Tag Archives: seeking

EQT Corporation: Deep Utica Update

Summary EQT released early production results for its Deep Utica test. Early-time performance looks encouraging. On the other hand, the performance by Range Resources’ deep Utica well may be sub-economic. In its latest presentation, EQT Corporation (NYSE: EQT ) provided an update with regard to its deep Utica test in Southwestern Pennsylvania. As a reminder, in July, EQT reported results of its highly anticipated Scotts Run well in the dry gas window of the Utica/Point Pleasant play in Green County in Southwestern Pennsylvania. The well is one of the deepest exploratory wells in the Utica drilled to date and is located almost 2,000 feet downdip from the previous frontier well. Due to the considerable depth and very high reservoir pressure, the well was challenging to drill and took more than half a year from spud to completion. However, EQT’s effort was ultimately rewarded. The entire ~3,200-foot lateral length was successfully completed. The well tested with a 24-hour rate of 72.9 MMcf/d with ~8,600 psi flowing casing pressure. This represents the highest initial flow rate for any shale well brought on production in the U.S. to date. Performance Update Based on the slide presentation posted by EQT yesterday, the well has produced at a pressure-managed rate of ~30 MMcf/d. Judging by the plot, pressure drawdown appears to have stabilized at ~40-50 Psi/day rate. If this rate is sustained, the initial production plateau may last for approximately six months from the beginning of production, resulting in cumulative production during the plateau period of ~5-6 Bcf. (click to enlarge) (Source: EQT Corporation, September 2015) I must emphasize that the well is a short lateral, which results in even more impressive cumulative production metrics per foot. (click to enlarge) (Source: EQT Corporation, September 2015) Normalizing production to a 5,400-foot lateral length, cumulative production during the initial six-month plateau for a medium-length lateral could be as high as 8.5-10.3 Bcf. It is obviously premature to guess about the play’s type curve and EUR at this point, as the shape of tail production in this deep and highly overpressured formation is an uncharted territory. However, it is clear already now that the test is a success and demonstrates the deep Utica’s potential for “big” wells. Whether “big” means 15 Bcf or 30 Bcf is too early to tell, in my opinion. Of note, Range Resources’ (NYSE: RRC ) Claysville Sportsman Club #11H well, another high profile deep Utica test that came online in November 2014 and had 5,420′ of completed lateral (32 stages with 400,000 pounds of sand per stage) produced “only” 1.4 Bcf in the first 88 days. Given that Range did not include an update slide with the Sportsman production profile in its most recent presentation, the well is likely producing substantially below expectation. I would not rush to interpret the Sportsman well result as an indication of Deep Utica’s poor productivity (the Sportsman’s initial rate was 59 MMcf/d), as several other data points, including Rice Energy (NYSE: RICE ) wells in Belmont County, Ohio, which are located updip, and EQT’s Scotts Run well, which is located downdip, all appear to be holding up well, at least so far. Well Cost And Well Economics EQT encountered significant challenges when drilling the well. Due to the extreme reservoir pressures encountered, the company had to replace its drilling rig with a higher-specification unit, which resulted in a delay. As a result, the well’s cost came out at ~$30 million. However, the fact that the very first well could be completed, with the planned proppant volume loaded successfully, gives hope that technical challenges are not unsurmountable. Going forward, EQT believes it can reduce its well cost in the Deep Utica to as little as $12.5 million for 5,400-foot laterals. The high cost sets the bar for well performance quite high. Assuming a $12.5 completed well cost, the Deep Utica play would need to yield EURs in the 25-30 Bcf per well range to be economically competitive versus the existing “core of the core” sweet spots in the Marcellus, where operators currently drill wells with EURs in the ~15+ Bcf range for ~$6-$7 million per well. In the immediate term, the well’s success is unlikely to materially change operational outlook for EQT (or any of its peers, for that matter). EQT is hoping to have a total of two-three wells on production by early next year and will plan further steps based on the performance results. EQT believes that it has ~400,000 net acres prospective for dry gas Utica, including ~50,000 net acres that look geologically “identical” to the Scotts Run well. Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment, tax, legal or any other advisory capacity. This is not an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Global Infrastructure Investments

