In Today’s Post:

1. Holdings Watch
   
2. Commodity Watch
   
3. Natural Gas Supply Slide Show - April 2009 Data
   
4. Crack Spread Update
   
5. Stuff We Care About - Another, bigger XCO deal
   
6. 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.
    
• 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.
    
• #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.
    
• 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.
• Midstream Deal Also Penned:
  
  • XCO receives $249 mm in cash
    
  • Takeaway capacity for the partners is 440 MMcfepd, expect this to grow soon.
• 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).

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:

• Iraqi Sovereignty Day

What a much ado about nothing week. Very light volumes confirm that yep, it’s summer. I’ll have comments on the wrap in Monday’s post as it is so summery that few will read the weekend edition. In this coming week’s holiday shortened trading look for a slew of economic data and some adjustments to the portfolio as we take advantage of recent weakness in the groups to begin positioning for 2Q earnings. Also, look for a couple of small cap company specific snapshots. Not yet a subscriber?  Read about how to fix that here.

Holdings Watch:

• $10KP: 19,100
• 56% cash
• No closed trades last week.

Jobless claims disappointed at 627,000 so look for a bumpy opening as the market continues to focus on the 600,000 level (right or wrong, meaningful or not) as the go / no go point for equities. 

In Today’s Post:

1. Holdings Watch
2. Commodity Watch
3. Natural Gas Preview
4. EIA Oil Inventory Review
5. Stuff We Care About Today - Eagle Ford Shale update, SM thoughts
   
6. Odds & Ends

Holdings Watch:

• $10KP: $19,100 / 56% Cash

Yesterday’s Trades:

• HK - $23 July Calls (HKGT) for $0.60 on the mid, with the stock at $21.25. Just adding a little more leverage in the event they have a PR in store in the next 3 weeks.

Commodity Watch:

Crude oil fell $0.57 to close at $68.67 yesterday. The fall did not come as a result of the EIA’s inventory report (see details on that below) but was instead prompted by a late day rally in the dollar which itself was prompted by the FOMC statement that was somewhat poorly received by everyone but the bond market once the Fed failed to expand its Treasury purchase program. This morning crude was trading up as much as $0.80 but sold down to the $69 level following the jobs number.

• Nigeria Watch: MEND claims to have attacked another pipeline in Rivers state putting 3 flow stations "effectively out of service". Shell has still not confirmed the damage, if any from, three attacks last weekend.

Natural gas fell $0.12 to close at $3.76 yesterday. The August contract, which takes over as the front month contract on Friday was trading at $3.91. I think it is still early, in the bottoming phase for gas and that gas will not be able to maintain its footing around the $4 mark without injections of less than 100 Bcf in the very near future (including today’s report - see below). This morning gas is trading up a penny with the slight move in oil.

• LNG Watch: LNG tanker tracker "Waterborne" says Asian LNG demand was off again in May, a fifth consecutive month for Asian LNG to dip below 2008 levels. They point to this as the reason for U.S. imports being up 36% year to date. Waterborne adds that Chinese demand was not down but up 59% in May as they took advantage of cheap pricing. ZComment: I have to point out that this increase in LNG imports is attributable to very low volumes imported to the U.S. in 2008 that this increment is only about 0.3 to 0.4 Bcfgpd and that volumes are well off the record pace of 2007. I’d also point out that liquefaction capacity is up again in 2009 (see yesterday’s LNG comments) and yet it does not seem to be showing up anywhere. My suspicion is that Asia is taking more volumes than trackers are accounting for. 

Natural Gas Preview

• My number: 95 to 106 Bcf. 
  • History:
    • Last Week: 114 Bcf
      
    • Last Year: 85 Bcf
      
    • 5 Year Average: 86 Bcf
      
  • Weather:
    • Pretty warm, CDDs were essentially normal in aggregate but the distribution is out of whack with the northeast not sharing in the heat wave. While we definitely are seeing cooling load increase, the won’t shy away from bigger than normal without some more heat in the East consuming region (of which the northeast is a big part)
    • EEI reports electricity generation was up 4.6% vs the prior week but was also down a whopping 14.6% from year ago levels. 
  • Imports:7.5 Bcfgpd, in line with the previous week, not really enough to notice.
    

• Street Consensus: 101 Bcf.

EIA Oil Inventory Review

ZComment: Bigger than expected drawdown on crude stocks due to higher demand from refineries. First time in awhile I can say that’s a pretty good draw for a good reason (not imports which actually ticked up a notch). Trouble is, you refine more in a low demand environment and finished goods inventories tend to rise faster which is what happened yesterday. On the distillate side, this isn’t as much of a problem as we are already bloated on stocks and this time of year we expect to see distillates rally. But gasoline demand is erratic and can’t seem to find its seasonal footing. We are now "in line" with year ago and five year average levels on gasoline. While I expect to see increased demand in next week’s report for the 4th of July holiday the trend in gasoline demand is somewhat trendless at present, and refiners will need to curtail production quickly if it does not pick up soon.

