04
May

Too Bad It’s Already Friday!

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Yesterday could not have been better! The paired trade of short (TSO), long (VLO) worked like a machine! I even got "mega kudos" from Phil at PSW and that holds a lot more cache than a BUY, BUY, BUY from Cramer. I love it when you have the premier company in a sector (in this case Valero) reporting early (so they are a known quantity) and the higher flying little guys reporting later in the season (so they have all the hot air to lose). TSO is good company but it rose "too far, too fast." People have got to be wondering about higher multiple (HOC) at this point (earnings next week).

Adding to my glee yesterday were the E&P names:

  • led by (EOG) - up another 0.8% which may not sound like a lot but we were half out up 71% on our May 75 Calls and our remaining position is up 157%... in 2 days!
  • followed by another good day for (CHK) - uh-oh, is he kidding? see below,
  • (PQ) - up 5% - good numbers, up guidance but our calls are still wallowing down 30% after that little pre earnings dip, (I'm likely to roll this one tomorrow to June)
  • and (HK) - up 1.5% - solidly through $15 with numbers next week.
  • What's even better is the chatter on the site. Lots of good ideas, most of them not mine.

On to a review of the day that was as gas rallied on CNBC's "bearish" gas storage report. LOL.  I have two words for Epperson: Short Interest. As in there's a record amount of it in the NYMEX natural gas futures and options. Natural gas looks hell bent for $8 and we're at one of those "slice or dive" junctures. Nothing really fundamental (except more buyers than sellers) to drive gas much over $8 but it has great support at $7.50.

Natural Gas Storage Review:

Gas Inventories Are 20% Above The Five Year Average, But 13% Below Year Ago Levels.

  • Storage as of April 27, 2007: 1,651 Bcf (updated May 2, 2007).
  • Max storage for this week in history: 1,904 Bcf (2006). At present gas is at it’s 2nd highest level in history for this date (we were at our 3rd highest level last week). '
  • We are now down 13% (253 Bcf) relative to year ago storage levels. Due to the larger injection this past week relative to the year ago comparable week we eroded the YoY deficit slightly (see second chart below).
  • We are now 20% (276 Bcf) above the 5 year average which includes 2006's record levels (see third chart below).

Looking Ahead:

Here's some quick stats for the period running from the end of April through the end of October (the traditional end of the injection season):

  • 5 Year Average Injections: 1,896 Bcf. Taken with current storage that scenario would put us at a very comfortable 3,547 Bcf in storage, or 87 Bcf over record storage.
  • Minimum Injections: 1,491 Bcf in 2002. This would yield storage of 3,055. While many consider the 3 Tcf mark to be full storage, 3,142 Bcf would be the lowest peak storage this decade and would be seen as extremely bullish for gas prices (Despite the fact that it's well over the 3 Tcf mark which has traditionally been seen as "full" storage).
  • Maximum Injections: 2,433 Bcf in 2003. That year saw storage trough at a very low 642 Bcf. This won't happen with this year's much higher storage levels going into the injection season.
  • Last year we injected 1,546 Bcf into storage during this period which would yield peak storage of 3.2 Tcf at the end of October.

Previously, I had thought natural gas would suffer "a little bout of seasonal weakness, potentially falling as low as $6.50." Yesterday's report was only bearish in that it slightly outpaced last year's injection. However, everytime gas prices have attempted even a minor slide in the last few weeks, buyers were on the job, I suspect covering that near record net short position.

I'm setting aside thoughts of hurricane induced spikes and/or several consecutive weeks of excessive heat for now. While current Lower 48 production is up only slightly relative to 2006's storm impacted volumes Canadian exports to the U.S. are more than likely to decline more than LNG imports will increase. For this and many more little things like: spiralling service costs, increased demand for natural gas from the fertilizer and ethanol industries, low snowpack which reduce hydro electricity generation and thus increases demand for gas for power etc,) I don't see natural gas trading on average much above or below current levels of $7.50 to $8 this summer. Put a hurricane aimed at the Gulf in the picture and we see $9 within a day, then things get down to storm path and production impact.

Above $7 the well run E&P has a license to print money


nat-gas-sto-050207.JPG

Holdings Watch:

CALLS:

  • (CHK) - Added more Jun $45s before earnings. See earnings watch below.

PUTS:

  • (TSO)  - Sold the $120 puts purchased Wednesday at $3.10 for $7.00. The paired trade with (VLO) worked exceptionally well as it reached an all time record high while Tesoro was busy falling $8.
  • (APC) - lost faith in this trade some time ago, it fell off the radar and should have been folded some time ago. Sold down 69%. Stupid. Can you say use stops?
  • (COP) - sold down 54%. Ditto comment.