By Todd Rosenbluth Once every four years, America’s civil engineers provide a comprehensive assessment of the nation’s major infrastructure categories. The latest report card has a poor cumulative GPA for infrastructure of D+, with rail and bridges each earning a C+. While Congress continues to debate whether, and how, to fund the projects to improve the quality of the nation’s backbone, there has been some encouraging news at the state level. Nearly one-third of U.S. states, including Georgia, Idaho and Iowa, are addressing infrastructure investment through gasoline tax increases to support improvement of local roads and bridges. Indeed, nearly two-thirds of the assets inside the S&P Global Infrastructure index are domiciled outside of the U.S., with China (5%), Japan (4%), Italy (8%), Spain (5%), and the United Kingdom (7%) among the ten largest countries. The S&P Global Infrastructure index seeks to provide broad-based exposure to infrastructure through energy, transportation, and utility companies in both developed and emerging markets. S&P Capital IQ Equity Analyst Jim Corridore thinks that companies that construct infrastructure are likely to see increased demand over the next several years due to the need for upgrade and expansion of infrastructure both within the U.S. and around the world. Within the U.S., aging and outdated roads, electric transmission grids, and energy transmission facilities are in dire need of repair and replacement, according to Corridore. Meanwhile pipelines, water treatment, and rail are seeing increased demand and need for expansion. From an industry perspective, transportation infrastructure (40% of assets) are well represented in the global infrastructure index, but this is partially offset by stakes in electric utilities (22%) and oil, gas & consumable fuels (20%) companies. Holdings include Kinder Morgan (NYSE: KMI ), National Grid (NYSE: NGG ) and Transurban Group ( OTCPK:TRAUF ). The S&P Global Infrastructure index generated a 9.6% annualized return in the three-year period ended July 2015. However, given the strength in the US dollar relative to most currencies in the last three years, many currency hedged international approaches have outperformed those that hold just the local shares. This is one of those examples, where the currency neutralized infrastructure index was even stronger with a 13.0% three-year return. On a calendar year basis, the hedged index outperformed in 2013 and 2014, after underperforming in 2012. Meanwhile, from a risk perspective the three-year standard deviation for the hedged S&P Global Infrastructure index was 20% lower. S&P Capital IQ thinks that global infrastructure needs has created some investment opportunities. However, we think investors need to be mindful of the impact currencies can play. There are four ETFs that offer global infrastructure exposure and 39 non-institutional mutual fund share classes. Disclosure: ©S&P Dow Jones Indices LLC 2015. Indexology® is a trademark of S&P Dow Jones Indices LLC (SPDJI). S&P® is a trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a trademark of Dow Jones Trademark Holdings LLC, and those marks have been licensed to S&P DJI. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI and to see our full disclaimer, visit www.spdji.com/terms-of-use .

