zman’s Energy Brain

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Friday – Watching The Paint Dry

Posted by zmann on December 22, 2006

Merry Christmas. Happy Rest Of Hanukkah. I may take up Festivus as well if I get to invite anyone I want for the “airing of grievances” (OPEC, MEND, all the little Kim Jong wannabes, CNBC, Adninejad, BP, permabull analysts, natural gas traders, etc) but only if I get to kick them out before they get a shot at pinning the host (me) to the floor.

Thursday Was Another Red Day For The Energy Markets. Yippee.

  • Oil quit faking it in the wake of the reopening of the Houston Ship Channel and the sheepish admission by certain television personalities that Wednesday’s oil inventory numbers were bearish, not bullish. Feb crude fell $1.07 to $62.65. Initial support is at $62.30 (yesterday’s low) and oil must hold $61.50 or risk a real tumble.
  • Natural gas withdrawals came in a touch higher than expected at 71 Bcf. My premise for yesterday’s over-long post wasn’t flawed and given all the cautionary, “don’t front run this number at home” language, I was simply wrong but not disastrously so. I would have expected a bigger bounce (oohhh, 3 cents up on the day!) on the bigger number but storage still looks like this and weather forecasts remain mild through year end. This week marked the first time in nearly two years that the January gas contract traded below $7 and gas is busy giving back those 3 cents this morning, now down $0.08.

Today is really a holiday for the big wigs on Wall Street. With the kids left in charge of trading and few fund managers in the office I’m expecting light volume with periods of intense volatility in the morning followed by an afternoon of boredom and then sunshine for the weekend.
EEE: Not happy with this trade to date as it took a big bounce on 2x volume mid week. No news but I’d say a hedge fund is doubling down in helter skelter fashion in an attempt to reverse the downtrend. While I have the utmost respect for EEE’s new management I do have a List of Grievances particular to their current game-plan that forces me to re-access my prior thoughts on Calls in the New Year. I’m strongly considering doubling down on the puts today or next week.

  1. Visibility on commercial sales of their improved coal product (kfuel) is less than perfect. They produced trainloads (how many?) for test burns but it doesn’t look like a buyer is taking the product from continuous operation of the facility.
  2. The secondary offering they did in February at more than 2x the current price raised a lot of cash which they are burning through at higher than expected rates. After the third quarter they slashed expected capex in half for 2006 after buying a coal mine in the eastern US.
  3. That coal mine gave them revenues but no supply for their facility in Wyoming. Hmmmm. It obscures the fact that they still aren’t selling commercial quantities of their clean coal product.
  4. They bought that Ohio coal mine at just about the all time peak for eastern coal prices. Operating margins are a slim 8% compared to industry at 20% but it’s better than negative. While it can be said that the coal mine gives them an entree into the coal markets to me it looks like they did it so that they’re revenues wouldn’t remain in single digit midget status any longer. They called this part of their plan to transition from an energy technology company to an energy delivery company. Hope they got a good deal on the mine. Fore $37 million dollars, you’d think they’d mention the mine’s reserves but nope.
  5. G&A costs have skyrocketed as they ramp up to the commercial sales launch of the kfuel product and hire consultants to systematize the process for future facilities. G&A was more than double the nine month period last and more than triple the 3Q of 2005.
  6. In the 3Q press release they comment that they shipped kfuel to several customers as the plant operations ramped up. They didn’t say how much product they moved but kfuel revenues were only $192,000 for the quarter:
    1. at $40 ton that would be just under 5,000 tons
    2. theri new plant’s capacity is 750,000 tons per year (TPY) and one quarter’s capacity would be 187,500 capacity.
    3. 5,000/187,500 = 2.6% of capacity during 3Q
    4. hopefully they can beat that in 4Q – one of their stated goals is to maintain production at the plant – maybe they’re doing so and utilization is much higher and they’re just storing it on site. Sure.
  7. One Thing They Must Learn – Underpromise and Over Deliver. They’re barely off the ground but the latest presentation has a slide that says that the first 750,000 TPY plant “is only the beginning. Plans to achieve 50 MILLION TPY in 5 YEARS).” Please don’t make me laugh that hard. They brag about how they broke ground on this plant in December 2004 and were commissioned for production in early 2006 but I remember when they pre-ordered all the parts in early 2003 and the old management team then claimed to have broken ground much earlier. Goes to credibility.
  8. Coal prices look like they’re going to continue to weaken into 2007 putting pressure on prices for kfuel as it competes against high btu eastern coals. The flipside to this is that at least their feestock coal (Powder River (PRB) is getting cheaper as well.
  9. Check out the website. They used to take polaroids of all the activity from construction of the kfuel production facility to loading of the first (and only?) train of finished product. I guess it was effort to prove they were for real. They even have videos of them loading the first train shipment in August. What have you done for me lately? Time to get the camera out again boys. We need some new Christmas snaps.
  10. ACI bailed on signing contracts with EEE after over 3 years of evaluation. Why?

