Steve Zachritz's  Instablog

Merger Watch: AEZ bought by HES for a smallish premium. May light a brief, small flicker under the smaller Bakkens today.  We own AEZ in the ZLT (see details in the Stuff section) but not for long.  We also hold BEXP, KOG, OAS, and WLL that could get a little play on the announcement.  

Market Sentiment Watch: Lessons from the E&P sector quarter to date: 1) Do not raise spending levels  2) If you do, make sure the bump is far outweighed by evidence of bigger production growth AND much higher margins going forward, but 3) Do not raise spending levels. RRC did #1 without gaining that much in #2 and go sent to the penalty box for it (see price target cuts on RRC in the Odds and Ends section today). If we see much more this quarter we will have to conclude that the E&P realm is not paying attention to what investors are saying at present. Which is 1) wait for higher prices before you add that next set of 10 rigs, 2) hedge, 3) pay down debt, 4) get spending within your cash flow. All of that applies more to gassy names than oily ones but given the precarious nature of the economy, and therefore oil prices, I have to say that the oil-centric E&Ps need not get irrational exuberant with their budgets at this time either.

EcoData Watch:

• Durable goods for June came in at -0.6% vs 1.0% expected  (I wouldn't prop up a corner of my desk these days with the flotsam being produced by the economist community of late for fear it would collapse)
• Beige Book due out at 2 pm EST

BP Spill Watch:

• U.S. to launch criminal probe into the relationship between the MMS and BP, HAL, and RIG. Not sure why the last two are on there other than when you conduct a witch hunt you cast a wide net.
• Also, DOJ and SEC are probing trading in BP shares surrounding the spill.
• Last piece of casing will be cemented in place between today and Sunday, with BP targeting Monday for the Static Kill operation.
• NOAA says oil from Macondo rapidly degrading, "loop current threat" to east coast diminishing.
• Diagram of the relief well
• Oil spill tax credit

In Today’s Post:

1. Holdings Watch
2. Commodity Watch
3. Oil Inventory Preview
4. Stuff We Care About Today – Bye, Bye AEZ, NBR, BRY,
5. Odds & Ends

Holdings Watch: ZCAT (Zman Catalyst portfolio):

• $7,300
• 75% Cash
• Yesterday’s Trades:  None

ZIM (Zman Inefficient Markets portfolio)

• $1,400
• 12% Cash
• Yesterday’s Trades:  None

ZLT (Zman Long Term portfolio)

• Added the met coal leveraged producer WLT for $68.92. The stock has been to $100 and as low as $60, all this year. Recent comments from BTU and other producers and my own work on EIA data and anecdotal evidence all continue to point to firm coal markets and still higher met coal pricing. I’ve had no exposure in the ZLT to coal stocks in quite some time and am seizing on today’s weakness (profit taking after a recent bounce and reduced guidance by PCX) to rectify that. WLT reports on after the close tomorrow and remains discounted to a majority of it’s peers.

The ZLT as it now stands:

Commodity Watch:

Crude oil tumbled $1.48 to close at $77.50 yesterday. After the close, the API released a bearish across the board report (see below).  This morning crude is trading off another 50 cents.

Natural gas edged up another $0.06  to close the day at $4.68 yesterday. This morning gas is trading up a penny. Gas remains range bound.

• Imports: Up 0.5 Bcfgpd week to week.

Early Read On Natural Gas Storage: Street is at 32 BCF for tomorrow’s report. I'm at 35 Bcf

• Last Week: 51 Bcf Injection
• Last Year: 70 Bcf Injection
• 5 Year Average: 54 Bcf Injection
• 10 year Hi:  81 Bcf Injection
• 10 year Low: 19 Bcf Injection

Oil Inventory Preview

API Watch: Bearish report.

• Crude: UP 3.08 mm barrels
• Gasoline: UP 877,000 barrels
• Distillates: UP 407,000 barrels

Stuff We Care About Today

Bye, Bye AEZ … You Went Too Young

• For a full run through on AEZ, a nascent, west of Nessen, Bakken player, see my initial write up here.
• Deal valuation is relatively simple given AEZ's clean balance sheet and focus.
  

• Some more thoughts:
  
  • The premium is low. If this thing had the normal deal discount there would not be much if any run in the shares today. But given that management is onboard with the deal it may run to almost full price. In that event, I may punt immediately and reallocate the funds to the next perceived Bakken target.
    
  • I do want to be thoughtful about the potential for the stock to be tied to HES now and HES has a call at 10 am EST to discuss their 2Q results (they reported a 2 cents beat this morning). 
  • The press release mentions the possibility of a cash dividend based on where working capital stands at the time of the deal:
    
    • As of their 1Q report working capital stood at $73.7mm, with $73.9 mm of that in cash.
      
    • They've been busy boys in the interim so not all of that will be available for a dividend.
      
