Oasis Petroleum's (OAS) Management Presents on Delaware Basin Acquisition Conference (Transcript)

Oasis Petroleum, Inc. (NYSE:OAS)

Delaware Basin Acquisition Conference Call

December 11, 2017 09:15 ET

Executives

Michael Lou – EVP & CFO

Thomas Nusz – CEO

Taylor Reid – COO

Analysts

Neal Dingmann – SunTrust Robinson Humphrey

Brad Heffern – RBC Capital Markets

Ronald Mills – Johnson Rice & Co.

Gail Nicholson – KLR Group

Operator

Hello, and welcome to the Oasis Petroleum Investor Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I will now turn the call over to Michael Lou. Please go ahead sir.

Michael Lou

Thank you, Keith. Good evening everyone, this is Michael Lou. Today, we are excited to announce our entry into the Delaware Basin and provide a few operational updates. We’re delighted to have you on the call today. I’m joined today by Tommy Nusz and Taylor Reid, as well as other members of the team.

Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners, including the answers to your questions include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings release and conference call. Those risks include, among others, matters that we have described in our earnings release as well as in our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K, and our Quarterly Reports on Form 10-Q and on our Oasis Midstream Partners Form S-1. We disclaim any obligation to update these forward-looking statements.

During this conference call, we may also make references to adjusted EBITDA, which is a non-GAAP financial measure. Reconciliations to adjusted EBITDA to the applicable GAAP measures can be found in our earnings release and on our website. Throughout this call we will reference to investor presentation about this transaction which is posted on our website this afternoon.

With that, I’ll turn the call over to Tommy.

Thomas Nusz

Thanks, Michael and good evening. I’ll start by directing you to Page 3; it’s an exciting day for Oasis and we’re pleased to update you on the acquisition of over 20,000 highly contiguous net acres in the heart of the Delaware Basin oil window.

This acquisition brings us 507 net core inventory locations which more than doubles our current core position with locations targeting four vertical formations with material upside from other formations that the seller and offset operators have already drilled and aleniated. Results from these wells are among the best in the basin driving at November production rate of 3,500 net BOEs per day, than an oil cut in line with the current Oasis Williston production at about 78%. Our purchase price of $946 million will be financed with a mix of stock issued in the sellers. The public equity offering and draws on our revolving credit facility.

In 2018 we anticipated approximately $500 million of cash proceeds from non-core Williston assets that are attractive high return properties that are at the end of our development schedule. This acquisition is highly accretive to a number of metrics and the new asset fits very nicely with our oil weighted Williston assets, our vertical integration strategy and our deep experience operating in full field development mode. We are now strategically positioned in the core of the two best oil basins in the United States.

On Page 4 you can further see the location of the asset in the Delaware and begin to understand that we’re picking up core of the core acreage similar to our core position in the Williston Basin. We expect wells to deliver returns of over 75% across the core of both, the Williston and the Delaware and this transaction extends our core inventory life for Oasis. Due to the strength of our team and our assets we have already hit our Williston 2017 production exit rate of over 72,000 BOEs per day for the month of November, and as I mentioned previously, the new asset brings production of approximately 3,500 BOEs per day.

We expect to continue the 2018 plan that we’ve been talking about in the Williston Basin and we’ll keep running one rig in the Delaware with the option that a second rig in the latter half of 2018.

On Slide 5, we have highlights of how this transaction builds on the Oasis strategy. The deal materially expands core inventory as the area has been successfully delineated by the seller and multiple offset operators I mentioned earlier but the potential for inventory upside based on our conservative booking of inventory. The purchase price is below or in-line with others in the region for having attractive full cycle returns to the strength of the asset and the compelling valuation. Our asset is primed for our development expertise as Oasis has successfully entered full field development in the Williston and has continued to perform at a high level that we expect to do so in the Delaware as well.

It is also extremely helpful that many members of our management team have extensive Permian experience. We can also leverage our unique strategy of vertical integration through our internal frac and Midstream business to further drive efficient development. The nature of this transaction add significant core inventory life to our Company while maintaining a strong balance sheet and liquidity allowing us to continue to be free cash flow positive on the upstream basis.

Page 6, our required asset is in the deepest, thickest and highest pressure part of the Delaware oil window where recently drilled wells are already outperforming offset operators 1.2 million barrel of oil equivalent type curves and the asset is highly contiguous with ample takeaway capacity infrastructure to facilitate for full field development. The acreage is largely undedicated for oil and gas gathering and is completely undedicated for water gathering providing organic midstream growth opportunities to the Company. Most of our wells are expected to be drilled with two-mile laterals and there are still room for optimization on completions.

Lastly, Oasis has extremely reasonable drilling requirements on the acreage and does not have to maintain a high rig count to chase HBP requirements.

With that, I’m going to turn it over to Taylor to describe the strength of this assets [ph].

Taylor Reid

Thanks, Tommy. I’ll now direct you to Page 7 of the presentation. We look at both our log and well results from this asset. You can see that we are in the best part of the Delaware.

We have identified four core target formations, the third bound spring through the Wolfcamp [ph] with six target intervals within them, an anticipated spacing program of 4 to 6 wells per section results in 34 wells per DSU in our core inventory including an additional 4 to 6 wells per target in, the Avalon through Bone Spring 2, the potential wells per DSU jumped to 56 plus wells. Keep in mind, that the per zones facing numbers could be higher. When compared to other operators in the region, our spacing assumptions are either conservative or right in line without people characterizing their inventory, highlighting the fact that there is a considerable upside in terms of well inventory.

Let’s now turn to Page 8; the combination of the assets location in the heart of the overpressure oil window in the Blocky Acreage allows for longer laterals. The combination has resulted in the outstanding well performance in this area and implies best-in-class wells among peer group going forward. The chart on the lower left side of the page highlights two key points about this asset. First, we are in oiliest part of the basin based on historical production of recent wells, and second, Forge has been drilling some of the longest laterals in the region which we expect to continue.

Now on Page 10; we offer more detail on well control in the area demonstrating that we are buying in asset that has been well delineated. Extensive drilling and completion activities in this area over the last year has really derisked this asset, especially when compared to other transactions in the area over the past few years. As a result, we have minimized downside risk while pulling the trigger on an asset that has continued upside that has not embedded into our acquisition price. We are really excited about Forge and offset operator well performance is shown on the slide. The strong well results across the column again demonstrates a considerable upside of what we are paying for the asset.

If you now focus on Page 10, you can see that the recent completions from this asset are performance leaders in the Delaware as depicted in the chart on the right hand side of the page. A remarkable feat of these wells is that they tend to flow for extended periods of time. For example, the Bighorn well, the first well drilled by the operator on these assets is still flowing after 18 months.