None of this is new information but as the stocked jumped 28% this week on no news it makes me all the more curious.
Speaking of coal, here are some new charts that tell part of the story of why coals prices are starting to fall.

As A Result Of Consecutive Years Of Increased Production...

coal-prod-through-oct-2006.JPG

Note: The preceding chart is somewhat misleading and I don’t mean to overstate the case for production. While coal production is up it is being driven by a huge upswing in production of low BTU coal from Wyoming. Higher BTU coal from Appalachia is off about 1% this year but the 10% growth in the cheaper PRB coal of Wyoming overshadows this fact. On a total energy delivered basis production is up only ever so slightly (however, coal prices don’t seem to care and continue to fall).

…Coal Inventories Have Rebounded From Recent Lows…

coal-prod-through-aug-2006.JPG


…And coal prices have moderated.

coal-prices-122106.JPG
I Continue to hold on to BTU and ACI puts. Natural gas is leading coal lower. We may trade sideways over the next week as traders access next week’s withdrawal which I think will be around 100 Bcf. Tuesday we’ll have a better read on weather through the last week of 2006 which should let us peg just how bad December was for heating demand.

Thank-you from the bottom of my energy driven brain for reading and your questions and comments. Hope you have a great holiday and that you don’t get pinned to the floor, especially by any of my trading ideas! I’ll have one eye on the market today, one on the continuing effort to convert my CD collection to itunes, and a third?! on watching the ongoing holiday preparations swirling about my home. GLTYA!

Shameless But Selfless Plug: If you don’t read Phil’s Stock World you should.

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18 Responses to “Friday – Watching The Paint Dry”

  1. zmann said

    Putn put the screws to Shell. Gasprom just bought 50% + 1 share to control the massive Sakhalin Island 2 LNG project for $7.5 billion.

    On a $ per barrel of reserves basis it’s $4, much less than what the Russian oil companies are trading at: closer to $5

    After the deal was done Putin said that the environmental issues that had forced the sale had largely been resolved.

    How long until Putin puts XOM over a barrel on Sakalin 1?

    Hope I don’t turn up with radiation sickness for writing this but the guy’s a true gangster.

  2. zmann said

    Goldman cuts oil forecast for 2007 while maintain perma bull status.

    Goldman Sachs, the most bullish investment bank on oil prices earlier this year, has cut its forecast for U.S. crude in 2007 by $3 to $72.50 a barrel to reflect higher inventories, but still sees oil hitting $75.

    “We maintain our view that WTI prices will reach $75 a barrel by next year. But we now believe that it will take longer to reach and are modestly reducing our annual 2007 WTI price forecast,” the company said in a report.

    The Goldman report, led by its head of commodities research Jeffrey Currie, said its forecast suggested more stable prices next year that would reduce the drag on demand, which it saw as growing 1.5 million bpd against a supply rise of 1.3 million bpd.