    • Also, the language in the PR is rather vague and they did say "possible"
      
    • But if we go with the shares outstanding at present, and we assume that they went land acquisition crazy since the end of the last quarter, spending $50 mm all in (including drilling) then you could be looking at a dividend on the order of $0.40+.
      
    • Finally on this matter, note that the deal doesn't close until 4Q. Meaning the working capital could be gone or at least severely eroded by then. Again, this leads me back to my earlier comment about punting the initial pop (this is my play) and reallocating.
  • Price per acre works out to $5,400 which seems low to me but that could be attributable to AEZ's acreage being still relatively unproven.  
    • The WeeBaks are likely to be most affected by the deal including KOG and NOG and to a lessor extent OAS, BEXP, WLL, and CLR. 

NBR Chalks Up A Small Beat

The 2Q10 Numbers:

• Revenue of $918 mm vs $876 mm expected
• Contract drilling margins still declining but flattening with some light at the end of the tunnel.
• EPS of $0.19 (ex items) vs $0.18 expected

Highlights:

• “I believe the second quarter marks the start of a steady upward progression in our business." ~ NBR CEO Isenberg. Last quarter's CEO comment was more subdued.
• North American rigs were up 14 to 172.3 for the 2Q average and are at 179 (175 of them active and 4 being terminated) at present.
• Expecting modest rig count and dayrate improvements as the year progresses
• "With rig hours continuing to increase, we anticipate further rate progression, which should serve to more than offset the recent cost variances and return this unit to robust sequential growth. " ~ comment on US land.
• Seeing adds in the hot shale plays, they are still market share leader in the shales
• On the international front, operating income continues to grow and they see quarterly rig adds through 2011 but the pace of growth will be lower in the second half of 2010 due to continuing delays in Mexico and greater competition in Saudi Arabia.

Conference Call: Today, 11 am EST

Other Stuff: 

Earnings Wrap For The Season To Date:

• RRC – as previously mentioned, a boost in the budget and hints of dilution down the road spooked investors, who barely noticed a boost in volume guidance, and who sent the shares down 7%
• VLO beat estimates, espoused cautious optimism and ended the day down slightly as investors yawned at the outlook.
• PCX (the coal company) narrowed its loss to expectations but cut planned volumes, something no one likes, which prompted a 10% slide in the shares.

Nutshell: Don't spend more, don't deliver less and don't be too cautious sounding. This goes back to the beginning of this quarter as well if you look at the difference in the HAL and SLB post earnings release trading.

LINE Distribution Unchanged, as expected

BRY Conference Call: Today, 10 am EST 

• Bottom line scores a beat but it was, financially, a messy quarter
• 2010 Guidance maintained
• Planning to listen, but no interest in the name at this time.

QEP earnings call, 11 am EST.

Tomorrow we have a boatload of names reporting: WLT, OII, PXD, WLL, CRR, LINE, FSLR. As I will be traveling tomorrow  I will look over any that manage to report before about 4 am Thursday.

The rest of the week's earnings calendar can be viewed here

Odds & Ends

Analyst Watch:

• CRZO – raised to Outperform at BMO
• RRC – target cut $4 to $63 at Rodman, maintains Outperform
• RRC – target cut $11 to $45 at Barclays, maintains Equal Weight
  

Housekeeping Watch: I will be away from the office Thursday and most of Friday and again mid next week. BOP and Nicky will be in charge. 

This article was originally posted to our site at zmansenergybrain.com last Friday.

SSN Announces 75% Allotment:

• Shareholders receive 75% of their subscriptions. Expect to see shares and refund checks for the 25% in accounts next week.
• After the deal, SSN should have 82.7 mm ADS outstanding following the deal giving them a market cap of $71 mm.
• Proceeds of the deal are $6.2 mm to their cash reserves for this deal.
• Use of proceeds will be to tide them over on their programs and cash needs until the asset sale in the Niobrara closes in late July.
• I would not be surprised to see some very volatile swings in the shares, now that people know what they have in their possession. The acreage sale after all is not yet a done deal and between now and then, I'm sure many holders will take the easily flip, myself possibly included.
  
• My valuation thoughts in a table:
  

This was posted to our site Monday.

• Post offering share count confirmed, same as my model last week
  
• Niobrara portion of presentation shows the acreage sold so they are assuming the deal gets done
  
• In fact, they are assuming the deal gets done at the high end of the range of possibilities, $US 76 mm (pre tax).  Note that current market cap is $US 70.2 mm.
  
• Planning to drill two 5,000 foot horizontal Niobrara tests on their remaining acreage (they are expecting 500 bopd IPs, one would assume based on results they have heard about from EOG just to the south).
• They see 26.8 mm BOE recoverable reserves on their remaining Niobrara acreage … to early for me to gauge the reasonableness of the assumption but the math to get there would not be overly aggressive if this were good Bakken country.
  
• My sense is that the stock will move on positive Niobrara news from the EOG 2Q call, should there be any (EOG has been going slow as usual with the data from this play although not with the permitting and drilling).
  
