Market Sentiment Watch: D.C. soap opera continues. Enough said. Meanwhile in energy land we have reports from two more E&P stalwarts, CHK (nice beat and came out of the Utica closet) and SWN (also eported a nice CFPS beat and also announced a new oil play). See details on both in the Stuff section below.
Housekeeping Watch: Follow us on Twitter using either the little blue bird at right on your screen or go to twitter and search for @zmansenrgybrain (not a typo). Sometimes we comment over there after hours and away from the office.
- We get 2Q GDP at 8:30 am EST (F = 1.6%),
- We get Chicago PMI at at 9:45 am EST (F = 61.9%, last read was 61.1%),
- We get Consumer Sentiment at 9:55 am EST (F 64.3, last read was 63.8)
In today's post:
- Holdings Watch
- Commodity Watch
- Natural Gas Inventory Preview
- Stuff We Care About Today – Earnings Watch (CHK, SWN, SSN)
- Odds & Ends
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- 100% Cash
- Yesterday’s Trades: None
ZIM (Zman Inefficient Markets portfolio)
- 100% Cash
- Yesterday’s Trades: None but starting to mull taking the ZIM out of hibernation with regard to WLL and possibly with regard to CRR. See comments below in the Stuff section.
Crude oil ended up $0.04 to close at $97.44 yesterday. This morning crude is trading down slightly.
Natural gas fell 7 cents to close at $4.24 after the EIA reported a larger than expected and larger than seasonal average injection to storage report despite near record heat. This morning gas is trading flat
- Tropics Watch: Tropical Storm Don should come ashore just under hurricane strength late tonight or early tomorrow in south Texas. The storm prompted a number of Gulf producers to shut in production but I wouldn't expect much of an impact on next week's inventory report.
- Supply Watch: We get the EIA's read on supply and demand for the month of may sometime this morning. I'm expecting a slight pull back in total lower 48 marketed production but nothing that will make the bulls excited just yet.
Natural Gas Review
ZComment: Higher than modeled weekly injection levels of late pointing to stronger than anticipated production, especially from the Marcellus. The producing region did see a second week of draws and absolute storage levels remain well short of record levels (due to last winter and a period of Spring demand) but we really need to see a rollover in "other state" production levels before I or anyone else is likely to get too excited beyond the normal spikyness of hurricane season.
Stuff We Care About Today
CHK Reports Better Than Expected 2Q Results; Aubrey Chants: Utica, Utica, Utica
The 2Q numbers: Better than expected quarter. Do note that the quarter would have been up 12% sequentially had they not sold 400 MMcfgpd of volumes with their Fayetteville divestiture and another 40 MMcfepd with their last VPP.
2011 – increased from 8% to 13% over 2010,
- Minor Knock Here On The Guidance Here: They are pulling in the liquids production due to some physical restraints in getting volumes to market.
- 2012 – increased to 15% growth on the mid.
- 2011 – increased from 8% to 13% over 2010,
- Adding $500 mm per year to reach a range of $6 to $6.5 B in both 2011 and 2012. The increase comes from some service cost inflation and an increase for Utica drilling.
- The now hold 1.25 mm acres in the play
- 5 rigs running now, going to 8 soon with plans to really accelerate in 2012.
- They've drilled 6 horizontal and 9 vertical wells to date
- Well results were not included in the press release but they did go on to say that in part based on the well results they put a lofty valuation of $15 to $20 B on the acreage. This seems at first blush high but there are lots of potential Chinese partner in the mood for JV's these days and I would not be surprised to see CHK monetize a piece of the play in large part for a carried interest that comes close to the $12,000 per acre the low end of the range implies. He's done it before and he will do it again.
- Others who could see play in their stocks over CHK finally admitting they are going into overdrive in the play are numerous since the Utica Shale is actually geographically bigger than but underlies the the Marcellus. Names with Marcellus acreage include: GPOR, EVEP, MHR, RRC, XCO, PVA, COG, GST, KWK, SWN, GMXR, BHP, APC.
Nutshell: Capital discipline … you just knew it couldn't last. The bumps in production are not sufficient to cover the extra spending and the inflation question wasn't really handled by the press release so I would expect them to take a little grilling over that in the Q&A session. I will continue to hold as I didn't really think CHK would shrink away from big spending any time soon and the fact that they are well undervalued on a potential reserves basis is compelling enough to let me look the other way as they bump capex … I'd say let's not make a habit of it but I'd have to add "too late" and besides, Aubrey has proven time and again that what he pays $1 for he will eventually sell to someone else for $5 to $10 in the not too distant future. Also on the call I'll be looking for more color on what the Utica actually produced for CHK. RRC drilled the first horizontal in the play to my knowledge and it would be nice to add CHK's data to the limited sample set available now. Also, a little other play color would be good, still waiting on them to disclose their activities in the Williston beyond the coy comment about them thinking about the play differently than others.
SWN Reports Stout Corner, Reveals New Oil Play
The 2Q Numbers Comment: Nice beat from the top line on down. Nice to see a return to per unit LOE cost reductions although I would think they will flatten in coming quarters as water handling costs increase.
Guidance: Not mentioned but looks increasingly in the bag to beat the 20% current YoY guidance for 2011.
