zman’s Energy Brain

oil, gas, stocks, etc…

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Wednesday – Oil Inventory Day + A Word About Costs

Posted by zmann on January 31, 2007

Oil & Gas Shot The Moon Yesterday. More forecasts of cold lingering through the first 10 days of February combined with stories that VLO‘s damaged catalytic cracker in Texas City will be down for repairs for 3 weeks (67,500 bopd) and Saudi Arabia’s announcement that it was cutting production again on February 1st sent oil and gas higher. Much higher. This morning you’ve got a little profit taking on both oil and gas but we probably need to go ahead and get $60 oil and $8 gas out of the trader’s systems before we resume a path back to $50 and $6.

  • Natural gas rocketed $0.72, 10% to close the day at $7.66. Only a day after traders shrugged off the cold weather and sent gas below $7, they reversed course and drove the March contract to a two month high. Maybe they saw my post regarding the coming two 200 ish Bcf withdrawals. Gas is now much more likely to test $8 before $7 or my $6 or $5 targets for Spring. However, I still think the move is overdone at this point.
  • Oil rose $2.93 to $56.94 and broke it’s down trend. Although we’re getting a little profit taking this morning everything hinges on news and technicals. Yesterday’s breakout opened up a run on $60 that I think must be fulfilled before moving lower on the reality of a fundamental over-supplied market. It’s going to take more than a couple of weeks of heating oil withdrawals to erode the current heating surplus.

Consensus estimates for today’s inventory report are:

  • Crude: Up 1.2 mm barrels.
  • Gasoline: Up 1.6 mm barrels. I wouldn’t be surprised to see a noticeably bigger build here.
  • Distillate: Down 2.6 mm barrels. This would be the first drawdown in inventories in the last 6 weeks but it would leave inventories ABOVE the upper end of the historic inventory band for this time of year.
  • Refinery Utilization: Down 0.1% to 87.3%

Opec Watch: Russia says NYET to Iranian “Gas Opec” proposal. In the immortal words of Nelson, “Ha, Ha.”

Holdings Watch: As I said earlier in the week, I’m sitting tight on my foothold put positions (many of which turned into toeholds during yesterday’s commodity spike). I sleep well at night because:

  • 1) for the most part they are one fifth of my anticipated ultimate position,
  • 2) I’m not in the February contracts (except for EOG and BTU which are tiny holdover positions I miss timed) and HES which was an all or nothing earnings play, and
  • 3) the fundamentals haven’t changed and this run up will soon yield to profit taking.

With the preponderance of Major and E&P 4Q numbers still ahead of us and a rally into those number (albeit on rather weak volume) I’m reserving additions and subtractions to the portfolio for Thursday or later. I am being very cautious on new opening new positions, long or short right now. The old adage about the “market remaining irrational longer than you can remain solvent” can not be taken too seriously. While I know business has gotten more expensive for the companies I track and oil has come down significantly the fact of the matter is that the sector is still hot and trying to rekindle. I’d rather wait two weeks and short them from a higher level.

HES Reports In Line 4Q. $1.13 vs $1.13 expected.

  • Production jumped 16% YoY from 316 m boepd to 366 mm boepd. (up 4% sequentially). US production continues to decline as expected and the growth came from Africa (oil), and Europe and Asia (gas).
  • I’d point out that growth is good but a barrel of oil in the US is not a barrel of oil somewhere else (same goes for an Mcf of gas for that matter). African differential for oil was $3.87 per barrel ($49.77 vs US of $53.64) due to the effects of lingering bad hedges and European and Asian gas garnered prices of $0.72 and $1.88 below US prices respectively.
  • Lower margins in both refining and marketing cut R&M segment earnings from $229 mm in 4Q05 to $67 mm in 4Q06.
  • E&P segment earnings jumped from $298 mm to $350 mm on higher production and high oil prices (lousy hedges from 2005 are gone now).
  • Costs continue to rise on a per unit basis: Lease operating costs rose 16% in 2006 to $9.54 per BOE while G&A per BOE shot up 23% to $3.59 per BOE.
  • Meanwhile, as you’d expect with a company trading at it’s all time high who just met (and didn’t exceed) substantially reduced numbers they’re pushing the stock to even greater heights in pre-market trading.

A Little Research While I’m Waiting On “Rationality” To Return. I often say costs have gone up a lot for the producers of oil and gas and that that will either lead to a crunch in a lower commodity price environment or a fall off in service contractor’s rates. I’m not picking on any of these companies right now but am just doing a little quantifying of what it is I mean when I say that costs higher.

Lease Operating Expenses (the cost of producing the oil and gas) Have Surged In Recent Years. This shouldn’t be a surprise since it’s what’s behind the growth in Oil Service company earnings. The table is a measurement of the cost in dollars per barrel of oil equivalent ($/BOE) required to produce oil and gas. A BOE is determined by using the ratio of one barrel of oil or NGLs to six Mcf of gas.

loe-lc-ep.JPG

When you add production taxes and gathering expenses, costs have grown even more.

loe-plus-p-tax-plus-gathering.JPG

Finally, you’ve gotta pay your workers. General and administrative costs are up but not uniformly so (you guys at EOG and Devon need to complain)

ga-per-boe.JPG

Add all that up and you’ve got per unit costs up 36% between 2003 and 2005. This jumps to 59% when you include the most recent nine month period. While this average is somewhat skewed by the impact of higher costs at APC which will undoubtedly come down as higher cost assets are pared off. Still the following table shows only EOG managed to trim op costs this year (via higher production). Note: the table below is a little fat for this page but you can see the entire table when click on it.

op-costs-per-boe.JPG

Talk about inflation! If oil and gas prices settle down somewhere near current levels it seems obvious that service costs, while they might not come down, will certainly lose their momentum…as will the earnings of the OIH companes.

