Wednesday Morning – Inventory Day
Posted by zmann on November 22, 2006
Oil Inventories, Light Draws Expected: Prices dipping back below $60 early and we remain in a downtrend channel. While TAPS tanker loading was shut down for the last week the pipeline system is operating at 25% of capacity (filling storage tanks I assume), not the 75% of capacity I stated yesterday. Also, you’ve got two major refineries unexpectedly down furthering the crimp on products inventories. Inventory expectations are still set up for light draws (less than 1mm bls) so the analysts are doing their job of bagging the street.
Gas Inventories: Today at 12:30. I’m looking for a draw of 15-25 Bcf. It’s pretty hard to estimate this time of year but last week was a bit colder than originally forecast. I’d make the point that inventories are near record highs and that we’re really not pulling anywhere near the normal amount of gas from storage as we get deeper into November but you’ve heard that too many times. Never-mind that weather continues to remain unseasonable warm just about everywhere:
Bottom line on gas prices: I think if we get a number of 30 or more on the draw side it supports $8+ gas, if not, gas will begin to sell off, slowly at first. You should have plenty of time to decide on stocks because 1) there’s no chance of a build in inventories that would absolutely shock the market, and 2) you, me and about five other guys are paying any attention to this today. Ok, maybe 10 other guys. Stocks will pick a direction within 30 minutes of inventories and drift that way all day.
TSO vs MRO. Walter asked which was the better short candidate so I looked at the two in a mutually exclusive vacuum. Up front I’ll disclose that I”ve got puts on VLO now and really don’t like the price tag on HOC. If I were going to short one of these two (buy puts in my case) it would be TSO for a longer term play and MRO for very short trades. Although MRO is tempting as a proxy for a longer term reversal in the group it’s too strong right now for puts and is a dangerous long term short (see below).
Here’s the short path to the thought process behind that decision with the acknowledgement that it was 20 minutes of work, and it’s not a recommendation of any kind. Both stocks move in generally the same direction (with oil) so I look for which one is more likely to be mispriced, which is more or less vulnerable to specific events, what the insiders have been doing at each, and a lot of other quick checks. Usually I don’t look for stocks to buy or short. Instead, I look at fundamentals of the industry and break that down into smaller and smaller trends letting buys and sells fall out of the process…but here goes.
— TSO – straight up refining ; — MRO – integrated oil & gas
— forward P/E to 5 yr exp PEG:
— TSO (8.6x; 1.59) Peers: VLO (7.6x; 2.1), SUN (9.3x; 0.6), HOC (14.5x), WNR (11.5x, 2.5)
— MRO (8.8; 0.6) Peers: XOM (11.7x; 1.4) MUR (13.7x; 1.2) CVX (9.3x; 1.3)
— earnings revision trend:
—TSO – recent uptick in crack spreads has yielded a halt in eps reductions. TSO is set to make $10.69 for 2006 but only $7.88 for 2007 . Although the other refiners are also expected to make less next year (reduced crack expectations) this is the worst drop in the group.
—MRO – down slightly over last 3 months as oil has flallen, pretty steep drop to outyear estimate as analysts are expecting lower price decks to prevail next year. While the near term reductions are pretty much in line with its peers, the outyear drop is cause for concern.
— Insider activity: – TSO – 1% sold last 6 months – meaningless; MRO – sold a little more but who could blame them up here.
–Technical – TSO – just made a minor breakout although it’s on the back of a very short term trend (holiday gasoline demand); MRO – pretty strong, within a stone’s throw of all time highs.
— Options – both are expensive with larger than necessary spreads but both are liquid.
— Events: MRO is part E&P company so you have the risk of them hitting it big somewhere although given their size it would have to be really big. Also, they’ve long been rumored to be a takeout target and while I wouldn’t worry about that happening during a trade (it’s like worrying about lighting on the golf course) it does lend support to the stock.
Analyst Watch: ECA price target raised from $53 to $58 at RBC. This come’s on the heels of Encana completing the monetization of its storage assets which produced a $1.5 B in cash but is curious in the face of declining oil prices which are more damaging to oil sands projects thn conventioal oil development. I guess RBC is counting on natural gas prices remaining high.