29
Aug

T.G.I.F.B.4.a.L.W.E. + Hurricane Putin + Haynesville Thoughts + CRR

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Tropics Watch: Three Areas of Interest? I put this first today because, let's face it, this is pretty much all people care about today. I included some thoughts on gas storage, prices, winners and losers for the long term due to the burgeoning shales plays which I hope you glance at before staring at the satellite movies. Either way, Have a great day and a safe and fun long weekend.

  • Gustav - Category 1 storm probably later today, tracking for central Gulf of Mexico with Louisiana or Texas landfall on Tuesday or Wednesday next week.
  • Hanna- Continuing to churn toward Florida.
  • 96 Invest - low formed in the southern Gulf of Mexico last night, probably just moves West into Mexico.

From Russia With Not So Much Love: The Russian government has told at least one of its oil companies to prepare for a possible cut in exports to Europe in days in response to threatened sanctions from the West ~ The Daily Telegraph. This is a rumor but the route in question is the Druzhba pipeline which supplies Russian crude (from LUKOY) to Germany and Poland. Note that the E.U. is holding an emergency meeting next week to decide what to do in terms of sanctions against Russia. Lukoil said overnight the rumor is not true, Moscow had no comment...we shall see.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch - Natural Gas Storage Review
  3. Stocks We Care About Today - CRR, OII
  4. Odds & Ends

Holdings Watch: The Holdings Wiki tab is updated.

 

  • TSO - Added more of the TSO September $20 calls (TSOID) for $0.45 on sector weakness.

 

  • HK - Sold the HK September $35 calls (HKIG) for $2.60, up 24%. I continue to hold the common and the September $40 calls.

Commodity Watch:

Natural Gas - October gas got crushed in its first day of trading as the front month after the EIA announced a much larger than anticipated injection to storage (see below) re-raising the specter of a looming gas glut. Gas fell a whopping $0.56 to close at $8.05, dipping as low as $7.72 ( a penny lower than its recent low) and I suspect it would have tested $7 were it not for the action in the tropics. This morning gas is up a little over a dime.

The Gas Table:

 

Gas thoughts after seeing the 102 Bcf Injection:

  1. Wow That Was A Large Number ... Never before in the 14 years of available data for this week in history have we seen an injection that big in this week of August.
  2. ... And We Are Probably Going To Have 3.4 Tcf In Storage By The End Of October (the nominal end of injection season) ... This is what I would term "full" storage. Not too much, not too little, but just right.
  3. ... But August Has Been Unseasonably Cool ... 
  4. ... And Before This Week Injections Have Been Running In Line With Expectations Given The Growth In Production ... Injections to storage have run 1,523 Bcf so far this season vs an average of 1,362 Bcf injected since 1994. This is better viewed on a gas per day (Bcfgpd) basis. In this manner we have gas is running high to those average injections by 1.14 Bcfgpd.
  5. ...So While Production Is Up, Normal Demand Growth Has Consumed The Excess Gas With Help Of Lower Imports... With domestic production up about 5 Bcfgpd year to date relative to year ago levels and net imports off 3 ish Bcfgpd  this would leave an extra piece of gas relative to year ago levels which is not all showing up in the storage numbers...it is being consumed via higher demand (as long as the weather does not go away like it did in the last couple of weeks)
  6. ... And Price Has A Way Of Fixing Price. The Haynesville Shale (and the Woodford and the Marcellus and a host of other gas shales) are being viewed by the Street as an approaching tsunami of methane. The thinking goes something like:
    1. Drill a mess 'o wells,
    2. Get a huge pile of gas, and
    3. Magically transport said pile to market. 
  7. The theory then concludes that this tidal wave of gas will plow prices back to the point that E&P companies will:
    1. Curtail spending
    2. Curtail production

ZComment on the Tsunami Theory: It's A Nice Play But The Street Has The Cart Before The Horse.

  1. There's A Chance The Haynesville Shale IS The Best Gas Shale Play On The Planet Discovered So Far.
    1. It's massive with a total extent thought to be over 3,000 square miles
    2. It is gas rich with a wide range of estimates most of which are far above Barnett Shale metrics
    3. The economics are stellar with average EURs in the core of the play estimated by CHK to be about 6.5 Bcfe and a completed well cost that will approach $6.5 million in the near future.
    4. This allows strong returns in the $6 to $8 range.
  2. ...But The Haynesville Will Cannibalize Capital And Equipment From Other Non-Conventional And Conventional Plays... While the Haynesville Shale appears to be economic in the $6 to $7 per MMBtu range and up, other plays are not so lucky. Many conventional plays, especially out west are much less profitable and there prices are a far cry from Henry Hub.
  3. ...Meaning There Will Be Higher Growth Shale Players And Slower Growth Conventional Players With Commensurate Internal Rates of Return At Lower Gas Price Thresholds. You know I like CHK and HK here from a pure growth and well run, low cost operations standpoint and GMXR from a this is too cheap to believe standpoint. Names that have access to rigs and OCTG, HBP acreage, and access to firm transportation will do well. Some of the smaller players may find themselves constrained and potential unable to meet the lofty double digit growth goals the Street expects from the Haynesville.

On To The Weekly Natural Gas Storage Slideshow:

Crude Oil endured a little profit taking yesterday after hitting $120 early in the session as Gustav weakened over Haiti and closed down $2.56 at $115.59 yesterday. This morning crude is rebounding $1.50 on the Russian rumor and the tropics and I would not be surprised to see it close near its high of the day close to or above $120 as traders close out more shorts before the long, stormy, politically tense weekend.

Stocks We Care About Today:

Carbo Ceramics (CRR) Announces (HAL) Deals; Adds Buyback

Sells Diagnostic Label To Halliburtion:

  • HAL is paying $137 million to buy a portion of CRR's Fracture and Reservoir Diagnostics business. See the PR here.
  • They are keeping their fracture mapping software.
  • They also signed a multi year deal to supply proppant to HAL.

Definition Watch: Proppant. CRR makes proppant. Lots of proppant. So what is proppant?

