with St. Mary’s Land and Exploration (SM)

Company Specific - The two companies I liked the most were CNX Gas (CXG) and St. Mary’s Land and Exploration (SM). St. Mary’s is undervalued by any measure, trading at 11 times consensus 2008 earnings per share of $ 3.58, 5 times EBITDA and 78% of net asset value of $49.32, according to Howard Weil. It has a new CEO who has started to transform the company from its old legacy asset base to one with significant growth prospects. St. Mary’s is in many hot areas including the Woodford Shale and the Cotton Valley.

CNX Gas (CXG) was spun out of Consolidated Energy (CNX) a couple of years ago (they still hold 80%) and has most of its assets are in the Appalachian Basin. After surviving an attempt by Consolidated Energy to bring them back into the company, CNX Gas can now move forward and develop its huge acreage position. Interestingly, the company’s entire reserve base of 1.3 TCF is only on 7% of its acreage, leaving 93% to be proved up. There is very little exploration risk on its acreage, as it is in known areas where natural gas is prevalent. They also are present in all the major shale plays such as Marcellus, Huron and New Albany. I don’t have a position on either of these names currently.

1 comment:

john said...


good story, particularly

"most walk around with that peculiar mixture of arrogance and self-entitlement etched onto their face."

Good nuff to stumble

John Bougearel