Zman’s Energy Brain ~ oil, gas, stocks, etc…

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16
Aug

Wrap - Week Ended 08/15/08

 

Well that was less than fun and one of the worst months I’ve had since publicly disclosing my trades (see updated holdings on the ZEB Perf tab). 

Sentiment on the group, despite the occasional glimmer of hope, remains decidedly negative.

  • Blame the "dollar - oil" reversal trade,

 

  • Or blame fears of oil demand destruction (more properly termed demand growth erosion since no one sees global crude demand declining in 2008 or 2009 but only rising 1 mm bopd each year),

 

  • Or blame a perceived natural gas glut in the states.

 

  • Or blame job security at the hedge funds, as in "I know its cheap but I’ll blow it out now and buy it back this Fall even cheaper … if I still have job".

 

  • Or blame poorly guided Hurricanes which don’t seem to understand the energy markets and their place in them,

 

  • Or blame a kinder, gentler Iran (right, right, I know, give me a break)

 

  • Or a vacationing Movement for the Emancipation of the Nigerian Delta,

 

  • Or blame the new OPEC motto: "oil prices are too high".  The unpublished second line to the motto reads "because we need the West to continue to buy oil and not develop alternatives that would cut the number of Palm Shaped Islands under construction" but that’s too long and sounds a little greedy,



  • Or blame the Olympcis (well, in the last week anyway) for providing a bright and shiny and non-coal burning distraction and thereby reinforcing the Summer doldrums in the market,

 

  • Or blame Speculators who, when they are on the short side of a trade, unless its is a financial stock, are actually like by Congress, a body who I think should be blamed for many things and often.

The fact of the matter is that right now not war, not pipeline disruption, and not larger than expected or even unexpected product draw downs can stop the tumbling energy market at this time from er, well, tumbling. The true reason(s) for the fall don’t matter as much as recognizing what will alter sentiment and get the group back on track. Until sentiment improves I plan on being more opportunistic with options trades while doing the legwork (listening, reading, and spreadsheeting) to lay the ground work for future equity and option entries.  



 

 

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14
Aug

GMXR - Buy The Cash Cow And Get The Sweet Milk For Free

 

(GMXR): No position yet but its on my list of dance partners that will shine when the commodities stabilize. Highly concentrated, gassy play with high leverage to the Haynesville and little if any value in the stock for it. They’d make a nice stocking stuffer for any mid or large cap E&P that finds itself behind in the resource play game.

Price as of 8/13/08: $62.19

GMXR - East Texas Cotton Valley Lime player with Bossier  / Haynesville Shale underlying their acreage. 94% gas with a strong balance sheet.

  • What’s To Like:
    • Highly concentrated: 1 core asset in 2 counties (Harrison and Panola in E. Texas)
    • "Soft guidance" for 100% production growth next year. They have grown production by 100% in each of the last 3 years.
    • Large inventory of highly economic drilling locations (read on)
    • Proved Reserves at YE 2007: 434 Bcfe. At $3 per Mcfe in the ground that equals  $1.3  billion vs a current Total Enterprise Value of $1.25 B.
    • They see 3P reserves at 3 Tcfe (7x current proved)
    • Operating costs : falling below $1/ Mcfe and looks to fall more as production runs up
    • Deal already out of the way, they are saying taking the deal fear off the table for the next 18 months and took debt down to 32% debt to cap.
    • Bread & Butter business is Cotton Valley wells
      • low, low F&D costs of $0.79  per Mcfe …just about best in class
      • only 15% of acreage drilled up so far; 890+ locations remain
    • Haynesville/Bossier Shale Exposure:

      • 38,455 haynesville acres - with two targets,
      • 480 net locations on 80 acres,
      • acreage in fairway of the play
      • 350 foot thick section, EURs of 4.5 to 8.5 Bcfe estimated by others in the play; is about 10 miles west of CHK’s big well and just east of PVA’s wells.
      • Have drilled multiple vertical wells on their acreage back to 2006, waited for industry leaders to crack the code on horizontal development and to share data - goes to management intelligence.
      • Porosity of 12 to15%, maybe be underestimated due to presence of dolomite. It’s going to flow.
      • Gas in place in this area is in the 170 to 200+ Bcf range per secton 
      • 81% operated with a 79% net revenue interest
      • Plan to spud first horizontal well in 3Q08.
      • pre purchased OCTG for near term program,
      • 5 rigs now, 6th rig coming Nov., 2 will drill vert cv wells, 3 now drilling cv and they will be repurposed to finish the current well and then go Hs, sixth rig goes hs immediately on delivery in NOV. HP flex rigs show up next year (2) and go to drill HS. 9-11 rigs by end of next year with 2 to 4 of them in the CV.