  • In the simplest terms it is round sand or ceramic particles used to keep fractures created during fracing of a well open (propping them open) to allow oil, gas, or water to better flow to a wellbore. 
  • Roundness and uniformity are key to good flow (conductivity).
  • There are many different types and grades suited to different plays. Basic types are sand, resin coated sand, and ceramics.
  • (CRR) makes several types of ceramic proppant some of which appear to be best suited for deep, hot, high pressure wells (like those found in the Hanyeville Shale) where sand proppant is more likely to be crushed. Crushed proppant is bad in that it allows those fracture close up reducing productivity.
  • They estimate the benefit of ceramic vs normal sand proppant as a 20% increase in initial production and ultimate recoveries.
  • In the Bakken Sahle the IPs are 40% higher with ceramic vs sand.

CRR Authorizes Buyback

  • 2 million shares authorized for repurchase equaling 8% of the current shares out

Conference Call to discuss the deal: today, 10 EST.

 

CRR Tidbits From The Recent  Quarter:

  • Posted record quarterly revenue
  • volume of ceramic proppant delivered in the quarter: 281 mm pounds, up 36% YoY, global demand increase, on track to do 1,100 mm pounds in 2008.... production going full tilt.
  • announced a capacity expansion - adding 20%  or 250 mm pounds per year by 1H10.
  • U.S. up 35% yoy, led by strength in demand from East Texas, North Louisiana, and the Rockies (Bakken showing particular promise).
  • Big success in Russia, up 38% YoY
  • expect prices up in 3Q, just put through price hikes and energy cost surcharges
  • their margins expand as natural gas prices fal.
  • they normally like to hedged 70% on gas prices and were below that level before gas prices fell off and have been hedging down at these levels. 

Valuation: Current trading at 25x this year's earnings and 21x 2009's consensus EPS of $2.87 one could argue it is fully valued and more than fully valued if you look at other oil service companies that trade at 10 to 15x. It appears numbers will continue to rally here and would like to better understand the terms of the deal with HAL with regard to product pricing and margins.

(OII) - I will take a small position in OII calls for a hold into next week specifically for the big storm potential in the name if things get ugly in the Gulf.

 

Odds & Ends

Analyst Watch: Morgan Keegan re-initiates (HK) with an outperform rating.

Housekeeping Watch: Have a great and safe weekend if I don't see you in comments!

102 Responses to “T.G.I.F.B.4.a.L.W.E. + Hurricane Putin + Haynesville Thoughts + CRR”

  1. 1
    bill Says:

    z on vlcc rates

    Read a piece today that said recent vlcc weakness was due to cracks for asian refineries.

    Cracks used to 40 dollars but it recently drop to 20 and they put off imports

    dry rates have weakened and waiting for post olympics rebound

  2. 2
    zman Says:

    Thanks Bill, very green open.

  3. 3
    ddaley Says:

    test

  4. 4
    zman Says:

    It’s on DD, just nobody around before the long weekend.

  5. 5
    tomdavis12 Says:

    Z: Do you have any updated visuals on the GOM action. I seem to like your and Sam’s stuff better than my websites. Not very green for higher prices. Thanks for your response to the consensus view that we will ONLY be oversupplied in NG going forward.

  6. 6
    zman Says:

    Try this site:

    http://tropics.hamweather.com/2008/atlantic/gustav/clir/loop.html

  7. 7
    tomdavis12 Says:

    Z: Thks

  8. 8
    Jason Says:

    Hi Z, A couple of questions: As you’ve said, I can’t imagine wanting to be heavy short gas during the long weekend with something headed into the Gulf. When would the shorts typically cover? Middle of day, end of day?

    How long and to what extent did gas prices spike after Katrina?

  9. 9
    ddaley Says:

    Z,
    Thanks,I was wondering.

    So what is the realistic take on Putin’s threats and cutting off Russian oil to Europe? Another sell the news event?

  10. 10
    Garyinhou Says:

    Everybody have a great weekend! Todays action has caused my holiday weekend to start at 9 Central. Cheers.

  11. 11
    zman Says:

    Jason – some already have, some are doing it now…some will wait til near end of day and I would imagine they cause a close at the high of day.

    Re Katrina, they moved from around $11 to $14 by Novemberish, then started drifting lower.

    Russia routinely cuts off natural gas to europe/ukraine during dead of winter, would not put it past them at all.

    trying to get on CRR call

  12. 12
    zman Says:

    See ya Gary and have a good one, leave town early if it heads more westerly.

  13. 13
    Nicky Says:

    Morning all.

    Peter Beutel made some very interesting comments I thought this morning on CNBC about the oil price. Basically said that as we all already know energy should and would have shot higher on this news 6 weeks back. He then said that the market had now factored in so many bullish things that had NOT happened that it was overpriced and that market action is telling you this market wants to go down. He said if we had been at $80 dollars going into this there may have been room for a lot more upside but thinks it is probably limited here.
    Don’t know if you are around Tater but it certainly looks that way to me. The move off this weeks low is very corrective looking – yes it could go higher but with this pattern it will only be a matter of time before it rolls over again. We could then see a move down which will be the equivalent or bigger that the move from 147 to 111.

  14. 14
    zman Says:

    Peter B is a permabear. Here he is talking about how we’d broken the back of the energy bull back in Jan 2007 (um, not so far) and that we were headed to $20 oil.

    http://transcripts.cnn.com/TRANSCRIPTS/0701/07/cnnitm.01.html

  15. 15
    jsaun14 Says:

    Z-

    What’s you thought on the September COP’s? Hold into the hurricane party?

  16. 16
    Nicky Says:

    I hadn’t read him as a permabear. Earlier this year every time I heard him talk he seemed bullish! But I did agree with the comment about a market being run up on bullish factors that had not come to pass (yet of course!).

  17. 17
    zman Says:

    Nicky – he always seems to be long term bearish when I catch him, lol.

    Re: COP, yes that one and VLO, and TSO through the weekend. I may add to COP as they are cheap anyway to the other majors and would benefit from restrained refining capacity in the Gulf Coast, and more than the other majors were natural gas production to take a hit (say Ihub falls over which I really doubt) …also, I like the thin option spreads there.

  18. 18
    QUARRYMAN Says:

    Hi Z.

    My brother keeps hammering me for a way to play the hurricane threats. He’s very bearish on oil prices (2000 sh DUG)
    I’ve told him to sell 10-20 SEP call contracts and buy them back next week.

