Oil Inventory Day Holdings Watch

Includes: CLR, NFX, PBR, UNG, WLL
by: Steve Zachritz

Yesterday was a good day. And not just because of a T Boone Pickens inspired mini-spike in oil prices. Catalytic news out of Continental Resources (NYSE:CLR) drove the shares 23% higher on the day and I took a majority of my position off the table when it was up a mere 16%, (read on). Anyone with a parcel of moose pasture in the vicinity of the Bakken play of North Dakota saw their share price move higher, in some cases, drastically so. Buying of those names led to buying in their peers.

Meanwhile, over in oil service land, Lehman Brothers targeted the oil service group for a seemingly sector-wide price target upgrade. So while the broad market burned, energy soared. Word to the wise, unfortunately, it will not always be this easy, although to be fair, I would quibble with the word easy as I feel that myself and others on the site have worked diligently to uncover the right names in the right plays and it has paid off. So a big thanks goes out to my readers/contributors.

In Today's Post:

  1. Holdings Watch - another busy day
  2. Commodity Watch with oil inventory preview
  3. Stocks We Care About Today
  4. Odds & Ends

Holdings Watch: Wiki Holdings and New & Improved ZEB Performance Tab updated.

  • CLR - Sold the June $50 calls for $10.70, up 511%. This was house money that turned into more of my money as I had sold the first half position early last week for a 200% gain.
  • CLR - Sold three-quarters of my June $55 call position taken last Friday for $7.30, up 192%. I plan to hold the remaining calls through CLR's comments on Thursday.
Analyst Watch: CLR cut to neutral by JP Morgan this morning. I had this possibility in mind when I sold down the positions yesterday, not by that particular analyst who has a problem abiding by SEC rules for calculating reserves despite the best efforts of schooling by Chesapeake, but by some member of the analyst community who couldn't justify a buy rating after the 23% run in the shares…if it dips I am likely to buy some of my sold position back.
  • Newfield Exploration (NYSE:NFX) - Added the July $70 calls [NFXGN] for $2.90. See NFX UBS presentation notes below.
  • NFX - Sold the June $60 calls for $8.40, 105% since entry at the end of April.
  • Whiting Petroleum (NYSE:WLL) - Entered the September $105 calls [WLLIA] for $6.20. Despite the recent massive run, this is one of the least expensive "Bakken" plays out there trading at 5.6x 2009 consensus CFPS vs. a Bakken group average '09 multiple of 8.7x. Furthermore, they are in the known sweet spots of the eastern side of the Neeson Anticline.
  • Petroleo Brasileiro (NYSE:PBR) - Sold the June $67.50 calls for $8.40 (not a typo from NFX above), up 155%. This has had a good run and I plan on buying it back long dated and lower on an eventual pull back in oil.

Commodity Watch

  • Crude Oil. The July crude contract (CL/N8) takes over as the front month contract today. Yesterday it closed at its all time high at $128.98, up $2.26 on the day. Saudi Arabia and other OPEC members discounted rumors of a supply increase before the Cartel's meeting in September and T. Boone Pickens appearing on CNBC and saying that oil was going "higher" contributed to the rally. Congress voting to give the Judiciary the power to sue OPEC for oil prices (the so-called NOpec bill) only added to the laugh factor of the day. This morning oil is trading up slightly and has traded over the $130 mark in the overnight session.
  • OPEC Watch: Oil hits new high and OPEC head Abdalla Salem el-Badri meeting with Hugo in Venezuela reiterates his stance that the globe is well supplied with oil saying "there's no scarcity of oil in the market" because international oil supples are very high.

EIA Inventory Preview (expectations are from the Dow Jones Survey)

ZComment: Utilization is expected to continue the beginnings of its seasonal (albeit anemic) rebound climbing to 87.1%. If this occurs without a rebound in crude imports to levels back above 10.25 mm bopd look for a draw on the crude number and not the slight build that is anticipated. However, the real money is on distillates and anything short of a 1 million barrel build there will more than likely yield a bounce in HO contracts and a run on at least $130 crude.

