08
May

Tuesday – Hurricanes In May?!

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How's That For A CNBC Story Teaser Headline? In case you hadn't noticed there's a swirling low pressure system off the coast of the Carolinas and while it's not even a named tropical depression at this time it has been demonstrating tropical storm force winds 150 miles off Cape Hateras.  What's more, it's track is southeast which would take it over northern Florida and right into the center of the eastern Gulf of Mexico. While the storm has the windspeed it lacks the warm water and humid low pressure at its center, characteristics of a tropical storm, and is therefore unlikely to amount to much of a blow.

Oil. Another Day Bites The Dust. Crude fell for the sixth straight day yesterday as talk of increasing OPEC output and already swollen crude stockpiles combined to send prices to a six week low despite the fact that expected increeases in refinery utuilization from here on out should eat away at those large crude stocks.

Crude Stocks by year (excluding the SPR)

crude-stocks-050807.JPG

Gasoline fell last week but crack spreads set another record for 2007 edging  higher in all regions. I think we're very close to the peak for spreads this year as more and more people become convinced that the EIA's demand data, which fall out of an equation that contains multiple estimates, are a little suspect.

crack-050807.JPG

Early Read On This Week's Inventory Report: (from Bloomberg)

  • Gasoline Expected To RISE 100,000 barrels breaking a string of 12 consecutive weeks of declining stocks. More important than the absolute change in inventories will again be:
  • imports -  which seem to like the high U.S. price, and which are going to be increasingly available in the months ahead as Venezuela resumes gasoline exports to Carribean nations which compete for fuel with the U.S.. Imports need to remain above 1.2 mm bopd for the next several weeks to soften the gasoline market.
  • utilization - which is expected to have moved up slightly in the last week. Of course last week's report showed higher utilization but lower gasoline production and we need both moving up to soften RBOB prices.

Earnings Watch: 

  • (CRK) - Beat driven largely by operations at it's 50% owned BDE (see below). Both companies exhibited very tight operating expense control and on a per unit basis, LOE fell sharply (from $1.67/Mcfe in 1Q06 to $1.35 in 1Q07) which is almost unheard even among the high double digit production growth small cap E&P names, and I can't think of an example of this occuring this quarter in a player with both Gulf Coast and Gulf of Mexico operations. Pretty impressive. If it doesn't run at the gate I'll be eyeing the June 30 calls.
  • (BDE) -  Nice bottom line beat with strong production growth (42% YoY and --% sequentially) helping to offset a modest decline in realized prices as cash flow from operations leapt 23% vs 1Q06.
  • (AXC.to) -  Addax Petroleum. See comments later today.
  • (FST) / (WHT) - I'm looking for comments on Forest's Hill County Barnett Shale progress as a gauge of the future fortunes of little Westside Energy (WHT) with which Forest has a 50/50 JV on 7,000 acres.  Shale leaders (DVN) and (EOG) have been very active in Hill county and in close proximity to Forest/Westside's leasehold. EURs in the area have been estimated at between 1.2 to 2.5 Bcfe  and sell-side analysts are putting numbers of between 10 and 40 Bcf per 1,000 acres on the JV acreage. The high end of that range is probably not realistic (seems highly unrisked). However, at a pretty conservative $2/Mcf in the ground (they'd likely get $2.30 to $2.50 in a sale) that would put WHT's Hill county assets at ~ $50 to 200+ mm versus the company's tiny $75 mm EV.

Odds & Ends

Holdings Watch:

  • (SU) June $80 puts taken at $1.75. Glutton for punishment but with retreating oil and firm gas well over $7 Henry Hub .
  • (BPG) Followup: Well I was looking for the stock to get knocked for a loop and it did: down 40% a one point and closing down 23%.  No action on my part but I think I'll buy an opening position on residual weakness (if it occurs) this moring.

Analyst Watch: (RDC) cut to neutral at Wachovia.

Nigeria Watch: MEND claims to have bombed three oil piplelines feeding the Agip operated 200,000 bopd capacity Brass export terminal.

Iran Watch:  UN non-proliferation conference moving ahead after Mahmoud accepts compromise in the meeting's agenda.

