IXC Offers Exposure to the World's Biggest Energy Plays

by: Don Dion posted on: May 14, 2008 | about stocks: BP / BRGYY.PK / COP / CVX / E / ECA / IXC / PBR / RDS.A / SLB / TOT / XOM    

For much of this past year, iShares S&P Global Energy ETF (IXC) has lagged the three other energy-focused iShares ETFs, both in performance and on our ETF Momentum Tracker Sector Momentum Table.

IXC currently sits in the 10th spot and has fluctuated between No. 9 and No. 13 in the last three months, while iShares Dow Jones Oil & Gas Exploration (IEO), Oil Equipment (IEZ) and Energy (IYE) sit in the top six.

Of course, IXC has by no means been left out of the energy sector’s long run-up; its global construction—nearly half its assets are in foreign stocks, and it strongly emphasizes typically more stable, giant-cap stocks—means it could maintain momentum if foreign stocks take the lead from their U.S. counterparts.

With BP (BP), Total (TOT), Royal Dutch Shell (RDS.A), Eni (E), BG Group (BRGYY.PK), Petrobras (PBR) and EnCana (ECA) among its top 12 holdings, IXC stands apart from the typical energy fund. In fact, though ExxonMobil (XOM)—whose stock has struggled recently (down 5.6% year to date through March 9) because of sky-high expectations—is the longtime and recent top holding, it accounts for less than 15% of assets, compared to 21.4% for Dow Jones Energy. Add in Chevron (CVX), which accounts for 14.6%, and 36% of IYE’s assets are in two stocks.

Recently, with investments in two share classes, Royal Dutch Shell was actually IXC’s second-largest holding, at about 7.5% of holdings. In late April, Shell and BP reported “forecast-busting” earnings, according to Reuters. Shell shares are up 11% in the last month, while nominal IXC No. 2 holding BP is up 12.5%. The fund recently boasted an average market capitalization of $104 billion, with nearly three-quarters of assets in stocks described by Morningstar as giant-cap and nearly 98% classified as giant- or large-cap. That weighting makes the fund a bit less volatile than its peers, though its three-year standard deviation of 19.84 more than doubles that of the S&P 500.

The fact that the iShares Dow Jones funds have outperformed this year (Energy is up 7.0% year to date, Oil & Gas Equipment gained 14.2%, and Oil & Gas Exploration added 19.9%, all through May 9) could indicate that IXC has more room to run.

Morningstar analyst Emiko Kurotsu wrote last month that the company covers about 66% of IXC’s assets and found that, on average, those stocks are trading at a 6% discount. By contrast, on May 9, Dow Jones Oil & Gas Exploration traded at a 2.3% discount, according to Morningstar.

Because of our exposure to natural resources funds through the iShares GSCI Commodity-Indexed Trust (GSG) and Dow Jones Basic Materials (IYM), we currently don’t hold any of the energy-focused ETFs in our ETF Momentum Tracker portfolio.

One of the things that makes those broader funds more attractive than this one—and the other energy-focused funds—is that while GSG and IYM offer exposure to oil, they’re more diversified and therefore not tied solely to oil prices.

Energy funds tend to move up and down with oil prices, which explains their laudable returns in recent years, as oil prices quadrupled. The iShares energy ETFs have posted an average one-year gain of 35.7%, but GSG is up 66.7% over that period.

U.S. crude hit a new record high of $126.27 per barrel on Friday, and last week brought a wave of predictions that it could hit $200 in the coming months. At the same time, the dollar strengthened a bit, leading Edward Meir of MF Global to note that the sector appeared overbought and prone to a short-term correction. Meanwhile, others posited that oil could just as likely fall to $80, which would likely have a negative impact on energy funds.

Last week’s rising prices brought forth speculation that OPEC may increase supply by this fall, in the hopes of keeping markets “orderly,” according to Bloomberg.

