zman’s Energy Brain

oil, gas, stocks, etc…

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Thursday Morning-Inventories, To Draw Or Not To Draw?

Posted by zmann on November 2, 2006

Gas Inventory Day. Oooooh, Aaaahhhh. We could get a pull given the cold weather but I still doubt it. Last week’s number was unbelievable low. Here’s my take on that. If we get a pull (which some analysts are now forecasting) gas will trade briefly back over $8 which might be a good thing as it could flush out some hedge funds who could made their bet and have a quick, sizable gain. I’m still going with 20 to 25 but the street ranges from a draw of 29 to a build of 35 so simply stated, a draw will boost prices, a build will tear them down.

Oil Notes. I forgot to add to last night’s comments that refinery utilization inched up as the maintenance season begins to wind down. Although gasoline rocked on the bigger than expected draw the effect will be fleeting as refineries gear production back up.

— Note to EIA: you really should proof read your releases, while the summary paragraph shows refinery utilization increasing, the table below shows it falling.

— Shell is restarting 47,000 bopd of villager halted production. No word on BPs lifeboat inhibited rates in Norway.
SZE Gets Coastguard Approval for Florida LNG Receiving Facility. See story. SZE has the necessary size ($75 billion TEV) and know how 1) they are building a new facility (Neptune to open 2009) to serve the Boston market, and 2) they currently operate Everett, MA LNG facility and another in Belgium, and 3) operates a broad portfolio of power generation and other energy assets. Moreover, their Florida facility is a choice location given the hundreds of Tcf discovered on and around Trinidad. This is not an add for them as much its a continuing critique over the valuation and chances of success for LNG (the company). See my past article on LNG here.

Dominion Punting E&P Arm. Five years ago Dominion, another broad portfolio energy player, bought Louis Dreyfus Natural Gas (LD) (of which Julia from Seinfeld is an heir so all that comedy is just a hobby) for $2.3 billion. And now they’re selling them.
At the time of purchase LD had about 2 Tcfe of proved and 2 Tcfe of unproved, mostly gassy reserves. D had about 3 Tcf so the 5.5 Tcfe of proved reserves they’re selling now is Ok (they’ve been developing and selling those reserves all this time plus they’re keeping about 1 Tcf of low risk reserves for themselves in Appalachia).

  • What’ll be interesting to see is the pricing the underwriters put on those reserves. Either way remember the axiom, “Buy Low, Sell HIGH”. Dominion made that purchase when gas was trading around $3 per Mcf. I wonder why they don’t just roll it back out as a public company. Maybe because this way they can wash their hands of the assets whereas there is no way to spin out 100% of the deal and still get it done. Alarm bells are ringing.
  • By the way, these guys own and operate a large network of natural gas pipelines and storage facilities so they know a little bit about the commodity. I’m not saying anything about a trade on D here, just finding more evidence that gas is over priced.

CNQ Takes The Axes To Canadian Drilling Activity. Will drill only 423 natural gas wells in 2007, down 43% from 2006. From Wednesday’s conference call, “We can step back somewhat from this overheated market.” In August, CNQ said it was scaling back the number of gas wells it would drill in the 2H06 by about half, the result of lower natural gas prices and a desire to expand its crude drilling program. However, now it only plans less than a 2% increase in North American crude wells in 2007. Comment: Service guys and drillers should be getting nervous.

Stocks of Interest:

SFY Continues To Roll. Announces a crushing beat ($1.68 vs $1.33 est), ups production guidance range, and shows good cost control with per unit LOE diving 24% (which is unheard of these days). This is pretty oily but they continue to ring up exploration and exploitation success in Louisiana. Their international stuff in New Zealand has not done so great of late – hopefully they’ll sell that but I doubt it. If oil gets whacked over the next few months, SFY will be one to watch for a rebound.

TSO – big beat but these guys are in “what have you done for me lately land” .

I’ll put out an earnings addendum later today with more comments. Gotta bop.

Analyst Watch: Funny thing, both CNQ and D caught downgrades. this morning. I keep telling these companies that if they cut production growth the analysts think that’s bad and punish them but they just don’t listen. BHI and PXD received upgrades.

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15 Responses to “Thursday Morning-Inventories, To Draw Or Not To Draw?”