    But, while I’m thinking about oil…
    any SEP call trades? You were mentioning the COP calls, can you be more specific?

    Q.

    P.S.- in the past 60 days, I’ve traded VMC several times and playing with a lot of ‘house money’ as you like to say.

  19. 19
    zman Says:

    If you note from the wiki tab, I have 2 positions in E&P left, both OOTM calls (HK and CHK), the NFX is way out of the money holdover that I can’t sell from months ago.

    Refining and Service are next on the list.

    The red in everything but refining today is a little post game sell of starting early after the recent rally we’ve had. Light volumes making for a bit of an exacerbated move in some names. Don’t see a reason to go jump on it.

    Hey Q – long time no chat. Yeah, been looking more at the refiners and those COPs are the $85 September calls.

    Also thinking about taking out some OII calls as a play on any damage (they do subsea inspection and repair work and made a bundle after 2005…that business only tailed off 6 months ago). I don’t think Gus does anything like the damage Kat/Rit/Wilma did but there will be some and I think the refiners are just as vulnerable as they were 3 years ago, hence the buys in that group (but I also think cracks are going to turn higher soon).

  20. 20
    Dman Says:

    Hi Z,

    there’s been a lot of talk lately about how OPEC bumped up their supply recently. I’m not sure exactly when this is supposed to have happened, maybe July? Anyways, Jim Kingsdale has a piece on July & August flows based on a Petrologistics report

    http://www.energyinvestmentstrategies.com/2008/08/23/large-increase-in-opec-production-is-reported/#more-677

    Amongst other thing, it says

    – KSA supplied 9.47 bpd in July versus 9.7 they said they would supply & predicts a slight drop to 9.45 in August.

    – the big OPEC ramp in August is mostly from Iran

    The second point suggests, given Iran’s recent announcement that they are down to 3 tankers floating offshore, that the OPEC flood in August is essentially Iran running down its storage of sour crude.

    With non-OPEC fields all struggling, this hardly seems a bearish case on the supply side. Am I seeing straight on this?

  21. 21
    zman Says:

    Dman – yes, that is my read. Saudi has been trying to talk oil prices lower for I guess about 3 months. At one point even Iran and Venezuela were on board with the plan. When oil finally fell I think it fell faster than they thought. The language has changed from oil should be valued at $100 per barrel (both Ahmed and Hugo) said this within 24 hours of each calling into question whether or not they are indeed the same person viewed from different camera angles. Now they both say OPEC should cut production. OPEC says it sees the potential for rapidly rising inventories. It also still sees growth of close to 1 mm bopd for the planet in 2008 and again in 2009, these numbers have come down from earlier estimates but jive with EIA and IEA thoughts pretty closely. Meanwhile, India will be selling $2,500 cars to the masses of the world which may or may not be a lot of money depending on where you live but when you consider that India has a bigger middle class than the US that’s a lot of spare cars bought for teenagers over there that did not have a car before…demand, demand, demand. Then you have the Sovie/// Russians and the fact that after 10 years of production growth, to levels equaling those of Saudi, volumes are beginning to decline. Then you have all the other stuff that prevents me from seeing sub 100 oil. Mexico, Norway, UK North Sea, costs in Canada, heavying up and souring up of global oil etc.

  22. 22
    zman Says:

    McCain picks Sarah Palin, gov Alaska. Didn’t see that coming.

  23. 23
    Dman Says:

    z- #21 thanks for your analysis.

    I think you’re onto something with the camera angles. You should let CNBC in on that… pretty sure they’d go for it, because on the one had, only half as many bad guys to talk about. But on the other hand, twice as bad in one guy!

  24. 24
    zman Says:

    wow, Palin was runner up for Miss Alaska in
    1984.

  25. 25
    zman Says:

    and her husband works for BP on the North Slope.

  26. 26
    tater Says:

    Morning Nicky and everybody,

    I have a 2 month ban on CNBC going (when the market is open). I find them to be distracting at best. The huge swings in oil of last week have caused me to step to the sidelines and just watch, except for making small plays on some TA indicated trades. I tend to agree with your analysis about oil possibly rolling over but…
    1. I believe that the oil market really is manipulated and controlled by behind the scenes players. I have no clue what their plans are. Not trying to get into an argument, I just believe that big money has always controlled things, even before Julius and Alexander. Why should today be different?
    2. Because of #1, I feel it best to wait until they show their hand and jump in behind them. They are big elephants, powerful and sometimes very fast, but far from silent.
    3. We are at one of those moments when they will soon have to show us their plans, technically speaking. I feel that I can be patient, especially since it’s a beautiful day outside and the Harley 105th Anniversary has over 100,000 bikes outside my house that demand attention. There will be more than enough of a move left for me to make some $ on. I don’t have to be first.
    4. I am inclined to believe that the general market is going to have a real problem in Sept, the kind that makes the proverbial tide sink all ships, so I am in all cash with some small shorts, ready to add to them once the big shake-out occurs first. (And ready to get long if my predictions of gloom are wrong).
    5. Back to TA, I feel that the volatile movements of late in oil foreshadow a big move. Again, anything about which direction that move will be would just be a guess at this point, but I tend to believe that whatever makes the most money for the big boys in the long run is the direction that it will take. (Down is my guess, as we need to repeat the past and stop movements such as T. Boone’s quest to purge his soul before he dies). The “real” players are countries like the Kingdom of Saud. They do not want to see the US off the oil teat.
    6. Seems convoluted to believe the general market is going to turd and oil is going to fall, but I feel that I am very close to the “heartbeat of America” and they are out of cash, rebate checks or not, and so is the Fed. (Oh no they aren’t, we’ll just print more!). Time to pay the piper.

  27. 27
    jsaun14 Says:

    I like this bit on her…Not a very political piece.

    http://en.wikipedia.org/wiki/Sarah_Palin

  28. 28
    zman Says:

    Tater – especially agree #2, #3. Not that I’d use the word manipulation (I call it sentiment). There are times when the same news matters or does not and you can tell the fix is in. We seem to be coming out of one on the bear side and into a period where news does matter. Not to say we rebound from here but stories are getting a little more traction with price. So we either U back up or trade sideways and then further down. I don’t see a big U up given the economy and some concerns that inventories are going to get bloated for everything but coal. But I don’t see a crash in prices either as OPEC and Russia will come into play more as prices fall and then all the stuff in 21.

