zman’s Energy Brain

oil, gas, stocks, etc…

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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
MURRepeat 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.

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16 Responses to “Tuesday Wrap / Wednesday Morning”

  1. SoccerF1 said

    Excellent post, Zman!

    THANKS

  2. zmann said

    HAL is on fire post earnings after firiming up its plans to spin out KBR. Up 7.5% in 2 days while the entire E&P industry is bitching about over heated service costs. If you think the Dems are going to take congress, you’ve gotta know that spinning out a minority of their troublesome little subsidiary won’t save the parent from congressional hearings. HAL @ $31.56, mulling taking on December puts here.

  3. gungagalonga said

    Short covering aside, much of the strength in the nat gas front months may also be due to the spot rally.

    I’ve even noticed a brief premium of spot over Nov futures.

    As we all know, it’s the weather stupid. it’ll be interesting to see how Nov rolls out this Friday.

  4. zmann said

    U.S. crude supplies fell by 3.3 million barrels in the week ended Oct. 20, the Department of Energy said Wednesday. Motor gasoline supplies fell by 2.8 million barrels and distillate fuel supplies fell by 1.4 million barrels.

  5. zmann said

    At $60.70 on the December contract, oil remains in downtrend channel, not worried about it technically until we break through $62.50.

  6. SaneObserver said

    Imports drop by almost 1Mbbpd?, What are they doing parking tankers in the ocean?

    -SaneO

  7. zmann said

    Uh oh, trouble in Nigeria. Who would of guessed that? There’s another buck on crude.

  8. SaneObserver said

    I have been looking at the eia numbers off and on today and I don’t now if it is me being crazy, but the numbers in the report look strange like last week. I keep looking at the Midwest PADD and it looks strange.

    BTW they are now filling the SPR. Up 300K this week

    -SaneO

  9. zmann said

    Iran doing its part to boost oil today with more cetrifuges

    http://news.yahoo.com/fc/world/iran

  10. SaneObserver said

    I guess they are pulling out all of the stops

    I swear, all of these people have to be in concert.

    😛

    -SaneO

  11. zmann said

    Yup, Bodman has a very short term memory problem. Or, he’s a liar.

  12. zmann said

    Nymex close in 5 minutes, time for one last pump. Then what. I’d guess stocks drift higher into close, then in the moring, everybody celebrates the biggest quarter ever at XOM (again) while ignoring their comments about how they think oil should be $35 .

  13. SaneObserver said

    Edmund was angry that people didn’t take him seriously so he went and hired some rebels to…… ( Insert oil related rebel activity here )

    -SaneO

  14. zmann said

    Seriously, I am surprised by the tankers being up today, especially FRO and now OMM, and ok the rest of them are up with oil as well now, but if shipments are falling, rates are falling, the population of tankers is growing, why are earnings going to be up in 4Q and 1Q? Can they ship olive oil in those things? I use a lot of olive oil and many these guys are greek so maybe that’s it.

  15. zmann said

    XOI about 4% off all time highs. wow. are things really that good going forward for producers? cost go up, prices fall, production mixed to up. hmmm

  16. SaneObserver said

    I have come to the realization that the people with money in the market see only what they want to see. Look at the lunacy in nat. Record storage, but yet prices go up, up and up.

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