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.

Range Resources (RRC) at Howard Weil

Range Resources

Tenth most active driller in U.S. – will drill 1000 wells this year – 2.7 million acres net under lease and 11,400 drilling locations in inventory.

Company has a record of strong production growth at low cost - $1.64 all in cost – 424% reserve replacement through the drillbit in 2007. Selling off low growth plays to focus on higher growth. Range needs 30% of cash flow to keep production flat – one of lowest in industry.

Hedging currently don’t look so good since gas prices spiked, but they hedge to protect capital program so they won’t have to access capital markets.

2.2 TCF in proved reserves at end of 2007 – and company believes another 3.1 TCF in inventory.

Emerging plays – Marcellus Shale, Huron Shale, Barnett, Woodford Shale.

Huron Shale – Nora/Haysi field – 300K acres – 1800 producing wells on current spacing - 3000 sites to drill left. These are Coal Bed Methane wells at depth of 2800 feet. Wells have multiple horizons available – Huron Shale is at 5,000-6,000 feet. The Big Sandy field is across the border in Kentucky, which is a naturally fractured shale play from the 1940’s. Bad news is that Huron Shale is not naturally fractured. Company drilled one Huron Shale well and it cost $1.2 million for 1 BCF. Huron Shale is thicker than Big Sandy and higher pressure. Ten Huron Shale wells to be drilled in 2008.


Marcellus Shale – project has most long term impact on range – view this play the way Mitchell Energy viewed the Barnett Shale – Range knows the play very well. They have drilled some “really good” horizontals in shale. Plans in 2008 are to drill delineation wells (60 wells) to find out more about the play. This will tell them where to lease land since play is so big. They are also building infrastructure and they are in the middle of “land grab” in the area.

Marcellus Shale is 63 million acres – 20 times the size of the Barnett – play is very early however. Depth is 5,000-8,000 feet deep, most gas still in place. Play needs to be fractured.

XTO Energy (XTO) at Howard Weil

XTO Energy

Went public in 1993 – stock up 70 times since then. Strategy is to buy assets and exploit them.

20% growth projected in 2008 – company decline rate is only 15% versus 30% for industry.

30% of cash is needed to maintain production (reserve replacement) and the rest to grow production.

XTO does not have a lot of properties that are sensitive to gas prices – most are economic at $4-5 gas.

Sold stock in February 2008 to fund an acquisition – believes that the fourth quarter will have many opportunities to buy properties.

2008 Goals

15 TCF reserves – 15% annual growth - 1/3 by acquisition and 2/3 by drillbit. Feels that this will lead to a $75 price on stock.

Cycles have been longer and stronger – it is possible to have a cycle of 15 years and we are in year 6. Intrinsic value of oil to gas is 6 to 1, and we are at 10 to 1. That makes gas too cheap relative to oil – makes the case that if you believe in high oil price then gas should move up to bring ratio back to 6.

XTO is comfortable buying oil properties, but is still focused on gas mainly.

CNX Gas (CXG) at Howard Weil

CNX Gas

Most assets in Appalachian Basin – total company wide is 1.3 TCF proved reserves. 3.8 million acres total company.

Very far ranging assets – they have Coal Bed Methane, Shale plays, tight gas, etc.

Although these are assets which are very old and were handed down – they were never worked over because they were owned by Consolidated, which focused on coal.

7% of acreage holds all proved assets.

CBM assets – Virginia, Mountaineer, Nittany, and Illinois Basin. The majority of reserves are in Virginia and will drill 300 wells there in 2008. Total inventory is 2578. Seven active rigs. CXG owns its own midstream assets in area and has two pipelines and can sell into two different hubs.

Mountaineer play is key play – 100 wells to be drilled in 2008 – 6 rigs running - this was a new start up area 2 ½ years ago.

Nittany – in Pennsylvania – production started in November 2007 – 100 wells in 2008.

Shale Potential – Want to go slow - $88 million plan to examine these areas – they have 4 areas – Marcellus, Chatanooga, Huron and New Albany.

Marcellus – acreage goes from Upstate New York down to Pennsylvania, Ohio and West Virginia.

CNX Gas and Valuation

In late January, the parent who owns 80% tried to buy the rest – they abandoned this plan and the stock has been flat since then. Company feels this is unjustified.

