zman’s Energy Brain

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Archive for February 8th, 2007

TGIF – Elk Hills Rally Overdone

Posted by zmann on February 8, 2007

No picks today – too much gaming going on with oil and gas prices.

Oil Rallied Hard On Elk Hills Fire. Oil was treading water yesterday until OXY announced that its Elk Hills field in California had a fire on Tuesday and that 95% of the field’s 120,000 boepd capacity would be shut in indefinitely (the field is 60% oil so this is only 72,ooo bopd) See table below. Crude rallied two dollars even or 3.5% on the news to close at $59.71. Interesting that buyers ran out of steam before they breached $60 but in electronic trading they have now shot through $60.40. I still think it’ll bounce off $60 in the regular NYMEX session and head lower again but only if OXY provides further details on a recovery schedule and if the Nigerian oil worker unions don’t re-threaten to strike.

elk-hills-on-fire.JPG

Why yesterday’s move in oil was a bit overzealous:

elk-hills-c.JPG

Even If It Is An Over Reaction The Rally May Continue Due To Short Covering And Technical Reasons. So we got a 3.5% rally in crude off a 0.45% disruption in U.S. total crude supply. If we hold demand and supplies flat from here it would take 58 weeks to eat through the current surplus over the five year average crude inventory level. However, a word of caution would be that a month of this outage would take you into deficit versus year ago inventory levels. Traders have been looking for oil to close over $60 and if it manages that tomorrow all sights will be fixed on the next juicy round number: $65. It’s bunk but that’s the way the barrel rolls.

This is very similar to the rally we got last August when BP announced it’s little rust problem at Prudhoe Bay. That rally was short lived despite the fact that a lot more produciton was affected. Prices ended up tumbling when the company released details on when the pipeline would be rerouted. Although this market is a little tighter thanks to Opec, I’d expect the same reaction here when OXY begins releasing time estimates.

He’s Got A Ticket To Ride, And He Don’t Care. Goldman Sets $69 Oil Price Target For 2007. From Bloomberg:

New York oil futures may rise as high as $71.50 a barrel this year and average 4 percent higher than in 2006 because producer investment is “significantly” short of requirements, according to Goldman Sachs Group Inc. The price of the benchmark U.S. crude, called West Texas Intermediate, may average $69 this year, an increase from $66.25 in 2006, Goldman economist James Gutman said at a conference in Hong Kong today.

My Comments:

  • Which producers would that be? The FSU is growing, China is spending cash all over Africa to make sure it grows, XOM is actually going to grow this year, etc.
  • OPEC has 3-4 mm bopd of spare capacity now.
  • True, capital budgets are mixed this year but oil sand s production will be rising as will West African volumes.
  • Even the long standing decline of US crude production has actually flattened and turned up over the last year.

U.S Crude Production – The Long Slide Appears To Have Stalled.
us-crude-production-graphs.JPG

  • I remember when analysts used to employ price decks that were below current levels. It’s conservative and let’s the user of their analysis judge the company based on the fundamental business, you know, production, costs, cash flow. Conservatism has gone out the window and, I might add, room for upside to GS’ estimates.
  • days-supply-crude.JPG

Not only are we near an all time high for crude inventories but we’re very near the high for this decade on days of supply (which takes into account demand). OECD inventories are near highs as well and the China/India per capita oil consumption growth card is not playing out as well as many in the industry portray.

    Natural Gas Review: Withdrawal: 224 Bcf. My estimate 230. Street 216.

    Gas actually backed off on the news since the report was roughly in line with estimates. While the next report will almost certainly be smaller I urge caution in the coming week for when considering adding to put positions. Also, traders are commenting about the large amount of selling that arrives every time gas makes any positive headway over the last several days. They surmise that if gas can break through the $8 ceiling that a wave of short covering would likely ensue driving prices significantly higher.

    Close Enough For Hand Grenades (Closer Than The Street).

    gas-sto-revu-020807.JPG

    Gas Inventories Are Still 19% Above The Five Year Average

    gas-storage-020807.JPG

    We’re Still On Track To End Storage North Of 1.5 Tcf! If you take the coldest 8 week period (late January to the end of March) over the last 14 years you get demand of 832 Bcf which would still leave 1,515 Bcf in storage. That’s well above the 5 yr average trough level storage (end of March) of 1,025 Bcf (excluding 2006’s warm and Katrina impacted levels). For more on my thoughts on the natural gas storage data click here.

