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Holdings Watch: Took some profits this week in June contracts as we approach expiry next week and also adopted a more cautious stance as oil started making new 7 month highs on an almost daily basis. As I’ve written before, this is not how I like to see prices unfold and despite the fact that the stocks have for the most part only partially kept pace with the rise in crude, they will no doubt suffer the consequences of an approaching, short lived but painful, correction of 10 to 15% in the commodity.

The $10,000 portfolio started in October 2008:

• $10KP: $37,000
• 52% Cash

Things We Sold This Past Week:

• PXD - Sold 100 (75%) of my June $30 calls for $0.90, up 44%, with the stock at $29.75. The position had grown too large for the $10KP to be appropriate.  I continue to hold the July $30 calls here.

• KWK - Sold the June $12.50 Calls for $0.45, up 73%. The stock has a had strong run and I will be selling the $10 strikes here shortly.

• KWK - Sold the $10 June Calls for $2.40, up 113%.

Wrap Comments:

1) My kind of week for the equities.

• Oil Service -  We’ve taken a hands off approach to the oil service names for the last several weeks.  I still think that the rally they have had is due for a setback (hard to put these kind of gains on 2011 earnings expectations which seems to be what the Street is doing) and I will re-examine puts (in tentative, toe dipping fashion) prior to 2Q earnings releases,
• E&P - We  names
  
• Majors - I’ve been away from the names all year … and they have done nothing. Enough said.

2) Oil Up, Gas Flat… Not a new story here this week but as I mentioned above, I think the near term crude rally may be on borrowed time. Inventories are, after all, quite full, I know, I know, "what’s new about that?" Nothing. But we’ve seen China’s imports rally in May in part to support their own version of an SPR and this effect may be slowing. "What about the dollar?" The dollar / crude relationship is a strong one but the recent move in crude is not supported by current levels if history is a guide.

4) … Crude Shorts On The Rise. I’m not alone in this thinking; the non-commercials (speculators) are adding to their short position as seen below. I think we may have a trip to $75 still in the cards for this leg up but then I’d expect profit taking and potentially a short term dead cat bounce in the dollar to take some wind out of the crude rally.

Thoughts On Oil Prices Vs Oil Estimates For 2Q09. As we approach the time when analysts will be marking their models to the market price for oil and natural gas, it is clear that the oilier names will be seeing upward revisions (disregarding hedges for a moment) while the gas exposed will be seeing quite the opposite. 

• Analysts Consensus Estimate for 2Q09: $50.50. This is the median WTI price flowing through the Street’s models
  
• Quarter to Date Oil Price: $56.28
  
• 2Q09 If Oil Prices For The Rest of the Quarter Average:
  
  • $60 = $57.17 (doesn’t look likely with oil over $71 now)
    
  • $65 = $58.36 (I’d call this the conservative case with about 2 weeks to go in the quarter)
    
  • $70 = $59.55
    
• So it is more than likely analysts will flowing almost $8 per barrel more through their models at least for the second quarter over the next 2 weeks or so (they try to get the marking to market process done by the first week of the next quarter so say they wrap it up just after the July 4th holiday)
  
• Who will be affected in a positive way? The obvious names are the oil leveraged and oil unhedged.
  • Amongst the mid and small cap E&Ps
    
    • CLR comes to mind first: 75% oil, completely unhedged. This one should see the biggest % boost to CFPS estimates of the names I track
      
    • WLL - 74% oil; 40% oil hedged 2009; 33% of oil hedged 2010
      
    • DNR - 69% oil; 59% oil hedged 2009 with a $75 floor;
      
    • PXP - 62%oil; highly hedged 2009 and 2010
      
    • BRY - 55% oil; 90% of oil hedged 2009; 75% of oil hedged 2010
      
    • PXD - 43% oil; 45% of oil hedged 2009; < 10% for 2010
    • NFX - 30% oil; a little over half hedged and that well over $100
  • In the big caps
    
    • APA - 51% oil
      
    • APC a distant second at 29% of production from oil
      
    • EOG at just 21% but the percentage is growing, it’s all in the U.S. so its getting better prices than some of its peers international prices, and it remains unhedged for oil.  

Other Names I’m Holding Now That May See Some Upside to 2Q Numbers:

• WRES - 55% oil, low hedge prices in 2009; unhedged in 2010. 

I’ve included the following table for tracking purposes; as we move towards 2Q09, I would expect the less hedged names to see significant upward revisions to at least the 2Q09 estimates.