Finally, political moves to reduce the cost of gasoline and other oil products could have an adverse impact on the price or at least the perception of energy stocks. Last week, U.S. Senate Democrats unveiled a new energy package that threatens to revoke $17 billion in tax breaks for energy firms and would place a 25% windfall tax on firms not invest- ing enough in new energy sources.

After the long run-up, such a move could be painful for energy fund shareholders. Of course, geopolitical events in any number of countries could send oil prices skyrocketing, and quickly. In the end, the only sure thing is that oil prices will remain unpredictable, as they have for decades. Energy funds will likely move with them, and that volatility makes IXC both worth watching and possibly worth avoiding.

This article has 2 comments! Add yours below...

Don Dion

Don's Investment Newsletter: Don's Asset Management Business:
Become a Contributor Submit an Article

This article has 2 comments:

  •  
    g.pincheot
    May 15 10:14 AM
    I'd like to know your thoughts on nuclear energy. I've been hearing
    more about it recently. I see that Invesco has a new ETF out -
    PKN.

    I know Cheney's Energy Task Force was looking at this in 2001 - but haven't heard much since.
  •  
    Brinks
    May 21 05:56 PM
    I read your Seeking Alpha energy articles with interest.

    How about an article about Foothills Resources? Very unusual situation. Results for their GB Well should be out by May 31.

    Managemnt is world class.


    Listen to www.foothills-resource...

    Date Title
    Apr 09 2008 IPAA Oil & Gas Symposium - Webcast

    Regards

    Adam



    Foothills Resources Overview and Summary ---

    1964:

    "The Grizzly Bluff field was first drilled back in 1964, by a company called Zephyr. At that time the company tested gas at commercial rates from one well flowing at a remarkable 5 million cubic feet per day (MMcf/d). But Zephyr wasn't looking for natural gas but oil and moved on to another field."

    So the fact is, there's little doubt that the gas is there.

    Fast Forward: Excerpt from Foothills Resources Press Release March 26, 2008

    In the Grizzly Bluff (some call it Grizzly Bear) Field GB 4 well was drilled from a surface location about 25 feet (25 FEET !!) from the Zephyr well, which tested gas from the LRD formation at an average rate of 5 million cubic feet of gas per day over a four-day period in 1964. The Zephyr well was ultimately plugged and abandoned without being commercially produced due to the lack of a viable gas market in the area at that time. While drilling, the Foothills GB 4 well encountered the same gas-bearing zones that tested gas in the Zephyr well.

    GB 4 well was successfully drilled using oil-based mud to a total depth of 9,530 feet, electric logs have been run and a production liner cemented in place to prepare for a comprehensive production testing program. .. The successful drilling of the GB 4 well achieved two primary objectives: offset the Zephyr GB 1 well drilled in 1964 that tested gas at significant flow rates from the Lower Rio Dell formation (“LRD”) and evaluate the deeper formations below the Grizzly Bluff Field with the drillbit – the Grizzly Bluff prospect. .. The Foothills GB 4 well encountered the same gas-bearing zones in the LRD formation that tested gas at the rate of 5 million cubic feet of gas per day in the Zephyr well. .. The well encountered extensive gas shows and electric log indications of potential gas-bearing zones from the deeper formations in the Grizzly Bluff prospect.

    Testing of the GB 4 well should be completed by the end of May, 2008.



    Key Listen to www.foothills-resource...

    Date Title
    Apr 09 2008 IPAA Oil & Gas Symposium - Webcast


    Why Purchase Foothills Resources (ftrs)?

