BP is set to try a top kill tomorrow on the MC252 well in the Gulf.

Effectively, a top kill consists of injecting heavy fluids under high pressure down into the well bore. The weight of those fluids (i.e. the “head”) counters the pressure of the oil and gas coming up the well bore, and the end result is a “kill”.

Then, BP can come back in with cement and permanently plug the well.

The key is that the fluid you’re injecting needs to be very heavy. Drilling fluid is typically used; it’s used on the drilling process for the exact same purpose, to contain fluids in the well bore.

The other requirement is that you must be able to inject that heavy fluid under enough pressure to initially overcome (or overpower, if you will) the opposing pressure of the oil and gas condensate coming the pipe.

Good luck BP. I’m excited to see if this works. It’s never been done in deep water.

The Obama Administration is now saying that it will push BP off cleanup duty and take over if they determine that BP isn’t taking all the appropriate actions.

Great. Call in the experts.

The administration also accuses BP of “missing deadline after deadline”.

If that isn’t the kettle talking…

BP will try a top kill on Tuesday, and if that doesn’t go well I suspect they’ll try a junk shot. I don’t have much faith in junk shots.

The Organization of Petroleum Exporting Countries (OPEC) decided to hold out against further production cuts at today’s meeting, and resolved to enforce compliance with existing reductions.

Obviously dealing with crude oil ($wtic: chart) production is a double edged sword.  Cut production in an effort to drive up prices, and you risk cutting demand even further in these fragile economic times.  Leave production alone and prices could fall further, cutting the economic incentive to bolster reserves.

OPEC has claimed that crude oil prices in the range of $50 to $60/bbl would be ideal, which is down from the $70-90 range that OPEC’s secretary general Abdalla el-Badri levied as appropriate at the end of January.

One positive aspect of a lower price range is that production with higher lifting costs will be shut in, further helping moderate the industry financials as s whole.

The next meeting is in two months on May 28th where the supply-demand analysis may be a bit more clear.

Rig counts in the U.S. are back down to July, 2005 levels as crude oil prices have dropped back to the $40 range.

Baker Hughes (BHI: chart, web, Y!) has issued the rotary rig counts as a service to the petroleum industry since 1944, when Hughes Tool Company (of Howard Hughes fame) began weekly counts of US and Canadian drilling activity.

The rig count acts as a barometer for the drilling industry and its suppliers.  In effect, the more drilling rigs out making holes in the ground, the more is being spent on exploration, leaving one to believe that the industry believe oil prices justify drilling for more production.

As of last Friday (rig counts are updated at noon on the last day of the work week) the US rig count was down by 73 rigs with a total of 1,399 rotary rigs actively drilling.  Of those, 283 are being used in drilling exclusively for crude oil.

That compares to data from back in July, 2005, when 1,404 rigs were working, but at that time the count was steadily increasing.

This data indicates that the oil and gas industry doesn’t see crude oil prices rising substantially any time soon, so as not to increase capital expenditures to increase production.  In fact, most analysts are expecting a production cut by OPEC at the next meeting in March.

As for natural gas…

Baker Hughes also publishes the number of rigs used in drilling for natural gas.  That number dropped this week by 46 to 1,104 rigs.

Directional drilling has declined also, which isn’t surprising.  The cost of drilling a horizontal well is far greater than drilling a conventional straight bore well.  In this environment, there’s no point in spending top dollar only to have to shut in production due to poor economics.

Corner Office Comments

I believe crude oil will continue to trade in a $40 to $50 range for the next several months, with an occasional but short lived dip below $40.

OPEC will most certainly cut production in March, but to what effect those cuts will have on market prices for crude is uncertain.  The market has not reacted in like kind in the past, and I suspect it won’t care much about OPEC cuts this go ’round either.

Have you noticed prices at the pump lately? In my area, gas went from $1.39 per gallon to $1.79, even while crude oil prices are floundering below $40 per barrel.

There seems to be a significant divergence of crude oil prices as compared to gasoline, and it’s indicative of a shift between demand for crude oil and production output of refined products.

Refiners margins have been down recently due to the drop in crude oil. During the fourth quarter of last year, the price of a barrel of crude oil was actually more expensive than a barrel of unleaded gasoline (remember there are 42 gallons in a barrel). That meant that the refineries were paying more for the raw material than they were selling their product for. Hence, the drop in refiner stocks, such as Valero (VLO: chart, web, Y!) and Tesoro (TSO: chart, web, Y!).

