zman’s Energy Brain

oil, gas, stocks, etc…

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Finally Friday

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?!


20 Responses to “Finally Friday”

  1. zmann said

    CVX beats by a penny.

    Reserve replacement of 101% including bitumen (oil sands).

    without the oil sands replacement fell to 70%. Not good.

  2. neil said

    Good morning..just want to reiterate..seeing option volatility really coming out of Energy is telling you that prices are stabalizing…Prob a great opportunity to make a bet on VLO SLB etc if you have conviction…Personally, I am buying HOC Feb calls as protection versus my WELL DOCUMENTED short bet from last week 🙂

  3. zmann said

    Morning Neil,

    You making bets on with CALLS on those names?

  4. WDKING said

    Heh Z

    I agree with your 60$ thesis, saving my ammo for when that time comes,I would also like to see XOM test near its high again before getting back in. I really like your gas storage charts, it would be interesting to see the same thing but with crude inventories….

    Again thanks for the informative post

  5. zmann said

    WDKING – Glad you like it!. I meant to add a graph of the decline in recent storage surplus relative gas prices. Pretty tight. When it (the surplus) starts to expand again you’ll see gas prices fall back off. And when the weather decides to warm up a bit.

    the EIA does a pretty good job of tackling that. Here’s the link:

    Let me know if you need anything else.

    CVX reserve replacement could weigh a bit on the majors today as long as oil doesn’t spike up (which it probably will). XOM dodged answering RR on the conf call…see today’s post but they’ll release it in a couple of weeks. He wouldn’t even ballpark which makes me think it’ll be light.

  6. walter said

    MUR was the one that got me. Went up 10 percent on me- I’m out of the game.

    You guys have fun and be careful out there.

  7. neil said

    if i find cheap options, i like to short the stock and buy slight out of the $ calls to hedge my Walter could have done on MUR 😦

  8. zmann said

    Sorry to hear that Walter. I took a beating last month on that one as well despite their downward eps revision. I value your insights and would ask that you poke your head in from time to time.

    Neil’s covered shorts are a good angle if you have the capital. I occassionaly do the same with calendar spreads.

    Now oil is dropping on BRSN action. Like the other two Opec cut deadlines, crude ran into the cutback date and is selling off. I don’t trust this am’s drop since I still think it needs to hit $60 so no new puts today.

  9. zmann said

    PTSG just broke out. These are the guys who have a small working interest along with XOM in the Barnett Shale. I have it on good authroity that I was offbase in my original read that XOM was likely to be testing the play for acquisitions. Their line through the area will mean they are the only access for what could become a 100,00 acre play.

  10. zmann said

    US gas rigs up 6

    Late surge in oil…stocks on the offense for the most part and definitely off of lows. Once again, USO up $0.50 in 1 minute.

  11. zmann said

    oil workers union strike set for Monday in Nigeria

  12. WDKING said

    got a chuckle from his oil predictions….

    he is assuming logic will prevail.

  13. zmann said

    Thankyou WDKING! I think that guy’s been raiding my upcoming post files!

    We have to get $60 (or very near it ) before we can resume a downward path so I was actually happy to see oil strain to get there today. Get it out of the way with I say. If the Nigerian oil unions strike on Monday that’ll surely do it. Once the technicals are out of the way the fundamentals will take over again, which may even roughly coincide with the first warming trend forecasts.

    Thanks again and have a great weekend!

  14. WDKING,

    Nice article. 07 is going to be interesting, either commodities are going to go up and the market down ( less the energy stocks ), or commodities are going to go down and the market is going to go up. I would perfer the latter d/t the less economic strain.


  15. zmann said

    AXC.T – Addax Petroleum – This is one a friend pointed out to me a few weeks ago. Remarkable Swiss E&P company, listed on the Tronoto with operations almost entirely in Nigeria. I’m doing a piece on it soon. Was saddened to see they announced the loss of a contract worker in Nigeria today (abducted over the weekend and subsequently killed).

    Unlike most operators in the delta, Addax relies on Nigerian employees for 90% of their in-country staff. They’ve never had a supply disruption since they took over some fields from Ashland in 1998. In fact, this is the first incident I have seen involving AXC and if it has to serve as the tipping point for a workers strike on Monday then so be it.

    The government needs to wake up to calls to reverse corruption and spread the wealth from lucrative PSCs beyond it’s personell. It’s no wonder that the locals are upset when officials regularly embezzle PSC funds set aside for schools, hospitals, roads, clean water etc…things that are all very noticebly missing in much of the country. That’s not to say I condone their actions in any way. Hopefully, April elections bring some order and legitamacy to Nigeria. I’ll get off my soapbox now. Just saw it while researching the stock and frankly it pissed me off.

    My condolences to the victim’s family.

  16. neil said

    i am selling crude into the weekend if we get a spike from shorties covering before the weekend…dont mind giving up the last $ of upside for what inevitable will NOT be a V-shaped bounce

  17. neil said

    Last point, I have been tracking the relation between energy stocks and the commodity..Since the end of last year, the dislocation has been extraordinary, however with the latest move in crude and earnings reports from the drillers and refiners that werent as bad as expected, I think the relationship is finally back at fair value

  18. gary said

    I wonder why SU is weak while oil is so strong?

  19. zmann said

    Gary- good question. I think some of the steam came out it this week in the wake of the BP buyout from the late in the prior week which failed to materialize. That and the cost of natural gas, one of their chief op costs has risen dramatically in recent weeks.

  20. gary said

    Thanks, Zmann.

    Seems the oil workers union in Nigeria won’t strike on Monday. They’re going to talk to the president.

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