As you can see results have been great. Oasis will continue to optimize completion design on these outstanding wells. Keep in mind that Forge has completed just 9 wells of the 600 plus well inventory, so we’re in the early innings of optimization and performance enhancement opportunities on this asset. One example is profit loading; we’ve generally seen a correlation and increased pounds per foot in well performance outlining a path for additional upside and well performance on this asset.

Let’s now turn to Page 11; looking closer at some well results in the region, our wells are at the top of the peer set. On the right hand chart you can see that our wells are outperforming one of the closest offset operators, 1.2 million barrel of oil equivalent type curve and still doing so without artificial lift.

With that, I’ll now turn the call over to Michael.

Michael Lou

Thanks, Taylor. If you turn to Page 12, Oasis has earned a track record of strong execution in the Williston Basin as we developed a skillset that is highly transferable to the Delaware as well. We’ve driven extensive improvements in capital and operational efficiency over the past few years while we transition to fulfill development.

We’ve drilled 750 wells since 2010 with lateral links averaging about 10,000 feet across multiple zones. We continue to optimize operations through the use of zipper fracs, large pad developments while decreasing spud [ph] to rig release drilling times. Differentials continue to dramatically improve in the Williston with the fourth quarter average differential to WTI expected to be lower than a dollar per BOE. LOE continues to improve and we expect fourth quarter LOE to range between 7 and 7.50 per BOE.

On the next page, Page 13; you’ve seen a strived value through vertical integration with OWS and OMS. And that competency also provides future upside as we operate this asset during fulfill development. Vertical integration leads to costs savings and has greatly reduced our completion cost and our lease operating costs in the Williston since 2014. Our new acreage is largely undedicated for midstream services allowing the possibility of midstream build out through OMS in potential future return of capital to Oasis through dropdowns of ownership to OMP.

OWS has the possibility to build out a frac crew in the Delaware bringing top tier well completion efficiency to this asset. Either way we can bring supply chain management that manages to the new asset in advance of launching another crew in the Delaware.

On Page 14; this slide speaks to this continued strength of our Williston asset and the quality of our Oasis team. We’ve already achieved our 2017 exit rate in November with production averaging greater than 72,000 barrel of oil equivalent per day. Our 2018 Williston production exit rate of 83 MBoe per day is unchanged but total Oasis projected exit rate is now over 88 MBoe per day with 5 MBoe per day coming from the Delaware. We plan to achieve these targets by running 5 rigs in the Williston completing a 120 operated wells at our current well cost.

In the Delaware we would drill 16 to 20 wells in 2018 by running one rig initially with the option to add a second rig in the back half of the year. We plan on spending about $100 million in capital assuming 6 to 8 wells completed and a minimal outspend at $55 WTI due to EBITDA generated from production. Even with the acquisition we are expecting to be free cash flow positive for our total upstream business at $55 WTI.

On the final page, Page 15; in conclusion, I want to reiterate that Oasis has a premier collection of assets and a highly disciplined management team. We have further expanded our operational scale with assets focused in the Top Two U.S. oil basins. Our positions continue to be large and contiguous delivering high returns with low risk across various commodity prices and we see clear upside with near-term catalyst.

Our midstream segment continues to remain strong with the MOP giving the Company greater flexibility and liquidity; and we’ve got a team — a strong team that manages capital well, is returns focused and adds the financial and technical ability to deliver above market shareholder returns.

With that, I’ll turn the call back over to Keith to open the lines up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Neal Dingmann with SunTrust.

Neal Dingmann

My first question is for you and Michael. I’m just little surprised, again — I do agree with you guys, I think there is acreage there but given the all in place, why run just one rig initially or for the early part of the year given the number of core locations and for running a Dcf kind of what you’re running at times zero to try to obviously recoup that cash off the door?

Thomas Nusz

Neal, as you’ve heard us talk before we try to approach things from one direction. This is a move into a new basin and we want to be diligent and prudent about that and for along with integration, to run out there and pickup another rig right away, we don’t think is the best idea. So we’re going to run one, our plan is to add a second, so we’ve got a run rate or two in the second half of the year; now that doesn’t mean that we don’t — in the first half of the year maybe picking one up for one or two lows but depending on how our integration activity is going but initial phase is that the integration of project and having a solid plan in place makes more sense to us than going out and picking up a bunch of rigs.

Michael Lou

One thing I’d add to that is, if you just look back at Will [ph] Basin for example, we did that acquisition in 2013, we had a similar approach and we took the time to do the testing, understand our productivity on the wells and with the — looks like it’s spacing and then get out for upfront, get all the infrastructure in place so that we can efficiently produce the asset.

Neal Dingmann

Just on the non-core, you talked about — you mentioned I think the release by $500 million potential sale, what area that might be?

Thomas Nusz

Yes, so there is couple of things there Neal to — it’s mainly a fairway acreage, you know, some of those blocks that are out net fairway position, as well as potentially some non-op production as well.

Neal Dingmann

Okay. And Tom does this mean now — because given that certainly core acres that you’re picking up, does this mean Allerden [ph] paying some of the — that the northern paying or some of these others you won’t necessarily go after as soon and I’m just trying to get a sense of your Bakken plan with 5 rigs, is that going to remain the same or will that change now a bit given having this other acreage?

Thomas Nusz

Yes, our Williston plan doesn’t change Neal, it’s still going to be the same; we’re running 5 rigs and we’ll stay on the same path that we have in there; and then, this is in addition too.

Operator

Thank you. And the next question comes from Drew Wanker [ph] with Morgan Stanley.

Unidentified Analyst

I wanted to follow-up on Neal’s question; I do definitely agree that the acreage looks like high quality stuff but curious as to why now because you guys have participated in M&A within Williston for quite some time and I guess until now had not found anything interesting or attractive enough to enter [indiscernible]. Does anything increment versus your prepared remarks, I would like to hear that.

Thomas Nusz

To find anything incremental as in outside of the basin? Outside of the low [ph]?

Unidentified Analyst

Tell me just incremental from your prepared remarks about why you would want to leave just Williston Basin as of now relative to from inceptions really not moving upto the Basin?

Thomas Nusz

You look at the growth that we’ve had in the Williston from our initial acquisition of 175,000 acres to expanding to the east side of the basin, when we IPOed in 2010 we had about 300,000 acres and since then we did the Rosy acquisition at the end of 2013 included Wild [ph] Basin painted woods and former view. And then last year you saw us still bolt-on with the SM position that was right in and around all of our consolidated blocks, made a lot of sense to us. And so we’ll continue to look for opportunities in the Williston, we view this though as a compliment to consolidation of core positions where we take some of that asset that’s out in the Fairway, that’s further out in the development plan, that we can enhance the value with through putting into somebody else’s hands and use that to continue to build core inventory that’s resilient to very low oil prices.

