02
Jul

Monday Morning – Data Delayed Week But Check Out (IOC)

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The Week Ahead:

  • Thursday: Oil Report
  • Friday: Gas Report

Oil. Treading Water Over $70. After rallying 2% last week to reach $70+ and a high for 2007 on news that inventories of crude had reached a nine year high but that demand for crude from refiners is about to pick up oil is little changed this morning.  Nothing further on the geo-pol front and a day's delay in the week's inventory data are probably behind the malaise.

  • Nigeria Watch: Price of machetes falls 50% as demand from politician backed thugs wanes. Comment: Unlike presidential approval ratings and gasoline prices in the U.S., Nigerian machete prices and global oil prices have a more direct relationship.
  • Iran: SSDD: U.S. accuses Iran of militant support in Iraq; asks Putin for help blocking Iran's nuclear aspirations. Iran tells U.S. to get stuffed.

Natural Gas: Giving back Friday gains in early trading. That chart from the weekend wrap piece looks ominous. I think we're setting up for a pretty good buying opportunity but I'm feeling pretty patient at present as the technicals are in charge and look like they need a $6 test.  That'll turn on a dime with real heat and/or a storm of course.

Odds & Ends

Enough Is Enough Watch: (IOC) Is This The End? Early well results trip up stock In a nutshell this is an over-reaction.

  • (IOC) is down from $44 to $19 in four days; a 58% plunge since Tuesday.  The fall started the day after the company's annual meeting and a day before they announced preliminary drilling results at their Elk-2 appraisal well in Papua New Guinea. Rumors have been that the well is dry casting doubt on the ability of the Elk structure to support a proposed LNG facility.

ioc-chart-070107.jpg

  • IOC has two main areas of operation: 1) a small 38,500 bpd refinery which accounts for the vast majority of the company's revenues and 2) an exploration arm that has had some notable successes. A LNG project is expected to be underpinned by one of these, Elk, discovered in November 2006. At present revenues and cash flow are derived almost entirely from the company's midstream assets. But the snap to the story is the potential for the LNG project.
  • In its well report last Wednesday, the company failed to report test volumes for the still drilling Elk 2 well, a 5 kilometer downdip stepout designed to help delineate the size of the initial discovery, which is estimated to contain several Tcf of gas, enough to support the development of an LNG facility.
  • While initial results do not confirm a commercial gas discovery the well is not yet at total depth. At 5,920' the ELK2 was said to be near it's target objective, the Puri limestone. At 8,684' the well was 1200 feet into the formation and was still not deemed commercial. However, drilling results are required on a weekly basis for Australian firms and for many exploration wells drilled in this part of the world and in this case I think investors are jumping the gun. In the U.S.,these results would not have been released and this opportunity to scoop up cheap shares would not have arisen.
  • Balance sheet: solid. Lowish debt to equity for an E&P of this size with a respectable cash position.
  • Most importantly, yesterday (IOC) announced it had reached a deal to continue the preferential interest rate of 4% on a $130 million secured credit facility through May 2008 underwritten by Merrill and Clarion Finanz AG. All parties say they are now "encouraged with the interim results of the Elk-2, and the overall resource potential in the structure which can underpin the joint LNG project."
  • In yesterday's press release, the company reiterated a few points that seem to have been ignored by the Street about the Elk-2 well:
    • gas was produced to the surface (though how much is in still in question),
    • logs show heavy gas and gas liquid compositions,
    • downhole pressures of 3,800 psi are very good (higher than in the discovery well),
    • gas concentration is increasing with depth,
    • to date, the gas water contact has not been reached nor has a targeted oil leg,
    • so far, a 2,300+ foot gas column has been encountered!
  • Summary: This almost certainly gaps up in the morning and I'll take a few calls at the open if reasonable but also after the stock takes a breather and the quick buck artists hit the exits. I'm looking very a very significant bounce here folks.

Analyst Watch: (ADM) raised to Buy at BofA.

Have a great week and I'll talk to you in comments!

