zman’s Energy Brain

oil, gas, stocks, etc…

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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:

weather1122.JPG

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.

Industry:

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.

mrotso1122.JPG

— 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.

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23 Responses to “Wednesday Morning – Inventory Day”

  1. Soccer_F1 said

    TSO way up today while VLO is flat (XOM is actually down)

  2. Soccer_F1 said

    U.S. crude supply up 5.1 mln brls last week: Energy Dept.

    U.S. distillate supply down 1.2 mln brls: Energy Dept.

    U.S. gasoline supply up 1.4 mln brls: Energy Dept.

  3. zmann said

    Thanks soccer. That crude build pushes even further ahead. I guess the LOOP was open. Pretty interesting and although it would be too early to see the effect of OPEC cuts it helps confirem reports that October volumes were rising relative to September. I’m sure part of this is max capacity of the loop taking crude from a queue of tankers. Crude is getting popped back to the downtrend line.

  4. zmann said

    LNG remains up here but will probably get popped with the group. Those guys are up almost 20% in a week for no real reason and now you’ve got insider sales. Comeon!

  5. zmann said

    Refinery utilization dropped to 87.1%. When this picks back up , which has got to be soon if the refiners care about their fourth quarter, the slide in product inventories will begin to slow (still falling with cooler weather on the heating oil side). The build in gasoline is the first in 6 weeks and should spell big trouble for the near term crack spreads.

  6. zmann said

    USO within $0.30 of all time low. XOI within 6% of it’s all time high. XOM withing 3% of all time high. This can’t continue forever. Analysts have got to be worried that maybe crude won’t rebound (as most of them think) in the near term.
    Liking the EOG, SU, VLO puts here as well. LNG due for a big pullback which we might get at 1:30 with the gas storage number.

  7. zmann said

    PBR announces Brazil oil output to jump above 2 mm bopd in 2007 as it adds 400,000 bopd from 4 offshore platforms. Between 2008-2011 it plans to add another 1.02 mm bopd. Take that pundits of non-opec supply growth.

  8. jon said

    Brazil – development of offshore oil fields which is the biggest reason they are energy independent, NOT just ethanol…

  9. zmann said

    NAT GAS INVENTORIES AT 12:00. Consensus is for a 7 bcf decline which looks light to me given the weather.

  10. walter said

    Zmann.
    what a great lesson on refiners!- your effort is much appreciated. I’ll look into VLO options as well.

    thank you!

  11. Soccer_F1 said

    Crude dropped to $58.55 yet some oil stocks barely moved today (APC down only $0.30).

    You know how this works.

    Crude will bounce back a few cents on Friday and oil stocks will rally.

  12. zmann said

    TAPS started tanker liftings last night. Began loading two tankers. TAPS storage was 85-90% full out of 7 mmbls capacity so look for another increase in crude imports in the report in 2 weeks.

  13. zmann said

    hear ya soccer…bounce back friday on a few pennies up.

    wow, nat gas only saw a draw of 1 bcf. that’s bearish, plain and simple.

  14. Soccer_F1 said

    U.S. natural gas supply down 1 bln cubic feet: Energy Dept.

  15. zmann said

    hear ya soccer…bounce back friday on a few pennies up.

    wow, nat gas only saw a draw of 1 bcf. that’s bearish, plain and simple. now they’ve got a guy on cnbc that says we were expecting a build in gas inventories. like hell. why? the stories I read showed a draw but cnbc finds a guy looking for a build. heating degree days were 120 vs 87 last week when got a small build. CNBC is full of crap.

  16. Soccer_F1 said

    CNBC (or its parent) clearly has a financial interest in oil/gas. That’s why the slant the “news” to the point it’s criminal

  17. zmann said

    From Marketwatch 1 hour ago: “analysts at Global Insight are expecting the government, in a separate report due at 12 noon Eastern, to show a 7 billion-cubic-foot decline in the nation’s natural-gas storage for the latest week. Analysts at Strategic Energy & Economic Research expected a decline of 2 billion.”

    CNBC brings out a guy who says consensus was for a build of 3 to 5 bcf so the 1 bcf draw is bullish. Holy smokes these guys are so biased and they don’t even try to cover it up.

    If we got a 7 bcf build on 87 HDDs a week ago and we have 120 HDDs this week, how do you expect a slightly smaller build? There’s no way. I’m shocked the draw wasn’t bigger. Natural gas almost has to sell off here. November is over half over and we haven’t pulled a B out of storage yet.

  18. zmann said

    What’s more important than their inability to report objectively is that demand ddin’t crank up with cooler temps much so next week (which is expected to show 136 HDDs) is probably going to yield only a small 15-20 BCF draw. Also, you’ve got people off for the holiday which kills some commerical and industrial usage. November is turning out to be a bust for gas demand giving us break going into winter and yielding higher trough storage at the end of March which is what all the analysts should be focusing on now.

  19. zmann said

    CNBC anchor just commetned on natural gas being down despite a bigger than expected draw?! These guys know nothing.

  20. CNBC Needs to shut up.

    -SaneO

  21. Bigger than expected draw. 1bcf draw vs. what? 0.5bcf draw? Keep reading that script by T. Boone

    -SaneO

  22. walter said

    Happy Thanksgiving everyone, and thanks for a great blog!

  23. Soccer_F1 said

    CNBC guys must be long oil & gas.

    They cannot possibly be so incompetent.

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