zman’s Energy Brain

oil, gas, stocks, etc…

  • Blog Stats

    • 101,915 hits
  • Seeking Alpha Certified
  • Hello and Welcome - I’ve created this blog for the purpose of discussing energy related topics - primarily but not limited to oil and natural gas - and their potential impact on stocks, options, and futures. I am an amateur investor/trader and make no assurances about the opinions expressed on this blog. Please consult your financial advisor before buying, selling, borrowing, or otherwise risking capital based upon ideas taken from this site. Any advice construed from this website is worth what you paid me for it.
  • RSS Subscribe with a reader

  • Subscribe via RSS with

    Powered by FeedBurner

  • logo

Archive for the ‘Uncategorized’ Category

Thursday Morning – Oil Review / Natural Gas Preview

Posted by zmann on March 8, 2007

EIA posts bigger than expected withdrawals of crude, distillate, and gasoline and prices run wild. Given the size of the inventory declines it’s clear that the recent “fog out” at the Houston Ship Channel is responsible for a majority of the break between estimates and reality. Next week we are likely to see a sizable build in crude inventories. Oil and gasoline prices spiked up on the unexpectedly large withdrawals.

  • Crude: down 4.8 mm barrels. I thought is would be closer to the high end of the range which was a build as I had thought the backlog of tankers at the HSC had been worked through. According to the EIA:
Due, in part, to delays at the Houston Ship Channel, U.S. crude oil imports
averaged less than 8.9 million barrels per day last week, down 650,000 barrels
per day from the previous week. 
    • 0.65 mm bopd X 7 days = 4.55 mm barrels. It’s not gone. It didn’t sink in the GOM. It has been worked through and will show up as a surge next week.
    • So I missed by a “country mile.” Of course so did the guys who get paid $MM to do this. By the way, some of the suggestions I got via flaming emails last night are not anatomically possible. Jeeze.
  • Gasoline: down 3.8 mm barrels. Refinery capacity actually fell 0.2% to 85.8% and according to the EIA the mix of gasoline vs distillates also weighed on inventory levels.


The EIA estimated yesterday that gas prices will rise another $0.40 between now and the beginning of the driving season. My thoughts is that gasoline prices have already had an extra-seasonal rally that will mute the normal run up towards the driving season (unless things stay broken and imports continue to fall- which I really doubt).

  • Distillate: down 1.3 mm barrels. And really ceasing to matter much given the time of year(unless you drive a diesel or ship things from place to place, then it’s not so good).

On to the natural gas inventory numbers:

  • My expectation: 75 Bcf withdrawal. Last week was a very normal week as temperatures go this time of year. Gas-weighted HDDs of 170 were 2 above normal and 2 below the comparable week a year ago. We got a pull of 85 Bcf then but supply and demand were both still pretty hinky from Katrina. Also, the east was a lot colder in the year ago week than it was last week.


A 75 Bcf withdrawal would leave storage at 1,662 Bcf for the end of February, down 229 Bcf from a year ago still pretty full (4th highest on record for a Feb. month end) as shown below:


Consensus expectation: ??? Bcf withdrawal. I’ll let you know when I see it on CNBC. I think it’ll take a number below 80 Bcf to move gas out of its current $7.25 to $7.50 trading range and to make a serious run on $7. Conversely, a number of 100 Bcf or higher would probably move my estimate of the Spring floor price up to the $6 to $6.50 range.

Odds & Ends

Analyst Watch: nada

Opec Watch: All of the talk from Opec ministers seems to indicate no further production cut will occur at the March 15th meeting.

Holdings Watch: Getting Ready To Make Further Short Moves. The broader market is called up strongly this morning after yesterday’s Beige Book showed a broad slowing in the economy’s growth rate. Odds of a rate cut by July have increased further this morning as jobless claims seem to confirm what the Fed has been saying. With the market going one way (up) at least for the time being (I think we’ve got more correcting to do) and oil and natural gas looking toppy (at least to me) I’ll be looking at adding to current and entering new put positions later in the day (after natural gas inventories come out). But I’ll be very selective and chintzy with my bids.

Snafu Watch: Northstar back online. From Upstream – Oil giant BP has resumed production at its offshore Northstar oilfield in Alaska, three weeks after a pipeline leak prompted the field’s shutdown. Comment: That’s 47, 000 bopd off the snafu list…let’s see if anyone notices.

Posted in Uncategorized | 48 Comments »

Wednesday Morning

Posted by zmann on March 7, 2007

I’ve got a late breakfast meeting so I’ll make this brief.

Headfake or New Life? Yesterday, the markets zoomed in the morning and again in the afternoon. Stocks were broadly higher with the Dow and S&P500 up over 1.3% and the Nasdaq up nearly 2%. The energy indexes fared even better with the XOI (up 1.9%), XNG (up 1.6%), and OIH (up 2%) all up on the strength of the largest cap members in each. Even gold rallied 2% on the day.