  29. 29
    zman Says:

    Ya know, given that we are in true buy the storm track sell the landfall territory, I may take half of those TSO $20’s back off the table today. Tidy little profit to my original 30 cent entry with the bid play about at 60 to 65.

  30. 30
    tater Says:

    Nice analysis in #21. I was so busy falling in love with the sound of my own voice that I missed your piece. Once again, I gladly leave the thinking to the thinkers. Time to fire up the bike. Have a great weekend.

  31. 31
    Fiveanddimer Says:

    Tater, re your comments in #26, you have earned my admiration. I agree with what your saying. And if you think the oil market is manipulated by the “Big Money,” then the precious metals markets are in their hip pocket. But as you wisely say, eventually the piper must be paid. I’ll continue to bury gold in the dead of night in the backyard.

  32. 32
    mahout Says:

    Nicky:

    Your #84 Yesterday:
    (As long as this is still August) Thanks, that is the best synopsis of the Olympics I have seen. Appreciate the accurate reporting. As for me, I got tired of the 17,000 swimming and diving events, but I did enjoy Misty May!

    FULL DISCLOSURE: I do not swim.
    I only watch basketball, football, baseball, golf, pool(billiards that is) and Misty May.

    Back to bidness:

    Using perfectly good logic I grabbed a little TSO this morning. (Wish I knew how to do options. Maybe someday). But now I’m getting worried. Here’s how I figured it:

    I took the high and the low for the last 2 years ( which was also the high and the low for the last 4 years) and averaged them. 65.98 and 14.63 = 40.30.
    I then estimated the mean price, by eye, for the last 4 years.
    Which I figured to be about 35.00. Being conservative, I chose the lower number, 35.00 and subtracted the current price at that moment of 18.58 and got an attic of 11.42 and took half of that as my
    target price. Voila! 24.29 target price.
    I then bot it at 18.33.

    I know I was being very scientific (I used math and everything) but somehow I think there might be a better way.
    But if it works do you think it’s patentable?

  33. 33
    tomdavis12 Says:

    Z: I would have expected a little more strength today with prices of CL & NG. Do you think you can still buy today and sell Tues? I bot a little OII @ 62.36

  34. 34
    zman Says:

    Tom – In past big storms it has worked better to buy early and sell early in the E&P names and service and to hold the refiners. I hold the few E&Ps for other reasons. Thinking about OII now. I suspect we see some greening of the group later today with more strength in products taking oil higher. If the storm does unexpected things like goes west or breaks up bad on the yucatan we will gap lower (oil and group) on Tuesday.

  35. 35
    davidjeso Says:

    Z – I just checked wunderground.com re: Gustav. There are some opinions that would take it directly toward N.O. but then it stalled offshore and moves west. In looking at the offshore rig maps, that would take it right through the heart of nat. gas production in the gulf. If it’s at a Cat 3 or 4 and follows that path (which I know has a lot of uncertainty), wouldn’t we see quite a bit of damage, with a spike in nat gas prices? I ask primarily b/c I hold Sept. $40 UNG calls that are slightly underwater right now…just trying to figure a strategy for the long weekend.

  36. 36
    zman Says:

    david – yes, but I would not fall in love beyond the initial pop unless you see a litany of press releases and lost rig reports. One thing that always happens is that the gas traders assume they know before they really know and it takes time (days) to get people back out there to find rigs and assess damage. Often gas moves on the hype and sells on the facts as soon as the spacing between those PRs starts to lengthen. That’s pretty short term stuff but you were asking for the weekend, right?

  37. 37
    Nicky Says:

    Broader market – good support at 1285, and then between 1274 – 79. We appear to be in a triangle consolidation pattern – possibly now in E down which could take us to around 11400 on the Dow and 1275 on the SPX.
    We need to see a breakout – either below 11300 or above 11850 to determine the next move (I favor the upside) but those are the lines in the sand. Equivalent levels on the SPX are 1260 and 1313.

  38. 38
    davidjeso Says:

    Z – yes, this weekend. Should be an interesting open on Tuesday, one way or the other.

  39. 39
    zman Says:

    group trying to green but agree Tuesday open to be very interesting.

    Nicky, thanks for the broad mkt levels. I take it Hanna won’t be a bother to you?

  40. 40
    Nicky Says:

    Z – wondering whether we see a lot of the movement played out in the futures market Sunday night/Monday in which case the event may be open by the time the pits opens on Tuesday?

  41. 41
    Nicky Says:

    Z – Hanna is a complete mystery right now! All I can see is her off the Bahamas as of Wednesday and then the computer models are in complete disarray as to where she goes from there!

  42. 42
    Nicky Says:

    sorry 40 should have said over rather than open!

  43. 43
    tomdavis12 Says:

    Z: I assume that TS does not sell tubing to GOM. With X starting to show some support, Maybe tubing could benefit from GUS and the next few spinners.

  44. 44
    Wyoming Says:

    accuweather has Hanna curling to South Fla.

  45. 45
    Wyoming Says:

    Tom,

    Tubing is tubing, we get it from whoever has it as supply is tight. Right now we are using off spec China pipe.

  46. 46
    tomdavis12 Says:

    Wyoming: Isn’t that risky? I thought deep water pipe need to be high spec.

  47. 47
    Wyoming Says:

    No, all pipe conforms to API (American Petroleum Institute). They have regulations/ recommend practices for other materials too.

    As an Engineer we design the strengths of the pipe (casing/tubing) that we will use. Diameters (Out and In), environment of fluids (ie. H2S/CO2). We place the order to the supplier who sources it from various manufacturers for various costs. When the broker can not fins API spec pipe he asks if off spec (cheap available China pipe) is acceptable.

    Hard to type what I want to say, tell me if this explains it.

  48. 48
    Wyoming Says:

    Oil pipe is a pain for steel guys to make compared to their regular mill runs but profitable anyway. oilfield API cement is same issue too.

  49. 49
    tomdavis12 Says:

    Wyoming: Thanks for your explanation. Very helpful. Do any of the tubing companies seem cheap to you? Can you say?