         
  • What’s To Knock:
    • Small caps are going to be extremely volatile in the near term
    • "Gas glut" thesis not yet resoundingly defeated
    • Hot money still in the name may present overhanging supply as it tries to rally
    • The stock is up 90% since the beginning of the year but see valuation metrics below

 

  • Where’s It Trade:
    • P/CF of 6.7x on a 2009 CFPS estimate of $9.31. Not expensive given their growth and that CFPS number is not based on 100% expected growth.
    •  
    • Debt to cap of 32%, not bad at all.
    •  
    • They had 435 Bcfe in proved reserves as of YE07. Putting a 6 Bcfe EUR on its acreage risked 50% with an 80 acre spacing and their royalty guidance yields a net potential reserve estimate of 1.2 Tcfe, or 2.75x current reserves. In their presentations they are not risking the play 50% which would double the reserve number to 2.4 Tcfe or 5.5x their current reserves
    •  
    • The stock is trading at a TEV of $1.045 billion:
      • If you assume they could garner $2.50/Mcfe for their in the ground booked reserves which is beyond reasonable that leaves the Haynesville acreage for free.
      • A takeout at a 50% premium to yesterday’s closing price would probably get the deal done and would still only value the Haynesville/Bossier acreage at under $10,000 per acre, a far cry from the $20K to $30K per acre deals we have been seeing of late.
      • I think they could get $3 /Mcfe for the in ground proven  reserves  and $25K per acre for their Haynesville acres which would yield a triple digit share price as calculated below.
      • They have mapped out a potential price that is much higher but for now, the easy math gets you a double and isn’t such a stretch to the Summer-weary energy investor.


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13
Aug

Wary Wednesday - EIA Preview Plus E&P Dance List

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:

  1. Holdings Watch
  2. Commodity Watch - with some crude thoughts on the oil inventory report
  3. Stocks We Care About Today - WIOWIO - The dance list.
  4. 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:

  1. Large Caps: (EOG), (CHK)*  - See WIOWIO and Reports pages for thoughts on this one…nothing has changed in my opinion here.
  2. Mid Caps: (HK), (SD), (CLR), (PXD), (SWN), (NFX)*provide the most upside in terms of stock price appreciation among the mid caps;
  3. Small Caps: (WLL), (PQ)**
  4. 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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11
Aug

Monday Morning

Sentiment Watch: Still negative sentiment for E&P and oil service. The refiners are trying to make a turn. All three groups closely tied to the minute to minute price of oil and not fundamentals and stories. As such, I’ll be looking at slow, opportunistic additions to equity and not option positions except in the refiners where I may add a little more call exposure as margins once again find traction with the fall in oil prices. This Wednesday’s gasoline demand number will be key to that decision.

HK Announces Another Secondary. For repayment of debt and to fund further leasehold acquisitions. This reminds me of past cycles where the E&P companies lost site of capital discipline … not saying we are there yet but repeatedly increased capital budgets funded out of investor pockets and not cash flow don’t make me happy.

  • 25 million shares + 3.875 shares for the overallotment. Another 12% dilution.
  • Probably raises about $700 mm.
  • I went back and reviewed my 2Q notes and their transcript and there was no hint of this as they talked about what they’d already raised this year ($1.5 billion) and the fact that they had $500 million in cash and an undrawn bank revolver so I think people are going to feel pretty sandbagged by this deal.
  • I’d be asking "why now, when your shares have been pounded do you want to sell more of them?"
  • I assume the rush rush rush of the Haynesville shale land grab is the answer to the preceding bullet, maybe they have a deal in mind but the seeming lack of capital discipline here is a worry.
  • It’s true that the finding costs here, even with the high price of acreage, are low to historic levels and while 1 well per section puts you into HBP status, you have to wonder if the rigs and steel will be available, given the larger players appetite in the same play, to get a majority of their current acreage drilled up before leases begin rolling off or in need of extension.
  • I won’t be adding on the coming dip and I may sell some of my (HK) common shares bought at $18 some time ago and reallocate until this has settled into a more friendly pattern and management has satisfied its taste for acreage and deals.

In Today’s Post

  1. Commodity Watch
  2. Stuff We Care About Today
  3. Odds & Ends

Commodity Watch:

Crude Oil fell 8% last week to close at $115.20; that’s off $32 per barrel since its peak on July 11. The decline has been brought about by fears of global demand destruction, a lack of geopolitical new news (other than an all out war brewing between Georgia and Russia- see first bullet below), and a recent rally in the dollar (see second bullet below). This morning crude is trading up a buck which is a pretty insignificant bounce given the $5 crude fell last Friday alone.

