zman’s Energy Brain

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Wednesday Morning – Too Many Tricks

Posted by zmann on November 1, 2006

Oil Is Indicated $0.20 lower but nothing really matters until we see what the impact of the reopening of LOOP was on inventories. Estimates are scattered but I think consensus is still calling for a crude build of 2.5 mm bls, with distillates and gasoline falling 1.3 and 1.1 million bls respectively. Key technical levels remain $57.30 and then $57.

Interesting read from the People’s Daily about the “China factor”. Shows oil imports to China and Chinese oil and products consumption fell in 2005 due to high prices.

Gas Looks Flat Pre Open. After yesterday’s minor recovery, I expect gas to resume its slide through the rest of the week, unless of course, the EIA continues to monkey with inventories on Thursday.

Good News For The Majors: MMS Abandons Royalty Claim Vs Chevron. The U.S. Interior Department abandoned claims that the oil giant Chevron underpaid the government for natural gas produced in the Gulf of Mexico, which could pave the way for other energy firms from paying royalties to the government, according to a report published Tuesday.

  • Great news if you drill in the GOM, the government just gave you a license to steal saying it’s not worth the time and expense to take you to court and make you pay what you owe.
  • Probably means that the recent flap over a typo that misstated the royalty terms on certain deepwater leases will now go nowhere – which it should since the companies bid on those leases at auction paying for leases, which they thought, had terms which were too good to be true at the time – turns out they were. Great for CVX and DVN who most likely won’t have to pay upwards of $1B in royalties  on recent discoveries in the deep tertiary trend.
  • Conspiracy theorists get renewed vigor from their belief that Cheney is behind this.

SEC Wants HAL To Enter Tolling Pact Over Nigerian Squabble. The SEC wants HAL‘s agreement to suspend the statute of limitations while it investigates allegations that HAL bribed Nigerian officials prior to the construction of a natural gas liquifaction facility. It’s hard to believe that HAL could have any part in something so seedy. 

Earnings Watch:

  • DVN reported $1.63 vs $1.52 estimate. Production would have been off slightly if not for acquired volumes so YoY it’s not growing. Lessor hedge position than peers allowed 21% drop in gas price realizations. Operating highlights were a rehash of the quarter’s PRs about its deepwater program – impressive but you guys aren’t growing and the tertiary deepwater stuff is a long way off.

— Specifically onshore activity in the Barnett Shale isn’t offsetting declines elsewhere (especially Canadian gas and U.S. oil) – organic growth would be nice.

 

— per unit costs accelerated for LOE and G&A. No guidance published as of yet.

  • HOC reported a small beat. Key statement: “Our income from continuing operations continues to surpass prior years’ levels, and has already placed us on track for another record year (what they just reported)…However, refined product margins have recently declined somewhat from the very high levels experienced in the spring and summer months.” (what they will report in 4Q)

— Company showed pretty good cost control and while refinery margins were up YoY they are on average lower so far in the 4Q.

— Sale prices from their Wood Cross refinery were close to $95 / barrel (average 3q) which is extremely high and won’t be repeated in the near future.

–All in all, a pretty good quarter but so was VLOs. At 2x the price (on a forward PE basis), HOC‘s share price has room to consolidate with product prices while maintaining its premium multiple.

  • PTEN reports narrow beat on top and bottom lines ($1.12 vs $1.08est, $674mm vs $669mm est). 

–Key statements: While the high level of activity in our industry contributed to increased pricing for drilling services, it also contributed to substantial increases in compensation and repair costs during the quarter.” and,

“The current gas storage overhang combined with the effect of some customer budgets that are running low and have not yet been replenished, have resulted in some recent moderation of demand in certain markets” – sorry to be like the guys picking apart Bernacke’s verbiage but these guys are very careful with wording and this is new speak for them.

–Embezzlement costs on the income statement. Yes, I know it’s old news but I’ve got laugh when I see this as a line item. – Embezzlement costs, net of recovery. It was negative this quarter so I guess they sold off some their former boss’ gold plated seat covers.

–Balance Sheet Notes: Depleted cash hard this year while building current liabilities and adding some long term debt ($65mm vs $0 at year end). Hmmm, most energy companies are using current high levels of cash flow to strengthen their balance sheets , not to weaken them so they can maintain their buybacks. That reminds me, these guys would have missed estimates had they not continued to buyback half this year’s repurchases during the third quarter.

–Bid up big preopen so I may get a chance to add to puts. 

Analyst Watch: IMO to neutral from buy at UBS, HNR cut to neutral at MorKeg, BJS price target at FBR cut from $47 to $38 but still outperform. MRO PT upped from $72 to $79 but still a neutral.

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21 Responses to “Wednesday Morning – Too Many Tricks”

  1. zmann said

    SU downgraded by S&P to hold on valuation

  2. PB said

    Z-man,

    Great site, half green half red what gives? Are they that confused they don’t know which way to go? Thanks.

  3. zmann said

    Thanks. That was the quickest failed rally on seemingly positive inventory data yet. I think the bar was set too high and traders knew. The estimates are taken from oil and gas analysts, not oil traders, and those guys are about as accurate as the economists who predict job growth and housing starts. Please. Glad to see the stocks giving it back here. Check and SU, VLO, XOM , DVN all with big tukrns at the data now giving up the ghost.

  4. zmann said

    HOC is next, theeiur numbers weren’t that good. Also see PTEN after earnings getting trashed. The cautionary statements are not made lightly by these guys.