Hopefully we don’t see that like we see in over the last couple of years but if we do, we’ve got an opportunity set here in doubling our core inventory to really be resilient to low oil prices. And then, whether it’s low or high oil prices, you know, strive to have peer leading margins.

Unidentified Analyst

And overtime, you have a good sense of how many rigs you could run in this acreage before you run into infrastructure challenges or other logistical issues?

Taylor Reid

So Tommy said, we’re going to start out with one, picking up the second later next year. As you get into full field development you could run 5 to 6 rigs, something in that range and we’ll probably be executing on this asset, similar to what we do in Williston where you’ve got multiple rigs on a single space ménages [ph] to bring the cycle times down and so in doing that you could run, say 5 or 6 rigs or something in that range but that’s going to be stepped into that overtime.

Operator

And the next question comes from Brad Heffern with RBC Capital Markets.

Brad Heffern

I would wonder if you could delve into the services side of things a little bit more. Are you happy with the spec of the rig that you’re inheriting there? And then, I wasn’t really clear on whether you have a frac going right now or not, I know in ’18 you’re planning to complete a lot of your wells than you’re expecting to drill. So is there like a period of time there where you’re not having a crew and you’re building adhoc [ph] backlog?

Thomas Nusz

So first with respect to the drilling rigs, we’ll inherit a rig that — it’s got all the specs, current kind of high-spec rig that we would like to have; so we’re happy with that and we’ll keep that rig. With respect to the frac services, it ends up being back loaded just by nature of getting the stuff drilled and then getting a little bit of a backlog before we start completing. We’re going to — we don’t have enough frac activity, early time here to justify a frac crew by itself, so it will be kind of aggregating probably a few wells and then getting spot services on the frac side but we don’t think that will be a problem, it’s just going to take advanced planning and then overtime as we get enough — we pick up the activity more and get enough inventory, we’ll have the option to get a full-time frac crew and if that type can even consider, either bring him on rolling frac crews down or put another of service in this area.

Brad Heffern

And then, obviously this is a nice size acquisition but I’m sure people are immediately going to think is the large enough or are you’re done here. So, is there — are there bolt-on targets and you guys are thinking about or is this a big enough size to the attack for now?

Thomas Nusz

So there are some additional bolt-on opportunities, it just entered around this asset, not usual repowering but once that will allow us to continue to block up the position and add to this asset. So definitely interested on that front, as it gets to the sizes of the deal while it’s 20,000 acres, I mean relative to the large Williston position. Now as we all know here we’ve got a lot of stack page and so a bunch of inventory and we’re doubling our core inventory, we don’t have a need to go do a bunch more deals, we’re going to be focused on really executing on this asset, the right thing comes along, we’ll certainly look at it but not in a position where we need to really got to go do something else on top of it and really kind of core in up disposition.

Operator

And the next question comes from [indiscernible].

Unidentified Analyst

Can you talk about the overall mainstream CapEx requirements, the asset and any kind of outlook you gave on potentially capturing third party volumes with L&F [ph]?

Thomas Nusz

We’re not there yet on all of that so what we know is that the asset has no long-term marketing arrangements on the water side, fresh water or produce; and only has a little bit on the gas and oil side, so there is a lot of big infrastructure out in this area that you can attach to and we’re going to look at opportunities in what’s best for the asset. We certainly think OMS/LMP has a role to play but we don’t know exactly what that is yet, so we’ll continue to work that over the coming months and let you know as we get to more of it later.

Unidentified Analyst

I wanted to touch on Forge wells, you said you add in the presentation, and it looks like your wells are largely outperforming the peers using less intense completion technique. But you also mentioned a preference towards potentially increasing the popping loading there; so just trying to understand about how you’re thinking about the future completion in the Delaware?

Thomas Nusz

Yes, so that’s on Page 10 that you’re talking about and you can see on really 10 or 11 that the Forge wells have really outperformed the competitors and they are showing a large dataset there that you’re going to look at. Part of that we take the position in the basin, deep part of the basin, higher pressured, very oily — oiliest part already 5% of production in early time when these wells is all oil. And as you noted, the intensity on the fracs are less than what you’ve seen for some other operators, you can see that on the graph on Page 10. So what we’re looking at increase in the loads, it’s generally been correlation in a lot of these basins between proper loads increasing in CNURs and productivity go up. So [indiscernible] will look at and we’ll continue to work on optimizing the completions, keep in mind, this is the ninth well or they’ve done 9 wells so far with an inventory as we talk about of over 600 wells, it’s really early days in terms of the completion techniques being employed on this asset; so we’re super excited to continue to dig in and work with the Forge guys and try to really improve these well results.

Michael Lou

Keep in mind that I think it’s optimization is the key word here and just more sand isn’t necessarily the magic fix, you know, it’s what the sand volume, what’s the fluid volume and then how it’s efficiently placed; so the whole lateral science thing that we talked about in the Williston that we have a tremendous amount of experience there. So it will be a combination of evolve things as Taylor and the guys look to optimize these completions.

Unidentified Analyst

Can you give us a sense of where you are with the Williston assets and sales process? Is there a data room open; I’m trying to pin that down on a date but I’m just curious on if you can give any additional color on timing there?

Thomas Nusz

Yes, so — we actually have one project that’s in process but it’s relatively small, in the tens of millions, not hundreds of millions; and it will — it should close next week but as far as really ramping up on the remainder of it, we’ve done a little bit of work on it but still some work to do. So I would expect it to feather in over the course of the year, and it’s — when you look at the spread, if you go back and look at the fairway positions, it’s — from east side to west side. And so I think it’s unlikely, not out of the question but unlikely that you have a single buyer for big chunks of that, it’s probably going to be more targeted given some of the experience that we’ve had up there. So I would expect it to be spread throughout 2018 but I would probably wouldn’t expect anything in the first quarter.

Operator

And the next question comes from [indiscernible].

Unidentified Analyst

Some of my have been addressed. I guess one kind of big picture one, if you kind of step back and look out a few years, how do you guys envision Oasis in the Delaware Basin? Just trying to get a sense for kind of how big you plan to get? And how big of a component of the overall corporate profile you really see this being over a decent timeframe?

