Tuesday Watch: More E&P Earnings

Fantastic Monday. What I should have called yesterday's post in light of the move the energy sector and especially our holdings in (Continental Resources (CLR), up 16% yesterday) enjoyed. See last night's wrap on CLR here. Today its back to more earnings from the E&P sector with a big beat at perennial favorite (though not currently held) Anadarko (APC) and at PetroQuest (PQ) where we have significant call exposure.

In Today's Post:

1. Holdings Watch: added more Devon (DVN), punted some Chesapeake (CHK)
2. Commodity Watch
3. Stocks We Care About Today: APC, PQ
4. Crack Spread Update - staying away
5. Odds & Ends

Holdings Watch

Calls:

• DVN - added June $125 Calls for $2.45 in advance of earnings on Wednesday.

• CHK - took some May exposure off the table as the group continued its rally. Sold the May $50 position for $4.70, up 262% since entry in late March.

Commodity Watch:

• Crude Oil: closed up $3.65 to $119.97. A retreat in the dollar helped along with the markets' sudden thought that an improving economy = more oil demand. Lightish trading volumes due to some major market holidays no doubt exacerbated the move. This morning oil is trading flat to down slightly.

• Super-Duper Spike Watch: Goldman saying that oil will reach $150 to $200 per barrel due to tight supplies in the next 2 years. Here's a link to the Bloomberg article.

• Natural Gas: closed up a whopping, stunning, mind blowing $0.40 to $11.18. The move higher keyed off weather, which came in cooler than expected for last week, a further dip in imports, and then the rally in oil. This morning natural gas is trading around even.

• Imports: total imports fell to 8.2 Bcfgpd last week, down 3.4 Bcfgpd from year ago levels.
  • LNG remains stuck in other ports with U.S. send out volumes mired at 0.7 Bcfgpd, down 2.6 Bcfgpd from year ago levels.
  • Canadian volumes dipped to their lowest levels of the year at 7.5 Bcfgpd, down 0.8 Bcfgpd from year ago and last week's levels.

• Independence Hub: scheduled to come back on line Mid May according to Anadarko's 1Q operations update. This has kept 0.9 to 1.0 Bcfgpd offline for 3 weeks now.

Stocks We Care About Today:

PQ Reported Solid 1Q08 Results

The 1Q08 Numbers:

• EPS of $0.28 vs $0.26 Street Consensus,
• CFPS of $1.03 vs $1.03 expected,
• Revenue of $77 vs $71 million,
• Production of 86.7 MMcfepd, vs guidance of 86 to 92 MMcfepd
• Lease operating expense came in well high of expectations at $1.29 / Mcfe, I suspect due to increased workover expense at two Gulf of Mexico shelf properties. Note to management, it would be nice to have at least a footnote on this kind of thing in the press release.

Guidance:

• 2Q08: issued at 91 to 97 MMcfepd,
• FY2008: reaffirmed 94 to 100 MMcfepd.
• Boosting Capital Budget: from 230 to 260 million…they did not break out where the additional money goes other than to say it would be directed to long-lived basins.
• Cost guidance: higher ranges set for LOE and production taxes. Both are very low but I'm not wild about a 10% boost in the $/Mcfe guidance without explanation.

Operations Update: Not a lot of meat in the press release. Hopefully the call will flesh some things out.

Arkoma Basin : > 20,000 Mmcfepd net from the Woodford and Fayetteville Shales Combined

Woodford Shale:

• still seeing good rates, 14 wells completed so far, #12 and #14 IP'd 4.6 and 6.3 MMcfgpd,
• #13 has been on for 7 weeks having IP'd at 6, the well is averaging 4.6 MMcfgpd after 7 weeks… that's maybe a slightly decline rate than they would expect.
• wells are coming in at much better rates relative to plan from last Fall (which is the same modeled EUR in their April presentation so maybe it's time to revise those numbers up). IP's then were thought to be 2.5 to 4.0 which EUR's 2.5 to 3.5 Bcfe per well. Costs remain in line at around $4.5 mm a well so development costs here are coming down.
• 3 rigs running in the play,
• "in excess" of 31,000 net acres, a majority of which is in the core of the play, so on 80 acre spacing that gives you nearly 400 locations left to drill. If (NFX) results continue to be encouraging in their 40 acre spacing pilot.

