Energy Stock Trader: Thursday Outlook

Includes: GW, OII
by: Steve Zachritz

Baby, bathwater, rubber ducky, bath mat, porcelain. All things thrown out as oil  took out it’s record high and bounced lower. Refiners took the brunt of the action, falling on average 3% (it was 7% before the DJIA’s last minute dead cat bounce) as RBOB dropped $0.076 to $2.03 on higher-than-expected refinery utilization which in turn apparently dragged crude lower despite a massive draw. Nicky sees September RBOB support at $2 and I concur. See EIA report details below.

Earnings We Care About Watch:  

Oceaneering International Inc. (NYSE:OII) - BIG RESOUNDING BEAT! Guidance Increased.

  • Q2 EPS of $0.86 versus consensus of $0.71 (range was $0.69 to $0.73 which was roughly in line with guidance the company gave back in May). Up 55% YoY, 44% QoQ.
  • Revenue of $432 million vs. consensus of $376mm. This also exceed the top end of Street expectations ($369-$387) by a mile.
  • ROV Division: Increased operating income 30% relative to 1Q07. Increased day rates to $8,300 (up from $7,900 in 1Q) and utilization to 87%. These guys operate the largest fleet of ROVs in the world with 202 vehicles vs 193 at the end of March.
  • Subsea Projects: gunning for another record year. 1H07 operating income equates to 75% of all of 2006. Expect back half 2007 to be stronger than first.
  • Inspection: Operating income set to exceed 2006’s record levels.
  • 3Q raised to a range of $0.80 to $0.88; Street is at $0.80.
  • Backlog now at $378 million.
  • ‘07 Guidance Increased to range of $2.95 to $3.10 (equates to 30% YoY) from range of $2.70 to $2.90. Street is at $2.83.
  • Conference call: 11 ET.
  • This is also one of the hurricane plays I outlined in Always An Option 1:3 and highlighted on yesterday. Get your complimentary copy our new newsletter (.pdf) Your feedback on our new endeavor would be greatly appreciated; email me and I’ll forward it along!

Grey Wolf Inc. (GW) - Reported $0.19 vs. expectations of $0.20. This was a 28% decline from year-over-year earnings, and attributable to increased competition from new rigs entering the U.S. land rig market and depressing day rates, especially in the lower end rig market. Yet another reason to steer clear of land drillers at present. Stock was down 5% after the closer upon the results yesterday.

Nutbag Hugo Watch: Chavez says oil to go straight to $100. “As we continue to see increases in the price of oil, which is headed straight to $100 (per barrel), the price of (natural) gas is also going to rise,” Chavez said during a televised speech. September crude promptly fell $1.70 to close at $76.50 on the day. So why would the “man of the people” want $100 oil. Oh yeah, that’s the only way he can subsidize his existence.

Nigeria Watch: Rebels kidnapped a Nigerian oil worker employed by Eni.

Refiners have repeatedly taken it on the chin since I ran this story on June 12th. My mistake was going long Valero Energy Corp. (NYSE:VLO) too early in the face of a wave of “take no prisoners” selling that knows not statistics and margins but employs more cro-magnon style logic like, “Hey they make gas. Gas bad”.

Oil Report:

  • Crude: At 6.8 million barrels, the draw down is not only much bigger than expected but highly suspect. 
    • Yes refinery utilization jumped up to 93.6% (about a 1% more than anticipated)
    • And as a result, refiner inputs increased… Refiner throughput increased by nearly 400,000 bopd, which would account for additional demand for oil of 2.8 million barrels relative to last week,
    • …While crude imports were down slightly… imports were down 200,000 bopd which translates into a week-to-week slide of 1.5 million barrels.
      • I’d Say they overestimated yesterday’s draw again. The numbers just aren’t there in the weekly changes to get to an almost 7 mm barrel pull.
    • Oil did what I thought it would by taking out the record and then quickly beating a retreat. While I don’t think it’s done just yet with the high $70s, I bet we will see lower 70s / upper 60s soon. With gasoline in hand and distillates rising, products won’t support current prices no matter what Chavez, the EIA or Goldman Socks tells you. Remember the last “super spike” call of theirs saw oil 20% lower within two months. Also recall that Cramer interview where he “explains” that hedge funds always, always, always say one thing while doing the opposite. Goldman Sachs Group Inc. (NYSE:GS) is the biggest hedge fund on the planet.
    • Gasoline: 600,000 barrel build was essentially in line with expectations. Imports drifted off to 1.2 mm bpd after hitting record levels last week. September RBOB got nuked back to $2.03. Key psychological support remains at $2 and the contract traded as low as $2.0015 before the close of NYMEX trading yesterday. This morning the contract has already touched on $2.0005,

I Hate To Poke The Bull But Can’t Help Myself Watch:

“The refineries have finally gotten their act together,” Flynn said. “They’re back to normal, almost.”