Other of note:

  • (PQ) rallied on better than expected guidance. I've got a long piece in the hopper but have been unable to find the time to complete. All systems go there.
  • (HAL) edging higher as higher natural gas prices through the trasitive property (higher natural gas price = swelling E&P cashflow  = rising E&P CapEx =  happy service company shareholders). Why not pick the most beat up name of the big cap service bunch?
  • PTEN 's chart looks great and, based on all accounts, business should only get better for many of the land drillers (PKD, BRNC, etc) but I'll due a little due dilligence over the weekend before moving into that once again hot money group.

Option positions are updated on the ZEB Perf page as of last night.

Earnings Watch:

(CHK): Where's The Love?! First, to repeat what I said after asked what to do with 15 minutes before the close holding naked calls on the Phil's Stock World site I said:

Tough call. I am up 57% now on the bid on my two entries: one at $0.85 yesterday and one at $1.85 today. What I SHOULD do is take half off the table and play with their money. P [Phil of PSW] is the option guru so he might say to sell a higher call or buy a protective put. I however operate in the more 2 dimensional space of oil & gas land and I like the chart and the company. As long as nat gas doesn’t fall off a cliff and they don’t screw up earnings (which I doubt but it could happen) then I’s staying long. But if you have the same profits as I outlined above how do you not sell half? Comment: I of course didn't.

  • Earnings: Take out the mark to market unrealized hedge loss and it’s a beat. $0.87 vs $0.78 exoected. That’s not the concern here. Either way, it trades on CFPS (which is not affected by the non cash hedge loss), not EPS so the after hours sell off last night may be short lived if that was the only reason for it.

Comment: What is a non cash, mark to market, unrealized hedge loss and why don't I care about it? Oil and gas companies use futures to hedge their production. Periodically, those futures are "marked to the market price" meaning that if they were closed out at the current price this would be your gain (if the price of the underlying commodity fell) or loss (if it rose, which is what happened in CHK's case). It is non-cash becasue there is no actual loss of dollars (it hasn't even been sold yet, hence the term "unrealized") but it is required by GAAP accounting.  99 out of 100 analysts will not factor this into their estimates as it has nothing, zip, nada to do with the operation of the company.

  • 1Q Production of 154 Bcfe beat guidance range of 150 to 152.5 Bcfe.
  • Production growth of 14-18% expected for 2007. No change from previous.
  • LOE increased a little but not bad. 1Q07 $0.93/Mcfe vs $0.87/Mcfe in 1Q06. Guidance was $0.85 to $0.95 so this is a little high considering they topped the production number. They're looking for $0.90 to $1.00 going forward. Still, <$1 /mcfe LOE is by no means high.
  • They’re completeing a well a day in the Barnett.
  • They replaced over 4x total company production in the first quarter doing this.
  • They’re about to accelerate drilling in the Fayetteville Shale now.
  • More unconventional reserves on tap: Woodford Shale (both in W. Texas and in Oklahoma) activity about to step up.
  • Deep Bosier (high potential wells) is about to move from 1 rig to 6.

In summary, a very good quarter. I could see an analyst having a bone to pick with them over a little cost creep in the LOE and G&A lines given the pace of growth here and the already low operating cost levels I think those are pretty forgivable sins. The stock got hit for a 3+% in after hours trading and is still down over 2% this morning as I type this. If it stays in the red through the open I'll be adding to my call position.

Odds & Ends:

(PTR) - Wow! 7.3 BILLION BOE Discovery!!!??? 3 Billion of it is said to be oil. They announced this last month but the reserves were then thought to be closer to 2 billion barrels. The JiDong discovery is partly onshore and partly in the Nampu Block of Bohai Bay. This could mitigate much of the "demand from China"  argument beginning in about two years. It's shallow water and although initial production is likely in a relative short time frame, full development will take longer but would likely yield production in excees of 1 mm bopd. As a point of reference, last year China imported 2.9 mm bopd. (NFX) is probably picking a good time to market it's Bohai reserves.

Analyst Watch: (RDS.A) upgraded to neutral at BS, GSF and WFT get modest price target bumps at FBR.  WNR (which I still have half of my original put position on) got cut at BMO to underperform. Thanks BMO!

 

SPR Watch: Refill, announced just days ago, is now suspended thorugh "at least the end of the  summer driving season. DOE said a second round of solicitations for the purchase of 4 mm bbs of oil was rejected because the bids received were too high and thus, a bad deal for taxpayers. And to think I thought they didn't care! The SPR 689 mm bbs out of a capacity of 727.

