Energy Stock Trader: Thursday Outlook

Lots to talk about today; here are the cliff notes:

1. Western Refining (WNR) downgraded again. Another sell rating… that’s just mean.
2. Fear of tropical weather boosted prices yesterday…may continue a bit early.
3. Stocks that’ll play if we get some real tropical weather.
4. Oil Report was tailor made for the bulls, but the gasoline draw was almost entirely a “lumpy” imports event - meaning I think it’ll run it’s course while we mostly stand aside, but that tropical weather could make the resumption of the expected downward course in RBOB take a little longer.
5.  Natural Gas Pre Show: Range is a 70 to 90 Bcf injection. I’m thinking a low end number.
6. Holdings watch: trades yesterday into OII calls, out of the TSO July puts early
7. Stocks of Interest: DVN, HAL, and NE (earnings and revenues beat)

Analyst Flash (of insight) Watch: (WNR) cut to Underperform from Neutral at Credit Suisse. Recall that Deutsche re-initiated coverage with a Sell rating here two days ago. Two big brokers saying it’s gone up too far, too fast and that valuations are so bloated they have to go to a SELL, that all too often dusty rating in sellside research. I have to nibble on some puts here and will let you know in comments what and if I’m at but I’d point out that although (WNR) is the 2007 % point gainer (up 141%!!!) and trades at 18.0x forward earnings, Holly (HOC), another fly on the wall in terms of capacity but a $4.3 billion dollar market cap company, has also enjoyed a strong run year to date (+52%) and trades at an even more excessive 18.9x 2008 estimates. I’ve also noticed in recent days that while 2008 numbers continue to march higher on an almost daily basis, the rate of change is slowing, especially among the smaller caps. In (WNR)’s case their 2008 number actually fell a touch in the last week. Oh what the heck, here’s that refiner performance and forward multiple table one more time.

Tropical Weather Watch: If you were closely watching natural gas trade yesterday you saw what fear can do. That “fire in a crowded theater” variety of fear I was speaking of in yesterday’s post reared it’s rally inspiring head and natural gas went from a standstill to close up $0.22 at $6.52. The trigger was an updated report that came out 10 minutes before its usual time of 1:00 EST that showed a tropical wave annotation near Trinidad & Tobago where there hadn’t been one just hours before. Put more simply:

The Same Was True Of Gasoline. RBOB, which had gotten a bit of a reprieve a couple of hours earlier with the EIA’s oil inventory report (see below), was fairly happy trading up $0.04, a somewhat modest retracement after the hell bent for leather plummet from the mid $2.30s over the last week. Then that picture of tropical waves hit the internet waves and RBOB closed the day up a bear bone shattering $0.0946 at $2.195.

If only we had something that even remotely resembled the picture on the left the move in commodities would have made sense. Instead we had some bunny shaped clouds. But it tells you something about the fear level. This was a tropical wave that NOAA said was unlikely to develop. Imagine if it were a real spinner!

This morning it looks like no less than four tropical waves are moving about in the Atlantic and the tropics and storm fear supported prices are probably going to be intermittently with us for a while now. These markets can get carried away but I prefer to bet on gas, the natural kind, when I’m asked for storm plays. I’m no more a meteorologist than I am a geologist and NOAA’s textual description says no development is expected in the next 48 hours which is their standard spiel when they’re not too concerned so I’ve got to go with that for now.

But here are some plays that I like if something wicked Gulf way comes. The explanations are fairly meathead but it’s late and you can always pin me down on specifics in the morning.

• (CHK) - nice and safe onshore, gassy as can be.
• (KWK), (SWN) - gassy, onshore and rapidly growing but priced that way.
• (APC) - well diversified, gassy E&P “mini-major” and cheap to boot. Well run as always and management continues to get more believers in the new Anadarko.
• (COP) - gassier Major, ditto regarding believers in its acquisitions.
• (LNG) - it’ll run with gas. I prefer (MCF) which includes an LNG component and a swiftly growing E&P arm but it has no options.
• (OII) - they're one of the ones that’ll collect the clean up bill if things go bad.
• (TSO) - all the benefit of a spike in gasoline and distillates with none of the geographic risk.

The Oil Report Was Just What The Bulls Ordered! At least if you don’t look too closely. At 10:31 I wrote: refiners off the table. I had taken out my July (TSO) puts  during the morning’s initial downdraft but I held (FTO) into the breach and even went against my own “off the table” statement adding more within an hour of the report (see Holdings Watch below).

• Crude: Down 500,000 barrels. Pretty much in line with expectations if not a bit of a bigger than expected draw by some accounts. Crude imports rebounded, after last week’s strong dip. Interestingly, refining inputs increased (causing the draw) but gasoline output fell slightly as you’ll see in a minute.

• But Gasoline Was The Big Story:

Inventories DOWN A Consensus Stunning 2.3 Million Barrels vs an expectation of a 1 million barrel BUILD. That kind of surprise gets you a rally, especially after the shallacking RBOB took since the last report.