Proved reserves have grown 7.5% from 2003-2007 but remember company is not focused on growing proved reserves during that time when it spent most resources moving PUD’s to PDP’s.

15.5% production growth through 2010.

Finding costs of $1.25 per MCF calculated as drilling CAPEX of $175 million divided by net reserves ads and production of 136 BCF.

Company says they are “debt free” and can fund entire CAPEX program with cash flow.

Pioneer Natural Resources (PXD) at Howard Weil

Pioneer Natural Resources

About two years ago changed focus to onshore and things have worked out great since then.

14% production growth per share is projected.

Will generate significant free cash flow over next several years driven by production growth and roll off of legacy hedges.

Plays include downspacing in Sprayberry and Pierre shale.

Will be relatively unhedged in 2009-2012 period as legacy hedges roll off – if there is a superspike in gas prices, then might consider hedging again.

Pierre Shale – a shale play in Raton basin – drilled 2 wells 18 months ago and they have been working on it since - 15 wells in 2008, 30-40 next year. Zero percent entry cost in this play since they are already in area in different zones. Very economical wells similar to Raton Basin Coal bed methane play.

Raton Basin CBM – 160 wells in 2008.

Alaska – 2 projects underway – one will have first production this summer. Peak production in 2013 from the projects here.

Tunisia – have to get capacity installed to handle operations on their blocks – good leads and prospects here. Will be expanding the fairway.

Edwards Trend – 35 wells in 2008 – running six rigs here – 200 identified locations.

Barnett Shale – partnering with Devon – 20 wells planned in 2008.

Sprayberry – 5th largest oil field in the United States – company has 5300 wells and almost one million acres - drilled four successful wells on 20 acre downspacing in 2007 – will do 20-25 more in 2008 - 12-13% recovery on 40 acre spacing – 25-28% recovery ultimately is expected. One billion barrels is ultimate resource potential here. Will add 250 million barrels over the next few years. This will help with booking PUD’s and lower finding and development costs.

St. Mary's Land and Exploration (SM) at Howard Weil

St Mary’s Land and Exploration

Grow reserves 17% in 2007 and five year average is 17% also.

Production grew 16% in 2007 and 14% CAGR over last five years – 1 TCF of proved reserves and 2-8 TCF 3P reserves – 23% PUD’s and 74% gas.

Arkoma – Woodford shale – 16 wells planned in 2008 – 2 rigs running - 40,000 acres. Recent wells last 9 months have seen EUR double. Costs have fallen as well. 521 locations

Atoka – Granite Wash – a very economic play for them – key is performance and execution – 537 locations.

Cotton Valley – 3 different areas here – Terryville, Elm Grove and Carthage - 643 locations –

James Lime – have been here for over four years – 86 locations – 50,000 acres in James Lime. Have done initial evaluation and company may have 10,000 acres of Haynesville.

Wolfberry Tight oil – 310 locations – 70 wells to be drilled in Wolfberry – testing 40 acre spacing.

Olmos Shallow Gas – 382 locations – new basin interest bought last year – doing 3D seismic and evaluation.

2.1 million share repurchased in first quarter of 2008 - additional 3.1 million authorized.

Capital program of $661 million in 2008.

Company expects to be within cash flow after capex and share repurchase.

Forty percent debt to book capitalization currently.

Goodrich Petroleum (GDP) at Howard Weil

Goodrich Petroleum

GDP will have expanding margins on 2008 due in part to falling rig rates and completion services.

Goodrich is mainly in Cotton Valley Trend – 267 wells drilled through 2007 – 96,000 Mcfe per day is production rate currently. Core properties straddle Texas- Louisiana border.

Company is drill bit only – no acquisitions needed or planned.

Bethany Longstreet area in Louisiana – 18,700 net acres. Have been developing for several years.

Haynesville Shale – a highly gas saturated gas section - early in play – will be watching it over the next few months.

Longwood Area – 9300 net acres – monitoring development ongoing here.

Angelina River Play – Travis Peak and James Lime is target – 35 Travis and 4 James Lime wells on line currently – 40,100 net acres.

