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Crude and the energy stocks will hinge on the words of OPEC like bond traders deciphering a Fed statement.

Commodity Watch

  • Crude Oil: Closed down $0.99 to $88.32 in roller coaster style trading.
  • OPEC Watch: still waiting on decision. Will post in comments.
  • Enbridge reopens last of damaged pipes.
  • Natural Gas: yesterday down $0.06 to $7.155.

Gas Thoughts from yesterday's comments (Illustrated Version)

Yesterday Dave J wrote:

I manage a 50 story office building in Houston and buy the electricity for it, which is based on the NG price. I like this site because it helps give me a feel for whats going on day to day. I am close to buying the rest of 2008, but interested what the opinions on how low this NG price can go. Thanx

My somewhat long winded response follows (for those of you who don't always read the comment section) augmented with pictures! I've put any new text in [] for clarity. Also, I've inserted the graphs as thumbnails to conserve space but clicking anywhere on them will open them in their own window.

Hi Dave…it may take me a few comments to address that so bear with me.

As you know storage is at record levels not seen since 1990, besting last year’s levels which were well above anything recent.

gas-storage-120407.jpgclick to enlarge. gas-graph-line-120407.jpgclick to enlarge.

Primary driver of the surplus has been the shale plays. Barnett leads the way but Fayetteville (NYSE:AR) and Woodford (OK) gold rush mentality have yielded record rig rate for Arkansas (just topped 50 rigs and that’s up from 2 or 3 in years past) and 200 in Oklahoma which is a 20 year record and I guarantee it is gas and not oil as it was when last the Okies saw that many rigs turning to the right. Colorado, New Mexico and obviously Texas are drilling balls to the wall right now.

rigs-120407.jpgclick to enlarge.

Also we just added nearly a Bcfgpd from the Independence Hub in the GOMex which should yield a small bump in production even after rest of region declines.

This chart of the GOMex illustrates the long-term problem faced there:

gas-production-gomex-120407.jpg

So the production side is bearish for NG right now and you’ve got a bit of drilled but not completed wells in the shales waiting higher prices before their operators hook them up. Many of these will get added by year end so the operators can report higher exit rates for 2007 relative to their 4Q numbers. Helps give them a jump on 2008 % guidance targets since they get to start from a lower base.

[Total Dry Gas Production Is Up 2.0 Bcfgpd YoY Through August (most recent data available). Despite a near 20 year high for the U.S. gas rig count, U.S. dry gas production is not exactly exploding. Much of the reason for this is the high decline rate nature of the type of well behind the surge: the shale well. Sure you get flush production of 1 to 3 MMcfgpd as a ballpark range and in rare cases like some recent horizontals drilled by (NYSE:NFX), but initial declines trim volumes by half withing 3 to 6 months in most cases. So you have to keep drilling them to keep production growing. There's also the matter of increasing extraction of natural gas liquids (ethane, propane, butane and other higher hydrocarbons heavier than the methane we use to heat homes and generate electricity) which reduces available gas for storage as these products are stripped from the wet gas stream. Extraction losses have been on the rise due to the higher value of liquid BTUs relative to gas prices.]

First Texas, Which Accounts For A Third of Lower 48 Natural Gas Production…

texas-gas-120407.jpgclick to enlarge.

…And Then The Complete Lower 48 Production Picture.

gas-production-l48-120407.jpgclick to enlarge

On the imports side [of supply]:

[Imports from] Canada is a wildcard. Drilling has fallen off a cliff due to low prices and so far this has not had a huge impact on imports to the U.S. I would say that won’t continue, especially with rising demand from Albertan oil sands producers (they use the gas to cook the oil out of the rock it’s trapped in). I watch the numbers weekly and a dip below 8 Bcfgpd will get noticed by gas traders. We’re running 8.2 Bcfgpd now.

canadian-imports-120407.jpgclick to enlarge

Furthermore, record LNG shipments this year helped boost that gas storage surplus. Here there has been a change in the last two months as now LNG shipments have fallen to very low levels. This started with a nuclear reactor problem in Japan which forced them to import more gas a couple of months ago…since then there has been a gradual exodus of LNG tankers from the Atlantic basin to the east taking gas from Qatar and Russia and even from closer places like Trinidad to Asia. While imports hit 3.6 Bcfgpd last summer, they have trailed off to 0.6 Bcfgpd at present which is just under half of year ago imports. I don’t see them returning to this market soon in a significant way given a colder than normal forecast for Europe (which also imports gas at times) and the ongoing demand from Asia…Not unless NG tops $8 or even $8.50 for an extended period this winter. So this factor is slightly supportive of gas.

lng-120407.jpgclick to enlarge

But the biggest factor is weather. The Producing region (hello Barnnet shale) has continued to inject gas very late into the season (normally we’d be pulling gas from storage in all three gas regions this time of year). I was listening to Tom Ward (ex CHK president) now running (NYSE:SD) this morning and he plainly said “we need some winter weather or we see lower gas prices 08 relative to 07″ and then “I’m amazed how much gas people are getting out of the shales” …you can see what he thinks about prices. I’d also point out that it looks like they hedged ALL of their first 3Qs of 2008 gas production with an average over $8…you don’t do that if you think gas is going markedly higher soon. You would do it if you thought the 12 month strip was in jeopardy of falling.

