The 12-Month Strip: Still In Backwardation
Gasoline inventories fell. Slightly higher demand, slightly lower production, but it was imports falling off a cliff that made the RBOB bulls run again… for a whole day. Then it was back to declines. You’ll note in the graph below the decline in stocks came about when it should. True enough we’re out the bottom of the range, but imports and production are very likely to higher again this week. Demand? That might be higher as well but stocks should go back to builds.
Last Friday I pointed out the fat valuations being placed on refiners. This is nothing new, and I’ve often pointed it out. They’ve gotten even fatter.
That was then (7/13/07):
This time Wall Street Analysts started to agree after a week of sharply decline gasoline prices and crack spreads. The results was the beginning of downdraft, broken up Wednesday by an import induced drop in gasoline stocks. I think the decline in gasoline and in crack spreads will continue, barring a hurricane of course, for some time.
This is now (7/20/07):
Do I think enough is enough for this refining fall from grace? The big-caps are coming back into a the high end of their historic forward multiples. I think they have less room to fall at this point, but that fall they will until crude oil starts to soften. As to the tiny little companies above (Frontier Oil Corp. (NYSE:FTO), Western Refining Inc. (NYSE:WNR), Holly Corp. (HOC)) -- there is little doubt they have jumped the shark.
Natural Gas in Storage: U.S. gas in storage increased by an in line 65 Bcf. Gas reacted somewhat bullishly to the report and we made several gas picks that if taken quickly turned out quite well. Still thats only 3% below last year’s record level of storage, and while some real heat is on the way, inventories are 16% ABOVE the fire year average.
What matters more -- storage or storms? Great question. Storms for the short term, but storage for the long term.
While the import situation remains in flux it is not plummeting yet. And production in Tx, Wy, and many smaller states is on the rise due to a combination of non-conventional plays and reassessment of older fields (deeper, new tech etc). Gulf of Mexico production continues to recover from the storms of 2005 and is poised to move even higher with the additional of large gas projects like Anadarko Petroleum Corp.'s (NYSE:APC) Independence Hub which came on line this week. Independence alone is expected to reach its capacity of 1.0 Bcfgpd by year-end, and it serves to make several nearby projects economic and thereby will sustain production at peak levels for several years to come.
So am I saying there’s too much gas around and that prices will fall off a cliff? No. The funny thing about much of the recent growth is its cost. You’ll note from the table above that gas-directed rig count is a stone’s throw from the record (which was set last week at 1,501). It has to stay that way as places like the Barnett Shale, through large in overall size, suffer from high early decline rates (50% is common within 3 to 6 months). To continue growing operators have to keep drilling. A lot. That keeps a lot of rigs busy which is expensive. Manpower is short and those people need to be, and are, paid to stretch themselves so far.
Then you’ve got the fact that many E&P companies were late to the proverbial game. Mitchel found the Barnett (or at least they were the first ones to make it a name every soccer mom knows) and Devon (NYSE:DVN) acquired them for it. Then the other big cap E&Ps came into the play, one after another, and then the mid-caps and then the smaller guys with the more recent ones paying a pretty penny for the privilege to lease and drill there. While some of the early guys are probably economic at $4 gas, many of the new entrants (last four to five years) and even new leases by the old guard, would find $4 gas intolerable and $5 and even $6 only marginally profitable.
So, no I don’t see us plummeting much below $6 (if we get there with all these clouds in the Atlantic) or you’ll see operators announcing shutin (as is there right) until prices make more sense to them. It won’t happen in the Barnett at first or at all, but the Rockies may see some news along those line soon.
CFTC -- Another Record For The Shorts: The net short position reached 93,000 for futures and options combined, another record. While shorts again edged up, I note that longs increased for the second week in a row and I suspect that if the numbers were through today as opposed to Tuesday (the date of record) that long position has grown a little more. Gas was awfully jumpy as the tropics looked somewhat threatening and that tells me there’s a lot of fear for losing the large gains the shorts have made over just the last month.
