zman’s Energy Brain

oil, gas, stocks, etc…

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Archive for October, 2006

Stone Energy – Always A Bridesmaid

Posted by zmann on October 31, 2006

SGY first blush looks awful. EPS missed pretty bad on better than expected revenue.

  • Costs Soar. Operating costs look high and they’re increasing op cost guidance substantially. LOE, which was not good in the first place, flew up 66% to $2.65 per mcfes. SG&A per Mcfe jumped 52%.This is not the impact of reduced volumes because they’re up 4% YoY. Guidance going forward is lower for op costs – we’ll see.
  • Production guidance is being maintained for 2006 and they’re still suffering from Katrina /Rita damage which is fine although I’ve seen these guys remain behind the eightball over weather too often. As one of their GOM peers said once, “yeah, we noticed it was raining harder over on their platforms” ;->
  • Boosting its cap ex budget, not for increased activity but due to higher expected costs in China.
  • Hedges (or lack thereof) SGY’s production is a little over 50% gas and yet they have nothing hedged for 2007 and less than a quarter of expected oil production hedged at $60. That’s pretty naked compared to their peers. The commodity prices that have prevailed over the past 6 months have provided other companies with the opportunity to hedge ample volumes through 2008 and beyond. SGY is betting on higher prices (I guess they need them with those costs) but could have locked in prices $3 higher on gas and $20 higher on oil. They’ve been burned by bad hedges before and now, I guess, they’re a bit gunshy.
  • Recent trip down the isle costs more than just price, substantial prospect inventory went with it. This is the second failed marriage in a year. What’s hiding under the covers that the grooms haven’t liked?
  • I mentioned SGY when the breakup was announced a couple weeks back but didn’t follow up on it. I’ll be watching this naked, under performer much closer now.

Posted in Uncategorized | 2 Comments »

Tuesday Wrap – Short Covering Anyone?

Posted by zmann on October 31, 2006

Crude Rebounded Mildly… CNBC attributed it to end of contract short covering so I’ll leave it at that since no explosions, rebels, or opecies made headlines this afternoon. Whatever the cause, the new target to break is $57 on the December contract. If we get that tomorrow, and we might, with inventories than a lot of fund managers have got to worry about holding the group as an overweight position much longer. The damage to 4Q earnings is increasing with each passing day below $70 let along below $60 per barrel. I think we get a pretty good sell off in the morning prior to inventories but nothing matters until after them except earnings specific stories (and even that can be overcome by a big swing in oil prices).

…And Natural Gas Took A Breather After Diving The Last 3 Sessions. Lifted a bit on colder expectations for the weekend and early next week in the Rockies and the northeast. Still looking for a 20-25 Bcf injection this Thursday. Have not seen consensus but will post when I do. The $0.14 rise in the December contract was due after a three session drubbing that left gas 10% lower. I’d bet on flat to slightly higher trading into inventories.

Investors Proved Their Willingness To Overlook Fundamentals For A Few Hours. XOI/ XNG/OIH all rallied with oil. The indexes got back most of what they gave up yesterday while oil came no where close to recovering and actually ventured into new low territory

  • SU outperformed its peers and oil and remains my favorite put or call as a proxy for oil.
  • Until the rally, the street was snubbing VLO‘s seemingly positive results and shellacking shares of HOC which fell over 2% before closing flat. After oil closed up $0.23, all red stocks had turned to green.
  • XOM, which for a rare change, fell with oil was more than happy to close up more than the products it sells and this on a lackluster DJIA day.
  • EOG – see this morning’s comments but it sold off pretty hard prior to the crude rally. Probably a pretty good entry point as it’s been trading with crude more than natural gas but I’ll wait to pull the trigger until after oil inventories.
  • The rest of the gang was pretty disappointing with modest declines yielding to modest gains over a 30 minute period just prior to the close of NYMEX.

DAYS LIKE TODAY PROVE THE ENERGY GROUP’S VULNERABILITY. The capitulation in energy stocks was about $0.30 away on oil ($57) and the slide in names like EOG, VLO, and XOM prove it.  But for the grace of short covering, many energy analysts would be receiving calls from their research directors asking them how much they like their jobs and how they feel about bonuses since they never seem to change a rating in response to anything other than a press release. The last 4 years of rising commodity prices have given these analysts, and their clients, a false sense of security. They repeat a complacent mantra of “just wait, it’ll go back up, buy the dips”. Sooner, not later, I believe they will be the dips.