39 Responses to “Monday Morning – Data Delayed Week But Check Out (IOC)”

  1. 1
    zman Says:

    Morning N. So Phil is saying to wait to buy nat gas until it falls another $0.38.

    I don’t get his RBOB comment. Not a late of faith in his inventory number with that stop.

  2. 2
    zman Says:

    IOC opened up $3.70 (195). Watching closely. Looking at the July 25s and potentially 30s but would like to see some more volume here.

  3. 3
    zman Says:

    bidding IOC $22.50s. Gotta be patient with spreads like these and a stock that looks like it’s still very nervous.

  4. 4
    zman Says:

    Long initial IOC 22.50 call position at $2.15.

  5. 5
    Sambone Says:

    Here is something to watch in the coming days. It has rotation and is heading west.
    http://www.ssd.noaa.gov/goes/east/catl/loop-vis.html

  6. 6
    zman Says:

    Sambone – are you talking about that little system midway across the Atlantic?

    N – thanks for the levels. Do you think we stop at 38% on crude ($69.54)?

  7. 7
    zman Says:

    IOC really getting its second wind now, up $4.70 (25%).

  8. 8
    zman Says:

    Raymond James ups IOC to Strong Buy from outperform. Better late than never.

  9. 9
    zman Says:

    Natural gas tagged Thursday’s low of 6.551. Hard to get excited about that chart for a bounce just yet.

    That Atlantic thing looks to me like it’s rotating but it’s pretty thin.

    Cooling degree days came in at 71 vs an expectation of 68. Much warmer than last week’s 59 but essentially in line with year ago and normal readings for this time of year.

  10. 10
    zman Says:

    Someone on the PSW site asked me about a specific target and should they sell half if they’re up 50% this morning on the IOC trade. Here’s my response:

    No specific target. I think they have another pop in the morning as there will be no news. Who could blame you for taking 1/2 off the table with 50% profits in 2 hours?!

    This had fallen all the way back to levels not seen since November 2006. The well is a stepout meaning they move a certain distance from the discovery well and see if they find the same structure. They definitely found a huge gas column but the characteristic of the limestone appears to be different here. But they’re not done turning to the right and with that much pressure and more gas concentration as they drill down the well is very likely to be a complete waste of time and money. There will be other delineation wells here.

    If you think of the structure like an underground hill, the first well came in somewhere near the ridge line. Above a certain point the “hill” is filled with gas. The second well is located 5 km away and downdip or down the “hillside”. The idea of stepping out this far is to see just how big the aerial extent of the structure is. From the logs in the well, everything looks good from a geophysical standpoint; they just didn’t say how much gas flowed to the surface and since this well is deeper down that slope, you wouldn’t expect it to flow at the same shallower depth as in the discovery well. Capiche?

  11. 11
    Sambone Says:

    Zman – Yes, Just watching it. Weak shear, water temp at or above 80 (Bathtub/fuel), moving west at 5 mph. Could or couldn’t. High north of it will keep it from heading north, as most did last year. We’ll see in a couple of days. Still early in the season, so just watching it.

  12. 12
    zman Says:

    Hear ya just watching Sambone. Keep me posted. Believe it or not I sometimes forget to check the sat animations in the morning!

    USO breaking out to HOD.

    IOC up 31%

  13. 13
    Pete Says:

    zman,
    New to your site thou I have been following it for sometime. I would like to learn how to be a better investor in the oil/gas sector. Would you have any suggestions as to reading material or sites that would be helpful? Have been picking up bits ad pieces from you and the comment section but much of it is flying over my head.

    I am long VLO,DVN,APC and HAL and feel I will get it handed to me if I do not learn more—- if I haven’t already.

  14. 14
    Tom Says:

    I’d dispute your assertion that they have a “solid” balance sheet. Elk2 is basically do or die for them. Sunday, Merrill Lynch extended the 4% rate on their credit facility until the end of the month.

    If they can’t get a LNG plant deal done by then, their rate goes up to 10%. This would put them into a position where they either need to find new financing, or go bankrupt.