CRUDE OIL:

GASOLINE:

DISTILLATES:

Jet Fuel - I don’t generally track this smaller component but I’m looking for signs of a turn and will begin tracking this one as well beginning this week. One group thinks air traffic may have reached a floor.

Stuff We Care About Today

Eagle Ford Shale Update:

• (SM) Announces Webb County Well. See map of Texas counties here.
  • Briscoe G 1-H:
    • 7 day test of 5.6 MMcfepd, 79% gas; working interest on this one and the next, 100%. They commented the test was constrained by facility limitations but did not elaborate.
    • 7,500 deep (much shallower than the PXD well way over in Dewitt county) with a 3,200 foot horizontal, 10 stage frac
    • Cost of $5.2 mm with extra science on the well; (SM) sees future wells in the $3.5 to $4.5 mm range. They comment that their EFS acreage is shallower than others in the play which is true and say this leads to reduced drilling times and therefore costs which really isn’t that much of a savings as the vertical part of the well is the easiest, least complex part of the task.
  • Acreage Increasing. SM announced that they had bumped up their E.F.S. acreage from 210,000 to 225,000 acres
  • Second Successful Well. A second well has been drilled and cased in Dimmitt County but not yet tested
  • Two Rig Program Through Year End
    • They are running a 2 rig program (1 rig in Webb and 1 rig in Dimmitt in JV with APC/TXCO)
    • They plan to drill 2 more horizontals (beyond the second well mentioned above)  on their 100% working interest acreage (195,000 acres) and 2 more on their JV acreage with APC prior to year end.
  • SM had reserves of 866 Bcfe as of YE2008 so this program won’t be a big addition this year, assuming the wells ar 4 Bcfe apiece, but with higher prices, they offer a low finding cost solution for reserve additions when gas prices recover in 2010 and beyond.
  • Just a little background on these guys;
    • Haynesville, Eagleford, Woodford, Marcellus focus
    • fairly gassy (65% of 1Q production),
    • well hedged (50% of Mcfe’s hedged north of $8 this year; but also over 50% in good hedges in 2010 and 2011.
    • balance sheet: 34% debt to equity (so not high, a little over half of that is revolver debt which they may have a desire to eliminate given gas prices) ; EBITDA to Interest of 17x (so debt is well in hand, their hedges are helping them a lot with cash flow generation at present)
      
    • they beat guidance for 1Q and upped full year guidance to a decline of 7 to 10% for 2009 YoY as try to spend within cashflow.

Map of Eagle Ford Shale wells to date: Excludes PXD well to the north east in Dunn County, three more wells drilled in La Salle by HK and this SM well:

From HK we are waiting on news regarding:

• Dora Martin 1716 1H
• STS Palmert 944 1H

Eagle Ford Players Acreage Vs Impact:

Eagle Ford Shale Players Valuation:

I have added an Eagle Ford Shale Notes page to the Reports tab.

The KOG Notes page has been updated. 

Odds & Ends

Analyst Watch:

• Goldman changing ratings and price targets in both directions on a slew of oil service names. Notable names on Goldman’s list include:
  • (HAL) and (PTEN) cut to Neutral
  • (NBR) cut to Sell
  • (DO) and (FTI) lifted to Neutral
• Keybanc starts (BRY) at Buy, (CLR) at Hold.

News of Weird Watch:  In this age of google earth and gps everything, how does one lose an island? I ask because Mexico has lost an 80 square kilometer island off the Yucatan, known as Bermeja. Bermeja Isla was thought to be, well, where it was thought to be, because of a number of map references from the 16th and 18th centuries (no GPS but sextants and men who got paid to find things). Turns out that going there in a boat, flying over it, and questing for it on satellites actual turned up … water. Why do I care? Because I find that kind of thing amazing. And by treaty, Mexico received a 200 nautical mile exclusive right to drill around the island, as part of a 2000 treaty with the U.S. to exclude "doughnut holes" in the Gulf of Mexico around islands giving the owner (in this case Mexico) sovereignty.  According to Wikipedia ~ "Explanations for its disappearance include an erroneous observation by the early cartographers, shifts in the geography of the ocean floor, rising sea levels and conspiracy theories claiming that the CIA blew up the island in order to expand the economic zone allotted to the U.S."  Other references show the island had gone missing in the 1840s, well before the global warming or the CIA existed. But this all really matters because the area is currently off limits to drilling but that moratium expires in 2010. Hmmm.  Maybe those conspiracy theorists should be looking at the Department of the Interior and not CIA. 

Cash For Clunkers Update. More rules, less opportunity for the junkyard to make a buck.

Sentiment Watch: Cautious, sit on hands mode. Commodities are easing with a directionless, summer equity market. While individual catalysts continue to crop up they are few and far between this time of year so patience between now and 2Q earnings season is key.