The energy commodities also had a good day:

  • Oil gained $0.62 (1%) to close at $60.69, a day after barely reclaiming $60 at the close. I probably shouldn’t bother pointing out that the markets and oil generally run opposite each other or that a stronger dollar usually means lower oil prices.
  • Natural Gas rallied $0.22 to close at $7.47 on renewed storage and supply concerns but honestly it had fallen pretty fast (from near $8 to near $7 in little of a week’s time) and was due for a deadcat bounce. Those concerns voiced on the gas storage page by Bill are valid and I appreciate the input (more on them in Thursday’s post).

No new picks (other than quick trades) until I’m comfortable buying off on the current direction of the broader market. This looks like a head fake to me and one more bad day in Asia could really spoil the mood on the Street.

Take a look at the XLE vs the DJI and the USO.


Oil couldn’t have mattered less to the energy stocks over the last week. However, that may change promptly if the market settles down today and inventories are out of line with consensus. Anyway, I’ll be in a meeting when the numbers come out so good luck and be careful. Especially watch out for the five minute reversal in oil prices following the data.

Speaking of inventories it’s that time of the week: Gasoline and refinery utilization are key to oil holding $60 or running to the $63 to $64 level. Estimates in bold from Reuters.

  • Crude: up 2.0 mm bls. Imports appear to be on the rise and this they are playing catch up. I understand the Houston Ship Channel actually processed the prior week’s fog laden backload of roughly vessels last week so I’ll bet crude comes in higher than expected. Note this is a reversal of yesterday’s statement but at the time I had thought HSC was still partially shut in for the period. Either way, this is not the number people are going to watch unless its either very high or very low.
  • Gasoline: down 1.4 mm barrels. Call it an educated guess but looking at the number of refineries starting to gear back up from maintenance and/or technical difficulties I’d say utilization should start to creep up to say 86% this week. That could yield a slightly smaller than anticipated draw in gasoline. Offsetting factors are increased demand for fuel and potential drawdowns in blending components. I thinking the number will be a little smaller but my confidence here is not high
  • Distillate: ??? million barrels (from the Bloomberg survey). I ‘d be shocked if it’s lower but it really doesn’t matter unless it’s a huge number. Remember the “catch up” demand from secondary and tertiary sources here can be enormous well after the degree days have started to melt away.

Odds & Ends

Snafu Watch: Reader El Diablo said it all here. My two cents, traders will grasp at the 35,000 bopd shut in at China’s second largest oil field due to heavy snow.

Analyst Watch: BEXP price target slashed at FBR but buy rating maintained.

EIA Cuts Global Demand Forecast. I think someone who looks and sounds just like me said about a week ago that the IEA (International Energy Agency) would have to do this soon. The EIA beat them to it. Highlights of yesterday’s report:

  • 2Q07 global demand falls 0.3 mm bopd to 84.8 mm bopd.
  • 3Q07 falls 0.1 mm bopd to 86.3
  • full year 2007 falls 0.1 mm bopd to 86.6
  • 2008 falls as well from 88.4 to 88.1 mm bopd

from my February 28th post:

“Recent demand growth prognostications now in question. From the IEA’s January Oil Market Report dated two weeks ago: Global oil product demand is raised by 111 kb/d in 2006 to 84.5 mb/d and by 273 kb/d in 2007 to 86.0 mb/d following revisions to China.

They may have to trim this back some.

Hey, somebody’s gotta pay attention to this stuff. (Psst, sounds like the EIA is still too high).

Vladamir Watch: Very few new stories out there all of a sudden. Nice plane, going to Athens to sign a pipeline deal but otherwise very quiet.

Greenspan Watch: From Former Federal Reserve Chairman Alan Greenspan sees a one-third chance of a recession, according to an interview published by Bloomberg News. “We are in the sixth year of a recovery; imbalances can emerge as a result,” the 81-year-old Greenspan said. He said he was “surprised” by the market reaction to comments he made on Feb. 26 on the possibility of a recession. Comment: Guess his assets are out of the blind trust now, eh? So he retires and starts speaking plainly? Nice.

Posted in Uncategorized | 51 Comments »

Trepidation Tuesday

Posted by zmann on March 6, 2007

Asia and Europe bounced overnight. The U.S. markets and the dollar are called higher this morning after Asia and Europe found solid footing overnight. Oil and natural are looking higher as well. The gains are all stemming from the fact that the Nikkei did not fall for a sixth straight day.

I’ll be very cautious about buying the rally as few recoveries are V-shaped. I’ve taken profits in several names over the last few days including doubles in APC, PTR, and XOM and healthy profits in BP and will probably fence sit today. Exceptions to the fence sitting include that TK put which still bothers me and HES (short) and PBR (long) where I still haven’t found good entry points.

The decline in the broader markets began the evening of February 26th. I find that a numerical review, no matter how simple, is helpful in gaining a little perspective amidst all the carnage. Here’s a quick review of the the damage wrought by the Asian Flu and subprime one-two punch.


Oil: More pricing shenanigans with oil closing down$1.57 to $60.07. Crude hit $59.60 but was saved by the bell and traders who managed in the nick of time to trade the “crude falls below $60” headline for “crude skids with market jitter, holds above $60”. If you’re a bear or drive a car you should thank them. I’d rather have high $50s, low $60s oil as we head to the next OPEC meeting March 15 so that OPEC has no reason to sabre rattle about further production cuts.

