08
Aug

Wednesday – Oil Inventory Plus HK Knocks It Out Of The Park

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Bernanke Watch: Ben, Ben, Ben. Damned if you do nothing. Damned if you ...do nothing. What does this guy do? "Sources" say the Fed is "organizing liquidity behind the scenes through channels". From their statement yesterday you'd think a credit crunch was pretty far down the ladder of priorities: inflation, looking attentive on camera, speaking in a way that even you don't know what you mean, what to have for lunch etc... The market hated it until it loved it.

Gulf Gas Pileup Watch: Three gas pipelines destroyed by an explosion the other day will likely be out of service for another 2 to 3 weeks. The three normally carry a total of 0.6 Bcfgpd in from offshore Louisiana.

EIA Watch #1. Rising Demand For Crude. EIA has revised it's fourth quarter global demand estimate upwards by 100,000 bopd to 87.4 mm bopd. U.S. demand accounted for 40,000 bopd of the hike. Bear in mind that this is the agency that overestimated demand by 10.5 million barrels (340,000 bopd) when the monthly numbers were tallied against their weekly estimates in the month of May alone.

EIA Watch #2. OPEC Production Continues To Ramp. EIA was busy with the estimates yesterday and concluded that OPEC shipped 30.370 million bopd in July versus 30.01 million bopd in June. For those of you keeping score that's 360,000 bopd that Opec just added which sort of takes the teeth out of EIA Watch #1. Especially since even the EIA expects OPEC to increase production from current levels in the fourth quarter.

Stocks We Haven't Forgotten About Watch:

  • (OII) - Holy Smokes. I'm up 650% on my remaining half position of August 60s bought 7/18. The stock is up 14% since we mentioned it as one of our favorite plays on MN1.com last Wednesday.
  • (CRK) - beat and delivered a 9% gain yesterday. Results were solid and the stock is exceedingly cheap even after yesterday's gains. I sat this one out and boy do I regret it. I think the stock will continue to appreciate towards $30 (from whence it recently came) over the next week or two with the caveats that the broad market behaves itself and natural gas holds $6 which I view as more and more likely given this extended period of heat.
  • (BBG) - beat and beat me over the head. Betting against Bill Barret was my one and only significant miss this earnings season. Looking for a way out on the small speculative position I took two days ago. After listening to the call I realized I got caught a little flat footed on my due diligence here. Note to self: do not bet against good companies / management teams through earnings unless the stock has run spectacularly into earnings and is severely over-valued (and then only maybe!)
  • (PTR) - Mainland China listing coming soon. Watching for an entry point. Largely depends on oil prices and I think they still have room to come in a bit, say to the upper $60s but then a bounce is probably in the cards.
  • (HAL), (CHK), (NFX), (SWN) - the solid earnings and sold off with everything else group in which Zman has fairly good sized positions. I'm in August and September calls here and while I'm comfortable with the positions the broad market's ability to whack these stocks has been frustrating. (HAL) in particular seems to be re-igniting the fire under their buyback. (NFX) I expect to retake $50 in short order but I'll be adding to September or longer dated positions here while opportunistically starting to weedle out of Augusts this week.
  • (EOG) - still in the what do people think was wrong with that quarter or the raised guidance camp. To enlighten me leave a note in comments. I'll be looking at rolling Augusts calls to September this week.

Earnings Watch:

  • (HK) Nice Beat. Major operational quarter. Kicked butt with the drill bit.
    • Reported $0.17 versus $0.15E;
    • More importantly reported $0.86 CFPS which is pretty massive for 1 quarter on a $15 stock if you think about it given the their high production growth rate and low cost structure.
    • Revenue $234mm actual vs $228 expected;
    • Production: 324 Mmcfepd (middle of guidance) which is up 151% from a year ago.
    • 3Q production guidance: 322 to 332 Mmcfepd.
    • LOE at $0.59 per Mce is below mid point of previous guidance.
    • Cost guidance remains low and unaltered from last quarter except for per unit G&A which is expected to fall.
    • Operations: 98 out of 100 wells drilled during the quarter successful. 19 rigs running now.
      • Mid-continent region saw 74 of 75 wells successful, seven were Fayetteville Shale, four of those were company operated with nice IPs of 3 mm/d.
      • Gulf Coast 17 of 18 wells successful (Elm Grove and Terryville in La).
      • Permian: 7 for 7.
    • Acquisition: bought a private company in the last week for undisclosed $ with properties in Arkansas, Indiana, and Texas. Adds 32,000 acres to their position in the Fayetteville and gives them a good start in the New Albany. This is in addition to the 32,500 acres acquired in the Fayetteville announced in June (now 80,000 net acres there)
  • Fayetteville Shale: Plan 50 operated wells for 2H07 and will participate in another 40 during that time. This is a significant acceleration of activity since the last report. Two wells had multiple simultaneous stimulations (probably by Multifrac) and came in with IPs of 3.5 and 3.8 Mcfgpd. I know this is a small number of wells and the Fayetteville is anything but homogeneous but these are some sweet rates. Ask (SWN) whose last 10 wells averaged IPs of 2.6 Mmcfgpd. They have three rigs running now and expect to be at eight rigs by mid 2008. Wow.
  • Louisiana: Terryville Field. Downspacing a portion of the field to 20 acres. They didn't quantify how much of the field they could expect to downspace but said it could add substantially to the 550 locations they have on 40s. Don't expect to double here but it should be a nice add to inventories. Also, completing one Gray sand well after another came in at 6.1 mm/d (which is a little above the old average as I recall it closer to 5). These are $2.5 million wells which have typical initial production of 2.5 mmcfepd and an additional $600K gets you deeper to the Gray. Nice. They've grown this area from nothing in 2004 to an expected 40,000 Mcfepd in 2007.
  • Louisiana: Elm Grove: operated wells IPs of 2 mm/d with program running like clockwork. Second horizontal test came in at 4 mm/d; plan four more by year end. 20 acre infills showing strong results with average IP of 1.5 mm/d.
  • Lion Field, Goliad County, Texas. Two big wells added during the quarter.
  • Along the Gulf Coast - they drilled several deeper tests (some with (NFX)) and have encountered quite a bit of pay. More later on this druing the conference call.
  • Nutshell: Great quarter. Conference Call: 10 est.
  • (KWK). Nice beat. Reported $0.38 vs $0.31 expected. Revenues $136 vs 124 expected. Production of 208 MMcfepd is up 11% sequentially and 27% YoY. Looks like an increase in the planned well count for the Barnett. Looking over the short PR and will add details in comments. My earnings calendar left this one off. Damn. Conference call: 11:00 est.
  • (FTO) $1.64E ; 1.6B est. Will address in comments.

Crude Oil Report Expectations: Imports have rarely been more key for gasoline prices. Imports dipped last week after hitting record levels in the prior week. If we see a return to 1.5 mm bpd or greater RBOB is bound to sell off mightily.

  • Crude: down 2.7 million barrels. I wouldn't be surprised to see this come in as smaller draw after last week's super-sized number. These have a way of gravitating towards the mean over time and last week's was pretty suspect. Of course, it all depends on imports.
  • Gasoline: up 900,000 barrels (note that this would put us back into the bottom end of the range of historic storage levels and that usually this is the time of year gasoline stocks are declining). Production should be a little higher than last while demand should be leveling off. Holding imports flat would get you a slightly larger build than the expected one but anything close to a million barrel build will should put supply fears here to rest.
  • Distillates: up 1.8 million barrels. In aggregate distillate stocks are above the mid point of the normal range for this time of year and we're building stocks at least as fast as usual as can be seen in the following graph. Perhaps this fact has been the impetus for a retreat in heating oil prices.

distillate-stocks-080707.jpg

  • Refinery utilization: up 0.1%. As always the number will be trotted out as if it has some importance. That being said, a retreat is possible given a handful of closings and reopenings last week that net net could go slightly in either direction. Any dip will be met with "Ah-HAAAA's" from the "perma bull oil should be at $105" section of the analytical peanut gallery. Even if production rises. Bear in mind that 3 out 4 guys that will give their honest opinion on CNBC regarding oil are long right now.

