04
Apr

Wednesday ~ Oil Inventory Days Plus Some Interestng Odds & Ends

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Wednesday Topics

  1. Oil Inventory Preview
  2. Iran Watch
  3. Natural Gas
  4. Odds & End
    1. Analyst Watch
    2. Howard Weil Conference Gleanings
    3. Contago Oil and Gas (MCF)
    4. BPI Energy (BPG)

Oil Inventory Preview: Gasoline imports and utilization remain key to gasoline continuing its recent rally or falling below the critical $2 level.

Survey Expectations (from Bloomberg)

  • Crude Oil: increase of 1.4 million barrels.
  • Gasoline: decline of 350,000 barrels.
    • Utilization is expected to tick up to 87.5%.
    • Imports need to fall back from the 1 million barrels per day mark to support $2+ RBOB.

Iran Watch: Britain is calling for direct talks with Iran after the unexpected release of Iranian diplomat, held in in Iraq for the last two months. These guys keep playing nice and we can have those troops home by the middle of next week (and oil back to testing $60).

Natural Gas - Down with oil yesterday. What a shock. May gas fell $0.25 to $7.42 yesterday. We've been hearing about a cold snap that will chill much of the country to near freezing temperatures over the long weekend and a mess 'o hurricanes this summer but gas isn't really supported here by anything but lofty oil prices here.

Odds & Ends

Analyst Watch: (GLBL) downgraded to hold at CapitalOne-Southcoast. B of A raised price targets on several majors and independent refiners, most noticeably raisng it's price target on (TSO) from $88 to $120. In a situation like this where the stock price has long ago outstripped the prior target on a buy rated company I always find it interesting that the Street will seize up an upgrade in PT despite the fact that up until yesterday, the guy was officially saying, "Buy the TSO, I think it's going to $88." How busy (lazy) can the analyst be? The other price target increases  came on buys as well that had seen the PT outstripped. Now he's doubly lazy as he simply raised the PT's instead of having to downgrade based on valuation. Sheeesh.

Howard Weil Conference Gleanings:

  • (BHI) says the recovery in Canadian drilling to be slower than rest of N. America and that the slowdown that began last Fall could last through year end. Around the globe, BHI sees more strength and singled out Russia as being particularly active now.
  • (GSF) says dayrates and backlog remain high and growing respectively.

After the bell watch: Contango Oil and Gas (MCF) announced a sizeable second well at its Dutch discovery in the Gulf of Mexico.

  • This brings net reserves in the prospect up to 45 Bcfe relative to the 34.2 Bcfe they had booked for the entire company as of year end 2006.
  • (MCF) has a 29% net revenue interest in Dutch. The #1 well tested at 14 Mmcfepd in Noveber and should have been online in January and is now flowing 35 Mcfepd gross (10.15 Mmcfepd net to the company). The #2 could be online later this summer and the #3, a 2,200 foot stepout is set to spud in May.
  • This is a very interesting company with huge plans in the deep shelf Gulf of Mexico, the Fayetteville Shale, and in an LNG terminal due onstream 2008. Little debt and only seven employees and little apparent need for additional financing.
  • Unfortunately it had fallen off my radar screen long ago and was up >7% in the after hours yesterday by the time I "rediscovered" it. I won't chase anything in this market. Once things settle down a bit I'll be looking to begin building a position here. Sorry options guys; they don't have any.

BPI Energy (BPG) Snapshot: This is not a report and it's unlikely to turn into one given it's very small size but here's a quck run through. It's a snapshot done at the request of a reader and while interesting I personally don't need any more single digit midgets in the portfolio right now. Still it is a grower and apparently well run. Here's my 15 minute look from the Howard Weil conference.

Tiny (< 1 Mmcfgpd) coalbed methane producer in the Illinois Basin. Debt free and management has skin in the game (11% ownership). The company has roughly 500,000 acres now.

First, this is not your father's CBM play. Forget what you know about production rates in the Rockies. This is generally thinner coal with lower saturation per ton. As dewatering occurs production typically climbs to ~80 over 18 months, drops to 60 by year 4 and tails out over 20 years. Not exciting but if you drill enough wells you've got a nice, low cost, long reserve life annuity.

  • 50 well program in 2H07. When this was announced the stock shot up from $0.60 to $0.90 and has since given back most of that.
  • Management includes former Chief Engineer of BR who has undoubtedly got lots of CBM experience with BR's huge program in the San Juan Basin. Field Ops guys is from HAL's CBM Solutions Team...not too shabby.
  • Technical: 2 more seasoned staff from BR adn 2 from Energen

Areas of Operations:

1) Southern Illinois, Delta project: single seam wells. 100% WI and NRI, 86 wells onstream - ~ 700 Mcfgpd and 3,500 bpd of water. Four productive horizons present. First well was drilled back in 2003 and the first pilot took place 2005 so I'd bet that their first 10 wells or so make up a vast majority of production here and that the rest will begin to make their presence felt over the next 12 to 24 months.