Nigeria Watch: Shell sees exports restarting in June. It has already restarted some shuttered production but the company is just getting a look at some areas shuttered for a about a year now and has noted considerable facilities damage.   In other news, MEND took another 21 hostages.

Good luck today and have a great weekend everbody! Speaking of the weekend,  come back on Saturday for the Weekly Wrap!

43 Responses to “Too Bad It’s Already Friday!”

  1. 1
    Kevin Says:

    Wow,..chk clawing back toward $36. A,..you know how I feel about this mgmnt team. Do you really see a whole lot of upside from here?

  2. 2
    zman Says:

    At $7 to $8 gas with the reserves they’ve got for as little and the find and develop them for … yes.

  3. 3
    zman Says:

    PQ and HK on fire!

    VLO and TSO trading up in line with each other.

  4. 4
    zman Says:

    CHK say it’s poised to become the top US gas producer during 2008. Five years it used to be BP, then in no particular order some of the majors and the big E&Ps (APC, DVN, EOG etc.) rounding out the top 10. If you want to know where gas prices are going long term, there’s a pretty good clue.

  5. 5
    zman Says:

    Here’s another good CHK headline – 1Q07 nat gas production exceeded Exxon’s

  6. 6
    Big H Says:

    I sold my calls on tso 4.6/4.7

  7. 7
    zman Says:

    Nice Big H

    Listening to the CHK call now.

    Fayetteville shale wells so far seeing 1.6 Bcfe gross which is beigger than the SWN wells at 1.3 to 1.5 Bcfe. CHK says last 10 wells have been > of 1.6.

    In Barnett they are over 1 Bcfgpd (gross) having drilled 300 wells to date. They plan to drill 8 to 12x that many wells in coming years.

  8. 8
    zman Says:

    more from the CHK call:

    Seeing service cost REDUCTIONS :

    dayrates for drilling rigs down in all areas ~ 15% relative to 6 to 9 months ago. Quoted a land rig rate drop of $21,000 having fallen to $17-18,000 per day.

    frac job costs down 15 to 25%

    This is due to new entrants to the frac market and increased capacity of existing players.

  9. 9
    zman Says:

    Sold VLO covers at $1.40. Entire 4x position sold as I was in the May 75 calls which are losing IV and TVM quick.

    Will reposition next week … or not.

  10. 10
    zman Says:

    Nat gas through $8 and climbing fast. I guess it’s slice time as the shorts run for the hills.

  11. 11
    Big H Says:

    Didn’t sell the full holding , up their, but now I did : ) dumped the rest for 5.3

    not bad….the reason I brought was gas wasn’t gonna dive from yesterday overnight to today, and the stk was loved, plus I throught the report would not crack the stk today with gas xom and the bunch.. it was ment as a quick trade… what’da you think, I was ok in thinking gas bounce, ?

  12. 12
    Big H Says:

    o yea and nattys move to…just added to this should bounce!

  13. 13
    Big H Says:

    I hope everyone dumped their 120 may puts…..on tso…..including eric ( whats his name ) boweheading!

    Zman, I do this all the time I can’t hang onto a winner as a it and the sector inches up, I always sell just seconds on minutes before it breaks out for the day., thinking its a top…why any advice?

  14. 14
    Stephen Says:

    Anyone have any idea why UDRL is getting hit so bad, with nat gas rising?

    I mean their results weren’t really really bad. $0.39 for the 1Q 07 compared to $0.32 1Q 06.

  15. 15
    zman Says:

    Stephen – it looks like they bricked

    Estimates were:
    EPS $0.48
    Revenue $74 mm E vs $70 mm actual.

    “Looking forward, we’re seeing some pricing weakness emerging in the Barnett Shale as the rig supply continues to grow.”

    CHK said this exact thing this morning on their CC

  16. 16
    MMarkkk Says:

    CHK’s comments regarding the unrealized hedge loss highlight the fact that these hedge losses are GAAP crap! The only reason this shows up as a loss is because prices went up during the quarter. At the beginning of the quarter, the had a certain amount of “gains” due to the hedges; by the end of the quarter, real gas prices had gone up and the hedges were worth less, hence the unrealized loss. Only in the GAAP world can a “less good” thing turn into a “loss”

    CHK’s call was great. They intimated that they will be revising upward their production guidance later this quarter. Current production is higher than the 2nd Qtr target already so looks like they’ll blow through guidance!

