Late Monday afternoon in comments I said:
Refiners -- more brokers agree with me and the stocks can’t hold gains into the close. Refiners report next week, so this could get a lot uglier before they can report some big YoY and QoQ #s.
Brian08 responded after my comment at the end of that rollercoaster of a day with rally headfakes too numerous to count with what seems now to have been quite prophetic clarity:
Amen to that one Z! Only a small blip in the radar... A day like this only goes to show the importance of having a thesis when you are trading... If you don’t have that, a day like this will CERTAINLY make you panic and make some stupid, rash decision(s)...
Comment: Without that thesis, “we’re all just one trade away from humility.”
On Friday the 13th I wrote:
Multiples have become elevated for refiners as the stocks have had a good run this year owing to large increases in YoY crack spreads. But the stocks have recently accelerated their run. If they went up in lockstep with higher cracks, it stands to reason that the stocks, especially the smaller caps that have experienced significant multiple expansion, will full the same pull -- if only seasonal in nature -- as estimate growth slows, and eventually falls.
Finally, I was taking a look at historic forward multiples of earnings, and valuations look pretty lofty here. Even VLO, my favorite refiner, is trading a little higher than it normally does on a forward basis. As you go down the market cap chain, the relationship between past trading range multiples and present multiples of forward earnings gets truly stretched.
This was then (12 days ago):
This is now:
The Equal Weighted Refiner Index looks a little different from the 13th as well:
Nabors Industries Ltd. (NYSE:NBR) -- slight miss. $0.79 including a $0.10 gain vs $0.80 consensus. They point out the gain (which should be excluded) “was offset by a $0.10 drop in investment income” as 2 of the 30 funds they invest in stung them.
- They only did this well due to a lower effective tax rate and their share buyback since they missed on the top line as well ($1.16B vs $1.20B expected).
- Canada operations: abysmal - their word not mine. First significant loss in a quarter for this division since the early 1990s. No visibility on a turnaround here.
- U.S.: Lower 48 activity - sizable drop. Then you're drilling in the wrong basins my friend. U.S. gas directed activity is hitting 20+ year highs.
- U.S. land well servicing business continues to slip - a combination of adverse weather and increasing competition from “a large influx of additional rigs by numerous contractors”
- International looks good (based on current rates) with good visibility into 2009.
- In summary: cautious outlook towards N. American natural gas, optimistic regarding International ops.
- RBC docked its price target from $44 to $39 this morning.
In a nutshell, here’s how much the various moving pieces matter (be they strong with high visibility, or weak like the U.S. onshore or “abysmal” with little insight into a turn):
One last thing. They mentioned achieving the per-share results in part because of the share repurchases over the last year. But sequentially the share count ins up from 284.8 mm fully diluted to 287.9 mm, so either they bought something during the quarter that I missed (they seem to be busy selling rigs, not making acquisitions that would call for stock issuance), or their option grants are outpacing the buyback.
Other Earnings Out Today That We Care About
- XTO Energy Inc. (XTO) - good numbers, boosting 2007 production guidance from 15% to 17%.
- EnCana Corp. (NYSE:ECA) - raising outlook on strength in oil sands.
- ConocoPhillips (NYSE:COP) - reports $2.90 (after you take on the Vz charge), beating consensus of $2.68 quite handily. Bought back $1B of their stock during the quarter, debt to cap down to 21%. The production slide from continues. 2.1 mm boe in 4Q, 2.0 in 1Q, now 1.9. More on these guys later
- Cabot Oil & Gas Corp. (NYSE:COG) and Murphy Oil Corp. (NYSE:MUR): more later if interesting.
CALLS: No Action. The two recent E&P trades got knocked around pretty hard, but were off their lows by the end of trading as natural gas broke $6 but didn’t spiral with the markets. I’ll add more Newfield Exploration Co. (NYSE:NFX) today after the inventory numbers come out to bring myself into 2x or 3x position prior to earnings on 7/26.
- BJ Services Company (BJS) - conference call did not go as good as it could have… see my play by play in yesterday’s comments for details. Added the August $27.50s for an average cost of $0.775 about halfway through the call somewhere around the time the fifth or so analyst made sounds akin to beating a dead horse over margins and market share. Last bid $1.05. Up 35% for listening to a conference call and acting before the analysts got a cup of coffee and sauntered over to their squawk box mikes to give the troops the bad news.
Late yesterday we took a little off the table as the stocks were preparing to close near their lows:
Tesoro Corp. (NYSE:TSO) - Sold the August $55s for $4.60, a 53% gain since Friday’s re-entry. The stock is approaching $50, from which I’d expect it to find its sea legs for a short period, and I may flip some of the house’s money into a small call position here, especially if tropical weather begins to crop up. At just under 9.0x 2008 numbers (which may be a bit high at this point but probably not too high), TSO is out of the excessive pricing range it has enjoyed for the last several months, although I wouldn’t call it cheap -- and I’m not expecting it to get back to it’s recent all-time highs in the near future. Still, it may bounce tradeably off that nice round $50 mark.