Early Read on Crude Inventories (these are broad ranges but I’ll have the “over/under” point estimates in tomorrow’s post):

    • Crude: up 1.5 to 2.5 mm bls. I’d bet on the lower end of the range as the Houston Ship Channel was shut for an unspecified amount of time last week.
    • Gasoline: 1.3 to 1.6 mm barrels. Probably the most important number in the report and I really don’t have a better handle on this
    • Distillate: 1.8 (Fimat of course – why be accurate when you can be a bullish estimate bagger) to 3.2 mm barrels. This could still easily be larger.

Odds & Ends

La Nina Watch: There’s nothing new in this story in terms of La Nina’s development but it’s worth taking a look just for the really cool image of the earth (cool meaning I like the picture, not that the earth is cool) as seen by the Jason altimetric satellite which measures sea level height. The author says that it’s unclear weather or not a La Nina is forming and in the picture green (normal sea temperatures) dominate the globe from my purely laymen’s perspective.

Taxman Watch: A leaked draft report of the Canadian House of Commons Natural Resources Committee suggested that a tax break implimented to spur investment in the oil sands be revoked. The tax break is estimated to be woth C$1.4 billion (US$1.19 billion) annually to investors ~ from Upstream. The government already takes roughly 41%. Let me get this straight. You’re sitting on top the world’s largest recoverable hydrocarbon deposit but it’s only marginally economic as is so you think now is the time to dis-incentivize investment? I only thought that kind of logic was applied in the States.

Opec Watch: The Organization of Petroleum Exporting Countries (OPEC)’s weekly average crude oil prices rose to $57.50 U.S. dollars per barrel, up $3.03 from the previous week and the highest so far this year, the cartel’s secretariat said on Monday. That’s a weekly average and this week’s activity will bring it down a little but again, I want it to stay up over the next two weeks to give ministers no reason for further action. At present, OPEC appears to be concerned about tightness (if you can believe that) in the second half of the year.

Nigerian Rebel Watch: Nigeria is deploying more gunboats (of the government variety) to patrol the delta before the upcoming presidential elections and in the wake a large Shell oil pipeline leak over the weekend. Comment: What have they been waiting for?

Putin Watch #1: An expert on Russian intelligence was critically injured in a shooting in front of his suburban Washington home, authorities said. The shooting of Paul Joyal, 53, came days after he accused the Russian government of involvement in the poisoning of former KGB agent Alexander Litvinenko. The FBI was assisting in the investigation. -AP.

Putin Watch #2. In a bit of unrelated news: In Moscow, Ivan Safronov, 51, was an ex-colonel and journalist for Kommersant who had irritated the Russian FSB security service with his frequent exposes. He was reported dead yesterday after apparently falling from a fourth floor window of his apartment block on Friday. UK Telegraph

Comment: Due to lack of demand I am retiring the Putin Watch segments.

Analyst Watch: Jefferies started FST at buy and SM at hold. Morgan Stanley took E from under to overwieght. CSX started at underweight at Prudential (the coals rails have become interesting of late).

Posted in Uncategorized | 20 Comments »

Monday Morning – Next Verse, Same As The First … More Selling

Posted by zmann on March 5, 2007

Asia got whacked for another 3% while the vast majority of you were sleeping so we’re almost certainly in for another bumpy session.

Axiom of the day watch: When the markets are running fast and scared round numbers take on heightened meaning.

The Week Ahead:

  • Current Positions: I’m content with put positions in BHI, SLB, XOM, and APC right now. May take profits (pretty much a wash right now on the Mar 110 PTR position) as I last Tuesday when I took it that it was a rank wildcat of a bet. It should pay off pretty nicely on the open this morning,
  • BP: Got stopped out last week in a “failure to communicate thought versus trade entry” (aarrgghh!). Still looking for a point to enter a longer dated put position but it just keeps falling away from me.
  • Shippers: TK – all the good news is out here and estimates are actually coming down following the quarter’s results. As a group the shippers rallied Friday as VLCC rates began to build in the second half of last week (a potential sign that OPEC is cheating. Of course, I may reverse course at a moment’s notice if further indications arise that OPEC production is rising.
  • Mini-majors: HES – insider selling continues, stock remains just off all time highs; MUR – still expensive at 11x forward numbers despite its share of operational short comings of late,
  • SGY – high operating and F&D costs = high economic breakeven. This is an oilier E&P than most, facing stiff Gulf of Mexico decline rates and offering guidance that is flat to down. They have failed to partner up twice in the last year and I think it’s highly vulnerable to the effects of retreating oil and gas prices.
    • Natural Gas Shorts:
      • APC: fell below $40 (nice round number) and is now at it’s lowest levels since acquiring Kerr-McGee and Western Gas. The company is over half way home in its desired divestitures but commodity price pressure won’t help when try to sell the remaining, potentially higher hanging fruit on the auction block. Doubtless the company is both cheap and extremely well managed. This is a TRADE, nothing more.
      • BBG: high F&D + good operating costs = slightly elevated full cycle economics. Contrast that with the generally unfavorable discount Rockies gas receives now and a smaller than peer group average hedge position (and a stock that’s been on a roll of late but now looks toppy) and I’m looking for an entry.
      • COG: on the fence but thinking puts. Higher full cycle costs than the preceding. A goodly hedge position around $8 and strong management make me hesitate. Still, if gas plummets through $7 I’ll be in the puts.
      • COP: this gassiest of all majors is selling off technically without me. I’ll most likely add an initial short position on any contra-group strength over $65 this week.
      • Staying away from shorts on CHK, SWN, and KWK. If gas cracks $7 these guys will fall as well. I just don’t like shorting extremely well run companies that aren’t excessively overvalued. Besides, they’re hedged to the gills for their size.
    • Refiners: It doesn’t get any better for them this time of year (gasoline really got out of hand last week culminating in a 10% wholesale cash price jump on Friday!!!) and they’re going to have a great first quarter but enough is enough. I am strongly considering adding near the money positions on VLO, TSO, and entering a new put position on WNR.
    • Coal: No change. Still bearish
    • Longs Trades. PBR is down 16% since the beginning of the year versus less than half that for the XOI. Late Friday they announced another big oil discovery in the Campos Basin. I know I’ve repeatedly grouped the stock with other, high flying foreign oil firms but the damage to the shares of late has been extreme in comparison to most and this news could provide a small bit of respite.