  • Natural Gas rebounded sharply yesterday climbing $0.41 to $11.36 and in the comments section of Monday's post I said that I didn't buy into the apparently weakening natural gas chart and I won't, not until it is backed up by a strengthening imports picture … something we currently don't see. Production is strong, true enough, and possibly running as much as 5 Bcfgpd ahead of year ago levels but with imports off nearly 3 Bcfgpd and evidence suggesting exports to Mexico may be up 1 Bcfgpd, the impact of the higher production is barely trickling through in the weekly gas storage numbers. This morning gas is trading up another $0.10 to $0.15 with the rally in crude.

Stocks We Care About Today

NFX UBS Conference Presentation Takeaways:

In a nutshell, there is a lot going on a Newfield, a lot more than just being the dominant force in the Woodford Shale and they spent the majority of their time slot focused on South Texas with Q&A leaning on their potential in the Mancos Shale (underlying Monument Butte) and their upcoming results from the Bakken.

  • South Texas - Numerous Joint Ventures Building On Past Regional Expertise. Recent JV with Exxon (NYSE:XOM) just extending their East Sarita know how to another set of acreage. The XOM JV gives them access to 87,000 contiguous acres to run with, not the easiest asset to come by in South Texas these days and they are looking at testing targets in the 6-10 Bcf Estimated Ultimate Recovery [EUR] range with a 2 to 3 rig program with Exxon for a cost of 8 to 12 mm per well again they are focused on adding low $/Mcfe reserves. They are currently drilling a 50 Bcfe ultra-deep gas test in the S. Tx Sanchez JV.
  • Uinta Basin, Utah, Monument Butte Field, Deep Gas - they have a Mancos shale test drilling now, and may deepen it to around 16,600 to test the underlying Dakota shale in this stacked pay environment. Note that Questar (NYSE:STR) is the most experienced driller to date in the deeper Uinta (Mancos, Blackhawk, and Dakota formations). STR even reported one well flowing in excess of 6 MMcfepd from the Dakota unfracced so I have confidence [NFX] can make this and the Mancos work but we will need to see results and I would bet on getting them the next quarterly conference call. The Mancos and potentially the deeper Dakota would be gravy to the economics here as gas could be commingled with the shallower traditional Monument Butte production uphole in the Wasatch and Mesa Verde pays. They see the Mancos as being fairly homogeneous under their acreage and plan a series of east to west tests to prove up that theory.
  • Bakken Play, North Dakota. Yes, they are here too as described in my note here from May 5 but so far the stock has not yet yielded itself to Bakken Mania. They are drilling their third Bakken test now and plan to announce results in short order … sounds like they have 3 tests to talk about in the next 2 to 4 weeks. They plan a total of 14 Bakken tests in 2008 including a Three Forks Sanish test, below the typical middle Bakken productive member.
  • Favorite quote watch: "Three Forks Sanish underlies much of our Bakken acreage". A test of TFS potential is in the planning stage…a successful test of the TFS is what sent CLR soaring yesterday.
  • Woodford Shale: They should spud a dual lateral in the Woodford in mid July so we could see results on the 3Q call of a 9 Bcf well for about $10 mm which significantly improves the already high IRRs in the play (they're getting 4.5 Bcfe EUR for the single extended laterals now which cost $6 to $7 mm drilled and completed).

How To Spot A "Mania" Stock. Bulletin board stocks start press releasing data-poor stories regarding asset purchases in hot plays. Case in point, Western Standard Energy Corp - announcing the signing of a letter of intent to purchase Bakken acreage in the southern part of the play (Stark County, North Dakota). Here's how I spot a "mania" stock:

