21
Aug

Tuesday Morning – All Is Well In Houston; Dean Targets Campeche

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Lots of people were asking if it was time to bottom fish this sub prime beleaguered energy market late last week. At the time I said I wasn't planning to wade back in just yet (both the schizophrenic market and the fact that I knew it would be next to impossible for me to give the market an iota of attention Friday through Monday) although I did take a position in the (OII) September $60 calls on Thursday which is performing decently so far (all due to Fed Friday action) ... it could have been just about any energy name for that matter but it is an exceedingly strong fundamental play and it had gotten a pretty decent haircut at the time.

Holdings Watch: Right now I've got September calls in (CHK), (NFX), (SWN), (OII), (HAL) and Jan 2008 calls in (CHK). For the first time in recent memory I'm not short the refineries although those plays paid nicely last month and could again I'll be taking a fresh look this week. Patience is king right now and the market is still not to be trusted. Plus, we've got some near term pressuring factors on both natural gas and gasoline which could yield opportunities on both sides of the fence in coming days.

Natural Gas Overreaction? Way back in P.D. (pre Dean) I wrote that natural gas would maintain a level of $5.75 to $6.25. Yesterday's $0.97 drop to $6.04 left us right back in P.D. support land. As I wrote in yesterday's post, the somewhat cooler than expected temps for this week were likely to exacerbate the pressure on natural gas as Dean snubbed the northern GOMEX. On top of that pressure comes news that natural gas imports hit a year high of 13.8 Bcfgpd as LNG imports forcefully reasserted their importance by more than doubling year ago volumes.

Gas Imports Hit 2007 Record. Gas imports rose 1.7 Bcfgpd from the prior week to hit a 2007 record of 13.8 Bcfgpd. LNG tied the all time record at 3.8 Bcfgpd. That record was set just four weeks ago but suffice it to say, $6 to $7 gas is enough to bring gas to U.S. shores.

imports-082007.jpg

Other factors affecting gas. Last week saw another strong week for generation and their were numerous reports of coal-fired generation outages and to my knowledge, the first incident of nuke being shutdown by the TVA because the water feeding the cooling system was simply too hot. That's all strong news for gas.

Oil Dipped But Didn't Take The Slapping Natural Gas Did. While the northern Gulf may be out of harms way for the early alphabet storms, the fact that Dean was targeting the third largest oil field in the world with it's move towards the southern gulf of Mexico, a PEMEX's backyard.

GOMEX Watch: Pemex literally runs for the hills. According to Upstream, Pemex has evacuated 407 platforms (>14,000 men in a day!) in the Campeche Sound area (southern Gulf) including the entire Cantarell field (the world's third largest oil field). In aggregate, production is down a staggering 2.65 million bpd or roughly 80% of total Pemex.

Of note, the U.S. imports approximately 1.46 million bopd from Mexico (making it the U.S.'s third largest source behind Canada and Saudi Arabia). That breaks out to roughly 15% of total U.S. imports so the storm has the potential of quickly boosting WTI. While natural gas was obviously affected as well Mexico remains a net importer of gas from the U.S.

At last glance Dean was centered over the Yucatan with winds of 125 mph and headed squarely for the Campeche Sound area where it is expected to arrive as a Cat 2 storm.

Early Read On Oil Inventories (expected from the Bloomberg survey):

crude-expectations-082107.jpg

Grain of Salt Watch: Estimates have missed actuals by a mile especially on crude for the last several weeks. Part of this miss has been caused by the high degree of variability in imports. Part is I think attributable simply to error in the estimation process and will eventually be revised upwards when the monthly numbers are released a few months down the road, much like May's numbers were. We shall see but of course by then few will notice and fewer still will care.

Odds & Ends

Analyst Watch: nada.

India Watch. 45,000 workers went on strike this morning and went back to work later in the day when their demands for higher wages were met.

OPEC Watch: Tanker tracker company Oil Movements expects OPEC volumes to increase by another 260,000 barrels by September. Comment: With that kind of quota discipline in place I would bother even holding a meeting in September.

China Coal Watch: According to the FreeMarket News, China is expected to suffer coal shortages by 2010. If anybody's got "a slow boat to China filled with coal" play please pass it along.

62 Responses to “Tuesday Morning – All Is Well In Houston; Dean Targets Campeche”

  1. 1
    codydog Says:

    z–hope you had a safe trip.

    do you follow the Enercom presentations in denver?