      Odds & Ends
      CFTC: Natural Gas Open Interest Plummets While Net Position Recovers To Neutral. Does this bode poorly for near term gas prices? Maybe, maybe not (I know, how useful). I consider this week’s look to be slightly gas price bearish. Here’s why:

      • As I’ve stated in the past I believe the predictive element of CFTC data is somewhat contrarian in nature. In my way of thinking, large net long positions represent potential supply and are therefore actually bearish and visa versa. This week bulls and bears are evenly matched (the net position is near zero).
      • As always when I’m writing about the CFTC I’m examining the non-commercial (speculator) data. After rising to levels of what can only be considered speculative excess last Fall, open interest in NYMEX natural gas futures had its largest one week decline in open interest in seven years. Maybe it’s nothing. Maybe they’re just gathering their firepower to go long when things settle down in the broader markets. I’ll keep a close eye on this because a continued reduction in open interest has often led to falling commodity (gas) prices. But again, we’re at step one in that analysis now.
      • Combining this sudden lack of betting one way or the other with the players abandoning the table for friendlier games (and that’s all this is to the hedgies speculators) I’m struck with a slightly bearish look for gas.


      I’ll See You In Comments. Have A Great Week!  

      Posted in Uncategorized | 37 Comments »

      Fiasco Friday – Market Looking Lower

      Posted by zmann on March 2, 2007

      Stocks continue to be led around by the broader market and it looks like another bad day for bulls is in the offing.

      Oil has had a heck of ride this week… Oil has been trading a little fishily this week. Closing at $61.50 on Tuesday, $61.75 on Wednesday, and $62 even yesterday. Reporters will tell you this is the gasoline rally and they’re right.  That rally has been powered by a long list of infrastructure issues from refinery fires to fog shrouded waterways.

      …But The Latest Rally Should Run Out Of Steam Soon. As those issues sort themselves out and gasoline inventories remain at high levels (I’m not kidding, look here if you don’t believe me!) crude should snap back. However, the current rationale is that because crude is higher, it will go higher. I’d like to sell stuff to these guys. “Wait, you’ll take another if I agree to mark up the price for you?! Sold!”

      • One Caveat: Crude may still reach $63 or $64 before any kind of retrenchment occurs (I’d also note that the continued dollar weakness is nothing but fuel for the oil bulls- yet another bit of near support for crude.)

      Natural Gas Review: 5 Weeks of Winter To Go!

      Gas Inventories Fell 132 Bcf Vs My 130 Estimate And The Street’s 140… First the errata. My table had the correct 130 Bcf estimate but the I had earlier been estimating 120 Bcf and forgot to change it in the text. Sorry for any confusion. Second, I got pretty close on the total but the west still had a draw which was offset by lower than expected demand (or greater supply) from the producing region.


      …But Gas Took Its Cue From A Rallying Crude Market To Close Up Slightly On The Day. After a brief dip gas traded higher with crude closing the day off a couple of pennies. No matter. Winter is rapidly drawing to a close and the next withdrawal number will again be smaller.