Thomas Nusz

What I would say is that if you looking for the roadmap, look at the last 10 years and it’s all in our presentation; I wouldn’t expect it to be widely different than what we did in the Williston. You kind of — you continue to evaluate things, you pick your spots, you hand around the hoop and it’s — it is much about timing and execution as it is about deals, but you can look at what we did in the Williston and it kind of provides you a map to how we think about things. Now that being said, when you start looking at 3,800 feet a section versus 300 feet of section, the — that looks — the footprint looks a little bit different; and it’s not what you’re seeing with some of the players in the Permian where — I mean, they’ve captured enough to where you start. I mean, having a lot of inventory is a good thing but if it’s out 60 or 70 years from now then it’s — you can’t pay a whole lot of money for it. So I think we’ll continue to look for opportunities to build on this and like I said, I would kind of look at the Williston as a road map.

Unidentified Analyst

And then I guess, I was curious as you highlight on the deck, being free cash flow positive in the Williston with a minimal deficit spend in the Delaware at 55; how are you treating interest expense in that and any other corporate overhead? I’m kind of trying to get to the aggregate I guess from those comments.

Taylor Reid

The interest in the G&A is included in the Williston side of it. I mean, it’s kind of our — got pre-standalone model if you will; there is some additional G&A that we’ll incur we think with the new asset but it’s pretty minimal and we associated that with the new asset.

Unidentified Analyst

And then, to an extent — I mean, as we think about [indiscernible] and minimal deficit spending in the Delaware, is that 20% outspend or I’m just trying to understand the percent of outspend.

Taylor Reid

Well, the D&C for the first year for ’18 will be about called around $100 million. We’ll have about $50 million in cash flow off the assets, it will be about $50 million but that $50 million will be covered in the total EMP cash flow; so really covered out of the Williston asset of $50 to $5 oil price, we’ll be kind of balanced through the whole program.

Unidentified Analyst

And then, I guess last on my end is just — and I’m sorry if I missed this in the deck; but what’s the assumed kind of drilling and completion cost in the model right now for your Delaware asset?

Thomas Nusz

So D&C cost is we’ve modeled it with the coming into the front part, it’s around $11.5 million and overtime we think we’ll work that down; so within the next year and a half we assume we’ll get to around $10 million. And just for comparison, if you look at some of the other operators that have the luxury of bigger programs and then what Forge has had and have been doing it for a while, they are in that $10 million range or even a little bit below that. So we think there is a path and we’ve demonstrated the same thing in the Williston, you’ve got learning curve and you’ve drilled up wells in the program, we think we’ll continue to drive that cost down.

Taylor Reid

And Michael, that would be for a 10,000 foot lateral, 2,000 pounds per foot type completion.

Operator

And the next question comes from Ron Mills with Johnson Rice.

Ronald Mills

Just a bit of a follow-up on the earlier question, you addressed the prop in terms of completion optimizations. You talked a little bit about targeting as far as you’ve been able to evaluate it, the lateral targeting from Forge, is it where you would have liked the wells to be targeted? And I guess, adding to that do you have — they have seismic over it to help identify the better lateral targets?

Thomas Nusz

They view some seismic, I don’t — that’s not a huge 3D issue but they’ve utilized seismic as to develop their prospects and to help them pick. In terms of targeting, we think they’ve done a good job, I think the well results speak for good zone selection, so we’ll be working with those guys in transition as we are picking wells going forward and just making sure that we understand everything that they’ve done and it’s consistent with the data we’ve been gathering in the area.

Ronald Mills

And to understand the core inventory across the four zones and including the upper end lower potential in both, the A and the B; I know they’ve only drilled 9 wells but in terms of derisking north to south, it looks like you have — most of your acreages is derisked, but how about within the — all of those benches [ph]?

Thomas Nusz

So if you look on Page 9, I’m sure — just one of the things you’re talking about, you can see that there is 9 wells drilled; the first 4 wells that are shown here, this is 480 days of production in the A, they’ve got wells in the additional 5 that are located in the other intervals and so in some of the other intervals; and the thing though that goes along with that is all the other activity in the area. So you can see that you’ve got a coverage in really all the inter formations that we’ve talked about from Third Bone Spring to Wolfcamp C, so when you take the Forge data plus the other data; we’re getting pretty comfortable with what we would expect to see in the other zones that A and B have the most wells drilled at this point but definitely an update and the others to give us a view and we’ll continue to improve on that.

Michael Lou

Right now of the 9, there is 5 in the A, 3 in the B and 1 in the lower Second Bone Springs; then there is a couple of others that are — those are 9 producing wells that are coupled but they aren’t producing as yet, I think one of those is of A and the other one also a lower Second Bone Spring’s well.

Ronald Mills

And then, Tommy, maybe for you; you have provided a little bit of context in terms of dealers strategy, their backers were seeing — couple of the backers that were in Oasis historically, it looks like from a management standpoint there is probably been quite a bit of overlap between whether the Burlington days and/or Conoco [ph] amongst other teams have — are members of your team; just a little bit of history on that.

Thomas Nusz

So, this is not much of like a lot of things that we do. We kind of figure out where we want to be and pick our spot as I mentioned earlier and you know, actually if you look back, whether it’s the Rosy deal, the SM deal; these projects — we learned it from anywhere from 12 to 24 months before we come into the right window where there is an opportunity that we think we can execute on it, this is one that we knew a lot about. As you mentioned, the incap [ph] guys were our capital sponsors and which is something that I think plays into the whole story here and that I think they did well with us once and I think they have a lot of trust in the management team.

On the Forge team, Ron, you hit on it, it’s a bunch of — the original founders were Burlington guys. Barry and I worked together when I came out of college in Midland, and then I worked in a number of places with Danny and Arnold in Farmington and Gulf Coast and so we’ve got a lot of history with these guys which makes the process like this a lot smoother across the Board, there is a lot of trust there and I think with else just getting to a transaction but I think that will help us also in transition. We’ve known some of these guys for 30 years, so I think it helps it to be a lot more efficient.

Ronald Mills

And then one last one; just — you talked on Slide 5 about the relative valuation with other transactions, can you just provide a little bit more color — it looks like the use of PDP value for the acquired production comes to about 38,000 per acres. I’m just curious the other transactions that you’re comparing to for that comment?

Thomas Nusz

I think as we look at it, we try to do relative comparisons with other transactions that looked the same. The Permian is a big combination of three sub basins for the like of a better term and even when you look at the Delaware in isolation, the thing that where you are in the Delaware, things can change a lot on a number of fronts, whether it’s rock properties, food properties with different GLRs and all kinds of other things, other acreage positions are consolidated or whether it’s a scatter shot and so when we do these kinds of comparisons we try to look at transactions that are similar to the ones that we’re entering into, we can go out and do a deal that’s got half go past your and really look great on surface metrics but really doesn’t do a whole lot for us.

