Energy Group Sentiment Watch: Negative. Yesterday’s little bounce was weak, especially in oil service. Stocks are trying to find a bottom but could easily go lower with fresh 3 month lows on crude. From my perspective, I saw fine, go ahead, find a bottom. Good news from companies continues to have "flash in the pan" importance and rallies are often quickly reversed. I see no reason to try and force new trades to work in here until such a bottom is plainly in progress.
In Today’s Post:
- Holdings Watch
- Commodity Watch - with some crude thoughts on the oil inventory report
- Stocks We Care About Today - WIOWIO - The dance list.
- Odds & Ends
Holdings Watch - No changes. Keeping powder dry.
Commodity Watch:
Crude Oil closed at a 3 month low, down $1.44 at $113.01 yesterday. Russia’s move on Georgia and the pipelines that were shut in as a result were not enough to lift crude but the cessation of hostilities was blamed for its continued decline.
- From The EIA’s Short Term Energy Outlook: (EIA’s comments in italics)
Preliminary data indicates that global consumption rose by roughly 500,000 barrels per day (bbl/d) during the first half of 2008 compared with year-earlier levels, as a 1.3-million bbl/d rise in consumption outside of the Organization for Economic Cooperation and Development (OECD) was partially countered by an 800,000 bbl/d drop in U.S. consumption compared with year-earlier levels.
Total world oil consumption is expected to grow by a little over 1 million bbl/d during the second half of 2008 and by almost 1 million bbl/d in 2009 compared with year-earlier levels. The projection for 2009 consumption is about 460,000 bbl/d lower than last month’s assessment, reflecting lower expectations for consumption in the United States and other OECD countries. Over the next year and a half, lower OECD consumption is expected to be more than offset by continued non-OECD consumption growth, led by China, the Middle East, Latin America, and India. (IEA is thinking 2009 comes to growth of 930,000 bopd)
And on Supply The EIA Wrote The Following.
Non OPEC. EIA is revising this month’s outlook for non-OPEC supply growth in 2008 compared with last month’s, largely because of project delays in Asia, lower output growth now expected in the Former Soviet Union, lower growth in Canada caused by the upward revision of 2007 data, and reduced production in Azerbaijan due to the closure of the BTC pipeline. If new projects come online as now anticipated, total non-OPEC supply is projected to rise by about 510,000 bbl/d in the second half of 2008 and by 850,000 bbl/d in 2009 compared with year-earlier levels.
OPEC. OPEC crude oil production is projected to drop to about 32.4 million bbl/d in the fourth quarter of 2008, and to decline to 31.6 million bbl/d in 2009.
And Finally, What Has Demand In The U.S. Been Doing Lately. Preliminary June and July 2008 weekly survey data indicate that year-over-year declines in total consumption, which began in August 2007, have narrowed since earlier this year. During the first 5 months of 2008, total petroleum consumption fell by an average of almost 900,000 bbl/d from the same period in 2007. During June and July, the year-over-year declines narrowed to just over 400,000 bbl/d.
ZComment: You’ll note supply is not expected to keep up with demand. Where they get the OPEC expectation of reduced production in 2009 is something of a mystery but the important point is that Non-OPEC production growth is tentative and does not keep up with demand…so the Saudis still hold the pricing cards. Read the whole STEO here.
- Iran Watch: Pretty quiet with Russia and Georgia taking the spotlight
- Russia / Georgia Watch: conflicting reports of ceasefire mixed with bombings. As many as 4 pipelines in the region with a capacity of > 1 mm bopd remain off line due to the conflict. Putin tightens his control over the region’s and Europe’s access to crude.
- Tropics Watch: 92L and 93L moving across the Atlantic. Accuweather sums it up pretty well here.
EIA Oil Inventory Preview (estimates from the Reuters survey)
ZComments:
- The drawdown on gasoline stocks is likely to be larger than forecast as production remains flat at best and demand picks up relative to last week. Do I think another bigger than expected draw on gasoline stocks will stem the tide of dollars flowing away from crude? No. If we get a large draw and gasoline prices spike up a bit I think it will only provide a day’s worth of relief before gasoline and crude resume their march lower.
- On the distillate front, the build is typical for the season and I would not expect a surprise here, or maybe just a slightly lower than expected build.
- Ultra low sulfur diesel (ULSD), diesel with a sulfur content of less than 15 parts per million which is what cars and trucks drive around on, makes up about 60% of current distillate stocks
- In aggregate distillate stocks are 6.6% above the five year average (as seen in the table above). Maybe we see some pickup in this segment of demand as we have seen in gasoline.
- U.S. average retail diesel prices have fallen only 30 cents in the last three weeks and despite the excess quantities in storage price remain 55% above year ago levels. I assume blame higher exports for that. about
- DistilIate production remains high to year ago levels since that’s where the margins have been.
- In other words, the U.S. has a more than adequate amount of distillate in storage (see chart below) and while we may see a smaller number soon I would not expect a reversal of the seasonal building trend.
Natural Gas closed just about flat at $8.33 yesterday. This morning gas is trading flat to slightly down and will almost certainly try to $8 no matter what happens with crude post inventory numbers. Below $8 and I think we will begin to hear rumblings of capital budget decelerations (slower well hookups) and perhaps regional curtailments out of some E&Ps who would rather wait and sell gas for better prices later.
- Production From First Floating LNG Facility Goes To Japan. Mitsubishi has agreed to take all of the output from the Progress LNG plant offshore Nigeria for 15 years beginning in 2011.
Stocks We Care About Today.
