zman’s Energy Brain

oil, gas, stocks, etc…

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Testy Tuesday

Posted by zmann on January 30, 2007

Oil Backs Off: Saudi Arabia’s apparent lack of concern over oil’s recent declines slapped crude prices yesterday. If the Saudis decide to set what they consider to be a fair price at roughly current levels this will muffle/neuter the most vocal (also the most prone to cheat) cartel members.

Opec Watch: In Venezuela, the Collective Junta of Workers in the Orinoco Oil Belt for the Socialist Vanguard (CJWOOBSV???!!!), a pro Venezuelan government oil worker group whose acronym is undoubtedly pronounced just like it is spelled, is reporting that XOM has rebuffed the country’s efforts to nationalize their joint Cerro-Negro extra heavy oil project in the Orinoco Basin. No comment from Exxon but it wouldn’t be the first time they’ve told Hugo to pound sand. This could lend support to oil prices if XOM decides to shut everything down and take Chavez to the Hague instead of just cooperating and taking less money from the project.

Putin Watch: Russia to expand ties with Iran. Nothing says please support our ideology like a fresh stack of Euros. Moscow is going to get all the good engineering contracts that we won’t let SGR and the like have anyway.

Nigeria Watch: Good Reuters story on Umaru Yar’Adua, currently a regional governor likely to be Nigeria’s next president. Elections are in April and it promises to be interesting/volatile. The opposition candidate is a former military dictator.

Earnings Watch: SII – in line fourth quarter at $0.71, in line expectations with $3 number for 2007. WFT – slight beat. More on these two later.

Natural Gas pulled back below $7 today despite new forecasts calling for bitterly cold weather through the next two weeks. It’s possible gas’ retreat is attributable to 1) a reaction to the drop in gas rigs I delineated in yesterday’s column (which I know is sort of the tail wagging the dog but it happens, trust me), and 2) a bit of profit taking and repositioning after a week of short covering. Looking ahead:

  • It was colder than originally anticipated last week… The heating degree days (HDDs) for the week came in at 224, slightly colder than the early read of 219 and I would’nt be at all surprised to see a 200 Bcf draw when inventories for last week are reported this Thursday.
  • …And this week will see the coldest weather of the season to date.This week’s advance tally on HDDs is a whopping 238 (Ok not really whopping, just about normal for this time of year actually). We’re probably looking at a draw of 200-210 Bcf vs 5 year average draws for this week in history of 166 Bf.
  • So if we get withdrawals of 200 Bcf this Thursday and 210 Bcf next week where does that leave us at the end of January? 20 Bcf shy of all time high storage territory for the end of January, that’s where.
  • I expect a bumpy ride this week for gas as people refocus on just how cold the data says this week is going to be. Potential long side quick trades are EOG (which I still have puts on but may hedge this week), SWN, CHK, and APC. More on gas Thursday.

Analyst Watch: Bear Stearns upgrades TSO (talk about a day late and $10 short!)

TSO Had A Blowout, Best In Show Quarter Yesterday. No stock is changing hands on the acquisition of a west coast Shell refinery and several hundred service stations and I’m told accretion amounts to 20% in 2007. Debt to cap will be under 50% after the deal and I’m holding off on taking action here until the shine where’s off a bit.

Holdings Watch: I’m pretty content with my March opening puts (opening generally being about a fifth of what I’d ultimately like to hold in terms of contracts) in BP, SLB, EOG, and BHI.

Odds & Ends

XOM Drilling In The Barnett Shale. They been working with Harding Co., a local private oil and gas company and single digit midget PTSG, for about a year gathering leases and drilling wells through their DDJET venture. XOM acts as operator in a five county area around Ft Worth. The strange thing is that Exxon doesn’t do much domestic exploration/exploitation of anything in this size range. It’s just too small. They had infrastructure so that makes some sense and this could be part of a campaign to look like they’re doing something green at home but unless its scalable it won’t make a dent (bump) in their financials. It does make me nervous about shorting a company like DVN who acquired their way into the Barnett when they picked Mitchell back in the play’s nascentcy or even EOG or COP who are big in the area.

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14 Responses to “Testy Tuesday”

  1. zmann said

    Oil up slightly on Saudi pledge to cut a further (and final for now) 158,000 bopd

    Consesus Inventory Estimates for tomorrow from Dow Jones

    crude: up 1.2 mm bls
    gasoline: up 1.6 mm bls
    distillates: down 2.6 mm bls – they’re not setting the bar very low here which is contrary to estimates of late.

    The weather wasn’t much colder than in the prior week when we got a surprise build so we’ll see.

  2. neil said

    Hope someone out there got some HOC shorts off !!!!!!
    TSO – wont be surprised to see 85 esp if we get higher oil or if VLO isnt as bad as advertised…you DEFINITELY have time before you consider putting on shorts here!!!!!!!!!!

  3. zmann said

    NYMEX just opened and it looks like a big pump is on.