Now that oil prices have started to stabilize around $40 per barrel, and refiners have taken delivery of their crude purchased for much higher prices, they’re starting to increase their margins by cutting production.

In the first week of January, refined gasoline totaled 9.1 million barrels per day.  By the end of the second week of January, total production was 8.8 million barrels per day, a 300,000 barrel per day drop in refined products.

Demand has been dropping for the last three weeks, and demand on January 9th hit 8.75 million barrels per day.  So production is just keeping up with demand, and no more.

Gas prices typically lag crude prices by a month; two depending on how futures contracts play out.

Corner Office Commentary

If oil prices continue to trade between 35$ and $40 per barrel for the next two months, I would expect gasoline prices to start to turn the corner and head down at the beginning of February.

The change in refined product output should run its course by the end of this month, so long as more output cuts are foregone.  Even then, once the refiners build margin back into their books, we should see gas prices stabilize.

Last week Provident Energy Trust (PVX: chart, web, Y!) announced that while they had successfully closed the sale of their U.S. oil and gas business, they would also be cutting the monthly dividend to $0.09 Canadian, or about $0.07 USD.

Although that certainly smarts, I can’t say that I’m surprised.

Provident has traditionally been a very conservatively managed trust.  They look to increase their reserves with the smallest amount of risk (i.e. expanding production through infield drilling and acquiring proven reserves), and they really don’t take off any more than they can manage, and manage well.  A case in point was the divestiture of its equity interest in BreitBurn Energy Company L.P for a total sale of about $305 million USD.

Provident has been beaten down lately with the rest of the markets, commodities in particular.  As fast as oil prices rose, they fell even faster.  I suspect that the price action from most Canadian trusts came as a result of big money fleeing the market to increase liquidity, and money was pulled from even the most attractive places.  No stock is/was safe.

The good news behind all this is that fundamentally the trust looks fairly robust.  Funds flow from operations in Q3 were up 44% from the same quarter of last year.  Production from the Canadian side of the O&G business was up just slightly (~1%) from the same quarter year over year.

Interestingly, the payout ratio was down to 61% for the third quarter, as compared to 89% from Q3 last year.  For the nine months ended September 30, the POR was just 53% compared to 88% for the same period last year.

So why the dividend cut?

Just like any business in this economic climate, PVX is facing the same pressure economically as the mid-majors in the U.S.  The forecast for oil prices in the next 6 to 12 months is anyone’s guess, and while things were looking up as of the end of the third quarter, they aren’t so bright going into Q4, and I suspect the results from this quarter, reported next year, will be less than palatable.

Provident believes that capital spending must be aligned with prevailing economic conditions. To this end, the Board of Directors has adopted a conservative capital budget of $165 million. Provident has an extensive inventory of quality opportunities available for additional investment. Provident will review its capital program throughout 2009 to determine whether any combination of work program results, commodity prices, equity and debt market conditions or other material factors merit changes to the capital budget. -Source

It’s clear that Provident is getting a head start on the budgetary aspects of this downturn in the oil and gas industry, however I believe that they are savvy enough to capitalize on these bad times. In a lot of respects, they already have.

The company has a new development they’re calling the Pekisko play in Northwest Alberta, consisting of a 100% working interest in about 54,000 acres of undeveloped land.  What’s interesting about this is that that acreage is right next to existing company operations.  So they know the geology and they know the local reserves.

In fact, they drilled two horizontal exploratory wells that production tested more than 250 bpd.  Not bad, even for $50 oil.  In all, the reserves are estimated at 2 million barrels of proved plus probable oil based on these two offset wells.  In all the company has about 300 drilling locations in the play, so they’ll be busy for a while.

In all, I’m not really worried about my stake in PVX, sure the distribution cut is a bummer, but again I’m not surprised.  The potential that keeps presenting itself to the company is still attractive, and the fact that they capitalize on their opportunities is a sign of a well-run oil and gas company, regardless of the market or industry conditions.

I look for oil prices to hover between $40 and $60 for about the next six months or so, and then go up as the economic conditions strengthen.