Die Speculators Die Watch:  Senator Bernie Sanders is introducing legislation that would attempt to limit moves in the price of energy commodities. His legislation directs the Commodities Future Trading Commission to use its emergency powers "to stop sudden or unreasonable fluctuations or unwarranted changes in prices". The bill would limit the number of "oil and gasoline contracts" that an energy trading firm could own.   Sanders quotes:

"Despite the record supply of oil and reduced demand, prices are going up, not down,"

ZComment:

The market (SP500) is up 41% from the 2009 lows having fallen 58% from its peak in 2008 to its worst point in 2009. The SP500 is now trading at 60% of its peak 2008 levels.

Crude is up 70% from its 2009 lows, but crude fell 71% from 2008’s highs and is now trading at 49% of those levels.

Perhaps Bernie should regulate the price of stocks as well since they are outperforming crude. Ugh. 

• "The last thing people need now is to be ripped off at the gas pump because speculators on Wall Street - some of the same people who received the largest taxpayer bailout in US history - are allowed to jack up oil prices through price manipulation and outright fraud,"

ZComment: Fraud? What fraud? Unless you mean the EIA saying prices are too low to support further growth in supply and that it along with IEA sees global demand increasing again next year.

In Today’s Post:

1. Holdings Watch
2. Commodity Watch
3. Natural Gas Preview
4. EIA Oil Inventory Review
5. Stuff We Care About Today - deal watch
   
6. Odds & Ends

Holdings Watch:

• $10KP: $30,500 /  37% Cash
• No trades yesterday but I will be looking to raise cash again in short order.
  

Commodity Watch:

Crude oil rallied after the EIA posted somewhat bullish (see breakout section on inventories below) ending the day up $1.32 at $71.33. Crude looks a bit extended to me but I’m no TA guy and the forward looking futures market always swings too far too fast at some point and we could easily go to $80 before we see low $60s (I think that’s the near term floor) again. This morning crude is trading around the $72 mark on IEA comments and a weaker dollar.

• IEA Watch: IEA raised its estimate of 2009 global oil demand from an expected decline of 2.57 mm bopd to one of 2.46 mm bopd. Its a small increase, coming on the heals of a 10,000 bopd increase by EIA, but it is the first time since August 2008 that the group has bumped UP its demand forecast. Sorry Mr. Sanders.

• Iran Watch: Elections are tomorrow. A defeat for Ahmadinejad is possible and all three of his opponents have been dubbed "less abrassive" to the West.
  

• Iraq Watch: Iraq’s Southern Oil Company, said it plans to expand oil production by between 350,000 and 500,000 bopd from a current 1.77 mm bopd (from the southern part of the country) within 2 years. Welcome news for HAL, SLB, BHI and WFT which are vying for the necessary work. Also note that we are seeing a number of OPEC countries talk up production increases over the last couple of weeks. This bears watching as it will be likely to soon put the brakes on the oil rally.

Natural gas closed off a couple of pennies at $3.71 and the gassier stocks were noticeably weaker than the rest of the energy complex fearing another super-sized injection today. This morning gas is trading up slightly pre natural gas inventories.

• Tropics Watch: All quiet on the tropical front.
• More Voices Calling For Higher Natural Gas: This kind of story is making the rounds with more frequency in recent days. My points on higher natural gas prices has been a function of :
  • Lower production, "not if but when" as it will happen given the U.S. decline and persisting low activity levels.
  • Weak Canadian imports: —they’ve got their own set of issues with declining production and increasing demand.
  • LNG wildcard - just not showing up despite repeated calls for a "tsunami of gas" to flood U.S. shores.  I have little doubt imports will increase here but not enough to offset the coming declines in late 2009 and 2010 in domestic production.

Natural Gas Preview

My number: 115 Bcf Injection

• History:
  • Last Week: 124
    
  • Last Year: 84
  • 5 Year Average: 87
    
• Weather: cooler than normal but building next week.
  
• Imports: inline with the prior week, short of last year’s number by 0.8 Bcfgpd, probably not enough to notice yet in the face of continued strong production and weak demand. 

Street Consensus: 110 Bcf Injection

ZComment: Gas is likely to rally but in an unsustainable fashion (not more than a few days) on a number of 110 or less. I don’t expect this "good" a number today but I would expect near term, more summer like forecasts to be supportive of current gas price levels even if they don’t push for higher prices. I do expect the first tropical depression coming anywhere near the Gulf to prompt a brief but sharp short covering rally here.

