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Why I Own, What I Own (Part I) - Thoughts from Tuesday

|Includes: American Oil & Gas, Inc. (AOIX), CHK, END, EXXI, HK, KOG, LNGG, NBL, NFX, SSN, STO, SWN, WLL

Market Sentiment Watch:  Greece Again? Sheesh. TED spread continued to run high yesterday and true to recent history the market pulled back in the afternoon when TED wouldn’t cooperate. Furthermore, volumes on the "rally" yesterday looked weak. Still not a lot of news aside from the oil spill in energy land but am planning to listen to a number of presentations from the Macquarie conference today. And finally, I have to again throw a kudo to Nicky who keeps calling the S&P spot on.

Ecodata Watch:

  • Empire state index came in at 19.57 vs 19.1 last reading
  • We get the home builder’s index at 10 am EST, forecast 21 vs 22 last month.


In Today’s Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Stuff We Care About Today – WIOWIO for the ZLT (Part I)
  4. Odds & Ends

Holdings Watch:

  • ZCAT (Zman Catalyst portfolio):
    • $6,000
    • 97% Cash
    • Yesterday’s Trades:
      • None


  • ZIM (Zman Inefficient Markets portfolio)
    • $5,300
    • 15% Cash
    • Yesterday’s Trades:
      • None

Commodity Watch

Crude oil increased $1.34 to close at $75.12 yesterday.  Crude seems to be stabilizing here and the weak dollar and increased potential for storms impacting Gulf Coast refining capacity will help this cause. This morning crude is trading up 60 cents.


  •  Early Read on Oil Inventories:
    • Crude: DOWN 1.75 mm barrels
    • Gasoline: UP 0.625 mm barrels
    • Distillate: UP 1.0 mm barrels

Natural gas jumped $0.23 or 4.7% to close at $5.006 yesterday on hurricane fears. This is the first close above the five dollar mark for this contract since the end of February. This morning gas is trading up a dime+.

  • Tropics Watch: Invest 92L still moving across the Atlantic, chance of development inched back up to 50%, storm tracks almost uniformly pointing to Caribbean/Gulf of Mexico.



Stuff We Care About Today

WIOWIO – ZLT Edition (part I. part II tomorrow). These are the long term holding of the site and while they are not held as catalyst driven plays, some of the catalyst will provide an opportunity for the next leg up. Note the preference in the portfolio for oilier than not plays. 

BEXP – Oily, growth, and a Bakken leader

  • Small to mid sized Bakken player, fastest grower in the play, transitioning to an oilier profile rapidly and drilling some of the biggest if not the biggest (based on IP) wells in the play.
  • Production growth:
    • 2010: Oil volumes increase 125%; total volumes forecast up 42%.
    • 2011: Oil volumes forecast to double again.
  • Balance Sheet:
    • 37% debt to cap
  • Management was early to see potential for high frac stage count, long lateral wells targeting the Bakken and Three Forks Sanish on either side of the Neeson Anticline in the Williston Basin of North Dakota.
  • Two established areas of operations: Ross (both Bakken and TFS) and Rough Rider (Bakken so far for them but other operators have scored TFS successes recently)
  • BEXP has 164,400 net acres between the two plays.
  • Near future catalysts:
    • a Three Forks test in Rough Rider – end of June/ early July
    • a Bakken test in a new area in southeast Montana, "Pale Rider" which would add another 83,600 net acres and would open up a third core area for them if successful.

HK – Gassy, growthy, heading to cash flow breakeven in 2012

  • One of my longest term holds, through thick and thin
  • Profile remains 92% gassy but they, like many of their gassy peers are making the move to a more liquids rich profile given the BTU disconnect from natural gas to oil.
  • Growth rate here is 31% for 2010, 36% for 2011, which is top notch in the names I follow and especially so in the E&P universe given that they are no longer in what I’d call the small player camp.
  • Haynesville – still driving a majority of the growth
  • Eagle Ford Shale – seeing capital transition here due to the liquids rich nature of the play including two regions that are oilier than not.
  • Balance Sheet:
    • 46% debt to equity
    • living within cash flow this year and ostensibly next (at least that’s their stated plan) as drilling to hold acreage decelerates in mid 2011 in the Haynesville and there are no pressing acreage holding issues in the Eagle Ford.
    • Potential for monetizations as they may sell the Eagle Ford Shale gathering system (or half of it) next year, similar to their partial sale of their Haynesville system to Kinder earlier this year. 
  • Management: transitioning away from the gunslinger days of the Floyd to a more disciplined approach to investment and return on investment.
  • Wall Street has been slow to believe in management’s discipline.

