zman’s Energy Brain

oil, gas, stocks, etc…

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Tuesday Morning

Posted by zmann on October 24, 2006

Oil: Looking Weaker On Weather. After a miraculous recovery which chopped its losses in half in the last hour of trading yesterday, December crude looks to be headed lower again this morning as traders eye much milder weather forecasted for next week. In other non-bullish news,

BP says Prudhoe Bay production is back to 400,000 bopd,

Canada has flat out rejected overtures from Opec to join the cartel. As our largest source of crude and with Canadian production scheduled to rise by 2 mm bopd from a current 2.5 mmbopd on the back of oil sands production by 2015, you can see why Opec might try to entice our neighbors to the north.

— This week’s Bloomberg oil inventory survey is looking for a build of 2.9 mmbls.

— After officially cutting production last week, Nigeria, Venezuela, and Indonesia have failed to make official statements stating that, er, well, it’s official. These guys are all producing well below quota anyway so maybe they thought nobody would notice.

Gas: What goes up…!? I’m not going to beat a dead horse but two more injections will put gas inventories over the 3.5 Tcf mark. Given the weather forecast for next week we’re almost certainly going to get at least 3 and possible 4 more injections before the season is done so gas should be going down, not up.

WSI Forecasting Warm Then Cool For Northeast. WSI released a new winter forecast calling for potentially warmer temps in November followed by colder weather in the primary heating fuel consuming months of December and January.

–“Warmer weather in November may extend the injection season and put additional pressure on physical gas prices as there is little room for excess gas due to the extremely full storage, expected at 3.5 to 3.6 Tcf (trillion cubic feet) by early November,” – my thoughts exactly.

–As I wrote a few posts back, Pacific sea surface temperatures have declined away from El Nino and potentially toward La Nina conditions. WSI’s new forecast is attributed in part to this shift and I would note that: 1) a present SST are approaching average readings which would lead to a modest impact on weather (cool not cold, warm not hot), 2) if SSTs continue to decline into La Nina, temperature forecasts for the US could rise.

Not In My Backyard. James Bond is waging war on LNG facilities. At least ones off the California coast. Pierce Brosnan, Halli Berry, Cindy Crawford and other environmental experts gathered yesterday to protest a proposed receiving facility 14 miles off the coast of Malibu explaining that it would be bad for the environment and a target for terrorists. Hey 007, what about the three facilities planned along the Texas Gulf Coast or can’t you see those from your private beach.

Canadian Oil Sands Companies Potential Takeouts. Although SU is the best proxy for trading oil I can find I can’t ignore Royal Dutch’s takeout of Canadian oil sands producer Shell Canada. While it does put the group in play, these kinds of sector roiling events often produce a short term pop in their peers which is often quickly retraced as: 1) the prospects of another major deal occurring in the immediate term are unlikely, 2) falling oil prices weigh on the potential take-out premium and 3) cost overruns in oil sands are commonplace which could also put a damper on premiums offered. The list of hopefuls include SU (16x ’07 pe), NXY (9x), ECA (11x), and CNQ (13x) (which surprisingly caught a Goldman downgrade this morning). One thing is certain, if the majors do come to Canada to consolidate the oil sands plays, they won’t do it to restrict production levels. Sorrry Opec.

Earnings Watch:

BP Beats On Price. After adjusting for asset dispositions, BP beat eps estimates by a touch on the back of higher oil prices . Quick takeaways: 1.) refinery margins fell 32% YoY falling from Katrina boosted levels in 2005, 2) production guidance for FY2006 was shaved from a range of 4-4.1 mmbopd to 3.95 – the second downward revision since July, 3) production was down sequentially almost 200,000 boepd or 5% – Prudhoe Bay, divestments, lower oil prices reducing profit sharing contracts, 4) total revenue was up 4% sequentially, 5) Realizations were $67.22 vs a Nymex 3Q average of $70 so with 4Q Nymex looking more like $60 the get out of jail free pass provided by higher oil and gas prices won’t be there.

SII Tops Estimates. SII is an old oilfield stalwart: bits, mud, tubulars, etc. If oilfield activity is on the rise, they’re happy. They reported best ever sequential and YoY revenue growth. Earnings beat of 4 cents is pretty typical for them so no real surprise there. Strength across all categories was driven largely by accelerated activity in Canada. Volume of product and only secondarily price are driving strong results. It doesn’t get any better than this unless rig counts continue to climb. If commodity prices put in a top on counts this could falter but not as much as a pricier story like SLB.

Analyst Watch:

–Goldman cuts CNQ,

–Truckers cut to underperform at Wachovia which is either the 4th or 5th sector downgrade in the last month. Not a good note for the economy but at some point, lower fuel prices (the second highest cost for the truckers after wages) has got to boost this group.

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5 Responses to “Tuesday Morning”

  1. Jon said

    Hi Zman, good job this morning (as usual). Your blog has become a regular stop in my morning reading.

    You mentioned BJS a few days ago, and with good results from SLB, HAL, and SII, are you thinking BJS might be a good play into earnings?

    Jon

  2. zmann said

    Jon,

    Stands to reason but not liking anything in the service realm at this time as a long. BJS should put up strong results but my main contention for staying away from the group is an expected (at least by me) reduction in oilfield activity. if it materializes, it will hurt some players more than others. I’ll take a look at BJS and get back to you. Just keep in mind that SLB and SII had great reports and the response has been tepid. HAL did as well and has performed better than I would have thought but then again, they carry a lot lower multiple so less is expected of them.

  3. arnie said

    zman
    Oil up up up this am
    Noticed credit suisse price target updated yesterday for VLO in mid $70
    Are we on the right side of the trade with our puts?
    Arnie

  4. zmann said

    Arnie,

    I said I was staying away from the refiners last week as crack spreads had made a pretty good recovery over the last 2 weeks. I still have a negative bias on the E&P and drillers but short term, the refiners could be due a rally.

  5. arnie said

    Thank Zman

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