2008 drilling program:

115 wells – $ 275 million cost

GDP believes they have 1500 net locations to drill in inventory.

GDP is a big believer in hedging particularly given the margins in the areas that they drill.

359 Bcfe proved reserves – 125,000 net acres – 267 wells drilled in Cotton Valley Trend.

Capitalization

$250 million in debt and $283 million in total equity.

Employees own 42% of company.

NAV on proven basis is expanding rapidly – as probable reserves are converted to proved.

Petroquest (PQ) at Howard Weil

Petroquest Energy

Historically a drill bit company.

Petroquest made a decision in 2003 to embark on long reserve life assets strategy, and started making acquisitions.

Acreage cost in Woodford Shale is under a $1000 an acre and $1200 in the Fayetville shale.

Company has stable of developmental prospects that will last for years.

Three core areas: Woodford Shale (27,000 acres), Fayetteville Shale (18,000 acres), and East Texas.

Woodford Shale – last well drilled by company was one of the most economic to date.

Forty percent of reserves are Gulf Coast off shore, which is where the company started. By 2009 it will only be 30%.

Pelican Point prospect – first production in May 2008, initial production will be 20,000 mcfe per day. Eight more prospects nearby with six more to drill in 2008.

Financials

30% growth in reserves expected based on estimated cash flow -

Valuation

Petroquest trades at 3.3 times 2007 cash flow and 3.1 times 2008 cash flow.

Drilling program for 2008 – 140-150 wells at a cost of $200-220 million.

Hedging program- 30-50% hedged is goal.

ATP Oil and Gas (ATPG) at Howard Weil

ATP Oil and Gas

ATP doesn’t do exploration – all properties have previous drilling on properties so less risk.

Production growth of 26% in 2007.

Follows hub concept in areas it drills.

ATP had three phases – Private until 2001, 2002-2005 when it made decision to go into offshore, and then last few years when production started to ramp up.

Ladybug project – first deepwater after going public. Since buying it, ATP has produced more than original estimated 2P reserves.

Gomez Hub – largest producing property in company – mostly developed but still some possibilities – drilling in 2 blocks.

Telemark Hub – bought from Norsk Hydro – first phase drilling to begin in fourth quarter of 2008 and production in 2009. another development coming in 2008-2010.

Canyon Express – Vicksburg discovery by competitor nearby.

Cheviot – just about to submit development plan 3 blocks – primarily oil Production in late 2010.

ATP has offered to pay the mortgages of all 66 employees for one year if they cut debt by $600 million by monetizing assets.

Occidental Petroleum (OXY) at Howard Weil

Occidental Petroleum

Stable cash business is on Texas and California – about 75% of reserves - low capex required.

Permian Basin – core of company business – continue to make small acquisitions – good time to make acquisitions now because banks have stopped lending to levered players – and MLP’s are getting their “well deserved demise.”

California – underexploited area but difficult to drill. More growth here than in Permian.

Middle East – North Africa – Dolphin Project in Qatar is completed.

Oman – steam flood project in Oman – 173 wells in 2006 and 2007.

Libya – 30 year agreement signed – good growth expected here.

Latin America – Colombia and Argentina. Colombia Cano Limon field is legacy field near the end of its life.

Chemicals

Capital allocation policy – projects must meet minimum returns and be competitive with stock buy backs.

Company takes very little reserve risk – most areas they know reserves are there. They are unhedged.

Spent $1.13 billion to buy back stock in 2007 – Company authorized another 20 million shares in 2008.

Company not happy with G and A expense per barrel so put in cost reduction program.

Long term production growth rate of 5-8% - maintain at least an A rating to compete against larger oil companies.

Murphy Oil (MUR) at Howard Weil

Murphy Oil

2007 was a “repositioning year” for Murphy Oil.

Acquired acreage in Suriname and Australia – leased blocks in GOM – natural gas play in British Columbia.

Production looks to about double from 2007 through 2010 to just over 200 K barrels a day.

Kikeh – 120,000 barrels per day by end of 2008.

Sarawak Natural Gas – supplies gas for LNG plant in Malaysia – production starts in 2009.

Tupper – natural gas play in Canada – tight gas play –2 TCF to Murphy after royalties.

