Market Sentiment Watch: Technicals rule as the markets move back to flat on the year. In energy land, real news remains a scarcity outside of the BP spill and the President’s speech last night was short on details and big on a push towards clean energy. I thought it was supposed to be about the effort to cap, contain, and clean up the spill. How naive of me (more on that below). In economic news, inflation remains more than tame once again pointing to no chance of a change out of the Fed. PPI today and CPI tomorrow should be tame, giving the Fed an excuse to do nothing, which should provide support for equities as they provide the only real game in town at the moment aside from some commodities.
Nicky Watch: I suspect that we re -test that 200 dma at the 1108 level but could happen overnight in the futures. The astro points to another day of upside although not as strong as today. Cycles too are into their target area for price and time – the short term cycles at any rate. Due to the strength today I think it likely we go take a look at the 1119 – 1123 area and its possible we go as high as 1130. I expect at least a short term top by no later than the eod tomorrow.
Obama Oval Office address was done in less than 20 minutes.
I did not hear much new. Key points:
1) BP Gulf Recovery Fund. President Obama will "direct" BP to set aside "whatever funds are necessary" today when he meets with BP’s Chairman (that’s day 58, first meeting between the two for you people playing at home). No size of the fund was quantified. but the whisper number is $20 B. The president did borrow BP’s phrase "legitimate claims" which I find interesting but I think BP is going to have to offer some resistance soon to the President’s plan unless it wants to become an ATM for the U.S.. Not that I don’t think they should pay what they owe but they’ve said they will repeatedly and at some point you must take a prudent approach that doesn’t kill the Golden BP.
2) Big Oil Was Unprepared For The Size of the Spill. The President won’t get any argument whatsoever from me. The plans are "cookie cutter" copies of each other to borrow a line from Waxman, and are obviously insufficient if not downright bogus. Obama laid blame on MMS as well. Again, no argument here although I fail to understand how Interior Secretary Salazar sidesteps blame as easily as a greased (oiled?) pig evades capture. Obama expressed an interest in finding out what went wrong, correcting it, and getting back to drilling in a timely manner. I was not on board with the moratorium in the first place given the safety track record to date and the multitude of failures that had to all occur to make this event happen but I take some small relief from the idea that we may see a restart before the end of 6 months. He said he understands the hardship this moratorium causes on the people in the drilling industry in the region. I doubt that very much.
3) Big Oil Bashing. He did a little BP bashing and Big Oil bashing for not spending more on alternative clean energy R&D comparing it to the tech sector who spends way more as a percentage of revenues. Honestly the tone was a little gentler than I expected. I would point out that the difference between the two industries should be obvious to everyone (except I guess the president). If not then I would point out that tech companies must invest in R&D to come up with the new, faster, better chip each year. Oil companies produce the same product year in and year out. And they do invest in R&D by funding the oil service companies who are … wait for it … tech companies.
4) Clean Energy Is The Golden Path To The Future. Ah, here’s the real point of the speech. This too was expected. A big push for research into clean energy tying in a recovery in the economy and "millions and millions of jobs". He did note that the effort to shift the U.S. to cleaner energy would come with costs. He didn’t even attempt to quantify those, a time line for the change over, or how much the energy base would be shifted. Basically he said this will have costs but that to those who say we can’t afford it, he said we "can’t afford not to do it." Uh huh. I’d rather see the horse in front of the cart that is this weak economy first sir. Sounds like higher taxes on energy companies but again, no specifics. Don’t get me wrong, I’m all for clean energy but I think the free market and not unfunded government subsidies are a better road to getting there with the transition period being shouldered by U.S. natural gas and clean coal. And wait a minute. Don’t we have natural gas out the wazoo? And isn’t it clean (about half the carbon foot print of coal)? No mention whatsoever.
Zman Speech Grade: C- for too many quotes lifted from JFK and FDR speeches and a general lack of specifics. I’m tempted to give him a D for failing to mention natural gas at all. Talk about a clean form of energy we already have. Sheesh.
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Oil Inventory Preview
- Stuff We Care About Today – WIOWIO ZLT Edition Part II
- Odds & Ends
ZCAT (Zman Catalyst portfolio):
- 97% Cash
- Yesterday’s Trades: None … just not a lot of catalysts in the immediate term.
ZIM (Zman Inefficient Markets portfolio)
- 74% Cash
- HAL – Added (10) HAL June $25 calls for $0.41 with the stock at $24.70. See today’s post and comment #21 today for reasoning.
- HK – Sold (75) June HK $21 calls for $0.75, up 186%.
Crude oil rallied $1.82 to close at $76.94 yesterday. Strong equity market and a weak dollar. After the close, the API released a bearish looking report with across the board builds (see below). This morning crude is trading looking slightly weaker with lower equity futures and a slight bounce in the dollar.
Natural gas rallied yet another 3.6% or $0.18 to close the day at $5.19 yesterday. It’s hot, damn hot. And there’s also the potential for an early season storm to track into the Gulf although that appears more remote now than it did 48 hours ago. While I can look at the data and say that early storms have historically not assured a busy tropical season I can also tell you that Bastardi and others are calling for a very busy season and are pointing to this early development as an ominous sign. This morning gas is trading flat.
Early Read On Natural Gas Storage: Street is at 86 BCF for tomorrow’s report.