Transocean Inc. (NYSE:RIG) and GlobalSantaFe Corp. (NYSE:GSF) Merge: Deepwater capable drillers hook up, and pre-market shows big up percentage moves for both. The Oil Service HOLDRs ETF (NYSEARCA:OIH) will likely take out 190 at the open and 200 could be in the cards as Diamond Offshore Drilling Inc. (NYSE:DO), Noble Corp. (NYSE:NE) and ENSCO International Inc. (NYSE:ESV) and other higher-end, offshore and deepwater drillers and ancillary deepwater service companies (like my Oceaneering International Inc. (NYSE:OII)) are bid up in anticipation of further sector consolidation. Land drillers should do less, but nevertheless should rally on the news. We’ll be taking a look at laggards in the OIH early this morning. To forestall any questions -- no I won’t consider shorting the OIH or any of it’s high flying components now. Given another few days the index could easily test 200.
Second Big Up For The OIH -- Halliburton Co. (NYSE:HAL) Tops Views. We rolled to August here on Friday, so whew! No miss. $0.60 (after excluding a 3 cent gain) nicely topped Street consensus of $0.56. This is what Cramer calls a miss? That was his call Friday. International operations were easily enough to offset North American softness attributable to Canada. U.S. well stimulation picked up nicely.
Third Big Up For The OIH: Price targets are rising swiftly. FBR raised it’s price target for Schlumberger Ltd. (NYSE:SLB) after Friday’s stout earnings from $93 to $118.
Analyst Watch: Refiners Put On Notice: UBS initiates coverage on the refining industry. The solitary Buy rating goes to Valero Energy Corp. (NYSE:VLO). Good call there. Namby-pamby Neutral ratings go to Frontier Oil Corp. (FTO), Holly Corp. (HOC), Sunoco Inc. (NYSE:SUN), and Tesoro Corp. (NYSE:TSO). And a Reduce rating goes to Western Refining Inc. (WNR). In other broker news, B of A cuts ConocoPhillips (NYSE:COP) to neutral and Citi hits EOG Resources Inc. (NYSE:EOG) and Quicksilver Resources Inc. (NYSE:KWK) with sells. The last two are ridiculous, but we’ll thank them later for the reduced entry points for calls which we’ll take as gas approaches $6 and the CFTC short covering starts.
Natural Gas Getting Cracked Early... as Nicky said it would last week, so kudos to her! Will gas prices stay above $6/Mcf? I was asked over the weekend if natural liquids prices would prevent gas prices from falling much below $6. Well, let me say that while I don’t think gas goes much if at all below $6 soon, the support of gas prices by NGL’s will be modest compared to other factors, mostly importantly weather followed closely by imports.
As to the NGL’s question. When you have relatively higher relative NGL prices (to natural gas) a greater percentage of NGL’s will be extracted thereby reducing dry gas production, decreasing injections to gas storage and reducing the climb in storage relative to year-ago levels and thereby supporting prices. But given the way the government presents the data it would take a while to see.
I still think $6 is in the near term cards, and then technical trading factors will take charge for the near term. As Nicky so aptly pointed out last week, we stand at the cusp of moving into record gas storage territory. This coming week a year ago saw a 7 Bcf WITHDRAWAL. A 65 Bcf or greater injection would flip us into record storage territory for this week of the year. That’s rather bearish.
Tropics Watch: Three tropical waves on the way.
Perma Bulls On The Warpath: Here’s a Bloomberg article calling for $100 oil from a half dozen or so prominent analysts, traders, and hedge fund managers with no vested interest in being unbiased I’m sure. In a nutshell, they say if OPEC doesn’t ratchet up production very soon you could see $100 /oil by year end. This year end!
To that claim I say, well what about this?
To which they say, “you have to look at it on a days of supply basis, then you’ll see how it doesn’t matter how much we have in storage, it’s about how much more we’re consuming now than we were 9 years ago” (the last time we had this much oil in storage).
To which I say -- ok -- what’s wrong with this graph?
Days supply is up where it was, oh, I don’t know, say 9 years ago, and yet WTI is through the roof. I’m not saying it won’t go to a hundred. I’m just saying lets point out the real reason it will. Two words: hot money. Two more words: hedge funds. Enough said.