2008 Exploration portfolio

U.S – 3 to 5 wells in Gulf of Mexico
Malaysia – 5 wells – Sabah field and Sarawak.
Australia – 1 well.
Congo – 2 or 3 wells.

New Areas

Suriname – bought block 37 – great source rock – looking for gas in this area will begin drilling in 2008.

Downstream Business

U.S retail – Walmart partnership – 20 state region – growing market share. Selling almost 300K gallons per month. Margin per site for non fuel is now $13,000 per site.

Refineries

Meraux, LA – 125K barrels per day
Superior, WI – 35K barrels per day.
Milford Haven, UK – 108K barrels per day.

Conclusion – a quiescent 2007 to change to significant exploration in 2008.

Sandridge Energy (SD) at Howard Weil

Sandridge Energy

Overview

Company has 1,4 TCF of gas reserves, owns 44 drilling rigs, and major oil service business. Employees own 28%, and with board 37% ownership of company.

Company was an IPO in 2007 – focused on West Texas overthrust, where two continental plates collided millions of years ago leading to multiple traps, etc.

Likes the Pinon Field – 2600 locations and 260 wells to be drilled this year.

2008 is “year of exploration.”

8% growth in production in 2008 – but expect much higher in future.

Pinon field is south of Permian basin – where major CO 2 infrastructure is located. Sandridge has CO 2 reserves in its acreage at the Pinon Field.

Main focus of company capital spending is on E and P – don’t need acquisitions – debt to capital target is 33-50%, and the company hedges opportunistically.

Ensco International (ESV) at Howard Weil

Ensco International

Company has an excellent track record meeting Wall Street expectations – 33 consecutive quarters.

ESV had best safety record in 2007 in company history working toward zero incidents per year.

Highest operating margin in industry – 65% in 2007.

ROCE – 28% in 2007.

Average age of fleet is 5.5 years – company is adjusting rig age for upgrades.

ESV is making a substantial investment in deepwater – all new builds are contracted or have a letter of intent. Revenue base of company shifting from Gulf of Mexico to international. ESV now has 9% of ultra deepwater market.

International markets will continue to be strong – believes that demand will absorb new builds - North Sea market still strong – expected collapse in gas prices there did not materialize.

Iran offshore – 12 rig shortage there.

ESV has 31 rigs in the international market;

North Sea – stable - 10 rigs.
Middle East – all under priced relative to market – will roll off and be priced higher - 9 rigs.
Of the 12 left, 8 are under long term contracts.

Gulf of Mexico – supply keeps shrinking – 79 in 2008 versus 156 in 2001.

Conoco Phillips (COP) at Howard Weil

Conoco-Phillips

COP discussed business environment that they are operating in. OECD demand is flat – growth from Middle East, China and India. Resource nationalization and heightened competition to continue. They are still bullish on oil prices.

Demand to grow to 120 million barrels a day by 2030 – COP can’t see industry meeting that demand.

Cost of new supply is driving prices higher in oil markets.

Natural gas – COP has always contested the estimate of the amount of LNG that will be imported to U.S. – see Europe getting a lot of it - thus the see a robust market for Natural Gas in the U.S.

Strategic Objectives

To be competitive with peers on Cash and income per BOE.

Debt rate 20-25%

65-70% - E and P
20-25% - R and M
5% - everything else.

Production – 2% long term growth rate.
5 year reserve replacement - 100%

Downstream investments being made are not to add capacity but to improve ability to refine heavier crude.

Encana venture – they have no refineries so traded an interest in a refinery for some of their properties.

Lukoil – COP owns 20% of Lukoil – value is double what COP paid for them.

Financial Strategy – aggressive share repurchase, competitive distributions, enhanced per share metrics.

Return on Capital Employed – used purchase accounting to buy Burlington and since Natural gas prices were low after purchase, this affected ROCE. If you use cash based metrics, then they are better.

Bought $ 5 billion in shares in last two quarters of 2007 – this leaves $10 billion left in authorization – this strategy boosts per share metrics.

Baker Hughes (BHI) at Howard Weil

Baker Hughes

First quarter earnings call coming April 22 so will not comment during presentation or break out session on quarter. Baker Hughes spent much of its time discussing its investment in research to handle the increasingly complex drilling that is needed today. They company went into great detail on it new technology center and how it would help expand its capabilities. Maybe Baker Hughes felt it had to justify the cost to investors.