Busy day tomorrow with earnings from stocks of interest of: DVN, HOC, NBL, PKD, PTEN

Other energy that I don’t really have an opinion on but could say something informative include: CNQ, DNR, PXD,PVA, SM, SUN, WLV
GLTA through inventories tomorrow. Should be a pretty “head fakey” trade so be careful. Gotta go trick or treat.

Posted in Uncategorized | Leave a Comment »

Creepy Tuesday Morning

Posted by zmann on October 31, 2006

Early Indications:

  • Oil looking slightly lower in early trading. Bloomberg survey indicates a build of 2.7 million barrels for Wednesday. “Inventories are high, spare capacity is growing and demand is going nowhere,” said Michael Lynch, president of Strategic Energy & Economic Research. “Until winter hits, demand will be somnolent.” From Websters: Somnolent: 1 : of a kind likely to induce sleep <a somnolent sermon> 2 : inclined to or heavy with sleep 3 : how I feel when analysts use words like that.
  • Natural gas looking down hard.December gas is off $0.31 as I write this pre open. Time for T. Boone to get on the blower (that’s what he calls CNBC) and pump.

Holdings & Stocks Of Interest Watch: EOG, VLO
EOG Reported $1.12 vs expectations of $1.07 after backing out the hedge gain. Not a huge beat for those guys. No guidance other than an expectation of strong growth in the PR but the conference call should be accompanied by something more specific. Barnett Shale is running ahead of expectations for the 2006 exit rate now so that’s pretty good. Behind the scenes the number don’t look so good. Revenues were up 4% despite an 11% increase in volumes. Costs were up on a per unit basis substantially and resulted in a 9% decline in EBIT.

The cost side doesn’t look so good Mr Papa.

eog-3q.JPG
To be fair I should point out that sequentially, LOE and G&A per mcfe were up but only slightly while per unit transportation costs were off slightly. Production volumes grew 5% which is not too shabby.
VLO Reports Top & Bottom Line Beats. They mentioned a return of better margins from September lows and strong differentials for the sour crude they use. Good report for them but this should be the best of the refiners reporting this quarter. I picked up a little HOC put position yesterday and that could feel a little upward pull from this report today but with luck I’ll get out with my skin attached later this week or next. I’ve been shying away from shorting the refiners for the last 2 weeks over the improvement of margins and now they may rally, even with falling crude.

Briefly on DO: They missed top and bottom line last Friday. Despite higher day rates revenues were flat due to unanticipated downtime and unexpected costs hit earnings. and most of the 31 analysts who cover them were forced to lower estimates but the street wrote off the miss as a hiccup, with no downgrades and one upgrade. In fact, since falling from a high of $95 in May to its current level of $68 only 3 analysts have bothered to change a rating (1 upgrade in July, 1 down grade in early October after much damage had been done, and the upgrade yesterday). These guys are in a perpetual state of denial. Lots of drillers report starting tomorrow so I’ll be watching them closely to see if further forgiveness and apathy are in order.

U.S. Natural Gas Decline Rate Is Accelerating. Be Afraid, Be Very Skeptical, I Mean Afraid. As shown in the latest drilling vintage graph courtesy of EOG, annual production declines have been rising over the last 2+ decades and EOG projects that they will reach a new peak of 32% for wells drilled in 2006. This chart is trotted out anytime someone has something to say about the high price of natural gas. My thoughts:

  • For years, the U.S. E&P industry said “all the easy stuff’s been drilled
  • Now the industry, lead by the independents, finds play after play where exploration risk is zero and drilling prospects number in the tens of thousands (in aggregate)
  • Just because the decline rates are asymptotic in the beginning doesn’t mean that we’ll run out of gas if we take out time drilling these plays. Many of these wells are very long life- upwards of 10 years.
  • from EOG’s 3Q press release: “In eastern Johnson County, the Casstevens #1H began flowing to sales at an initial rate of over seven million cubic feet per day (MMcfd) of natural gas in September and is producing at a current rate of 4.5 MMcfd. In western Johnson County, the Hardcastle #3H came on-line in August at a rate of eight MMcfd and is now producing over four MMcfd of natural gas.” So the wells decline almost 50% in 2 months.
  • Given the sheer volume of these types of wells, is it any wonder the overall decline rate is increasing? The old, lower decline rates also had the risk of exploration with them. I notice EOG doesn’t publish a chart showing overall success rates. They are much higher than they used to be.
  • Finally, the economics are outstanding on these wells with FD&A running just over a buck- so don’t whine about $5 gas to me either.

