Energy Stock Trader: Thursday Outlook

by: Steve Zachritz

Nigeria Watch: Royal Dutch Shell (NYSE:RDS.A) expects to resume full production from the western Niger delta in five to sixth months. This production was shuttered after attacks and harassment by MEND in early 2006, and would add 500,000 bopd to Nigerian production taking it above the countries OPEC quota of 2.2 mm bopd.

* Said Shell's managing director for Nigeria, "I don't see anything standing in our way of restarting our production." Comment: Sir, how about the MEND board of directors seen in this rare file photo.
MEND in a Boat 05 04 2007 * Shell plans to increase the amount of work it offers to local companies, which is much the same tactic Addax Petroleum (AXC) has used all along. Addax has never suffered a supply disruption in Nigeria. Comment: What took you so long?
* Shell also noted that the level of violence in the Western Niger Delta has gone down recently and that dialogues with the communities have been fruitful in making them understand that everyone benefits when the oil flows. Comment: the 70+ hostages taken year to date were treated pretty well, so I guess that doesn't count as violence.

Natural Gas Inventory Report Day

I expect a small build of 20 to 30 Bcf. Natural gas prices should hinge on what is likely to be the season's last withdrawal from storage next week (in other words, don't expect a drop below $7 in the next couple of days).

* It looks more and more like 1,500 Bcfe is going to be the trough for the year.
* Prices have been buoyed by oil and by increased talk about hurricanes and a warmer than normal La Nina influenced summer. I wouldn't expect a big move in prices today, as traders will be heading out early to enjoy the long weekend.

Speaking of oil I'm going to do a review of the whole inventories, demand, supply, utilization, imports ball of wax this weekend. I think oil is going to slowly slide back to $62.50 now that the British hostage "crisis" is over. After that it's up to the domestic refiners to increase production and not catch on fire anymore this season (BP had another fire at Texas City yesterday), which was part of the cause of the 9-cent rally in gasoline to a new 6 month closing high.

Analyst Watch: Pioneer Natural Resources Company (NYSE:PXD) upgraded to neutral at BS. Cal Dive International Inc. (NYSE:DVR) upped to overweight at JP Morgan.

Contango Oil & Gas Company (NYSEMKT:MCF) shot out of a cannon yesterday, up 32%. If this gets any kind of a near term question, I'll take a small piece.

A couple of friends asked me my opinion of ethanol industry over the last few days. This is an amalgamation of excerpts from my emailed responses to them:

There are between 110 and 120 ethanol plants running now in the U.S. and 80 more in various stages of permitting or construction. The latest estimates I've seen are for ethanol growth in a range of 30 to 60% this year, which is starting to depress ethanol prices a little. However, ethanol is likely to rise or at least follow gasoline into the summer months.

Ethanol plays range from producers like little Pacific Ethanol (NASDAQ:PEIX) to massive Verasun (VSE) and to enhanced corn seed providers like Monsanto (NYSE:MON) and Archer Daniels (NYSE:ADM). There are a ton of penny stock plays that combine ethanol and biodiesel plays into one, and many of them won't survive if ethanol prices come in too severely. I'd shy away from these unless you know someone in management -- lots of stories and dreams out there in penny land. Not saying they're all doomed. but the play attracts the gold rush types and snake oil salesman alike.

The more interesting long-term plays are the cellulosic ethanol producers (hardy grasses, wood chips etc.) like Sunopta (NASDAQ:STKL) that essentially use "crops" no one wants and are easily renewable.

Corn is actually pretty bad for making ethanol, since it takes so much to move the needle and people and animals compete with ethanol for it. It's a 7-to-1 trade off: 7% of the U.S. corn crop is needed to replace 1% of U.S. gasoline consumption.

By way of comparison you get 370 gallons of ethanol from an acre of corn, vs. 700 from sugar beats, 1,150 from Switchgrass and 1,500 from Miscanthus (another grass). The grasses actually build up the soil and re-grow, whereas corn has to be reseeded annually.

Acre for acre sugar beets are the way to go (Brazil does this) if you want bio ethanol, and even better would be jerusalem artichokes, an invasive perennial tuber and not an artichoke at all but a member of the sunflower family although I haven't seen a play there in the U.S.