Energy Stock Trader: Monday Outlook

by: Steve Zachritz


WEEKLY SUMMARY

What’s so scary about Friday the 13th? I’ll tell you this: it’s much less scary if you had puts on the biggest loser of the day in the Oil Service HOLDRs ETF (NYSEARCA:OIH) - Baker Hughes (NYSE:BHI) - which warned and tumbled 6%. Our July $85 puts responded by skyrocketing at the open where we sold for a tidy little 286% one-day profit. That was a bit lucky, but it was my main call when the gas storage number came out. Friday the 13th was also less scary if you happened to be long the best performer in the OIH, Halliburton (NYSE:HAL), which gave our now 4x position a much-needed boost. What a great week! I hope you had as much fun as I did!

Weekly Wrap 16 07 2007

Something's Gotta Give Watch: As I said on MN1.com on Wednesday, the EIA’s report was a good one for crude and a bad one for gasoline. Check out this chart:

Oil vs Gas 16 07 2007

Here’s one opinion from an oil trader late Friday that wraps the above relationship up pretty well:

Frankly a pig of a week, crude finishing some $2 higher over the course of the action and gasoline some 1600 points below its early week’s highs - it is not sustainable. I know this may be getting to be a boring mantra, but now either products have to rip or crude has to fall to maintain a fundamental equilibrium that sees refiners make a turn on the marginal barrel of crude they run - if they don’t, they just don’t run the crude. In Europe some are already cutting runs because they are not, and in the near term we see gasoline imports into the U.S. maintaining high levels given the cracks over the last six weeks, thus we continue to seek a top in crude.

Oh yes, one last thing on crude: we’re backwardated. Note to speculators: Your license to print money has temporarily been suspended, please find another commodity to play with. Just kidding. And crude can and does rally in backwardated markets. But a lot of hot money is in this market, and they just lost their ability to buy it, sit on it, and automatically reap profits (spread less storage cost). That’s got to be a disincentive to own it for some. Come to think of it this has to be frustrating for the IEA who keeping calling for panic in the streets!

Backwardation 16 07 2007

CFTC Net Short Position Hits Another Record: Can you say 'The pendulum is swinging too far?' Man are they going to be in a hurry when the bearish music stops (hurricane), and their aren’t enough sellers to accommodate all that covering.

Gas Directed Rigs Rebound To Record Topping 1,500: Rigs drilling for natural gas hit 1,501, a record since Baker Hughes started splitting out the data in 1987.

Gas rigs 16 07 2007

Natural Gas Storage Increases By 106 Bcf: At 2,627 Bcf in the ground, we’re now 3% off all-time record storage and 17% above the five-year average.

Gas storage 16 07 2007

Holdings Watch For The Week Ended 07/13/07

CALLS

  • Chesapeake Energy Corp. (NYSE:CHK) got a whole lot of love with their Anadarko Petroleum Corp. (NYSE:APC) JV. Our January 08 calls rallied nicely, but I’m nowhere near done with this one. Next week, the Street should pay homage to the deal.
  • Oceaneering International Inc. (NYSE:OII) - sold the July $55s for $2.50 for a 127% gain to the $1.10 purchase on 7/6.
  • BHI - sold for $0.75 for a 29% loss upon release of the gas storage number on 7/12.
  • Halliburton Co. (HAL)- doubled by 2x position in the July 35s upon announcement of the increased buyback and after Cramer had been dumping on the stock for two days. We’re now 4x here with a $0.775 cost. Last bid $0.75. Cheap, whether it be refining, E&P or oil service, increasingly looks to be outperforming glitzier but expensive stories going into earnings.
  • Nabors Industries Ltd. (NYSE:NBR) - bought a 2x position in out of the money ($35 July calls) for $0.40 to protect myself in case I’m wrong (see put section) and they get taken out.

PUTS

  • BHI - July 85s were taken within 30 seconds of the gas storage number for $0.35. BHI said it wouldn’t make consensus due to Canadian weakness, and we sold on the open for $1.35, a one-day gain of almost 300%. I understand some of you sold in the $1.70 to $1.80 and my congratulations to you, but I’ve got to go with Phil on the “selling into the initial excitement rule.” Four out of five times you’re going to be very pleased!
  • Southwestern Energy Company (NYSE:SWN) bought July $45s for a quick trade on the NG number for $1.15. Last bid $1.35.
  • Frontier Oil Corp. (NYSE:FTO) bought the August 50s for $2.90. Last bid $3.10.
  • Tesoro Corp. (NYSE:TSO) - no adds to my current small position of $60s and $57.50s. but they did come back to life and as Tupp put it, it continues to form a delicious double top!
  • Nabors Industries Ltd. (NBR) added the August $32.50s on Friday for $1.60 in the wake of the Baker Hughes announcement. This didn’t work out so well later as takeout rumors once again surfaced driving the stock. Despite a $0.70 (2%) rally in the shares since my early morning put purchase, last bid was $1.60 due to the increased volatility. I’ll be pretty quick on the trigger as once volatility dies, so do these puts.