  50. 50
    Wyoming Says:

    Oh, deepwater is kind of a giggle to us. The wells are way easy to drill, not much below the mudline. The cost and trickery is getting to the sea floor. CAM, FTI, DRQ, OII have a lot of high tech stuff required.

    Not pipe.

  51. 51
    Wyoming Says:

    Tom,

    Z is way better at judging companies for CF, Rev etc..

    I took a little off of WH today, nice gain and it is thin.

    As I said, MT, TS, X has oilfield steel as a way small portion of revenue.

    Did not mean to slight DO, RIG, and ATW either.

    Of course all this means bupkis when the knife is falling.

  52. 52
    zman Says:

    Grinder of a day, going to lunch. Will have my blackberry on me if anything interesting happens or someone has a question and I’ll get back to you. Have a great long weekend.

  53. 53
    Nicky Says:

    Oil gone negative – not sure if that is interesting or not Z.

  54. 54
    Nicky Says:

    Okay CNBC reporting that a handful of traders eyeing a track that would go more north and miss the main rigs. Also… a natural gas speculator has taken a very large position which would equate to oil seeing a pop of $30 bucks.

  55. 55
    md Says:

    For the novice reader
    “The economics are stellar with average EURs in the core of the play estimated by CHK to be about 6.5 Bcfe and a completed well cost that will approach $6.5 million in the near future.”
    Please elaborate,,, how does this compare to Baaken or conventional sites.
    When is Marcellus and/or HS expected to come onstream.
    Txs for your explanations

    On another note I visited Matt Simmons webiste for 1st time. Is there substance to his prognostications about massive need to repair the oil rig nfrastructure at mega trillion$$

  56. 56
    ram Says:

    ZMAN – When did a ZTRADE come through for selling SWN? Not in WIKI.

  57. 57
    ram Says:

    HAPPY ANNIVERSARY ZMAN!

  58. 58
    Wyoming Says:

    md

    There are several factors for the “stellar” economics for CHK (they are unique):

    1. PXP will be covering some of their costs on their working interest.
    2. PXP is also a partner, they will be payingtheir share and when you factor in a CHK owned rig you will have qs example CHK paying 250k/1mm in cost for a 50% working interest.
    3. I believe that the HS is relatively dry and has a lot of pressure (flows naturally). This means no compression to shove the gas down a transmission line. Also, I have not heard of a huge water yield (disposal costs). Nutshell, low LOE (lease Operating Expense).

    Bakken, not an expert, but to hear our guys, they are averaging ~200 bopd. Everyone compares rates to EOG Parshall field which has boomers. Use the factor of 6 mcf/bbl for gas to oil equivalent, and you get a HS ~2500 BOEPD vs Bakken 200 BOPD for both around $6.5MM, excluding the CHK $ goodies I mentioned above.

    Probably onstream already, the area is close to existing production and pipelines should be near by. If I know CHK like the Barnett, they will have superior placement of their production in the pipeline (ie. they have priority over competitor production should they need to compress/produce more).

    This is my casual observations, somebody closer to the projects could argue and I would not have any facts to support what I have said.

    Marcellus, no idea but that play looks to be mired from my observations. Hardly gets a mention anymore from the E&P’s or this site for that matter. HS and Bakken appears to be the focus more so.

  59. 59
    Wyoming Says:

    Expand on #2, this is for services owned and provided by CHK. All other cost will be according to Gross/Net as would be expected from partners.

  60. 60
    zman Says:

    Ram – good catch, the SWNIH is on there now, thanks.

  61. 61
    Wyoming Says:

    The 6 BOE conversion can be found in Wikipedia under

    Barrel of oil equivalent

  62. 62
    md Says:

    A blast from the past
    Katrina Aug.29 /05
    rita Sept.24/05

    CL HU-CL NG
    Jul 25 59 12.67 7.28
    Aug. 29 67 19.35 10.85
    Aug. 31 69 40.87 11.47
    Sep. 9 64 18.23 11.26
    Sep 28 66 32 13.90
    Oct.21 61 8.24 12.87

  63. 63
    Bleemus Says:

    Taking off for the day. Holding TSO and COP through weekend and all other energy option plays are off the table. Rough hedge put on with a few DUG calls as well.

    Everyone have a safe and fun weekend!

  64. 64
    ellwodo Says:

    Are all hurricane models created equal?When I look at the Hamm weather site and see all the projected tracks,are there ones with more credibility based on past performance?

  65. 65
    zman Says:

    Wyoming – thanks for covering for me re 58!

    Let me add on the comparison that these are much bigger wells than the closes comp in shales of the Barnett (in terms of extent of the play) for prices that are not that much higher. The early wells are full of science dollars (around $8 mm) but that will come down in time to at least $6.5 mm per well. The EUR, estimate ultimate recovery or economic ultimate recover of 6.5 Bcfe per well will likely go up, they always have in shales for CHK in the past. So your pure drilling finding costs come to about $1 / Mcfe vs other non conventional plays around 2.50 to 3.00/Mcfe. Non-conventional finding costs often but not always higher. You simply have more hydrocarbons in place here per section. You don’t need seismic as much as you need the generally right acreage and there is a lot of that. You do need a way to drill it (supplies) and even more important you need transportation out of the area or you will be sitting on lots of completed but shut in wells.

    HS best guess on volumes as some now but not a lot before late 2009, then you are looking at an add of 1 to 1.5 Bcfgpd.

    Marcellus geography is very difficult (hilly) and will be slower to develop, I don’t see the play adding much before 2011.

    Re Matt Simons – he is generally onto things before the rest of us although many of his topics are hard to prove up until years have passed and then everyone say, oh, yeah, I see that now.

  66. 66
    zman Says:

    ellwo – they all weigh different variables slightly differently…not sure if one rules the others or if they just work better from time to time. In other words, don’t know if there is a super model vs the rest. There are a lot more models than the 6 or 7 shown, if you click the link to add models you can get a whole mess o spaghetti.

  67. 67
    md Says:

    Wyoming
    I’m familiar with 6×5.8)BTU multiple for conversion. Is there any rule of thumb for what a 6 bcfe well would produce in BCFPD.

  68. 68
    md Says:

    typo correction
    Wyoming
    I’m familiar with 6×(5.8)BTU multiple for conversion. Is there any rule of thumb for what a 6 bcfe well would produce in BCFPD.