- Last Week: 99 Bcf Injection
- Last Year: 113 Bcf Injection
- 5 Year Average: 81 Bcf Injection
- 10 year Hi: 114 Bcf Injection
- 10 year Low: 56 Bcf Injection
Tropics Watch: Disturbance 92L continues to weaken as it moves across the Atlantic.
Oil Inventory Preview
ZComment: We should see a drop in the YoY surplus of gasoline stocks today along with a continued inching up in demand there and a slight boost to demand for distillates.
- Crude: UP 579,000 barrels
- Gasoline: UP 1.344 mm barrels
- Distillates: UP 2.143 mm barrels
Stuff We Care About Today
WIOWIO (Why I Own, What I Own) ZLT Edition Part II (some interesting, off the beaten track names), tomorrow part III (the mainstays)
TAT – Turkish Delight.
- Operations concentrated in Turkey, a preferable regime from an economic standpoint to develop oil and gas assets to many places on planet.
- Production profile is largely natural gas at the moment and gas in Turkey, which is almost all imported trades in excess of $9 / MMBtu.
- Production growth via re-entries and exploration is expected to grow significantly in 2010 and again in 2011, especially on the oil side.
- There are also some "swing for the fence" type plays, with large oil targets that are analogues to recent exploration in nearby Kurdish lands just over the border in Iraq.
- As far as volatility goes, this may be my most vulnerable name and as such it’s definitely one that I look to add on weakness not strength. Right now, I’d like to see them get further along in their Turkish plans before I consider adding any more.
SSN – Australian Based Bakken and Niobrara Play
- Micro cap with section sections in the Bakken (a little over 3,600 net acres) and 40,000 net acres in the Niobrara.
- The Bakken stuff is nice for cash flow and news events but I’m now in this one for the Niobrara play and the potential for a takeout of the name.
- This is not one that I would normally hold as long as I already have but I plan on holding it through year end and it should move better again following the closure of their rights offering. My expectation that oil prices will be higher through year end and into the next couple of years also provides a bit of comfort.
- If you put a $2,500 per acre on their Bakken position and ignore their other assets, the Niobrara acreage is valued at just under $1,100 per acre, which is not going to be considered pricey and part of my thought that this name goes away over time or get’s a better valuation that it doesn’t. At present, their acreage could prove enticing enough for EOG, who has a large slug of acreage just to the south of SSN, or some other Niobrara player to pick them up and it would barely be noticed even at a significant premium for most of the potential acquirers.
- However, there is no guarantee that all Niobrara acreage is created equal, in fact it is almost certainly not. EOG has been very active in the play having filed 10’s of drilling permits and is rumored to have good wells in the play. I plan on adding a real Niobrara play in terms of held stock (maybe EOG or SM or PETD and this name is only a wildcard and not a substitute for that).
EXXI – Oily Gulf of Mexico Player with Wildcard Potential in the Ultra Deep
- Management is exceedingly talented, John Schiller hails from Ocean Energy, used to work for APC’s Hackett and is a gas finding kind of guy.
EXXI’s portfolio is a little different than most of your Shelf (shallow water) players:
- 1) It’s oily with 68% of production coming from liquids. Most names on the shelf are much gassier
- 2) It’s reserve life is longer at 11 years
- 3) It has a large inventory of drillable exploitation and exploration projects
- 4) It is at the forefront of the ultra deep Shelf play along with partner MMR
- Balance Sheet: on the extended side at 65% but that should come back into line this year and next as recently acquired work interests merely bumped their ownership in existing fields in the Gulf.
The main reason I own it is the exposure to the deepshelf, not just the current Davy Jones target but another dozen prospects which, if they work, and that’s going to take at least 5 years to know for a majority, will yield a much bigger but lower cost company than the existing one.
Looking at the ZLT and WIOWIO comments of today and yesterday you may be tempted to say, "Z you are overweight the Bakken. You’ve got AEZ, BEXP, KOG, SSN, and WLL who have big positions there." I’d respond that:
AEZ is the small name with running room and likely to be the next BEXP like mover,
- KOG and WLL are the deep value names, obviously on quite different scales,
- SSN doesn’t really count (I hold it for the Niobrara) and either way, as a true penny stock, its a total wild card,
- and I am constantly watching NOG, CXO, CLR (pricey) and others in the area.
- I have been on the "oil is preferable to natural gas" in terms of E&P exposure for some time now and the Bakken is one of the more economic plays in the oily portion of the U.S.
- A word on the weighting in the portfolio as to oil and gas will be included in tomorrow’s post.
Tomorrow: KOG, CHK, NFX, SWN, ROSE
- Tesla Files For IPO
BP Spill Watch:
- U.S. bumps estimate of daily gush to 60,000 bopd
- Fitch cut APC’s outlook to Negative after the gush bump.
- B of A put restrictions on trading oil with BP
Odds & Ends
BMO adds E&P names:
- WLL, XCO, XEC, EQT, SM, VQ added at Outperform
- BRY, SD, PVA added at Market Perform
- HAL – estimates raised at Susqeuhanna – keeps target at $38 and Buy rating. Company says activity and pricing in NAM are trending better than expected during 2Q.
Interesting Reading Watch:
Disclosure: tax, exxi, ssn, bp, hal, wll