Thursday Thrashing – 1/11/07

Oil Got Waxed Yesterday…Again. And it’s down to $53.50 as I type this have dipped into $52 territory late last night. WOW. The February contract is down $8 since the beginning of the new year! Opec is once again calling on it’s members to comply with the cuts from October. Since it’s gas inventory day I’m going to devote most of today’s post to gas and the stocks but what a humiliating kick in the crotch for Opec! You guys had better skip the teleconference and catch a charter to Dubai. Of course a call to your local MEND representative wouldn’t hurt either. But if you really want to raise oil prices you’ve got to think big:

• How About Taking A Week Long Production Holiday? Let’s see, that’s 26.5 million bopd for 7 days or 185.5 million bls off the world market in one week at a cost to you (Opec) of $55, $54, $53 per barrel which comes to $9.8 billion you won’t be seeing that week. We’ve got to have everybody in on this. No cheating…I’m looking at you Iran and Venezuela.

• However, On The 8th Day You Start Pumping. And you pump more oil than before. You pump 30 million bopd even on the weekends.

• On the dawn of the eighth day the NYMEX takes your oil of your hands for a much more respectable $100/barrel and the price drops by say $10 /week for the first 4 weeks and then holds at $60.

• It’s A Win-Win-Win For You Guys. First, you’re paid out with the pop to $100 and the increased production in about 4 days. Secondly, your weekly revenues at $60 are 28% or $2.8 billion higher than when you started, and lastly, no one will ever accuse you of crying wolf again.

Goldman Sachs Sees Oil Rebounding, Not A Little But A Lot. This a direct quote. “We would see some weakness forthcoming,” probably “below $50,” but then oil prices are going to rebound to “the high 60s,” said Jim O’Neill, the head of global economic research at Goldman Sachs Group Inc. “The underlying influence of high users, China, India, is becoming more important.” Two words: Perma Bull. Hurray, It’s Natural Gas Inventory Day!

• My Estimate: 42 Bcf withdrawal based upon heating degree days of 147.

• Consensus: 45 Bcf with a range of 37 to 75 according to Bloomberg. 75! Really?! You need to get out more pal. It could happen (it’s a survey and a government run one at that ) but I doubt it.

• Weather Comment: It’s getting colder this weekend and for the next month if Accuweather has anything to say about it. Next week’s number will be pretty small for this time of year as well as HDDs are expected to only rise to 173 this week. Moreover, looking at the scattering of degree days the coolest stuff was out west and not in the heartland where we can tunnel through a lot of gas in a week. That’s the first 12 days of January all shot to heck as far as gas demand goes.

EIA Chops Its Forecast For 2007 Gas Prices. EIA now expects Henry Hub to average $7.06 /Mcf this year, down 10% from its estimate last month of $7.87. Comment – none other than to say they’re still too high. We should be at $5 in late February or early March unless NYC freezes over for at least a month.

The Stocks: Energy stocks continued to suffer as oil made a series of lower highs and lower lows yesterday.

• The XOI broke through my 1,100 key support level, rallied briefly back over it but then settled near its lows of the day down 1.7% at 1,097. Minor support is at 1,080 followed by stouter stuff at 1,045. That 1,045 level was set in the last week of September when oil was $10 higher than current levels.

• The XNG continues to slide but only modestly. Held up by the approaching cold, or as traders are calling it, “The Great Arctic Hope” the gassy stocks of the XNG are slowly conceding to oil and the fact that everyone knows it needs to get cold and stay cold through March just to support current gas prices. The XNG flirted with its 200 dma yesterday for the second time in a week and once through it, is set to fall at least 6% to support in the 397. It won’t happen for two weeks but it will happen. You don’t want to talk about levels lower than that because there’s absolutely no support and the go money won’t be able to find a wide enough doorway to run through. I’m thinking that’s what’ll happen beginning mid February.

• OIH – You’d think business was terrible here. Not so but see below. Technically speaking this group has gotten bashed. I’d expect weakness to continue as long as oil trudges toward $50 but to moderate towards the 119 level. On a minor bounce I like puts in BHI and PTEN but am currently underexposed to the group with only a small position in OII.

BTU Catches Two Upgrades And Closes Up $0.22. What can I say to those analysts but the trend is not your friend. This week, coal has taken a hiatus from the daily pounding it was taking and CNX got an upgrade as well but it still wasn’t enough to light a fire (so to speak) under the coal sector. Of course, overproduction will do that to an industry.

NOAA To Speak On El Nino Today. They do this once a month and the last release was December 7th when they said the event was strengthening and was likely to continue to strengthen over the next 1 to 3 months. Traders are likely to read this very quickly. If the report says weakening has occurred (Pacific SSTs are moving towards the long term mean) then look for gas to make a run on $7. Unfortunately no time of day is specified for the release so I’ll just hit refresh here periodically.

Analyst’s Continue To Quietly Cut Numbers. The following is an overly simplistic yet effective snapshot of how the analyst community is treating the recent slide in commodity prices. The table shows the change in consensus EPS estimates over the last 30 days for the current and next quarters as well as next year. It also shows the corresponding change in stock price and the current forward PE multiple. This last bit of data is useless in a vacuum (without the historical framework that I am very slowly adding to the Valuation tab) but it does let you compare peers.

• For instance, it’s interesting to note that while XOM is the most expensive of the Majors (in terms of forward PE) it has fallen the least over the last month.

• Conversely, MUR a name I have often picked as being a mini-major without the benefits of a massive buyback is also the most expensive in its group but has fallen the most.
• Also of note is the brutal but very quiet slashing of estimates going on the E&P group. Note that the longer reserve life gassy guys carry some pretty astonishing forward multiples. SWN I don’t touch on the short side however EOG has been a favorite pummeling post of late and still has room to fall.
• The refiners as well have their own set of problems but this data doesn’t show much except that I think yahoo Finance has some bad data for the fourth quarter on TSO.
• Finally, I’ve included an assortment of service and drilling names which should be categorized separately for valuation purposes however my point here was to show that Wall Street hasn’t been changing estimates here. In this case it’s not that the estimates aren’t falling like the other groups but it is that they ARE NOT rising. Looking back three months ago you would have seen continually rising numbers from the prior three months. We have anecdotal evidence that rates (at least onshore) will be coming down soon as rigs are freed up. Further, service costs could not continue rising or the only company capable of paying for them would have had to be selling Ipods.

Analyst Watch: Nothing. Like I said…very quiet.