So the great thing about this is that it’s all in a big contiguous block right in the heart and I think we — when we do our calculations and come up with that 38 to 39, we think that it’s — that’s very attractive relative to similar type transactions but you’re not going to — obviously, you wouldn’t see it that way if you just did a cheese spread of every transaction over the last two years but that’s not how we look at it.

Operator

And the next question comes from Gail Nicholson with KLR Group.

Gail Nicholson

Just about a standpoint of the expense structure, you said you’re going to pick up a little more G&A. When you look at the LOE, how does LOE on this asset compare to your Williston? And where do you think you can drop LOE down to us infrastructure fully build out?

Thomas Nusz

The LOE here relative to Williston is a little bit lower, it’s probably — early times, these balls are flowing, it’s going to — it will be pretty low, it’s in the $3 range and as you get into artificial lift and more wells and all those things, it’s going to turned up a bit for created time, so you may consider it to be $3 or $4 or in that range. So it will be additive to what we have in Williston.

Gail Nicholson

And you talked about $11.5 million to pay the well cost in the beginning; does a lot of that is in a push lately in the Delaware as well as [indiscernible] sand, is that assumed — using well-resourced sand is that something you guys are planning to test or thoughts around that?

Thomas Nusz

Yes, that $11.5 million I don’t think really incorporates lower cost for local source and so that is one of the things that we’ll optimize around, see if we can reduce the sand cost and try to do that across all the service components like we talked about. As we get into a full suite of completions where we can justify and whole frac crew, we’ll contemplate whether it makes sense for us to use our own services and help to drive down costs further that way.

Gail Nicholson

And then, if you guys did choose out to maybe a source of brand new fleet for OWS, what would that run you?

Thomas Nusz

There are fleets in the past have generally been kind of $20 million to $25 million range for the equipment. If we have a — coming into a new basin or having to service point and doing all those things, there is going to be incremental money to that and I don’t have a great figure on that at the moment. When we originally did Williston all-in that was more around $30 million but we’ll look at that as we go.

Operator

Thank you. That was the last question. I would like to return the call to Tommy Nusz, for any closing comments.

Thomas Nusz

Thanks. We’re really excited about this asset position and entry into the Permian but want to be clear that this is for us not a repositioning but a compliment to a tremendous Williston position that we’ve already got in place. This capitalizes on our operational competencies and full field development and also gives us the opportunity to redeploy capital tied up in a very attractive Williston asset base out in the Fairway that — what this transaction kind of tends to go to the end of our inventory. And so we feel like we can accelerate some value there and redeploy that capital and something also that we’re not — and at least in our minds for that — those things and the divestiture bucket assets that we think are meaningfully undervalued in our current stock price, so that repositioning should be very accretive to us.

So this expands our platform as we build scale with core of the core inventory and that inventory is going to be resilient as I talked about earlier to very low oil prices and will provide us what we think across the Board will be pure leading margins. I know the call is a little bit late today, and so I appreciate you guys hanging with us. And have a good evening.

Operator

Thank you. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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Weighing The Week Ahead: What Can Investors Learn From 2018 Forecasts?

The economic calendar is loaded, especially with reports on housing. Despite this, the calendar and recent events will stimulate pundits to get out their crystal balls. I expect many to be asking:

Can the rally in stocks find fresh legs in 2018?

Last Week Recap

In the last edition of WTWA I observed that Santa might need a GPS to deliver on the typical year-end rally. The various sideshows – the Alabama election, the Fed meeting, the tax cut saga – played out and the market celebration continued.

The Story in One Chart

I always start my personal review of the week by looking at a great chart. Jill Mislinski’s weekly version is first-rate, pulling together several key points in a single look. She notes the new record for the market in addition to the daily moves. Friday’s rally was the key feature of the week. Her article also takes note of the big increase in volatility this week.

Despite the excitement of the record high and Friday’s trading, the weekly trading range was again less than one percent.

The News

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

The economic news continues to be strong. New Deal Democrat notes a small deterioration in his long-range indicators. Take a look, as I do every week, at his helpful list of high-frequency indicators as well as his summary. For those of us with a serious interest in the economy, it is an efficient way to see items you would otherwise miss.

The Good

  • Job openings told a positive story. The JOLTs report is widely misunderstood and most of the commentary is unhelpful. The most important elements are the quit rate and the labor market structure. Voluntary quits are at a rate of 3.2 million per month, better than before the recession. Structure of the labor market is best understood via the Beveridge Curve. Here is the BLS explanation.

  • Inflation remained tame with both PPI and CPI core rates rising at or below expectations of 0.2%. There are many that view this as a sign of a weak economy, but that is not consistent with the rest of the data.
  • Initial jobless claims made another new low. Bespoke’s chart combines both a long- and short-term look. You might wonder how someone could view this as bad news, but see below for the answer.

  • The FOMC decision to raise short-term interest rates was not a surprise, and the markets took it in stride. This is despite the continuing plan for three more hikes next year, as illustrated by the Fed “Dot Plot.” Perhaps the calm is because few market observers have much confidence in the dot plot forecasts!

  • Tax cut legislation neared passage. With several key Senators either getting concessions or dropping their demands, Senate passage seems nearly certain. With the loss of a Senate seat and some serious illnesses, the GOP has a strong incentive to move quickly. (I know that many readers oppose these changes. Please note my description of “good” as “market-friendly.” It is one perspective, and the one most important to us in our investing roles.
  • Industrial production was up 0.2%, slightly less than expectations, but the prior month was revised upward from a gain of 0.9% to 1.2%. This is a noisy series. New Deal Democrat takes note of this case of “hard data” confirming prior survey data. Sometimes the surveys serve as solid leading indicators.
  • Small business optimism reached a 34-year high. (HORAN) If the survey opinions lead to action, small business investment and hiring could take an increased role as an economic driver.

  • Retail sales grew at a very strong pace, 0.8% versus expectations of 0.3%. The prior month was also revised higher, from 0.2% to 0.5%. This is very encouraging for a sector regarded as under pressure.

The Bad

Not much bad news last week. Feel free to add comments about anything I missed.

  • Investor sentiment turns more bullish, a contrarian indicator. David Templeton (HORAN Capital Advisors) notes this as a story mostly about the decline in bearish sentiment.

  • Imports and exports, measured by sea container data, suggest an increasing trade deficit. Steven Hansen’s excellent regular update on this story provides, data, charts and analysis.

The Ugly

Student loans. Nearly 5 million students in default, double that of last year? Despite a strengthening economy? (WSJ). Student loans account for the largest asset of the U.S. government, $1.37 trillion. That includes only debt that is at the repayment stage. Mrs. OldProf (a former banker) sees this as a big problem. We need the contributions of graduates. Taking away their bank accounts and professional licenses does not help on that front. She notes that there are precedents for leniency as an incentive to take certain jobs or to work in certain locations. It is a very challenging issue.

