Creepy Tuesday Morning
Posted by zmann on October 31, 2006
- 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.
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.