WLL – Cheap, Bakken player with running room to the south…

  • Results to date have been some of the best in the Williston Basin
  • And it is perpetually cheap:
    • 2010 at 5.6x CFPS
    • 2011 at 4.6x
  • Growth is there (12% for 2010) with a decidedly oily mix (80% of 1Q10 volumes)
  • Their east of the Nesson Anticline activity has captured most of the attention for the story due to big rates, some in excess of 4,000 BOEpd and with an average of over 2,300 BOEpd. They have 87,000 net acres in this area.
  • However, they have about 200,000 net acres in their nascent Lewis & Clark play (Three Forks Sanish) further to the southwest where preliminary results have been better than expected … we should see activity accelerate in this new play, which WLL has largely to themselves, as the year progresses
  • Outside the Bakken, their enhanced oil recovery projects continue to perform better than expected.
  • They speak at Macquarie today at 9:30 EST by the way.



WHX – Oilier than not high yield royalty trust 

  • Depleting asset with a terminal date around 2017.
  • 58% of production from oil
  • Smooth decline rate and hedges yield predictable disribution
  • My forward 12 month distribution estimate (paid in quarterly installments) is $2.40 to $2.50, providing a yield to current of about 13.4%.

LINE -My gassier yield play, run more like a traditional E&P than your usual MLP

  • 52% of production from natural gas
  • But almost all expected production volumes hedged through 2013 at favorable prices to the current long term strip.
  • Management has done an exceptional job of buying low and selling high in the asset market
  • Granite Wash position gives them both catalysts and the possibility of another increase to the distribution.
  • Coverage ratio has been moving back up with recent acquired volumes and better than expected cost control, also giving rise to the possibility of a distribution hike late this year.
  • Current annual distribution is $2.52 leaving a current yield of 10%.


AEZ -  Bakken midget, not as far as long but more running room

  • > 76,000 net acres, roughly in the northeast corner of Rough Rider
  • Their first two wells were impressive entries to the play (around 2,800 BOEpd each)
    • #3 is expected late this month and will be a longer lateral, high stage count well
    • #4 is the same, expected mid July
  • Balance Sheet:
    • No debt
    • > $76 mm cash

This section will be added to the Long Term Names page. Tomorrow we’ll include the rest of the names on the table above including one I am thinking of killing off …

Other Stuff:

  • TGA piece not yet ready, will be in Wednesday post. 
  • Eagleford Energy (OTCQB:EFRDF) -acquiring lease in Zavala county, TX …. Sounds like a Toronto based wanna be Eagle Ford player sort of five cent wild card name to me. One of the signs of an overheated play is when you have companies cropping up with 0 to very little acreage in a play that they are suddenly named after.
  • BP Spill Watch:
    • President speaks from the Oval Office tonight on the spill
    • It looks like BP will create a Gulf relief fund to be administered by a third party
    • No word yet on the dividend suspension issue but expect that tomorrow.
    • BP said to to cut corners in the drilling process.
    • SLB rumored to have been hired to run the cement bond log. Also rumored to have been told it wasn’t necessary by the BP company man (man in charge on the Deep Water Horizon). After that they are further rumored to have asked for a chopper to leave the ship.
    • XOM said after the close that BP violated industry practice on drilling.
    • HAL said to have requested more casing centralizers, but were turned down by the company man due to time/cost. That’s good for HAL and bad for BP. Although, again, BP is already pretty beat down at this point.
    • BP meanwhile is martialing more capacity for Macondo, contracting one FPSO from Petrobras and another from Helix Energy Solutions (NYSE:HLX) which will cause them to push back the date of first oil from their Phoenix field but should get them sort of good citizen’s pass from the public and Administration.
    • Fitch lowered BP’s debt 6 notches this morning.


Odds & Ends

Analyst Watch:

  • ROSE - Cut to Neutral at SunTrust

Disclosure: Long all stocks mentioned in table plus HAL, BP