  5. jim said

    man, i was ready to jump on xom, but decided to wait for your comments. i nearly got in at 65.50 mid oct b4 a trip. i was really upset at missing the move to above 70, and have been hair triggered ever since. still hoping to buy in lower b4 winter. thanks for your comments.

    thanks
    jb

  6. zmann said

    Sorry you missed the move. As I said yesterday, I’ve been dead wrong on those guys for a while now. I still see the fundamentals as poor for the industry from both oil and gas perspectives in the near term. Longer term, oil and gas should be lower than they currently are. If you like oil, XOM has been the safe bet but it’s not growing. If you’re looking for a stock to buy, you must be thinking the commodities will go higher. If that’s the idea, then SU for oil and I like CHK for gas. If playing calls, then XOM on any bad down day is probably ok because they almost always buy themselves off the bottom and usually retrace half the move. Like now, with XOM down a buck, if I were inclined to play (and I’m not) I’d take the 70 Nov calls for a day trade hoping XOM closes down only $0.50 and me sold and sleeping soundly.

  7. Attacking Mid said

    I’m on the sidelines waiting for a better short opportunity. I sold my SU puts this morning. Guess I should have bought ’em back. I still think we’ll get a good suckers’ rally. The frequent irrational buying of SU never ceases to amaze me.

    It looks like there’s starting to be some broad-based selling in the oil patch. I’m still looking for SU to go back to about $67, so I’ll be buying puts whenever one of those frequent irrational rallies happens.

    Haven’t followed HOC much, but it looks strong today. If it goes up much more, I may start looking at it for a short opportunity.

    Do you follow BQI (Canwest Petroleum)? It was my main trading stock for the first half of the year. Could be a good long term hold eventually, as they’re potentially sitting on a gold mine of bitumen. A surge in oil prices back over $70 would likely create a significant runup.

    AM.

  8. zmann said

    Hear ya sideline. Lots of games likely into Nymex close.
    Don’t know BQI closely but bitumen with oil over $70 is a nice bet if they’ve got size. Below $60 at year end and a lot of those plays will take a gut punch on PV10 so NAV will be more important than growth.

  9. chetg said

    Z — a good LNG read:
    http://energybulletin.net/21849.html

  10. zmann said

    Thanks chetg

    How about that prediction of XOM pairing their losses. Down only $0.35 from a buck at the time. Like clockwork. Got to take better advantage of the Euro close pump/ XOM buyback effect.

  11. I read that article on LNG when I scrolled down and saw the timg about the BP / Shell merger rumor. Wow, BP who can’t keep oil flowing in the US and North Sea, and Shell who can’t keep oil flowing in Nigeria and the North Sea. Sounds like a match made in heaven
    -SaneO

  12. zmann said

    XOM should buy both, fire upper and middle managements, stabilize production and make opec a non entity. Just a thought. The pump is fading fast by the way.

  13. For as much as I don’t like XOM at least they produce

    -SaneO

  14. zmann said

    If anyone has quest6ions, comments, suggestions for this blog I’m creating new suggestion box tab at the top. You guys have good ideas and I happy to hear ’em. Thanks for your continued readership.

  15. Thinking about mergers and such. I think oil might go the way of the steel industry. The 90’s and early 00’s were tough on the American steel industry. We had 5 major steel corps here where I live. Bad managment started to plague all of them. Now we have 2. Mittal bought 3 of them ( LTV, Inland and Bethelhem ) and US Steel bought National Steel. It is strange driving down Route 12 and the only signs you see are US Steel and Mittal, but on the other hand production is rocking and the layoffs have stopped. Mittal is not an American company, but like the oil majors, he is competing against state run companies to whom stockholders and dividens don’t mean crap. Just a thought.

    -SaneO

  16. zmann said

    It’s been underway for awhile in the oils but activity tends to peak around oil peaks. The majors and super independents get a much better deal form the service guys than the smaller E&P comanies and numerous mom and pops.

    The problem with that function is that the majors turned their backs on domestic crilling in the 1980s in favor of larger pools of oil in foreign countries. Occasionally they make a foray back into the states like COP buying BR earlier this year but for the most part, they want African assets.

    Strange they haven’t gotten into Latin America more but maybe they’re afraid of getting burned again. Russia could turn out to be a horrible problem for them in that vein.

  17. Latin America is a hornets nest that needs a can of Raid. Russia ( I Think ) has the policy of shut-up and produce or get out.

    -SaneO

  18. zmann said

    That’s shut and produce unless your contract was too lucrative for you. Then it’s shut up, renegotiate or get out

  19. true

  20. zmann said

    Drillers getting hammered today. It’s not about the results, it’s about the outlook. PTEN, PKD, and BRNC had good results but are diving along with the group. That talk about a slowing in NA gas drilling is starting to creep up in more reports.

  21. Attacking Mid said

    Yeah, I made a ton of money on PKZ when the buyout happened last year. Then lost a bit on Nelson Resources and Chapparal. Currently under water on a bit of BSKO, but will just hold long term. All are/were Kazakhstan plays.

    As corrupt as that part of the world is, one has to tread very carefully when investing. PKZ’s management was very shrewd, but it seems these others just didn’t/don’t have the same skill.

    I see SU’s falling more. I missed my opportunity to reload my put position. Perhaps tomorrow.

    AM.

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