Oil Inventories On the Rise: Where's the Shortage?

I just saw something I haven't seen in ages -- an ad for gasoline. It was for Marathon Oil Corp. (MRO) (10/31), and they are putting STP additives in their gas, so come on down! Marathon is coming off a blowout quarter that cannot be beat.

Of course that got me looking at Marathon, a company I don't usually watch, and that made me run all the numbers, the way I haven't done on our usual suspects in a while, and I noticed some strange things:

While cash has grown from $1B to $3B in the past 4 quarters, accounts payable had gone up too, from $6.6B to $8.3B! Receivables are up just $300M over the same period.

The company bought back $500M worth of stock in the past two quarters, and paid $500M in dividends in the past 4 -- so, why didn't they pay their bills? One possible explanation is they are, but spending is rising so quickly that they just can't pay it down fast enough.

Analysts are expecting MRO to rack up earnings of $3.57, substantially lower than the $4.16 they made last quarter, but still 75% higher than last year's $2.16.

Last October 20th MRO was trading at $56.28 and oil was $60, so with oil down at $60 again I have to like the $85 puts for $2.80, especially if they come down a little. I also will be watching the $80 puts at $1.30 with great interest as a possible roll.

But that's not what I found REALLY interesting...

I noticed something in Marathon's numbers that I hadn't noticed in my usual oil plays. I guess coming in to a fresh company gave me a different perspective, but here's something that should unnerve any retail analyst:

Inventories are rising!

Since last September, Marathon's inventory is up $500M, from $3.3B to $3.8B.

How can that be? Don't they know there's an oil shortage? Don't they know OPEC can barely keep up with demand?
OPEC Spare Capacity Chart -- SHOCKING (and from OPEC themselves)!

While inventory did draw down $300M in the post Katrina/Rita Q4 last year, it has risen $800M ($400M in Q1 and $400M in Q2) since then! Gosh that's a lot of oil! Especially when you consider that the company "only" sold $18B of it last quarter. That's a 2.5% sequential inventory build-up...

Just like any good retail analyst, that sets off some alarm bells for me, so I take a look at the sector to see if any other companies are having that problem, or if it's just Marathon brand oil that's gone out of fashion (to the point they have to start adding stuff to it and advertising!).

Tip of the iceberg? You bet and energy traders are the captains of the titanic!

ExxonMobil Corp.'s (XOM) inventory is up $900M, but up $2.5B since Q4 -- Oh my! If we assume that inventory at XOM is not iPods or DRAM chips, perhaps something like... oil, and we assume it really is worth $57 a barrel (choke), that's 43M barrels added to inventory in the past 3 quarters.

Exxon has $11.8B worth of inventory. In 2003 they had $8.9B, in 2004 they had $9.4B, in 2005 they had $9.3B. By the way, the companies maintain a fixed price of oil in storage, so these results are not due to fluctuations in price! How nice of them to hold all that oil for us!

But we know we can always count on Exxon to do their part -- the other majors are contributing too:

ConocoPhillips's (COP) inventory is up $1.6B since last Q3 -- up $2.7B since Rita.

Chevron Corp. (CVX) is up $1.3B since Q3, just $700M since Rita -- they must be in fashion!

Even little Sunoco Inc. (SUN) chipped in with a $600M build in the first 6 months of this year. That's 7.5% of their market cap -- very patriotic!!!

The European majors are just as patriotic:

BP PLC (BP) has built an inventory of $1.2B, quite amazing with all that production shut down!

Royal Dutch Shell (RDS.A) is the most patriotic oil company I've seen... I don't have their 3rd quarter numbers, but between December 31st of 2005 and June 30th of this year, Shell was kind enough to hold $3.9B worth of oil for us! That's $24B warehoused versus just $15B in 2004. Thank goodness someone is saving some for a rainy day!

PetroChina Co. Ltd. (PTR), also near its all-time high, added $18B to inventory between 12/31 and 6/30 and, even if we assume that they price inventory at the price of oil -- that would only account for $8B of the increase! Dec $105 puts are $1.75.

Petroleo Brasileiro S.A. (PBR), also in just 6 months, added $1.9B

Just this little group of the big boys added $32.3B to their inventories in less than 9 months. Yes, I know some of it was gas too, but if we convert it to just oil, that's 560M barrels!

Legend has it that the modern Marathon gets its name as that city won a great battle in 490BC and a messenger was dispatched 25 miles to Athens to proclaim the victory. He ran all the way there, gave his message and died. Perhaps the message of this Marathon will reach the ears of oil traders before we have to write a Greek tragedy about them!

Something to think about next time you see a commercial from your favorite oil company.

Read all of Phil Davis's articles on Seeking Alpha.

Comments

[WC Whiner:]

Stocks are the big issue for energy right now. If prices are market-clearing, whyn would stocks be rising? That said, I am not certain there has been a 560mm barrel build. Total US crude stocks are 336mm barrels, which is about 8% above year-ago levels, but does not congrue with your analysis.

FD: I am long vol, short delta in the energy complex.

2006 Oct 22 07:02 PM

[glendokid:]

So? The world uses about 67M barrels per day, so that's about 8 days supply. If inventories were low - perhaps that's reasonable. Is there a seasonal variation in inventories?

in any case, I can't imagine that oil speculators are not aware of the inventories of majors and others.....

FD: I'm long MRO.

2006 Oct 22 09:28 PM

[CrossProfit_:]

Does this mean that according to the "V" rule the oil companies expect the price of oil to spike this winter? After all "V" knows this market best...

Not commenting on the math, just the logic. Throw in Shell buying Shell Canada at a 22% premium from what you say is already inflated prices and you have another company that is totally disconnected with reality - correct?

2006 Oct 23 08:38 AM

[Philip Davis:]

Whiner, you are correct (or possibly correct because there are no accurate records) - as I said above, those "supplies" include oil and gas (and, in XOM's case chemicals), I just converted the whole lot into barrels as it's less complicated to wrap our heads around.

Tom, you can be aware of a trap, you can understand the trap, you can know how you got into a trap but that doesn't mean you can get out...

Cross, after this busy weekend I can just sit back and see if the markets bear me out. We've already made our plays so good luck to all on their positions!

2006 Oct 23 01:23 PM

[CrossProfit_:]

Forgot, FD: We are out of oil plays until after the elections. Good luck Phil, still think you might do better playing straight oil instead of XOM.

2006 Oct 23 03:06 PM