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

Oil & Gas oilfield equipment, pump jacks, 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.

Energy, Oil & Gas commodities, crude oil, OPEC

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. Read more…

Energy, Investing, Oil & Gas CHK, hedging, margin, oil and gas