      Here’s a brief summary of my thoughts on gas storage with 5 weeks traditionally left in the gas withdrawal season:

      • Storage as of February 23, 2007: 1,733 Bcf (updated March 1, 2007).
      • Max storage for this week in history: 1,972 Bcf (2006). At present gas is at it’s 4th highest level in history for this date.
      • We have fallen 12% (239 Bcf) into year over year deficit. This is actually up 39 Bcf from last week as last year’s comparable week withdrawal was 177 Bcf.
      • We remain 11% (179 Bcf) above the 5 year average.
      • If you take the coldest 5 week period (last week of February to the end of March) over the last 14 years you get demand of 485 Bcf which would still leave 1,250 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). Could happen but I feel its unlikely given the predicted warm end to February and the pronounced warming trend expected beginning around March 10th.
      • Conversely, the warmest 5 week period (late Feb to the end of March) saw demand of only 165 Bcf which would leave storage at 1,568 Bcf (and probably drop gas to $5.50/Mcf). I don’t think that happens either. I’m estimating we reach trough storage of about 1,400 Bcf. Note: I’m taking the low end of the my gas price range for Spring up $0.50 because storage levels have come down a bit faster than I thought and the expectation of a hot summer will likely provide additional support to gas prices that I had not previously expected.


      So It’s Likely We’ll End The Heating Season Amply Stored…

      …And That May Not Be Enough To Significantly Hurt Gas Prices. The relationship between gas prices and end of heating season storage levels has changed over the last few years. The cost of getting gas to the end user has risen due to a combination of factors ranging from a tight service market in terms of both rigs and skilled labor to accelerating decline rates to increasing use of gas (although demand really haven’t grown much over the last several years). Because of these inflationary pressures high gas storage levels at the end of the heating season have been less of a factor in determining the direction or level of gas prices.

      I realize the following chart is a gross oversimplification (it doesn’t take into account forward looking data and is just a snapshot in time) but at the same time it is illustrative of the change in this relationship.


      While I still think gas prices will fall this Spring I think the impact may be muted, say to a low of $6 (maybe $5.50) unless a significant demand response occurs. I’d also note that those prices will make it pretty tough on some of the higher cost Rockies producers.

      Odds & Ends:

      Russian February Oil Production Up 4.2% YoY.  According to upstream, Russian oil production reached 9.86 mm bopd this past February (up slightly from January) while pipeline exports from Russia climbed a little over 100,000 bopd  (2.5%) from January.

      Hillary Watch: The other day the oil companies recorded the highest profits in the history of the world. I want to take those profits. And I want to put them into a strategic energy fund that will begin to fund alternative smart energy, alternatives and technologies that will actually begin to move us in the direction of independence. ~ Hillary Clinton at the DNC winter meeting yesterday. That was the scariest thing I’ve seen in a long time. Her quote was pretty frightening as well.

      Zman Bullishness Watch: This doesn’t happen very often but once in a while, in this high cost, low growth, bloated global inventory, surplus production laden environment I find something I really like. Not for a trade but for the IRA. Click here for a link to the Addax Petroleum post.

      Analyst Watch: HAWK, CRZO, UPL started at Buy at Jefferies.

      Snafu Watch: About 45,000 oil workers in India are planning a two-day strike demanding restoration of the selection panel to head the Oil and Natural Gas Corp (ONGC), a union official said on Thursday. ~ from Upstream.

      Posted in Uncategorized | 47 Comments »

      Addax Petroleum – A Good Old Fashioned Growth Story

      Posted by zmann on March 1, 2007


      Massive Production Growth History:

      • Acquired 4 concessions in Nigeria producing 8,800 boepd form Ashland Petroleum (ASH) in 1998.
      • Increased gross production 65,600 boepd by 2005.
      • Averaged 90,050 bopd.
      • Exited 2006 at 116,000 bopd.
      • Nigeria represents the vast majority of current production but the company is using it’s African connections and operating expertise to take advantage of other regional opportunities.
      • Other areas of exploration:
      • Cameroon,
      • Gabon (now producing 18,000+ bopd),
      • Iraq, Kurdish region (2 large wells and counting)- don’t wince at the country, these guys know how to play here too and the Kurd’s are desperate to increase oil production
      • Sao Tome (offshore Nigeria)


      • Exploit neglected oil fields in Africa, going where being a US company would have it’s disadvantages (employ mostly locals to help dissuade retaliation from militant groups),
      • Exploration: offshore W. Africa, onshore Middle East

      Strong Outlook: Production targets of 130,000 and 145,000 bopd for 2007 and 2008 respectively.


      Street Consensus Estimates: 2006A $2.04, 2007E $3.36 which puts them at less than 10x forward earnings on a stock with 40% expected production growth.

      • Note 1: AXC is afforded some protection from oil price declines due to the high quality of a majority of their crude which trades at a premium to Brent.
      • Note 2: As cost recovery is fulfilled earnings growth will decelerate but this is also mitigated by their movement into new plays.

      Show me another E&P with this kind of growth expected in 2007 in this market cap range and I”ll take a hard look at buying it. I haven’t seen it but I’d love to.


      Sao Tome Exploration – First well with operator APC should spud in 1H07. This is a very high potential region (see Sao Tome section below).

      Iraq Exploitation/Exploration – second Taq Taq well (TT-05) tested at 26,550 bopd from two zones totalling roughly 400 feet of pay. Flow rates were restricted by the capacity of the testing conditions (trucked oil).

      • TTo6 now drilling quite a bit further away as the try to delineate the size of the field.

      Gabon development- additional production comes on line 1Q07.


      2006: 2P reserves (proved + probable) increased 80% to 353.7 mm boe.

