Energy Stock Trader: Tuesday Outlook

Includes: APC, EOG, SWN
by: Steve Zachritz

EARLY READ ON CRUDE INVENTORIES (from the Bloomberg Survey):

Crude -- up 1.5 million barrels. I need a fleet of suburbans that can run on straight crude to get this number to fall. This would push crude stocks to 5-month highs.

Gasoline -- down 1.3 million barrels. This actually seems light since more refiners appear to have been offline than in the prior week. Maybe if imports pick up significantly or demand dips (fat chance), although we are approaching the $3 mark which made many motorists choke last summer.

1Q07 Results To Date: Rising Production, Skyrocketing Costs

This is by no means a comprehensive list, but it includes three of the largest big cap E&P names and two others I've been harping on. As you can see from the table, production growth is atypically high. Lease operating expense on a per unit basis continues to spiral higher as well.

LOE per MCFE 01 05 2007

First, this obviously good for the service companies.

Second, this is supportive of elevated natural gas prices to a point, in that much of the production gains on the gas side are coming via onshore production in Texas and Wyoming. Obviously if the big boys keep up this pace natural gas prices will eventually fall. However there's always the threat of production curtailment as plays are marginalized by costs, and rising service costs continue to push that tipping point higher. I'll keep adding companies I consider to be key to this picture as the earnings season progresses. Suffice it to say that anyone that manages to eke out better cost control is going to be the sellside's favorite and vice-versa (whipping boy).

Earnings Watch: (All reported after the close last night)

Anadarko Petroleum Corp. (NYSE:APC) -- Ok

o Earnings: Reported $0.23 vs expected of $0.72, but it contains a number of charges. Production was just over the top end of the guidance range. Both oil and gas volumes beat the high end of estimates.
o Guidance: Looking for a sequential decline in production for 2Q of between 10% and 15%, although it looks like at least half of the decline is related to the divestiture program.
o Costs: The good side of the divestiture program is the higher cost nature of the stuff they're punting. The company is looking for a significant reduction in per unit LOE next quarter. (< $1 / mcfe).
o Algeria provides a sucker punch. An "exceptional profits tax" (sound familiar?) is being applied to the full value of revenue and not just that in excess of $30 per barrel.
o I'll address anything interestng from the operations update in comments.

EOG Resources Inc. (NYSE:EOG) -- Better

o Earnings: $1.11 (after adjustments) versus expected EPS of $1.03. Total company production increased 8%, but U.S. natural gas production increased an eye popping 21% y/y led by Barnett Shale production.
o Guidance: reiterating 10% 2007 growth target. Expecting 18% growth in U.S. natural gas volumes on top of the 14% seen last year.
o Cost control here is truly impressive. Only up 10% on a unit basis y/y.

Southwestern Energy Company (NYSE:SWN) -- Best

o Earnings: $0.30 vs expected of $0.26 on the back of a 44% increase in production volumes. Production blew out the top end of the guidance range by 9%!
o 2007 Guidance: Increased the bottom end of the range. Range now equates to 48% to 52% y/y growth.
o Fayetteville shale gross volumes increased to 155 Mmcfpd vs. 120 disclosed just two months ago. Nearly half of 2007 production is expected to come from the Fayetteville, up from just 16% of total production last year.
o In other areas (Arkoma conventional) and E. Texas, the company continue to meet with excellent drilling results yielding increasing production.
o Costs are on the rise here as well but the expected increase appears within reason.
o One cause for pause: Southwestern may drill fewer wells in the shale due to longer than anticipated drill times, however the wells likely have longer laterals which hopefully will (should based on what they've seen so far in some of the pilots) yield greater reserves per well.

Analyst Watch: EOG Resources Inc. (EOG) goes from under to overweight at JP Morgan. Southwestern Energy Company (SWN) price target cut from $52 to $49 at FBR.