EIA Oil Inventory Review

ZComment:

CRUDE OIL - Bigger than expected draw down of inventories, once again correctly foreshadowed by the Tuesday afternoon inventory release by API. This was what I call a "poor quality beat" meaning it was supply (imports) driven and not demand (inputs) driven. So it’s positive in that inventories retreated but we are still not seeing significant signs of a demand recovery, and in crude, we are unlikely to see that recovery until we see a string of several weeks of rising gasoline and distillate demand…so far no joy from either component.

Imports: If we call last week’s bump an anomaly it almost looks like a trend is forming with imports hugging the low end of the seasonal range. Blame logistics of unloading in the Gulf for the lumpiness and perhaps recovering Chinese and Indian imports for the low to trend imports of late. 

GASOLINE - Unexpected, unseasonable draw down on stocks. There was some oddness in last week’s numbers with a much sharper than expected decline in demand from the highs seen around the starting day of driving season.

Prices Are Up But Still Well Below Year Ago Levels:  Gasoline prices may be up 55% year to date but consider that they are still down 35% from year ago levels. They normally rise 25 to 35% from  New Year’s Eve to early summer. This year the rally is bigger because they had fallen so far from the September/October highs. If we look at consumption of 9.1 mm bpd of gasoline this year vs 9.4 mm bpd a year ago and apply current retail average prices of $2.62 per gallon and $4.04 per gallon respectively, that comes to an average daily cost of $24 mm per day this year and $38 mm per day at this same time last year. Suddenly it does not seem so crushing a burden for the consumer.

DISTILLATES - Still swollen, need to see more trucks rolling, so far no joy there.

Stuff We Care About Today

Deal Watch: More signs of the road to recovery in group with asset deals and more debt and equity offerings.

• EVEP Buys Into Austin Chalk
  • Small deal $12.2 mm for 9 Bcfe reserves. Sounds fairly price impacted and it’s a small deal so I dont put a lot of stock in the low $/Mcf acquisition cost here but a good bolt on for (EVEP).

•  PVA Senior Deal:   $300 mm,  10.375% couplon notes, priced to yield 11%.
• ATPG files a 7.25 mm share offering (23% dilutive if the green shoe is exercised)
  • proceeds to be used to fund development of a deepwater Gomex discovery
  • The company is highly leveraged and this deal would bring their debt to equity ratio down to 69% from 73%. 
  • Just coming up to speed on the name, no strong thoughts by me either way yet, but I’ve got a file open here now, again expect to see something next week. 
    

Odds & Ends

Analyst Watch:

• (SLB) started at Buy at SocGen
  

T Boone Pickens Watch:

• I attended an hour long presentation from T Boone last night at the Clinton Center. 
• First, things first. His oil price prediction:
  • $150 oil in 2 to 3 years.
  • $300 oil 10 years from now.
• He told a story in which Candidate Obama told him he had a plan to have 1 mm plug-in hybrids on American roads in 10 years. TBP told Obama that Obama didn’t understand the problem. Obama said that he meant it about the 1 million cars. TBP told Obama that while 1 million cars in a parking lot would look like a lot of cars,  the U.S. has 250 million cars already. Obama then said "1 million cars isn’t a lot, is it?" They then talked about natural gas as way to "get the U.S. off foreign oil".
  

• He is therefore confident the Obama Administration will see the light on natural gas as a transportation fuel. Here is a good place to insert the president’s quote on energy:

"And for the sake of our economy, our security, and the future of our planet, I will set a clear goal as president: In 10 years, we will finally end our dependence on oil from the Middle East". Please  note that Nixon said this too, in 1970.

• TBP made a good case for natural gas availability, defended the frac water question easily and the inevitable chicken and egg question of refueling infrastructure for CNG cars and trucks. Basically on this last one, he said gas will make inroads by having refueling stations open up as you add compressed natural gas garbage trucks and buses, and corporate fleets and  then move to the 18 wheelers (he expects to win (WMT) over and is in talks with all of the big trucking lines). The play here continues to be (CLNE).

• In most things I agree with T. Boone as he is essentially in favor of using the resources you have and not increasingly leveraging energy depedence to ones you don’t. Not to be xenophobic but I believe that a country that consumes as much energy as the U.S. does (about 25% of the oil produced each day with a population of just 4 to 5% of the earth’s total) should work to make itself more independent. There has been no energy plan in this country and on the topic of a need for such a plan I am in absolute agreement with him.

• Check out the Picken’s Plan here.

Reality Check Watch: Three congressman introduced a bill that seeks to put frac water under the control of the Safe Drinking Water Act.  They say they want to have EPA regulate the drilling of each well and thus close down the so-called "Halliburton loophole".

