zman’s Energy Brain

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Archive for November 6th, 2006

Monday Morning – Mid Term Elections, Winter Warmth, Prop 87

Posted by zmann on November 6, 2006

The Week That Was: Commodities up, stocks up

— Oil – up 1% to $59.14 – Nigerian rebels took hostages, threatened synchronized bombings while Iran fired off a broad array of missiles, plus a stronger than expected jobs report. I’m looking for a retest of $57.05 early this week.

— Gas – up 6% to $7.88 – it was cold.

– Stocks: XOI / XNG / OIH – all up 2% ish. XOM was also up 2% last week and set an interday all time high. This makes sense given XOM‘s Aug 7 strategic decision to no longer sell oil as denoted by this chart. As seen in the chart the company is now primarily in the business of buying back its own shares which is much more lucrative than searching for new oil fields scattered around the globe and then developing them, refining that oil into products and marketing it.

This Week: Unseasonable warmth and democrats to unsettle energy markets.

Weather or Republican Dream Tuesday? Sorry W, HAL, it’s the weather and it’s going to be downright hot for the second week of November. Maybe gas storage will see one more injection next week.

By the way, while artic air moves into the west next week the east coast, which saw all of the gas draw last week, heats up as seen here.
Mid Term Elections: If the House and Senate go democrat I don’t see a huge “big-business backlash sell off” but I thnk certain names (obviously HAL) but also some of the E&P names who want greater federal lands access and even gas gathering firms could come under near term pressure.

Nigeria Blows Over. Hostages to come home. So far no synchronized bombings which would take more organization than the rebels (generally just impoverished villagers) have shown to date.

Saddam To Hang. After a lengthy auto appeal process so don’t set your Tivo just yet. Iraq production was off about 140,000 bopd in October because the bad guys there do know how to blow things up.

OPEC Watch: If Opec cries wolf in a forest and no one is there to hear them will oil prices rise?

— Reuters survey showed OPEC oil output rose 70,000 bopd in October as a jump in supply from Nigeria outpaced cutbacks from Saudi Arabia, Iran and Iraq.

Moreover, Qatar has told Asian customers it will cut their supplies by 2.5 percent this month, a much smaller curb than those imposed by its Gulf peers (most of last month’s cuts were around 4%).

Opec president Edmund Daukoru said yesterday that another cut may be necessary when the cartel meets in December “because the market is still soft.” – Comment: when the price of anything falls 25% and inventories remain near record levels you have a problem, be it routers and hubs, gumballs, or oil.

Venezuela says Opec should cut another 300,000 bopd to add to the October 1.2 mm bopd cut. Could this be Hugo’s decline rate now?

$100 oil story. No facts but a lot of fear, five year open time frame makes it hard to refute but it could have easily been written 5 or 10 years ago.

US Economy- Slow week with the federal government closed on Friday for VD (veterans day) . Thursday is the busiest: look for another drop in consumer setiment which could put minor pressure on gasoline prices if off too far (below 90).

Prop 87 Brings Production Taxes To California, Potential Pain To Producers. It’s a heated topic with strong arguments on both sides but in a nutshell it would levy a production tax whose revenues would be used to fund alternative energy research. See a relatively unbiased breakdown of the story here.

— If you want to read a well thought out rant about this with more details check out Phil’s thoughts on Prop 87. This tax is overdue. States with any production at all have severance and or ad valorem taxes but Cali doesn’t and produces 12% of the nation’s oil (and believe me I don’t take taxes lightly).

–This measure is not so good for a host of local oil producers including CVX, OXY, and XOM but these are all too large and diverse to really feel the pinch (although OXY‘s share price might notice it for a time).

–I think the best play on the outcome of the event is in the shares of California heavy oil producer BRY (a perenial earnings disappointer who’s at bat Nov 8). The company’s production is 74% heavy oil (where margins are lower) and 74% of its reserves are in California. Earnings estimates have been falling with crude prices and a 6% production tax would hamper their recently announced plans to develop a new heavy oil play in the Sunset strip which just became economicaly feasible.

–Over the weekend both sides of Prop 87 indicated they are ahead in the polls so it’s a gamble either way and current BRY option bid/ask spreads would make a straddle fairly costly at present. I’ll do a little more political news watching/reading than usual and either go directional based on that or, if we get a volatile energy day, wade into a straddle over the course of the day.

Holdings Watch:

CHK and SWN have announced they’re building their own rigs due to rig shortages largely attributable to increased drilling in the Barnett Shale. Day rates for Barnett capable rigs are up 3x in as many years to almost $21,000. That’s real money when you consider these wells average about 23 days to drill (2003: $161K, 2006: $483K and that’s just the rig, not the service costs) . No wonder these guys think $8 nat gas is a bargain! This is good, this is how markets come back into balance and the E&Ps are flush with cash so watch out PTEN, they’re diluting you (although it’s going to be a slow process).

APC Sold 2 deepwater GOM discoveries and a prospect for $0.9 B as part of a continuing effort to restreamline their capital structure. They report today so I’ll have an update in comments.
Analyst Watch: Nothing so far, got an early meeting so I’ll post anything noteworthy in comments.

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