zman’s Energy Brain

oil, gas, stocks, etc…

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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.

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2 Responses to “Thursday Wrap – XOM blah, blah, blah, CHK – WOW!”

  1. SoccerF1 said

    Another great post, Zman!

  2. zmann said

    Thanks soccer. Just posted the Friday comments. I had technical difficulties.

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