Friday Morning – 1/12/07

Well, I Didn’t Call It Thursday Thrashing For Nothing!

• Oil fell another $2.14 (4%) to $51.88! Ouch but the 24 month strip took an even worse pounding and literally looks like a Fimat oil trader taking a cliff dive. These are the contracts that oil and gas companies use to hedge with so that security is going away. In fact, there’s not a single contract >$60 out through December 2012!

• Heating oil fell a similar percentage to crude but gasoline is really getting walloped this week and is down $0.28 (or 17%!!!) since the start of the new year. It’ll take another two weeks to see that at the pump but the refiners are growing misty for the good ol’ days of four months ago.

• Natural gas got popped for 7% but more on that later.

• The pendulum has probably swung a bit too far and definitely too fast (as usual). I’ll be looking for every opportunity to lighten up on the puts and may take a call or two for an “Opec’s going to pull something over the long US weekend” play. Probably SU or VLO or something just as wildly volatile and highly oil correlated.

Oil – S.S.D.D. Rally a little, retreat a lot. Sad really. We’re set up to see similar action today although the long weekend and Opec threats should be able to keep oil positive. Tell me how this doesn’t hit $50 soon if not $45. Notice in this long term chart how you always get a rounded bottom on the change in direction. You’ll have time to buy calls on energy stocks. There is no reason to catch a falling knife here except for a quick trade!

Opec Watch: Rumors of an emergency meeting. Hey guys I thought it was about inventories and not price. US crude inventories continue to fall so what’s the problem? Oh, I see. You thought that falling crude inventories would lead to more stable prices but you didn’t count on the massive builds 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? You’re a bloody cartel so act like it!

Fimat Watch: Since these guys get published somewhere with a silly bullish/inane comment on a daily basis I just had to add a Fimat Watch. “The impact of the weather should not be overstated. Heating demand is a comparatively small part of global consumption,” said Antoine Halff, an energy analyst at Fimat. “There’s potential for a rebound.” I especially love that last line, “potential for a rebound”. Now that’s some concrete analysis. ROFLMAO! When these guys capitulate I’m going ALL IN LONG! Just shut up instead of babbling daily about how prices should be higher. It’ll happen but bagging your estimates and calling every reporter you’ve got on speed dial won’t make a difference! I really miss Melissa Francis! She would have taken these guys to task!

Natural Gas Had A Very Bad Day…Falling $0.46 (7%!) to $6.29 on the February contract. The last three withdrawals have been below 50 Bcf (47,46, and 49) at a time of year when 120 to 150 per week is the norm. Say what you like about the approaching weather but unless the Sun takes leave of the solar system we’re going to have a lot of gas in storage at the end of March. For its part, NOAA said it sees warmer than normal weather for the U.S. persisting through March which would seem to contradict the recent dire forecasts calling for a month of Arctic blasts. For a better summary of the gas storage numbers look here.

…Look For Gas To Trade With Heating Oil Today. Illogical as that may be, the long weekend and threatened cold could send oil and heating higher today and gas is likely to at least find support here. Next week we can resume our downward course on the way to a failure of $6 gas. My one caveat would be that if we somehow, maybe with the help of a warmer weather report, crack $6.18 then gas could move lower fast for that $6 test. Once we warm up again I fully expect gas to crash back to $5.50 in late January and to $5 by early February.

Stocks Tread Water. Stocks did a lot better than you’d suspect on a day in which oil and gas got shredded. Lots of early buyers got burned though as brokers called for bargain hunting and at least two rounds of buy programs kicked in. Every time this happens it makes the next time the brokers say, “it’s time to buy this dip” that much harder to pull off. I’m still in puts on APC, EOG, MUR (not enough but that’s a problem to have!), BTU, EEE, and PBW and a goodly bit of cash for the long weekend. Of course, I still like puts on the refiners, especially SUN and VLO (although they’re all suffering), BHI, PTEN, and am looking for an opportunity to buy puts on HES but probably won’t add any puts for carrying over the weekend unless oil gets out of hand on a rebound (>$54.50).

Adding XLE To The Hit List. It’s an ETF holding the “whose who” of energy names but is very heavily weighted towards XOM and CVX (36% of assets) which happen to be the two most expensive majors out there. COP is another 10% or so of the fund and it has its own set of problems. Very near term support is 4% below current levels at 52. Interesting the XLE has found a bottom around 51 three times this year in Mar (when oil was $62), June ($70) and early October ($62). So here were are at $54 but oil is all $10 lower!

• XOI – Down Slightly. rebounded above but then closed well below the 1,100 mark and very near it’s low of day at 1,092. Next stop 1,080 which we may get this morning on the MUR warning (see below) if oil cooperates.
• XNG – Ditto. Still headed to 400 and then 380 in conjunction with my position on natural gas outlined above.
• OIH – Down 0.9%. Still heading for 120.

MUR – Warned After The Close. Estimates 4Q of $0.40 to $0.45, down from past guidance of $0.40-$0.60 and much lower than Street consensus of $0.65. The Street had 4Q EPS at $0.95 just three months ago. Talk about a state of denial from the analyst community. Key takeaways of the shortfall:

• R&M margins were weaker than expected. This is the third company after COP and CVX to warn on refining in the fourth quarter. That it happened is no surprise at all given what happened to cracks during the quarter but that analysts hadn’t shagged the data and adjusted numbers yet is! All the other majors, mini-majors, and refiners have drafted their press releases by now.
• 4Q Production was lower than expected. 4Q production was 92,000 boepd, down from October estimate of 94,000 boepd.
• More Dry Holes. This month it’s an exploration well off Malaysia described in presentations as “large gas prospect”…it’s now a $22 mm dryhole. This comes on the heels of the disappointment of the 100-200 mmboe Thunder Ridge prospect in the GOM in late November.
• MUR is still trading at a fat 12.5 times 2007 consensus earnings. See yesterday’s note for a look at how this compares to its peers.
• Summary: I still like this for puts although I ‘ll be selling the initial reaction and rolling into the February’s on the bounce. It makes me like the HES put idea a lot more since that stock hasn’t been touched by the 2007 sell off but essentially does the same thing albeit on a slightly larger scale. True, it’s cheaper but it should be sliding with its peers.

COP’s Organic Reserve Replacement Was Abysmal; Do High F&D Costs Loom? 300% reserve replacement. And over 96% of that came from the acquisition of Burlington Resources and increased ownership in Lukoil? So you guys barely edged your production with the drill bit? Man. AG Edwards even called into question the quality of COP’s prospect inventory. That’s gotta smart! What really scares me is the early release of the numbers like they were something to be proud of. Or did you not want to wait and release this when you had compiled your finding and development costs? Are they going to be that bad in lieu of the current forward deck? It’s not going to be hard to figure out that you guys paid to much for BR, you might as well go ahead and spill it all at once. Now we have to wait for the other shoe to drop.

Analyst Watch: BTU upgraded at Citigroup. That’s 3 upgrades in as many days. I’ll hold my Feb $35 Ps though this and reevaluate next week. THX downgraded to neutral (FST bid for THX on Jan 8thand their stock fell through all semblence of support this week. On MUR, no downgrades and only price target reduction from UBS who already rate the stock Reduce. They cut their target from $46 to $45. Shouldn’t that be a Maintain/Hold rating? That’s where the stock is now. The other analysts are either asleep or expect to have to slave their estimates by over half in the last 3 months. Talk about complacency.