Regional banks may be in for rocky ride
Local and regional banks are not immune to the financial meltdown affecting Wall Street institutions and could be the next to feel the impact, says Bill Gross, chief investment officer at Pimco. The bond fund guru recently told CNBC that, unlike Bear Stearns and some of the larger New York-based financial houses, regulators will not attempt to bail out regional banks.
Gross noted that regional banks lack the diversity in their funds and are having difficulty getting access to capital in a tight credit market.
He added, “There’s a lot of stress in the financial markets. Let’s face it, this economy, the US economy, and even the global economy, is delevering. And when an economy delevers, there are substantial problems and substantial risks.”
Gross isn’t alone in his dismal assessment of the US economy. Several Wall Street analysts have slashed their earnings estimates on S&P 500 companies.
Merrill Lynch analyst Edward Najarian warned that large-cap regional banks will face difficulties preserving capital and paying out dividends, and bank stocks will suffer. He warned that bank stocks will “likely trade below fair value in the near term” while the companies face credit risk, uncertain earnings outlook, and the need for additional capital.
Najarian forecasts bank earnings to fall by an average of 22% for 2008 and 19% for 2009. The cuts are the result of higher loan losses at banks.
Estimates rise for total natural gas supply
A comprehensive study released last month by the American Clean Skies Foundation (ACSF) and Navigant Consulting Inc. (NCI) indicates the United States has 2,247 trillion cubic feet (tcf) of natural gas reserves – enough to last more than 100 years. The results differ significantly from forecasts from the US Energy Information Administration (EIA), which have historically underestimated and understated the contribution and potential of unconventional natural gas from three sources: tight sands, coalbed methane, and gas from shale formations.
“To help determine the long-term viability of natural gas, ACSF engaged NCI to develop a comprehensive assessment of the current state of North American natural gas production, with a particular focus on analyzing the future of rapidly expanding natural gas production from unconventional formations, such as shales,” said Aubrey K. McClendon, chairman of ACSF and chairman and CEO of Chesapeake Energy Corp. “New technologies have allowed the rapid emergence of gas shales as a major energy source, representing a truly transformative event for US energy supplies. American producers can clearly supply enough natural gas to meet today’s uses and become an economical source of transportation fuel in the form of CNG or greater supplies of electricity for plug-in hybrids for generations to come.”
“The assessments and estimates on natural gas supply are very impressive and have, frankly, caught industry forecasters off guard,” added Rick Smead, one of the study’s co-authors and overall project manager for NCI. The study found that while all three unconventional gas sources have increased production over the past decade, natural gas production from shale formations is growing exponentially, increasing from 0.3 tcf/year of production in 1998 to 1.05 tcf/year in 2007 – a 203% increase.
“The extent of this ramp-up has not been fully captured by many reserve estimators,” said Smead, “probably because their emergence has been too rapid for existing models to capture accurately.”
Wood Mackenzie: significant shale gas potential in Rockies
Speaking of shale, Wood Mackenzie, the research and consulting firm based in Edinburgh, Scotland, has released a new study of emerging shale gas plays in the Rockies.
“The region holds a number of shale gas plays that have either been overlooked or were produced with other tight gas plays,” says Connie Lin, upstream research analyst for Wood Mackenzie. “While it is too early to quantify the impact of these plays until they enter the development phase, should these companies succeed, the Rockies could become a major producer of commercial shale gas in the Lower 48.”
Exploration of shale gas is growing considerably in the area, with operators ramping up drilling to exploit these deeper resources. The Wood Mackenzie study profiles seven of these plays – both existing and emerging – including the Gothic, Cody, Cane Creek, Baxter, Mancos, Lewis, and Pierre shales.
The seven plays are located in six basins across the region and are in various stages of exploration. Vertical depths range from 3,000 to 16,000 feet, and the typical play has multiple pay zones. Initial production rates are highly variable and have reached as high as 12 MMcfd in the Cane Creek play. Well costs and completion methods are still being modified as companies learn more about these emerging plays.
By definition, shale gas is an unconventional, continuous natural gas reservoir contained within fine-grained rocks, dominated by shale. These plays tend to be organically rich, with a thick pay zone. They also have long-lived wells, which produce at low rates for up to 30 years. Recoveries are typically up to 20% of the gas in place, which is much lower than conventional gas plays.