    1) Trading Below NAV--- Reserves 7.8 million barrels of oil and oil equivalents
    2) Company targets low risk identified resources.in or near existing infrastucture
    3) Several high impact growth catalysts including prolific natural gas Eel River Basin
    4) Good Cash Flow From Existing Operations --production 620 barrels of oil per day from Goose Creek Oil Field
    Goose Creek Oil Field Multiple PUD and PROB drilling locations--Extensive portfolio of high quality, repeatable recompletion
    and PUD opportunities. Goose Creek Oil Field 150 MMBO produced, 30 productive reservoirs between 800 and 4,500 ft..
    5) First-mover advantage in prolific natural gas Eel River Basin--Grizzly Bluff Prospect..500 Bcf–1 Tcf potential
    Major natural gas development / exploration opportunity in California..Grizzly Bluff Prospect.
    Multiple PUD and PROB drilling locations in intermediate depth Lower Rio Dell formation
    6) Acquired 12.7 sq mi 3D seismic survey over Grizzly Bluff Prospect (3 D SEISMIC)
    7) Very experienced management team---own 18.9% of ftrs fully diluted --60.51 shares outstanding --85.6 million fully diluted
    Dennis B. Tower –CEO and Director..Geologist with 37 years experience in exploration and management positions, including 28 years with ARCO..
    John L. Moran –President and Director..Geologist with 38 years in exploration and management positions,including 19 years with Mobil and Apache
    8) Operating control and dominant position in core areas..
    9) Opportunistic acquirer –access to proprietary M&A deal flow..
    10) Fully-funded 2008 drilling program --Will be drilling 6-8 new oil wells in Goose Creed Oil Field
    11) Goldman Sachs owns 9.3% of fully diluted outstanding shares

    ftrs Foothills Resources Inc

    finance.yahoo.com/q?s=...

    www.investorcalendar.c...=

    . www.foothills-resource...

    finance.yahoo.com/q/bc...


    ..
    .
    Natural Gas Nirvana: Foothills Resources (ftrs: OTCBB)


    Several weeks ago I spent hours investigating a company that at first looked too good to be true.


    My final conclusion?


    Foothills Resources (ftrs: OTCBB), is hands down one of the best undeveloped gas plays I’ve ever seen.


    It’s so good, I classify it as a zero-risk gas play with the massive upside of a pure exploration play.


    Foothills is a company with a large, undeveloped gas property in northern California.


    Everyone I’ve talked to about this company has basically said the same thing: it’s about as low risk a play as you’ll ever find.


    But when talking to CEO Denny Tower, who has been involved in the discovery of billions of barrels of oil in over 35 fields, along with tens of trillions of cubic feet of natural gas. For him to say it’s the best opportunity of its size anywhere, period….now that really made me sit up and take notice.


    You might think Denny is biased, being the CEO. In reality, he’s simply stating the facts.


    Chris Moyes, who’s in the business of finding oil & gas deals for dozens of clients worldwide, agrees. Chris’s company analyzes over 200 deals per year, and has been doing so for decades. These guys know the industry…inside and out.


    And Chris’s response was the same as Denny’s. In fact, Chris liked the deal so much he joined the board.


    This is incredibly important. In fact, everyone in the oil & gas industry who’s had a chance to look at this project has essentially said the same thing: It’s a no-brainer.


    Case in point: When the company set out to raise money early on, they were hoping to get about $7 million in order to get the exploration program off the ground, secure more leases in their target area, and begin drilling.


    As is the norm, the company went to private investors for the funds. Now, these folks are what you’d classify as the “smart money.” Long story short, the company ended up raising $10 million because everyone who heard the story and had a chance to look it over wanted to get in on the deal.


    Here’s why…


    Grizzly


    Foothills has secured the majority of the Eel River Basin in northern California. The basin is home to several conventional natural gas reservoirs, some of which have production history, and some of which are producing right now.


    But the basin, over the past several years, had been forgotten.


    It was first drilled back in 1964, by a company called Zephyr. They tested gas at commercial rates at their first six wells. Now, understand, they had a steady, sustained flow of 5 million cubic feet per day from one well….Grizzly Bluff #1. Obviously, that’s a major hit.


    But these guys were looking for oil, so they capped the well and moved on.


    You see, gas at that time was selling for under 20 cents per thousand cubic feet. On top of that, there was no infrastructure. For the most part gas was considered a nuisance, flared off at the wellhead.


    So the company moved on.