  1. Gungagalonga said

    Z– I’m sticking my neck out there and calling for a 22 Bcf draw. We’ll get a a rally in Dec NG but it will be short lived as traders focus on more benign approaching weather patterns.

    I must note that my record on predicting storage numbers stinks at best.

  2. zmann said

    Bad gunga, bad gunga! But…you just might be right since you’re record is far better than mine. Having fun laughing at the site daily are we?

  3. Gungagalonga said

    Yes… yes… I laugh at the Zmann on a daily basis. Life dosn’t get better than this!

    Seriously, I respect and admire your deep, detailed analysis on energy. HAve you done this before?

    On to the storage number…

    9 Bcf draw!

    I bite…

  4. zmann said

    Ouch. They’re selling natty gas off on it anyway. Seems we’re due a build next week.

  5. Attacking Mid said

    I looked at HOC this morning, z, but I didn’t jump on the puts in time – wish I had. Oh well, the good news is that SU stock buyers gave me an opportunity to reload my SU put position at just slightly lower cost than what I sold for yesterday. Never underestimate the irrationality of SU stock buyers!

    I have dabbled off and on with PGH – a Canadian Royalty Trust. Often have parked money there if I didn’t know what else to do. I’m thinking these things are getting substantially oversold due to the proposed tax legislation recently announced. Any thoughts?

    AM.

  6. zmann said

    APC saying it could issue $3 billion new equity. Like I said, by low, sell high.

    AM, think that’s a good idea here for the dividends at least over the winter months. Gas could crack but so far so good.

  7. walter said

    Interesting blog, thanks Zman!
    what do you guys think about VLO puts right now? Looks like the stock wants to go under $50

    thanks!

  8. Jon said

    You might like some of the US royalty trusts like SBR, PBT and SJT.

    I had PGH and PVX and was unpleasantly surprised to find that Canada had witheld 15% of the royalties for the IRS, and that I had to submit Canadian tax forms to have it refunded. A “royal” pain. I suppose if your position is large enough and you have a tax accountant the extra royalty may be worthwhile.

    The US trusts are easier for me to deal with and the dividends are almost as good.

  9. zmann said

    Walter,

    I like em. The move on gasoline today is pretty suspect so it probably won’t last through the weekend. Heatng oil is down and the recent stability in spreads has weakened a lot in the last few days. Its best to catch them on up days or interday peaks and play pretty fast since any pop in oil sends these guys flying

  10. zmann said

    VLO getting whaled on late. TSO and maybe HOC shouldn’t be far behind but they may need more out of oil or for their leader (VLO) to break that $50 mark. Very tempted to pick that up now but, must, fight, urge, to, buy, more, oil, puts. Drowning in them now.

  11. walter said

    great advice- much appreciated!
    will be reading this blog daily.

    walter

  12. zmann said

    Thanks. I wish I’d taken my own advice on SFY this am. That stock started off slow and closed up 4%. Not too shabby. On a day when oil didn’t drop a percent it would have been up 50% more. Still like them on pullback.

  13. zmann said

    SU rallied with the mid day oil pump and for the second day kept most of its gains. XOM and the other majors sold off but then bought enough themselves to go green on the day.

    Another trading day for crude like today’s and we break $57 but they’ll fight like hell to keep it up plus they’ve got Iran and other crazies for support going into the weekend so I bet we settle in just short. The stocks will break if oil could close below $57. Sorry, should break.

  14. Attacking Mid said

    If oil stays under $60 for much longer (and I think it will – barring a significant news event), then at some point, won’t the oil co’s need to start issuing lowered guidance for the 4th qtr? It’s as if the buyers of these stocks are ignoring the reality of profits dropping by 20% or more – leaving P.E.’s way out of range for the sector. Perhaps a reading of _The Emperor’s New Clothes_ is in order for these shareholders.

    AM.

  15. zmann said

    What’s funny is that for the last 2 months (mostly October) analysts have been quietly shaving numbers back without downgrading stocks (except lehman who downgraded at the very bottom for the XOI). Analysts had 4Q oil as of 2 weeks ago at $67.50, so now they’ll have to cutt numbers for 4Q and start looking hard at 2007, which is also still above $65 I think. Although this time they can draw it out even longer since year end reporting won’t happend until February.

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