Market Sentiment Watch: China's 2Q12 GDP came out at 7.6% overnight, in line with expectations prompting a modest rally as futures breath a sigh of relief. Moody's downgraded Italy after the bell yesterday but that's hardly surprising. In the Statesn, JPM is back in the headlines adding to the renewed sense of distrust investors have in the financials. And in energyland, the ongoing mark to market season prior to 2Q12 reporting season is predictably seeing those cut price targets and maintained ratings. We continue to slowly add to select positions on weakness mixed with bouts of hand sittingas we seek out value and study up while the market goes thrrought the process of sorting itself out. In today's post please find comments on natural gas storage (continued progress) and on another financially levered beat down and unloved natural gas weighted name.
- PPI came in at +0.1% headline and 0.2% core vs expectations of -0.2% and +0.2% respectively,
- We get consumer sentiment at 9:55 am EST (F = 73, last read was 73.2)
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Natural Gas Inventory Review
- Stuff We Care About Today – XCO, SSN
- Odds & Ends
Please click the link right below this to
ZMT (Zman Medium Term portfolio):
- Yesterday’s Trades: None
ZLT (Zman Long Term portfolio)
- Yesterday’s Trades: None
Crude oil oscialled with the equity markets and inversely to the dollar to end the day up $0.27 at $86.08 yesterday, reversing an early selloff along with equities. This morning crude is trading around $87.
- Iran Watch: The U.S. tightened sanctions on Iran again late yesterday by targeting front companies and indentifying a number of ships that have been renamed by Iran in an attempt to circument prior limits.
Natural gas fell after invnetories missed a consensus number that was simply too low before rebounding to close the day up two pennies at $2.87 yesterday. Natural gas is behaving a bit more predictably now than it has been in recent memory. I still think we will be weather tied but the erosion of the storage overhang has to be putting fear in the minds of shorts about a record that isn't all that bigger than last year's peak for storage and, with demand at record highs, leaving them to ask the question "then what". More in the next sections. This morning gas is trading flat.
Natural Gas Storage Review:
The storage overhang fell from 573 Bcf over the 5 year average last week to 516 Bcf over it this week. Flatter slope.
Cumulative injections for the season to date are now running a whopping 3.0 Bcfgpd behind the five year average. This is up from 2.7 Bcfgpd through last week and the highest level of the season so far. There's a new chart (i)below showing this trend. This is likely to moderate some due to this week's milder weather in next week's report and we are not going to see a a record low injection next week but it should still be on the low side of average by probably 10 to 20 Bcf.
Storage is now 249 Bcf below the 2009 level, down from 306 Bcf last week. The chase to that level gets a bit more difficult from here on out as the summer of 2009 got pretty warm. 2009 is important since it represents the top end of the range on the envelope chart (A) below.
Stuff We Care About Today
XCO Book Report Updated ~ Part of my ongoing series "I've Fallen, I'm Gassy, I'm Leveraged, and I Can't Get Up … Or Can I?"
Others in this group include KWK, SD, and to a certain extent PVA. I find the beaten down by leverage fears and weak gas prices some of the most rewarding names during a natural gas price recovery. Just some more food for thought at the moment and I'll have a refereshed look a KWK out next week but here are some basic updated comments on XCO. An end of year write up with more of XCO''s history and assets can be seen here.
- They are extremely gassy with natural gas making up 98% of 1Q volumes. Volumes come from the Haynesville and the Marcellus, and to a much lessor extent the Permian (Cline and Wolfcamp)
- Their realizations are very closely tied to average natural gas spot prices.
- They are not rapidly getting oilier although they do have oil plays they are very late to the liquids party
- They are highly leveraged and it has impacted their plans
- 58% net debt to cap
- Capex constrained by their debt but also by choice. In April, like we have seen with other gassy players, their borrowing base was cut from $1.6 B to $1.4 B (well telegraphed by management) and as of the end of April they essentially had $1.1 B outstanding on that line.
- They are within their debt covenants at 3.3x debt to trailing twelve months EBITDA
- They have $183 mm in cash, most of that restricted cash and they have been slowly paying down debt.
- They remain highly flexible on the rig count under the current weak natural gas price regime.
- Their budget for the year has already been reduced (due to weak natural gas prices and the lower borrowing base) from an early expectation of $710 mm to $470 mm at present.
- They spent 162 mm in 1Q so cash on the balance sheet, borrowing availability (about $200 mm) and EBITDA of, according to the Street about $330 mm for the last 9 months of the year …
- …should easily handle the remaininig $307 mm of the 2012 budget.
- And they are expecting to sell off chunks of non core producing assets and potentially some of their midstream assets while looking into making acquisitions in oil prone basins.
- This budget will allow them to limp along this year until natural gas prices improve but they are now determined to keep spending within cash flow.
- Meanwhile, they are cutting cost
- Operating costs are falling due to a concerted cost cutting program, you can see part of that effect in the table below.
- and Drilling and completion costs are fall as well as other operators flee the gas plays … note that not cutting and running on the Haynesville has allowed them to cut CWC from $9.5 mm at YE11 to an expected $8.0 mm later this year.
- Insider Buying – seeing recent buying at the lows.
- Upcoming events: 2Q results 7/31/12, could see a midstream monetization announcemt. They will be moving to 3 stream reporting to break out their NGL production.
- Nutshell: These guys would obviously benefit from higher natural gas prices. Looking at the table below in the EBITDA section and the production section, one can easily see that in a better gas price environment they would crank out some serious cash flow. Right now, despite the drop in the stock price, the high debt level and low gas prices have prompted them to repeatedly cut their budget back (3 times since November) and this leaves them lacking for growth (at present) and not exactly cheap, despite the decline, on TEV/EBITDA nor on TEV / proved reserves basis (unlike at PVA). And they are not rapidly getting oily (also unlike at PVA) but again, that's not why I'm looking here, and the stock price has taken its lumps for their seeming reticience to "go oily" already. I'm looking for the guys that everyone thought were about to die to get up off the floor as natural gas does. When people really start hunting for gas leveraged and financially leveraged names, this one will be high on the list. I think they agree or they wouldn't be buying it themselves. Moreover, I admire their resolve and think that things could begin to improve for them as the year progress as prices appear to be moving higher at a time when they are wringing costs from their system.
SSN Mini Ops Update
About to frac the SOA well … basically saying they will know something next week. Also implies the conventional play in Wyoming is make or break on this frac
They are going to workover Defender 2 following the work at SOA 2. Idea is to clean out the lateral and then put it on rod pump.
Odds & Ends
- Baird cuts price targets on their E&P unverse, looks like most ratings unchanged, however they did up their rating to Outperform on COG and RRC.
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