The Week Ahead

1/21/07

• Several gassy E&P’s had 5%+ days on Friday (SWN and KWK up 7%, EOG up 5%) but not CHK. Chesapeake’s been beat up in the recent commodity downdraft despite having a majority of its gas hedged north of $8/Mcf. I’d look for a pop over $31 with gas bumping up over $7 on all this cold. However, I wouldn’t fall in love because gas will fade hard with the cold and should test $6, then $5 in February.

• PTR Rebounding. PetroChina started to rebound on Friday with a $3.80 (3.2%) move up after falling from $142 to $120 over the last three weeks. If oil continues this bounce the stock could run hard through at least inventories.

• Oily Correlation. Names that have been moving tick by tick with oil over the last few months become especially intriguing when every day brings a $1 or more change in price. Of late SU and OII have followed oil on an almost second by second track. Of course, you’ve got to get the direction of oil right or it would just be too easy.

• Watching HES Like A Hawk. Strong exploration results can’t save you from a down commodity market. This beasty is completely unscathed.

• COP Earnings Jan. 24th. The first of the biggies to report 4Q numbers. Expecting $1.98 vs $2.69 last year. Estimates were $2.23 three months ago and have fallen 5% in the last week. These guys alread pre-announced paltry organic (non-acquisition) reserve replacement but they’ve still got to post their F&D costs (primarily the Burlington and Lukoil additions). Probably not pretty. I’m on the fence here but it’s worth watching and I’ll try to put out a mini model before numbers hit so maybe I’ll have made up my mind by then. Either way, if it scores a big beat (unfriggin likely) I’ll be looking to own XOM. A big miss and I’ll probably wait for the panic to clear before taking a very short term long trade on XOM.

• MUR – Beaten and Rebounding? I’m staying away but looking for an area to re-enter puts as, at 13.3x 2007’s greatly optimistic earnings estimates, this is the most expensive mini-major of the group. Funny thing. They warned a week ago that they’d put up numbers of $0.40 to $0.45 on the quarter and yet analysts have only dropped them to $0.52 from $0.65. Sounds like half of the 16 analysts covering the company are still in la, la land or do they just not believe it’s possible the company could have halved analysts estimates from three months ago for the year’s final quarter? It’s no wonder Lehman upgraded it to buy this morning!

• Refiners. Higher oil is bad. Higher products prices made from oil is good. Watch to see if heating oil and, perhaps more importantly, gasoline keep up the pace if oil continues to bounce. When crude oil levels off these guys will be the first to fall. Favorites for puts (but not right now) VLO, SUN, TSO (pumped in Barron’s this past weekend), WNR, and high priced HOC (which has burned me 3 times in the last 3 months).

• HAL vs SLB. SLB beats and runs over 5% on Friday. HAL rallied only half as much, is cheaper (thanks to Pelosi and Co.) but probably fairly safe for a “service isn’t dead yet” rebound. After all, the service arena has been getting stomped but the earnings numbers that back it up are flat with those of three months ago (strictly service and not the drillers). It may be worth a bounce to $31 and then back out. By the way, the drillers may bounce like a new day is dawning but as soon as gas stalls I’ll be buying back into puts on the land drillers as well as a few offshore names.

• Other Names That Could Get A Boost If Oil Holds It’s Short Term Gains. Solid operators NFX and SFY. Both have been knocked for a loop, 20% since early December as investors shunned the mid-cap E&P names for safety stocks like XOM. On Friday, Newfield cited weather delays at multiple projects that prompted what I’d call a pretty short sighted Morgan Stanley downgrade. This is the fourth downgrade since October and with the stock 20% off it’s highs this starts to look a lot like most of the damage has been done here. At 9x 2007 estimates I’ll take it’s 20% expected EPS growth (which admittedly may be a bit too high based on assumed commodity prices) over XOM’s 12x 2007 earning and negative 4% growth track. As to SFY they’ve got a large prospect inventory that’s oily and delivering double digit production growth for them. If oil stabilizes between $45 and $55 these guys have a license to print money.

• Important Note: I’ve got more longs in the list above than you almost ever see from me. I am not bullish. Just looking for a way to play the irrationality factor while I hunt for better entries on puts. Besides, if all I ever did was write about the short side I become one of those guys that everybody goes, “oh sure, here comes the perma-bear, doom and gloom, broken record guy” and I realy hate those guys.

3/5/07

• 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 thatOPEC 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.