  2. 2
    zman Says:

    Thanks Cody,

    I plan on reviewing several of them if they’re available in replay.

  3. 3
    zman Says:

    PBR adding some fat production:

    new platform boosts production by 180,000 bopd from current (July) level of 1.8 mm bopd.

    They’ve got another 310,000 bopd of platform capacity coming on by year end. Of course, this is all well known and nothing new but it increases their leverage to oil prices and if Mex takes a hit it could pop stocks like PBR and PTR.

  4. 4
    Alan Says:

    I understand that the refiners should be following the trends of the value of crack spreads and should be reacting to oil and gasoline prices and futures, but it seems lately, (past 10 days) that all they do is follow the dow, only magnified. i.e. dow goes down .2% – refiners go down 1.5 %.

  5. 5
    Alan Says:

    sorry, my question was ” are we in a market that will be driven by overall market unease, or will the fundamentals prevail. opinions?

  6. 6
    Sambone Says:

    Market unease

  7. 7
    zman Says:

    Alan – my sense is that energy stocks in general are taking direction but not magnitude from the broader market. Refiner fundamentals are worsening so it makes sense for them, as a group, to take a bigger hit. When the broad market decides to straighten up and fly right (which may take more time and a lot more pain) fund managers will start to sort through the wreckage for value.

    In E&P land many of the stocks have been hammered for no fundamental reason whatsoever…still the market holds sway.

    In service land…ditto the E&P comments. Except that in many cases the stocks are enjoying their “best ever fundamental environment”

    ——————————-

  8. 8
    jimbo Says:

    China coal play per your request. FDG is a coking coal producer in BC. Well positioned to provide coal to China, especially as BC shipping capacity is increased. Set up as a open-ended mutual fund trust it also provides excellent dividends.

  9. 9
    zman Says:

    I’d consider going long a little UNG later in the week if gas remains below $6 following inventories on Thursday.

    Oil is creeping back up with Pemex impact fears.

    TRADE: APC $50 calls @ $1.40. Been watching for awhile and think it’s due a near term retracement. After this kind of market discombobulation players usually come back to the bigger, and as such perceived as more solid names first. In E&P land, APC fits the bill for both pretty well and the spreads aren’t atrocious like they are in many names right now.

  10. 10
    zman Says:

    Thankyou Jimbo! So do they train it to the coast and then put it on dry bulk containers? If so, whose the big drybulk play to go along with FDG?

  11. 11
    jimbo Says:

    I don’t have an answer for railing to coast in BC….except transportation infrastructure (rail and port) is a very big push. http://www.rupertport.com/

    The one drybulk which stands out on my radar is ESEA. Maybe a pro on this board can provide more info.

  12. 12
    KL Says:

    Sambone, evidence insiders are the ones moving en masse to t-bills: http://liquidityblog.blogspot.com/

    More confirmation of your ideas of the trend.

  13. 13
    Stephen Says:

    I played dry bulk in Hong Kong, a company called Pacific Basin HK:2343, it is up 300% in two years, I sold way too early, you only have to look at the Baltic Exchange Dry Bulk Index (BDI) to understand why.

    http://investmenttools.com/futures/bdi_baltic_dry_index.htm

    Some good dry bulk companies in the US are EGLE, GNK, they are up quite a bit over the last year. There is also a division in the ship sizes between handysize (small) and handymax (big), with different day rates, handymax correlates better with the BDI.

  14. 14
    DrT Says:

    FDG’s coal goes to coast by CP Rail. Most is currently shipped to Japan by various carriers.

  15. 15
    zman Says:

    Thanks Stephen, any of those predominantly coal?

  16. 16
    Sambone Says:

    K – This thing is going to get ugly. Nobody wants to buy short commerical paper. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aP7BZw9X19P8

    So, cash is king (As long as your money market is safe). I have very few postions at this point, mostly cash.

  17. 17
    Stephen Says:

    I’m no expert on the US companies, although EGLE do transport coal, you might have to look at an Annual Report to get the break-down. I think you can carry any dry-bulk cargo on a given ship, it is just a matter of who charters the vessel.

  18. 18
    zman Says:

    Agreed Sambone/KL cash is king.

    E&P and energy in general getting smacked.

    OII from last Thursday is a nice 4 trading day double and I think I’ll let it go at that given the market.