    HOC downgraded at Deutsche Bank. I’ve been burned by this one in the past but it’s so pricey now it almost has to fall. Option spreads are wide so I’ll go out a ways and in the money if I pull the trigger.

    SII, which makes drilling bits and drilling, reported in line results and it wasn’t enough to wow the street. They didn’t argue with current estimates calling for 20% earings growth in 2007 but it looks like the Street wanted to see more out of them.

    WFT, driller and services, which beat by a few cents, is up 5%
    despite flattish N. American results. Go figure.

    In general the stocks continue to find it much easier to rise with oil than to fall with it.

  4. zmann said

    Neil,

    How good is the BS oil guy on the macro? That’s a wildly bearish case for oil whether or not he admits it. Exploding 2007 OECD inventory levels!

  5. zmann said

    The WFT numbers were not this impressive and not great for the group if the trend of reduced activity in N. America continues. In the case of the drillers you don’t have to see demand come off to hurt these stocks. The prices paid for services has grown asymptotically over the last 4 years and a deceleration of that rate should be enough to hurt multiples. If rig counts actually fall for gas, like they’re doing now for oil, it would be really bad for the group. Analysts keep pointing to cheap multiples, especially among the land drillers but at the same time they continue to reign in their estimates.

  6. neil said

    WFT..this is a RELIEF rally..lots of shorts thinking Canada would blow them up and it dint implode too badly..also, international was a nice balance, similar to HAL and SLB

    Bear Stearns..i think they are awful on oil, if you remember, i said to short into their call on HES which was based on their wildly bullish call on oil…always good t hear the bear case of the trade….i like the idea of shrting into HES ahead of earnings tmw

  7. zmann said

    I’d hold off on the EOG putters (and I own a small pos now). They’ve got earnings Thursday – first of the large cap gassy names off the line and I doubt they’ll miss. They have a habit of hounding analysts to cut numbers and then beating when they release. They won’t have much to say about upping an already 10% production growth profile but there shouldn’t be any bad news either. Reserve replacement should look great although with high finding and development costs but analysts won’t care about that.

    The big expected draws in gas could put a crimp in the puts and I’m waiting for earnings and the first of two 200 ish withdrawals before taking on more puts (if any). It’s very tempting with it rocking today but if you do it I’d say ITM for a day trade and that’s it.

    Another reason to be cautious is the news that XOM is actually snooping around in the Barnett Shale. They don’t do anything small and their current op there is very small. It’s nearly impossible to lease up any sizeable position at this point so I’d say they want to tinker around with the economics from inside of the play (a sort of financial science project) before they take out someone with a major established position…EOG, DVN, CHK or even APC or COP.

  8. Attacking Mid said

    I’m beginning to think the tide has turned on us, and that a long bias is going to be the way to trade. I would actually prefer that, as, just as you mentioned last week….. world peace doesn’t just break out causing sudden declines in oil.

    The only play I’m in currently is BQI. I’ve over-accumulated calls to reduce my avg. cost, and will be looking to lighten up if today’s rise gathers additional momentum. It’s bumping into resistance at $5, so this may be as high as it goes today.

    From the believe-it-or-not file: I bought puts in EOG yesterday and escaped today with a 15% profit.

    AM.

  9. zmann said

    AM – the fundamental side of me, especially on natural gas, wants to tell you that we’re in for a pretty good slide as winter draws to a close. That’s probably a good reason to trade futures and not stocks though.

    The Street continues to defend stocks with historically high multiples (XOM as 10X+ fwd CF is NOT CHEAP!) and negative growth expectations for 2007 like it does the homebuilders. Our beta to oil is one sided to the upside!

    I too feel like capitulating on days/weeks where the stocks pop on every little move in oil but fail to fall on even bigger downdrafts in the commodity.

    —————————–

    Neil – GMTA! – just took an opener in HES for tomorrow. At it’s all time high so they really need to beat #s to sustain.

  10. Attacking Mid said

    When I was in the industry, I never really understood the gas side of the business. I guess I still don’t. I was a bean counter at first, and we always pitied our compadres “down” in gas accounting. It’s a messy business from an accounting perspective. Now as an investor, I still get that uneasy feeling that I don’t really know what I’m doing with the gassies.

    Funny you mentioned Mitchell in your writeup. They were HQ’d in The Woodlands, which is where I lived. I often longed to work for Mitchell rather than Shell so I could avoid the 2 hours of daily commuting.

    AM.

  11. zmann said

    Looks like a technical rally on oil. We’re right on the cusp of breakout if it holds current levels. Could go to $57.50 or even $60 before stopping. Heating oil weighted degree days were massive. If the bounce has staying power I like NFX and SFY long. However, year to date oil has only managed to put together 2 days of consecutive gains 1 time.

  12. neil said

    nice move Zman..Hes is really under-performing this move up in crude….

  13. zmann said

    You can smell the fear. From their chart you’d suspect they sell Ipod phones or lap dances.

  14. walter said

    Zman, Neil- good info on refiners- much appreciated.

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