Grab a nice warm bowl of …. Soup from a market in Wuhan and join us for the #hottakeover this week where we talk about the coronavirus and how it may change my beer preferences, the impact on global oil demand (1.386 billion people in China, 11 million in Wuhan, 41 dead, 13.5 mmbbl/d oil demand in China….. I’m not seeing it), the baby it’s not cold outside gas price going below $1.90/mcf and Lilis Energy’s announcement of their borrowing base redetermination. 

** Note: In the podcast, 2017 US influenza death estimates are quoted as 80,000, and are referenced in the links below. Because CDC estimates from the 2017-2018 and 2018-2019 seasons are preliminary and may change as data are finalized, the CDC has since revised their 2017 death estimate to 61,000.

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Related Mentions:

Bat Soup
Coronavirus
Centers for Disease Control
Influenza deaths – U.S.
Rocky Mountain Chapter of the American Association of Drilling Engineers (AADE)
DRW AADE Panel Discussion
ADAM Presentation
Qasem Soleimani
Libya Production
Chris Kalnin
EQT Corp (EQT)
Lilis Energy (LLEX)
SMOG
Varde Take-Under
Todd Brooker
Cawley, Gillespie and Associates, Inc.

Transcript:

PLEASE NOTE SOME LEGAL STUFF:

David Ramsden-Wood owns the copyright in and to all content in and transcripts of the #hottakeoftheday podcasts, with all rights reserved, as well as his right of publicity.

Episode #9: #hottakeover your commute transcript

What is up #hottakenation, DRW here coming to you for the week of January 27th, your hot takeover-your-commute, getting ready for the week ahead with a little summary of what happened last week.

I just finished a nice bowl of warm bat soup myself. It was delicious, a little intimidating to be looking at the little critter, back at me… Yeah, a little intimidating, but you know kinda warm little fruit bat flavoring makes it taste more like chicken. No, that is not actually what I did, but it does kick us off on a flight around the world to the epicenter of what can only be described as a worldwide black plague-like epidemic coming to take everyone you know. Hide your children, hide your families, lock yourself in, shut down your life, stop ordering on Amazon, get on Netflix, and just hunker down for the Zombie Apocalypse. Because if you have been reading any of the news over the last week that is what sounds like is coming to America, coming to every country around the world, terrifying, horrible but is it really? I gotta… I gotta ask some questions here and, you know this this could be the worst aging episode of the #hottakeoftheday podcast cast ever, so I’m going to take the risk on that one and just ask a couple questions.

Now, let’s start with the fact that the CDC, the Centers for Disease Control in the United States, said that in the winter of 2017 eighty thousand Americans died from the influenza virus, which you might not recognize, it’s just the flu. We get flu shots, some of us do. I don’t get it, I’ve never got it, at some point I probably should but I just never have. And I didn’t realize myself that eighty thousand Americans died in the winter of 2017. Now, winter is a ninety day event. Not this year. It’s about a four day event this year, but lets just assume that winter is a ninety day event, and if you take ninety days, eighty thousand people, that is eight hundred eighty nine people a day in the United States we’re dying from the flu. The coronavirus, as they like to call it, is really going to change my view of drinking corona, I think going forward. I don’t love Corona but, but now that I have the coronavirus on my mind I think I’m gonna move full board a Pacifico or Dos Equis when I’m in Mexico. But nonetheless, the coronavirus was the first case I think was reported, I want to say December 31st and it’s now as as of this recording, it’s January 25th, and forty one people in the world of died, 1300 have been infected. Now, I’m no mathematician – I did write a book that was number one in economics for a while, improperly categorized, nonetheless – but I think this math is pretty easy to do forty one people over, kinda, 25 days is two people a day, and that’s not good, is definitely not good. You’d never want people dying of of illness or really of anything, but during that same time that forty one people died of the coronavirus in China and 1300 been infected at the same run rate of the influence of virus in 2017 we would have almost twenty thousand Americans die from it. And that that is a legit number. Here’s another little known fact. Everyone dies little morbid, I agree, but as I understand it, most of the forty one who died were already in the hospital with other complicating conditions. I think influence as an example the Norwalk virus, if I have that name right, as another example are examples of viruses that attack weak immune systems, older people, you know, when they already have other medical issues, and so, we will see where this goes, but…

To me, you know, oil started the week, felt good, you know. Did the American Association of Drilling Engineers; Apologize, I did I did drop more F-bombs, but when I get passionate I, I had, I had a little bit more f-bombs than I would have liked but starting at that and then ending the week with the ADAM presentation down at Houston, every day oil was falling. A buck fifty, two bucks, and if you’re an equity holder which you guys know that I am equity holders in three E&P companies, you got your face absolutely ripped off as oil moved out of fifty four dollars a barrel. That is crazy. That is just some crazy, crazy, volatility in the market based on forty one people in China dying. So, I wanted to look at the numbers. We’re going to talk a little a bit of both the numbers today.