      • Only booked 40 mm barrels from Iraq. Oil in place (STOOIP) is thought to be roughly 2 BILLION barrels, so the recoverable reserves here are significant to AXC’s bases.

      That’s nearly 2.5 barrels per share not counting most of Iraq!Reserve engineers: Netherland Sewell -top notch, conservative firm.

      A Little More Detail:Nigeria:

      • 13 oil fields produce the bulk of AXC’s current production, and the majority of this is offshore. They have multiple exploration concessions.
      • Nigerian government wants to go “no flare” by 2008-2010. Very large natural gas production potential.
      • New Exploration Concession: OML 67 Okwok Field – 67 mmbls reserves acquired June 2006. 40% participating interest. Shallow water field, they announced “medium to light quality crude, in a high quality reservoir. Nice producers, nothing earth shattering.
      • Next round of Nigerian oil licences: mid March, 2007.

      Sao Tome – Three Deepwater Exploration Blocks (JDZ Blocks 2,3,4) – adjacent to several discoveries. Evaluation of seismic ongoing.

      One of the keys to finding oil is drilling in the right neighborhood. Sounds simple but it’s very true and AXC’s three JDZ are in a very good neighborhood for oil. They’re ontrend with three fields with aggregate reserves of 2 billion barrels. Drilling will commence in 2008.

      • #2 – AXC 14.33% participating interest (PI), Sinopec operates. Petroleum Geo Services seismic survey led reservoir engineers to estimated reserves of 1 billion barrels on the block. Block 2 is adjacent to the 700 mm bbl Akpo field among others.
      • #3 – AXC 15% PI, APC operates.
      • #4 – AXC 38.3% PI and operates.
      • Note: Chevron drilled a well on Block#1 in May 2006 and, as of January, it was classified an oil discovery with further exploration to quickly follow.

      Cameroon – Ngosso property offshore Cameroon. 60% wi. Will drill 2 wells later this year.

      Gabon – Maghena property onshore. Capacity had been restricted to 5,000 bopd; exited 2006 at 18,000 bopd.

      New export system capacity is 20,000 bopd going to 30,000 bopd by mid 2007.

      Iraq (Kurdistan Region) – Taq Taq prospect.

      First well (TT-04) results announced November 2006. Partners with Genel, a private, Turkish oil company.

      • 29,790 bopd light crude flow test from 3 intervals.
      • Over1,500 feet of pay!
      • Tests were constrained by surface equipment.

      Kurdistan minister of natural resources called it “great achievement” and looked forward to initial production in 2007. This guy is planning to increase Kurdistan’s oil production by 1 mm bopd over the next few years!

      TT-05 same as above but likely downdip as it’s less pay. Excellent test rate announced today.

      TT-06 step out is drilling now.

      Participating interest here 45%

      Separate prospect, Kewa Chirmila, will be drilled this summer.

      In short: I like these guys as a long term hold. Production growth for their size is best in show and they appear extremely undervalued to their reserves and potential.

      Posted in Uncategorized | 4 Comments »

      Thursday Morning – Oil Review / Gas Preview

      Posted by zmann on March 1, 2007

      The market is in for another wild ride today so look for any picks in comments once things get rolling.

      Brief Oil Review: My comments from this morning are in italics

      • Crude Oil – Street Expectations: Up 1.9 million barrels. The change in crude inventories could easily be lower than Street expectations due to the partial week closure of the HSC and potentially could be a small draw on inventories. Actual: up 1.4 mm barrels.

        • Comment: if the Houston Ship Channel was closed last Thursday and Friday this could easily account for the smaller than expected number. I’d also note that the HSC has been closed at least three days this week which is lending some support to curde at present.
      • Gasoline: Down 1.8 million barrels. With all the refinery outages and an increasing number of local shortages gasoline is moving towards center stage as a key determinant of oil prices. Blending component consumption could easily make this number larger than this which would lend support to crude prices on a normal day. I think the amount of fear in the market will require a much bigger draw than the 1.8 mm barrel expectation to rally/support crude. Actual: 1.9 mm barrels.

        • Comment: Crude sold off after the number but rallied later (along with everything else) on Bernanke’s stable economy comments.
      • Erroneous Comment Watch: from Bloomberg: ``The demand is there and that will underpin prices,” said Angus Geddes, chief executive officer of Fat Prophets in Sydney. “Inventories for gasoline in the U.S. have dropped to 12-month lows so that’s having a positive impact on prices.”
      • Comment: Not Even If I Stand On My Head To Read This Chart (Aussie Perspective) Do I Get “Inventories at 12-month Lows”! Come on Bloomberg!


      Maybe the following chart was what he was worried about.