Crack Spreads: Auuugah, Auuugah, Dive! Dive! Well, you know my thoughts...

cracks-080307.jpg

That last chart is new and is pretty interesting in light of the fact that 3Q07 vs 3Q06 estimates for the independent refiners are up across the board. In some of these cases that's obviously justifiable like (TSO) where they've acquired capacity. For the little guys, where nothing much changed (save (WNR) who merged with (GI)), the YoY higher expectations are more likely the result of analysts who have yet to reverse their earlier enthusiasm for cracks which had little chance of maintaining 2Q07s margin momentum.

Note that estimates for (VLO), which are revised on a much more frequent basis, as analysts mark their estimates to the crack market, are already called slightly lower for both 3Q and 4Q relative to year ago levels. As it becomes clear that not only was all of the buck for this year's bang front end loaded but also that the back half will actually be down relative to year ago levels I think the smaller, higher multiple names will come under further pressure.

An illustration and then I'll shut up about it.

broker-lag.jpg

Odds & Ends

Analyst Watch: Nada.

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Important Note:
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85 Responses to “Wednesday – Oil Inventory Plus HK Knocks It Out Of The Park”

  1. 1
    zman Says:

    If HK doesn’t explode off the pad this morning I will be taking a slug September 15s and/or $17.50s. Great quarter.

    Scoop will do for tonight.

  2. 2
    Brian08 Says:

    The noob here thinks NFX has support at about 46…Does that look correct? Was also thinking of adding to the SEPT position…

  3. 3
    el_vogel Says:

    thanks for the HK analysis Z!

  4. 4
    zman Says:

    FTO – massive beat both top and bottom line. Analysts, Wake Up!

  5. 5
    zman Says:

    Brian – Man I’d think so. With a calmer market I’d really expect their 2Q results and forward plans to re-exert their influence on the shares. For me, everything from now on will be Septembers or beyond as it has reached that time of the month.

    El V – you’re most welcome!

  6. 6
    Brian08 Says:

    Yeah I’ve been waiting on them…Figure they should start to turn up…Was able to unwind most of my Augusts but the market has been screwy as all get up…

  7. 7
    zman Says:

    Hey Brian – how’s that for an open on NFX?

  8. 8
    Brian08 Says:

    unfortunately pretty bad when you are trying to get options on the cheap!!! 🙂

  9. 9
    zman Says:

    CHK should run too here.

  10. 10
    zman Says:

    KWK and HK will positively impact SWN’s stock price today.

  11. 11
    zman Says:

    welcome to the world of doubling UP

  12. 12
    zman Says:

    HK open, looking at Sept 17.50s but they threw the spread open wide. Still a good bet at $0.45 based on those #s

  13. 13
    zman Says:

    OII up another 2%

    Rig due for a bounce here.

  14. 14
    zman Says:

    HK is one of the delayed reactions calls where it’s lost in the maelstrom of a “sigh of relief” rally this morning. Conf call in 15 should wake it up.

    Nicky – I always appreciate new data, even if I happen to think it’s insane ;-). I will eat my NFX ballcap if we hit $4 this year.

    Can you blame PF?

    CRK continues to run

  15. 15
    codydog Says:

    very steady selling in HK – about to bail

  16. 16
    zman Says:

    cody – maybe b/c no one can get on the conference call. The system is not accepting the pass code from the press release and they’re not offering a web version. What a cluster.

  17. 17
    codydog Says:

    ticking only pennies higher – where is the call? NYC having tremendous flooding causing mass commuter lines to be shut or very delayed

  18. 18
    zman Says:

    Nicky – ouch, uh…can’t be pinned down right now, gotta get ready for the radio.lol.

    I’d give something of dear value to get on the HK CC right now.

  19. 19
    codydog Says:

    leaving tight trailing stops on HK … and moving on

  20. 20
    sane Says:

    Well at least demand is dropping off, but I guess the refiners did not want to make gasoline.

    Sane

  21. 21
    zman Says:

    hey folks…what did I miss.

  22. 22
    codydog Says:

    z–do you like DK?

  23. 23
    scoop006 Says:

    Z Thanks for the RIG tip Aug $100C In @ $2.60. Sell now or hold?

  24. 24
    sane Says:

    Solar is getting a pop today SPWR up 8%, STP up 5%

  25. 25
    zman Says:

    Cody Don’t Know DK

    Wow SWN, OII, NFX, NFX,

    I like HAL here. NFX and CHK have plenty of room to run.