    Don’t try to outguess COP movement…it will kill you everytime! Still undervalued but hard to time.

  17. 17
    zman Says:

    M – Couldn’t agree more. Call was excellent. They’re studs.

  18. 18
    Big H Says:

    Hey, an Off Market Post:

    Check out the Gernal Lee Car on ebay, from the Dukes Oh hazzard TV Show ( its not even the TV car But The TV star built it and used it in a movie ) yesterday the bid was 2.6 now look,I like the link under the bid from ebay/paypal that says “Low monthly Payments…) I ckick bid just to see if I could AND I COULD… I bet its some Wall Street trader from the top list…one of those 50m and up guys! its stupied, the car only cost maybe 20K to build, John Duke must be really happy ! LINL:
    http://cgi.ebay.com/ebaymotors/ws/eBayISAPI.dll?ViewItem&ih=015&sspagename=STRK%3AMEWA%3AIT&viewitem=&item=250108256198&rd=1,1

  19. 19
    tom Says:

    Hey hi Z,

    Looks like you’ve been enjoying that crazy run up in the oil patch. Congrats!

    Not sure what’s your FA take on WNR but I got puts on that thing EOD yesterday. TA wise it’s quite bearish. We’ll see.

    Regarding the broad market, here’s something for you and Phil and his gang if you can relay it to him. That bull run was quite fun but now is the time to be very careful though especially if that breakout above SP500 1500 to go test the magnet at 1527.46 is negated. We might see some remorse buying selling kicking off a pullback. Whether it will be an healthy one or a new downtrend remains to be seen. But what I wanted to share with you and Phil is that chart below of the percentage of stocks over 200MA. I monitor it everyday with other market charts to have feel on the market. You will see there is a possible H&S top in formation on there so that is a very valid reason to be very cautious here on the long side.

    http://img145.imageshack.us/my.php?image=200ma53yn5.jpg

    Anyway, keep having fun out there!

    Best,

    Tom

  20. 20
    tom Says:

    Oh, and here is something I loaded up on the HNW blog earlier today. Looks like someone took advantage of the gap up to sell a lot of FXI (HK/China ETF). Is another China selloff in the cards?

    http://img63.imageshack.us/my.php?image=fxi53iu4.jpg

  21. 21
    Big H Says:

    This floor that holds the participants on this market rally is higher, and its getting a bigger heavier, more crowded load every day, i would say that elevators the bring people up seem to stop on each and every floor, but i would think that might not be the case on the case in the other direction!

    beautiful! and ( yes my spelling sucks )

  22. 22
    Big H Says:

    because it be to full ! and everyone would want to get in so it gose, express!

  23. 23
    zman Says:

    Hey M – you financial or science or ops?

  24. 24
    zman Says:

    Tom – I’m happy to relay.

    WNR – I’m still short half my original position. The fundamental have been strong. Take a look at HOC in same business, higher valuation than rest and I think they miss next week.

  25. 25
    zman Says:

    Nicky – agreed. I think it hovers in th e$60 to $62.50 range for a awhile but if yet another report of declining demand gets released by EIA and IEA and Opec then you’re in for a $50 test. Note the tankers keep running (unfortunattely now without me). OPEC is shipping skads of oil.

    Tom – take a look at that deadcat bounce on TSO and tell me up or down from here. tia

  26. 26
    tom Says:

    Thanks Z. HOC will be in a bearish chart at EOD if price can close at this level or based on the pattern and and a close in the lower BB. But you know how I feel about earnings, could go both ways. Although someone with your FA knowledge have a definite edge on those. Heck, you and Phil nailed TSO earnings pretty good, congrats!

  27. 27
    tom Says:

    TSO starting a bearish consolidation in the form of a bear flag. Newbies traders often buy dips on strong stocks without seeing that the TA character has changed. Heck, been going up so will continue to go up. Until there is another TA character change, we never know with the oil crooks, this chart and bearish and once the bear flag process is over this POS looking chart is going down, way down. Need to be patient into those frustrating consolidation pattern but the flag should break down sooner or later. G/L

  28. 28
    slm Says:

    I bought PTR last week, its up 11% so far? Does anyone think it might test its all time highs?

  29. 29
    tom Says:

    Meanwhile that POS WNR is cooking nicely. Did you see USO crashing earlier on? Gee, if the energy sector dives, the whole market will follow. This crazy run up in the oil patch is what triggered that run up of this week.

  30. 30
    Big H Says:

    and triggered the run up over the whole don rally

  31. 31
    MMarkkk Says:

    A little of all. Started out in engineering, did some management, strategy and now in A&D. Work for a major focused on the U.S.