Noteworthy

Wired has a great article on the increase in data collection and integration in China. Some will find it disturbing, but everyone should be interested. Imagine that you had a score, relevant for credit, and various other perks. It was influenced by whom you chose as friends. And so were their scores. Would it affect your choice of friends? Even George Orwell could not have imagined this! And how close are US methods?

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

The Calendar

It is a big week for housing data. Starts, permits, existing sales, and new home sales are all released in the same week. Personal income and spending are also important. The PCE price index is the Fed’s preferred measure. And of course, with the FOMC decision behind us, FedSpeak can resume.

Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.

Next Week’s Theme

At a different time of the year, the combination of all the major housing reports in a single week (I can’t remember seeing this before) would be the obvious topic. If the news preceded a Fed meeting, the topic would be a slam dunk. Not so this year. The effect of the calendar can sometimes be dramatic. Much of the investment business for the year will be finished by Wednesday. Producers might even be challenged to find experienced pundits for interviews. The result:

The 2018 forecasting season is upon us!

Here is a simple (but not comprehensive) typology for 2018 forecasts, including some examples:

  • Market forecasts
    • Bearish change. This requires a negative view on the economy and corporate earnings. An example is this source, which argues that a recession is in the “not-so-distant future”. The argument includes many of the recession analysis mistakes, including describing the poor forecasting record of the National Bureau of Economic Research. The author seems blissfully unaware of the actual role of the NBER. It is too bad that those claiming to be experts on this topic are not required even to know the definition of a recession! The author then takes a chart of current good news, jobless claims (see Bespoke chart above) and guesses that this might be the best things will get. I am always amazed that perma-bear authors get away with arguing that good news is bad (as is, of course, bad news). A recession always starts with a business cycle peak. Calling the peak is quite a challenge. You could draw the little yellow circles at several points over the last five years! Why now?

    • Trending. This includes most of the Barron’s panel from last week. Here is the summary, but it is much more important to read the reasoning.

    • Bullish change. Earnings expert Brian Gilmartin takes a skeptical look at the landscape and still finds that earnings are moving higher, and so are the changes in estimates.
  • Economic forecasts
    • World economy. How about India?
    • US economy.
    • Specific sectors or themes. The IEA has an excellent publication on the World Energy Outlook. It includes a specific analysis of China and the sharp change in energy policy. For example, China’s energy mix is becoming more diversified, with greater emphasis on solar. Demand for the average household will double by 2040.
  • Political forecasts – power shifts around the world. These are often speculative, but might be worth reading.
  • Pseudo forecasts – research which seems to invite a conclusion, but leaves responsibility to the reader. This encompasses most of the objective stock research that supposedly does not do any forecasting. If someone writes, and supports with data, that on 27 of 36 similar situations stocks move higher, how should that be interpreted?
  • Forecast objectors – those who see no value in the process. This position has gained popularity in the past year. The proponents believe that their behavior should not adapt to any expectations about future events. This has become the most prevalent viewpoint in the investment blogosphere. The leading proponents apparently have no modelers or economists as part of their team. Their brief and repeated criticisms of models, surveys, and other research methods is very basic. The topics repeatedly mentioned are those covered in the first week of any serious course. The criticisms might be more persuasive if the critics had even minimal experience in the relevant subjects. It is usually accompanied by praise for low-cost index funds, passively invested. Barron’s asks when this “passive juggernaut” might end. Here is a key observation:

“The Vanguard juggernaut will roll on until we see a very good correction of some length, if not a bear market,” predicts Dan Wiener of Adviser Investments, who, with his colleague Jeffrey DeMaso, has been thinking about big events that fund investors might face in 2018. What happens then “could be a complete reversal from the experience” of the past several years.

As usual, I’ll have more in the Final Thought.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

Recession odds remain low and many economic indicators are improving.

The Featured Sources:

Bob Dieli: Business cycle analysis via the “C Score.

RecessionAlert: Strong quantitative indicators for both economic and market analysis.

Brian Gilmartin: All things earnings, for the overall market as well as many individual companies.

Georg Vrba: Business cycle indicator and market timing tools.

Doug Short: Regular updating of an array of indicators. Great charts and analysis. Let’s take another look at the regular update (via Jill Mislinski) of the Big Four indicators most influential in recession dating. The recent strength in these indicators is clear from the chart.

Insight for Traders

Our discussion of trading ideas has moved to the weekly Stock Exchange post. The coverage is bigger and better than ever. We combine links to trading articles, topical themes, and ideas from our trading models. This week’s post discusses how to put your trading in the right perspective. Check it out to learn a great trading trick from Charles Kirk. Model performance updates are published, and of course, there are updated ratings lists for Felix and Oscar, this week featuring the DJIA. Blue Harbinger has taken the lead role on this post, using information from me and from the models. He is doing a great job.

Insight for Investors

Investors should have a long-term horizon. They can often exploit trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be Eddy Elfenbein’s weekly market review – clear and to the point. Here is the key observation:

“They say you never go broke taking profits. No, you don’t. But neither do
you grow rich taking a four-point profit in a bull market.” – Jesse Livermore

This week, the Federal Reserve decided once again to raise interest rates. True, interest rates are still quite low, but a lot of folks thought these hikes were a long way off (including me). Now they’ve really happened.

The Fed also released its economic projections for the next few years. They see more rates coming next year (call me a cautious doubter on that). Remember, the environment for stocks will remain favorable as long as rates don’t get too high. We’re not there yet, so stocks are still good.

Eddy’s much-awaited stock picks for 2018 will be released next week.

Runner up is Roger Nusbaum, who looks at the dire predictions from several sources, including the usual suspects. He notes that Vanguard recommends tempering expectations, but not expecting a crash. He has some good charts and analysis.

[If you are concerned about major declines, you might be interested in my paper on risk. Just write for our free information on these topics. While they describe what I am doing, the do-it-yourself investor can apply the same principles. Both the concepts on recessions and how we used it to forecast Dow 20K are available for free from main at newarc dot com].

Stock Ideas

24/7 Wall St is collecting the sell side ideas for 2018. Here are some samples.

Chip stocks (JP Morgan)

Oil service stocks. See also Ray Merola, who provides a close analysis about why he prefers Schlumberger (SLB) to Halliburton (HAL).

Top DJIA stocks for 2018?

Large-cap stocks expected to beat Apple (AAPL) and Amazon (AMZN). No real surprises, since they are other big stocks. The rationale is worth a read.

And some ideas from our other favorite sources.

