Monday Wrap- Commodities Get Thrashed, Stocks Shrug

Commodities Take A Beating. In comments this morning I said,”if products start to creep back down at a faster rate than crude, which I think is overdue” then HOC could get slapped. I wasn’t expecting the powers that be to take me so seriously and get on with it today but hey, cool.

Oil Gets Popped 4% … December crude fell $2.26 per barrel on a warm weather expectations and the LOOP reopening story. People are now talking big import numbers for Wednesday. USO hit $51.86, its second lowest interday level on record before closing at $52.00. Gasoline got crushed falling $0.076 (5%) to $1.48 per gallon the biggest single day drop since mid September. Heating oil fared little better getting pounded for $0.065 (4%) to $1.67.

…And Natural Gas Got Smacked Falling 5%… Take that T Boone. That’s $0.88 (10%) in the last three days on the December contract so I don’t want to hear any journalists or traders trying to explain this drop away as a simple roll-out issue. The 12 month strip now looks like this so kudos go to CHK for their enviable hedge position. Good job guys. For the rest of you E&Ps who chose to go more naked into the abyss of 2007, good luck guys. I’ll be very interested to see EOG’s hedges (only 50% at last summary) for 2007. More on them later.

…And The Stocks Could Not Have Cared Less. From a commodity day, you couldn’thave asked for weaker performance but the oily XOI drifted off 1.5% while the gassy XNG fell a paltry 1%. It appears that Goldman is beating the snot out of Lehman on the energy call this fall. How long can the stocks defy the falling prices of that which they sell? How much funny money is in this market, controlled by 32 year olds who have the ability to lose $6 billion in 10 trading days? Apparently lots.

Important Quote For This Point In The Wrap: The Market Can Stay Irrational Longer Than You Can Stay Solvent.

Holy Reversing Crack Spreads Zman. Sorry but I couldn’t resist. With the larger than commensurate drop in product pricing crack spreads broke out of what had been a fairly narrow (stable) trading range in the $7s. I’ve been staying away for the refiners through earnings which start tomorrow with VLO. Much more of this and they’re going to have to rescript the opening comments of their conference call.

CFTC Shows Longs Starting To Get A Little Fearful But It’s Early, Just Wait And See. Forgot to throw this out there for the weekend but the CFTC showed a decline in both the long and short non-commercial positions, but net long positions remain near record highs (indicating a ready supply of sellers when they decide this market is out of steam.

Of course, XOM shrugged off the selloff in oil, gasoline, and heating oil, and a much weaker than expected economy. If you watch minute charts (I’m an addict) you can see that every rest in between legs down on oil was met with rampant buying in XOM. See what I mean. XOM is like the millionaire poker play at the $5 table. He’s in every time, no matter how bad the hand.

Cheniere Watch – I saw a comment somewhere that it was a good thing for LNG (the company) that some Russian LNG (liquefied natural gas) project was no longer going forward. If you’re an investor in LNG, you want more facilities shipping the stuff here, not less.

Analyst Watch: pretty quiet but it’s Monday and weekends are precious

– DO- hold to buy at Deusche (stock fell 3% ha, ha) while FBR cut its target price by 15%

– BHI – also got a slight TP reduction from FBR

Holdings Watch: Everything we have puts on pulled back a little but nothing to right home about except for SU and PTEN which put in respectable 2.5% losses. PTEN is breaking down before earings which is interesting. Took a little HOC position (puts of course in front of earnings and because I like them short at 2x VLO which announces in the morning.

EOG – earnings tomorrow. Watch for unbelievable growth in Barnett Shale gas volumes. If they don’t show then I’d expect a 2-3% drop in the name for the week (barring a reversal in gas back to new hedge fund crazed highs). With a good chunk of their natural gas production growth coming form Trinidad, whose pricing is primarily tied to bunker fuel (oil prices), these guys could start to feel some pain during the fourth quarter. If EOG is damaged by its quarter, you’ll have a few minute to take puts on APC and DVN who’re in the same boat.

More Cheniere Comments

I don’t mean to pick on these guys, just their stock.

Sabine pass note offering of $2.15 B last week to refi old debt, fund the completion of the initial 2 stages of their first of 3 LNG projects, and general corporate purposes.

Mkt cap: $1.4 billion, Total Enterprise Value (Mkt Cap + Debt- WC) = $2.7 billion

TTM Revenue: $2.4 million, that’s right, some pipeline revenue on $2.7B in TEV. Earnings? Forget about it!
Cash per share: $0.66B / .055 billion shares = $12 per share (we’re at $25 per share kids)
Book Value: about $5 per share.
Insiders continue to bleed shares although not a deluge.

Ok, so it’s a development stage company with no prospect of earings anytime soon.

The company is developing no less than three LNG terminals along the U.S. gulf coast (Sabine Pass, Corpus Christi, and Creole Trail) and also develops pipelines and has a smidegeon of gas reserves on its books but in truth my dogs give off more on a daily basis. The heart of this story is the LNG facilities which decompress shiploads of LNG arriving from foreign lands to supplement US supply and Canadian imports.

