30
Jun
Tuesday - End of 2Q Plus Natural Gas Slide Show
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Natural Gas Supply Slide Show - April 2009 Data
- Crack Spread Update
- Stuff We Care About - Another, bigger XCO deal
- Odds & Ends
Holdings Watch:
- $10KP:
- $19,100
- 56% Cash
- No trades yesterday in this directionless pre-holiday, light volume market.
Commodity Watch
Crude oil rallied $2.33 to close at $71.49, a 10 day high, on the back of:
- Nigerian attacks,
- word that China planned to boost its version of a strategic petroleum reserves by 160% over the next five years
- and a rare, upward revision to EIA’s monthly figures for oil demand in the U.S. (April rose 1.18% which may sound small but amounts to 215,000 bopd).
This morning crude is trading up slightly.
- Nicky’s Comments Watch (from yesterday’s comments section):
- Indices I am looking for the 930 - 935 area to stop this rally if its going to. That said its tricky here and a move above 843 has us going to new highs which is not exactly helpful as a comment I know as we will nearly be back at the highs!
- Commodities may be giving us the heads up that in fact we are heading for new highs which oil powering away today. I do think oil is going to make new highs and I believe we are in v up which started at 66.36. We are now in iii of v.
Natural gas fell $0.16 to close at $3.94 after the tropical disturbance in the Gulf of Mexico fizzled and this week’s forecast for the U.S. turned much more mild than last week’s weather. This morning gas is trading down a couple of cents following yet another lackluster natural gas supply report from the EIA (see below).
- Imports Watch
- Canada: 6.5 Bcfgpd, down 0.9 Bcfgpd from year ago levels
- LNG: 1.3 Bcfgpd, up 0.2 Bcfgpd from year ago levels. Run away from the dock, you’ll be crushed by all the ships coming ashore. Ugh. Where is the gas tsunami? We are at mid year now and still no tsunami.
- Canada: 6.5 Bcfgpd, down 0.9 Bcfgpd from year ago levels
- Electricity Watch: Up 6.3% from the prior week, generation at the highest level of the year to date.
Natural Gas Supply Slide Show - April 2009 Data - Ho Hum
Key Takeaway Watch:
- Overall U.S. Lower 48 production:
- fell 0.08 Bcfgpd from March to April to 59.15 Bcfgpd. This is insignificant, meaning production is still in its "rounding top phase". The gas market wants to a less glacially paced move lower here.
- On a year over year basis, production in April was still up 1.7 Bcfgpd.
- fell 0.08 Bcfgpd from March to April to 59.15 Bcfgpd. This is insignificant, meaning production is still in its "rounding top phase". The gas market wants to a less glacially paced move lower here.
- #1 Producing Region Texas: inched lower from last month and is now down 1.03 Bcfgpd from its peak reached in November. Most math would have had this lower by now, in light of the rig counts but as drilled but not yet completed wells are completed to help now rigless producers maintain or even grow production, the effect is to mute the declines we would expect to see.
- Wyoming - easing but still near its highs.
- Louisiana - if production here were a stock chart, I’d say we are about to see a breakout to the upside. Haynesville volumes are becoming more self evident which makes sense as many players are focusing only here now, in this play which offers arguable the best returns in the U.S.
- This summary will be archived on the Natural Gas tab along with previous reviews.

Crack Spread Update

ZComment: Nothing new here. Ok, except for a deterioration in cracks across the country as the quarter draws to a close. Not only were cracks flat for the second quarter relative to the first but they were down by 37% from 2Q08 which its selft was down 36% from the prior year. A disturbing trend if you run a refinery. Each week I ask that we see 2 or even 3 consecutive weeks of rising demand. So far, we have instead seen very lumpy demand like this:

The story on distillate demand is worse, and keeps getting worse every time you think it might be bottoming. There is just no signs of a U.S. demand recovery for diesel.
And What Have We Missed By Staying Away From The Refining Trade This Year?

Stuff We Care About
Deal Watch:
XCO Signs JV To Accelerate Haynesville Development; Receives $904 mm Cash + Drilling Capital
- Yesterday XCO sold low upside properties to raise cash to help develop the Haynesville (see Monday post)
- Today XCO announces a joint development deal in the Haynesville Shale with BG Group:
- deal covers 120,000 acres of XCO’s East Texas / Northwest Louisiana properties
- sells down XCO’s interest to 50%
- 84,000 acres are prospective for Haynesville.
- XCO puts drilling locations on the play at > 1,600 with reserves ballparked at 4 to 6 Tcfe in the Haynesville Shale with additional reserve upside in the Bossier shale
- "aggressive development program" planned beginning 2009
- XCO says to date it has drilled 8 wells in the play with average gross initial production > 23 MMcfepd.
- They see drilling another 26 wells by year end.
- deal covers 120,000 acres of XCO’s East Texas / Northwest Louisiana properties
- XCO receives:
- $655 mm at closing
- BG will pay $400 mm of drillilng / development costs, carrying XCO on a 3/4 for a half basis. This is expected to take until 2011 to exhaust the $400 mm at which point each company will pay for half the drilling costs.
- $655 mm at closing
- Midstream Deal Also Penned:
- XCO receives $249 mm in cash
- Takeaway capacity for the partners is 440 MMcfepd, expect this to grow soon.
- XCO receives $249 mm in cash
- Nutshell: Exceptional Deal For (XCO)
- Forgetting about the development cash and the midstream deal for a moment, the Haynesville JV works out to $10,900 per acre, a heft sum given the current environment. On a proved reserves basis, the acquisition values proved only reserves at a hefty $3.16 per acre - BG wanted in.
- The drilling capital gives XCO the ability to target its acreage instead of loose it as leases expire.
- Significant debt paydown. Yesterday I commented that XCO had adequate EBITDA to interest coverage but that the net debt to cap ratio "improved" to a very ugly 90% following their asset sale on Monday. This deal brings in another $904 mm cash, so they have essentially cut their debt load in half in the last 2 days.
- They expect to have $500 to $600 mm of borrowing capacity post deal and will host an analyst meeting in the near future to update guidance (production numbers will be coming down as these are producing assets) but bringing in a parter of BG’s capacity is a big win for them.
- The stock is likely to make a significant move today and this kind of news can give it legs, perhaps back to its recent highs and a bit beyond (see daily chart).
- Forgetting about the development cash and the midstream deal for a moment, the Haynesville JV works out to $10,900 per acre, a heft sum given the current environment. On a proved reserves basis, the acquisition values proved only reserves at a hefty $3.16 per acre - BG wanted in.
Odds & Ends
Analyst Watch:
- Deutsche Bank out, raising price targets on E&P slightly, maintaining holds. Nothing really notable, looks like upgrade targets are the result of a higher oil prices.
- PQ target cut from $5 to $4 at Jefferies. This takes into account dilution from recent secondary.
Interesting Article Watch:





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