Just a couple mores things. Another hedgie bites the dust and,

HAL Watch (Something scary for Halloween): On Monday, Republican Susan Collins, chair of the Senate Homeland Security and Government Affairs committee along with everyone’s favorite independent Joe Lieberman called for an end to HAL‘s overuse of the proprietary stamp. They cited the company’s marking of headcounts going through KBR run food courts and the amount of fuel issued to foreign embassies as proprietary. In HAL‘s defense of the practice, the company cited the U.S. Economic Espionage Act and U.S. Trade Secrets Act as not only encouraging but requiring it to mark everything as proprietary. Give me a break. You guys billed taxpayers for phantom food and over-billed for gasoline at more than 5x the going rate so we shouldn’t know about the counts on this?!?! Give me a break.

Posted in Uncategorized | 12 Comments »

Monday Wrap- Commodities Get Thrashed, Stocks Shrug

Posted by zmann on October 30, 2006

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.
crack1030.JPG
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.

cftc1030.JPG
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.

Posted in Crude Oil, Holdings, Natural Gas, Uncategorized | 14 Comments »

More Cheniere Comments

Posted by zmann on October 30, 2006

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.
lng.JPG

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.

Posted in Uncategorized | 2 Comments »

Monday Morning – Ho Hum Earnings Reaction So Far

Posted by zmann on October 30, 2006

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

Posted in Holdings, Uncategorized | 3 Comments »

Friday Addendum-I thought that gas number looked funny

Posted by zmann on October 27, 2006

The EIA has changed their tally of gas in storage one year ago. The historical data can be found here and remains unchanged showing 3,155 Bcf in storage one year ago.

Yesterday’s storage report shows year ago storage of 3,128 Bcf.

These guys have altered the historical data in for the report (and not commented on it) but not yet updated the historical data support files.

They’re now saying there was less gas in storage a year ago than they said so to account for it, they adjusted this week’s injection (and probably some intervening ones as well) downward to get to the end result they wanted.

That helps to explain why, in a week not THAT much colder than the prior one injections tumbled from 53 Bcf to 19.  I keep an excel file of the storage figures and the only reason I noticed the change was that people were reporting a 333 Bcf surplus to last year vs mine at 306.

Way to slip one by everyone and report a tiny injection. Your tax dollars at work. Nice job guys.

Posted in Uncategorized | 10 Comments »

Friday Early Brief

Posted by zmann on October 27, 2006

Spilled coffee on my keyboard so this morning’s note is going to be late and brief.

1.6% GDP – That’s not good for the oil bulls!  This will surely result in a demand reduction from both the IEA and Opec in coming weeks. We’re by far the biggest market for crude so if we sneeze, oil gets a cold.

What else is not good?:

— Villagers/rebels abandoned the 3 to 4 pumping stations/platforms they stormed the other day. All is well.

— Oil is continuing to consolidate a day after giving up half its gains on a bogus inventory number. Not only was the LOOP (which on average takes in oil imports of 900,000 bopd)  down for 71 hours but other undisclosed facilities on the Texas gulf coast look to have seen some downtime last time.

— Norway announced that 200,000 bopd is back online now that lifeboats have been upgraded.

On the flip side: 

— Venezuela thinks Opec should cut another 300,000 bopd when it meets in December. Can’t keep up with even your reduced quota, hey Hugo?

— BP says while production at Prudhoe Bay is climbing towards 450,000 bopd, the weather, at 26 degrees F, is too warm, much warmer than normal, so that the turbines that sepearate gas from oil operate inefficiently. Apparently they are designed to run optimally at temperatures of 20 to 30 below zero.  Comment: How do they run at 400,000+ bopd in the summer?
CVX, like everyone else beat 3Q expectations. I’ll dig into the numbers in a bit.

Analyst Watch:

ING cuts BP to neutral

RBC cuts SU to Neutral

Credit Suise cuts APA to Neutral

Posted in Uncategorized | 2 Comments »

Thursday Wrap – XOM blah, blah, blah, CHK – WOW!

Posted by zmann on October 26, 2006

Oil Takes A Rest: December crude gave back half of yesterday’s hard fought gain today falling a buck (1.6%). No news other than multiple import points were closed due to inclement weather. Products fared far worse with gasoline down 2.5% and distillates off 2.1%. Crack spreads fell $0.60 per barrel to $7.15 per barrel but remain fairly healthy as we close out the first month of the fourth quarter. I’m staying out of the refiners until after 3Q results are announced next week.