2) Northern (Shelby) project: multi seam wells 10 wells onstream, flaring , 2 more awaiting completion. 20 Mcfgpd and 1,000 bpd water, has some nitrogen but it doesn't sound like a problem. The company appears to be getting bottom hole pressures down well which takes time and as that occurs, prodcution will climb.

3) Macoupin (additional Northern Basin potential): 4/07 - begin 10 well pilot.

LOE - probably pretty darn low.

F&D - very shallow, 500 feet, <$200K to drill and just under 0.2 Bcfe reserves per well yield very attractive finding costs.

llinois is criss crossed with infrastructure and has a good local market. Gas here trades at a premium to Henry Hub and Rockies.

52 Responses to “Wednesday ~ Oil Inventory Days Plus Some Interestng Odds & Ends”

  1. 1
    p.wilmington Says:

    Z – Thanks for your comments on BPI. I think the major concern is money, or lack of it. As of 1/31/7, they had 10 million. But the recently announced drilling program will cost 10 million by June 30. So, they have to come up with some. They are also in a lawsuit with Drummond coal, with which they had signed an agreement over synergystically working some fields that Drummond owned, i.e. getting the gas out before Drummond went after the coal. Drummond claims BPI hasn’t performed and in truth it doesn’t appear that there had been much activity in those fields. From the latest 10q – “BPI Energy, Inc. (“BPI”) is currently subject to litigation with respect to approximately 115,000 acres of its CBM rights that are located at the Northern Illinois Basin Project. To date, BPI has drilled one well on this acreage, a test well that was drilled in September 2006. This well is not currently at the production stage.
    In 2004, BPI and affiliates of the Drummond Coal Co. (“Drummond”), including IEC (Montgomery), LLC (“IEC”), entered into a letter of intent to obtain coal and CBM gas rights for one another in the Illinois Basin and to work together in a relationship in which BPI would extract CBM from coal beds prior to the Drummond affiliates’ mining of coal from those beds. Pursuant to and in reliance upon this letter of intent and its relationship with Drummond, BPI arranged for the transfer of 163,109 acres of coal rights to the Drummond affiliates for a total purchase price of $5,845,500, which BPI believes reflects a significant discount to current market prices. In light of its obligations to Drummond, BPI charged no profit on its transfer of the coal rights to the Drummond affiliates. Rather, in consideration for obtaining those coal rights, the Drummond affiliates were to lease approximately 115,000 acres of CBM rights to BPI for a primary lease term of 20 years and with favorable royalty rates. Although the Drummond affiliates entered into two CBM leases with BPI on April 26, 2006, they have since sought in various ways to void or terminate the leases.
    Ignoring mandatory arbitration provisions in the CBM leases, Drummond affiliates IEC and Christian Coal Holdings, LLC (“Christian”) filed suit against BPI on February 9, 2007 in the United States District Court for the Northern District of Alabama, claiming that BPI has breached the CBM leases in various ways. Specifically, although the CBM leases include no specific drilling commitments, IEC and Christian allege that BPI has breached the CBM leases by failing to use best efforts to commercially produce all economically recoverable gas. IEC and Christian also allege that BPI has breached the CBM leases by failing to provide maps of existing and proposed gas wells and facilities every six months and failing to maintain required insurance coverage. BPI refutes each of these allegations and intends to vigorously defend the Drummond affiliates’ claims of breach. In addition, BPI has moved to dismiss the lawsuit for lack of standing, lack of personal jurisdiction and improper venue, or in the alternative to transfer the case to either Ohio or Illinois.
    On March 13, 2007, BPI filed suit against IEC, Christian and additional Drummond affiliates Shelby Coal Holdings, LLC, Clinton Coal Holdings, LLC and Marion Coal Holdings, LLC in the United States District Court for the Southern District of Illinois. In its lawsuit, BPI seeks to rescind its transfers of coal rights to the Drummond affiliates for failure of consideration due to the Drummond affiliates’ efforts to avoid the CBM leases, and has also asserted claims for money damages for breach of contract, breach of fiduciary duty, unjust enrichment and promissory estoppel.
    We believe that Drummond and its affiliates, after having received favorable coal rights in exchange for favorable CBM rights, now wish to obtain a significant windfall by seeking to renege on the CBM rights that they were obligated to grant to BPI.
    We believe that we will be successful in either having the lawsuit filed by the Drummond affiliates dismissed or in defending against their claims of breach. However, there can be no assurance that we will be successful in maintaining these acreage rights. The loss of these acreage rights would not have a material impact on our financial position, results of operations or cash flows.”

