zman’s Energy Brain

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Archive for January 9th, 2007

Tuesday Morning – 1/9/07 – Energy Going Lower

Posted by zmann on January 9, 2007

Oil Is Plummeting In Pre Market Trading.After a pretty weak attempt at a rally yesterday morning oil closed off $0.22 to $56.09. In early morning trading it’s down $1.73 to a new low of $54.21.  The slide this morning is so far being attributed believe it or not to warm weather, doubts about Opec cuts (see below), and they possible cessation of the blockade of Russian oil going to Belarus (and thereby Germany and Poland).

Inventories Expected To Rise According To The Latest Bloomberg Survey: Normally  I’d say the following estimates are insane for this time of year and I do think the crude draw will be bigger but the other two really aren’t so rigged as to be obvious. There’s just so little weather bases demand and with refining cranking back up they are reasonable.  And the survey estimates are:

  • Crude Oil down half a million barrels
  • Distillate Up 2 mm bls
  • Gasoline Up 2.6 mm blsl

Opec: Once A Cheater… According to another Bloomberg survey, Opec output fell by 245,000 barrels a day last month and declined 550,000 barrels in November. Comment – That’s a far cry from 1.2 mm bls gentlemen of the cartel. That’s less cohesion than Ohio State’s offensive line last night! Saudi, if I were you I wouldn’t should the brunt of the cutback to support Iran…they’ve got a big army you know. That’s just me you do what you want but word has it they’re buying military hardware with those excess petro dollars. They can’t be worried about the U.S., we’re busy. Anyway…

Gas  Continues To Tread Water. Gas traded up $0.19 to $6.39 with oil on the hopes that an approaching cold air mass will prompt the first bit of serious demand this winter. This morning it is up a penny in the pre market but if the losses hold or build for oil today I’d expect we’ll get another shot at $6. Gas prices have been flat and then slightly up over the last two weeks despite the fact that only 93 Bcf of gas was pulled from storage in the back half of December. Average demand for gas in December general results in 450 to 500 Bcf being withdrawn over the month.

Analyst Watch: SJT from hold to Buy. I will buy puts on this (no matter the spread) if it pops. It’s a pure royatly trust completely dependent on the price of gas yet AG Edwards put it on the buy list. They also updraded HGT to Buy, another RT. BEXP goes from over to underweight at JP Morgan.  No stop in between means they messed up or ticked off the analyst. REP downgraded to Sell at Deutsche Bank.

Ratings Comment – The shear lack of names on the my daily analyst watch list over the last several months points to complacency. It tells me that Wall Street is building up an avalanche of downgrades but doesn’t believe commodity prices will force them to actually publish. While they aren’t really upgrading lots of stocks  the lack of downgrades and accompanying price target reductions is deafening. Silence is deadly.
Holdings Watch: Added back the BTU and doubled my APC position with some $42.50s to add to my $40s. Also added some OIIs on Phil’s suggestion – it was up 5% and was just too tempting to pass up.

Odds & Ends:

GE Buys Privately Held Oil Service Firm. I find this interesting both strategically and from a valuation metric standpoint. Pointing out strong global demand for energy,

  • General Electric Co. said yesterday that it agreed to buy oil services company Vetco Gray Inc. for $1.9 billion from a group of private equity funds. Vetco Gray provides drilling, completion and production equipment for oil and gas fields.
  • The business is forecast to generate more than $1.6 billion of sales in 2006. So it’s being purchased for 1.18x sales.
  • The market is valueing other service firms a little more: SLB (3.9x), BJS (2.6x), BHI (1.8x), and HAL (1.3x).
  • Based upon the multiples above it looks like GE got a pretty good deal. This would almost be a buyunder had Vetco been public. Not a good sign for pricing in the service sector if the private equity firms (including JP Morgan) let this one go so cheap! Maybe that’s what this chart of the OIH is telling you.

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