In an effort to throw out some information on the oil and gas industry, I thought I’d write up a quick on on pumping units.

Pumping units provided the linear motion to the production string required to produce the liquid emulsion that is made up of water, crude oil and natural gas, among other elements.  Other common names for pumping units are beam pumps, sucker rod pumps (SRP), pump jacks, horse head pumps, and nodding donkeys.

Pump jacks are commonly referred to by their model, which is fairly common between manufacturers.  For instance, a 16-53-30 pumping unit is smaller than a 57-76-54 unit.  The model number is denoted by the rated torque of the reducer, the maximum rod capacity, and the maximum stroke length.

So the 16-53-30 unit will support 16,000 in-lbs of torque put out by the reducer, pull 5,300 lbs worth of rods, and have a stroke length of 30 inches.

-Source

Obviously, the deeper the well, the more rods you’ll need in the well bore, requiring a larger pumping unit to pull the weight.

Some major manufacturers of pump jacks are Lufkin Industries, Bethlehem, Parkersburg, Cabot, and Rigmaster.

Overall, a pumping unit is made up of several major components.  The samson post holds the walking beam with what’s called the saddle bearing.  A pitman arm connects the rear end of the walking beam to the reduction gear box crank, which is driven by the prime mover, or engine/motor.  The horses head attaches to the opposite end of the walking beam, to which the bridle cables attach.  The shape of the horses head ensures that the bridle cables move in a linear motion, even though the walking beam is rotating.

There are more exotic variants of the pumping unit, such as air-balanced units, but this description should provide the basic concept.

Additional Resources

Lufkin Pumping Units

Last Friday OPEC announced a cut of 1.5 million barrels of daily crude oil production as part of an effort to stabilize crude oil prices.  Evidently the commodity did not react as expected, shedding more than 7% more after the news.

It seems that the stability of the global economy is trumping anything OPEC can do to prop up the price of crude.  There is still a lot of money leaving the energy markets, either by force or lack of confidence.

Unfortunately, with every down day in the crude market, the foresight of alternative energy comes more into question. Everyone with a vested interest in developing alternative energy is starting to question the security of the decision to steer to wind, solar and other alternative energy sources.

As the price of gasoline slides, efforts from the likes of GM with the Chevy Volt seem to carry less of a return.

I think in the long run crude oil prices will start moving up again.  It’s just a matter of how long the alternative plays can ride out the dip.

Sometimes you have to go with your gut, and when your gut ends up being right, you get this warm and fuzzy feeling that you may actually know a thing or two.

Frequent readers of The Corner Office Blog know that I’ve been bearish of Chesapeake Energy (CHK: chart, web, Y!) due to their huge amount of debt (and the pilfering of shareholders to pay off that debt by diluting the stock) when commodity prices were at record highs.

I’ve owned CHK before and have made money off the stock, but when credit started tightening over the last year to 18 months, I knew CHK would end up with a target on its back just due to the debt alone.

Well, it seems the debt has come back to haunt Chesapeake, along with an in-house trading philosophy that ended up costing the company $1.6 billion on paper, and forced CEO Aubrey McClendon to sell all of his own companies shares involuntarily.

Here’s how it all went down.

Chesapeake was making money hand over fist when commodity prices were high, just like any other player in the field.  Then, their trading operations made the gamble that the run on oil and gas wouldn’t continue.  So the company bought options and other financial vehicles to lock in the current rates (around $120/bbl for oil at the time) to protect from what they saw as an expensive downside risk (also known as hedging).

So what happened?  Oil continued to rise to a high of just over $145/bbl in July of this year.  That’s actually a good thing for Chesapeake, right?  Not necessarily.  Since Chesapeake hedged their oil at $120, they were only getting paid $120 for every barrel they pumped, not $145 that was the current market price.  Again, they’re still making boo-coo bucks at $120 oil, but they could have been making more.

The fact that they could have been making more shows up as a loss on the balance sheet.  All in all, Chesapeake could have made as much as $1.6 billion more if they had not hedged their oil and gas at lower prices.  So this goes as a loss on the books for the second quarter.

What effect does the debt have?

Creditors typically want to see that their their loans are safe, and as such they write in certain conditions that if met, they reserve the right to call the note.  Sort of like having a margin call if you can’t maintain the margin requirements.