    Odds & Ends:

    Oil Sands Watch: – FBR is voicing concerns over oil prices and their impact on oil sand economics. Wow, a voice of reason amongst all the perma bulls. Stocks impacted: CNQ BQI, SU, and ECA.

    Hugo Watch: I once said Chavez’ management of Venezuela was a textbook example of how not to run an oil country based on this chart and his various statements and activities. vz-vs-opec.JPG

    I’d like to revise that simply to “how not to run a country” since now there’s no meat or sugar in the grocery stores. When are the people there going to get tired of the blatant mismanagement of their country and toss this guy? Where’s the beef Hugo?

    For more insights into my stocks picks see Wendesday’s edition here.

    As Always, Thanks For Reading and Have A Great Weekend!

    .

    Posted in Uncategorized | 21 Comments »

    Thursday – Big Gas Draw Day But It Should Already Be Discounted

    Posted by zmann on February 8, 2007

    Oil…Third Strike And You’re Out! Oil was up $0.75 going into the inventory report and began a session long slide from there to close the day down $1.17 at $57.71. The drop may only be temporarily but this was not the big move through $61 many technicians were looking for to carry crude to $65.

    In T. Boone parlance I’ll say that I think we’ll see $55 before we see $60. At that point Opec starts squawking again but I think once the cold subsides in the northeast we test $50 again. Yesterday, the National Weather Service predicted that below-normal temperatures will persist in most of the U.S. through 2/20 so I’ll have to be a little patient. As we approach that date traders will unwind an avalanche of recently acquired long positions as the simple fact that the US is amply supplied for the driving season and crude in general takes sway from the weather.

    My quick review of yesterday’s oil numbers:

    • Crude – Expectation of a million barrel increase was met with a 400,000 barrel draw. The draw is explained by a combination of lower imports (9.547 mm bopd vs 9.967 mm bopd last week) and slightly higher refinery utilization. Crude inventories remain well above the five year average and the US market remains well supplied for current demand. Click on the chart below to get a better view.

    crude-020807.JPG

    • Gasoline – Expectation of a 1.4 mm barrel increase. The number came in at almost twice that with a 2.6 mm bls increase. I took additional puts on VLO and a first tranche of puts on TSO in the wake of this number. Despite the fact that demand continues to creep up (we’re running 1.8% ahead of year ago levels this week) and that refineries have been conducting more maintenance than usual gasoline stocks continue to build quickly. This much gasoline in storage this time of year has got to weigh on prices soon.

    gasoline-inv-020807.JPG

    • Distillates – Expectation: withdrawal of 2.6 to 3.3 million barrels. I said it could be much bigger and though it blew out the top end of the range with a 3.7mm bls draw it wasn’t the gargantuan number I was leary of. How the street arrived at smaller number than the preceding week can be explained by: 1) the fact that most analysts are leaving it to their research associates who do the simple degree day math, and 2) the fact that they want to low ball the number because sell ratings don’t generate trades (at least not as many as a coverage universe full of buys) let alone banking. In summary, Winter is nearing completion and there’s no shortage here.

    Distillate stocks remain well above the 5 year average. Note in the chart at right that East Coast stocks remain at levels 50% greater than a year ago!

    distillate-020807.JPG

    Natural Gas Inventory Day.

    It appears that $8 is the ceiling for the recent run in natural gas prices, much like $60 is turning into the top for crude. While I’m confident that today’s pull from gas storage will be the biggest of the season it will have to enormous (240+) to push gas above $8.

    • My Estimate: 230 Bcf. The producing and eastern regions saw the coldest weather of the season to date by far while the western gas region was only slightly warmer. Unlike last week, were the overall high degree day total misled analysts into overestimating demand, this week’s season high 258 HDDs will yield a season high withdrawal and the first breach of the 200 Bcf mark.

    020307-hdd-vs-bcf-table.JPG

    • Street Consensus: ??? Bcf. Sorry no news stories published so far with estimates. I’ll have to get it from CNBC this morning.

    Impact: anything over 230 Bcf and we may embark on a short lived rise over $8. The cold in January served to completely erode the YoY storage deficit and the transition between surplus and deficit has historically led to spiking gas prices. In this case gas is already up 18% in the last 3 weeks so most of the transition is already discounted into the price of gas. Last year March saw some late season sizable draws from storage so if they’re not repeated this year, our trip into YoY deficit status may be very brief…which should send gas back to $6 territory.