  26. 26
    sane Says:

    Crude-oil stocks fell by 3.6 million barrels to 336.4 million barrels in the week ending August 3, the American Petroleum Institute said Wednesday. Distillate stocks rose by 1.4 million barrels to 128.2 million barrels, while gasoline supplies fell by 5.4 million barrels to 203.1 million barrels, API said.

  27. 27
    sane Says:

    Looks as if by the totals, the API and the EIA are closing the gap on each other

    Sane

  28. 28
    zman Says:

    HK running now

  29. 29
    Kevin Says:

    Z,

    Have you noticed that coal stocks have FINALLY come back from the dead!

    K

  30. 30
    zman Says:

    No K I hadn’t thanks. Like ANR there but am not buying yet. Will look more in a bit.

  31. 31
    zman Says:

    HK = know your thesis.

  32. 32
    zman Says:

    HAL finally starting to move, still only up $0.15 here.

  33. 33
    codydog Says:

    z–back months in crude weakening…..is this rally a fakeout?

  34. 34
    codydog Says:

    stopped on HK – out completely

  35. 35
    zman Says:

    END – reported – no rush on that. will get to it tonight.

  36. 36
    zman Says:

    Nicky re 38-39 I concur

  37. 37
    dorian Says:

    what about our old friend CLR? It seems to be all over the place this one, down on up days, up on down days in the market and not too correlated to oil or other e&p… any opinion appreciated…

  38. 38
    zman Says:

    Dorian,

    I’ve noted what I’d call odd behavior in lately as well. Numbers were fine but it may just be the newness of it and the run it had encouraged profit taking into the quarter. Think it’s just waffling about a bit as it’s support base of investors and analysts aren’t well established yet.

  39. 39
    dorian Says:

    yeah, it is the curse of the new ipo 😉 I have a high opinion of clr based on fundamentals and management…

  40. 40
    zman Says:

    FTO – still holding my puts there. Massive rally on the number, now flat. That kind of action in a stock is pretty disheartening to all the longs who got into the rise late are down, bought more on earnings and are down some more.

  41. 41
    zman Says:

    The VLO long side of the VLO long vs little refiner short play is starting to work.

  42. 42
    zman Says:

    KWK conference call very encouraging

  43. 43
    zman Says:

    Sambone,

    what do you think of that system south of haiti?

  44. 44
    zman Says:

    listening to replay of HK CC…

    nice call, nothing spectacular but on the whole very encouraging on this one as well.

    Stock looks poised to go higher.

  45. 45
    zman Says:

    TRADE: HAL August 35s for $0.75.

  46. 46
    zman Says:

    TRADE:
    SWN running for today’s earlier highs. Took some August $40s at $2.70

  47. 47
    Brian08 Says:

    WNR? Guess somebody knows something about their upcoming earnings that I don’t…

  48. 48
    rammastr Says:

    What seems to be the resistance for HAL to participate? HAL wants to hover around 35.

  49. 49
    zman Says:

    WNR: thin stock being pumped up in anticipation of earnings similar to FTO. I’m holding as the stocks fall in the “that’s great, but what have you done for me lately” camp once the number hits.

  50. 50
    zman Says:

    rammastr: re HAL – good question. No answer. Very odd, you’d think they’d pound the buyback button extra hard after the dip the group took and especially on a relatively “safe” day like today.

  51. 51
    zman Says:

    NFX trying to join the party.

  52. 52
    Brian08 Says:

    Exactly what I was thinking on the thinly traded end Z…One the ‘Mo starts going with or against this guy it is ugly if you are on the other side…

  53. 53
    codydog Says:

    Con Edison implements brownout in Brooklyn as heat strains power grid – Reuters

  54. 54
    rammastr Says:

    Major averages stalling…where is the fresh money?

  55. 55
    zman Says:

    taking some recently CHK $35 aug calls off the table for a double.

  56. 56
    zman Says:

    HK at $16

    EOG and SWN continue to rock, wheh! both trades from mid to late month resurrected from the ashes.

    Trade: Out small CHK for 114% gain.

    Cody -thanks, you knew it was coming.

  57. 57
    Stephen Says:

    Nicky did say S&P peaks at 1502 in post #41.