So I suspect that the $1.6 billion loss on Q2 earnings triggered such an event.  Since banks would like nothing else than to have cash right now, they probably capitalized on the opportunity to call Chesapeake on a loan, and I suspect it was a big one.  So now Chesapeake has to scramble to come up with a boat load of money to pay off the note.

As a result, there is a fire sale going on right now in the oil patch in Oklahoma and Texas.  I suspect Chesapeake is selling everything they can, from surplus oilfield equipment to leases, just to raise money.

But what about the CEO’s shares?

Chesapeake CEO Aubrey McClendon was so sure of the prosperity of his own company that he bought shares… on margin.

When the second quarter results showed a multi-billion dollar loss, the shares couldn’t have headed for the deep end fast enough.  Due to insider trading rules, McClendon couldn’t unload shares prior to the news, so he had to ride it out.  By the time the smoke cleared, the brokerage called him on failure to maintain margin requirements and sold his shares for him.  All of them.

So what does all this mean?

It means that there are a ton of CHK stock holders out there that are stark raging mad.  And rightfully so, but it appears for now that they really don’t have a stick to shake.  Chesapeake gambled and hedged oil and gas and got burned.  End of story.

It also means there are going to be opportunities to capitalize on Chesapeake’s misfortune.  There will be some leases available at rock bottom prices since the price of oil is falling, and some weak hands are being flushed out of the patch.

Corner Office Comments

Debt isn’t always a bad thing, and can be used as leverage in some cases.  However, when you hold a lot of debt in an industry that’s making record profits, you’d be wise to get rid of the debt as soon as possible.  If and when the credit industry tightens, those with the most debt will be the first to be denied.

For the last couple weeks I’ve been sitting on the sidelines trying to figure out how to play my hand in the market. There appears to be some semblance of rationality forming, but I think there are going to be new fundamentals arise that continue to beat back the bulls.

Crude oil ($wtic: chart) prices continue to drop, closing out the week under $114 per barrel, and natural gas ($natgas: chart) is maintaining ground just above $8 per MCF. Oil prices have dropped based on waning global demand, and natural gas prices have moderated for the same reason, just on a National scale.

On the topic of global demand, I have to wonder if the Chinese curtailment of demand during the 2008 Olympics has anything to do with the current oil market. Back in February, Beijing made the decision to halt manufacturing production in several locations during the Olympics in an effort to reduce pollution.

They also implemented an effort to remove 50 million cars from the roads for the same reason. According to the source, all of this was supposed to take place a month prior to the opening ceremonies in Beijing.

When did the price of crude start to retract? About 30 days prior to the opening ceremonies.

It’s just a theory right now, but I have to wonder if “global” demand will pick up after the closing ceremonies.

Time will tell.

It’s been a while since I posted anything regarding my investment activities, mostly out of lack of information to report on. I’ve been buying more shares of PVX (PVX: chart, web, Y!) recently, but more significantly, there is some good news on Duncan Energy Partners (DEP: chart, web, Y!).

Second quarter results are out, and things are looking strong. A few snippets:

• The partnership reported a 45 percent increase in net income to $6.6 million for the second quarter of 2008, compared to net income of $4.5 million for the second quarter of 2007.
• Distributable cash flow increased 65 percent to $10.8 million in the second quarter of 2008 from $6.6 million in the second quarter of 2007.
• On July 16, 2008, the board of directors of DEP’s general partner approved an increase in the partnership’s quarterly cash distribution rate paid to partners in respect of the second quarter of 2008 to $0.42 per common unit, or $1.68 per unit on an annualized basis.
• Revenue increased 52 percent to $360.4 million for the second quarter of 2008 from $236.9 million for the second quarter of 2007.
• Gross operating margin for the second quarter of 2008 decreased to $18.7 million from $21.5 million reported in the second quarter of 2007.

Overall I think these are good results, and definitely a sign of strength.

DEP stock has been battered down due to big money fleeing income funds, primarily from the likes of Goldman Sachs.  The company is paying out a 10% return, on growing revenues.

The only down side I see to the report is margin compression, which is to be expected in today’s environment.  The cost of doing business is going up, just like everywhere else.

This is why we need to maintain high oil prices: Spur on the little guy to find more, and spur further development with alternative energy.