    Next Week It’s Unlikely Withdrawals Top The 200 Bcf Mark. Traders at the NYMEX are no doubt preoccupied with the cold in the northeast but I’d point out to them that this week has seen a veritable heat wave through the core of the producing region with temps hitting the mid 70s across Texas and reaching temps 20 degrees above last week well into the nation’s mid section and South Atlantic regions. Next week’s HDD tallies, when they arrive on Monday are sure to fall from the early read of 254. You’ll know by looking at the March natural gas contract which will be down if I’m right in pre market trading Monday. At that point, analysts, who are probably drooling another over the prospect of 220+ Bcf withdrawal next week will be forced to curb their enthusiasm.

    While it’s still pretty cool, the West and Producing Gas Regions are enjoying an extended respite from colder than normal temps.

    weather-map-020807.JPG

    Odds & Ends:

    Nigeria Watch: After agreeing to meet with two oil unions that threatened to strike last week, a move that would virtually shut down Nigerian production, Nigerian president Obasanjo skipped a meeting with them saying he had other more pressing matters of state. Smart. Meanwhile a French oil worker was kidnapped yesterday which should set the unions back on the strike path PDQ.

    PTSG Up 17% Yesterday As IPAA Attendance Announcement Is Announced. The key thing to remember here: Easy come, easy go. If I bought in at $0.90 when I originally mentioned this single digit midget on January 30th, I’d be very tempted to take the 41% gain and run for the nearest T-Bill, CD, mattress, etc. The potential is enormous but so are risks in investing in bulletin board listed pennies so go in with only your, well, mad money. They speak at the Independent Petroleum Producer of America (IPAA) small cap conference this morning just before the open. You can listen live or check out the replay of the webcast here.

    NFX Reports 4Q Brick.

    • Expected: $0.97 EPS, $530 million revenue.
    • Actual: $0.86 and $427 million. I gotta say I’m shocked the Street could be this far off. Some of the earnings miss will be forgiven since it’s based in part on the timing of hurricane related expenses from last year. However the top line miss is a Street blunder.
    • These guys have already announced timing related production delays and 2007 should be a much better year in terms of operating costs and production growth than 2006 (much of the bad news is behind them). In fact G&A and other cash costs fell on a YoY per unit basis. It was really just the LOE which jumped and that will come back down soon.
    • Reserves up 14% – all organic. 111% reserve replacement. Not a world beater but that wasn’t expected this year. All in finding and development costs surged to $2.18/Mcfe and I honestly don’t know if this big an increase was anticipated by the Street. I’d guess not. You can always tell if it will be perceived positively or negatively if the press release contains the calculation or if you have to do the math yourself. In this case I did the math. On the other hand, some of NFX’s peers like PXD are reporting F&D costs north of $3/mcfe ($18 / barrel).

    2006-nfx-fda.JPG

    • 1Q Guidance probably won’t please since it’s down sequentially:
    • 4Q production:67.9 Bcfe (81% gas),
    • 1Q Estimated production range of 59.4 to 66.2 Bcfe
    • Costs look much better however with LOE tumbling

    SFY Reports A 4Q Beat

    • Expected: $1.06 EPS, $156 mm revenue
    • Actual: $1.16
    • 2007: expect to grow production 7-10%, reserves 4-6%
    • Their ops in New Zealand are really declining pretty quickly and with the slowing growth of domestic production they’re estimating another sequential decline in production.
    • Costs appear well contained.
    • All in all, they just had a great year but it’s hard to get too excited about near term guidance. Just watching for now.

     AXC presenting at Scotia small cap conference 2/14. Very interesting company. More soon.

    MRO had a couple of sizable discoveries offshore Angola with TOT.

    Analyst Watch: APA upgraded by Opco to buy, SU cut to underperform by FBR, CNQ cut to hold at FBR (FBR taking the Canadian stocks down, probably over all the dire capex budgets and comments of late about weak prices). Note TLM got cut the other day.

    Other Stuff I’m thinking about right now. Coal is probably headed lower soon. I’ll have a piece out on coal over the next week or so but for now know that inventories remain high but coal prices ran up with natural gas prices. BTU and ACI should roll over here as coal comes in.

    Posted in Uncategorized | 24 Comments »