As to a level. $7 is key. Fail to hold that and I’d bet we take a quick trip to $6.50 or maybe a little lower (again, two weeks of warm weather would do it) and then the curtailment press releases come and we waffle around until a big arctic blast blows in and you’ll see spikes into the $8s again. But the storage level not really coming off with cold last week is concerning. It may have been the steep contango…it may have been higher production. This Thursday will be more telling as we don’t shift contracts forward so the contango is less of an issue and it is again the coldest weather we’ve seen this season. Need to see a big draw or gas will test $7.

Hope that helps. Given my gassy weighting right now I hope I’m wrong…but my names are cheap and not discounting $6 let alone $7 gas.

EIA Report Preview

exp-120407.jpg

Z Comments: Not sure this report will get noticed on an OPEC meeting day. Crude imports unlikely to be as high this week given the Enbridge outage last week and more reports of fog in the Houston Ship Channel and the fact that imports were near record levels last week and those kind of numbers rarely come in twos. We also had some refinery issues last week so its possible utilization could slip a bit this week and with it demand for crude but again, I don't think this will have much bearing given the OPEC announcement.

Stocks of Interest Today:

  • (SD) good conference call yesterday but no guidance until March for 2008 is a little lame in my book. Doesn't hurt my opinion of the stock and I still think analyst recommendations will be stellar here either today or tomorrow.
  • (NYSE:OII) got away from me on a mini-breakout. Continue to watch
  • (NYSE:BTU) climbing away as well and it's decoupling from North American natural gas prices is interesting. Need to get back in but will wait for a bad day in the group. That's never more than a day or two away these days.
  • (NYSE:CLB)…still interested, still waiting for the stock to see if it can regain some direction.
  • (NFX) got little follow through after announcing those new monster wells in the Woodford. This market has the attention span of a gnat and this is one that the analysts and bankers don't see a near term deal from and therefore the focus is elsewhere. Meanwhile R/P expands, production leaps, costs fall and reserves are set for low cost big percentage increase as they get to play the drill up the resource play, book the surrounding PUDs game. Hmmmm.

New and Improved Tanker Multiples added to the renamed Transports tab on my site. Many thanks to Bill for helping me put together a list of convenient links to track rates and news on both the dry bulks and tankers.

tanker-multiple-120407.jpg

Key Tanker Takeaways:

  1. I'm still coming up to speed having taken a longer hiatus from trading these names
  2. In general rates have been falling as have estimates. When you look at 2008 earnings, often they are expected to be down from 2007.
  3. Many of the names trade on yield and that's not yet incorporated into my thinking…a little more excel work to go there.
  4. Some of the companies, like (NYSE:FRO), have been supporting their dividends by selling off tankers during these tough rate times. Obviously you can only do that for so long.
  5. I think when the names "come back" or "turn the corner", the liquid big dogs and pure plays run up first
  6. Higher OPEC production is good for the VLCC (very large crude carrier) endowed. TK, FRO all the way down to little VLCCF which has a couple of massive Capesize drybulk ships on its roster.
  7. Oil inventories in OECD countries are below average and in line with the five year average but 9% off year ago levels in the world's #1 consumer. Replenishment will be key
  8. All of these are optionable save (ATB) and (RAMS)
  9. Bill likes TOPT as they diversify into the realm of drybulks
  10. Part of the weakness in rates has been a boom in the global tanker inventory. Recent announcements that 60 vessels will be converted to drybulk service over 2008-09 will help to alleviate this glut.
  11. If I felt compelled to buy tanker calls today (say OPEC boosts ouput by a million bopd) I'd have to look at TK, FRO, and OSG - all are volatile and have liquid options trading, and have had recent pullbacks as people start to believe OPEC may do nothing. VLCCF and TOPT appear interesting among the minnow players.
  12. If OPEC did nothing I think the names with vulnerable looking charts will see the worst damage… (NYSE:SFL)
  13. TGP and GLNG are slightly different animals in that they are weighted towards the gas markets. Need to do a little more work here on how many vessels are under construction but the amount of LNG liquifaction and regassification capacity is set to skyrocket. We're a cold winter away from seeing rates for these guys explode.
Source: Energy Trader: O-Day and N.A. Natural Gas & Tankers