In Today’s Post:

1. Holdings Watch
   
2. Commodity Watch
   
3. Oil Inventory Preview
   
4. Stuff We Care About Today
   
5. Odds & Ends

Holdings Watch

• $10KP: $30,300 / 38% cash
• No trades yesterday

Commodity Watch

Crude oil rallied $1.92 to close at $70.01 yesterday on a weak dollar and little else. Crude is trading at it’s highest level since early November.  This morning crude is trading above $71 after API released fairly bullish looking inventory numbers yesterday afternoon.

• Saudi Watch:  Khurais Online. Saudi Arabia’s 1.2 mm bopd Khurais field came on line yesterday. Completion of this field is the key to Saudi’s goal of bumping their productive capacity to 12 mm bopd. It is unclear how quickly the Kingdom will ramp Khurais up and what this will mean with regard to their currently production quota. They have been making comments lately that oil has "risen enough" for now.
• MEND Watch: Rebels claim to have attacked a (CVX) pumping station. The military claims a fire at the pumping station was the result of an accident. Chevron has not yet verified or denied Mend’s claims
  

Natural gas closed unchanged at $3.73 yesterday, lifted to even by an end of day climb in crude.  This morning gas is trading up a dime with crude.

• Early Read On Natural Gas Inventories: The Street is looking for an injection of 110 Bcf tomorrow.
• Tropics Watch: Zip, nada, nothing.

Oil Inventory Preview

• API Watch: After the close yesterday API reported:
  • Crude: Down 5.959 million barrels
    
    • Utilization up 1% to 84% (EIA was at 86.3% utilization last week which looked high given the tepid demand for crude last week and the low product production levels)
      
    • Imports: Down 0.51 million bopd to 8.518 million bopd.  (this is pretty low)
      
  • Gasoline: up 27,000 barrels
    
  • Distillate: up 19,000 barrels
    

ZComment: Normally during this time of the year we expect to see smallish draws on crude and smallish builds in gasoline and distillate inventories. This makes sense as demand isn’t really at its peak yet as far as summer driving goes while refineries are gearing up for higher demand in the hotter months. On the distillates side, the complete lack of a heating oil market this time of year leaves inventories building for spring less what is used by trucks and trains and sent abroad. The export market at present is lousy and storage abroad is high as well so I don’t see anything but bloated inventories for some time here.  But in the summer gasoline will have the greater influence on oil prices. When distillate demand does turn, look for another leg up in crude as it will be a major reversal of trend from levels that are as high as I have ever seen them. 

Stuff We Care About Today

PXD Eagle Ford Wrap

From my converstaion with PXD yesterday:

• They are disappointed by the mechanical issue here. The well had to be sidetracked and the lateral ultimately was not where they wanted it (high in the Eagle Ford) and also not as exposed to as much of the Eagle Ford as planned (500 of 3,000 feet)
• Everything looked good as far as rock quality and gas content…as expected.
• This in no way changes their thoughts on the Eagle Ford Shale, or in this area. They plan to drill another well in close proximity to this one next year.
• They didn’t have their 3D reprocessed when they drilled this well. They will for the next well.
• The next well in the play will be drilled some 40 miles to the southwest in an undisclosed county in the third quarter.
• They are sticking with the $6 mm figure for well costs here ($4mm to drill and $2 to frac) (first well is more expensive but it’s loaded with tests so that’s to be expected). He would not comment on an EUR but said the ranges out there (4 to 7 Bcfe per well were likely to be reasonable) and did not balk at all at $1 finding costs (which suggests a 6 Bcfe well at $6 mm.
• Also looking at a potential drillsite to the north east.
• Had no comment on APA’s well but had apparently been getting lots of questions about it.

Analysts got on board later in the day:

• Simmons basically said too bad on the mechanical issue, we expect them to come up the learning curve by the next well.
• Johnson Rice upgraded the stock to Overweight after stating the results were very respectable given the number of mechanical issues encountered in the well.
• JP Morgan said the rate per frac stage completed was better than the HK wells to the west .

(ATPG) - I’ll be putting together a piece here soon. Hopefully next week with this one.

Deal Watch:

APC Prices Senior Notes:

• $900 mm senior deal priced in three tranches from 5.75% due in 2014 to 7.95% due in 2039.
• Replaced portion of the $913 mm floating rate notes due in September 2009
• Deal window remains wide open, rates are getting a lot better for senior debt.