  2. 2
    zman Says:

    Iran says will free Brits

    http://news.yahoo.com/s/ap/20070404/ap_on_re_mi_ea/iran_britain

  3. 3
    dave Says:

    Zman…the freed brits should move the market up and oil down

  4. 4
    dave Says:

    Hay! Got that wrong

  5. 5
    zman Says:

    MCF up 32% this morning…like I said not chasing for now.

  6. 6
    zman Says:

    TSO looks like a spueculative blowout this morning. Buy it til your head explodes type of activity. That usually ends in either stupidly higher prices or a complete reversal and hard sell off.

    If we get bearish data out of the EIA today (high util and imports )that could casue the reversal. Bullish and that may leave at all time high by EOD.

  7. 7
    zman Says:

    PW – Those coals take a long time to develop so I’m not surprised they haven’t drilled more wells their yet.

    As to money, they should be able to swing the program in the 2H07 with cash and miniscule cash flow for ops and squeeze buy. Plus they can utilized a revolved and go into a little debt there.

  8. 8
    El Diablo Says:

    British hostage crisis ends, but Americans still held hostage to oil prices.

  9. 9
    zman Says:

    Oil: up 4.3
    Gasoline: down 5
    Utilization: 87

    Refineries just not running. Very supportive of high oiil prices

  10. 10
    zman Says:

    gasoline imports came in at the 1 mm bpd mark, low enough to keep gasoline over $2

  11. 11
    sane Says:

    The American Petroleum Institute reported a fall of 104,000 barrels in crude supplies for the week ended March 30. The Energy Department had reported a climb of 4.3 million barrels. Motor gasoline supplies were down 440,000 barrels, the API said. The government reported a drop of 5 million barrels. Distillate supplies were up 455,000, the API said, but the government said inventories were unchanged

    Sane

  12. 12
    zman Says:

    Sane – great report.

    Nice timing Mahmoud on the prisoner give back. Wait til inventory day, tally how much refinery capacity is going to be offline and release the hostages knowing that the downdraft will be muted by the big gaso draw.

  13. 13
    sane Says:

    Again we get a big descrepency between the two on gasoline and oil. Strange.

    Sane

  14. 14
    sane Says:

    This reminds me of last maint season where the refiners were dragging their feet.

    Sane

  15. 15
    Big H Says:

    How true Mr.Z ! Was thinking that myself! I got stoped out og my xom apr 75’s P’s for .50 average cost was .65– I think I should have waited till tommor or later for a better exit, I was suprised my order went through, since when I entered it the line was long and I was way in the back and it went off, on low volume

    Some upgrades today TSO SUn and others!

    anyone have those tso 100 P’s?

  16. 16
    zman Says:

    I’ve got some may 100s and I’m not adding here as the madness shows no signs of weakening for a time.

  17. 17
    dave Says:

    Looking at RDC as a long

  18. 18
    zman Says:

    COP puts doing nicely and SUN seems to be coming around.

    All the refiners bashing me today but I’ve got time as I’m almost entirely in the Mays

  19. 19
    Jon Says:

    Sane, Z, anyone…

    How does API get it’s numbers vs. the EIA? Is the EIA behind and the API reflects data that is more current? Or are the surveys actually different inventories? The government number serves to keep gas over $2, but the API signals lower prices ahead.

  20. 20
    zman Says:

    Many believe the EIA to be far less accurate but everyone uses them as they cover more specific details.

  21. 21
    Big H Says:

    You know a 5million draw in gas, with the build in the last few weeks, form proudction to storage, should say, that their should be pleantly in the wholesalers tanks for delivery foe a while as driving season begins……follow?

  22. 22
    zman Says:

    Big H – in aggregate we’re a little low for this time of year but not outside the band of average holdings.

    We’re not going to run out unless there are more disruptions or everyone just takes their time getting back online by conducting extra unplanned maintenance. If you look back a week or so ago in the snafu tab you’ll see VLO being asked to belay maintenance on the west coast. Amazing they had to be asked at all.

  23. 23
    zman Says:

    Blew out the second half of my XOM cover at 3.20

  24. 24
    zman Says:

    TSO up 60% in 3 months!

    Granted earnings estimates for the full year 2007 are up. 28%.