Gas Retreated Slightly. Gas fell after what I thought was a pretty weak injection. I guess traders needed a draw to get their blood pumping today but 19 is not only way below the 5 yr average of 58 for this week (like it really matters) and last year’s storm impacted number of 77 Bcf (even less important) but it’s simply hard to explain. What bothers me is that the small number doesn’t really seem to be complete a function of rising demand (we put 53 bcf into the ground last week with only slightly warmer weather).

— Gas has soared over the last three weeks so I don’t believe a bunch of industrials were trying to break in line to suddenly buy more.

— On the heating front, yes it was colder, but not that cold.

— Maybe we’re having trouble putting more gas in storage (seems unlikely given the non-coincident storage capacity study I summarized back in September but I guess it’s possible) but may it’s explained by…

–…this short statement from this afternoon’s EIA Natural Gas Transportation Update: Over the past week, several pipeline companies and storage operators relaxed the constraints on their systems as cooler temperatures occurred across much of the Lower 48 States. Dominion Transmission, Inc., for example, announced that actions taken by its customers as well as the arrival of colder weather allowed it to lift the operational flow order (OFO) on Thursday, October 19, that had been issued on September 20. Because of the resulting lower linepack on its system as of last week, the company is now able to resume storage injections. Similarly, Transcontinental Gas Pipe Line Corporation announced on Monday (October 23) that its operational flexibility has returned to more acceptable levels and that it has thus lifted numerous restrictions, including services covered under the park and loan (PAL) rate schedule, and will allow excess storage injections under the general storage service (GSS) and the Washington storage service (WSS) rate schedules.

Anyway, it’s only a survey and could be wrong and despite the fact that the injection looked pathetic, we once again blundered into new record storage territory.

— Given that we’re looking at colder weather this week, I’ve got to bet on an even closer to par injection next week. How about 10, that’s a nice number.

— After that, if the forecast holds, we should see at least one to two more injections leaving us at my adjusted projected peak storage level of around 3,500-3,525 Bcf.
storage102606.JPG

— We still have almost enough of a surplus to give us a free ride on average demand in November and March, the first and last months of the winter season.

If natural gas begins to correct, I’ll be all over puts on APC, EOG, KWK, and SWN who despite their wondrous hedge positions will move lower with gas.
XOM’s Best Investment Is Itself: Summary of today’s action in the stock: Up Big, tread, tread, tread, Plummet, Buyback more stock, rally, Rally, pant, pant, raaalllLLY. Although the national media seems obsessed with how much Exxon makes in each nanosecond you’re sleeping I’m more interested in how they spend it. Last quarter:

XOM generated cash flow of $14.6 billion

XOM spent $4.1 billion on upstream projects (85% outside of the US), $0.65B on downstream upgrades (67% non US) and $0.2B on chemical, for a total of$5.1 billion worldwide capex.

XOM spent $8.4 B on share repurchases ($7.0B for the treasury and $1.4 B to offset option grants) – So according to management’s spending habits, their best investment remains in their stock even as it approaches all time highs.

–This quarter that spending equated to roughly 7% of average daily volumes. No wonder XOM can miraculously recover even as the energy sector reels from the steep drop in oil and gas prices and refining margins and has disassociated itself from the price of oil over the last quarter.

— In the 2Q02, XOM spent $6.8 billion on buybacks (5% of average daily volumes)

— and in 1Q they spent $6 billion on buybacks. My long winded point is that with Nymex averaging about $10 off 3Q levels, gas about flat but I suspect down, and refining margins down, these guys should have less to spend this quarter buying themselves.

Holdings Watch:

MUR got pounded on downgrades a day after they disappointed the street. 2 day relative under-performance relative to the XOI: 7%. In this market if you lower production a hair you get your head chopped off. If you’re an analyst and you take 24 hours to cut your rating you’re considered timely. wow.

SU: Continues to be the best proxy for oil I’ve found and is a great vehicle for options given its volatility.

CHK: Blew estimates away after the close. Short at your own peril.
— Top notch interim reserve results. 314% reserve replacement, $1.89 FD&A.

— These guys remain hedged out the wazoo at >$9+ gas, >$63 oil going forward. CHK recently rolled out of some hedges (very good timing) but is still over 50% hedged on gas in 2007.