  • Bulletin Board Listing - that's a bad start but not enough to condemn them,
  • Lack of Details - No mention of dollars, no mention of drilling plans in the press release.
  • Use of the word "Billions" - It does mention the "billions of barrels of undiscovered oil" in the Bakken. Yes and that can be found by people who know what they are doing.
  • Recent Name Change. Their 10Q reveals they were formerly named Lusora Healthcare Systems but with healthcare being what it is today who can blame them for jumping on the energy bandwagon.
  • History of Abandoning Their Game Plan. Before the health care idea they wanted to make finger print recognition systems for residential buildings in China. Anything that even sounds like that which cannot possibly be made up is a red flag.
  • Recent Upping of The Authorized Share Count: In this case, they have about 87 mm shares outstanding and recently upped the authorized count to about 2.8 billion. Hmmm, I wonder if those shares come on toilet paper rolls?
  • Lack of cash. At $25,000, they have less cash on the balance sheet than most Americans have in their IRA's so of course they should be acquiring acreage and drilling multi-million dollar wells.
  • G&A Outways Any Other Expense By Far. Plus massive consulting fees.
  • Management Has No Energy Experience. I see telecom, tech, healthcare, some accounting.
  • Management Doubled Its Salary 2007 vs 2006. Again, despite the aforementioned dumping of their Game Plan,
  • Nepotism. I see a repeat of last names on list of people who made late filings to the SEC.
  • Late Filings To The Sec.
  • Management Apparently Lives in London … the play is in North Dakota and while proximity doesn't insure success, being on the wrong side of the ocean doesn't either

…but I digress. These are just a few of my least favorite things to see in an "energy company" but maybe they'll make it. Good luck fellas.

END Announces Norwegian North Sea Success. Operator StatoilHydro (STO) has said the well hit gas and they are sidetracking, Endeavour Intl. (NYSE:END) has 7.5% of this apparent discovery.

The Following is a reprint from yesterday's post on the UBS conference presentations I will be listening (all times CST):

Wednesday (May 21):

  • Chesapeake (NYSE:CHK) - 8:40 - they could give a test rate in the Haynesville shale but I doubt they are ready to further increase the price of lease acreage in the play. More likely they will update their acreage position here and hit the company highlights … but you never know.
  • FMC Technologies (NYSE:FTI) - 8:40 (replay) - subsea trees and other bits
  • Pioneer Nat. Resources (NYSE:PXD) - 10:00 - cheap and I keep missing it … coming up to speed.
  • PBR - 11:20 - would not expect anything new
  • Petrohawk (NYSE:HK) - 11:55 - they could have news from their first horizontal well but I bet not as its probably still completing. They are more likely to update their acreage inventory in the Haynesville (last count was 150,000 acres). They also may have further results from the recently announced horizontal Hunton Lime play.

Thursday (May 22):

  • Swift Energy (SFY) - 7:30 - post New Zealand divestiture Swift.
  • Quicksilver Resources (NYSE:KWK) - 8:40
  • Valero (NYSE:VLO) - 9:25
  • SandRidge (NYSE:SD) - 10:00
  • PetroQuest (NYSE:PQ) - 10:35 - Not expecting anything new,
  • Anadarko (NYSE:APC) - 10:35 (replay)
  • CLR - 11:20 - I'm fairly heavily here in June $50s and $55s and while the stock has been resting in the two since CLR reported 1Q results, analyst consensus estimates for 2009 CFPS have risen by 13% to $5.75 and at least one analyst has taken his '09 CFPS number over $7. At the time of the report my quick and dirty model took their 09 CFPS number to $6.20 with some fairly conservative cost assumptions so I expect estimates to continue to rally with a positive test at "TFS" providing impetus to analysts to get off the pot.
  • Venoco (NYSE:VQ) - 11:55

Odds & Ends

Analyst Watch: National-Oilwell Varco (NYSE:NOV) and Smith Intl. (SII) cut to add from buy at Calyon, Pride Intl. (NYSE:PDE) cut to underperform at Wachovia, First Solar (NASDAQ:FSLR) cut to underperform at FBR, although they did raise their price target from $155 to $200 which shows a little bit of inattentiveness on the analyst's part if you get me, Weatherford Intl. (NYSE:WFT) sees a large price target increase from Sterne Agee, Baker-Hughes (BHI) upgraded to add at Capital One.