Over a week ago Provident Energy (PVX: chart, web, Y!) released their 2008 first quarter results.  After venturing out of town on business for a week, I’m finally starting to catch up on the market events, which, by industry standards are now old news.

A few highlights from the report:

• Funds flow from operations in the Canadian Oil and Gas Production and Midstream business units, as well as oil and gas production in the U.S. was up 107% to $180 million or $0.71 per unit.
• Distributions for Q1 totaled $0.36 per unit, equating to a payout ratio of 59%, down from 91% in Q1 2007.
• Production increased to 52,300 boed, up 61% from Q1 2007 due to acquisitions and internal development.
• Canadian oil and gas production averaged 27,600 boed in Q1 ‘08 as compared to 24,300 boed in Q1 ‘07, an increase of 13%.
• Production remains fairly balanced at 51% natural gas and 49% crude oil and NGL (natural gas liquids).
• The May distribution will continue to be $0.12 CDN payable on June 13th.

Corner Office Thoughts

This company continues to impress me.  We’re starting to see the results of well tendered acquisitions in 2007 as an effort to replace reserves and increase production and drilling potential.

It’s good to see the payout ratio drop as I thought it would, but I had no idea it would drop by 32%.  The effect is that this leaves good opportunity for one of two moves: increase the monthly distribution, or continue to invest in acquisitions to replace reserves and increase production.  Personally I’d like to see the distribution left alone, and the added net cash flow used to further production.

As of today’s writing, Provident stock stands at $11.94 per share.  This time last year I’d consider taking some off the table and buying back on the dips below $11.  However, with the increase in production (funds flow from operations doubled) and the lowered payout ratio, Provident is starting to look cheap, even at these levels.

I’m looking to buy more PVX in small chunks, but only after we see a retrace of the price action over the last couple days.  The stock has seen a solid run up, spurred on by the Q1 report, and I think there may be some profit taking in the works over the next week.  An order placed at $11.50 per share is reasonable.

Last Wednesday, Provident Energy (PVX: chart, web, Y!) came out with their 2007 year-end and Q407 report, and also provided an update on reserves.

All around a positive report, and I’m curious as to why the stock dropped almost a dollar in two days on a fairly bullish report. The only thing I can think of is that crude oil ($wtic: chart) dropped $6 and natural gas ($natgas: chart) prices waned almost a dollar in those same two days will a lot of money fleeing commodities.

A few highlights from the report:

• The payout ratio in the fourth quarter of 2007 was strong at 57 percent, down from 64 percent in the fourth quarter of 2006. Full year payout ratio in 2007 was 77 percent, up from 67 percent in 2006.

• Consolidated funds flow from operations increased 8 percent to $468 million ($2.04 per unit) compared to $433 million ($2.20 per unit) in 2006. Consolidated earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA) was $545 million in 2007, an increase of 10 percent compared to $496 million in 2006.

• Consolidated upstream proved plus probable reserve life index (RLI) increased from 12.4 years to 16.9 years, reflecting the increasing quality of the assets and the sustainability of the Trust. Provident’s Canadian proved plus probable RLI increased 24 percent to 9.7 years. Factoring in the long-life midstream assets, Provident’s economic life on a consolidated basis is now approximately 18.5 years.

• On a consolidated basis, Provident drilled 159 net wells with a 99 percent success rate while in Canada 103 net wells were drilled with a 98 percent success rate. Provident’s drilling activities in 2007 were focused primarily on crude oil.

• Consolidated proved plus probable oil and gas reserves increased 111 percent to 322 million barrels of oil equivalent (boe). Canadian proved plus probable oil and gas reserves increased 37 percent to 101 million boe.

I like the fact that Provident is actively increasing their reserves at a rate of nearly 13 times the annual production, thereby procuring the longevity of the trust. I suspect that many of the CANROYS were brought down by the sell off in oil the last few days, and this only makes PVX look more attractive.

We’re moving into the lull for natural gas consumption: the period when demand drops due to increasing temperatures, and right before demand increases due to… well, increasing temperatures. With crude still above the $100 mark, it’s more attractive to use natural gas to generate electricity. Consequently, you’re seeing the price of both the commodity and the associated stocks drop.

If PVX continues to drop below $10, it’s going to be tough to not pick up a few more shares.