- Another quarter of strong growth as they stay on pace to add 150 wells per quarter this year
- They are now drilling wells for $2.8 mm a copy here, with many being drilling in 5 days.
- If I had to sound one cautionary note it would be on the IP rollover we have seen over the last two quarters. They say it is a function of shorter lateral lengths and well mix but this may be a knock on the stock for some analysts.
- Ramping rapidly with production of 5.1 Bcf in the 2Q vs 2.8 Bcf last quarter and 0.8 Bcf a year ago.
- As we've seen in all unconventional plays, the first wells for SWN were not their best and the learning curve is yielding better wells now, with one coming in at 7.8 MMcfepd.
- The 5.1 Bcf comes from 18 wells, another 10 are awaiting hook up and the company is now going to add another rig. Look for bigger guidance for next year on the 3Q or 4Q call… it should be impressive.
New Horizontal Oil Play - Lower Smackover Brown Dense (mudstone – basically a dirty limestone)
- Massive position in potential oil play built: They spent $150mm over the last two years acquiring leases on 460,000 net acres prospective for the Lower Smackover Brown Dense (mudstone) in southwest Arkansas and northwest Louisiana. That works out to $326 / acre.
- Depth of 8 to 11,000 feet with a thickness of 300 to 550 feet.
- This is potentially a big play stretching from the Texas Gulf Coast to Alabama if not Florida.
- I don't know how fractured this is or how much data they have over (2D or 3D?) or how much well control they have if any (vertical well penetrations they have data from that penetrated the new target) but this has been an oil producing region since the 1920's … I don't know if this is related to the Magnolia Anticline where oil has been produced from the Upper Smackover since the late 1930's but that would make sense as you see many of older plays being reexamined from a source/reservoir standpoint for horizontal exploitation.
- We do know that the play is low porosity and permeabilty and that unlocking oil from the play is on of CLB's pet projects. Lots of clay will make completions somewhat tricky but if they didn't think they could handle it you wouldn't see the name pushing half a million acres here.
- And we know that EOG has drilled a well in AR (vertical I think) looking for oil last year but has been quiet about it. I expect several other names to emerge with positions in the not too distant future.
- SWN is planning to spud the first well, a 3,500' lateral, in Columbia County, AR this quarter, followed by a 6,000' lateral in Claiborne Parish, LA. We might here something regarding the first well results between the third and fourth quarter calls.
Nutshell: Better than expected production and they didn't up the budget so no immediate hate rays from the sell side. Will be listening closely for additional information on the Brown Dense. No plans to sell at this time.
Quarter Wrap – WLL - Just some quick thoughts on management's comments regarding their Lewis and Clarke play relative to their past experience. The quote from management was along the lines of "this is the best play I've seen in my 40 years of experience". Without a doubt WLL's crown jewel is the Sanish Field so making that statement about the Three Forks play at Lewis and Clark in Stark county, ND is either extremely wishful thinking on their part or a simply a matter of confidence brought about by having seen this kind of play develop/evolve before. I had been working on a well study on WLL's operated effort at Sanish and in an nutshell, and to no one's surprise, the field is a producer of monster wells. I don't care for IP's as much as I do long term production so here's Sanish broken down by the available data (which is actually quite a lot).
These are very strong numbers for Lewis and Clark to stand up against but L&C is also 3x the size of Sanish on an acreage basis and its very early there (most L&C wells don't have even 6 months of available production data).
CRR Call Notes - to be added in comments this morning.
SSN Reports 2Q Results
Production was up 63% for the quarter as more Williston Basin Bakken wells were added to the mix. The percentage increase looks large when you are growing from a small base but its good to see them moving the numbers up as we await news from tests in both the Niobrara and Montana Bakken program later this Fall. There's a lot of data points in the press release on current operations however there's very little in that's new. Right now the story is waiting on results and that's going to take a couple more months to see anything really newsworthy out of the name. The first data points will be:
- from the HAL run (and 100% paid for) Niobrara horizontal well in Goshen (think we here something regarding an IP in September or October),
- followed by an IP for their 6th Bakken well at North Stockyard (which should help boost 4Q volumes),
- followed by two wells in their recently acquired Roosevelt acreage in Montana (think August / September spud with October
Nutshell: I'm holding tight awaiting more news. The company has no debt and continues to hold over $50 mm in cash after taking the Roosevelt county leases. If you've never read a SSN quarterly piece and have an interest in the name I'd suggest taking a look as they give a fairly detailed run through of their current plans.
Next week from names of interest we get 2Q reports from ATPG, CRK, CXPO, FST, SM, XCO, REXX, SGY, VQ, CLR, EPL, PXD, WLT, BRY, XEC, DNR, FSLR, KOG, PETD, PQ, SD, and EOG.
Odds & Ends
- WLL – Ticonderoga ups to Buy
- WLL – BMO cuts to Market Perform with a $65 target
- WLL – Jefferies maintains Buy rating but cuts target by $10 to $75
- WLL – Dahlman Rose cuts target by $5 to $73.
- WLL – Morgan Keegan ups to Outperform with a $73 target
- COG – Jefco ups target by $10 to $95.
- GPOR – SunTrust ups target $5 to $45 (presumably on the CHK Utica news)
- EVEP – Wells Fargo ups to Outperform