zman’s Energy Brain

oil, gas, stocks, etc…

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Thursday Thrashing – 1/11/07

Posted by zmann on January 11, 2007

Oil Got Waxed Yesterday…Again. And it’s down to $53.50 as I type this have dipped into $52 territory late last night. WOW. The February contract is down $8 since the beginning of the new year! Opec is once again calling on it’s members to comply with the cuts from October. Since it’s gas inventory day I’m going to devote most of today’s post to gas and the stocks but what a humiliating kick in the crotch for Opec! You guys had better skip the teleconference and catch a charter to Dubai. Of course a call to your local MEND representative wouldn’t hurt either. But if you really want to raise oil prices you’ve got to think big:

  • How About Taking A Week Long Production Holiday? Let’s see, that’s 26.5 million bopd for 7 days or 185.5 million bls off the world market in one week at a cost to you (Opec) of $55, $54, $53 per barrel which comes to $9.8 billion you won’t be seeing that week. We’ve got to have everybody in on this. No cheating…I’m looking at you Iran and Venezuela.
  • However, On The 8th Day You Start Pumping. And you pump more oil than before. You pump 30 million bopd even on the weekends.
  • On the dawn of the eighth day the NYMEX takes your oil of your hands for a much more respectable $100/barrel and the price drops by say $10 /week for the first 4 weeks and then holds at $60.
  • It’s A Win-Win-Win For You Guys. First, you’re paid out with the pop to $100 and the increased production in about 4 days. Secondly, your weekly revenues at $60 are 28% or $2.8 billion higher than when you started, and lastly, no one will ever accuse you of crying wolf again.

Goldman Sachs Sees Oil Rebounding, Not A Little But A Lot. This a direct quote. “We would see some weakness forthcoming,” probably “below $50,” but then oil prices are going to rebound to “the high 60s,” said Jim O’Neill, the head of global economic research at Goldman Sachs Group Inc. “The underlying influence of high users, China, India, is becoming more important.” Two words: Perma Bull. Hurray, It’s Natural Gas Inventory Day!

  • My Estimate: 42 Bcf withdrawal based upon heating degree days of 147.
  • Consensus: 45 Bcf with a range of 37 to 75 according to Bloomberg. 75! Really?! You need to get out more pal. It could happen (it’s a survey and a government run one at that ) but I doubt it.
  • Weather Comment: It’s getting colder this weekend and for the next month if Accuweather has anything to say about it. Next week’s number will be pretty small for this time of year as well as HDDs are expected to only rise to 173 this week. Moreover, looking at the scattering of degree days the coolest stuff was out west and not in the heartland where we can tunnel through a lot of gas in a week. That’s the first 12 days of January all shot to heck as far as gas demand goes.

hddwithdrawal011007.JPG

EIA Chops Its Forecast For 2007 Gas Prices. EIA now expects Henry Hub to average $7.06 /Mcf this year, down 10% from its estimate last month of $7.87. Comment – none other than to say they’re still too high. We should be at $5 in late February or early March unless NYC freezes over for at least a month.

The Stocks: Energy stocks continued to suffer as oil made a series of lower highs and lower lows yesterday.

  • The XOI broke through my 1,100 key support level, rallied briefly back over it but then settled near its lows of the day down 1.7% at 1,097. Minor support is at 1,080 followed by stouter stuff at 1,045. That 1,045 level was set in the last week of September when oil was $10 higher than current levels.
  • The XNG continues to slide but only modestly. Held up by the approaching cold, or as traders are calling it, “The Great Arctic Hope” the gassy stocks of the XNG are slowly conceding to oil and the fact that everyone knows it needs to get cold and stay cold through March just to support current gas prices. The XNG flirted with its 200 dma yesterday for the second time in a week and once through it, is set to fall at least 6% to support in the 397. It won’t happen for two weeks but it will happen. You don’t want to talk about levels lower than that because there’s absolutely no support and the go money won’t be able to find a wide enough doorway to run through. I’m thinking that’s what’ll happen beginning mid February.
  • OIH – You’d think business was terrible here. Not so but see below. Technically speaking this group has gotten bashed. I’d expect weakness to continue as long as oil trudges toward $50 but to moderate towards the 119 level. On a minor bounce I like puts in BHI and PTEN but am currently underexposed to the group with only a small position in OII.

