zman’s Energy Brain

oil, gas, stocks, etc…

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Creepy Tuesday Morning

Posted by zmann on October 31, 2006

Early Indications:

  • 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.

eog-3q.JPG
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.

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12 Responses to “Creepy Tuesday Morning”

  1. zmann said

    The initial reaction is not good from VLO and that was a really strong quarter. Their optomistic pr is getting the stock shelved, maybe the conf call but I’m getting more comforatble with that HOC put every minute. Probably wish I’d gotten the VLO puts that woudn’t fill yesterday afternoon.

  2. zmann said

    Another driller missed. RDC – wonder if the Street will forgive them like DO last week?

  3. Attacking Mid said

    Any thoughts on what’s holding SU (and most oil stocks) up? I’ve been long SU puts for about a week. Do investors not realize those record-breaking profits will not happen next quarter with oil selling for 20% less? Strange behavior.

    I enjoy your blog.

    AM.

  4. zmann said

    SU’s performed pretty well since earings despite the pullback in commodities. I think the perception on the Street is that the oil and gas stocks will ride out the storm on the back of hedges and the belief that any downturn in the commodities is just a bump in the rode towards record highs. I happen to disagree. The go, go markeet isn’t letting much fall, for now.

    I’m glad you like the blog. It seems that we have lots of soccer fan readers so I might start posting Man U scores on days when the stocks are boring. Woops, there goes USO into the tank taking SU along for the dive.

  5. jim said

    while i am respondsable for dd, should i be selling xom at this price (70). sold half at 68 a few weeks ago. my dilemna is either buy here or get entirely out.
    thanks in advance for any opinions.

    jim

  6. zmann said

    Jim,

    I would not be long the stock given my negative sentiment on the group and the fact that it hasn’t responded to lower commodity prices. I said this a month ago, and the month before that and I have been dead wrong.

    If you’re going to be long oil stocks there are a lot worse choices to make although I still believe that they’re due a bit of a retrenchment. After all, they sell this stuff and it keeps going down in price.

    XOM acts as a safety stock for the energy complex so when times get uncertain and the mutual funds and hedgies get nervous, they reduce the number of energy names in there portfolios but plow much of the cash back into buying XOM.

    I currently have puts on the company but have been long and short over the last 2 months (often both). I wrote this on them in mid October and it still holds true from a valuation standpoint:

    https://zmann.wordpress.com/2006/10/13/exxon-trending-towards-expensive/

    Thanks for the comment and hope this helps.

  7. jim said

    thanks, i really appreciate your time & comments on this reply & the other posts re energy. it a mine field.

    jim

  8. zmann said

    The pump in oil right now is pretty interesting. Not really the fact that it is up (at least the USO) but the no holds bar screaming buy, gotta have it right now taking it up $1 in just 30 minutes. Nymex didn’t do that but the stocks did at the same time. Anybody see some Opec, weather or other news I’m missing?

  9. Attacking Mid said

    Whew…. sold my SU puts a bit early when SU was at 75. When it got to around 74.70, I bought calls. Sold those when SU hit about 76, so too early once again. Comtemplating buying back my puts????????????

    AM.

  10. zmann said

    Nice job AM. Thinking about adding to some OOTM SU puts but want ot know the story behind todays products pump

  11. Attacking Mid said

    I have some OOTM SU puts (Nov 75’s) that I’m way under water on (they were ITM when I bought ’em 8^( ). I generally only buy ITM options, and I try not to deal in anything expiring in less than about 2 weeks.

    I also can find no news justifying crude’s sudden rise. It seems to have leveled off. I bought my SU Nov 80 puts back at the current bid ($4.60). Hope it works out. I’m back to the same position I started the day at, but added a good chunk of cash to my account. Wish I could pull that off every day!

    AM.

  12. zmann said

    Here ya ITM and not less than 2 weeks. Gotta love the responsiveness of SU, either side of the trade.

    CNBC just attributed the rise to close of contract short covering which maybe the case although it was pretty sloppy and these guys are generally better than that. CNBC reporters will generally repeat on television whatever the traders tell them. I think this rally is going to fade soon but it also sets up a nice precedent level for a selloff tomorrow if we get the big 3 mm barrel build.

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