A week ago, I attended a land auction to see if I could pick up some additional oil production. I’m not sure what land is going for in your neck of the woods, but around here it’s gone crazy!

Tracts 1 through 3 and 5 were primarily farm land, with acreage ranging from 30 acres to 300 acres. One of the tracts had some oil royalties attached to it that only amounted to about 200 barrels per year.

The farm land alone went for nearly $2,000 per acre. Unreal.

Tract 4 was what I was interested in. 630 acres (a full section) with all the mineral rights associated with the land included, with existing production, and the ability to drill out the section. I went in mainly to observe, knowing that I’d be way out of my league in no time at all. I figured the land would bring at most $1,000 per acre since it was such a large tract.

I’ve been wrong before.

The bidding started at $800 per acre, and the auctioneer quickly had the bid above a cool thousand an acre. Here’s where it gets interesting. About 5 minutes into the bidding, a gentleman walked in through the back door and immediately started bidding. This guy was so far out of his element it was funny. His hair was slicked back, a Bluetooth gizmo hanging from his ear, a pair of dockers accented by Nike tennis shoes, and to top it all off, a dark pair of sunglasses and brown leather satchel.

Not terribly out of place for, say, New York, but this was central Kansas where overalls, work boots and a cowboy hat was considered all gussied up. Out of about a hundred people, all of which knew each other, not a soul knew who this foreigner was, but he was sure cranking up the price on this land!

The bidding ended at $1,350 per acre, with the final bid being held by Mr. Big City. All in all, taxes and fees included, the guy probably ended up shelling out $1 million for a single section of land.

Too rich for my blood!

The spring will bring new opportunities, as many folks try to off load acreage during the rush. I’ll keep an eye out for a steal of a deal in the future.

I had a few teaser comments in my post on how Venezuela is cutting off their supply of crude oil to the United States, and I noted the low quality of the crude they export to us, and I touched on the refining requirements to process their oil.

So I thought I’d expand on this a bit and explain the different types of crude oil.

When it comes to crude oil, there are several different varieties, some of which are more familiar than others. For instance, sweet crude refers to hydrocarbons with relatively small amounts of hydrogen sulfide and carbon dioxide. The biggest trait behind sweet crude is the low sulfur content, which is typically 0.5% or less.

Sweet crude is most commonly used to produce gasoline.

Brent Crude is another classification of oil consisting of Brent Crude, Brent Sweet Light Crude, Oseberg and Forties.

The name ‘Brent’ comes from the formation layers – Broom, Rannoch, Etieve, Ness and TarbatOil – produced in Europe, Africa and the Middle East. Brent blend is a light crude oil, though not as light as West Texas Intermediate (WTI). It typically contains approximately 0.37% of sulfur, classifying it as sweet crude, yet again not as sweet as WTI. Brent is ideal for production of gasoline and is generally refined in Northwest Europe.

Typical price difference per barrel is about $1 less than WTI, and $1 more than OPEC Basket (the weighted average of prices for petroleum blends produced by OPEC countries).

Sour crude oil contains the impurities hydrogen sulfide (H2S) and carbon dioxide, or mercaptans. While all crude oil contains some impurities, when the total sulfide level in the oil is more than 1% the oil is called “sour”.

The impurities must be removed before this lower quality crude oil can be refined into gasoline, thereby increasing the cost of processing. However, sour crude is most frequently refined into heavier products such as diesel fuel.

Sour crude is extremely toxic and corrosive due to the high levels of hydrogen sulfide, and is fatal if inhaled.

As I alluded to in the previous post, Venezuela is a major producer of sour crude. But since it’s very expensive to refine and transport (due to its corrosive properties), its not a great loss to the United States if they want to take their low quality oil somewhere else.

I’m starting to shift my resources back to expanding my oil and gas business. Not that it has been on autopilot completely, it just hasn’t required much attention lately, which can be attributed to having good people run the day-to-day production.

It’s time for more though, and I’m looking to increase production through additional acquisition or drilling.

This weekend I’ll attend a land auction with five different tracts for sale. Tract four is the one I’m interested in, as it has existing production on a full section, which equals about 640 acres. According to state records, there are five producing wells on the section, and between the five wells, the lease produces 150 barrels of oil per month, and has done so for the last several years. They are shallow wells drilled to about 1,700 feet, so consequently there is little to no reservoir pressure to push oil into the well bore.