Other Stocks of Interest:

Continental Resources Inc. (NYSE:CLR) - On Wednesday I was asked to give a target on Continental Resources. Here was my response:

If they hit the mid point of their guidance, I’d say they’ll do $2.25 to $2.50 CFPS as long as commodity prices hold up. (I went with a pretty conservative realized oil price of $60 for the year, which they may beat with those hedges and higher production as the year goes by.) You could easily put a 7.5x on that CFPS, which gives you roughly $18 to $20. The multiple could be higher given their growth rate, tight control of op ex, and those nice new hedges, but why push things, eh?

CLR closed at $18.15, up 14% on the week

Newfield Exploration Co. (NYSE:NFX) continues to move higher with no news. Looks like they’re starting to get a little more respect, and perhaps there’s talk or at least speculation that recent divestment announcements (North Sea and Bohai Bay) are close to fruition. This is one of the three stocks I highlighted in our second Alwaysanoption Newsletter. Here’s a link to a complimentary download (.pdf).

It was a fun week! Thanks for the kind words and helpful suggestions. Let’s do exactly this week again next week, except let’s see if we can’t get the refining sector to come to terms with that whole oil/gasoline relationship. I know it’s tough, and that those stocks are just supposed to go higher everyday, but let’s give it a go folks!

MONDAY PREVIEW

Oil - Welcome to the land of backwardation. Although this may not matter right this second as the Euro keeps making new highs against the dollar pushing Brent to within a hair’s breadth of its all-time high, which of course helps support WTI. August crude is still hell bent for $75, but then I think we may see a pretty good setback into the upper $60s as the same tired old stories that were used as justification for oil’s move from $65 to $70 are trotted out again as “news” to continue this rally. Obviously with the out months, those news items are no long outweighing the fundamental fact that we have an awful lot of crude in storage (nine-year high).

Last week traders seized upon the IEA increased demand forecast for 2008. From the Daily Times: Prices were also lifted by news that the International Energy Agency has lifted its 2008 forecast for oil product demand by 2.5 percent to 88.2 million barrels a day. But they failed to notice the IEA predicted in a monthly report that tightness on the global oil market would ease next year, forecasting that supplies will exceed robust demand. And that IEA sees refinery upgrades reducing tightness in the gasoline markets and possibly reducing crude prices next year.

The IEA again called on OPEC to produce more oil. From the Daily Times: The IEA suggested again that the OPEC producers’ grouping should pump more crude, notably during the ongoing U.S. summer driving season when many Americans take to their cars for their holidays. Which would be a good suggestion if your car could run on straight crude and not gasoline. We could put in a pump at every stripper well in Texas and just fill up straight from the source on that logic.

Natural Gas Is Getting Hit Early: Down $0.20 in early trading, which would give back all of Friday’s crude inspired rally and then some. Cooling degree days came in at 76, the warmest this year, but well below expectations a week ago of 85. I’m looking for natural gas to resume it’s prior course towards $6.

Weather Eye Watch: Nada, unless you want to count a tropical depression and a tropical storm, both in the Pacific, and both headed generally towards Hawaii. I don’t. In the Atlantic I count not five, not four, not three, not two, not one, but no tropical depressions, storms or large fluffy clouds.

Analyst Watch: Baker Hughes Inc. (BHI) cut to neutral from add at Calyon, W&T Offshore Inc. (NYSE:WTI) cut to hold at Lehman, Royal Dutch Shell (NYSE:RDS.A) cut to underperform at HSBC, Evergreen Solar Inc. (ESLR) cut to hold at Weisel.

IAEA Confirms North Korean Nuke Shut Down: By the way of thanks, the South sent the North a shipment of oil. Ultimately North Korea is to receive a total of 1 million tons (7.3 MM Barrels) in exchange for being less of nutbag a good neighbor and dismantling their nuclear program.