Five dividend stocks for 2018 from Colorado Wealth Management.

A rebound in CenturyLink (CTL)

United Health Group (UNH) shows up as a choice on Peter F. Way’s unique method. Check out the post for his risk/reward chart. He also updates performance.

Hale Stewart recommends a look at Black Hills Corporation (BKH). His argument is based mostly on technical analysis, and provides an interesting application of a rotation graph. (I’m not convinced, but my mind is open).

Income Investments

Brad Thomas has some ideas for retail REITs – looking better after the recent news.

Dividend Sensei suggests that Iron Mountain (IRM), a “hybrid storage/data REIT” can be bought on the dip from a secondary offering. The analysis shows the rare combination of a good business, a good yield, and attractive valuation.

Blue Harbinger offers some “Amazon insurance” via five “attractive, high-income retail REITs.” He includes a nice performance comparison of FAANG stocks and the candidate REITs. He sees both big winners and losers, so read the entire post.

Barron’s features a very thorough analysis of yield sectors and specific stocks. They suggest comparisons with high-dividend stocks. One conclusion:

Electric utilities appear fully valued after producing a 17% return in 2017, with an average dividend yield in the 3% range. Preferred stocks too seem richly priced, following a strong year in which their largest exchange-traded fund, iShares US Preferred Stock (PFF), has returned 8%.

Next year, U.S. interest rates could finally show a notable uptick, with the economy possibly expanding at a 3% rate, unemployment staying around 4%, and global growth accelerating. If all that happens, yields on 10- and 30-year Treasury bonds could rise by a half-percentage point or more, resulting in negative total returns on Treasury notes and bonds.

Hale Stewart recommends Cardinal Health (CAH) for dividend investors. He analyzes the financial data, the growing dividend, and the Amazon threat. While I do not disagree with the conclusion, it is an example of how you might do better (as we do in our enhanced yield program) by selling near-term calls while collecting the dividend. This strategy is especially good if expected downside is limited, while upside is gradual or limited.

Personal Finance

Seeking Alpha Senior Editor Gil Weinreich continues his strong work. Every day he has a topic of interest for financial advisors. It usually hits key points for individual investors as well. This week he has a good discussion of how those who have “missed” the Bitcoin surge should feel about their approach. This is very important, especially as we enter the holiday season. Expect to encounter many who are chortling about profits.

As promised, I have revised his excellent discussion last week of the values and pitfalls of market forecasts.

You might also find interesting my post about the contradictory advice from Goldman Sachs, the first in a new series about the difficulty in following “authorities.”

Watch out for

Sucker Yields. Colorado Wealth Management helps to identify what might be too good to be true. A key is avoiding what is unsustainable given the company fundamentals.

Costco. Brian Gilmartin takes his typical deep dive and comes away with some concerns.

Final Thoughts

Forecasting season is valuable, if you approach it with the right attitude.

Forecasts by others. Reading the ideas of others about what might happen helps to open your mind and avoid confirmation bias. I am dumbfounded by those who claim to believe in behavioral economics and yet close their minds to alternative ideas. I need not agree with the items on lists from Doug Kass or Byron Wein to find them useful. They often raise points missed by most other observers. You need not place great weight on specific market targets and forecasts. Look instead at the underlying reasoning.

Your own forecasts. Many of my blogosphere colleagues explain that writing helps to focus their thinking and sharpen conclusions. Developing a forecast does the same. You need to think beyond the sloppy citation of a topic. What is the probability? What might be the consequences? Is there any advance preparation you can do?

These need not, and usually cannot be precise. An estimate is much better than completely ignoring a topic. It takes work to do it right.

Forecasting tips for the newbies

  • Don’t be driven by the calendar. You should change your view of the world whenever there is significant new information. That is part of my reason for the WTWA series. My assessment of market risks, potential, and stock price targets changes constantly. Most people are not so disciplined, so the calendar is a reminder. Think of it like the admonition to change your smoke detector batteries when altering clocks for daylight saving time. Otherwise it is too easy to drift along in a daily routine, never looking at the big picture.
  • Don’t give the illusion of precision. You do not know the chance of any particular event within 20 or 25 percent, at the very best. Don’t pretend otherwise.
  • Don’t shift the burden to your audience. If you note that there is a Santa Claus rally 70% of the time, what does that imply for your actions, or those of your readers? If there is a 35% chance of recession in the next year, what are the implications for your portfolio. It is a cheap shot to throw a scary number out there and then ask your readers to figure it out. Those who have a sophisticated method adjust position size by their expected edge. If you take this approach, you have some idea about how to use data.
  • Put some skin in the forecasting game. Make a small bet or two on a basketball pool or fantasy sports. You will learn a lot. The difference in sharpening your thinking and opinions will be as dramatic as that between paper trading and real money.
  • Don’t reach too far ahead. You do not know what will happen in ten years, and neither does anyone else. If you are analyzing and adjusting asset allocations and holdings on a regular basis, a year or so is good enough. These changes can fit well in a long-term investment plan.
  • Be willing to brainstorm and build simple models to help in assessing risks. I frequently did this in graduate seminars. The group, once moved beyond initial shyness, would always come up with great ideas. Each thought would stimulate something else.
  • Think about some contingency plans. What would you do if the yield curve inverted? If NAFTA ended? If the Korean situation got much worse? I have a plan for each of these situations, and so should you or your advisor. In the case of Korea, for example, there are certain stocks and sectors that will be the first to feel a crisis. Buying puts in those stocks provides an immediate and leveraged hedge. You need not and should not wait until missiles are flying.

The current market climate includes many supportive elements. There is still time, perhaps a lot of time, to enjoy the opportunity. The optimal portfolio for good times is much different than what you would choose in riskier times. We should all be receptive to signals about risk!

What worries me:

  • Tax bill effects on housing. The $10,000 limitation on state and local tax deductions will immediately reduce property values. Only the size of the change is in dispute.
  • Student loan debt.

And what doesn’t:

  • Low levels of credit default swaps. (Bespoke). This insurance is now back to levels from July,2007. This is good news unless the market assessment is unjustified.
  • Long-term effects of the tax legislation. I am not offering an opinion on the impacts. The investor perspective should be on the next year or two. The initial effect should be positive; then we will see.

Disclosure: I am/we are long CAH.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: CAH versus short calls

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Who Wants a Pet Direwolf? Perhaps a Passenger Pigeon?

For the past few years science writer Britt Wray has been delving into the strange field of “de-extinction,” traveling the world to meet with scientists who are working to bring back species ranging from the aurochs to the thylacine to the woolly mammoth. One of the most promising efforts is Revive & Restore, which hopes to create a living passenger pigeon by the year 2022.

