Posted by zmann on February 2, 2007
Bears Got Bashed This Week.
- XOI up 3.3%. Oil was up 3.4%. Much of the rally in the stocks came Thursday despite a decline of $0.87 in oil. The truth is, no one believes the pullback in oil is real until we hit $60.
- XNG up 2.9%. Natural gas was up 2.1%.
- OIH up 3.0%.. Can you say short squeeze?
Thursday’s action hinged on XOM and VLO’s earnings beats. Although the market took awhile to digest XOM’s low tax rate which actually caused the beat they came around and sent the stock up a buck by day’s end. VLO beat by just not cutting prices at the pump despite the fact that they’re the nation’s lowest cost refiner (somebody call Pelosi) and that was enough to send the stock up 3%.
The natural gas inventory report came in lower than expectations. I was looking for a withdrawal of 200 Bcf and the Street was at 215 Bcf according to CNBC. The EIA reported inventories declined 186 Bcf. Gas sold off but then rallied to close down only $0.14. This after gas rallied 10% in the last two weeks on the lingering cold and its impact on gas demand.
This is where we stand now. Still in record territory and not likely to break below it next week either.
I suspect a portion of industrial demand has become highly elastic to gas prices. Although the data to verify this won’t be available for another four or five months I strongly suspect industrial demand was the swing factor in the smaller than anticipated withdrawal. The regional weighting of degree days really should have prompted a bigger withdrawal. However gas has been over $7 for just over two weeks now and it’s possible that a physical buyer, maybe the fertilizer industry, decided to cut their intake until the cold weather subsides and prices fall (a two to three week wait). Smart move fellas.
This is what I think of taking on additional energy sector puts at present. At noon EST yesterday I wrote the following in comments:
I see nothing in today’s (earnings) numbers that would cause the street to reverse course on the group. Refiners are beating estimates with VLO heading up, service guys say there’s no problem and no slow down yet if ever, XOM managed a beat but only by way of a lower tax rate and no one cares. I see no reason to add to puts on this strength with cold hanging on longer than originally anticipated. I saving my bullets for higher levels. It’ll be up to falling commodity prices to take the stocks down and that could take a while. Gas almost certainly gets a bigger pull next week which is limiting the downside to today’s miss. I’ve got my token positions and will wait for the cold and Opec “cuts” to play out.
APA cut US capex in 2007 by $600 million due to falling natural gas prices and rising service costs. Apache will reallocate those funds outside of the US (much like the majors have been doing for a decade). Here’s the quote – insert link. If enough of the independents do this its not good for the onshore rig contractors and service stocks in general. It would be bad for SLB and BHI in particular but would effect everyone from HAL to PTEN and PDC (who committed the sin of missing their number yesterday as well).
There was some good news for the bears out this week. Besides all the fundamental data that shows we’re awash in oil and natural gas, that is. Scientists released their report on the state of Global Warm. The headline captures it all. Warming Likely Manmade, Unstoppable. The story summarizes recent findings/revisions and I gotta say, I’d buy ski boat maker BC and short ACAT, builder of really nice snowmobiles. Oh yeah, and whoever makes Tropicana suntan oil. LOL.
Analyst Watch: RDSA cut to neutral at JP Morgan, APA cut to hold by Citigroup, MUR to buy Goldman, VLO to overweight at Prudential,
Opec Watch: Quiet. Other than Saudi Arabia, I’ll bet a lot of foot dragging is going to occur on the Feb round of production cuts. Oil jumped $8 in the last two weeks and the temptation to cheat is mounting.
Odds & Ends
EEE Got Bashed For Another 10%. That’s a 24% slide since I referred to their press release as a non event yesterday. Not bad but I was out of my puts last month and didn’t re-initiate on the pre PR rally early this week. Here’s to paper trading! That and $4 will get you a cup a joe at Starbucks.
CRR Beat And Will Likely Go Higher. This is that little ceramic sand (propant) company I occasionally mention as one to just buy and hold. Up $8.27 (22%) today! Earnings were good but they mentioned a successful slickwater frac in the Barnett using their product. This has massive potential. I’m waiting for it to cool off passing the time until it does by kicking myself repeatedly.
Yellow orange snow falling over 580 square miles in Siberia. And Putin accused foreign oil companies of not complying with environmental regulations. Ha! This is Russian run oil region and they managed to turn the snow yellow! I thought only my dogs did that.
Highlights From XOM’s Year End 2006 Conference Call.When asked about the previously stated objective of 3-4% production growth for 2007:
Answer: When we look at — when we look at the production, we don’t really — I don’t really have a product target going forward. The 3% that we have talked about, when you look at — that’s an outcome of the projects that we have in the plans, and as we said, it will be lumpy depending on how projects come on, and it was a reflection of those projects over a longer period of time. So you see — you are going to see some positive peaks when you have more projects coming on and dips in that, and we really haven’t tried to get into year by year kind of outlook on that. — Comment – hard to pin them down since they’ve got a longer focus than most analysts care to think about.
When asked about what Exxon called unscheduled downtime in Nigeria, XOM later in the call made this clarification:
Answer: Well, I guess the bulk — from what I’m looking here, maybe the bulk of that Nigerian piece is associated with declines. And I just don’t have any specifics on the outages at this point.
Analysts had a couple of questions concerning PSCs (production sharing agreements) that are approaching payout. When payout is achieved the operator, in this case XOM, sees a reduction in their percent of production. It’s an accelerated cost recovery on what are huge, capital intensive programs and the terms vary from project to project. Seemed to be some concern that Angola , which has been a huge source of growth, is seeing this occur which impedes growth. On the flipside it means that prices were high and these projects have high IRRs. I can tell you the street cares more about production numbers staying on an upward slant going forward. Exxon had no detail on this.
On Global Oil Demand
Answer: Yes, I mean and that’s probably the best way to look at it. We do the global balances and what are projected in our original projections would have been higher than how it’s turned out this year. And we’d see overall demand worldwide somewhere in the million barrel a day increase, something maybe a little less than that when you took a total global balance. Comment: Russia and Brazil together will add more than that this year.
Mark Gilman of The Benchmark Company. My second question relates to tax rate. If I quickly to through the arithmetic and make the adjustment for the special item, the tax rate gets up to about 39% effective basis for the quarter if I’m doing the math right. Given business mix and things of that sort, where we were in this regard in the first three quarters of ’06, a rate in the 42% to 44% range would have seemed to have been where it should have been. I wonder if you comment on, perhaps, some of the factors that are responsible for that difference, and whether they are sustainable going forward. Comment: That’ll get you kicked off the Christmas card list! This is how they beat numbers. And no one else bothered to mention it.
Answer: Given business mix and things of that sort, where we were in this regard in the first three quarters of ’06, a rate in the 42% to 44% range would have seemed to have been where it should have been. I wonder if you comment on, perhaps, some of the factors that are responsible for that difference, and whether they are sustainable going forward.
When asked about Reserve Replacement that’s out later this month, specifically if 2006 would beat 2005. Last year reserve replacement was a paltry, non world beater 129% excluding property sales (112% with them).
Answer: I’m not really not going to get — we’ll have it out here shortly. The thing that you have to remember in all of these things, though, is the timing of when a project comes on and when it’s funded. That’s — mostly it’s decisions and recognition of reserves or actually when you have a full funding decision and you are proceeding forward. So there’s often a skewing between when something is funded and when it comes online that those reserves are often recognized at different periods. But we’ll update you here shortly. Comment: Sounds like next year to me. Surely they replaced production?!