  19. 19
    zman Says:

    Stephen,

    So sugar cane one month and coal the next? Yikes. I’ll work up those break downs soon as it’s not a problem that people didn’t see coming nor one that’s going to go away quickly.

    Bill F – if you’re out there today, you usually have great insights re tankers, any thoughts / knowledge on the dry bulk plays?

  20. 20
    Stephen Says:

    One thing about Dry Bulk and the BDI, is that the shipping companies can not hedge, you can only charter a vessel if you have cargo, you can not buy or sell the right to charter a vessel, that means that when the BDI goes down, as it did in 2005, Pacific Basin’s profits almost halved. Very cyclical and very volatile. Therefore 20x P/E can be dangerous, I thought Pacific Basin was overvalued, it has since doubled, but then again what do I know.

  21. 21
    zman Says:

    Thanks Dr T – just saw your CP rail comment. This gets back to RAIL too as their production has been a bit light of late but could step with rising demand for Canadian coals.

    By the way, watched a Discovery channel piece on the building of the Yangtze damn…to replace the equivalent of 18 nuclear power plants by the time the last turbine is installed in 2009…and they still need more power.

    Also saw where multiple thousands of Chinese coal miners are killed in accidents each year but that the number is falling on a per ton basis because production continues to ramp so quickly. There’s a play here in US coals as some coal that would be imported to the US from Canada is diverted, raising US prices. These stocks have been very weak with natural gas prices.

  22. 22
    zman Says:

    NFX dipping below its 200 day.

    Stephen – you’re not saying all dry bulk is spot market are you? Surely big shippers can lock ships for medium or long term contracts at negotiated prices.

  23. 23
    Stephen Says:

    No, it is not all spot market. Sorry, I got myself a little confused.

    I know, that the shipping companies, such as Pacific Basin, usually lock up 50% of the next year, and 25% of the year after that. I think the BDI tracks the spot price, though.

    What I meant to say, is that there are no speculators in the market, as is the case with commodities, I’m not sure if this is the same way that oil tankers work.

  24. 24
    Stephen Says:

    Here is a more comprehensive list:

    DryShips Inc. (DRYS), Danaos Corp. (DAC), Eagle Bulk Shipping Inc. (EGLE), Euroseas Ltd. (ESEA), Quintana Maritime, Diana Shipping Inc., Navios Maritime (NM).

    The 1y chart of DRYS is something to behold.

  25. 25
    zman Says:

    Stephen – ok, I see, thanks…sounds just like the tankers.

    OIH going positive … HAL continues to creep higher with natural gas recovering continuously since the open.

    Oil has given back its morning gain however. I’d say traders are underestimating not only the impact of the storm as far as damage goes but also the impact of that big of a unilateral shutdown on the reservoirs.

    In many cases, wells won’t come back on line at their pre storm levels…ever. If somebody wants to call me on that point feel free to and I’m not saying in all cases but in some (and given the size lets say it’ll be quite a few) when they turn the valve it just won’t produce as much as prior to shutting it in.

  26. 26
    Nicky Says:

    Nat gas count seems to be clearing up. I did think the previous rally would take us a little higher but 7192 seems to have capped it.
    From there we are now tracing out 5 waves down. Once complete we should trace out a 3 wave, wave ii retracement of the fall from 7192, before embarking on a much steeper fall.
    Get that hat ready Z!!

  27. 27
    Nicky Says:

    RBOB taking out some major support levels.

  28. 28
    zman Says:

    We simply don’t have an RBOB inventory problem.

  29. 29
    Nicky Says:

    RBOB has some support at 18455.

    WTI at 6960 and 6900.

    Distillates at 19530, 19460, 19310.

  30. 30
    Sambone Says:

    Lesson One – Just because a market or a stock is oversold doesn’t mean it can’t go lower.
    Lesson Two – Don’t fight the trend.
    Lesson Three – Don’t anticipate a reversal. Wait (a four-letter word you can say in public).
    Lesson Four – Don’t fight the Fed (but at the same time understand what they are doing), which we believe is on Marty Zweig’s top ten list.
    Lesson Five – Don’t trade without stops. Even if you are right that the down move from the July highs is over, a move below the August 16th low would not be good. Consider some GTC orders. Remember that a 10% loss of capital requires an 11.1% gain on the remaining capital to recover and a 20% loss needs a 25% return (from How Technical Analysis Works).