Looking At SCHZ In The Context Of A Diversified Portfolio

Summary SCHZ has done an exceptional job of allocating the portfolio across different debt instruments. The maturities of the portfolio also offer a high degree of diversification. SCHZ is a great option for investors that want to use a larger allocation to bonds in their portfolio. Investors that only use a bond allocation for negative correlation to their equity investors may want to stick to long treasury securities. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. I’m working on building a new portfolio and I’m going to be analyzing several of the ETFs that I am considering for my personal portfolio. One of the funds that I’m considering is the Schwab U.S. Aggregate Bond ETF (NYSEARCA: SCHZ ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expense Ratio The expense ratio on SCHZ is only .05%. Since bond yields remain very low, it is especially important for bond funds to have very low expense ratios. A bond fund with weak yields on the securities and high expense ratios would offer investors a terrible investment. While the yields on SCHZ are limited as the portfolio holds a large amount of high quality debt in a market that is holding yields down, the low expense ratio remains a very attractive feature. Allocations The sector diversification within the ETF is very impressive for a bond fund. If an investor wanted to simply grab one bond portfolio, this would be an option for doing it all in a single purchase. My personal preference is to use more than one bond fund to make it easier to target different parts of the yield curve and create more diversification benefits for the portfolio, but I do think this is one of the better “one stop shopping” options. (click to enlarge) Maturity In addition to having a large degree of diversification within the type of debt instruments, the maturities of those instruments are also highly diversified to reduce volatility stemming from twists in the yield curve. (click to enlarge) Building the Portfolio I put together a hypothetical portfolio using only ETF’s that fall under the “free to trade” category for Charles Schwab accounts. My bias towards these ETFs is simple, I have my solo 401k there and recently moved my IRA accounts there as well. When I’m building a list of ETFs to consider I want to focus on things I can trade freely so that I can keep making small transactions to buy more when the market falls. Within the hypothetical portfolio there are no expense ratios higher than .18%. Just like trading costs, I want to be frugal with expense ratios. The portfolio is fairly aggressive. Only 30% of the total is allocated to bonds and I would consider that the weakest area in the portfolio. I’d like to see more bond options (with very low expense ratios) show up on the “One Source” list for free trading. (click to enlarge) A quick rundown of the portfolio The Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) is a dividend index. The Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) is a broad market index. The Schwab U.S. Large-Cap ETF (NYSEARCA: SCHX ) is focused on blended large cap exposure. The Schwab International Equity ETF (NYSEARCA: SCHF ) is developed international equity. The Schwab Emerging Markets ETF (NYSEARCA: SCHE ) is emerging market equity. The Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) is developed small capitalization equity. The Schwab U.S. REIT ETF (NYSEARCA: SCHH ) is domestic equity REITs. is a remarkably complete bond fund. The SPDR Barclays Long Term Treasury ETF (NYSEARCA: TLO ) is a long term treasury ETF. The PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (NYSEARCA: ZROZ ) is an extremely long term treasury ETF. Notice that the 3 international equity ETFs have only been weighted at 5% while the broad market index has been weighted at 25%. I find heavy exposure to international equity to bring more risk than expected returns so I try to keep my international exposure low. I prefer no more than 20% in international equity. Plenty of domestic companies already have enormous international operations so the benefit of international diversification is not as strong as it would be if the markets were isolated from each other. Risk Contribution The risk contribution category demonstrates the amount of the portfolio’s volatility that can be attributed to that position. When TLO and ZROZ post negative risk contribution it is because the negative correlation to most of the equity holdings results in the long term treasury ETFs reducing the total portfolio risk. In my opinion, this is the best argument for including them in the portfolio. Correlation The chart below shows the correlation of each ETF with each other ETF in the portfolio and with the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). Blue boxes indicate positive correlations and tan box indicate negative correlations. Generally speaking lower levels of correlation are highly desirable and high levels of correlation substantially reduce the benefits from diversification. (click to enlarge) Conclusion SCHZ offers investors a remarkable amount of diversification within the holdings. The diversification can be seen in the allocations to different types of debt instruments and to different maturities. The weakness in this otherwise exceptional fund is that including non-treasury debt makes it more susceptible to weak performance when the market becomes more timid. The exposure to credit risk is represented by the correlation for SCHZ to major indexes like SCHB and SCHD running in the -.23 to -.27 range. Those are good negative correlations that improve risk adjusted returns across the portfolio, but the negative correlation is much weaker than it is for ETFs that are focusing on treasury securities like TLO or ZROZ. On the other hand, if an investor wants a simple option for grabbing diversified bond exposure with lower volatility, SCHZ stands out as a very solid option that can fit nicely into a wide variety of portfolios. The question an investor must answer in buying into a bond ETF is “What is the purpose of this allocation”? If the desire is low volatility for the fund while the investor collects the interest income, then SCHZ should be a strong candidate. If the investor is simply trying to acquire negative correlations to other equity positions, then using longer treasury securities make more sense. In my opinion, investors assigning a higher portion of the portfolio to bonds will benefit more from SCHZ because the low volatility of the fund will be more important. Investors focused heavily on equity and only using bonds for negative correlations may want to focus on longer treasuries that use more volatility and negative correlation to counteract negative movements in equity markets. I’ve been contemplating buying some SCHZ for my portfolio; however I’m also running a portfolio that is heavily overweight on equities and light on bonds which pushes me towards using the treasury options for the stronger negative correlations. Disclosure: I am/we are long SCHB, SCHD, SCHF, SCHH. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.