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Fracking Profits Could Resemble a Gerbil on a Wheel

Stocks in this article: SN CRZO BRK.A

Sanchez Energy  (SN) COO Chris Heinson outlined some of the factors that negatively affected Sanchez's fracking-based operations during a March 6 investor conference call that demands closer examination.

Heinson said that Sanchez, an oil and natural gas producer based in Houston, had encountered unanticipated interruptions of their fracking operations, events particularly relevant to the economics of the fracking business.

Here's what happened to Sanchez during the fourth quarter of 2013:

  • "Multiple periods of cold weather which has increased downtime and maintenance in the current quarter"
  • "Gulf Coast weather, particularly fog, has impacted barge and inner coastal traffic, tanker traffic, causing shortage, storage facilities to backup."
  • "Experienced periods where our crude could not be marketed due to the temporary receiving facility bottlenecks"

Specifically, Sanchez said that "Crude could not be marketed due to the temporary receiving facility bottlenecks"?

Could this revelation be an indication that other companies could also encounter similar problems? This potential speed-bump in the road to quick monetization of energy produced by fracked wells could result in a painful effect on profit margins (and a corresponding sharp increase in non-revenue reported inventory levels).

An example of a noticeable greater percentage increase in "Total Expenses", compared to a smaller percentage increase in "Total Revenues", was recently reported in the 2013 Annual Report (SEC Form 10K) of Carrizo Oil & Gas (CRZO), a driller in the Eagle Ford shale oil play:

CRZO Oil and Gas Total Revenues in the 4th qtr of 2013 were $131,936 million up 13% from the 4th quarter of 2012.

CRZO Oil & Gas Total Expenses for the same period were $30,710 million in 2013 and $23,904 million in 2012; up 28% from the 4th quarter of 2012.

CARRIZO OIL & GAS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

           
   

Three Months Ended December 31,

 

Year Ended
December 31,

   

2013

2012

 

2013

2012

Oil and gas revenues:

           

Crude oil

 

$

110,227

$

81,229

 

$

421,311

$

286,119

Natural gas

 

15,503

22,252

 

83,341

71,430

NGLs

 

3,998

3,969

 

15,530

10,631

Total oil and gas revenues

 

129,728

107,450

 

520,182

368,180

Net cash from derivative settlements

 

2,208

9,817

 

12,491

38,924

Adjusted oil and gas revenues

 

131,936

117,267

 

532,673

407,104

             

Costs and expenses:

           

Lease operating

 

11,902

8,872

 

46,828

31,471

Production taxes

 

5,124

3,866

 

19,811

13,542

Ad valorem taxes

 

1,853

1,575

 

8,701

9,813

General and administrative

 

11,831

9,591

 

45,356

33,056

Total costs and expenses

 

30,710

23,904

 

120,696

87,882

As reported by 9W Search.com/ http://www.9wsearch.com

There are several other possible factors that could have negative effects on oil and gas fracking companies' ability to reduce their costs related to fracking oil monetization.

One might be the current availability of "safer" railroad tank cars, desperately needed for delivering oil by rail to thirsty refiners. (See a recent US Department of Transportation report regarding the risks of continuing the use of the aging tank cars fleet. Many do not meet existing DOT safety standards imposed on the transportation of volatile cargo like fossil fuels. http://phmsa.dot.gov/)

Two current principal beneficiaries of a potentially higher pricing structure for the leasing and sale of tank cars are:

Carl Icahn recently reported the current ownership of 27,000 railroad cars (many of them tank cars) and his ownership control of a major builder of new tank cars, American Railcar (ARII). Carl, incidentally, has a "favorable right" to personally buy new tank cars from American Railcar, whose shares have appreciated 56% in the last year.

The other is Warren Buffet's Berkshire Hathaway  (BRK.A) the owners of the BNSF Railway, which builds new tank cars for their exclusive usage. Carl and Warren's level of influence in this highlyspecialized industry might lead to these two tycoons to seek greater profit margins in supplying access to this high demand commodity: new tank cars that meet the U.S. Department of Transposrtation's stricter specification requirements.

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