Market Sentiment Watch: S&P 500 closes at all time high yesterday. Energyland is still quite the mixed bag in terms of the last 24 months of performance (pull up a weekly chart of the XLE or the XOP ... nice long tightening base). I count in E&P alone a number of groups from growthy stalwarts (both oily and gassy) to small and mid cap growth which is much more of a mixed bag, to turnaround names which are for the most part levered, have been retreating for years, and are just now (and this is debatable on a case by case basis) starting to get recognition for their efforts to rein in debt and find more valuable hydrocarbons than natural gas. The question becomes "If the broad markets are at all time highs why isn't my energy portfolio?" I refer you back to those aforementioned weekly graphs and I see the delta as an opportunity and would say that it very much depends on how you have been buying (on dips and when others are not as opposed to chasing charts) as well as on what you have been buying within energy (a mix of leaders and turnarounds or just the beaten down names). I can say that my tradiest accounts are lagging and that my "patient hand" accounts, the ones I add to after analysis and digestion of news and waiting and then waiting a bit more and then buying when others are not and not selling into unexplained weakness, those accounts are within a stone's throw of an all time high (they hit that level about 3 weeks ago). I'm a long term guy and I don't say that because I was flat in all but the small accounts last year but because over time (and this is where the long term part comes in) that works for me. Know your names, be able to categorize them into the subgroups of oiliness vs gassiness, growth vs perhaps hidden value, know which way the fundamentals for them are moving, have an expectation of the macro (my price deck is $98.75 oil (unchanged so far this year) and $3.85 natural gas (raised earlier this week for the first time this year), and invest with confidence. And I always DCA, both going in and usually coming out and again I keep Cores that are expected to be held at the onset for 2 to 3 years at a minimum unless I misjudge badly or management loses it's way and/or mind, and I always watch the name for a time prior to entry (watch meaning reading and math) unless its a very special case and then I keep trading positions around the core for when things don't jive with the fundamentals of the name or the macro or some Euro banker has done something odd to the markets. In today's post please find a little food for thought on NFX, comments on RRC (big growth), PVA (upsized debt deal), and some other odds and ends. We will have live comments and analysis as the BCEI investor day plays out.
- Jobless claims came in at 346,000 vs 360,000 expected and 388,000 last week,
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Oil Inventory Review
- Natural Gas Inventory Preview
- Stuff We Care About Today - BCEI Analyst Day, NFX food for thought, PVA, RRC,
- Odds & Ends
Please click the link right below this to Holdings Watch:
ZMT (Zman Medium Term portfolio):
- Yesterday’s Trades: None
ZLT (Zman Long Term portfolio)
- Yesterday’s Trades:
- XCO – selling the trading positions taken this year for $7.47, up between 0 and 11%. Still holding the core but will shift proceeds to our other less opaque natural gas focused names
- The Blotter is updated.
ZLT - C
- Yesterday's Trades:
- REXX – Sold the 20 shares in the ZLT C accounts taken last July at $11.54 for $17.15, up 49% as the overweighted position had become too much of an overweighted position for these little accounts. Leaves 30 REXX shares in the accounts.
We'll have an updated table here on Friday.
Crude oil edged up $0.44 to close at $94.64 yesterday after EIA reported an "OK" looking report. See Review section below. We need to see gasoline demand pick up very soon for the current level to be sustainable. Unless OPEC further ratchets back supply which in and of itself might send a troubling message to the crude markets about non-OPEC supply and probably global demand. So the Cartel has done a good job of managing growth in U.S. production while at the same time balancing Iraq's unwillingness to restrain production (at least for the next 3 years). The Saudi's have been aided in this endeavor by a number of outages including depressed volumes from Sudan and Nigeria and flattening volumes out of Russia. Sudan is coming back to the market and North American volumes continue to inch up and Saudi may tip their production slightly below 9 mm bopd which probably sends the market into speculation about demand and about just how much spare capacity the Kingdom has (but undoubtedly concluding that less production = more spare capacity at the end of the day which can cause a little more price weakness). This morning crude is trading flat.
Natural gas rallied $0.07 to $4.09 yesterday. We noted the other day and continue to believe that we expect sell offs to be somewhat short-lived this shoulder season with short covering on the minds of speculators. In this case, the rally was attributable to a colder than expected forecast for next week which threatens to drag the season back into withdrawals in two week following an expected build next week. A slow start to the injection season in the form of waffling around about the trough level for several weeks augers well prices in late Spring. I don't really care as this is near term noise but if it helps with sentiment in the gassy equity space and inspires a little short covering that would be welcome. This morning gas is trading flat to slightly up.
Natural Gas Storage Preview
Street is at -18 Bcf for today's report. This time of year things get a little squishy with the models and it's entirely possible we get a smaller withdrawal that leads to some profit taking, no edge on that and again, I really don't care. It's a moot point at this point given the strong position we are headed into this late arriving shoulder season.
- Last Week: -94 Bcf
- Last Year: +11 Bcf
- 5 Year Average: +15 Bcf
- 10 Year High: +68 Bcf
- 10 Year Low: -45 Bcf
Oil Inventory Review:
- Headline numbers: Mixed bag. Better on crude due to higher utilization and lower imports but higher refiner throughput meant more gasoline production which is still being met by tepid gasoline demand.