  69. 69
    zman Says:

    md – Its going to vary from place to place and type of play from type of play. Porosity and permeability, method of completion. You can have a wide range of production depending what the well is producing. The Haynesville wells for instance for CHK are producing initially at rates in the mid teens MMcfpd and CHK thinks they are about 6.5 Bcfe in size. You can with some hope of being accurate scale that up or down to other wells in the same play but not so much when you start looking at a Woodford well or say, a conventional well on the Shell in the Gomex where you might have huge rate, 25 Bcfe but be spent in 4 years. These shale wells will have productive lives of 20 or 30 years but you will see asymptotic decline rates in the first 1 month through probably 24 to 36 months before it flattens out and produces a little bit of gas for the rest of its life.

  70. 70
    Wyoming Says:

    Z,
    Thanks for the compliment, I will still go to cash next time you go on vacation.

    md,

    If I understand your question, can’t be done. To take the reserves expressed in bbl or BOE and are dependent on the decline of daily production. Some of the decline is exponential, linear regression and a whole lot of other terms I slept through in school. Wells in a field will differ individually, fields in a play will differ and so on.

    Tell me if I got it right.

  71. 71
    zman Says:

    Not going to sell my TSO calls before the weekend. Refiners the only segment showing much sign of life (though not VLO or the Majors).

    Nicky as per your earlier, yep pretty surprised to see a flat close on crude with products off worse. At this moment nothing matters but Gustav and the tracks. Monday electronic session will provide interesting insight on how traders think about the tracks pre Tuesday open.

  72. 72
    zman Says:

    Odd moves down in names like NOV and RIG and SLB but volumes are light and seem to be just falling into the close with little attention paid to them. I may still take that bite of OII but only as a WILDZTRADE meaning high high risk.

  73. 73
    zman Says:

    WILDZTRADE: Added October OII $70 Calls for $1.55 as a pure play on damage potential from the hurricane.

  74. 74
    mahout Says:

    Wyoming #58 and #59:
    And Z: Tsunami theory comments and#65:

    Thanks, getting the picture now. Wow, why shouldn’t we all buy more CHK HK and GMXR before the weekend? Perhaps better you don’t answer that. I don’t want to know any negatives right now.

  75. 75
    zman Says:

    From Accuweather:

    http://www.accuweather.com/news-story.asp?partner=accuweather&traveler=0&article=0

  76. 76
    Wyoming Says:

    mahout,

    Learned long time ago not to fight mr. market on energy names. It does not make sense but it is the most hated sector to be loved.

    Falling knife. When it turns around I wonder why I did not try and catch it.

    I won’t bring up conspiracy theories but look at oil pre-election 2006 fight before dems took over the house and senate.

  77. 77
    md Says:

    Z and Wyo
    TXs for the education. Now I know how little I know.
    “HS best guess on volumes as some now but not a lot before late 2009, then you are looking at an add of 1 to 1.5 Bcfgpd. ”
    Do you mean for CHK at HS or for all players in HS.

  78. 78
    Wyoming Says:

    Someone did some last minute hurricane shopping on WH at the close..

  79. 79
    zman Says:

    All of the players in the HS, and it is just a somewhat educated guess though the play is less sensitive to gas prices than some of the other hot shales. I have a hard time seeing how they get more than 3.0 Bcfgpd out of there (the Hayneville/Bossier only and not the Cotton Valley included) by the end of 2010. I saw Pickering’s piece, who I have a world of respect for on the Haynesville yesterday and while I have not come to the same number conclusions on some of their points, their deliverability number of 2.5 Bcfgpd suits me just fine for the end of 2010. Note they are more conservative than I thought but they are also flush with interns ready to put 10 key to spreadsheet, lol. So I defer to them. At that point in time I think the Barnett will be slowing down quite a bit – see EOG comments from the 2Q and then disregard comments made by Aubrey days later because he is truly in the sweet spot of the Barnett play.

    I’ll have a big gas production update slideshow out for Monday / Tuesday.

  80. 80
    md Says:

    Would it be possible and of any use to show on E&P the acreage X $ per acre held by player on HS and other major plays inc. marc and woodford as you have done on Baaken.

    You plugged in a value of approx. $25000 per HS acre at GMXR. Would that apply to the others players.

  81. 81
    zman Says:

    md – If you go to the E&P tab at upper left and scroll down about half way, you can see a list of Haynesville players listed by exposure to the Haynesville vs their current booked reserves. The acreage changes every day but it should be pretty close. I would not want to drop 25,000 per acre on their numbers as a raw measure since some guys are in and some are out of the core of the play. Out of the core can be had for 2 to 5,000 per acre now so that would inflate them. Instead, what I did was to make an assumption about estimated recovery per well, well spacing, royalty burden and then say that if a certain % of their acreage is prospective for haynesville (which is going to be very conservative) than here is the multiple of reserves vs their current bookings that the play means to them. In this way, you can see that 38,000 acres for GMXR is worth a lot more to them in terms of their current booked reserves than CHK’s much larger position is to CHK. This metric gives you an idea of what the play means to them. But I could do what you are saying as well since I have the acreage data.

  82. 82
    Wyoming Says:

    Sure wish Sambone was around to explain Hanna.

  83. 83
    md Says:

    If you could inc that it’d be great.
    So how does one know how many of CHK etc. is core and outside the core.