BTU Catches Two Upgrades And Closes Up $0.22. What can I say to those analysts but the trend is not your friend. This week, coal has taken a hiatus from the daily pounding it was taking and CNX got an upgrade as well but it still wasn’t enough to light a fire (so to speak) under the coal sector. Of course, overproduction will do that to an industry.

NOAA To Speak On El Nino Today. They do this once a month and the last release was December 7th when they said the event was strengthening and was likely to continue to strengthen over the next 1 to 3 months. Traders are likely to read this very quickly. If the report says weakening has occurred (Pacific SSTs are moving towards the long term mean) then look for gas to make a run on $7. Unfortunately no time of day is specified for the release so I’ll just hit refresh here periodically.

Analyst’s Continue To Quietly Cut Numbers. The following is an overly simplistic yet effective snapshot of how the analyst community is treating the recent slide in commodity prices. The table shows the change in consensus EPS estimates over the last 30 days for the current and next quarters as well as next year. It also shows the corresponding change in stock price and the current forward PE multiple. This last bit of data is useless in a vacuum (without the historical framework that I am very slowly adding to the Valuation tab) but it does let you compare peers.

  • For instance, it’s interesting to note that while XOM is the most expensive of the Majors (in terms of forward PE) it has fallen the least over the last month.
  • Conversely, MUR a name I have often picked as being a mini-major without the benefits of a massive buyback is also the most expensive in its group but has fallen the most.
  • Also of note is the brutal but very quiet slashing of estimates going on the E&P group. Note that the longer reserve life gassy guys carry some pretty astonishing forward multiples. SWN I don’t touch on the short side however EOG has been a favorite pummeling post of late and still has room to fall.
  • The refiners as well have their own set of problems but this data doesn’t show much except that I think yahoo Finance has some bad data for the fourth quarter on TSO.
  • Finally, I’ve included an assortment of service and drilling names which should be categorized separately for valuation purposes however my point here was to show that Wall Street hasn’t been changing estimates here. In this case it’s not that the estimates aren’t falling like the other groups but it is that they ARE NOT rising. Looking back three months ago you would have seen continually rising numbers from the prior three months. We have anecdotal evidence that rates (at least onshore) will be coming down soon as rigs are freed up. Further, service costs could not continue rising or the only company capable of paying for them would have had to be selling Ipods.

valuation-11007.JPG

Analyst Watch: Nothing. Like I said…very quiet.

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37 Responses to “Thursday Thrashing – 1/11/07”

  1. zmann said

    Forgot to add in comments yesterday that Putin reopened the friendship pipeline yesterday and people attributing part of yesterday’s late session slide to that.

  2. zmann said

    Natural gas off $0.24 in pre market. Traders are starting to doubt the veracity of the “month of cold” weather forecasts.

  3. help said

    wow..Your Analysis is awesome. You are gifted

  4. zmann said

    Stop…you’re making me blush. I’ll be out of pocket until 10 minutes after the open.

    Still no resolution to the time stamp issue. I found a way to do it with a new template but then I lose my widgets and blogroll. Will work on it over the weekend.

  5. […] inventories are out today and Zman has an excellent look ahead posted already (at least one of us is on top of things today) and makes a great case for an […]

  6. zmann said

    Bargain hunting. Not buying calls here.

  7. Attacking Mid said

    Yeah, I sold my SU calls and flipped to puts. Starting to pick up some UPL puts, and will consider ECA if the stock gets up around 46. EOG rising – may consider those puts if it keeps going. Don’t want to be too heavily committed before inventories. Also don’t like owning puts going into a Friday. Friday’s usually a better day for put buying if you have the conviction to hold over the weekend.

    AM.

  8. zmann said

    COP breaking through 200 dma. Reserve Additions of 300% were almost entirely (2.5 of 2.6 billion BOE) attributable to acquisitions. Doesn’t say much for their efforts with the drill bit despite the year long elevation in rig counts.

