zman’s Energy Brain

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Finally Friday

Posted by zmann on February 16, 2007

Opening Indications: Oil down $0.15, Natural gas up $0.03.

Natural Gas Sees Monster 259 Bcf Pull. This was the second largest withdrawal in history prompted by a record withdrawal from the Eastern consuming region. Given the current weather outlook I’d say this was peak demand for the winter of 2006/07. After a few hours of indecision traders decided that a number over 250 Bcf was in fact, bullish and boosted prices by a nickel in very boring trading.

Oil Dove, Then Rallied On Another Refinery Fire. I Still See It Lower In The Next Two Weeks. The rally in natural gas also corresponded to a $1 recovery rally in crude which closed flat on the day. Crude rallied on news of yet another refinery fire, this time in Ontario. Unless the 118,000 bpd facility is seriously damaged I’d bet this support will be extremely fleeting. Here’s my thought on oil for the next two weeks. $55. Then a small bounce followed by comments like “people are flying kites in the midwest and wearing shorts in Texas.” Then $52ish. Then Opec starts chirping and the rally mechanism tries to kick in again. One caveat: no other infrastructure blows up and Ahmedinejad doesn’t smoke a peace pipe.

Gas Inventories Are Still 15% Above The Five Year Average

  • Storage as of February 9, 2007: 2,088 Bcf (updated February 15, 2007).
  • Max storage for this week in history: 2,266 Bcf (2006). At present gas is at it’s 3rd highest level in history for this date.
  • Thanks to a small withdrawal in the comparable week a year ago and the large withdrawal this week we have fallen 8% (178 Bcf) into year over year deficit.
  • We remain 15% (268 Bcf) above the 5 year average.
  • If you take the coldest 7 week period (mid February to the end of March) over the last 14 years you get demand of 675 Bcf which would still leave 1,413 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).

gas-storage-021507.JPG



The Eastern Consuming Region saw an all time record draw of 179 Bcf.
This caused me to fall a bit short of this week’s 259 Bcf report. Stories of freeze ups in the western region apparently didn’t have much of an impact as only 12 Bcf were pulled from storage.

table-021507.JPG

So What’s Next For Gas? In the near term that of course depends on the weather. The current two week forecast calls for a return to warmer than normal temps which probably puts a limit on gas of $7.50. However, a late season cold snap could make my $5 gas call during March a remote possibility. The fact they we’ve fallen into deficit is no surprise and though its duration may be short lived it will serve as a floor under gas, say $6.50, until we get some double and not triple digit withdrawals (probably another 2 weeks).

From Yesterday’s EIA Gas Comment: The continuing large storage stocks pose the possibility of incremental natural gas volumes entering the market before the end of the heating season as holders of storage capacity rights strive to meet contractual obligations to ratchet down storage volumes by specified dates. Comment: this is the storage cycling Ggas has been commenting on. If you combine this necessity to cut storage levels with the fact that Henry Hub gas prices are close to $9 right now and the March futures contract is at $7.35 you can see the economic incentive to pull gas from storage.

Longer Term I Still Expect Natural Gas Prices To Decline. There are several factors which bode for further/renewed declines in gas prices. Chief among them are:

  • increased production from Texas (laregely Barnet Shale), which had been flat for years prior to 2006 and
  • continued growth in Wyoming gas production (CBM, anticlines, etc).
  • High onshore rig activity has also arrested declining production in Oklahoma and is boosting product in other states not normally known for gas production via a variety of new shale, tight sand, and/or CBM plays from Arkansas to Michigan.

In aggregate these volumes do not replace the massive drop in Gulf of Mexico volumes that has occurred over the last decade. However Gulf volumes are not falling as fast as they once did due to greater gas production from deepwater plays. This means we may have reached a near term trough for domestic gas production. Combine that with an expected increase in LNG volumes over the next two years and some of the tightness in the gas market starts to relax. I’ll have more in a report on this soon.

Odds & Ends

Holdings Watch:

BHI obviously helped my performance yesterday with it’s nearly 10% drop. Will continue to hold as investors dump a management team that used many forms of the word uncertain in describing the current business environment and was reluctant to give guidance for 2007. I’ve only seen one downgrade so if we could just get a few more bulls to pull in their horns and let the stock fall below $65 that would be great…thanks.

  • The fellas at Motley Fool referred to managements handling of the conference call as how to “butcher a quarter” but I’m too nice a guy for that kind of talk. I’ll just hold my March puts a little longer as it gets pummeled, gets whacked, is reassessed by investors and analysts as to its proper forward multiple.
  • Of course this was also a Goldman Sachs favorite and Abbey Joseph Cohen included it in the Barrons Round Table on January 21 as one of her top picks saying “it’s selling at a discount to peers due to problems, soon to be rectified.” Soon is such a relative term. They actually upgraded the stock on Dec 18th at $78.80 some I’m sure they’ll like it at $65.

SLB – continue to hold feeling that it may start to suffer from BHI‘s honesty regarding the domestic environment.

Also taking a hard look at Calls on AGU and POT right now. Fertilizer companies directly benefit from falling gas prices. AGU has had a good run but is still by far the cheaper of the two. POT has access to cheaper Canadian gas and is forecast to grow faster even though it’s over 3x the size of Agrium. This makes a nice hedge for my gas puts.

Opec Watch: From the Gulf Times: Opec also said it may cut its forecast for growth in world demand this year from 1.2mn bpd, or 1.5%, should there be a return of the exceptionally mild temperatures in the US that curbed oil use earlier this year. They also indicated OPEC may need to pump more as they now forecast slightly lower supply from non-Opec sources in 2007.

Analyst Watch: CSFB downgraded BHI to Neutral last night and Calyon reduced its rating from Buy to Add. The overwhelming majority of analysts here have buy ratings and prices targets $20 to $30 higher than here.
Earnings Watch & Review:

COG reported a slight miss but good F&D costs and reserve replacement. Probably no action there.

XEC also had a one penny miss. Reserve replacement was not nearly as exciting here and production guidance is pretty tame. They did report shut in production due to ice storms in Kansas, Texas, and Oklahoma. I’m looking at puts on any gas related bounce. Have to do more work here before getting serious but the March 35s for $0.45 are pretty tempting.

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6 Responses to “Finally Friday”

  1. zmann said

    BP – or as I like to call it, core put position #2 – just gave over majority control of the Kovykta gas project to the Russians. Not a good sign for majors “partnering with Putin”.

  2. Henry said

    XEC CUT TO HOLD AT RAY JAMES

  3. zmann said

    BHI reiterated as buy at Goldman, RBC. Stock appears mired at $65. Getting a little support from up oil and gas this am.

  4. zmann said

    Thanks Henry. My basic thesis is that a combination of low valuation of reserves $Total Enterprise Value/Mcfe, strong production growth, good hedges, and good cost control will carry many E&Ps through a period of coming lower oil and gas prices although they certainly won’t go undamaged which is why you rarely seem me propose goig long. The ones that don’t have growth, good reserves numbers and are continuing to let their per unit costs run wild will get tagged.

  5. zmann said

    Add Pickering EP and Bear Stearns to the list of BHI downgrades.

    Would like to see Lehman and Goldman but they’ll at least wait out the weekend, get new forecast, see the rig count, check the CFTc data and otherwise kick the tires.

  6. Henry said

    thx Z…your insights are among the best

    I’m in the peak oil/jim rogers/kurt wulff camp that envisions spare capacity continuing to diminish and demand eventually outstripping supply…

    i’m grateful for all your work on fundamentals, however, i generally trade on money flow and consolidation potential

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