• If we transition from thinking in terms of acreage valuation to EUR valuation and they are close to correct on the reserve forecasts the stock will leg higher from here, perhaps adding another $1.25 to my $1.31 to $1.61 price target range (so call the new really case target $2.50). That should take us into next year's drilling to accomplish.   
• SSN is also planning to sell Rockies gas assets of about 11 Bcfe which could fetch $15+ mm.
  
• Lastly, I find it interesting that in the back of their new presentation they compare themselves to KOG and AEZ.

Market Sentiment Watch: As nervous as she gets. Everyone eying the S&P 1040 level which was broken temporarily in late trading yesterday. Fundamentals are already on holiday and technicals are in charge as we approach the last day of the quarter.

What Took So Long Watch: State Department says it will start to accept the help from other countries with the Gulf spill. This is day 72. State went on to say that this does not mean the U.S. has not already accepted some help. Uh huh. 

In Today’s Post:

1. Holdings Watch
   
2. Commodity Watch
   
3. Natural Gas Supply and Demand Slide Shows – Supply Data For April Shows Flat Production Vs. March; Demand data shows a 5th Up Month for Industrial Consumption on a YoY Basis.
   
4. Oil Inventory Preview
   
5. Stuff We Care About Today – KOG Operations Upate
   
6. Odds & Ends
   

Holdings Watch:

ZCAT (Zman Catalyst portfolio):

• $6,000
• 99% Cash
• Positions for the quick view are updated on the ZCAT, ZIM, ZLT page.

ZIM (Zman Inefficient Markets portfolio)

• $2700
• 7% Cash
  
• Yesterday’s Trades:

  • BEXP – Added (10) more July $17.50 Calls for $0.34 with the stock at 15.76. These are the same ones I added for $0.90 yesterday.

    BP – Added (10) July $31 calls for $0.60 with the stock at 27.70. Two comments in last 2 days from BP and Coast Guard that the relief wells are closer than previously thought. I don't plan to hold through the actual intersection of the wellbore as there is still a good chance they miss on the first try.

Commodity Watch:

Crude oil retreated $2.31 to close at $75.94 yesterday.  After the close, the API released a fairly bullish looking report (see below). Multiple OPEC ministers in the last 48 hours have said the $70 to $80 per barrel range is comfortable for now.

Natural gas fell as well, dropping $0.19 , or 4% to close the day at $4.55 yesterday. See following sections on natural gas supply and demand comments/charts.

• Natural Gas Supply For the Month of April – Quick Charts here, more indepth charts and comments in the section below.
  

Early Read On Natural Gas Storage: Street is at 65 BCF for tomorrow’s report.

• Last Week: 81 Bcf Injection
  
• Last Year: 73 Bcf Injection – supply is probably about 2 Bcfgpd (14 B's per week) higher than it was at this time last year
  
• 5 Year Average: 80 Bcf Injection
• 10 year Hi: 99 Bcf Injection
• 10 year Low: 60 Bcf Injection

Natural Gas Supply Slide Show – Flat Month To Month, Nothing To Get Excited About On The Supply Front …

Key Points:

1. April was flat with March production
   
2. and up 1.75 Bcfgpd from year ago levels.
   
3. So little hear for bulls to be happy about …. yet … and again.
   

… However The Demand Front Is Showing Signs Of Interesting Strength From The Industrial Sector

Key points:

1. Industrial demand up year over year for the 5th straight month
2. Electrical demand benefiting from lower gas prices relative to coal 

Oil Inventory Preview

API Watch: Nutshell: Bullish

• Crude: DOWN 3.4 mm barrels
  
  • Big drop in Cushing inventories, down 1.9 mm barrels. This would be very much welcomed by the market.
• Gasoline: DOWN 0.9 mm barrels
  
• Distillates: UP 4.0 mm barrels
  

Stuff We Care About Today

KOG Operations Update

1) KOG is obviously having trouble getting in line for frac crews. This is not surprising given their small size and the 128+ rigs now operating in the Williston Basin. By the way, if you or a friend are looking for work you can probably find it there as this is a boomtown play now.

2) The rate on their #13 well, of 1,517 BOEpd, is impressive for a short lateral. It seems clear they're honing their completion methodology.

3) Three more wells waiting on completion, not far away (one in July, one in August) but still well behind where we thought from the 1Q call. Again, having two rigs is nice but not a guarantee that you can make your time lines, especially if you are a minnow.

4) Their Three Forks test was set to spud in the first half. This has not yet spud and is said to be a 4Q completion. Slow, slow, slow.

5) They are drilling outside of the FBIR in their Grizzly acreage (in the Elm Coulee area) which is a good to see as the story will need to move off the Reservation, so to speak, to really leg up from here. One re-entry that will be completed in 3Q and then a new drill long lateral, both targeting the Bakken. Along with their Koala area they now have 9,565 net acres in McKensie county, N.D..