Wednesday Morning – Too Many Tricks

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.