Fayetteville Shale:

• rate increased 10% from 1Q08 exit to 3.3 MMcfgpd
• 6 non-operated rigs running here
• no well count given, still saying they will participate in 80 to 100 wells this year

East Texas Basin:

No update on activity in the SE Carthage Field, these are cheap to drill, nearly impossible to mess up Lower Cotton Valley targets, very predictable, and very low cost to operate. This field has been the core of their East Texas Basin operations and should be close to 15% of current production…hopefully we'll get a production number on the call.

Outside of the SE Carthage Field:

• Palmer Prospect (Robertson County): another Lower Cotton Valley lime well completed for 2.5 MMcfepd makes three
• Weekly Prospect (Houston County): second well drilling target Buda formation oil…no mention of what happened with the first well…don't see where I missed it, just no mention. They've got quite a bit of acreage here so oily results from that first horizontal test are pretty important…look for more details on the call.

Gulf Coast:

• Pelican Point Development: On line as expected at previously announced rate of 20 MMcfepd gross (they have a 22 net revenue interest (NRI) here). They have several exploratory Gulf Coast test planned for the remainder for the year, at least one of which should have already spud.

Hedging Update: ~ 40% of expected 2008 production is hedged at just over $8/Mcf.

In A Nutshell: Waiting for a little more meat in the Conference Call: Today, 9:30 EST.

APC Reported Blow Out 1Q08; Reaffirms Guidance Despite Independence Hub Shortfall

The 1Q08 Numbers:

• EPS of $1.44 (ex items) vs $1.22 Street Consensus;
• CFPS of $4.27 vs $3.44 expected. Blowout.
• Production: 585,000 BOEpd, up 8% YoY increase from retained properties; this blew out the top end of the range of 550,000 to 570,000 BOEpd issued in February.

Guidance:

• 2Q08: issued at 550 to 570 BOEpd (flat with that of 1Q guidance),
• FY2008: reaffirmed prior volume guidance of 565 to 585,000 BOEpd
• Cost guidance is in line as well, save a small increase in expected transportation costs.

Operations Update: There's a long list (15 pages long) on the APC website. Many of these have to due wit the timing of development activity in the Gulf of Mexico, Algeria, the Rockies etc. They did have a large discovery off Ghana and a large dryhole (the Green Bay prospect) in the lower Tertiary region of the deepwater Gulf of Mexico (in which DVN was a participant).

In A Nutshell, '08 CFPS Numbers Will Be Coming Up Probably $2 to $3. The stock has been trading at just under 5.0x 2008 and 2009 CPFS (they're practically the same for both years). Similar volume guidance and markedly better prices in the second quarter should add at least $1 to second quarter estimates. 3Q should see a bigger gain in volumes so add another buck there as well. So if we hold the multiple flat and raise the estimates by $3 the stock should at least advance to $80 before consideration is given to the deepwater extensions and discoveries. I'm not in at present and will listen to the call before deciding whether or not to bite at present or wait for the inevitable energy "red" day. Conference Call: 10 EST.

HK reports after the close / before the open Wednesday.

Crack Spread Update: Still Moving In The Wrong Direction. Not even tempted to add refining longs here.

Comments

[mmbtu]

Great research and advise on crack spread and refiner woes in Q2

[torino-t]

Nice work & thx.

Any idea about the possiblity of CHK & HK getting together?

[Brian A.Davis]

I finally picked up PQ based on a degree of your analysis! Thanks!

Do you have an exit point in mind?

Can you comment on the profit margins of domestic oil drillers v. foreign ones? Will we see better profit margins from the domestics?