Long term growth strategy – People -added 1200 people in 2007, difficult to find people with technical skills – invested much more in training.

Long-term growth strategy – technology

Long-term growth strategy – Infrastructure $300 million to expand international infrastructure. Opened new campus in Dubai which is regional headquarters for Baker Hughes. Phase 2 to have manufacturing center focusing mainly on sand control product line.

Center for Technical Innovation (CTI) is second major facility being opened. Will expand capability to 40,000 psi and 700 degree Fahrenheit.

Completion applications becoming more sophisticated as drilling gets more technically complex. That is one of the purposes of the CTI.

Production optimization is key to any oil service company – increased recovery factor is needed to produce energy for world.

Saudi Arabia is a key market the last few years – Saudis using Auto-Trak in offshore field, and has a joint development project on MRI to help drilling.

Apache Corp (APA) at Howard Weil

Apache Corp

Apache is first up on Tuesday morning and it must have been a rough night at the Bourbon House last night as the room is shockingly empty.

Management is focusing on its three growth areas – Egypt, Australia and Canada.

Egypt – Increased gas threefold since 2001 – 50% up on oil production. Very active here – 282 wells planned – 40 exploration.

Australia – 47 wells to be drilled, also 4 development projects will add 80K BOE/D by year end 2011.- 14% of total production. Revenue to go up much more than gas production in Australia.

Canada – Ootla Shale Play in British Columbia – 44,000 gross acres in play. Recovery is 9-16 TCF of gas at 20% recovery. Two challenges – only winter drilling – lack of infrastructure to support major drilling.

Unbooked resource potential – 120 k barrels a day of production coming on line through 2011.

Tremendous exploration program going on this year at Apache.

Howard Weil Conference

On Monday, I am heading off to the annual Howard Weil Energy Conference in New Orleans. Howard Weil is a boutique energy brokerage firm. Its annual Energy Conference is legendary in the Oil patch and draws the top Executives from every Energy firm out there. There are also hundreds of institutional investors from all over the world. I will try to do some blogging from the conference on some of the bigger names.

BLMC - Adieu

(Update - I did finally make contact with BLMC. See my other posts regarding this company.)

So I tried my best to get a sit down with the Biloxi Marsh Land Company - a fascinating pink sheet company that owns tens of thousands of acres of marshland in Louisiana. I was at an investment conference in New Orleans and actually stayed in Metarie right near their headquarters. It was a strange sequence of events and I must recount it here for the record:

Early March - Called BLMC and asked them to mail information on their exploration and devlopment potential that they presented at NAPE in February. They asked me to send an e-mail so they would have a record of it. (I honestly think that I forgot to send an e-mail as I was overworked on other issues.)

March 20 - Sent an e-mail asking for a face to face meeting with anyone in management.

March 20 - Received a very prompt e-mail answer from IR asking me to call Will Rudolf, the CEO of BLMC.

March 21 or 22 - I called BLMC and asked to speak to Mr. Rudolf. I was told that he was on the phone with a shareholder and that he would call back. (This was the last contact or response that I had with BLMC)

March 27 - Sent an e-mail to IR asking for a face to face meeting and received no response.

April 4 - Sent an e-mail post conference and included a list of my questions. I have received no response to date.

I don't understand why they responded to my initial e-mails and then suddenly cut me off from further contact. My questions really weren't all that tough either. I am not a shareholder activist type of hedge fund and wasn't going to ask them to recapitalize and pay out a huge dividend, etc. It was the inconsistency of the response that continues to puzzle me.

Here are my questions that I had for them. It would be difficult for me to invest money in this company until they were answered:

1. Has all the operations recovered fully from the hurricanes? Are all wells that were producing back on line?

2. Is the Manti Group the only operator currently drilling on your land? And they have committed to a 5 well package? Are they on schedule?

3. Your land is on your books at cost – which is $234,000 – I know you would never sell but do you have any idea of the current value?

4. On your balance sheet you have categories called:

Other investment – $1,775,995 - was not there at end of 2005. What is this investment?