Earnings We Care About This Week Watch:
- Tuesday - BJ Services Company (BJS), BP plc (NYSE:BP), Corn Products International Inc. (CPO), ENSCO International Inc. (ESV),
- Wednesday -- Cabot Oil & Gas Corp. (NYSE:COG), ConocoPhillips (COP), EnCana Corp. (NYSE:ECA), Murphy Oil Corp. (NYSE:MUR),
- Thursday -- Apache Corp. (NYSE:APA), Evergreen Solar Inc. (ESLR), ExxonMobil Corp. (NYSE:XOM), Newfield Exploration Co. (NYSE:NFX), Suncor Energy Inc. (NYSE:SU), W-H Energy services Inc. (WHQ),
- Friday -- Baker Hughes Inc. (NYSE:BHI), Chevron Corp. (NYSE:CVX)
This is by no means a comprehensive list of energy companies reporting this week. If you’ve got one you think should be on the list as always pipe up with a comment!
IPO’s Of Interest:
SandRidge Energy (formerly Riata): proposed symbol (NYSE:SD). Another Oklahoma powerhouse comes to market.
- Top notch management: Tom Ward runs the show, former President and Cooper Companies Inc. (NYSE:COO) of CHK. His name has attracted top management and technical talent, some from Chesapeake and most from other public companies.
- Top notch underwriters: Lehman, Goldman, B of A,
- Operations: Big play is gas laden West Texas Overthrust or WTO which is where the North and South American continents slammed together creating layers of rock with traps for hydrocarbons. Here SandRidge is concentrating on developing the Pinon Field and two prospects: South Sabino and Big Canyon. They plan to have 30 rigs drilling in the WTO by during 2Q07. They have additional activities in the Cotton Valley Reef trend of E. Tx/N. La, along the Gulf Coast, on the GOM shelf, and in the Piceance Basin of Colorado. The later two areas are not the focus here.
- Potential drilling locations: 3,800 (2,600 in the WTO).
- Reserves: 1 Tcfe, 85% natural gas. 99% independently engineered by Netherland Sewell which runs which is the #1 or #2 out there in the business. Almost 60% of reserves are in the Pinon of the WTO area.
- They own 32 drilling rigs outright and participate in a JV that owns another 12 with Clayton Williams Energy Inc. (NYSE:CWEI). This is a huge strength both from cost and control/availability standpoints. Especially in this time of spiraling service inflation.
- More on the WTO: through year end 2006 200 Bcfe has been produced from only 300 wells scattered across several fields (including the Pinon) in the WTO. These are stacked pay or multi zone targets but the area is remote and lacks infrastructure (Terrell and Pecos counties). SandRidge is acquiring a massive 3D shoot over the area now (1,300 sq miles). The first two phase of seismic should help additional infill drilling opportunities in the Pinon and should be complete by year end.
- The other two WTO prospects are near the Pinon. The Big Canyon prospect has some well control from a 1993 well that tested gas from a sand and a chert (think of fractured quartz or flint) but was abandoned. They drilled two wells which encountered hydrocarbons but no flow info means they were non commercial. They were selected using 2d and the addition of 3D data should firm up some potential targets late 2007.
- They have installed additional compression capacity for future expansion of Pinon gas production and more is on the way by year end.
- They gather CO2 from the WTO gas and use it for tertiary recovery of oil in older, post water flood fields in West Texas.
What I don’t have yet is a few crucial numbers: How many shares are coming at what proposed price? I’ll republish this when I get those. For now I’d say very interesting. It’s a grower with long-life gassy reserves. It just depends on what kind of multiples to CF and reserves they give it. It appears to be well run, has top talent and the costs and balance sheet look in line. It’s got a powerful set of energy savvy bankers behind it which won’t hurt either. And it’s prospect rich to boot. But I’ll get back to you on the numbers when I have them.
Hugo Watch: Send Money, Send Lots of Money. In his latest chapter of How Not To Run An Oil Country, Chavez writes, “kick out the stinking Americans and their billions of dollars, replace experienced oil hands running your drilling rigs with fresh faced military recruits, and finally, when all else fails to revive your flagging production levels, slash your rig count by 40%. That’ll fix them capitalistas!”
Comment: You want to get production up but so does everyone else. Rigs cost money and there is not an endless supply of them. Enticing people to come to your country by partnering with them seems a better way than stealing from the guy who brung ya, then looking for the next innocent face (Hello China, my name is Hugo. I’ll be your socialist host for a short time). With the 2007 rig count falling from a projected 191 to a mere 120 we can only expect to see more of this:
Have a great day everyone! I’ll see you in comments.