  3. zmann said

    Talk about inflation: rig rates continue to spiral out of control.

    http://www.rigzone.com/analysis/rigs/insight.asp?i_id=255

    Highlights:

    Offshore rig utilization remained consistantly about 86% all year with the weakest month coming in January (85%)and the strongest being this month (87%)

    Average rates climbed $3,000 per month starting just below $100K/day and ending over 135K /day

    On hihg end rigs the inflation has been even more excessive: more rigs are earning over $400K / day now than were earnings over $300K/day last year at this time.

    Oh and more rigs were delivered into service than at any time over the last 6 years.

    Sounds like the housing market. Can you say bubble?

  4. zmann said

    Not a single downgrade or price target reduction out of Goldmann after a 4% reduction in the firm’s 2007 oil price forecast.

    Let me see now. Production times price = revenue – cash costs = cash flow / shares = CFPS. So if CFPS falls and your price targets stay same, you must increase the multiple.

    So we have increased multiples in an admittedly decline commodity price environment. Why bother you permabull?!

  5. I am surprised that GS even cut it’s oil price forecast.

    -SaneO

  6. zmann said

    LNG up because it’s spinning out one of its LNG development companies. Majority of the shares to be sold don’t even go to it but are from a selling sharehold. Now repeat after me. Very close to shorting here with the stock up 9% and the rest of the group getting an xmas mugging.

  7. Jon said

    Careful shorting LNG! Did that last month after a similar jump to 28, then watched it go to 32 as my puts melted away.

  8. zmann said

    Jon – yup I was right there with you. I’m thinking about it

    BTU and MUR working well this am as nat gas and oil are weakening into the Brown Christmas.

  9. Attacking Mid said

    Well, other than some legacy (read, way under water) penny stocks, I’m all cash. Had a good week and don’t feel confident enough in anything at the moment to justify fretting over the Christmas holiday.

    Regarding Phil’s site, I gave up on him due to his very distasteful (to me) political commentaries. When someone has a world view that is 180 degrees different, I just can’t really take anything he says seriously.

    I appreciate that this site doesn’t really get into political footballing. I have plenty of openmindedness to listen to reasonable differing opinions, but I don’t find it of much use when it comes to investing. Emotions are a trader’s enemy, and political jabs are a surefire way to get me (and most people, I presume) emotionally charged.

    I’d rather debate which way XYZ Oil Co. is going to move.

    Best of luck and may God bless you and your family this Christmas season.

    AM.

  10. Attacking Mid said

    MUR gave you a nice little downdraft. Hopefully you took some profits off the table. I love holding an option position and occasionally getting an opportunity to sell high and buy back lower. If you’ve got the longer term direction right, it can really make for a winning series of trades.

    AM.

  11. zmann said

    Hear ya on the politics. Phil’s a good egg and a smart trader. He just feels strongly about the administration.

    My site actually has politics in the subtitle but it’s a rare day when I actually write anything about it. When I do I feel like I sound like Mel Gibson in Conspiracy Theory and that’s not good!

    Merry Christmas and God bless you and yours as you dig out from the storm.

  12. zmann said

    Thinking hard about taking getting some NEM puts. Gold looks like it may go for a $600 test week.

  13. zmann said

    MUR – not yet…I’m being patient on that one. Hey, what do you call a patient options trader? Smart if he hasn’t bought yet and broke if he has. 😉

  14. zmann said

    EEE backing off … low volume day but I’ll take a 5% drop no matter

  15. walter said

    Merry Christmas everyone!
    Thanks for the discussions, comments and great stock ideas. God Bless!

  16. Jon said

    Merry Christmas, all.

    I’m off to get the shopping done and boost those retail stocks! Go BBY!

  17. joe blogg said

    Thanks for that
    Merry Christmas

  18. Lou said

    Merry Christmas to all, thanks Zmann for your everyday generosity.

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