      • The above chart could be a problem if you’re a bear as it definitely would lend strength to gasoline prices. That is if they hadn’t already priced this in. Retail level gasoline prices are up 10% ($0.22) nationwide over the last month and have risen even faster in areas in close proximity to one of the handful of refineries currently experiencing technical difficulties.
      • Voice Of Reason Watch: “While prices will rise into the summer, the pace of recent gains, and a likely increase in gasoline production, could see the market pull back as much as $4 a barrel before moving higher. We have a slew of clients wanting to buy into this market and we’re telling them to wait. Refineries are going to start coming back on line and you’re still going to be well within the normal range for gasoline supplies.” ~ Bloomberg quoting Excel Futures CEO Mark Waggoner.
      • Distillate: Down 2.8 million barrels. I think this is probably a bit light but I’m not sure a “low ball” miss here will prompt much of a rally (at least much of a sustainable one) in heating oil or crude oil this late in the heating season. Actual: 3.8 mm barrel draw.

        • Comment: I think they (the surveyed traders and analysts) deliberately bagged the number to get a miss here. History will tell you that draws at the end of the heating season are not strictly linear to HDDs. These guys aren’t stupid they’re just bagging it!

      Switching To Natural Gas:

      Withdrawal To Decline On Warmer Weather, Nearly Cut In Half From Last Week:

      • My estimate: 130 Bcf withdrawal. While gas-weighted degree days fell from 246 in the prior week to 194 last week it was still quite a bit cooler than the CPC original forecast, especially in the New England and Mid-Atlantic regions. Like I said on Monday, this would cause me to bump up my withdrawal estimate. Note I’m expecting a small build in the West region.


      Consensus: 140 Bcf withdrawal. Anything over this and I’d expect gas to drift in between $7.25 and $7.50. Closer to my number and you’re likely to get a test of $7.

      Odds & Ends

      It’s Starting To Warm Up… from the International Herald Tribune: The weather “will turn very warm for much of the area that had one of the coldest Februarys on record,” said Joe Bastardi, lead forecaster at AccuWeather in State College, Pennsylvania. “By the 10th, a major warm-up should be well entrenched over the southern and central plains and the Ohio Valley to the mid- Atlantic.”

      …But El Nino May Be Shifting To La Nina Potentially Bringing More Heat And Hurricanes This Summer. A La Nina event appears to be forming. This could be supportive of natural prices as it generally brings more hurricanes and heat to the eastern seaboard and drought in the west. The actual impact depends on if it’s a strong or weak event and whether or not it forms at all or reverses as often happens. From a psychological standpoint it’s certainly gas bullish.

      Analyst Watch: TK upgraded to overweight by JP Morgan. HES to outperform at FBR.

      Snafu Watch: Imperial oil’s Toronto refinery is back to 50% of capacity.

      Posted in Uncategorized | 126 Comments »

      Wednesday – Oil Prices Begin Retreat Over Demand Growth Concerns

      Posted by zmann on February 28, 2007

      I couldn’t have picked a better day to write about the OIH getting cheaper than yesterday! To be fair I got lucky on the timing. The OIH and the rest of the energy complex simply marked losses in the broader indexes, which took their cue from the strange bed fellows of Greenspan (2H07 recession a possibility) and the Chinese (reigning in growth) – both factors that will reduce hydrocarbon demand.

      Oil Was Remarkably Resilient Into The Close Of Nymex Trading… April crude closed up $0.07 at $61.46 in a wild day of trading.

      …But When The Dow Took A Header Around 2:30 EST, The USO ETF Started To Trade Off Sharply. No doubt hedge funds heading for the exits. Electronic trading saw NYMEX oil reverse course before the close of stock trading, easily tumbling through $61 as the possible global deceleration and its potential impact on oil demand and prices began to be felt.
      Recent demand growth prognostications now in question. From the IEA’s January Oil Market Report dated two weeks ago: Global oil product demand is raised by 111 kb/d in 2006 to 84.5 mb/d and by 273 kb/d in 2007 to 86.0 mb/d following revisions to China. They may have to trim this back some.

      Oil Inventory Day: Analysts and Traders Are Looking For More Large Product Draws And A Small Build In Crude. As I mentioned yesterday, the Houston Ship Channel (HSC) was shut down due to dense fog beginning last Thursday and appears to have remained shut through Friday, the last day of the oil inventory reporting period. This is temporary and in my mind provides bears with a sort of “get of jail free” pass. By this I mean seemingly bullish numbers (unless they are vastly out of line with expectations) can be dismissed like non-recurring items on an income statement.

      Oil Inventory Expectations (from the Reuters survey) :

      • Crude Oil: Up 1.9 million barrels. The change in crude inventories could easily be lower than Street expectations due to the partial week closure of the HSC and potentially could be a small draw on inventories.


      • From the beginning of December to the middle of the month crude imports fell by roughly 1.6 mm bopd or 11 mm barrels per week through the Gulf Coast. Then analysts “expected” a draw of only 1.7 mm barrels but got blindsided by a drop of over 6 mm barrels. That’s a long winded way of saying that today’s number could even be a draw on crude supplies as could next week’s report. It all depends on the duration of the closure. However, as always “this too shall pass” and the U.S. remains exceedingly well stocked as seen below:


      • Gasoline: Down 1.8 million barrels. With all the refinery outages and an increasing number of local shortages gasoline is moving towards center stage as a key determinant of oil prices. Blending component consumption could easily make this number larger than this which would lend support to crude prices on a normal day. I think the amount of fear in the market will require a much bigger draw than the 1.8 mm barrel expectation to rally/support crude.
      • Distillate: Down 2.8 million barrels. I think this is probably a bit light but I’m not sure a “low ball” miss here will prompt much of a rally (at least much of a sustainable one) in heating oil or crude oil this late in the heating season.

