31
Aug

TGIF! Gas Review, A Tale of a Few Drillers, etc…

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Brief post for a low interest day...everybody have a safe and happy holiday!

Guilt By Association Watch: ESV, a shallow water operator warned about 3Q earnings yesterday and half the drillers get taken out and skinned. A few differences:

  • (ESV) drills in the shallow water (generally < 1,000 feet) and geographically on the GOMEX Shelf using Jack-Up rigs.
  • (RIG) generally drills in water depths >1,000 feet using a variety of drillships and semisubmersibles and geographically it is more diversified in the various deepwater hotspots around the globe, not just in the long helicopter trip areas of the GOMEX.
  • (ESV)'s clients are targeting smaller reserve pools which don't take as much planning to drill nor to develop if they're successful. These prospects cost less but are generally not the big swings for the fences that you read about on the front page from time to time. Don't get me, wrong many a fine company has made plenty of hay and drilled one well company makers on the Shelf but activity there is on a slow decline.
  • (RIG)'s clients are drilling after the really big game (100 million barrels and up reserve size) or smaller satellites to production hubs in really deep water that require long range planning. The go / no go process on these is lengthy and is generally unaffected by short term swings in prices.

This is not a big deal as so far it's just one day of non-sense in a thinly traded pre-holiday market  but if it happens again today I'll be in line near the close (or as close to where I can call a reasonable intraday bottom as possible) to take an extra piece for a trade. (RIG) is cheap. Everybody is talking $14 to $15 for 2009 numbers which would yield a 7 multiple on a company that's expected to double earnings over a two year period! That's what I call cheap. The same worries stressing (ESV) simply don't apply here. (DO)'s on my radar as well. 

A Quick Look At A Few Offshore Driller Multiples

offshore-driller-multiple-083107.jpg

Natural Gas Review. 43 Bcf injection. In line with consensus, a bit heavy to my number. Last week I thought the number would be bigger so on average of the two 30 puts in line with my expected trend.

Week Ended August 24, 2007: 43 Bcf Injection.

Gas Inventories Are Now 12% Above The Five Year Average (down from 13% last week), and 2% Above Last Year's Record Levels.

  • Storage as of August 24, 2007: 2,969 Bcf
  • Max storage for this week in history: 2,905 Bcf (2006).
  • We are now 2% (64 Bcf) higher than year ago levels, down from a 4% surplus three weeks ago.
  • We remain 12% (315 Bcf) above the 5 year average which includes 2006's record levels (see third chart below).

Looking Ahead: 3.5 Tcf here we come. This is old news.

 

gas-table-083007.jpg

 

As you can see in the table, average injections from now through the end of the traditional injection season get us to "high" levels of storage. Even the minimum level of injections, which occured last year and is therefore in both the 3 and 10 year scenarios gets us to a lofty 3.5 Tcf which by historic standards is more than "full". The  near record short interest on the part of the non-commercials will be supportive of prices but apparently only once covering is induced by either sharply lower injections or a storm. Where we are now:

 

gas-graph-083007.jpg

Gas prices yawned at the number, got excited about some clouds and rain over the Atlantic and closed up a nickel to $5.635.

Tropics Watch: Active African Wave Train. That's Accuweather's somewhat quirky way of saying things are still active and getting busier in the tropics. 94 L, central Atlantic (55w, 10n) looks ominous and its in the area that spawned Dean. For a trade I like gas through the weekend as this one good odds of of getting named while trading is closed but won't be far enough West to rule it in or out as a threat. I may take a little near the money (SWN), (KWK), (APC), (CHK), or (EOG) depending on the open. Also still got my eye on adding a third wedge of (TSO) as refiner whose out of harms way (geographically) but has been taking it on the chin a bit too much of late. I think it was Stephen who first voiced gas long for the weekend on the site 2 days ago but I'm a bit slow to react sometimes and this market hasn't exactly allowed a big run in any of these stocks yet.

Tesoro Watch: Here's a good story on the currently mellow California gasoline price market. Although margins are off recent lows sentiment on the West Coast is that storage is ample. Gas prices in Ca are currently only 3 to 4 cents above the national average which is truly rare (only 4 times this decade). When I see numbers like that I think, "time for a reversal, somethings gotta break somewhere, deferred maintenance will become "un-deferred", etc. Estimates for 3Q have come down a little here with the big slide in cracks but that's rear view mirror investing. This smells like an opportunity for a recovery since the stock has come off disproportionately more and their fundamental story continues to improve (return on about any metric you like, debt reduction, competitive position...take your pick).

Speaking Of Maintenance Becoming "Un-Deferred" Watch: A Reuters survey found that there will be an unusually high incidence of maintenance among Midwest refiners in September. Reuters indicated that many Midwest refiners have not been offline for maintenance since Katrina. EIA also noted that the regional tightness has already caused the EPA to grant a temporary waver for North Dakota to import non spec gasoline from Canada.

 

Odds & Ends

Analyst Watch: I'll add in comments before the open.

CATS Watch: BP is slowly bringing the CATS system back on line in the North Sea. Expect normal operations by mid September.  Probably ends the reprieve UK gas prices have been getting. Maybe you guys will get a real winter over there.

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Have a great weekend. The wrap will be the first private site post.

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