The Week Ahead:

• Monday 6/22: No U.S. eco data release.
• Tuesday 6/23: Existing home sales for May (expect 4.83 mm), FHA home prices
• Wednesday 6/24:  EIA Oil Inventory Report, Durable goods for May (expect -0.1%), New home sales for May (expect 360 m), FOMC meets
• Thursday 6/25: EIA Natural Storage Report, Initial jobless claims (exp 605m), 1Q GDP (exp -5.7%)
• Friday 6/26: Consumer sentiment (expect 69.5 vs 69 last reading)

In Today’s Post:

• Holdings Watch
• Commodity  Watch
• Stuff We Care About Today
• Odds & Ends

Holdings Watch:

• $10KP: $21,600 / 61% Cash
• The Wiki Holdings Tab Is Updated

Commodity  Watch:

Crude oil fell 3.5% last week to close at $69.55. The 12 month crude strip is now trading at $73 which is probably not altogether unreasonable given current elevated global storage levels. This morning crude is trading off $1 plus with down equity futures and another attempt to bounce the dollar.

• MEND Watch: MEND claims it attacked two more Shell oil pipelines and a shallow water platform in River state on Sunday. This is the furthest east attacks and the first in the Rivers part of the delta since the group launch their latest offensive. 
  

• Mexico Watch:
  • Production down 7.9% to 2.65 mm bopd for the first five months of 2009.
  • Exports were down 15% for the period to 1.24 mm bopd
  • Mexico is the U.S.’s 2nd largest imported source of crude behind Canada. Venezuela, Saudi Arabia and Nigeria rank 3rd, 4th, and 5th respectively.  

Natural gas rose 4.5% last week to close at $4.03, despite a larger than expected injection into storage. The short cover action we have seen showed up in the wrap data as a 10,000 contract decline in the short position (down 4%) although the net short position actually grew as longs abandoned ship north of $4.  The 12 month strip is now trading at $5.37 with the 1Q10 trading at $6.10 providing a decent position for prudent E&Ps to hedge more gas just in case industrial demand remains poor for longer than expected. This morning gas is trading up slightly with the heat wave gripping the nation’s mid section.

• Weather Watch:
  • Last week: CDDs came in at 52 vs 39 in the prior week and 57 expected. If you look at the Northeast and Pacific Northwest data you can still see the sub seasonal temps continued to hold sway last week.
    
  • This week: Hot. Damn Hot. CDDs rise to 80, 30% above normal for the week, with all regions expected to see warmer than normal temps.
    

• Tropics Watch: We’re starting to see the typical pattern of tropical waves forming in the southern Atlantic as they come off Africa and drift towards the Carribbean but at this time nothing looks likely to develop. 
  

• LNG Watch: XOM is close to signing long term deals for roughly 200 Bcf per year of LNG from its Papua New Guinea development with three Asian buyers starting in 2013. Asia is one of the wild cards (European demand and domestic supply being the others) that will help to determine how much of the LNG tsunami actually reaches U.S. shores.  
  

Stuff We Care About Today

Deal Watch:

• (CLNE) offering 6 mm share secondary
  
  • use of proceeds is working capital, potential acquistions, construction etc
    
  • This may offer a decent entry point on the name as they push natural gas as a fleet transportation fuel forward.
  • Catalyst here may be the passage of the Natural Gas Act later this year which you don’t hear a lot about but which is custom tailored to benefit the company via incentives for the adoption of CNG and LNG power vehicles.

Capex Watch ~ from Barclays

• U.S. 2009 E&P spending seen down 38%
• Canadian EP& spending seen down 36%
• Global spending seen down 15%
• Barclays survey shows most E&P’s see higher spending in 2010 - not surprising as they don’t want to see production declines to take but early to really say given the precariousness of pricing.
• Mixed bag for oil service; you can see this reflected to some extent in the rig counts. The fact that global spending is only down 15% runs testament to long lead time projects, especially deepwater that have become the focus with many NOCs. Probably better news for RIG and DO than for SLB, HAL, and BHI but the service group’s ability to look through the trough has been incredible.

OIH Multiple Table Notes:

1. Estimates continue to fall
   
   1. the bigger oil service names have repeatedly cut their work forces back and taken other cost cutting measures and it shows in their recent estimate revisions
      
2. Stocks have stalled but are still up 38% (as measured by the OIH) year to date
   
3. Most oil service names are not expected to earn as much in 2011 as they are this year so the downturn is expected to be protracted.
   
4. I expect the group to consolidate with the market and oil but to reassert itself early again as the defense by the Street here is strong small signs of recovery here and there or at least price stabilization will drive the stocks higher. I have no positions in service at present and will likely wait out 2Q earnings season before getting on board.

Odds & Ends

Analyst Watch:

• Raymond James ups targets and ratings on Canadian E&Ps.

Comments for the wrap will be included in the Monday post. Last week was not my finest with the group pulling back substantially despite the commodities ability to remain aloft. I had scuds in three (HK) call positions and two EOG positions and the remaining June PXD calls went out worthless as well.   I continue to maintain a high cash position and expect that certain names in our most frequented list will see pre quarter operational updates that will act as catalysts.  Have a Happy Fathers Day!