  58. 58
    zman Says:

    TRADE: Very small, and obviuosly very risky but took a little WNR 55 aug put action in front of earnings. With them up this much I figure they have to beat by a hundred miles and say incredible things about coming quarters.

  59. 59
    zman Says:

    Major profit taking in energy patch…except for WNR. NFX down now, HAL flat again …charts just reached the edge and fell off…

    OII continues to fly at least.

  60. 60
    rammastr Says:

    CHK gave up gain….is it done?

  61. 61
    zman Says:

    possibly for today. NFX ran into the same brick wall and is negative.

    This is forced profit taking.

  62. 62
    zman Says:

    nearly $2 off the high on NFX today. You tell me this isn’t forced liquidations. It’s a gift down here but I own enough near term options to make paper hats for a small army.

  63. 63
    rammastr Says:

    We make a top with an hour or so into the close and we get sell programs kicking in…..again.

  64. 64
    Brian08 Says:

    re: 69…You and me both Z…You and me both…Guess I got what I was wishing for today…Hopefully being disciplined and waiting for the trade to come in will be rewarded…

  65. 65
    zman Says:

    Buying back CHK $35 calls sold earlier at $1.65 for around $1.10 as the stock is now flat on the day.

  66. 66
    codydog Says:

    it was geogre bush saying fnm/frm cant buy bigger mortgages that stopped the rally and as the financials dove off a cliff, the mkt followed.

  67. 67
    codydog Says:

    trailing stops are the only way to go…

  68. 68
    Lije Says:

    I am hearing a lot of rumors on the few pages I pat attention to. From Todd Harrison:

    1. Fannie and Freddie have hit their debt ceilings

    2. Goldman Sachs is going to preannounce something bad

  69. 69
    codydog Says:

    Goldman Sachs OFFICIALS NOT IMMEDIATELY AVAILABLE TO COMMENT ON MARKET RUMORS – Reuters (190.18 -1.07)

    15:47 US STOCKS CUT GAINS ON MARKET SPECULATION GOLDMAN SACHS WILL MAKE ANNOUNCEMENT AFTER THE CLOSE – Reuters

  70. 70
    zman Says:

    Thanks guys…that’s nice little sandwich.

  71. 71
    rammastr Says:

    This rumor mill has to grind people into the ground!

  72. 72
    zman Says:

    Must not be a sure thing or we wouldn’t have this V up into the close.

    Do you think it’s vacation time for a lot of folks or just summer doldrums? Quiet around these parts and several others I keep tabs on.

  73. 73
    sane Says:

    summer doldrums

  74. 74
    codydog Says:

    summer doldrum and very nervous people – dopey hedgies who never worked at a tier 1 have no idea how tight the credit and risk controls are – they think tier 1 firms are a casino run by monkeys.

  75. 75
    zman Says:

    What’s up with the V close up over 145?!!??!!???!!???

  76. 76
    zman Says:

    cody I think a lot things are run by monkeys

  77. 77
    codydog Says:

    Chesapeake Energy Corporation Announces Offering of $500 Million of Contingent Convertible Senior Notes

  78. 78
    sane Says:

    fun day in the solar market today 🙂

  79. 79
    codydog Says:

    ummm,,maybe, but gs isnt

  80. 80
    zman Says:

    Re CHK, just swapping their higher rate revolver for lower interest and a little future dilution.

  81. 81
    scoop006 Says:

    Z RE # 87 is this why CHK is -$1.60 in after hours trading and do you expect a rebound in the AM.

  82. 82
    MMarkkk Says:

    anytime CHK issues Notes they get hammered for fear of dilution. They usually pop back up but not right away. Watch out for the afterhours play here; it isn’t always trustworthy.

  83. 83
    scoop006 Says:

    MMarkkk Thanks for your insight.

  84. 84
    rammastr Says:

    It appears not only the $500 Mil. is the problem, but the Fitch ratings of the debt is also a problem. Apparently the fantastic earnings for CHK and the business outlook going forward is a distant memory.

  85. 85
    zman Says:

    Fitch is upset b/c the company won’t issue stock soon. Stockholders should be happy about that. Those are 1P reserve metrics. When you add the 2P and 3P reserves which are very low risk this is a non issue. But it will hurt the stock short term as Mark indicated.

    http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070808005975&newsLang=en

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