EPA's Proposed Carbon Pollution Reductions by State

The EPA has recently announced a proposal to reduce carbon pollution.  Specifically the EPA has set state targets for emission rates (the number of pounds of carbon emissions per megawatt hour of electricity produced).  A summary of the percent reduction in proposed emission rate by state is below.

by_stateThe proposed reductions range from a maximum percent reduction of 71.82% in Washington state, to a minimum percent reduction of 10.58% in North Dakota.

Of course, looking at percent reductions loses scale -- which is paramount in this case.  If we look at total yearly proposed carbon reductions (in million metric tons) we see the largest reduction is by far in Texas (87 million metric tons per year) with Florida and Pennsylvania following.

tot_reduction

Consolidation of Shale Gas Producers

This is a decent article from Bloomberg News:  http://www.bloomberg.com/news/2014-05-26/shakeout-threatens-shale-patch-as-frackers-go-for-broke.html  The article is about smaller natural gas production firms having to lever up (increase borrowing) to stay afloat.

This is why I think the best bet in the natural gas production industry is large firms.  As natural gas prices have fallen, this places more pressure on smaller firms which (1) generally don't have cash flows from other operations such as oil, and (2) don't have the ability to access capital markets at low rates. The longer natural gas prices stay low, the more likely the smaller firms are to go bankrupt (or be pressured into divesting assets) -- either way the assets will end up being acquired by the larger firms at a low price.  This is classic industry consolidation.

Once natural gas prices do increase, I think the biggest winners will be the large companies which have used the leaner times to acquire assets --  BP, Exxon, Chevron, EOG, etc.

Really interesting paper (JF) by Ross

We can always back out the underlying's risk neutral density from derivative prices -- however what we are really interested in is the real-world (natural) density.  The recent paper by Ross (forthcoming in the Journal of Finance) backs out this real-world density.  The preprint of the paper is here.

Drilling efficiency gains -- making use of otherwise flared gas in the Bakken

There is an interesting piece of news in this week's (5/14/2014) natural gas update from the EIA.  The associated gas in the Bakken shale is presently being flared due to insufficient pipelines which can take the gas to a distribution point.  The news is about a company which will collect some of the associated gas, compress it to LNG, and deliver it by truck to customers.  Likely customers will be other well pads which would otherwise run their equipment on diesel.

A link to an EIA post on nonmarketed (flared) gas in the Bakken is here: http://www.eia.gov/todayinenergy/detail.cfm?id=15511#

Nisource (ticker: NI) as Acquisition Target

This is a good Bloomberg article about NI being a likely acquisition target: http://www.bloomberg.com/news/2014-01-21/nisource-link-to-shale-boom-spurs-deal-appeal-real-m-a.html

NI has natural gas pipeline assets which are of interest to companies like Dominion and Enbridge.   NI has, however, increased 16% over the last year on acquisition speculation , and now has a P/E of 23 -- so the price reflects an acquisition premium.

Other than price, NI has electricity generation assets which aren't useful to most potential bidders.  To get around this, NI could spin out the pipeline business so it can be acquired at a premium.

In sum, with a dividend yield of 2.7%, and a likely 10-15% acquisition premium, NI still looks like a decent investment [note I have owned NI for years].