    Next year’s estimates are up as well. 23%

    Unlike E&P company estimates these change weekly as refining analysts are quick to mark their crack spread assumpions to market.

  25. 25
    Big H Says:

    Zman and company…I would be intrested too know what your thinking on NOV is say around 80-

    This company is a standout , has a huge backlog , always makes its number and then some, its a cash cow, small enough to to taken out- I was in this from the 50’s and 30’s been out with very decant gaind for a while now, not thinking about buying here at all…

    Just would like to know wht others think, they had some nice recent reports..but things may not be as rosy this Q , theirs a lot good back in and it had a decent run…may puts If theirs a short term bump, from the bubble oil complex?

  26. 26
    Big H Says:

    TSo on a P/e is cheep, the 10+ this year and 8.88 next, so your right thats a y/y drop….like many refiners and service!

    But I don’t have to tell you it was uped today to outpreform and a 130 price object, them along with others uped today–

    How many more upgrade rounds comming BEFORE EARNINGS???

  27. 27
    Big H Says:

    XOM not over 77 today—–enouugh in alrady?

  28. 28
    Big H Says:

    Ok Everyone. I posted enough opines and questions- BUT this one really bugs me and like I said I’m not a sharp as the rest of you. I won’t coward the board anymore, I just want to know with the BIG gas surprise # WHy the refiners are not flying and making NEW highs that have been made over the last 8 sessions or so. i.e. xom mro pbr cop dvn rig su vlo etc.

    Thanks For The replys!

  29. 29
    sane Says:

    H

    They probably know that the crack spread action is not going to last. They are going to have to ramp up production here soon, or all critical eyes will be looking towards them. The draws in gasoline are d/t crappy refiner util.

    Sane

  30. 30
    zman Says:

    Sorry Big H – stepped out for awhile.

    Hog the board as much as you like!. NOV good stock, not doing any service right now and I’d have to look at it much harder to give you anything useful.

    My point on TSO and the other refiners is that the stock price gains have outstripped the earnings growht so you multiple expansion and cracks should be (I think) about to roll lower.

  31. 31
    zman Says:

    Robert asked about what dirves TSO higher besides the B of A upgrade adn short covering:

    My comment: Short covering is part of it and the higher gasoline vs lower oil prices today. I don’t see much of a rollover wihtout an increase in refinery utilization and gasoline imports. Downgrades to date have had little effect.

  32. 32
    Big H Says:

    Yea I agree with tou cooent to Robert, Untill utilization and gasoline imports, picks up….son’t expect any selling…maybe next week….or maybe Goldman or T.Bon ingites a stl rally for a few days by saying oil going to 100 ( not likly to be said by GS)

  33. 33
    foo Says:

    Is there news on the coal companies – BTU, CNX, ACI? What’s with today’s jump up?

  34. 34
    zman Says:

    Phil over at PSW theorized earlier that coal was rallying on an expectation that natty gas will be higher tomorrow after the inventory number comes out.

    They seem to be anticipating something although I would expect anything but a build tommorrow followed by a draw next week (probably the last of the season)

  35. 35
    umagumm Says:

    Gas, which coal ultimately competes with, is holding pretty strong for this time of year, also the DOE just approved a “clean coal” plant in Fla, FCL miners have announced a strike, and there was a snowstorm that is disrupting transport of coal from Wyoming. All are only minor positives, but many in the sector have been pretty beaten down lately.

  36. 36
    zman Says:

    good thoughts umagumm.

    I like, like many in the sector, have been beaten down lately as well.

    TSO keeps cresting $106 and I have enough for now. I really don’t care if it falls back a bit, I’m not going in again until sentiment changes or see it taking a dive towards, double , not triple, digit land.

  37. 37
    zman Says:

    I can make a case for why TSO may not drop until at least Wednesday. Not saying it won’t but I’m not adding to bets that it will.

    **THEY’RE buying every dip no matter how small.

    **You don’t get another inventory report until Wednesday and this one said:
    1) imports were off week to week and barely held 1 mmbgpd
    2) demand was up again
    3) utilization was off

    I’ll due some work or get my snafu guy do it to see if any refineries are due back up in the next week that could get you to 88% utilization which is what I think it takes now to get gaso back to <$2. That said, how long before GS goes long with the crowd ...they been hold for a while now. Bear Stearns and Deutshe just went to sell and hold last week and you know the GS guys would love to burn em. I'm short enough of this for now and I'm not going to DD again until I get some more data. That may come in the form of a refinery comong back up (it would have to be big) or it may come in the form another report from the EIA. I'm not adding to get my cost basis down and I've got May's so although it sucks now, I've got lots of time for this to reverse course. The powers that be can knock this to $115 with further upgrades so I'm pretty gunshy at throwing more $ onto their fire right now. This kind of post from me should scare the hell out of the bulls.

