Energy Stock Trader: Wednesday Outlook

| About: Endeavour International (END)
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You Can't Be Serious Watch: The EIA reported that planned refining capacity additions in the U.S. fell by one-third versus year-ago figures. By 2012 refiners now plan to add a total of 1 mm bpd of refining capacity. Refiners indicated uncertainty as to demand, and higher costs were to blame for the curtailment of plans. Comment: I couldn't believe it either!

Yesterday Was Cyclone Hangover Day

Gonu is headed directly for the Strait of Hormuz. Late last night Gonu had been downgraded to a Cat 1 storm, but its storm track was centered on the Strait of Hormuz, the world's chief choke-point for oil, with some 15 to 17 mm bopd traversing the two mile wide channel. Oil Daily stated yesterday that up to 30 mm barrels or 2 days of shipments could be delayed. Here's an interesting read on the Strait.

Oman shuttered 650,000 of its 750,000 barrels of oil per day (bopd) capacity on June 5th as the storm approached.

UAE and Saudi Arabia stated their production is unlikely to be effected. Fun fact: in February Saudi Arabia produced 8.6 million bopd while the UAE produced 2,600 million bopd. Combined they accounted for 36% of OPEC's output, and they're not going to be shutting down production for Gonu.

PSW/ZEB Radio Watch

When: 10:25 ET

Oil Report -- Expectations from the a variety of surveys:

Crude: up 125,000-500,000 barrels. Imports fell by 600,000 bopd last week. That's the difference between the 2 million barrel draw we got and a 2 million build we could have gotten. Given the recent spate of tanker leasings in the Gulf of Mexico, it's pretty hard to tell if imports will fully recover or if we're beginning to see a siphoning effect as the estimated 19 mm barrels of tanker capacity on lease is filled.

Gasoline: up 1.5 to 1.6 million barrels. This would mark the 5th consecutive week of rising gasoline inventories and the upper end of this range. If achieved, it would actually shrink the y/y deficit. RBOB prices continue to look toppy to me.

Gas YoY Deficit 06 06 2007

What to look for in today's report:

Utilization: 91.5% to 92%. Anything below 91% and the bulls will own the week. Looking at the nightly EIA reports, look for higher capacity levels as several facilities announced that they are in the process of coming back on line.

Production: 9.2 to 9.4 million bpd. Despite how low the stock situation is, production has been cranking, and last week's production of 9.258 mm bpd set the record for that week in history.

Imports: last week saw imports reach their third highest level ever. We need more of the same and given the recent backlog of tankers along the Gulf Coast flocking to get the highest prices in the country. A 1.5+ mm number is likely.

Demand: the real wild card. Demand has been averaging 9.4 mm bpd in recent weeks, or about 1.4% over year ago levels. While it may seem counterintuitive, demand generally falls off for the week including the Memorial Day Weekend. Maybe most people fill up during the preceding week, but in the last five years, only two saw demand rise during this week.

Oil Demand Memorial Day Weekend 06 06 2007

Distillate: up 0.8 to 1.0 million barrels. Distillate prices have been unusually strong of late despite inventories that are well above seasonal norms.

Odds & Ends

Endeavor International Corp. (NYSE:END) Update: This one is starting to show some signs of life in front of their exploration target at Balgownie which should be at TD before mid-June. This is an expanded version of a piece I ran Friday, but I think it's worth repeating.

  • Late last week, the Enoch development (between the North and Norway Seas) came online at 1,000 bopd net to END.
  • They produced just over 10,100 boepd in 1Q07, they added a Norwegian well in early 2Q07, and even with declines (which aren't occurring everywhere as fast as expected) they just added 1,000 bopd to the mix -- but 2007 guidance remains around 8,800-9,200. Talk about underpromise and overdeliver.
  • Stated another way, they would have to be suffering 15% declines per quarter to get to the middle of their guidance. They're not.
  • The test at Balgownie should be at TD in the next two weeks. Balgownie is a size target (57 mm BOE unrisked reserve potential with upside). Management puts a 1 in 3 chance of success on it. It's a big deal to END because they have 45% of it, and their proved reserves stood at 10 mm BOE at year end 2006 (29 mm BOE on a 3P basis). This is exploration, and no reason to buy a stock. One in three is pretty good, but the safer route is to take an opening position and reaccess after the well is announced.
  • Balgownie Risk/Reward. I think your risk is a decline to $1.75 on a miss with reward of a move to $2.50 with success. Just based on the reserve potential alone, it would go higher than $2.50 in the event of success as the analyst community wakes up, but I don't want to hype this as it's still likely to fail. That's why they call it exploration. So if you take a little, I'd have stops in place.
  • People have recently asked me two more questions:
  • 1) What's up with that falling chart? $5 to $2 over a period of 22 months! In a nutshell, the company wanted to get a jump on it's life as a North Sea player. They paid what many thought was too much for legacy-producing assets taking on what seemed like an unwieldy amount of debt. But at that time they laid in a series of very attractive oil and natural gas hedges, and since then they have experienced much-better-than-expected field performance from several key assets in the purchase. They are now paying down debt and going about their business exploiting opportunities in and around these assets.
  • 2) Why did the CFO abandon ship? The CFO resigned to join up with Dan Pickering's new bank and work with an old Goldman buddy. Career change and I'm sure the pay didn't hurt. Investors seem to understand his choice and the company has since promoted two old Ocean Energy hands (where much of END comes from) to senior accounting positions.
  • This is a $2 stock with $100 talent in both management and science sitting on a what could be the beginnings of the next big thing in the North Sea. In the near term, they're very likely going to be forced to raise production guidance, possibly with their 2Q report, and a they'll take a shot at a number of promising exploratory tests in the remainder of the year, aside from Balgownie.

Glad To See It Go Watch: Honda Motor Co. (NYSE:HMC) discontinues production of the Accord Hybrid sedan. Disappointing sales, because while it was a clean burning vehicle it got pretty average mileage at 28 mpg. I'm glad to see consumers opting for clean burning AND better fuel efficiency. That tells me that $3 gas is bothering people more than many would have you think with their $5 and $8 per gallon estimates of what it will take to alter consumers' driving habits.

Holdings Watch

Calls: Anadarko Petroleum Corp. (NYSE:APC) August $50 calls sold for $3.60 (71% gain).