  • Hot Spot Watch: Russia responded to Georgia’s attacks in South Ossetia with overwhelming force and what looks like a push into Georgian territory. Not a lot of production here but there are some big pipelines that criss cross the area including the BTC pipeline that was extinguished today after saboteurs set the 1.2 mm bopd line ablaze late last week.

  • Dollar Watch: It seems things are getting tough all over and the dollar has strengthened in response to this relative weakness. The Dollar looks to be entering resistance after last week’s run but with the EU and Asia showing more signs of softening further near term strengthening (putting pressure on oil) could be in the offing.

Natural Gas tumbled 25% last week or $1.14 per MMBTU to close Friday at $8.25, the lowest level since the beginning of the 2008 run up in prices in early February. Gas is now up 6% on the year and is in line with year ago levels which seems a bit overkill as then gas was putting in record highs on storage and more supply was seen looming around the corner in terms of both domestic production and LNG. This morning gas is trading up slightly due to the small bounce in oil.

  • Weather Watch: Heat wave replaced by at least a week of cooler than normal weather over much of the U.S. Cooling degree days fell to 74 last week vs a prior expectation of 83 which is in line with normal temps but well below year ago levels. This should yield a bigger injection this week but I’ll know a little more later in the day when the generation stats are released.
  • Tropics Watch: A tropical wave in the central Atlantic and another behind it off the coast of Africa are expected by global models to develop into cyclones over the next 3 to 5 days.

Stuff We Care About Today

Enercom Oil & Gas Conference - August 10-14. Conference Schedule. About 80 exploration and production and oil service firms tell their story in 20 minute rapid fire succession. All times listed on the schedule are in Denver time. Today I plan to listen to:

  • (BBG) - Rockies E&P Bill Barret at 10 EST
  • (CLB) - Core evaluation company Core Labs at 10:25 EST
  • (WLL) - E&P Whiting Petroleum at 12:30 EST
  • (TXCO) 3:55 - E&P TXCO Resources at 3:55 EST

A note on earnings so far this quarter. We are wrapping up the announcement and so far little has mattered in the way of either quarterly outperformance or lofty guidance. Investors have simply run for the exits as oil and gas have fallen. Until this changes I see no reason to add additional capital to the group, no matter how cheap it looks. This selling has applied to E&P, Service and Coal stocks. Refiners have been the one exception as there were no expectations for that group.

(SM) Ups Budget and Production Guidance.

  • St Mary upped their budget by 15% targeting increased activity in the Bakken, Woodford, and Haynesville Shales and their Cotton Valley conventional gas and Wolfberry tight oil program. Preponderance of the dough goes to the North Dakota and the Haynesville (2 horizontal wells included) regions.
  • Targeting 10% growth
  • Outlining in the field inflation with LOE in $/Mcfe rising quickly.
  • Too expensive for my blood at 8.3x 2009 CFPS with "only" low double digit growth registered this year.

Brazil May Breakout The Subsalt. Brazil is considering separating (PBR)’s subsalt (they call it pre-salt) offshore discoveries into a separate company that would be 100% government controlled and responsible for the development of these reserves. That would likely unburden (PBR) from the current fear of needing to come up with  the quarter to half a trillion  USD needed to develop these reserves over the next decade or two. (PBR) valuation is pretty uncertain as it depends on the compensation allotted to take these discoveries off their books if the deal happens at all.

 

Blackrock Capital Saying It Is Adding Energy Names In This Market. On CNBC this morning the trillion dollar fund’s vice chairman says they are increasing energy exposure now saying the group is cheap and citing a Baron’s article along the same lines this weekend.

Odds & Ends

Analyst Watch: Lehman trims (SD) price target by $2 to $58, maintains overweight, (BRNC) upped to buy at Jefferies.

 

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09
Aug

Wrap - Week Ended 8/8/08

 

Holdings Watch: Not a big week for trading. Here are the closed trades. Next week will see a larger number of scuds with expiration.

  • CHK August $57.50 calls sold for $0.10, down 96%
  • HK August $30 calls sold for $4.10, up 71%
  • EOG: out $120 August calls for $0.10, down 98%
  • XTO August $55 calls sold for $0.10, down 95%
  • WFT August $42.50 calls sold for $0.15, down 93%
  • SLB August $110 calls sold for $.15, down 94%

 

Comments TBA ….

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