Comment: This was said in response to utilization hitting 93.6%, as opposed to four weeks ago when the refiners produced a whole 27,000 barrels of gasoline per-day less. Man, they really pulled it together. Gosh, I guess if you only look at the utilization number, up from 90% at that time, you would think they’ve really “gotten their act together.” Furthermore, the “almost” just slays me, as that “almost” scenario got you all-time record friggin' gasoline production. I know what he means, but why not focus on the supply demand numbers and not the largely-irrelevant utilization number which is not meaningful for apples-to-apples comparisons from year-to-year? Ok, I promise not to poke the bull again for at least 1 day.

Gas production 02 08 2007

  • Distillates Up 2.8 million barrels. Double expectations

Premature E-Notification Watch: If you were listening to today, you’ll note that we had the numbers about 5 minutes earlier than their regularly scheduled released. Here’s EIA’s comment:

The Energy Information Administration (NYSEMKT:EIA) is aware that petroleum data for the week ending July 27, scheduled for release at 10:30 AM Eastern Time today, was available on the public EIA website before the scheduled release time. Initial indications suggest a malfunction in the system used by EIA to load the data while keeping it from public release prior to the scheduled release time. EIA is actively investigating this event and its possible causes. Once the problem is fully understood, EIA will make whatever changes in its systems or procedures that may be required to avoid a recurrence.

Comment: Maybe somebody there was just excited to get that massive crude draw out the door early.

Natural Gas Preview:

  • Imports Watch: Gross natural gas imports to the U.S. fell about 1 Bcfgpd vs. the prior week ,and were roughly in line relative to the year ago week.
    •  LNG - a week-to-week tumble in LNG volumes accounted for 0.95 Bcfgpd of the over all drop in imports. This is after a sharp spike last week to record highs, and the volatility is no doubt attributable to the timing of offloadings (3 extra ships in last week’s number could do it).
    • Canadian piped gas inched back a hair from last week to 9.2 Bcfgpd.
  • CDDs Were Flat Week To Week. Down a touch from 72 to 70.
  • My Number 60 -65 Bcf Injection. Haven’t seen the Street’s number.
  • That would push storage to 2% over record levels. Last year it was so hot 12 Bcf was withdrawn from storage. This summer, production is higher, imports are higher, the weather is cooler and we continue to inject away.
  • Over / Under: I think 50 to 70 Bcf is probably the range of injections that’s expected, and gas prices will look to other things for direction if it falls in there.

Tropics Watch: Getting Busier. Natural gas is getting some support from  from a couple of lows which remain fairly disorganized but have “some potential to become a tropical depression during the next day or so” in the case of the one near Barbados and “slow development is possible” for a low in the GOMEX west of Florida. There’s also increasing activity coming off Africa. Comment: It’ll take more than rain and slight convection to support gas in the face of another two weeks of easy comps for gas storage.

Holdings Watch


  • Tesoro Corp. (TSO): added August $42.50s for $0.55 just in case things go nutty in the morning. Frontier Oil Corp. (NYSE:FTO) and Western Refining Inc. (NYSE:WNR) puts are doing very nicely up 341% and 44% respectively on the bid, and make a nice hedge for my currently ill-fated Valero Energy Corp. (VLO) calls.
  • BJ Services Company (Pending:BJS): Sold the August $27.50s for $2.30, a 197% gain since 7/24. Much better than I expected, but not enough of a hedge to make me happy on a day when Halliburton Co. (NYSE:HAL) slumps a percent. I suspect on days like yesterday with so much market turbulence, their broker takes a relaxed stance towards accumulating shares for the buyback, knowing he can catch up later in the week at lower prices.

Analyst Watch: Gasco Energy Inc. (GSX) upgraded to outperform at Wachovia.

Have A Great Day Everyone and Good Luck. 

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