Davy Jones Locker

Here is a “Lessons Learned” for “Independent” oil developers trying to break into the “Once” lucrative Alaska North Slope scene. It is also a lesson every interested “Alaskan” should be aware upon, as it affects your right as a citizen and points out what has gone wrong with resource development for the past 10-years or so. Pioneer Natural Resources out of Texas was the 1^st “True Independent” that braved the hostile North Slope in search of oil. Pioneer was probably the “fittest” of explorers in this category that stood a chance against the “Big Oil” that had dominated the Alaska scene for the past 40-years. Of record, 17-billion barrels of oil has been extracted and sent down the Trans-Alaska-Pipeline, so somebody has the winning game plan and a “Formula One” strategy. But it is not for sale! And early this year Pioneer called it quits at the Oooguruk Development Site, and sold off its assets and holdings to Caelus, for a measly $300-million. Caelus seems to be a Mitt Romney kind of venture, cut it up spit it out, just another bad sign of a troubled development. Yes, giving it away at the same price Semco Energy paid out for the Enstar gas distribution franchise in south-central Alaska. So this was a bailout and today the PNR stock is still suffering from this loss, as there was quite a hefty up-front investment in the “Rock”, what the Ooogurk soon adopted as a name - as roustabouts that wanted an escape to brighter pastures found themselves stuck! So what went wrong, especially in a business environment that was calling for such trespass by the “Independents”? First and foremost, we can thank Frank Murkowski and Sarah Palin for getting Alaska into this bind, as they were all for inviting in the “Independents”. And this came to light especially when Palin was at the helm, after making an enemy of the “Big Oil” that seemed to be doing it right. And at the time PNR's “pinstriped” lobbyists were sanctioning the development of the Nuiqsut and Kuparuk formations under water in the Colville River Delta, by wining and dining the state legislatures while looking out for tax breaks and royalty relief, of course “Big Oil” was looking closely as to how PNR's gift of gab would change horses in midstream – as that is what it amounted to. What's good for the goose is good...Pioneer got what it wanted to move forward with the “Oooguruk”, with preferential treatment tax breaks and royalty relief, something never allowed with “Big Oil”. So sour grapes set the stage for the “Independents” and that “North to Alaska” dream was about to wreck havoc on what appeared for so many years a win-on-win solution. At the same time per edict of the legislature and shoved down “Big Oils” throat was a Department of Natural Resources' mandate that allowed “Independents” to utilize the infrastructure belonging to “Big Oil”. Like processing facilities now somewhat idle and “Common Carrier” pipelines with excess capacity, made possible as the Mother Lode Prudhoe Bay field was on the decline. This was infrastructure built over the years by the giants, like SOHIO, ARCO and EXXON, payed for and most likely completely depreciated. It was theirs, nobody else's, but now they were told to “be nice, and share”! So came the “Facilities Sharing Agreement” posture, wherein outfits like PNR could build a facility for some development work but then have “Big Oil” at its disposal to finish things off, so what came topside out of the ground was then fit for sending to TAPS – which meant processed as marketable oil, ready for sale in Valdez. This was a burden to “Big Oil” as they were now required to accept some responsibility for another's commodity, it became very complicated and the 1^st such agreement was between PNR and Conoco. Systems that had been moth-balled to handle the decline had to be placed back in service, at “Big Oils” expense, as this “Sharing” was something they were not familiar with, or for that matter interested in. So sour grapes said again it was and this is wherein the state bureaucrats blew it wide open with the realization that Parnell's “Million Barrel March” was a possibility had it been handled correctly – but it was handled with failure already. Yes, things were changing in the “Oil Patch” but demonstrated a “Bully” like attitude by the “Independents”, because they had the state behind them. But it was costly all around for PNR, as there were some things that did not come under the “sharing” requirements, like air transportation with “Shared Services”, “Big Oils” own airline. So it meant crews going north then south on commercial hauls. Which is pretty damn expensive. Camps could not be shared either, even though PNR workers were allowed to stop in at any camp for a bite to eat, as on the “Slope” all camps are open for the oil field workers regardless of company affiliation. I worked for PNR, and to see how desperate the management went, we drove our trucks over to the Kuparuk River Unit “Bull Rail” at night, just in time for the “Fueler” to be topping off the vehicles for the day shift workers. The gas guy didn't know who we worked for, but it meant a full tank of gas, paid for by “Big Oil” and while waiting for a “free tank”, we would raid the kitchen - hauling off bags of groceries to feed the PNR workers. Yes, desperate times! These were little difficulties, but it all adds up. Now one all important aspect wherein PNR went totally wrong, the price to sink a well. Original estimates ranged from $10-million a “spud” and there was envisioned at least 40-wells incorporated into the drilling plan of attack, some production and some for enhanced recovery – in efforts to reach a goal of 20-thousand barrels a day, within two-years time. Yes, after that the “Oooguruk” island would be un-manned, dismantle the rig and the 120-man camp and have but a skeleton crew of operators watching the ticker tape and singing the “Black Gold” salute. It didn't work, and today it is more crying we hear from the “Rock” then joyous celebration. See, peak production was supposed to occur in 2010, not yet! In fact, based on historical production, what was supposed to take 2-years finds more realistic 2022 as a revised peak, and wells have cost more in the neighborhood of $40-million. Such delays costs Alaska a whole bunch of resource revenue! But the “pool” was not an easy formation to develop, due erosion, the reason that ARCO and EXXON had abandoned efforts long ago as original lease owners, realizing there was a potential but a costly endeavor. Basically speaking, the formation started caving in as oil was withdrawn, so it was a finicky formation and only the best and brightest geologist could keep it flowing, by delicate maneuvering. But the demands to produce in efforts to sell the commodity to pay the bills risked the livelihood of the formation. Today, after all efforts, the output is still way below expectations. As a last resort, the new owner – Caelus – is trying to sink wells in the Torok, which was also abandoned earlier by the PNR geologist, as it is the most bothersome formation – but due desperation to recoup the investment loses, that is the only hope – with fingers crossed. It won't work, and it demonstrates somebody didn't bother to check the “Homework”. See, many “Independents” with the “Alaska Dream” have not the resources to perform years of costly seismic exploration work, followed by a “Test Well” in efforts to delineate the formation and maybe some 10-years after that after hours and hours of research, there is the possibility of moving forward with development – still all a gamble. In that same area wherein PNR thought it would hit the “geyser” instead of a “geezer”, oil development is moving towards the National Petroleum Reserve where Big Oil has been performing research but it is a 10 to 15-years down the road sort of prospecting. “Big Oil” has time on its side, especially in Alaska. So the newbies rely on exploration data that has become “public information”, it's a gamble as who knows whether or not the data is intentionally sabotaged by the original explorers? Look, if I spent $millions$ on seismic work realizing that state laws allow me only a few years confidentiality, sure I would tweak the data, as why in hell should another “outsider” get to take advantage of my work? Get the point! So Pioneer's Oooguruk prospect has been a bust, originally hoping to see 20-thousand barrels a day production by 2010. They were on target with that goal originally, then dumped the formation pressure being in a hurry to meet shareholder demands and since then the entire formation has shown signs of premature aging, depleted and caving in – so it means “Fracing”. And that in itself is a costly option, in such a remote situation. But they have a problem with their new plan of attack , as that Torok formation that some think will at least make enough to break even this venture, it sits too close to a “Disposal Well”, wherein all the “Camp Crap” is pumped. Frac too hard and open up a communication and that's it, start bringing human shit up with crude oil, it ain't going into TAPS! So they get what they deserve, for not being prepared. Yes, “Big Oil” gets the Sarah Palin screw job when it comes to her thirst of attention as when the “governess”, she pissed off the “Big Oil” then had too run to the “Independents” for help. Look and too prove a point upon an agent of the DNR, I once straddled a PNR lease with my left leg and my right foot rested on an ARCO lease, the only thing between was a gravel berm. PNR was paying 5% royalty, while ARCO was paying upwards 16% - 3x as much! And at the same time, a state agency was fining BP $millions$ for some questionable recovery injection operations when PNR was guilty of the same damn malfeasance and was being assessed a fine of $10k? I was told by several field agents that the word from up high is turn a blind eye at the “Independents”. So no wonder we see not a very open helping hand from “Big Oil”, as the game is no longer “fair”. And there is a very simple solution to it all, wherein that 800-mile long pipeline could once again see a rate equal to the “Glory Days”, when 2-million a day was sent to anxiously waiting tankers in Valdez, lined up like there was no tomorrow. Give the “Big Oil” legacy wells a face life. By lifting the law that says “Royalty Relief” is for wells that never produced, or economically deprived or whatever the damn law tries to insight with prejudice. Yes, treat “Big Oil” the same way the “Independents” have been treated and Alaska would once again be a boomer, even with oil prices depressed. See, not only did PNR get “Royalty Relief” down to the lowest possible denominator of 5%, so did ENI. When “PNR” first sort “relief”, many experts said “Don't do it, Don't touch it, Don't go there”, but that did not stop the bureaucracy from, well caving in. So until such time “Big Oil” sees it is not prejudiced against for developing “Our” resources and continue to watch as “Independents” act stupid at the state's account, “Big Oil” can sit back and laugh. Over time all the “Independents” will suffer and sell-out, then what? We will be forced to surrender to “Big Oil”. So we must act now and allow “Royalty Relief” for the Prudhoe Bay “legacy” wells. For those interested in what it means for Pioneer, here it is:

The Street Ratings team rates PIONEER NATURAL RESOURCES CO as a Hold with a ratings score of C. The Street Ratings Team has this to say about their recommendation:

"We rate PIONEER NATURAL RESOURCES CO (PXD) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. However, as a counter to these strengths, we also find weaknesses including deteriorating net income, disappointing return on equity and a generally disappointing performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

• The revenue growth greatly exceeded the industry average of 1.9%. Since the same quarter one year prior, revenues rose by 39.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
• Net operating cash flow has increased to $717.00 million or 24.52% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -6.46%.
• The current debt-to-equity ratio, 0.39, is low and is below the industry average, implying that there has been successful management of debt levels. Despite the fact that PXD's debt-to-equity ratio is low, the quick ratio, which is currently 0.63, displays a potential problem in covering short-term cash needs.
• The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 99.7% when compared to the same quarter one year ago, falling from $336.00 million to $1.00 million.
• Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, PIONEER NATURAL RESOURCES CO's return on equity significantly trails that of both the industry average and the S&P 500.

A few years ago it was an entirely different story! People were buying up PNR like there was no tomorrow! So over the MurKowski and Palin reigns, the “Davy Jones Locker” went packed with selfishness, and like skeletons in the closet, it is still a curse upon Alaska. I wonder how much PNR stock is in Frank's portfolio? Hope it craters......And like an old time pipeline construction bumper sticker advertised, “Happiness is a Texan headed south with an Okie under each arm.” Today, some 40-years later, well “Happiness is Pioneer headed south with an Independent under each arm”. AMEN!