- Cushing Inventories: Ticked back close to all time highs. Unwelcome but expecting it to rollover soon.
- US Production: New 20 year high, added 30,000 bopd to reach 7.181. First quarter average was 7.07 mm bopd with our view in line with EIA's on a 7.3 mm bopd average for the year.
- Imports: Soft, in new low territory for this time of year. More of the same expected as light volumes from the States displace light volumes from Europe and West Africa.
Stuff We Care About Today
BCEI Analyst Day
- Begins at 11 am EST, please see the comments section of the play by play on the webcast and tomorrow's post for the wrap up.
NFX Quick Value Thoughts
- Obviously poor on the stock side, and pretty much as expected on the operational side and yet this name underperformed just about every real E&P company I can think including ones with embattled or punted CEOs (SD and CHK).
- We've owned it for years and continue to own it. We're not adding now but thinking that at some point they go away, perhaps after a 2H13 international segment sale.
- Gassy Assets Probably Understated In Value Now:
- NFX is trading at 140% of the after tax present value of it's reserves but that's using the standardized measure of the proved reserves only. Doesn't sound like a bargain but there's more.
- 2012 proved reserves fell sharply last year (see table below) due largely to negative price revisions due to the low price of natural gas used to compute the reserves ($2.76 flat into the future).
- Prices are now back over $4.
- I'm not saying all of the reserves will spring back onto he reserve report in the future but what was removed was largely gassy reserves in the Anadarko Woodford where the leases are held by production. They are not gone nor will they expire.
- International Segment Being Sold:
- Present value here is about $1 B. There could be upside to that price given exploratory drilling planned prior to the sale and due to the gas discovery recently announced off Malaysia.
- After the sale
- I don't expect them to run back to drilling gas wells in earnest but I do expect them to be able to better grow the firm in a liquids rich fashion from a smaller base.
- Management is conservative and yet they have set out expectations of liquids growth of:
- 39% in 2013
- 38% in 2014 and
- 20% in 2015
- Note that total company volumes are expected to grow:
- 5% this year (with natural gas declining)
- then 18% in 2014
- and 12% in 2005 (with gas volumes holding flat in both years and with liquids comprising 66% of volumes (mostly oil) by 2015.
- Also, note that they have 650,000 net acres in liquids rich domestic plays from the Uinta to the Cana to the Bakken to the Eagle Ford. If we say $1 B for the Inernational assets that leaves a TEV of $5 B vs reserves of $3.4 B, and with a streamlined story (no Gulf and no International) the name should be on buyer's radar, especially due to the Cana and Uinta holdings.
- Maybe nothing comes of it, M&A is not why I own names but the underlying value here shoud be getting hard to ignore. ---
- CHK - won dismissal of one class action lawsuit alleging the company misled investors
- RRC - pre-announces big quarterly production beat.
- As usual, RRC pre-announced production for the upcoming quarter, another quarter, another record high for volumes
- 876 MMcfepd, up 34% sequentially vs company guidance of 845 to 850 MMcfepd
- 79% of volumes were gas, in line with recent quarters
- Realized gas price was $4.09 which was the best gas price for them since mid 2011
- They noted being off to a good start in a year where annual production growth guidance is 20 to 25% and said more importantly they believe they have "line-of-sight on production growth of 20 to 25% for many years" which isn't a surprise if you know the Range story but is rare growth amoung companies their size,
- At last check RRC was over 75% hedged for 2013 at $4.16 so higher than expected volumes and the lift in pricing of late combine to a good thing for them
- We continue to own the name in the ZLT.
- PVA - Debt deal announced with MHR EFS buy gets Supersized
- $400 mm senior deal
- Get's upped to $750 mm, placed at 8.50% coupon due in 2020
- Proceeds pay for the $400 mm for the Gonzales and Lavaca County leasehold and production
- And replace the $330 mm in 10.375% 2016 notes (nice interest savings there)
- and kills off the revolver balance which had just started to grow from $0 again
- They still plan to sell 10 mm in equity (ostensibly to MHR because there's really no need that I can see now for "debt deal support" if you are going to be knocking back the rate that much. The high yield window remains wide open.
- This leaves them with:
- Senior debt of nearly $1.1 B consisting of $775 mm in 8.625% debt and $300 mm in 7.25 debt due 2019 and
- Liquidity of about $300 mm consisting of $11 mm in cash and an untapped $287 mm revolver that is likely to be slightly boosted later this Spring.
- Interest costs are marginally better but the maturity of the seniors is pushed out,
- And given their EBITDA vs Capex needs they will be easily funded for this year's expanded program and well into next before by which the revolver will have expanded to accommodate 2014 drilling and the debt / EBITDA metric should be back rolling back over but I'll be calling them today to discuss that as the 2013 budge would see debt / EBITDA rising > 3.5x in my view.
- We continue to own the name in the ZLT.
Odds & Ends
- RRC - SocGen ups target from $80 to $93, rating Buy
- SWN - SocGen ups target by $3 to $44, rating Buy
- COG - SocGen ups target from $53 to $73, rating stays Neutral
- CLB - Guggenheim starts at Buy with $165 target
- CLR - SocGen ups target by $3 to $99, rating Buy
- CRR - Guggenheim starts at Buy with $110 target
- SYRG - MLV ups target from $7 to $8.50