    Have a great LD weekend to all

  84. 84
    zman Says:

    VISIBLE IMAGERY HAS OCCASIONALLY REVEALED AN EYE TRYING TO
    FORM…BUT THAT FEATURE HAS NOT BEEN PERSISTENT.
    NEVERTHELESS…THE CYCLONE CONTINUES TO INCREASE IN
    ORGANIZATION…WITH SOLID CONVECTIVE BANDS AND UPPER-LEVEL OUTFLOW
    THAT IS WELL-DEVELOPED IN ALL QUADRANTS. THE UNDERLYING WATERS OF
    THE NORTHWESTERN CARIBBEAN SEA ARE QUITE WARM…AND TO SOME DEPTH
    BENEATH THE SURFACE…SO THERE ARE NO APPARENT IMPEDIMENTS TO
    ADDITIONAL STRENGTHENING BEFORE GUSTAV REACHES WESTERN CUBA. EVEN
    RAPID INTENSIFICATION IS POSSIBLE…AS SUPPORTED BY THE LATEST
    SHIPS-BASED RAPID INTENSIFICATION INDEX THAT SHOWS A 35 PERCENT
    CHANCE OF AN INTENSITY INCREASE OF 30 KT OR MORE DURING THE NEXT 24
    HOURS…SO IT IS POSSIBLE THAT GUSTAV COULD REACH MAJOR HURRICANE
    STATUS PRIOR TO CROSSING WESTERN CUBA. PASSAGE OVER CUBA WILL NOT
    LIKELY HAVE MUCH IMPACT ON THE STORM’S STRENGTH…AND ALL GUIDANCE
    FORECASTS A STRENGTHENING TREND OVER THE SOUTHERN GULF…WITH
    SLIGHT WEAKENING POSSIBLE IN THE NORTHERN GULF. THE OFFICIAL
    FORECAST AGAIN CALLS FOR A MAJOR HURRICANE OVER THE GULF…AND
    DESPITE THE WEAKENING IMPLIED BY THE LESSER INTENSITY OVER LAND AT
    96 HOURS…GUSTAV COULD MAKE FINAL LANDFALL ALONG SOME PORTION OF
    THE NORTHERN GULF COAST AS A MAJOR HURRICANE.

  85. 85
    zman Says:

    md – will do. As to your last question its all anecdotal at present as we are still early in the play although this one will develop faster than any Shale has to date. CHK has the most experience here having worked for over 2 years on it (2 years prior to disclosure back in March) so when they say core I don’t doubt them however the area known as core is not well defined to me at present. HK, GDP, CHK, GMXR, even tiny Cubic appear to be in the heart of the play but then it gets harder to tell. Only time will tell. PVA messing around near the Tx/La border appears to be in something less favorable than what HK has seen for instance.

  86. 86
    Nicky Says:

    Last comment from me re energy prior to weekend but…looking at the chart I can make a very good case that we are about to explode higher in iii of of 2C. Target area would still be around 125 or higher. Nat gas setting up to do the same – target area 9.5.

  87. 87
    Wyoming Says:

    Thanks Z but I was looking at Hanna. Accuweathr shows her heading to Middle Cuba. Also, talks about Ike having formed in their comment too.

    Didn’t Katrina cut across Fla?

  88. 88
    zman Says:

    Katrina track:

    http://weather.unisys.com/hurricane/atlantic/2005/KATRINA/track.gif

  89. 89
    zman Says:

    Goodnight and have a good weekend gang.

  90. 90
    zman Says:

    AAA expects labor day weekend driving to be down 1%. 2007 and 2006 saw demand of about 9.6 mm barrels per day of gasoline in the U.S.

  91. 91
    zman Says:

    Gus is a Cat 2 now, with a 4 expected in the Gomex and a 3 at landfall in Louisiana. Those last 2 numbers are up from last projection.

    http://tropics.hamweather.com/2008/atlantic/gustav/trackmap_zoom1.html

  92. 92
    zman Says:

    Scratch that, now Cat 3 as per NHC at 6 EST

    DATA FROM AN AIR FORCE RECONNAISSANCE AIRCRAFT INDICATE THAT
    GUSTAV CONTINUES TO RAPIDLY STRENGTHEN AND NOW HAS MAXIMUM WINDS
    NEAR 115 MPH…185 KM/HR WITH HIGHER GUSTS. THIS MAKES GUSTAV A
    DANGEROUS CATEGORY THREE HURRICANE ON THE SAFFIR-SIMPSON HURRICANE
    SCALE…THE SECOND MAJOR HURRICANE OF THE 2008 ATLANTIC HURRICANE
    SEASON.

  93. 93
    zman Says:

    Pressure now down to 955 MB, very fast drop. Max sustained winds now 120 mph. Hurricane force winds now extend 60 miles from center, that is double from last night so it is growing in size as well as strengthening.

  94. 94
    isleworth Says:

    Z – Check out http://www.myfoxhurricane.com

  95. 95
    zman Says:

    Thanks Isle, good site. Just added it to the weather tab.

  96. 96
    ellwodo Says:

    HK filed several Form 4s Friday showing Wilson had sold 250,000 shares. Granted, he has over 2 million left, but it’s quite a contrast with Aubrey. Despite the rumors of great wells, I’m not going to be holding my breath for significant good news from the company.To me this is a sell signal. Am I just over reacting?

  97. 97
    crysball Says:

    US rig count tops 2,000 first time in 23 years

    Oil & Gas Journal

    By OGJ editors

    HOUSTON, Aug. 29 — There were 2,031 rotary rigs working in the US the week ended Aug. 29, up 33 from the previous week and the first time the count has topped 2,000 since Mar. 8, 1985, when 2,011 units were drilling, Baker Hughes Inc. reported.

    This week’s count is the largest since Mar. 1, 1985, when there were 2,143 rotary rigs working. The latest count is up from 1,829 during the same period a year ago. Land operations accounted for the bulk of this week’s count, up by 34 to 1,938 active units. Offshore drilling increased by 2 rigs to 65 in the Gulf of Mexico and 70 in US waters overall. That was offset by the decline of 3 rigs to 23 working inland waters.

    Of the rigs now working, the number drilling for oil increased by 21 to 416 while those drilling for natural gas increased by 12 to 1,606. Nine rigs were unclassified. Directional drilling decreased by 1 rig to 388. Horizontal drilling increased by 23 to 626.

    Among the major producing states, the Texas rig count jumped by 27 units to 958 rotary rigs drilling. New Mexico gained 14 to 97. Oklahoma increased by 3 to 215. Wyoming was up 2 to 76. Louisiana’s rig count fell by 11 to 182. Colorado was down 1 to 116. Unchanged were North Dakota at 74 rigs; Arkansas, 59; California, 51; and Alaska, 9.

    Canada’s rig count was down by 21 to 436 rotary units this week, up from 305 in the same period a year ago.

  98. 98
    crysball Says:

    Truck stop operators say diesel fuel sales volumes decline

    Oil & Gas Journal

    Nick Snow
    Washington Editor

    WASHINGTON, DC, Aug. 29 — Diesel fuel sales have declined at US truck stops in response to higher prices, a national association of truck stop and travel plaza operators reported.