These projects were conceptualized in the early 2000s when gas was substantially below current levels but LNG imports were far lower than the current four receiving stations now see daily.

Are they in doubt of coming to fruition at this point? You betchya. We have additional capacity but LNG shipments to the US have leveled off over the last 2 years despite a spike in natural gas prices.

There are currently 4 LNG receiving stations in the US. No one has built a new one in over 20 years although 2 were taken out of mothballs in the last 3 years as gas prices marched slowly higher on the back of increasing demand and declining (albeit pretty slowly) production levels.

Costs to complete the 3 facilities are : unknown but somewhere north of $8 billion, which seems like a lot, definitely more than the current round of financing will accomodate until you think maybe they’re just trying to get the facilities licensed and started and sell them off. The thing is, XOM just dropped its interest in a US LNG facility which calls into doubt the need for more facilities.
Just some food for thought on a company that trades extremely tight with gas prices.

Monday Morning – Ho Hum Earnings Reaction So Far

News Flash: Oil Down A Buck: Oil seen falling this a.m. over the reopening of the LOOP and a forecast of warmer than normal weather this week and for November, two points of interest that were well known but went largely ignored last week.

– The stocks look to be in for a fairly weak opening with serval oil names off bto and the OIH off 1%. Expect the biggest hits, if this is indeed the start of a much anticipated pullback (see below) to come from HAL, SU, the tankers (FRO and OMM especially) and the drillers (GSF and PTEN in particular). XOM could play to the downside for $2-3 over the next week as well but its a long shot given the self supporting nature of the stock.

Last Week’s Performance: So, So. Most energy stocks rallied with oil (up 2.4%) through mid week until the falling oil (Thursday) and falling GDP (Friday) muted the gains.

Gas was down slightly on the week. Frankly I was shocked by the yawning reaction of gas to the much lower than expected storage injection last Thursday. It was like the tradersin unison said, “yup, that’s a squirrely number.” Although many analysts will undoubtedly predict a small injection or even a small draw I looking for a build in the 20-25 Bcf range this Thursday. True, last week saw some of the coolest weather of the season but barring further governmental adjustments, we should see larger numbers until the really cold weather hits. Next week’s number looks likely to get back into the 30 range.
The energy groups peaked mid week and fell off following oil and gas lower on Thursday. The rally of the last 3 weeks has been impressive but looks to be faltering:

XOI up 1.4% last week, up 5.1% in October.

XNG up 0.7% week, 6.3% October
OIH up 3.8% week, 3.7% October. – It was a big week for service on the back of HAL –> OIH now at 2 month highs.

Oil vs The Energy Groups, S&P500. In the last three months the only energy group to even remotely track the fall in oil has been service, which has probably been the least fundamentally affected. Looking at the year to date chart demonstrates the breakdown in correlation that occurred on Aug. 7th at around 9:30.

I’m looking for a snap back for the energy stocks (8-12% downside through November) after energy earnings season draws to a close this week and fund managers begin to ask the questions,

– “how can things get any better for the group unless commodity prices resume their advance?” and

– “won’t borrowing bases be reduced with inevitably lower PV10 values based on year end oil and gas prices” and

– “3.5 Tcf, isn’t that a lot?” and how about,

– “when will E&P company’s pressure the service guys to reduce costs”

Earnings/Performance Post Mortem: Just taking a quick look at the notable performances of stocks that have reported 3q results so far: (italics indicate my holdings-all puts- man have I been negative lately-you’ll see, just wait)

CHK 15% beat, stock up 2%, – outstanding quarter. Won’t touch on either side since I’m down on the group and you can’t find a better name in a better environment to go long. This replaces the EVG as my favorite gassy takeout.

XOM 11% beat, stock flat comment: a gagillion analysts follow this beast and they were too low by 11% – you guys are bagging. 16 buys, 6 holds – talk about group think.

SU 8% beat, stock down 1.7%. This remains my favorite way to short oil via stock puts. Given the stair-step growth profile, with absolutely no chance of upside to production estimates, no chance of any real surprise save a negative one, this tracks oil like shadow after earnings season is over.

HAL 7% beat, stock up 12% – if the dem’s take senate, look out below. Stories of overcharging and cover up are arriving almost daily but the stock is up on the KBR spinout. Note to HAL: you’re a great company but you can’t hide from the malfeasance of your subcontractors and subsidiaries.

Key Earnings This Week

GW 10/30 – benchmark land driller in the Ark-La-Tex, Rockies – if these guys say the wrong thing, “signs of slowing, anything like BHI’s comments, it spells big trouble for the drillers and the gassy stocks (APC, EOG, DVN, SWN).

EOG 10/31 – production growth guidance is key here. If no change then this will head lower short term. After CHK’s report last week, the bar is set pretty high.

VLO 10/31 -

HOC 11/1 (could get slapped pretty hard after recent run, especially if products start to creep back down at a faster rate than crude, which I think is overdue.

DVN 11/1 -needs production upside or another deep GOM discovery

PTEN 11/1 – ditto comments of GW