  32. 32
    zman Says:

    Mark – I won’t out you but my software told me your IP’s owner as soon as you sent your first message. Your input is very welcome here.

    I was in sellside E&P research in a former life (which probably brings me down a few rungs in your eyes, lol). But I’ve met many of the managements I write about either across a table and/or at conferences and spent innumerable hours on conf calls.

    As to CHK, Aubrey’s a class act and there’s very little to complain about in that quater. I think they’re bagging the street from both production and cost guidance standpoints (which is exactly what they should do, “underpromise and over-deliver”.

    Anyway, if you stick around your insight would be welcome. We’ve got a few oil types of different backgrounds here, a geologist I can’t seem to get to comment lately, some good gut traders, that Tom guy is a good chartist etc…

  33. 33
    zman Says:

    slm – PTR – given a little time it very well could. That’s a massive discovery. ~6-7x the largest in the GOM which if I’m not mistaken was Crazy, ahem, Thunderhorse.

    I think you need oil to hold up and the energy sector as well. This announcement is just an addendum to the announcement in late March. I was surprised how little bump the stock got then. Lots of people are saying there will likely be more discoveries in close proximity.

  34. 34
    zman Says:

    GST had a nice well, I assume it’s with CHK since it’s a 50/50 in the Bosier. Don’t forget about that little stock.

    PQ – holding up nicely.

  35. 35
    MMarkkk Says:

    Sounds great. For obvious reasons, I have to limit some of my comments and input so hope you’ll understand. Where I can, I’m happy to give my personal opinion. I also like to watch sites like yours for input on competitors, alternative views of the markets in general, etc. Its amazing what you can hear from folks.

  36. 36
    zman Says:

    We’ve had everyone from Saudi Aramco to Exxon to Tesoro to Devon in here in the last 24 hours. Your opinions are all welcome fellas.

  37. 37
    zman Says:

    M – Great. Sometime when you get a chance would you poke holes in my “NFX is a diamond in the rough” thesis. They’ve got the talent, they’ve got the assets, and they’re making the right moves to get their valuation up. I’ve got a couple of short book reports on it in the ZEB reports area. Unfortunately they took a beating by Kat/Rit and those troubles/costs on top of the general rise in LOE/mcfe has kept them in the penalty box. Now they’re back to pre Kat levels in the Gulf and the Woodford looks to be coming on strong. Some of those wells are pretty husky. The Val Verde stuff is strong, etc, etc. After a two year hiatus they’re going to grow production and extend R/P north of 10. Maybe they even get a good valuation for Bohai stuff now with proximity of the nanpu reserves. Now if they could just punt the shelf…

  38. 38
    Kevin Says:

    OT: Tell me you guys got short on that MSFT/YHOO merger garbage after the announcement or the technical break of 32.25. That was some easy money,…it may even go lower. CNBC,..what a sham.

  39. 39
    Big H Says:

    Speaking of CNBC _WHATEVER~

    Zman, What happened to Eric on Fast $. did you watch, if so what did he say on TSO, , I know hes holding puts..tso, and that guy with the bear flag, its a bunch of gibberish to make him sound smart if the market gose to pot anytime ( soon ( qucik) like cramer in reverse! We all know what will happen in a major selloff, these high flyers , take the express down…no stops…

    Have a great weekend everyone, I’m off to dinner at some snuzy place is SO HO, then its getting to the marina, and off on my sailboat…. tommorow.

  40. 40
    sane Says:

    z, regarding the PTR discovery, CNOOC has been doing a lot of drilling around that area also. They are saying that there is potential for reserves around there. Nat and oil.

    Sane

  41. 41
    slm Says:

    Open Interest for Nat Gas is out.

    Non Commercial –

    Long – 68,862
    Short – 144,439
    Spread – 491,609

  42. 42
    Big H Says:

    btw my gdp call from yesterday looked good today…..

  43. 43
    lawdymama Says:

    Here’s Eric’s comments from Fast Money last night

    The headline: How To Trade Refiners Following Tesoro’s (TSO) 7% Plunge On Earnings Thursday

    The word: On Monday, Eric says he bought the $120 puts on Tesoro as it traded at $122, because, while he loves the refiners, he thought they were a bit rich. When a stock like Tesoro gets so far ahead of itself, investors should take a profit, he says. He’s bearish on Tesoro right now, but bullish on the sector long term.

    Here’s the URL:
    http://www.cnbc.com/id/18473397

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