    Rumors on the street are that Merrill’s institutional clients are the ones who caused this drop by heading for the exits.

  15. 15
    zman Says:

    Pete,

    Sure. The best source is the company 10K, and I’d say the group you’re in would be a good starting point. Read the management letter from CHK and EOG as well. Then read some of the backgrounders on oil, gas, gasoline from the eia.doe.gov site.

    Finally, good to have you here and feel to ask any questions that come to mind.

  16. 16
    zman Says:

    Tom:

    less than 50% debt to cap, positive working capital and a strong cash position. One well is not necessarily do or die for the company since they have midstream assets that are doing well and the original discovery may just need to be stepped out in a different direction.

  17. 17
    redjack Says:

    Z…regarding IOC, have you seen this: http://www.stocklemon.com/index.php?s=ioc&submit=

    also Interoil (IOL.TO) is down over $5.00 on the toronto exchange

  18. 18
    zman Says:

    redjack: I have. and they make some good points but it also looks like sour grapes. they were down on the stock since October and missed the entire run from 19 to 44. So now I’m to believe anything they have to say after they “stopped covering the story”. I’m not in love with this one by any means and my trade this morning is just that, a trade. But enough was enough.

  19. 19
    zman Says:

    USO popping to the upside…again.

    refiner actions makes little sense today

    EOG coming back to life with oil

    IOC taking a breather. Could go either way. one-third of the float is short.

  20. 20
    zman Says:

    CNBC babbling about $80 and $85 oil. What’s with those guys? Couldn’t be that service company GE owns could it? I smell T Boone around the corner.

  21. 21
    zman Says:

    Did they ask him what happened to $4 gasoline. Back in May he said it was 2 weeks out.

  22. 22
    Kevin Says:

    Z,

    Any more comments on END?

    K

  23. 23
    zman Says:

    Nothing until they say/do something worth commenting on. It’s extremely cheap and has a growing production profile but it lacks catalysts. I wouldn’t buy more until they have news as it’s in the penalty box and could continue to drift lower.

  24. 24
    zman Says:

    OIH hot again. Another day like to today and we could push through the 180 level. Taking a hard look at the July HAL 35 CALLS.

  25. 25
    zman Says:

    took another opener in the HAL $35 July calls for $0.75.

  26. 26
    scoop006 Says:

    Z- J. cramer is buying XTO
    Your thoughts please?

  27. 27
    zman Says:

    I like XTO. Well run, good grower, gassy. I wouldn’t buy into a cramer run though but would be patient scaling into it. Names like that I like longer dated, near the money (just slightly OOTM) CALLS. I’m sure he likes a lot of gassy names like CHK, SWN and KWK as well.

  28. 28
    scoop006 Says:

    Z- My thought was to go against Cramer. I think he is the kiss of death.

  29. 29
    zman Says:

    could be but I still like the company.

  30. 30
    zman Says:

    Nicky – hear ya bullish feel. That crude reversal this early afternoon was attributable to people not caring about a refiner that’s down due to flooding. A refinery that consumes 108,000 bpd of cushing oil. Seemed like a bit of an overreaction this morning on the downside but this rally makes little sense. I’m thinking it may have legs now though as the technicals could care less about the fundamentals.

  31. 31
    MMarkkk Says:

    Z: any thoughts on Linn Energy (LINE)? Big acquisition today of quality assets and people from Dominion. This follows on an earlier big acquisition in Appalachia late 2006. I know a lot of their people and they are top notch. I think they’ve got lots of good things to come. Being touted by Personal Finance’s editors as well (neil george and roger conrad). They are a LLC/MLP so you have to like to receive large distributions (6% and going up) and be willing to put up with getting your capital back monthly and managing a K-1 (or having your accountant manage the K-1). K-1’s are really not that difficult; just file an automatic extension in April cuz you’ll never get all your tax doc’s in time for Apr 15th! There are other MLP’s coming out which will be nice as well. Anything that the tax greedy folks don’t like, I like! Seriously, look at their assets and their operations.