  31. 31
    jimbo Says:

    Here is my compilation of drybulks, to augment Stephens….

    BHO DAC DRYS DSX EGLE ESEA EXM GNK HRZ KEX NM ONAV QMAR SSW TNP

    As long as we are talking shipping, one name which I keep running into is Tidewater (TDW)….looks to be a killer good company.

  32. 32
    zman Says:

    Sambone – LOL All very good rules. I’d add always sell the initial excitement which is a PSW rule but I’m sure he lifted from some other place.

    My first summer internship (in highschool) was analyzing Zweig 9s for a pure quant shop back when quant shops didn’t exist.

    Jimbo and Stephen – I’ll put a table in tomorrow’s post with some valuations, etc. THANKS for the list.

  33. 33
    Nicky Says:

    This rout looking a little overdone. All the length wants out at the same time by the looks of things.

  34. 34
    zman Says:

    Rout in RBOB and natural gas? I’d agree.

    On the rout over angle:
    1) you’re bumping against marginal economics for many of the growthy plays (this shouldn’t be underestimated as it was last September that the PRs detailing shut ins were released).
    2) heat is slumping but could easily reassert mid month,
    3) it’s early in the hurricane season

    On the lower gas argument:
    1) storage is very full now. This is not news and it’s going to be very full, perhaps record full come October.
    2) imports running very high to expectations
    3) drilling still continues at brisk pace
    4) production from Independence hub ramping as a big driver.

  35. 35
    zman Says:

    Stocks look sickly, but the XOI / xle/ oih all look well within support. Can’t blame downward moves on the broad market today but instead on oil and nat gas down 2 and 3% respectively.

  36. 36
    rammastr Says:

    Zman – since NFX seems to be the dog of the group (not because the tech’s say so), and Sambone and Nicky say that the sky will fall – alot – does it seem a good entry point for puts?

  37. 37
    zman Says:

    R – Not for me. The stock has come under pressure with the group, more than the group in the last 2 days, but I don’t like buying puts on good companies unless they’ve had a staggering run UP into earnings.

    I’d rather bet on an inflated name like SU which despises falling oil prices or any of the more expensive refiners who really aren’t liking the latest cracks (FTO, WNR, HOC) and whose estimates are starting to come in a bit.

    If nat gas does fall further, than higher priced names like SWN or KWK should get hurt worse than pretty cheap NFX. Of course that’s just my 2 cents and I’ve been wrong for the last couple of weeks on owning any E&P names.

  38. 38
    El Diablo Says:

    Seems that at least half of the market is expecting a rate cut by September. Any thoughts on energy impact if we do or do not get a rate cut?

  39. 39
    rammastr Says:

    Thanks ZMAN.

  40. 40
    zman Says:

    El D – depends on if you think the economy will slow without one. Energy stocks aren’t exactly debted up at the moment and given their cash flows, they’re not exactly running to the debt or equity markets to float new paper. But if the market wants it and doesn’t it, it and the energy stocks will remain vulnerable price wise. Fundamentals should be affected much at all as I don’t think oil is going to topple back to $50 unless the U.S. goes from having a cold to having pneumonia.

  41. 41
    El Diablo Says:

    I don’t know how we got from ‘market is OK with a soft landing’ to ‘market loves it if a rate cut is needed to get a soft landing.’

    All in a period of two weeks.

    It now appears that our economy is as volatile and fragile as our energy markets!

  42. 42
    zman Says:

    EL D – amen. Probably because it has an internet style attention span.

    We went from: Hey, the birds are singing, the sun is shining, and everyone on CNBC is debating whether or not the Dow will be above 14,500 by year end

    to:

    Holy crap, sell, sell, sell, Bernanke is an out of touch idiot who needs to cut now.

    Bumps in energy are being used as a source of funds.

  43. 43
    El Diablo Says:

    Top sub-prime lender New Century Financial filed for bankruptcy protection last November. Then suddenly, in August 2008, subprime concerns lead to a liquidity crisis.

    Something is rotten in the state of Denmark.

  44. 44
    zman Says:

    Energy stocks lack sector catalysts here. Oil below $70 is seen as bearish by hedgies and pulling down even the gas weighted E&P’s despite the fact that they (the E&Ps) are highly hedged at better than current prices. Again, logic and reason don’t matter in this bathwater tossing environment.