“That is what they have said as a target year where they can expect their gene editing experiments to produce the kind of birds that they would feel comfortable calling a de-extincted passenger pigeon,” Wray says in Episode 286 of the Geek’s Guide to the Galaxy podcast. “Of course it’s hard to put a real finger on when these experiments will succeed, but that’s how long they think they need.”

There were once billions of passenger pigeons in North America, and a passing flock of them could darken the sky for hours. Now that seems like something out of Lord of the Rings, at least according to Ben Novak, lead scientist on the project.

“He was learning, at the age of 13—while being a huge fantasy fan, usually reading about mythical creatures—that this species was not mythical, but it had the same sort of effect for widening his imagination for what it would be like to live in a world with them,” Wray says.

And Novak isn’t the only fantasy fan with an interest in passenger pigeons. A Game of Thrones author George R. R. Martin is also involved with the project. “They need money in order to do this,” Wray says, “so they collected donations, and yes, George R. R. Martin’s name is there as one of the donors.”

But given that Westeros is home to several extinct species, including aurochs and direwolves, it’s maybe not surprising that an author like Martin would have a special interest in seeing extinct animals live again. “De-extinction is so fantastical in its ambition that it makes sense that it attracts minds like George R. R. Martin who have a really vibrant way of visualizing the world and the type of creatures that could inhabit it,” Wray says.

Listen to our complete interview with Britt Wray in Episode 286 of Geek’s Guide to the Galaxy (above). And check out some highlights from the discussion below.

Britt Wray on Jurassic Park:

“Michael Crichton read this [paper], and was aware of this thinking that came from the group, and called George Poinar Jr. asking if they could discuss it, because he was working on a project that this experimental thinking could benefit, and George Poinar therefore became one of the foundational scientists to actually influence the science that went into Jurassic Park, because as you’ve probably already guessed from listening to that explanation I just gave, it sounds a lot like what Jurassic Park puts forward as a way that you could have actually created dinosaurs from petrified, encased mosquitoes that were prehistoric. … It’s been tried, but no one has ever recovered decipherable DNA sequences from old, old, old specimens of amber-encased DNA from those times, from millions and millions and millions of years ago.”

Britt Wray on climate change:

“The hypothesis here is that having many, many re-created woolly mammoths—or woolly mammoth/elephant hybrids—that could move north and run around in these areas where there is thawing permafrost, they could punch holes in the snow with their big mammoth feet, basically perforating this insulating blanket of snow and then allowing cold air from the atmosphere to come down, hit the topsoil of the permafrost, and promote some kind of refrigeration or cycling of frigid air. And then additionally perhaps they’d be able to knock over dark plants that absorb the sun’s heat, and fertilize the soil with their dung, giving rise to light, reflective grasses, eventually geo-engineering that area back into what it was like more similarly during the Pleistocene.”

Britt Wray on capitalism:

“One researcher who I met with a few times over the course of researching the book, Hendrik Poinar—the son of George Poinar Jr., the scientist who influenced Michael Crichton’s science for Jurassic Park—is a woolly mammoth genetics expert. He has sequenced its genetics, with his collaborators. And he was once taken out for a lunch by a rich businessperson—over a $7,000 bottle of wine—who offered to provide him a job if he would leave his academic post and join him on a mission to bring back the mammoth and open up some kind of theme park, so that people could pay to come and visit these marvelous, re-created beasts. He turned him down, and nothing went forward with the plan, but it demonstrates that some people already have their minds turning on ways to capitalize off of this kind of research.”

Britt Wray on DNA data storage:

“There have been many experiments to show that things such as movie clips or photographic stills or entire digital books can be converted and stored in a DNA molecule, and then sequenced back out from that molecular form back into binary, and it can be experienced again in a computer, and can be shown to work, to not have broken down or completely changed. Also, when you’re just storing it in a molecule you’re not putting it in a cell, so it’s not going to mutate and do all sorts of things, it can just sit there as an inert molecule, which opens up all kinds of possibilities for how we might store data in the future—particularly as we are generating so much more digital data all the time and we need places to put it, and it’s very energy-expensive to store it the way that we currently do.”

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Another Major Agency Wants to Regulate Bitcoin Because it’s Growing So Fast

Bitcoin’s meteoric rise has moved it out of the shadows of finance. The latest sign that it’s becoming part of the mainstream came Friday when a key U.S. agency proposed that trading be regulated much like other commodities.

Specifically, the Commodity Futures Trading Commission made clear to market participants that there could be penalties if they can’t show buyers can take physical control of purchased digital coins in 28 days — a framework that already applies to wheat, oil and gold.

The long-existing rules that require traders and exchanges to be able to deliver physical commodities has sowed some confusion for bitcoin because it’s an asset class that exists only in cyberspace. What makes the issue even more complicated is that many investors are amplifying their bets with margin, or borrowed money.

Read More: Coal Into Bitcoin? Dirty Secret of 2017’s Hottest Market

Bitcoin has jumped more than 1,700 percent in 2017, captivating everyone from retail investors to Hollywood celebrities. The digital currency has advanced 82 percent this month alone, a rise fueled by the CFTC’s decision to allow bitcoin futures to begin trading on exchanges run by CME Group Inc. and Cboe Global Markets Inc.

Futures Contracts

In its proposal, which the CFTC will seek public comment on for 90 days, the regulator said that if a trader can’t take possession of a virtual currency bought on margin within about a month, the transaction will be treated as a futures contract. Futures contracts are subject to strict CFTC oversight, and failing to register them could subject firms to fines.

The CFTC’s proposed guidance could apply to U.S. exchanges or transactions overseas involving Americans.

“The commission regulates retail commodity transactions, with the exception of contracts of sale that result in actual delivery within 28 days,” the CFTC said in a 23-page document. “The commission considers virtual currency to be a commodity.”

Platform Sanctioned

The CFTC said it has faced questions about its views on the delivery of bitcoins since it sanctioned Bitfinex, one of the biggest digital token markets, last year.

The regulator said Bitfinex broke the law because digital coins weren’t provided to buyers in the required time frame. Instead, the platform “held the purchased bitcoins in bitcoin deposit wallets that it owned and controlled,” according to the CFTC. Bitfinex agreed to pay $75,000 to settle the case without admitting or denying the allegations.

Friday’s proposal is the latest move by the CFTC to police virtual currencies, whose surge this year has largely caught regulators off-guard. CME, the world’s biggest exchange operator, plans on Monday to begin offering cash-settled bitcoin futures contracts. Earlier this month, the regulator said it would allow the CME contracts to start trading, as well as futures from Cboe, after they pledged that the products don’t run afoul of the law.

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