The land, including the mineral rights are up for auction, and the existing lease would have to be upheld. However, that’s not to say that a new land owner could come in and force the existing producer to drill a certain number of wells per year to hold the rest of the acreage.

The timing of this is not all that great. Crude oil ($wtic: chart) just closed above $100 per barrel, so picking up any acreage for cheap will be nearly impossible, and there are a lot of big players in the game right now that are willing to risk more capital than I am.

The nice part about buying land with existing production is that the drilling risk is fairly low, especially in widely developed fields with long production history (production in this area dates back 80 years or so).

I suspect I’ll be a little out of my league on this, but it will be interesting to see what 640 acres brings in terms of $/acre. If it goes for anything less than $1,000 per acre it will be a steal. I’ve been doing quite a bit of digging on the state geological surveys website, and I’ve determined that there is a lot of potential in the area, all it takes is money.

I’ll let you know how it goes.

Venezuela has taken steps to fortify their dominance in the oil and gas market, and has said it will suspend oil shipments to Exxon Mobil Corp (XOM: chart, web, Y!). This is an obvious attempt by Hugo Chavez to thumb his nose at the United States, however I’m not sure what his true motivation is: money or power… perhaps both.

You see, the crude oil coming out of Venezuela is heavy crude high in sulfur, making it very difficult to refine in comparison to light sweet crude. The high sulfuric content wreaks havoc on industrial components due to its highly caustic and corrosive properties. It just so happens that a few of Exxon’s refineries in the Gulf Coast have the capability to refine heavy crude with a high sulfur content. But not just anyone can refine Venezuela’s oil.

I believe Chavez is trying to inflate the price of his countries crude by selling it to third parties who would then turn around and sell it to the United States, thereby doing an end run on any pricing agreement already in place between the two countries.

Crude oil is all Venezuela has in terms of economic stimulus, which is why Chavez has had so much attention since crude turned north of $50 per barrel. Consequently he has a deep interest in keeping oil prices high, and eeking out every last cent per barrel exported.

His popularity in his own country has been sliding, and losing an economic battle on your home turf only increases the threat of a coup.

The United States is going to get the oil it needs from somewhere, be it Venezuela or otherwise, and the significance of lost imports from Venezuela isn’t as great as one might seem. Canada is more that willing to replace Venezuela’s heavy crude with it’s own, and if they won’t, Mexico will.

Truthfully I believe Hugo Chavez is starting to lose his big bully influence through the power of a free market. In this light, Venezuela needs the United States more than the United States needs Venezuelan crude.

I bought more Provident Energy (PVX: chart, web, Y!) today, adding another 50 shares to my holdings. Crude oil ($wtic: chart) spiked on the news that Benazir Bhutto was assassinated in Pakistan, and natural gas ($natgas: chart) is holding its own above $7 going into the cold weather season.

I’m playing the trend. I’m in the stock for the dividend, but if the price rises to $13 I’ll definitely take some off the table. 30% price appreciation is too much to pass up, especially when you see it coming. The fundamentals of the company remain intact, and the only other thing that is weighing on the canroys is increasing production costs and the lingering Canadian tax policy.

My Provident Energy Trust (PVX: chart, web, Y!) has been on the slide since the beginning of November. I can’t figure out why.

The only conclusion I can come to is that it’s attributed to end of year tax selling, but that theory only makes marginal sense. After all, PVX is continuing its CDN$0.12 monthly dividend, and fundamentally, I don’t see why they’d drop the distribution any time soon. Crude oil ($wtic: chart) is still North of $90 per barrel, and natural gas ($natgas: chart) is holding above $7 per MCF.

So it’s tough to tell why the stock has dropped nearly 30% since its high of $13.55 back in the first part of November.

However, I extended the chart out a few years today, and noticed a pattern. The stock price has dropped significantly in between late October and late November nearly every year since the inception in 2002. To further exploit the pattern, over the past three years, the stock starts its way upward after the beginning of the year and peaks somewhere around July.

I’m not sure how I’m going to play this. I’ve held PVX for its healthy monthly dividend, and haven’t really considered trading it based on the chart. However, it would be tough to miss out on a 30% gain that I can see coming…

What do you think? Would you play this trend?