    A survey of its 1,100 members also showed that gasoline purchases increased slightly, with a huge shift from premium and midgrade to regular, NATSO said. The Alexandria, Va.,-based trade association was founded in 1960 as the National Association of Truck Stop Operators.

    NATSO said the survey found that the average monthly diesel sales volume fell 5.2% year-to-year to 906,700 gal in June and 4.5% to 898,109 gal in July. During that period, it noted, data compiled by Oil Price Information Service showed that truckers paid an average $1.74/gal more in June and $1.76/gal more in July than a year earlier.

    The declines began after volumes began 2008 with strong growth, NATSO said. Sales were 6% higher year-to-year in January and February, 2.5% lower in March and 2% higher in April before falling sharply (5.8%) in May, it indicated.

    Meanwhile, NATSO members reported that gasoline sales volumes at their truck stops grew an average 1.5% year-to-year in June and 1.8% in July. Premium gasoline sales fell 17% in June and 19% in July, while mid-grade gasoline sales declined nearly 13% in June and 16% in July, the association said.

    It said OPIS data show gasoline prices were $1.03/gal higher year-to-year in June and $1.09/gal higher in July.

    The US Energy Information Administration reported Aug. 25 that retail diesel fuel prices fell for a sixth consecutive week to an average $4.145/gal nationwide but remained $1.282/gal higher than their level a year earlier.

  99. 99
    zman Says:

    Ellwo – I don’t think it is a sell signal. I’ll put why I think that in the weekend post.

  100. 100
    ellwodo Says:

    Thanks.

  101. 101
    crysball Says:

    Gustav Path Includes More, Bigger Oil, Gas Gulf Platforms
    by Brian Baskin Dow Jones Newswires Friday, August 29, 2008

    NEW YORK (Dow Jones Newswires), August 29, 2008

    Tropical Storm Gustav will have more and bigger offshore energy targets to hit than the 2005 hurricanes did, should the storm stick to its projected path through the central Gulf of Mexico.

    In 2005, only two platforms produced more than 100,000 barrels a day; this summer, six are producing at that level or are preparing to do so. Since 2005, oil and gas production has increasingly shifted to deeper water off the coast of Louisiana, with a handful of giant platforms generating volumes once produced by dozens of small, shallow-water facilities.

    Related Pictures

    Tropical Storm Gustav
    (Click to Enlarge)

    The industry has had two relatively quiet hurricane seasons since the devastation caused by Hurricanes Katrina and Rita in 2005. The two hurricanes damaged 75% of offshore platforms and resulted in the shutting in of 103 million barrels of oil and 610 billion cubic feet of gas production, according to the U.S. Energy Information Administration.

    Drillers and producers have attempted to shore up their infrastructure to prevent similarly widespread damage from the next major hurricane to sweep through the Gulf of Mexico. But with Gustav projected to pass directly through the Gulf’s main production zone early next week, potentially as a Category 4 hurricane, there are no guarantees. While the Gulf is layered with thousands of platforms and miles of pipeline, a handful are responsible for the bulk of production, and will be most closely watched in a storm.

    “There are a lot of things in the industry that have improved since the ’04 and ’05 seasons, but at the end of the day, it’s going to be a question of how destructive storms are and how powerful they are when they go through the Gulf,” said David Dismukes, associate executive director of the Center for Energy Studies at Louisiana State University.

    All large producers have said they are evacuating some staff, with a few, including Anadarko Petroleum Corp., announcing that they will completely shut down their offshore operations until after Gustav passes.

    Memory Of Mars

    The wreckage of Royal Dutch Shell PLC’s Mars platform was one of the most widely disseminated images of Hurricane Katrina’s aftermath. The platform at the time produced about 150,000 barrels a day, more oil than any other facility in the Gulf. Neighboring Ursa, also operated by Shell, produces around 100,000 barrels a day.

    BP PLC is in the process of ramping ap production at Thunder Horse, its 250,000 barrels a day platform. At its peak, Thunder Horse will be responsible for about 15% of offshore oil production. Thunder Horse started listing after being hit by Hurricane Dennis in 2005, delaying its start by three years.

    BP’s platform is the largest of a wave of major new projects to set up in the Gulf in the last year. The British oil major started production at its 200,000 barrel-a-day Atlantis platform in 2007, while Chevron Corp. has installed its 125,000 barrel-a-day Tahiti platform at its offshore location and is preparing to start production later this year. Shell’s Perdido platform was recently installed in the Gulf, and will produce 100,000 barrels of oil a day around 2010.

    The arrival of the giant platforms masks the fact that oil production has dropped 7% since 2005, to about 1.4 million barrels a day.

    Natural Gas Production Concentrated

    Natural gas production is also increasingly concentrated among a few platforms, though total output from the Gulf has dropped off sharply in recent years. Anadarko’s Independence Hub is by far the largest, capable of gathering 1 billion cubic feet of gas a day, or 12% of U.S. offshore gas production, from eight outlying fields.

    Katrina and Rita caused as much damage below the surface as above. The storms broke 17 drilling rigs free from their moorings, and the “wandering rigs” damaged underwater pipelines around the Gulf. Much of the production that was still down months after the hurricanes was lost due to damaged pipelines, not platforms.

    BP’s Mardi Gras pipeline system links Thunder Horse and Atlantis to shore, while Enterprise Product Partners operates the Cameron Highway pipeline system, which links production from seven deepwater platforms to Texas refineries. Shell operates the Mars and Amberjack pipelines to bring oil from its platforms to Louisiana.

    Drillers say they have upgraded mooring systems to reduce the chance of another major hurricane creating more wandering rigs. The industry worked with government regulators to draft stricter requirements for all types of offshore facilities. Pipeline operators are able to do little to protect against underwater mudslides caused by hurricanes, however.

    “Noble (and the other drillers) made changes and upgrades to many deepwater units following Katrina and Rita,” Noble Corp. spokesman John Breed said in an email. “In our case, we increased the moorings on (three rigs) from 9 to 12 and on (a fourth) from its original design calling for 12 moorings to 16.”

    But Gustav will be the first test since the 2005 hurricane season for both the drillers and the platform owners

  102. 102
    opiate withdrawal Says:

    opiate withdrawal

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