    While most stocks are up they’re only back to yesterday afternoon levels. Waiting to see gas inventories but if we get a weak number I think these levels (10-10:30) will prove to be HOD.

  9. zmann said

    AM – Agreed to all points. Oil was probably due for a bit of a technical bounce but nothing has really changed. More saber rattling from Opec, yada, yada, yada…

    The real problem is that CNBC and the Street are talking $50 then $45 already. That sets up a small rally just based on the fact that, well, we haven’t fallen that far yet. If you lay the hurdle on the ground it’s much easier to jump over it.

  10. Attacking Mid said

    Also picking up a few VLO puts. It rebounded pretty strongly this morning.

    AM.

  11. zmann said

    Oil’s also up, or at least not down as much as earlier, over our drop-kicking of the Iranian consulate in Iraq. That’s a non event for oil. Iran won’t retaliate with reduced production…they’re one of the biggest cheaters out there.

  12. zmann said

    FBR cuts PT on BTU from $72 to $68 with the stock $38…that’s just out of touch! Similar moves on the rest of the group.

    So, you cut the target 4 bucks but you think its going to almost double in the next 12 mos. This much be you’re #1, fist pounding the table, screaming on-fire BUY,BUY, BUY.

  13. zmann said

    49 Bcf – pretty much in line. Gas was down $0.25 at the time.

  14. zmann said

    NOAA’s update today of El Nino calls for ” an increased probability of observing El Niño-related effects over North America during January-March 2007, including warmer-than-average temperatures over western and central Canada, and over the northern United States, wetter-than-average conditions over portions of the U.S. Gulf Coast and Florida, and drier-than-average conditions in the Ohio Valley and in portions of the Pacific Northwest.”

  15. Attacking Mid said

    AAPL is trying to weaken for me, but it sure likes to find a price and hover around it for long periods of time. Heck, the IV is going to start dropping on my options! Need another buck and a half drop to turn green. Seeing the hype surrounding Apple the past couple of days, I may put on a straddle if we get a pullback. There will certainly be news (i.e., opinions) over the coming weeks that will rock the stock back and forth.

    AM.

  16. Attacking Mid said

    My buy just got hit on EOG puts.

    AM.

  17. help said

    OIL reversed. Looks like it is zooming up

  18. zmann said

    Yep, they’re making a run on $55 oil – nothing really other than a little mid east tension and the fact that we’re off $10 in less than 2 weeks.

  19. Attacking Mid said

    Very tempting to add more puts, but I’m going to hold off ’til tomorrow. DVN will be another target if it keeps climbing. They get double-whammied if both oil and gas head lower next week.

    AM.

  20. zmann said

    Gas Storage Tab updated

    https://zmann.wordpress.com/gas-storage/

  21. zmann said

    What a total pasting for the oil rally. I’m tempted on the puts of several as well but this is not the higher level I’ve been looking for. Notice how most of the stocks have not corrected as much as oil has in the last 30 minutes. Shock and disbelief are setting in for the bargain hunting crowd. Goldman is sending mixed messages and the analysts are all cutting numbers but maintaining ratings and telling everyone that everything is going to be all right.

  22. walter said

    I’m also looking at VLO puts. The stock went up like 3%.

  23. zmann said

    Walter…good point and now gasoline is flat agan after the 2 cent rise that drove up the refiners this am. I like TSO from a shorting standpoint best right now but the options are ridiculous. Also HOC although it’s too funky to trade. That leaves SUN and VLO…and maybe even WNR who probably paid too much for GI this past summer. Anyway, make sure you buy it on the highs today and don’t chase those lows unless oil breaks below the morning lows.

    Right now the oil “rally” looks like a repeat of yesterday except the stocks are still up. I say Happy Hunting but steer clear of the Jan’s as with MLK day, we’ve only got 5 left to expiry!

  24. zmann said

    Oil below $53. USO knifing lower. Stocks slowly falling off. EOG trading very well with oil. MUR and APC also. Like UPL right now for puts as well.