  38. 38
    zman Says:

    One fo the CNBC fast money guys just said he wouldn’t chase the refiners here but buy them on dips.

  39. 39
    Big H Says:

    Zman, I agree would not touch oil service or refiners puts to I see a sea change! to many damm dip shoppers ! But what the hell is with all this EOD buying and pumping up in the comples’s???

    I’m Stuned`

  40. 40
    T-Tupp Says:

    Z-mann:

    As for the analysts, in my opinion, the authority is BMO Capital markets (formerly BMO Nesbitt Burns). Being a Canadian firm they, in my opinion, are the most qualified to preach “price targets”, because their proximity to the US’s single highest source of imported oil- the Athabasca Basin’s oil sands. Also, I think they are more insulated from investment banking conflicts of interest that their American counterparts who, again in my opinion, are heavily influenced by. And if anyone believes that Chinese walls are in the upright position you are sadly mistaken.

    I can personally attest to the quality of BMO CM’s reporting’s—I was an Investment Advisor with them for some time. You can set your watch to their price targets: I had many very happy clients in my book of business because I listened to the Oil and gas reports (along with my personal caveat of course).

    They changed VLO’s PT to $65 when the stock was trading at a lowly $55 in the middle of Feb, and to $75 in the middle of March. This is a lot better than their peers changing their PT’s all at once from like $50 to like $80; after the party. This is specific example, but can be also said for TSO (PT: $120), integrated O &G, other refiners, and E &P’s—all of them spot on. They have made me and my limited partners A LOT of money.

    It is easy to be overwhelmed by the ridiculous amount of firms covering EVERY sector they can get their hands on. Not only are they usually under an investment banking conflict of interest, they are lazy in the timeliness and accuracy of reporting’s.

    If you want to have a peek at some of their research ill send you some—I still have access to the online database.

  41. 41
    zman testy Says:

    T – I agree and that would be great. I used to come across their research from time to time in E&P land and remember being impressed.

  42. 42
    bill fraser Says:

    I previously mentioned that Topt is a good value play in the tanker segment

    With today’s shortage of RBOB, i would expect imports of refined product to step up, and this will help support product tankers rates in general and Topt specifically.

    OMI is in play and a buy out will increase the price by 5 to 10 %, imho.

  43. 43
    bill fraser Says:

    some of you may find this of interest

    http://www.poten.com/%5Cattachments%5C03

  44. 44
    zman Says:

    Bill – I agree on the RBOB increase as it chases the higher price. Also, Opec is cheating as we got another increase in crude imports.

    I’m long a little TK and its been drifting up nicely.

    Can you repost that link, it errored out on me. Thanks.

  45. 45
    zman Says:

    Ok, went to Poten and partners website. the article on the other stock market (gasoline stocks) sounds very familiar to what I’ve been writing here. Glad to know someone else sees it too.

    Thanks for the site, I’ll add it to my blogroll

  46. 46
    zman Says:

    Bill – one other thing. Where do you get current spot tanker rates? My source has stopped updating for the last week.

  47. 47
    zman Says:

    COP says E&P volumes down sequentially but that refining margins will be up seq.

  48. 48
    zman Says:

    Re COP’s statement today:
    In a research note Wednesday, Merrill Lynch analyst John P. Herrlin Jr. said he maintains his first-quarter earnings forecast of $2.02 a share for ConocoPhillips _ well ahead of the current Wall Street estimate of $1.86 a share.

    “Street consensus, in our view, is too low … and overall market sentiment has turned bearish with recent downgrades,” the research note said. “We believe this will provide good entry points for the stock, which in our opinion remains deeply discounted.”

  49. 49
    zman Says:

    COP announced this early today but it’s worth reviewing b/c it applies to all the majors:

    refining margins sequentially up (and year over year up as well)
    marketing margins down
    chemical margins down
    oil price sequentially lower and down $2 vs year ago
    nat gas price up from 4Q but down YoY
    European refining margins down.

  50. 50
    zman Says:

    For El D,

    Shell announced plans for restarting the western Nigerian Delta. 500,000 bopd increase in five to six months.

  51. 51
    bill fraser Says:

    click on weekly reports

    http://www.pfbassoe.no/EpsPareto/Templates/WebRequestPage.aspx?Main=Y&amp;

  52. 52
    bill fraser Says:

    re poten link

    http://www.poten.com/

    click on the article labeled

    the other stock market

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