Odds & Ends 

Analyst Watch:

• (FSLR) cut to Hold at Soleil

Holdings Watch:

• $10KP $31,300 / 40% Cash
• The Holdings Tab is updated
• No sales last week, added to several existing positions
  

Nutshell on last week: Oil reaches fresh 2009 highs, toying with $70 on Friday after the jobs report before retreating very modestly. Energy stocks had a more wishy-washy, summer like week than the markets but were generally up. We are starting to see a pickup in asset deal activity which has been nearly frozen year to date and I expect more small to medium sized deals as we head towards the 3Q /4Q when many companies will be facing another round of bank line redeterminations (for many of the over-leveraged, cash flow crimped gassy names it will nut cutting time on sales).

A Pirate By Another Name Watch: Ecuadoran President Correa wants to "the world" to pay him $5.2 billion not to drill in the Yasuni Biosphere Reserve and National Park.

• Correa says this amount compensate Ecuador not only for potential lost revenues adding that "Calculating the tonnes of carbon that we will avoid sending into the atmosphere, because we are not going to drill for oil in Yasuni, we consider that … we could or should receive close to $5.195 billion dollars,"
• I’m thinking of drilling in my backyard, however, I have 3 dogs who might find such drilling to be an inconvenience. Would someone please send me a check so that I can maintain the biodiversity of the yard while still feeding my hounds? They, like Correa, like to eat well, so send a big check. 

In Today’s Post:

1. Holdings Watch
   
2. Commodity Watch
   
3. Crack Spread Update
   
4. Stuff We Care About Today
   
5. Odds & Ends
   

Holdings Watch:

• $10KP - $40,700 /  45% Cash / The Wiki Holdings Tab is updated.
  

• WRES - $10KP trade - Added 500 shares at $2.34.
• WRES - $10KP trade - Added 20 August $2.50 Calls for $0.50. I continue to hold the November $2.50 calls here as well.

Commodity Watch

Crude oil moved up $2.27 to close at $68.58 yesterday with a weaker dollar and surging equity market. The dollar is weaker yet again this morning but crude is trading off slightly, close to the $68 level on profit taking.

• Early Read On Oil Inventories (from the Reuters and Platts survey): Crude seen down 1.5 to 2.0 mm barrels, both gasoline and distillates expected to see slight builds.
• OPEC Watch: Hasan Qabazard, director of research division at the Organization of the Petroleum Exporting Countries ~ "Prices could still weaken again, this rally is driven by funds rather than fundamentals." He also added:
  
  • global oil stocks are 200 mm barrels above average
  • another 130 mm barrels is in offshore "tanker storage"
  • and long term oil prices need to be in the $70 to $80 range to encourage adequate investment

Natural Gas slammed 10% higher closing up $0.41 at $4.25 yesterday. This morning gas is trading down a dime with sluggish oil.

• Imports Watch: Up 0.2 Bcfgpd from last week and down 0.8 Bcfgpd from last year.
  • Canada came in at 5.7 Bcfgpd: Weak. Still holding the low end of any range you want to pick, down 1.3 Bcfgpd from last year at this time.
  • LNG was 1.5 Bcfgpd last week: Just Not That Strong. Flat with last week and up 0.5 Bcfgpd from the comp week in 2008. 5 months into the year and so far the "LNG gas tsunami" is a no-show. I am sure it will arrive but I don’t think it will be as big as many think it will be.

• Tropics Watch: The new thing in storms - Pop Ups. We saw a few of these last year, that suddenly materialized near the U.S. coast instead of coming across the Atlantic from Africa. See Joe Bastardi’s take here.

Crack Spread Update

Margins are strengthening. I would like to see another week of improved gasoline demand before I dip a toe back into the refiners. That and a pullback for oil.

Stuff We Care About Today

(PXD) RBC Presentation Today: No changes in the slides on their site, first Eagle Ford well still listed as completing. It is not apparent whether the presentation this afternoon will be webcast but no change to the presentation and no press release as of yet may bring the stock in a bit. That’s a bit silly as the company is a lot more than a one well pony but there may now be a little hype in the stock for the E.F.S.

Speaking today at RBC: (all times EST)

• 8:30 AM ELON ENP NVE SWSI
• 9:05 AM BGC BTU CXO ESE ORA
• 9:40 AM ACI BBEP ME NOV SE
• 10:15 AM APC FTI OII PLUG UTL
• 10:50 AM AXC.CN PNM SD SFY
• 11:25 AM DYN FST HTM RIG TLW.LN
• 1:10 PM CNE NE NOG OYOG
• 1:45 PM BHI GDP LNG NKO.CN WTI
• 2:20 PM COMV KWK NXY RAME RZ
• 2:55 PM ITRI PXD TCW TTI

Odds & Ends 

Analyst Watch:

• (CRZO) cut to Hold by Natixis
• (ASTI) cut to Neutral at Merriman