    Also like puts on HES if it is below $47.40 at close of Mymex

  25. zmann said

    For oil trading at $52.50 and nat gas down $0.40 today, the XOI is holding onto that 1,100 level (up 3pts) for dear life.

    It’s pretty amazing when you consider that this is the first day in 2 weeks when gas has given any ground and it’s now down over 6% in 1 day!

    The stocks simply don’t want to go lower and the brokers are all screaming for people to buy this recent dip.

  26. zmann said

    Oil below $52 at 2:23 est!!! Gas down $0.47!!

    Stocks in denial. Big Goldman pump job this morning did no service to their clients (on either side of the trade).

  27. WDKING said

    Heh Zmann Do you know where XOM was at last itme oil was @ 52$?..thanks

  28. zmann said

    WDKING – MID $50S

    Check out the tenacity of the XOI, XNG and OIH today. You’d think the commodities were up!

  29. Raj said

    Zmann,

    Is OIH still a ‘short’ candidate?

    Thanks

  30. Attacking Mid said

    Been away for awhile – looks like I should have caved into that temptation this morning to add more puts. Can’t complain, lots of green (actually blue) on my screen.

    I wasn’t going to play the EOG, but when it shot up so much today, I decided to give it a go. The stock’s almost down $2 since I bought :^ ) Thanks, z! I owe ya one.

    I bought more BQI Feb $5 calls. CEO is speaking at an industry conference next Tuesday, and that usually generates at least a short-term pop in the share price. If I can, I’d like to sell the Feb’s on a rise, then roll to the April’s on a pullback. I’m placing a sizeable bet on this one.

    AM.

  31. walter said

    VLO down 2% since last mention- Attacking Mid- you are the man!

  32. zmann said

    Welcome Raj!

    Actually I just use the OIH (and the XOI and XNG) to gauge the environment. I find the premiums extremely overpriced in the index options relative to those of their components.

    Over the next few weeks I do see the OIH going lower although a cold snap lasting longer than 5 days give the entire energy group a short term spike.

    Most of the land drillers, HAL, BHI, and OII are more current Put favorites in the extended group I’m calling service in the table above. North American onshore activity and to some extent GOM shelf activity is going to decline for a time on the easing of both oil and gas prices. But asking me during market hours tomorrow and I’ll tell you what I’m doing then. Cheers

  33. zmann said

    MUR just preannounced 4Q of $0.40-$0.45. Consensus was $0.65. ROFLMAO! This won’t be the last Major, mini-major, E&P, or refiner to warn/miss!

    Some of the miss may be dryhhole but the stock is off $1.40 AH.

  34. Attacking Mid said

    Congrats z. Hopefully you get a nice downdraft in the morning. I actually considered those puts this morning when MUR was up sharply. This may help our puts across the board.

    Chat with ya tomorrow,

    AM.

  35. zmann said

    More MUR – dryhole at sizable test in Malaysia. Just bad luck.

    –R&M margins down relative to 3Q – this is something all majors and refiners will announce over next week or so.

    Previous guidance was $0.40 to $0.60 back in October.

    Production was anticipated to 94,000 boepd… now it’s 92,000

  36. Raj said

    Z,

    Hi, yesterday regarding my question – Is OIH still a ’short’ candidate?

    “You mentioned:

    Actually I just use the OIH (and the XOI and XNG) to gauge the environment. I find the premiums extremely overpriced in the index options relative to those of their components.

    Over the next few weeks I do see the OIH going lower although a cold snap lasting longer than 5 days give the entire energy group a short term spike.

    Most of the land drillers, HAL, BHI, and OII are more current Put favorites in the extended group I’m calling service in the table above. North American onshore activity and to some extent GOM shelf activity is going to decline for a time on the easing of both oil and gas prices. But asking me during market hours tomorrow and I’ll tell you what I’m doing then. Cheers”

    Any additional comments on OIH?

    Regards

    Raj

  37. […] in gasoline and heating oil stocks. I gave you my master plan for correcting the situation in yesterday’s post…just do it…the rest of the world can’t stop you and what do the rest of us expect anyway? […]

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