zman’s Energy Brain

oil, gas, stocks, etc…

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Archive for February 27th, 2007

Tuesday – OIH Looks Cheap But May Get Cheaper, Also Snafus

Posted by zmann on February 27, 2007

Still Fence Sitting But Getting Closer To Squeezing The Trigger. Of the items mentioned yesterday morning:

  • TK trickled 1.4% lower as VLCC rates continued to come in and the hang over from the Bear Sterns downgrade made itself more widely felt,
  • TSO closed off a whopping $0.30, after a 7% run last week started to cool ever so slightly,
  • BP jumped for a second day over giddiness in settling with plaintiffs from their deadly Texas refinery blast, and
  • BHI and SLB posted slight gains along with most of the OIH (more on that ETF in a bit) despite my long held put positions.
  • Lastly, I continue to watch NXY closely for a breakdown and HES to see if anyone will notice the deluge of shares coming out of management. Otherwise, I continue to watch, listen, and wait for the right time to head back into bigger positions (on either side of the fence).
  • One last thing, PTSG re-rallied 15% to $1.42 and I can’t stress enough how quickly I’d recover my cost on this if further gains take place.

Mother Nature Still Supportive of Prices. I’m still concerned about this last blast of cold weather and now we’ve got fog in the Houston Ship Channel. Maybe they should build an elongated dome over it. Billions of dollars for sure but the guys sending the crude put islands in the ocean so how hard can it be to build a several mile long dome in the name of national oil supply security?

  • HDDs for last week came in higher than expected at 194 instead of the 166 predicted by the Climate Prediction Center, CPC, a week ago. We can kiss a sub 100 Bcf withdrawal for Thursday goodbye on that news and I’ll have a new, slightly higher estimate in tomorrow’s post.
  • Houston Queued Up With No Where To Go. Fog. As of Friday 55 tankers were parked outside the Houston Ship Channel waiting to offload. For a more detailed list of infrastructure issues affecting the price of oil see the section entitled “Snafu watch” later in this post or visit the new Snafu tab if you can’t wait.

A Little Discussion On The OIH. The Amex Oil Service HOLDRs ETF or OIH is comprised of 18 large oil service and drilling companies. The ETF includes a who’s who of service companies Transocean, RIG, the ETF’s largest position making up 10% of holdings down to Hanover Compressor, HC, at 1%. As oil and gas have had stellar rides this decade, so too have oil service company revenues and earnings. My question is whether or not continued out-performance is sustainable.

oih-chart-022507.JPG
Oil Service Analysts Point To Charts Like The Following To Show That The Oil Service Stocks Are Cheap… (this chart shows the range between high and low PE multiples for the OIH for a given year)

service-co-trailing-pe-022507.JPG

…And If Current Estimates Hold Up For 2007, These Stocks Are Even Cheaper

service-co-forward-pe-022507.JPG

But It Took Rising Oil & Natural Gas Prices…

oil-and-gas-prices-for-022507-post.JPG

…For The Majors and E&P Companies To Support Service Cost Inflation Like This.

cera-ucci.JPG

Now Something’s Got To Give Here! Service cost inflation has wildly outpaced production growth yielding large increases in per unit operating costs. Either:

  1. commodity prices must continue resume their long-interrupted upward course, or
  2. service cost prices must stagnate / fall, or
  3. oil and gas companies must live with smaller margins.

Maybe it’s a combination of #2 and #3 that ultimately occurs. Without further increases in oil and gas prices producer margins will be squeezed to the point that they reign in their capital budgets. And if that happens, then everybody (service and producer alike) suffers.

One Last Look At The OIH, From a Component Standpoint. While the forward multiple averages 12x you can see several outliers. Note also that the Street expects earnings growth to slow.

oih-tall-table-no-2.JPG

This post will be permanently archived with all my “Big Picture” posts here.

Odds & Ends

Coal Stocks Down Over Cancelled Plants. Should have seen this coming. Nine planned coal-fired generation plants in Texas get cancelled and it’s a bloodbath for the coal miners. BTU took the worst of it but they all had a good run of late on what can only be called meager gains in coal futures prices. I’ll have an update on coal inventories soon (government data willing) but coal production continues to surge. This probably isn’t good news for CSX and the other coal intensive rails either. Trust me, I’m kicking myself over this since I gave up on coal puts two weeks ago.

Energy Snafu Watch: I’ve taken to googling the refiners and energy sites every time oil spikes of late which is not the best of habits but what can you do when things are so jump of late? The latest list of snafus with their expected TTR (time ’til resolution):

  • VLO refinery: McKee, Tx 158,000 bopd refinery still “several weeks away from restart.”
  • Imperial refinery outage: Expects to run it’s 118,000 bopd capacity Ontario refinery at reduced rates through mid March. Serious shortages and the closure of several filling stations have been reported in the greater Toronto area.
  • BP’s Northstar Field In Alaska: 47,000 bopd offline since around Feb 17th and won’t be up for a few weeks as far as I can tell. If it’s not one BP field it’s another. I’d say statements like that are unfair since they have so many fields but then you read stories like this one where management opted to cut costs by substituting water for corrosion inhibiting chemicals and I gotta yell come on!
  • Houston Ship Channel: The Channel was shut due to Fog last Thursday. If you’ve ever driven into Houston at high speed before dawn you know fog there is no joke. No word yet as to when it will or if it has indeed reopened. This could easily prompt a draw in crude inventories this week and a bigger one next week if the waterway is not quickly reopened.
  • Elk Hills is slowly returning to normal capacity of 120,000 bopd after a 20 day outage due to a natural gas explosion in the field.

As I said earlier, I’ve taken this opportunity to add a Snafu tab above so that monitoring of these outages can be a group thing. I’m sure I missed one or two so please feel free to jump in there with those or anything new.
Reader El Diablo came with an excellent Wiki style way of tracking hot topics. The first is Iran and the dialogue (well, currently a monologue) is up and running here. New topics will crop up weekly and get their own thread while older topics will get archived. Thanks El D for a linear method of keeping up with multiple topics! I wonder if we’ll have one on hurricanes when the time comes?

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