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21 Responses to “Wednesday – Oil Inventory Day + A Word About Costs”

  1. neil said

    Good Morning

    HES Refining #’s bode poorly for SUN, HES makes #’s purely on better Hedging…EVERYTHING depends on Distillate #’s today, since that will affect Nat Gas.we def need a # greater than a 3mm barrel draw to keep the market sustained…

  2. zmann said

    EEE and TXU sign letter of intent to test coal technology.

    You’ve got to be kidding me. More testing? How many decades does it take. And yet the stock will be pumped up on this. Can’t wait to see how many tons of kfuel EEE actually produced and sold in the final quarter of the year.

    ————————
    HES. Neil points out they also benefitted from favorable tax rate. May add to put position on this little spike but want to see how the analysts spin the conference call.

  3. zmann said

    Actual headline: Petrochina executive sees production flat or up a tad in 2007. Up a tad. Well the stock is down a tad resuming the trend it started in early 2007.

  4. zmann said

    HES reserves up 14%. Stock running on early CC comments.

    $35mm overlift on earings. This means tanker loadings outpaced actual production. Makes more sense how they made the number now. That adds $0.11.

    EEE down 10% on that PR

  5. zmann said

    HES 2007 production guidance driving this rally:

    370-380 mboepd

    HES midpoint guidance 4.5% – assumes three major project startups and some asset sales.

  6. zmann said

    HES rebounded from early post earnings loss on production guidance on the call. Mid point of the range yeilds 4.5% YoY production growth in 2007. Still holding off on more puts here until it settles down. Lots of excitement around exploration success and reserve replacement on the conf call right now.

    I’d say there is less exploration and more appraisal in the near future. So less drilling excitement.

    Cash op cost expected to be up 20 – 30% in 2007! So 4% production growth X who knows for oil and gas prices and much higher costs. Hmmmm. I’m not adding until the love in is over.
    Gotta go watch the oil inv. numbers

  7. zmann said

    crude up 2.6 — much bigger
    gasoline up 3.8 wow – bigger like I thought.
    distillate down 2.6 – not enough fellas!

  8. Jon said

    Bloomberg reports that the numbers are bearish, but traders are watching to see if crude declines less than 1%, if so then they see it as bullish for crude.

  9. zmann said

    Jon – Thanks. Exactly what I was trying to say this morning. The numbers are bearish but traders want to test to the 200 dma and $60. You can see it in the mixed reaction the stocks are displaying. They look like the numbers were better than expected, not bearish.

  10. Tarded. I guess fundamentals don’t matter anymore. How high do inventories have to be?

    These are the times that frustrate me.

    -SaneO

  11. walter said

    good stuff…
    so, what’s in store for SUN and VLO..

  12. zmann said

    Sane – They’ve got $60 on the brain. Hear ya frustrating but that’s why I’m only in toeholds (now toenail holds) right now and further out in time than usual. I think this and the run in gas fades with the weather when everyone says, “wait a moment, we have how much still in storage? That’s a lot. Maybe we shouldn’t have to pay this much for it.”

    Listened to the HES call and it was not a “love in” but more of a mutal admiration society meeting. Lots of softball questions. Costs continue to spiral upward but people like the growth of 4% even though management said the timing and size of the production boost was more in question this year than last.

  13. zmann said

    Walter – How can HES’ nuumbers be good for SUN? Not possible. But does that mean the stock will sell off? In this environment, maybe, maybe not. I’m letting oil test $60 before I jump in for more.

    Interesting to see the pumps and fades on XOM intraday. Initially moves up with the spike in oil but then sells off when everyone gets antsy over earnings tomorrow. It’ll be interesting to see if it even closes above $74 (it’s in the red now).

  14. I guess I am just old school. Let the commodity be driven fundamentals and play the stocks on technicals and such. It just amazes me how overheated and overvalued the energy market is ***my opnion***

    Sorry for the rant.

    -SaneO

  15. ramana said

    Another really cool analysis, thanks Zman

  16. zmann said

    Sane – rant away. I’ve the Ipod on and am delving into more numbers while I wait for the commodities to give up the ghost.

    ————————–

    Ramana – Thanks and as always I hope you find it useful.

    ————————–

    XOM fighting with round numbers again, trying to hand on to $74.

  17. zmann said

    HES reiterated market perform at FBR. Guess I’m not the only one who thought it was a so-so quarter with high cost guidance.

  18. zmann said

    Fighting temptation to take TSO puts here. The 75 Marchs for $1.25 split the recent runnup nicely.

  19. zmann said

    Taking the VLO 50 March puts (opener) for $0.75.

  20. zmann said

    Big buy program on oil and the majors just got executed. XOM BP jumping…we’ll see if it lasts. Someone with a lot of cash is making a bet on XOM’s earnings Thursday.

  21. zmann said

    oops…my bad. That was a market reaction to the fed statement. DJIA knifing higher.

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