– They missed 3Q production target due to new drilling protocol in the Barnett. If they fall at all it’s buying opportunity. Note: The previously curtailed 100 mmcfgpd is back online.

— Production guidance:

–production growth for 2006 down to 23-24% vs 25% prior estimate

–2007 goes to 14-18% from 11%

–2008 goes to 10-14% from 6%
— They show remarkable cost control. Per unit costs are falling while their per unit service cost revenues are rising.

— This is my #1 pick for a takeout candidate sometime in the next 6-12 months – too much unconventional gas, in too many plays, with too many available drilling locations.

Posted in Uncategorized | 2 Comments »

Thursday Morning – E-Day

Posted by zmann on October 26, 2006

Warning: Oil and Gas Stocks Will Do Whatever XOM Does Today. Early Strong Advance Likely.

O&G Indications Mixed Pre Open. Oil looks flat to off slightly before the open but natural gas is  advancing with purpose, up $0.14 to $8.47 on the Decembers.  It’s gas inventory day and I’m expecting an injection of 30-35 Bcf. Still haven’t seen a consensus number but XOM overrides anything but a giant (55>) or tiny (<30) number.

The Louisiana Offshore Port Was Closed For 3 Days Last Week. Is it any wonder that imports fell in yesterday’s report? Someone asked if they parked the tankers. Well apparently they did. Nice of our government to omit this tidbit in its commentary. Now, I’m not going to go all Mel Gibson on you (conspiracy theory, not the raving luny on the side road) but some will surmise that the administration has gotten what it wanted out of the Saudis (lower oil and therefore lower prices at the pump in time for Nov 2) and now we’re reversing course to stabilize oil prices (refilling the SPR when we said we wouldn’t until after winter – Bodman never returned my emailed question on that – and now shutting down the biggest US oil import facility for half a week). I don’t believe any of that but some might.

Exxon Day: XOM Reports Second Biggest Quarter Ever ($1.77 vs $1.59 est.)

— Revenue of $99.59B (don’t you know missing that $100B number peeved them off)

Repurchased $8.5B during quarter – now we know why it won’t fall with oil prices. With an average trading volume of 20 million shares per day over the quarter and assuming they paid an average of $65 per share, XOM would have accounted for 7% of daily trading volume. That’s a lot of firepower.

— Results were attributed to higher commodity prices, better margins at refining and chemical segments and that giant share repurchase.

— Production was down 3.7% sequentially but up 7.2% YoY.

— XOM is setting new all time highs in pre market. I’ll have more later in comments when I get the full press release.

A Few Words On SU And Their 3Q Bottom Line Beat. ($1.48C vs $1.21US Exp) Converted this equates to 1.31US (a $0.10 beat). 2Q had better pricing and better production, eps were $1.64C or 1.46 US.

–Slightly lower than expected production due to unplanned maintenance. Production of combined synthetic and bitumen productions was down from 2Q levels: 3Q at 243,000 pd vs 2Q at 267,000. Probably won’t come as too much of shock given the maintenance was announced so analysts likely to forgive them.

–Natural gas production, a key cost component, remained flat with the prior quarter and relatively so with year ago levels.

–Fourth quarter expected to be back on plan with production inching towards capacity,

–4Q Operating costs are seen backing off a bit on a per unit basis with anticipated higher volumes. For the full year, higher gas costs have worked to bump this up and the full year number is now 5% over plan at $20.50-21C (mid point is up $1.50C). Here’s where I see a problem: 3Q averaged $23.70C vs $18.30 2Q (a 30% jump in unit costs due to 9% lower volumes) This bears watching closely.

–Crude realizations are expected to fall a bit more than originally planned. Now WTI less $6-7C.

–Long term plans remain on schedule for 2008 and 2010+ expansions. Indicated costs of expansion likely to increase from previous budgets (like every other oil sands project you’ve ever heard of).

–Summary: decent quarter, guidance shows op costs and cap costs are creeping up a bit, and realizations are down some with prices. Production is still subject to operational difficulties of the industry.

SU has the best correlation to oil of just about any stock around making it a good proxy for us until the USO gets options.

Analyst Watch:

Bear upgrades OMM – what are they thinking? They downgraded the stock August 17 at a price not $0.30 different than the current one. True, if you sold, you were spare a whopping $1 in the great oil decline of 2006 but you got it back if you held through yesterday. Nice job guys. Way to gen those commissions.

AG Edwards and UBS downgrade MUR

FBR whacks its NBR target from $54 to $45

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