Western Refining Inc. (WNR) - With the stock down 10% late in the session, I came out of half of my $55 puts for $4.60, a 70% gain since Friday’s roll. Still trading at 14.7x numbers, down from 18x less than two weeks ago. If we get a big drop pre-Oil Inventory Report tomorrow, I’ll sell the remaining into the excitement and reposition after the report.
Frontier Oil Corp. (NYSE:FTO) - Still holding August that are starting to wake up but still worth a lot less than what I paid for them. Sold my $45s last week in an apparent fit of stupidity (nice gain but it would have paid to sell off the $40s instead…ah hindsight). Also holding some $50 August strikes here with very tight stops and likely to be punted pre-report. I’m up 169% on those since 7/12, and there’s no sense blowing a good trade on a stock in which I routinely lose money.
Don’t forget to tune in live on MN1.com at 10:25 ast for the pre game show and post oil report play by play!
Oil Inventory Report (from the Platts And Bloomberg Surveys)
Crude Stocks Expected Down 1.4 to 1.9 Million Barrels: If nine-year highs (yes we’re still at nine-year high inventory levels in the U.S.) don’t discourage the bulls (and they haven’t so far) and the rebounding days of supply count doesn’t bother them, what does? Anything over a 2 mm barrel draw here and we’ll get a rally.
We’re still backwardated, and even though the last couple of days' action has tightened up the month-to-month spreads, the carry trade is still out of action and the 24-month strip is increasingly discounting Goldman’s call for $100 oil. The acronym SS stands for sell short, not Super Spike as some would have you believe.
Gasoline Stocks Expected Down 125,000 to Up 400,000 Barrels: The Reuters survey is showing a down 400,000 barrel count. And Dow Jones chimes in with a 500,000 barrel rise. Some folks have a 2 mm barrel build on the table which seems a little excessive to me, but they’re looking for a complete rebound in imports. It all depends on the imports. The change in imports last week resulted in a 3.5 mm barrel swing from the prior week, so it’s pretty important. Demand should be pretty much peaked out at 9.7 mm bpd and production should rise modestly. Last week saw imports nose dive, and as I’ve said before, it’s a logistical glitch in timings and not that no one wants to send finished product here anymore. I’d expect them to snap back half the distance to prior week’s report or to about 1.2 mm bpd. This could knock that gasoline build back up to close to 1 million barrels, which would send RBOB falling through $2.
Refinery Utilization - expected up 0.25 to 91%. That seems reasonable if not a little bit light. I’d expect a small gain in production this week to just over 9.3 mm bpd.
Bottom Line Over/Under: Bullish for oil if we get a 2+mm bls draw. Bullish for gasoline if utilization is less than 91% and production dips again, or if we get a draw on stocks. A build in crude would send the commodity lower for sure.
Analyst Watch: BioFuel Energy Corp. (NASDAQ:BIOF) initiated with Buys at Citi and JPM. RBC raised price targets for XTO Energy Inc. (XTO) from $63 to $66 and for ENSCO International Inc. (NYSE:ESV) from $62 to $77, and cut their target for NBR as mentioned above. Motley Fool will tell you that’s a buying opportunity. I’ll stay with the puts for a bit. Jefferies substantially increasing price targets for tankers Tsakos Energy Navigation Ltd (NYSE:TNP) and Frontline Ltd. (NYSE:FRO).
Exactly On The Money Watch: "The Iranians seem to have changed their policy,” said Astmax’s Emori. They need the money so that’s why they want to increase their position in the oil market. Comment: And I thought they were just being altruistic.
Flynn Watch: Now he’s saying:
“We could go down to the $70 a barrel area or even as low as $67.” Sounds very familiar.
“The long-term bull trend is still intact even with a correction of that magnitude.” Same story as always with the perma bull crowd, things go down on profit taking, they go up because we’re running out of oil!
“The market was rallying on the belief that OPEC would stay the course; now it looks like there could be a change in direction…Even opening up the slight possibility of an increase in production is a big bearish force in the market.
Comment: What can I say? I agree. Of course, the market was pretty foolish to think that at these prices OPEC could remain cohesively behind the production curtailments. They never got the 1.7 mm bopd in total cuts that were announced, and they’ve been inching and sometimes jumping back up for months. Wait a minute, for the longest time this guy and his CNBC cronies told us it was gasoline pulling oil up and now they say it was OPEC all along. Come on man, get your story straight!
Kevin Watch: Sorry man, ran out of time on Coal! I’m doing a bit on it for the next Alwayanoption newsletter now, but may have to accelerate that time table a bit due to the decline.