    And so it went for ARCO when they drilled in 1990. Plenty of gas, but no oil.

    So there’s no question the gas is there. In fact, the shallow Anderson formation has proven reserves, which the SEC defines as:

    “…quantities of natural gas which geological and engineering data demonstrate with reasonable certainty to be recoverable…”

    As you’ll see, it’s money in the bank.


    Other than one small independent that drilled 10 wells in 2003, the entire basin has been dormant. Most of these wells were in the shallow Anderson play, and three are still producing.


    Now, one of the guys in charge of the ARCO drill program in the 90s got all of the data on Eel River…seismic, drill logs, flow rates, everything. All of this data is now in the hands of Foothills CEO

    Denny Tower, thanks to his connections in the industry, and a past stint at ARCO.

    The company will begin by drilling the Anderson formation, which will allow for very fast completions and cash flow. A little farther out, they’ll target the Grizzly Bluff for the high impact wells.


    A Little Background


    When I first heard about this play I admit there was one thing that concerned me. California, home to the some of the most strident, radical enviro-fascists.


    But the more I looked at the California energy picture, I quickly realized this was a non-issue. First, natural gas is clean and green. It is by far the fuel of choice. But there is a small problem….
    And that’s supply.


    Right now, California imports 82% of it’s gas from out of state, which they must pay competitive prices for (most of this gas comes from BC). So now, what was a languishing asset a decade ago is now a bonanza.

    And, California is trying to mandate that if gas can be produced in California, purchasers will be required to buy that gas rather than importing it from out of state. This, obviously, is at market prices.


    The Foothills property lies in Humboldt County, which has actually has a favorable stance toward gas development. Plus, because there is already production in the basin, the infrastructure is already in place. In fact, there’s a gas trunk line that runs across the Foothills property.


    As a result, and because the Anderson formation is very shallow, these wells can be drilled, tied in and producing in only 10 days.

    The company plans to drill two wells immediately, targeting the shallow Anderson zone. These wells are super low risk production wells. In fact, they’re basically offsets from existing wells.


    As I said, the pipelines are there, so cash flow is immediate, no more than two weeks.


    The company anticipates production from the first two wells to be 1.5 million cubic feet/day for each well. And these are very long-life wells.


    By The Digits


    The wells cost about $1 million, start to finish. Now, these numbers are based on a gas price of about $7. (You know where the price of gas is headed, so keep that in mind.)


    So with the two wells on stream we have an operating profit of $300,000 per month… running around 40 million cubic feet per month. With cash flow of $300,000 per month, payback is in about 7 months. So based on just these two wells, we’re looking at cash flow of about $3.6 million per year.


    Of course, these won’t be the only wells the company drills. Going forward, the first phase plans are for 40 wells in the shallow Anderson play. This first phase will probably take the company 18-24 months to complete.


    From a geologic point of view, I just don’t see any risk. And from an environmental standpoint, the risk is gone. There’s already production from the basin…there are existing county permits to drill the wells, essentially the logistics infrastructure risk has gone away. This is more like gas mining. It’s truly a dream come true.


    So given the proven undeveloped reserves, and the initial 40 wells, we’re looking at 62 billion cubic feet net to Foothills.


    And I haven’t even gotten into the deeper Grizzly play. Remember, when this well was initially drilled it flowed at 5 million cubic feet per day. And, based on the well logs, every indication is that the well should have produced at an even higher rate…10 or 15 million cubic feet per day, per well.


    The deeper prospect holds from 1 to 3 trillion cubic feet.


    This is what gives this company the sex appeal. The deep play could turn this cash flow machine into a bonanza gas company overnight.


    But first, we’ll see the company establish cash flow and ramp up its drilling program in the shallow Anderson zone. This will happen within the next 60 days, so now is the time to own shares. END
Loading...
Symbols:
Authors:
Quick Links:

ETFs In Focus

  • Long Ideas

  • Short Ideas

  • Cramer's Picks