Which is that there are one point three six eight billion people in China, and the city of Wuhan, the epicenter of this just disastrous epidemic plague that’s coming to get you, is eleven million people. So one percent – less than one percent – of the population of China lives in Wuhan which is shutdown. Now, thirteen point five million barrels a day of oil are consumed in China, and one percent would be a hundred and thirty five thousand barrels. The world does one hundred million barrels a day, hundred thirty five thousand barrels a day. Even if you were to shut down that entire city have everybody, just stay in their house. Not drive, not go anywhere, not do anything. I mean, Libya’s down one point three million barrels a day right now. Is global demand really going to drop by the amount that the price projects that it is? Are we so awash with oil that one point three million barrel Libyan disruption is not a big deal? The assassination of a Iranian general with a missile in January is not a big deal, but a pandemic that kills forty one people in twenty five days is like threatening global GDP. I don’t see it. I really don’t. So, to me, I am an oil bull so I guess I’m talking my book a little bit, but to me I just I don’t see oil should trade at fifty four dollars a barrel and if it stays at fifty four dollars a barrel for, really, any period of time as we head into Q4 reporting, companies, you just can’t be completing wells at fifty four dollars a barrel and, you know, maybe it accelerates the declines that we’re already seeing. North Dakota? It’s been like minus thirty, cold. Not a lot of guys complete when it’s minus thirty and you have to waste money heating frac water. Oklahoma? We’re down sixty percent in rigs, completions are just off the map. You know, you gotta expect North Dakota and Oklahoma are gonna see declines and add to that lower levels of activity because of fifty four dollars a barrel oil. It is going to be an interesting February. But it’s not gonna be as interesting for the oil players as it is going to be for the gas players because gas is now below a dollar ninety an MCF. And we had Chris Kalnin on the podcast earlier in the month and he is a bull case FOR LONG-TERM NATURAL GAS OWNERSHIP; I agree with that. Long term coal to gas switching and more power generation. As we know twenty five percent of the electricity in the United States is still generated from coal. So it makes sense that we would have natural gas continuing to grow as a demand. But, we are awash – just awash – in natural gas in the United States right now. Hundred and ten BCF a day produced, and gas is currently a buck eighty. There is not a gas well in the United States, in my opinion – and I think, I think it’s fact, if I am wrong please send me an email, I will have you on the podcast and you can walk me through the math but – at sub-two dollars an MCF, there is zero gas wells in the United States that makes sense just to be drilling. And that being the case, why are we completing wells? Why are we drilling wells? Well, I’ll tell you, it’s called firm transportation. I don’t want to pick on EQT, I don’t really follow EQT that closely, but I use it as a good example as a massive gas player in the United States. They produce four point five BCF a day, which is about one point five TCF a year, and when they came out in October to talk about their 2020 expectations, they said we’re going to keep production flat. Flat is the new up up. Everyone’s gonna like us, capital is coming down, five hundred million dollars, we’re only gonna spend, like, one point three or something like, one point three billion dollars. It’s going to be amazing. You guys should be excited. But when you think about that, they’re still spending over a billion dollars drilling wells at every single well as uneconomic. That… that doesn’t make logical sense, so when you read through their annual report, you see, Ah…! There’s also four point five BCF a day of firm transportation that they… that they have, so the firm transportation here is also one point five TCF, so if you let your production decline and just stop drilling wells, regardless of debt/EBITDA levels and debt covenants and all the issues that come along with that, because at a dollar eighty, come on, your cash flow is already …last year I think it averaged two sixty? Your cash flow unhedged is already twenty five percent lower, so debt, debt holders are already like, holding their their hat and quite worried. And we’ll talk about that in the case of Lilis here in a second, but, it’s just this firm transport is forcing gas producers who were so confident that they could grow forever – go on back to 2010 when there were no pipelines in the Appalachia region they… – they just keep hammering away with new production, they keep back-filling their declines and every single MCF is created that we grow production is driving gas prices down, and, behaviors, just the economic behaviors of firm transport, are causing an even greater issue. In the Permian, you have fifty cents an MCF, that’s… that’s below the level of transportation compression, treating, filtering, you know, all that stuff, so guys are losing money on every MCF produced. That is going to show in February. And I think, you know, stocks are down. Mid cap stocks were down twenty percent last, kind of two weeks, really reflecting this just horrific gas price, so will be interesting to see the commutation of all the gas producers, certainly in the Marcellus area coming into Q4, and then Permian guys that maybe are drilling gassier wells. So, that’s oil. That’s gas. That’s the coronavirus.

Let’s finish this week with Lilis Energy, who is the first to report a borrowing base redetermination that created a liquidity crisis. So, the company had disclosed that they had one hundred fifteen million dollars drawn against their borrowing base, and when they did their fall redetermination, it was lowered to ninety million dollars, which meant that they were overdrawn by twenty five million dollars, and this is the crisis a balanced sheets we talk about. We talked about Lilis last week. Two hundred ninety two million of SMOG value, four hundred twenty two million dollars in debt plus pref, and now their borrowing base, which is a short term debt structure, they’ve overdrawn, and their bank wants twenty five million dollars within the next, I believe, forty five days and the first payment was scheduled to occur on January twenty forth. Now, companies don’t even have the cash, positive cash flow, to pay their their bills much less pay banks back twenty five million dollars when you’re that levered, so just as… as a thing to notice, not only was there a take under offer from their primary sponsor, Varde, last week at twenty five cents a share, because, they had a liquidity crisis, this then was taken one step further this week, with a borrowing base redetermination that has enhanced, so they will have to sell assets. I mean, they’ve… they’ve said, you know, in their Press Release, the company is engaged in active discussions with its bank lenders and is currently considering various transactions to fund the borrowing base deficiency. They’re not the only guys that are in this situation, and as we move ahead to February, and as more announcements come out with Q4, borrowing base, SMOG, determinations… It, it could be ugly. It… it really could be ugly.

So lots to talk about coming forward but that ends the episode for this week. I hope it was.. I hope it was not as scary as the coronavirus. And I hope to be able to come to you later this week from Austin where I will be interviewing Todd Brooker who is with Cawley Gillespie, and we are going to be talking about reserves, SEC reserves, a little bit more SMOG but primarily, What are the rules? How do you book them? What do they mean? How do you read them? Going to be great episode. Really excited about that, so until next time, you can follow us on the web at www.hottakeoftheday.com, you can check out our old podcasts, and be good, be safe, have a great week, and I’ll be back. Bye.