      Odds & Ends

      Natural Gas has been quietly trading lower on the expectation that this week’s inventory report will show a withdrawal somewhere in the neighborhood of half of last week’s pull from storage. Gas sliced through $7.50 overnight and, barring any surprises tomorrow, could be headed towards a test of $7 by the weekend as inventories continue to track towards a seasonal trough of 1.4 Tcf. More on gas in tomorrow’s post.

      Spring Is On The Way. The weather “will turn very warm for much of the area that had one of the coldest Februaries on record,” said Joe Bastardi, lead forecaster at AccuWeather in State College, Pennsylvania.~Bloomberg

      Opec Watch: Iran says it will “never” stop uranium enrichment, no doubt in a bid to ease tensions and lower oil prices for everyone. Admed’s trying to enrich something all right and not just uranium. Check here for all the latest Iran facts, figures, and er, um critiques.

      Analyst Watch: nada.

      Putin Watch: Gazprom lowers Rospan’s gas volume transportation allowance in a move critics say is more strong arm tactics designed to force a sale of the TNK-BP venture.

      Holdings Watch:

      • Small BHI and SLB positions remain ontrack posting nice retrenchments on the day,
      • BP puts came back to life after the settlement party of the prior two days was abruptly cut short by the group’s retrenchment,
      • sold my XOM position bought at $1.25 over the last 10 days for $1.75 and thought I was lucky to have escaped (that was before the Dow plummetted 200 points while I grabbed a Coke and the $75 March put I had just sold went on to close at $3.30 bid!!! (kick, kick, kick)),
      • shied away from any more TSO puts although they reversed hard with everything else. They and VLO may be reasonable shorts going forward as gasoline prices should begin to sort themselves out (that’s code for fall) in the next few weeks as a number of snafu are fixed and refinery utilization slowly climbs out of its current maintenance season induced lull of 85%,
      • Picked up a small put position on PTR (March 110s for $1.30 near the close) – a rank wildcat of a trade on the sincere belief that their will be further follow through in the morning on yesterday’s weakness. The better decision was to avoid the temptation to play the early bounce in the market and the group which was brief and would have been very painful,
      • HES – the insider selling continues and although the stock fell 4% yesterday it was essentially in line with it’s peers and remains near record highs. I have not yet seen the catalyst (other than substantially lower oil) that can put a real dent in the shares.

      Posted in Uncategorized | 83 Comments »

      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.

      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)


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


      But It Took Rising Oil & Natural Gas Prices…


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


      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.


      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?

      Posted in Uncategorized | 81 Comments »

      Monday Mullings

      Posted by zmann on February 26, 2007

      No picks today. Stop reading if you want picks. I’m told that the first rule for writers is to never tell the reader to stop reading. Because they often do. But seriously, oil, gasoline, heating oil, and natural gas look extended to me. I’d like to let the week get rolling and exhaust some of last week’s exuberance before I make any picks but if I were to pick anything:

      • I’d consider puts on a refiner (very possibly TSO which rallied 7% last week as crack spreads soared on higher gasoline (up 8%) and heating oil(up 5%)) but I’d wait until later in the week,
      • I continue to hold smallish put positions in service companies: SLB and BHI but I’m waiting for further action until the OIH establishes a bit more direction — cover over 143, add to puts under 135,
      • I hold puts on TK – which saw some pretty handsome estimate reductions last week 10% in 2008 and is near it’s 52 week high. VLCC rates continue to fall as seen here and they were a source of last quarter’s strength the company referred to in their 4Q press release.
      • BP continues to recover following the resolution of the Texas refinery fire lawsuits but the company will remain plagued with low growth and operational / managerial problems and I’m considering adding on to my position on this small spike (I’ve got a 2/5ths position now).

      Sentiment Watch: I remain bearish on the commodities but acknowledge that the after effects of a rash of refinery fires, pipeline breaks, geopolitcal tension crescendos in Iran and Nigeria will continue to be supportive of oil prices. Combine that with a late February snow storm that swept through the Midwest this past weekend and into the North East and both oil and gas find new floors in what was recent resistance: $60 per barrel and $7.50 per Mcf respectively. I think they break back through these levels, (potentially very quickly) as temperatures become more Spring-like.

      Oil & Gas Early Indications: both slightly higher in pre market trading.

      Opec Watch: Libya says Iran tensions already factored in, oil prices likely to trade around $60 through year end. Comment: Many analysts are guilty of only being able to see what is currently going on around them (pricewise) and then uttering something within a few dollars of that as their price target range. I expect more from an OPEC oil minister.

      Analyst Watch: CAM from SB to B at Matrix.

      Sorry for the short post: 1) not much going on in the oil patch, and 2) I’m working on a statistical post and didn’t get on the daily post until late.

      NOTE to SA editor – Do not publish today’s post.

      Posted in Uncategorized | 50 Comments »