(EGY) Snapshot:

  • Interesting little E&P operating almost entirely in Gabon. Probably grows production 20+% this year based on recent new field hookup. They have just under a 30% interest in two fields
    • (Etame- established with current production of 15-16,000 bopd gross and
    • Avouma - just brought on line and ramping (6,000 bopd gross going to 10,000) on one block in Gabon and they operate.
  • My favorite Swiss E&P, AXC has a slightly larger interest than EGY in the Etame field.
  • Balance sheet looks good, lots of cash, little debt.
  • The stock is cheap, trading at under 4x TEV/EBITDA.
  • Reserve replacement has been negative which combined with 4Q down production probably is what has been pressuring the stock.
  • Production comes via tieback to an FPSO so you have some lift-timing risk which may provide good entries if they are late lifting for a quarter.
  • Next big growth doesn’t come until early 2008 (Ebouri discovery) but you may have some exploration catalyst off Gabon and Angola later this year.
  • It’s interesting, I plan to do more work on it and will listen to their 1Q call this week (May 10).
  • The company has a few wells along in Texas and in the GOM which I assume are legacy assets as there seems to be no plan for advancing activity in the states. I’d sell em but maybe they carry sentimental value or allow for some data access or some such.

29 Responses to “Tuesday – Hurricanes In May?!”

  1. 1
    zman Says:

    http://www.thestormtrack.com/

    Latest update shows that storm getting more moisture and better organization.

  2. 2
    zman Says:

    TSO getting spanked. $110 puts coming back to life, probably dump the $100 and $105 here as they’re just too much of a long shot with 9 tradings left to expiry.

    I don’t have it on any more but the VLO long vs TSO short trade is still working well.

    Also, yesterday’s entry into SU puts is starting to work.

  3. 3
    Stephen Says:

    Anyone know why PGS is down 5% at the open, releasing results on Thursday.

    Z, any ideas on a rig and platform repair play that might get a boost out of the hurricane, or is it not worth it?

    One might look at DVR but came out with earnings below expectations, or AGY?

  4. 4
    Stephen Says:

    Sorry, I meant ACGY.

  5. 5
    Popeye Says:

    OIH down almost 2%.

  6. 6
    zman Says:

    Two words: profit taking. I saw a downgrade of RDC but the fundamentals in service remain very strong. You’ll have a deceleration in rates to be sure and onshore rigs and some service are going to fall with increase capacity but that increased volume is going to drive revenues higher and in turn earnings.

    Stephen – there are several names but it’s too early yet

    Don’t know ACGY – its seismic I assume?

  7. 7
    zman Says:

    Popeye:

    OIH – led down by RDC which is a disproportionately large share of the index, ~ 10%.

    I think NE is probably a good long bet in here but I’ll wait to see if gas holds $7.50 Mcf. I’ve been wanting a pullback in the OIH for a long time now but I don’t buy in days its going heavily “group” against your desired direction.

  8. 8
    zman Says:

    BTW, BPG is off another 12% today, back to yesterdays lows on decent volume. I may be in long later today.

    CRK results (including BDE) were stellar. The stock wants to go higher but is getting dragged by the group. Really hope it goes negative here as I’ll be going long.

    MCF – Contango – acting to good for something not to be up there.

    out remain May Rail 50s.

  9. 9
    zman Says:

    HOC reported a better than expected quarter.

    Volumes suffered from unplanned maintenance as I thought but margins were stronger than I expected. Stock’s off a little over a % but I don’t see a play there today. Maybe if it starts to really break down but the closely held nature of the stock and the wide spread, thinly traded options make it difficult to play despite its inexplicable valuation.

  10. 10
    Stephen Says:

    ACGY, they are a Norwegian firm with a 4B market cap that do offshore infrastructure and repair all over the world. They own pipe-laying ships and remotely operated vehicles for subsea repair work.

    I’m not really an expert, but I try to keep an eye on a list of companies that repair oil rigs and offshore platforms, i.e. GLBL, ACGY, DVR, HOFF.

    Listening to conference calls it seems a lot of the repair work from Katrina and Rita is still not done yet, and if there is another bumper hurricane season …

  11. 11
    zman Says:

    Stephen – agreed.

    Might also be a boon for guys like HLX. They took over Typhoon after it was destroyed by Rita. Chevron didn’t want to make a go of it, too little production to warrant a new platform, but 2 13,000 bopd wells went fine for HLX who converted a ferry into a FPS. They also own Cal Dive.

    Also, do you watch PHII, they get the immediate bump from storm evac runs.

  12. 12
    zman Says:

    bought some June 30 CRK calls.

  13. 13
    Denver Says:

    Stephen
    You might want to take a look at GIFI.

  14. 14
    Stephen Says:

    Thanks for all the suggestions.

  15. 15
    zman Says:

    Somewhat surprised the destruction of the 200,000 bopd Brass export terminal in Nigeria isn’t moving crude or gasoline higher. The pipeline had been operating at a quota restricted 150,000 bopd carrying Eni’s production from the Akri adn Oshi oilfields. ENI confirmed production from the two fields has been shut in.