  32. 32
    zman Says:

    Mark – Aren’t those mid-con assets the stuff they acquired when they took out Louise Dreyfus a few years back? Sonora etc. Got some nice socks off some of the sheep that graze those lands. Good assets below ground too. Also, got sent on a nice vacation to Cabo on LD’s dime so I’m probably biased. Good people if they still have them as well. I saw the news this am but was too bleary eyed to do the math.

    I don’t know LINE but an MLP report from a couple of months ago about the PXD deal said most were yielding 5 to 7% so at 6% in this environment it’s probably a bargain. K-1s are for accountants only and thank heavens I have one in the family.

    MLPs are in: Everybody from little HK to giant CHK are planning them.

  33. 33
    Sambone Says:

    This is the latest. Seems more pronounced. Just watching for now. Slow the loop down.
    http://hadar.cira.colostate.edu/ramsdis/online/trop_ge_storm_relative_0.html

  34. 34
    MMarkkk Says:

    Yes, most are LD assets. You got a trip to Cabo, I get trips to Midland and Fort Worth. What’s up with that? Of course I did spend 4 years travelling the Mid East, Europe and Asia so I guess I shouldn’t complain. Baku in the summertime…Aaaahhh.

    MLP’s seem to be the next big “thing” at least for now. The Canucks did a number on their Royalty Trust equivalents, with a nice hatchet job in the tax code. I expect that if these continue to boom in the US you’ll see likewise. But for now, ride them!

    Over the weekend I read 3 other detailed reports on NG and all agree with you and Nicky…sub $6 and things get shut in or shut down. Herold’s did a nice write up in their Headliner on the same subject. I’ve got an awful lot of cash sitting on the sidelines waiting!

  35. 35
    zman Says:

    Hey Sambone, is that near Haiti?

  36. 36
    zman Says:

    Mark,

    Yup Cabo, I was really sad to see them go.

    Sub $6 would be a very nice opportunity. Any thoughts on the pain being felt in the Rockies gas markets? I’m looking at BBG, SJT puts but haven’t done the work needed to pull the trigger.

  37. 37
    Tom Says:

    http://www2.interoil.com/presentation/Financial_Results_for_the_First_Quarter_2007_(Financials).pdf

    Let’s see, they have 24 mil in cash, and they burnt 7.5 mil last quarter.

    They have a secured loan (the refinery is collateral) of 85M that they’ve been deferring interest payments on. Currently they promise to recommence interest payments in September.

    They have a loan of 130M which they pay 4% on now, and will go to 10% if there’s no LNG deal by July 31.

    They had about 3 mil in EBIDTA last quarter and about 4.5 mil in interest expense. That’s without the 10% rate on the bridging loan and payments suspended on the older loan.

    You tell me how they get through the year without more financing. How are they going to get more financing if Elk 2 is dry? They don’t have time to drill Elk 3.

    This will be a great trading stock until the next report. Should be very volatile.

    Personally I wouldn’t touch this on the long side even if they do manage to work out a LNG plant deal. If they don’t….

  38. 38
    MMarkkk Says:

    I think there could be some impact on the Rockies co’s around earnings time. The stocks tend to trade with NG overall as few people catch the Rockies Basis story. Rockies Express P/L going in will help this but it can’t get put in soon enough! Some of the gas being drilled in the Rockies is problematic at $2 at the wellhead so the earnings of these co’s will be hit. Barrett, APC, SJT and others with heavy concentration in Rockies. Same thing happened last year with the basis blowout and I’ve seen it much worse. in 2002 we had wells getting 25 cents per MCF for a couple of months

  39. 39
    zman Says:

    Tom – I said I’m not in love with it. So don’t buy it. I bought the July 22.50s for $2.15 because I thought the stock would go up on yesterday’s pr and I thought the move back down to levels not seen since the Elk-1 discovery was a bit of the “too far, too fast” variety. Turns out I was right. This one was a trade. It worked. Last bid on those calls was $3.50.

    Mark – Thanks. That’s kind of my these. They trade with NG and the group until they report…then it’s woops, what the hell? ouch!

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