When you break out the numbers you see that while Conventional Gasoline saw a big draw down (see imports next paragraph) reformulated stocks hit their highest level in six weeks.

Imports Caused The Brick. I said in yesterday’s piece that gasoline imports would have to stay up. They did not. Imports fell from to 915,000 barrels a day from the prior week’s level of 1.423 million barrels. Do that for seven days and you come up with 3.5 million less barrels of gasoline about town! As can be seen in the following chart the drop in imports (highlighted in yellow) looks somewhat suspect but not implausible. Chances are this rebounds but the stat is volatile and it may take more than one week. I just don’t think that tankers were suddenly diverted from the U.S. to competing markets like Europe. That pattern would be more gradual. Big drops like this are more likely due to timing and survey methods than empty off-loading moorings at the LOOP.

Production Down Vs Utilization Up. Once again, which is the more important number? I’d say production but I’ll say that through thick and thin and not talk production one week when it works for my “cause” and utilization the next when that can be a useful excuse.

• Utilization Rose More Than Expected up 0.8% to 91% but,
• Production eased slightly from 9.229 to 9.165 million barrels.

Demand increased to the highest level of the year. At 9.71 mm bpd it wasn’t the all time record but it was close. That record goes to the July 4th week two years ago.

Bottom Line: Let the bulls run. We’re not running out of gasoline this year (nor oil for that matter) but as one commentor put it so aptly “I’ve gotten in front of the momentum train before and I’m not playing that game”. Exactly my sentiments.

My thoughts on what happens with prices next is very much subject to what happens in the tropics. If there were no external weather related threat I would say the rebound was a normal retracement after a pretty good move to the downside, and with the help of the passage of time, the downward course in RBOB prices will resume. But with the increased threat of tropical disturbances I’m a little less cavalier.

Natural Gas Inventory Pre Show:

• Consensus: I only saw the 70 to 90 Bcf injection range Nicki reported in comments yesterday.

• My number: 80 Bcf would be cute of me to say as that’s the mid point of that range and probably the over / under level for the report. However, make no mistake, if there is even a hint of tropical action it’ll take precedence over any number under 100 Bcf. I’m going with 70 Bcf today. In other words, probably looking a for a bullish number this morning.
  • CDDs.  At 76 this is the season high. This week NOAA is looking for 85 CDDs.
  • Imports were down another 0.5 Bcfgpd week to week, mostly attributable to another slide in pipeline imports from Canada

Holdings Watch

CALLS:

• (OII) bought August $60s for $0.80. Last bid $0.75.

PUTS:

As to the refiners, we hastily covered our (TSO) puts as the morning’s early weakness started to peter out. Other readers on the PSW site came out of (WNR) pre report with monumental gains. It’s fun when it works. My (TSO)s were July’s and should have been gone days ago.

• (TSO) sold July $57.50s bought July 5th for a 56% gain.

• (TSO) sold July $60s bought in late June for a 59% gain.

• (FTO) bought July $45s in a botched trade for $0.70. It costs to be hasty and I took the wrong month as my system defaulted to the near month. Painful. Last bid: $0.10. Ugghh!!! Maybe I’ll luck out with today’s downgrade of competitor (WNR) (doubt it) and if so sometimes it’s better to be lucky than good but this was sloppy. However, this kind of thing happens. When it does it’s discombobulating. I repeat this mantra which helps put these kind of things into perspective: “this is the first trade in the next 1,000 trades I will make.” And on we go.

Stocks of Interest Watch:

• (DVN) announced the formation of a mid-stream master limited partnership or MLP. As I wrote awhile back, form an MLP, win a prize; DVN ended the day up 4%, a big move on a company of this size. FYI, (CHK) has mentioned the possibility of an MLP in recent months. Yet another reason to hang around.

• (HAL) B of A started the company at Buy after the close. Still holding the July $35s and WILL ROLL FORWARD TODAY. If you don’t see me announce a trade in comments early please yell at me!

• (NE) reported $2.24 (backing out $0.08 charge) after the close vs expecations of $2.14. They beat the top-line handily. I’ve been saying this for awhile but it’s worth repeating. Onshore drillers I’m not so happy with now but these types of guys (offshore with a deep drilling and deepwater concentration) are very insulated from any potential setbacks in commodity prices (not that we’ve seen any lately).
  • essentially booked on all jack ups for 2007; 65% of 2008 booked.
  • day rates continued to increase and deepwater rates for new rigs are especially strong.

This is another reason to shy away from OIH shorts. Get more choosey as there is a lot of variety in the 15 companies that make up the index and most of them are doing well. Still I know several people who make a decent living trading the range there like clock work and who I am to fault another’s profits?!

Odds & Ends

Analyst Watch: Berstain takes (VLO) and (SUN) from market perform to underperform. Brokers again fearful refiners are over-heated. B of A initiates coverage on most of the big service names with a buy rating.