    MEND sent an email to Reuters saying it bombed the pipelines to embarrass Obasanjo in his last weeks in office. They vowed to carry out more attacks between now and May 29, the day president elect Yar’Adua takes office.

    Seperately, Chevron reports its 42,000 bopd Ebite flow station remains shut at machete point.

  16. 16
    zman Says:

    Stephen – here’s one last one for the road (LOL) – from a post back in March

    From the “tell you ’bout the plane crash with a gleam in her eye” file: Storm Depot: (TELA) – yep, they’re public, they’re setting up hardware stores in Florida selling hurricane preparedness materials (with installation) and they’re no doubt going to get sued over that name. Still, it’ll probably run like a banshee when the first tropical storm bends toward the Keys. Not an endoresment. Just an amusement.

    http://hurricanedepot.com/

  17. 17
    zman Says:

    AXC – excellent quarter. Gross Production up 45% YoY on the back of stronger volumes offshore Nigerian and on and offshore Gabon.

    Guidance remained unchanged. Midpoint calls for 130,000 bopd vs 1Q average of 116.

    Strong growth in both Nigeria and Gabon. I’ll do an update piece later this week.

    Preparing to flow test another well in Iraq. and the TT-07 well is turning to the right.

  18. 18
    zman Says:

    Wow USO!

  19. 19
    zman Says:

    bought 2x June 90 calls on NE.

  20. 20
    Stephen Says:

    Went long on PGS and FTI for earnings season.

  21. 21
    zman Says:

    CRK rocking.

    PGS and FTI – just got a feeling or what?

  22. 22
    Stephen Says:

    FTI, I’m bullish on subsea trees as the amount of deepwater drilling increases. FTI seem to be getting a lot of contracts to supply subsea trees to Chevron, Shell, StatOil and the like. Their backlog is over $2B.

    They trade at a discount to DRQ, but they seem to be doing a little bit more business.

  23. 23
    zman Says:

    the forward 12 and 24 month nat gas strips are very high which is what the E&Ps hedge against and budget with. The coming winter is trading between $9 and $10 and next Spring is already $8.30 to $9.00.

    Over $7, let alone over $8 is like Christmas to the gassy E&P’s everyday and they’re definitely locking in these prices.

    CHK already knows it will be the largest gas producer in the U.S. in 2008, they’re not going to risk the cash flow by remaining unhedged – they’re adding costless collars so they lock in the downside $8 ish while leaving the upside to about $10 or $12/mcf.

  24. 24
    zman Says:

    Something is up with MCF. I see the chats saying it was in a popular newletter with a $70 target but that was from a fund manager. I can easily get to a mid $30s valuation though with no exploration.

    No options unfortunately.

    Took opener in BPG at $0.81 as per plan yesterday / today in post.

  25. 25
    Attacking Mid Says:

    z- I hope you dumped your SU puts, as they are SOOoooooo this morning. 😉

    I managed to sell the puts at a nice gain this morning, then bought some calls on the headfake in oil about 20 minutes before NYMEX closing. Now I’ve legged into a straddle to hold going into inventories tomorrow.

    Have a great rest of day!

    AM.

  26. 26
    zman Says:

    What me sell, nah, the new ones are Junes. The mays are mostly toasted at this point. 🙁

    Tupp if you’re out there I never got that email.

    I take it you have my address?

  27. 27
    T-Tupp Says:

    zman– my outlook or internet connection at my condo is acting up, ill send it tomorrow when i go into the office- i havet been there since last thursday lol. sorry; lots going on.

    still have my vlo pos. but im june dated… 70’s

    PS you see the banter about Buffet buying Velero? god imagine all the sheep in that heard??? i do agree in the near termy reversal of the entire sub-sector: i’m in your boat. but i think it might have a few bucks left in her.. besides i have a measley $310 DCA.

  28. 28
    tom Says:

    Hi Z,

    Wonder what your take your take on these build of inventories. You think that rally in OIH related stocks will last considering the numbers?

    Took profit on WNR puts yesterday at open and switched to NE calls on a nice looking chart. Now back in black after the inventory dump but not sure I should trust that rally ahead of Fed. Also rode OIH calls on a daytrade from the low after inventories.

    Thanks.

    Tom

  29. 29
    tom Says:

    Hey Z, forget the above question. Just took profit on both OIH and NE ahead of FOMC. Not taking any chances with this market so complacent now, if Uncle is not friendly it might dive. Better be sideline. Thanks.

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