Why I Own What I Own: The Dance List for 2H08 Return To Good Graces. A number of subscribers have requested a list of what I feel are names that will "come to life" (more than the rest) when the sun once again shines on the Energy Patch. I’m choosing to break this out into E&P (names that are oily, gassy, large, and small) and Oil Service (I talk more about oil service tomorrow but the names their are SLB, HAL, NBR, RIG). As always when looking for dance partner there are pros and cons to weigh and ultimately you have to answer the question, what’s this costing me compared to my other choices.
Finally to take an analogy a little too far, I’ll rank them by performance growth in the back half of the year, assuming oil and natural gas prices don’t completely fall out of bed which is akin to the building where the dance takes place blowing up. For greatest near term price appreciation I think these will do better than theirs in the event of a return to stability in the group:
- Large Caps: (EOG), (CHK)* - See WIOWIO and Reports pages for thoughts on this one…nothing has changed in my opinion here.
- Mid Caps: (HK), (SD), (CLR), (PXD), (SWN), (NFX)*provide the most upside in terms of stock price appreciation among the mid caps;
- Small Caps: (WLL), (PQ)**
- Risky little wallflowers that may blossom. (GMXR), (BEXP)
Note 1: (CHK) And (NFX) Gets Asterisks. I think they too will do well but they often lag in terms of performance. For example, while CHK will often grudgingly move higher with a green group due to reasons listed in the next section, the large cap peer I have grouped with them, EOG, can really fly when the group comes into favor.
Note 2: PQ Get’s Double Asterisks. I like this more as an equity than an options play. The others I generally like from both equity and call option perspectives.
Note 3: This is just my opinion and I obviously could be completely wrong but I obviously don’t think so. This is my way of telling you what I’m thinking. If you have questions or something seems contradictory or off base just ask. For fresher thoughts on (SD) and (CHK) see below and recent postings on the Reports tab. Below I’ve included some knocks on the stories as well. I’ll have some more breakouts similar to those below for other names on this list in coming days.
Sand Ridge: 85% natural gas production, all U.S. onshore
- What’s To Like:
- Growing like a weed, just put up a 35% growth target for next year
- Management and multiple professionals from (CHK)
- Operating costs in good shape
- It just plunged 28% in 2 days after beating earnings and issuing that guidance; analysts are confused as to the reason but suspect it is over a lack of details regarding some recent well results.
- Moreover, the stock is down 50% since its peak in mid June
- See 2Q08 Note at the bottom of this post.
- See my original look at the company here.
- They have East Texas acreage underlain by the Haynesville/Bossier Shale. This could be worth $1 to 1.5 billion.
- What’s To Knock:
- High CO2 content which must be stripped from gas in its core field. This can present production bottlenecks until processing capacity is added…so far this has not been much of problem but its worth noting.
- Complex geology and a relatively new name mean it is one of the first to get shelled in uncertain times. Unfair, but apparently true.
- Increasing debt to total cap: began year at 32%, now increased to 46%. Still manageable but it may be reason for a bit lower multiple than the stock has enjoyed until now.
- Possibility of an equity and debt deal in 2009. Given their current capital program expectations for 2009, they will not need to go to the markets for additional capital if they can sell their East Texas asset.
- Where’s It Trade:
- P/CF of 7.0x 2009 numbers which should continue to rise. This is a little high to the group but lower than it has been and I’d be pretty comfortable with a multiple closer to 9x given the growth and positives surround the story … in a more stable natural gas price environment.
- TEV/EBITDA 7.5x on an ‘09 EBITDA estimate
- Given their expected growth and the visibility of said growth and in my opinion the likelihood that they can upgrade that production target early next year to a higher number (say 40%) I think they slightly elevated multiples to the group are warranted.
- I think they are due a near term bounce from this harsh correction but will take time to grow into that multiple and with that time will come a better understanding of their WTO play.
Chesapeake Energy (CHK): 92% natural gas production, all U.S. onshore
- What’s To Like:
- Finding costs are falling.
- Production growth of 20%, 20%, 19% 2008-2010. Few of their peers can provide this level of visibility
- Domination of major shale plays
- Economies of scale in drilling
- Expertise applied to a truly massive prospect inventory
- Partnering up in their major plays to deflect costs
- Hedges:
- Q308 - nearly 90% of expected gas production hedged at just short of $9
- Q408 - 76% hedged at nearly $9.50.
- 2009 - about 60% hedged at almost $9.75.
- (see below)
- Based on booked and unbooked reserve potential, NAV can be argued north of $100 with the stock trading at $45.
- What’s To Knock:
- They have been dubbed a serial filer, issuing equity to supplement cash flow
- They have gone from outspending cash flow to a plan of staying within their internally generated funds and back again within the span of 6 months…analysts are wary that some other shiny play will catch Aubrey’s eye
- Debt to cap of 57% is high to the group
- Hedges: people think they are giving away the upside and I would add that when the group sells off, hedges don’t save you as fund managers don’t use logic when puking up shares.
-
- Where’s It Trade:
- P/CF of 3.9x, in line to low with peers
- TEV/EBITDA of 5.0x in line to a little high to its mostly slower growing peers.
- Lengthening R/P (reserves/production measured in years) ratio augers for a high P/CF ratio and we saw this begin to materialize
- The stock hit a high of $74 on July 2 and has since fallen 40% while natural gas has fallen 37% despite their hedge position and given that hedge position, the change in cash flow generation due to this decline is negligible.
Odds & Ends
Analyst Watch: Nada
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