    SWN losing another level of whole number support at $37.

  45. 45
    zman Says:

    Here’s one for the bulk list:

    TBSI – which ships to China among other places up 12% today.

  46. 46
    codydog Says:

    tough 2 days to trade – NG, UNG etc all look so tempting.

  47. 47
    zman Says:

    Cody – yeah, but it could get weaker this week with larger expected injection – see this morning’s post. Also, UNG as an ETF is ok but the options on it have a nasty 10% spread. LNG trades pretty close as a proxy stock for nat gas though and they don’t have anything like earnings or an income statement at all to cloud things, LOL.

  48. 48
    Fred Says:

    Z – #9 I bought UNG this morning before you mentioned it. I don’t see it going lower as they’ll shut-in production plus as Nicky says Sept. and Oct. could be busy storm months.

    I sold my PBR longs back up in the high sixties and low seventies and waiting for a good long entry point.

  49. 49
    bill fraser Says:

    I am in drys in a big way (dry bulk shipper)

    They release earnings tonight and i expect them to beat the estimates.

    how does 3.00 vs 50 cent’s sound to you?

    Caveat big run up and leveraged and most everybody is expecting a pop in the stock so it may be priced in already. And some traders will want to get out on the good news.

  50. 50
    Sambone Says:

    El – Now you know why I don’t watch the talking heads.
    I think Helicopter Ben will lower now. That will give the market a boost short term, but will only delay the “Rotten in Denmark”!
    If Oil stays below 69.90 today, then the next support is 65.60. This will lower Energy stocks, because the “Street” will say that they won’t make as much $.
    Watching support levels on Energy names currently. We’re not there yet.

  51. 51
    zman Says:

    Thanks Bill…that’s a good caveat too. Why is TBSI running so hard today?

  52. 52
    scoop006 Says:

    Anybody home?

  53. 53
    zman Says:

    Hey Scoop,

    Yeah here, just watching the uniform carnage in the energy group. Cash remains king, bumps are to be sold etc. Not much going on news wise.

  54. 54
    zman Says:

    Little late day rally in energy…pretty unconvincing so far.

  55. 55
    rammastr Says:

    How can the market be pushed down when the “Tool” Bernanke will “use all tools to calm markets”. It’s like I “dare” you to try and take anything down.

  56. 56
    rammastr Says:

    ZMAN – in the past – will the Nat. Gas “industry” players try to “buoy” prices?

  57. 57
    rammastr Says:

    Sorry – has the Nat. Gas ……?

  58. 58
    Sambone Says:

    R – If the price goes to low, they shut production.

  59. 59
    zman Says:

    R – they have made statements that have that effect. CHK started in last year with a PR. Now, I’m not saying that what they did was done to lift gas prices. They shut in some marginal production in if I recall correctly Sonora. It was an economic decision to not sell at a loss and to wait out higher prices. It was a very small amount of production for them and not really impactful to the big pix but prices started rising about then. This year, Rockies prices are worse than last or at least they were last I checked with the differential to Henry Hub a fat $3+. Was it done to boost prices? Sure but I’d bet it’s a better move than selling at a loss.

  60. 60
    jimbo Says:

    Just reviewed the drybulk list. Delete HRZ, ONAV, SSW and TNP. These are containers, tankers, etc.

  61. 61
    bill fraser Says:

    Re message 49 DRYS

    They reported after the market closed 3.11 vs .57 cents.

    It was up 1.89 to 56.14 ( 3.5 % ) in reg trading.

    After hours its up to 60. Nice 6 dollar up move! Anyways , last week this traded as low as 47 on Thursdays 300 point down move. So buy this if it dips back down to the low 50’s

    I’m slowly rotating out of the energy area. Dry shippers are rocking and rolling and I like drys, nm, and exm.

    i stay away from the tankers at least until october/november timefram as q3 rates stink and some companies will be reporting losses. So i expect some selling in this sector

    Regarding message 60, TNP is a tanker stock and my personal favorite, great management. i own a little and if you have to be in the tanker sector TOPT and TNP are the best, imho.

    Good luck all.

  62. 62
    jimbo Says:

    bill frasier….appreciate your comments and analysis. Really thought about taking a position in DRYS yesterday, but have made too many mistakes shooting from the hip lately. Great call.

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