Tuesday Wrap / Wednesday Morning
Posted by zmann on October 25, 2006
Oil- Up Before Inventories: December crude rallied $0.54 or 1% to $59.35. It really doesn’t matter in front of inventories today. The Street is now looking for a crude build of 2.7 mm bls (however I suspect this could be a bit bigger given that refinery utilization should have fallen again). Distillates, the key driver this time of year, are expected to see a draw of 1.6 mm bls.
Gas- Up Because We’ve Got So Damn Much: December gas moved higher as well ending up $0.12 to $7.93. This rally is getting a little long in the tooth but I’ll restrain myself from commenting other than to say this is short covering, its about to warm up next week and next month (see weather below), but that’s all I want to say. Oh yes, and non-conventional gas production is expanding at a phenomenal rate and gas shuttered from last year’s hurricanes is coming back on line on a weekly basis.
Crack Spreads remain above $7 per barrel. A $0.05 gain in gasoline (a 3 week high) and slightly higher heating oil. The 3-2-1 spread has steadily risen from the lows five’s to the mid $7 per barrel since the end of September. I reiterate my positions that I’m staying away from the refiners until this begins to level off. Although the independent refiners (VLO, SUN, TSO, WNR) generally trade in line with crude prices (which I expect to continue to fall), the recent stabilization and subsequent rise in crack spreads will allow them to make fairly positive statements about 4Q spreads on their conference calls next week.
Performance: XOI up 1.1% /XNG up 1.7% / OIH up 0.9% – All three are approaching two month highs with the XNG approaching an all time high. That looks pretty interesting when you look at them vs oil. I guess oil prices just don’t matter at all anymore.
Earnings Watch – Key Takeaways:
COP – reported $2.31 vs $2.68 last year and $2.40 consensus. Down quarter with a miss on the bottom line. Should be interesting to see how they get treated although they do get a bit of a pass since they were out some volumes at Prudhoe Bay through no fault of their own. Production fell sequentially due to Prudhoe and planned maintenance in Venezuela and Libya.
HES – Very light on revenues and eps relative to consensus. Notice also that
MUR – Repeat after me, “reducing production guidance is a no, no”. See MMR last week. Not a good idea. Stock could get spanked over the next few weeks as investors look for growth stories to offset slowing commodity prices.
ECA – Reported an adjusted $1.00 (after removing 2 fat gains) vs $0.83 and estimates of $0.95. Slow start in Canada and Wyoming (see below) results in them cutting their natural gas sales outlook.
— Operating costs/mcfe advanced 9% YoY. The service companies are smiling.
— ECA sites cost inflation as a problem and instead of increasing activity, is planning to buy back shares.
— They have cut their North American rig count to 70 from 125 a year ago, and now expect to drill 650 fewer wells (3,650 down from 4,300)
— Jonah field (WY) less than forecast due to operational/pipeline constraints, cutting back drilling schedule
Better than expect production in the Barnett. XTO reported stronger than expected shale gas production. The company many Barnett wells expected to do 2-3 mmcfgpd came in at 4-5. These days it seems like everyone is reporting better than expected results in the Barnett Shale. So either expectations are too low or we’re awash in natural gas. Given the shear volume growth from this play and others like it , non-conventional natural gas volumes appear to be offsetting more of the declines from conventional sources than ever before. SWN reported better than anticipated production in its Fayetteville Shale play last week and EOG and CHK are likely to do the same in the Barnett when they report.
Holdings Watch: As you can guess from the performance of the energy indexes posted above it was not such a good day for the shorts. All of my current positions went against me save XOM which was flat most of the day, again having trouble with what’s now becoming resistance at $70. The early tone of earrings season seem to be that even a slight beat is OK but any tampering with volumes, or mentioning of flattening rates and you get taken out sock party. Remember XOM is “priced to perfection” so any misstep or misstatement could result in an exaggerated move.
A Good Article On Big Oil’s Problem. Well, at least one of their problems anyway. In short, prices are faltering while costs and taxes remain high. How do you keep growing profits when this happens? One word: buybacks. But buybacks are notorious for: 1) being announced but never completed, 2) paying too much for stock because the only time they’re used is during the good times when cash levels and stock prices are both high, and 3) they often only marginally cover the option grants to insiders brought on by those good times.
It’s The End of the World As We Know It. According to this study, we’re due to run out of everything by 2050. We apparently need two planets worth of raw materials given current rates of consumption. This is actually bad news for the oil bulls because: 1) for once oil isn’t mentioned as something we’re running out of, and 2) with the number of species rapidly dying off there will fewer areas in which we can’t drill furthering the current glut.