Marketable Debt Securities - $4,732,349 at cost. What type of bonds? Are they all investment grade?

Marketable Debt and Equity Securities - $7,183,412 – this is not listed under current assets but under “investments” indicating that it is a long - term type of investment. What are the details of these investments?

5. What sort of insider ownership is there in BLMC?

6. What is the relationship between BLMC and the Lake Eugenie Land Company? Is there a cross ownership? Why do you call it your sister company?

7. What is the effect on the title to your land if the marsh land should become completely reclaimed by the ocean?

8. Would you ever consider moving onto NASDAQ or the AMEX? If not, is that by choice or because that you don't meet exchange requirements regarding numbers of shareholders, etc.

Nabors Industries

Is it time to buy Nabors Industries? Nabors is one of the premier land drilling companies in the Energy Sector with hundreds of rigs in its fleet. So here is the debate. The stock has sold off from a peak of $41.35 in January 2007, down to its current price of around $30 a share, which represents a drop of 34%. There is no doubt that there is a slowdown in the land drilling market. Day rates have come down off their peak and utilization is dropping as well as rigs are released. Is this the start of a long down cycle as in past years?

The optimists believe in what is called the “snapback theory,” which states that as rigs are released and drilling activity slows, natural gas production will drop sharply cutting inventories and boosting prices which will in turn lead to a rebound in drilling as the economics improve. The reason for this is because a large proportion of the wells drilled in North America in the last few years are unconventional wells, which typically have high rates of decline in the first year.

There seems to be too much risk for me to jump in now. I would rather wait for the 100-year flood to happen. What do I mean by that? The Energy sector is periodically rocked by catastrophic events that cause panic and investors run for the exits all at once. Energy stocks are also owned by a lot of fast money accounts, which will accelerate this. In the last two cycles, Nabors fell 77.5% (1997-1998) to $5.37 a share, and 70% (2001) to just under $10.00 a share.

I was at the Howard Weil conference last week and attended a breakout session with Gene Isenberg of Nabors. He provided no reassurance during the meeting. He indicated the following:

-That Canada was going to have a dismal year.

- He wouldn’t comment on leading edge day rates and deferred any discussion of it until the conf call in May.

- Older rigs would not be cannibalized for parts (which would reduce supply and help rates) unless they were unsafe.

- He was open to “concessions” on contracts, which means that they would cut rates on existing contracts if the operators agreed to extend the term or pick up more rigs.

- In short, he did nothing to reassure investors that things have bottomed out. Now the company is in much better financial shape than in previous cycles so don’t look for the stock to bottom in single digits. My buy target is $20 a share. I will admit that Nabors is looking cheap on price to EBITDA and price to sales vs. previous cycles, but keep in mind that both sales and EBITDA in those ratios are trailing not forward looking and thus will be coming down which will increase the ratio.

Howard Weil

So I’m heading down to the Howard Weil conference in New Orleans. I’m passing Laurel, MS right now. This will be the first time I am attending as a hedge fund manager rather than a stodgy old long only investor. Do I think there are any bargains in energy? Not really. The OSX just broke through 200 recently, still below its high of 240 but no bargain either, especially after one company after another misses guidance – with HAL and NBR being the latest. They certainly aren’t value stocks.

So why am I going then? Well aside from the sumptuous food and drink, I feel like I am getting a little out of touch with the market and what is going on. Now this might come as a shock since I do despise the sell side but they are good at providing information and getting clues as to professional investor psychology. This may be of limited use as most of the positions in my hedge fund are too small or esoteric to be covered by Wall Street.

Another first for me is that I don’t have any one on ones set up at the conference. These are meetings with management that are the true purpose of the conference, as the presentations are just holding pens for institutional investors in between meetings.

I also tried to no avail to set up a meeting with the Biloxi Marsh Land Company (BLMC). I emailed them several times and called once but was ignored. It’s too bad because the company continues to fascinate me. Aside from its acreage position in Louisiana, the company has several cryptic entries on its balance sheet, i.e. short term and long term investments that may be carried at historical cost.

They also have some relationship with the Lake Eugenie Land Company (LKEU), another pink sheet company that is even more obscure than BLMC if such a thing is possible. I can find nothing on the Lake Eugenie Land Company, not even a market cap.