Archive for September, 2006

 

XNG/XOI/OIH Performance - A Repeat of Last Year?

Posted by zmann on 30th September 2006

Ya know, FWIW, last year things looked great for the XNG, XOI, and OIH during the third quarter (after all, winter was on its way and Katrina had driven prices through the roof) and they both rallied strongly into Sept 30. The XNG,XOI, and OIH then proceeded to fall 11% , 15%, and –% respectively by Oct 20, because the supply/demand fundmentals were deteriorating.

Of course, after this brief albeit painful correcton, each of these indexes went on to score new record highs and each of them remain up over the last 12 months. (XNG up 11%, XOI up 17%, and OIH up 20%), which is relatively good perfomance compared to the roughly 13% performance cranked out by the Dow and S&P500 since last October.

Now the XOI and OIH being up I can understand. Oil’s up and that good for the XOI and if one thing is clear from reading way too many E&P company quarterly reports it’s that service costs have risen - a lot. More on how much later but for now just trust me - the service guys have made (are making right now) a killing. This won’t last and that why I’ve got puts on HAL and PTEN. So 2 things happen when service costs rise: 1) one it makes the service guys rich - done and, 2) it raises the economic threshold of both future prospects and current plays. Combine this with falling commodity prices and E&P magins begin to slide. Yes, the E&Ps have hedged but those thresholds aren’t falling and as the quarters tick by, the hedges roll off and are renewed- at lower prices.

That brings me back to those E&Ps in the XNG. They’re up since last year. Natural gas has fallen from $12 last Oxctober to the $5s. It’s what they sell. Their orgainic growth on average is mid single digits so a 55% decline in the price of natural gas (their primary product) is offset by some piddling growth, some near term hedges and higher oil giving them an 11% rise ttm. I don’t think so.

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Energy Holdings as of Friday, end of quarter

Posted by zmann on 30th September 2006

Still holding my ECA, EOG, SWN, HAL, VLO, XOM, HOC, and PTEN puts in energy. Got beat out of SU and SLB but will be back. After this “restng phase” for commodities, I think the slide continues, probably starting next week. In fact, analysts and their minions are probably burning the midnight oil (which is good because there’s lots of it to go around) retooling their models. They’ve gathered the information over the last 2 weeks and now that the quarter is over none of the IR guys will talk to them afterwords due to REG FD. Next week comes the estimate reductions to “mark-to-market” the third quarter (notice I didn’t say price target or rating reductions- those will come after the first nasty company comments about reduced oil field activity to be announced in late October). The one exception may be the refineries where estimates have been dropping almost daily (despite the recent upgrades, go figure).

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Refiners Jump On Oil, Crack- Way Overdone

Posted by zmann on 30th September 2006

The 3-2-1 gross crack spread ended the week at 5.15/ bbl, up a tad (2.7%) . This week’s refiner performance: SUN up 5% VLO up 7%, TSO up 7%, HOC 10%, and WNR up a whoping 15%.

Commodities caught an End of Quarter (EOQ) bounce with crude oil (CL) ending up 2.4%, unleaded gasoline (HU) up 2.2% and heating oil (HO) up 2.8%. This was a late Friday bounce driven by technicals (the chart kind, not a bunch of guys with guns in the back of a pickup) and I think it will falgter Monday, especially when the Saudis remain quiet early next week.

This is EOQ crap and I really like WNR short after the GI a few weeks back and especially b/c I called the decline at $25 and watch it fall to $20. Unfortunately it’s thinly tradded and you can drive a truck through the spread on those options - although after the hugh run on underlying this week, I’m going to throw out a middling bid on some in and out of the money November puts. HOC and FTO also stand out for their high forward multiples and both have options. On the next bounce (following the next dip) both of whcih I expect to occur in early October, I”m likely to swap out of VLO for HOC. Product inventories remain bloated, the Iranian nukes (sorry, nuclear power program) crap is on everyone’s backburner during election season, and the real OPEC players appear to be disinclined to cut production when people are still willing to buy $60 ish oil.

I’ll be posting short and long-term 3-2-1 crack spread charts in the Crack Update page soon. in case you’re wondering the 3-2-1 crack is the theoretical gross profit derived from producing 2 barrels of gasoline, 1 barrel of heating oil (distillate) and subtracting the 3 barrels of oil you bought to make them. Crack spreads hit record levels after Katrina and now they’re coming back down to Earth. Anyway, you’ll see when I post them.

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Nigeria, Venezuela Announce Cutbacks Totaling 0.6% of OPEC Productin - Big Deal

Posted by zmann on 30th September 2006

My 2 cents on the Opecies cutting today is that it highlights the lack of real sponsorship in the cartel for a meaningful cut. You’ve got rebel plagued Nigeria cutting 120,000 bopd (5% of their total) and perma price hawk Venezuela, cutting 50,000 bopd (1.9%). Combined this represents 0.6% of OPEC’s production in the most recent month. Wow, better run out and fill up the Prius. Come on Chavez, that doesn’t even reflect the Big Gulp sized hit you took this week, you wanta be Putin looking chump. BTW, that’s a pretty strong message: Mess with Bush and you get fired from 7-Eleven. How does Rove get this stuff done?

When the Saudis step up to the plate and turn the spigot to the right on 1mm+ bopd then I’ll be convinced they’re willing to fight this tooth and nail all the way back to equilibrium. Even then, I don’t think that will halt the slide, just delay it some, making your favorite group of puts all that much more irresistable.

In the near term traders are praying, on their knees, that a giant Canadian high pressure system invades the US and sits on us ASAP. Looking at the major consuming regions of both gas and oil for heat, that’s not forecast through at least Oct 15. In fact, the South is headed back to the low 90s this weekend and Boston/NY will be balmy (for those guys)

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E&P Companies Not Quick To Cartelize

Posted by zmann on 30th September 2006

Good article from Saturday’s Houston Chronicle about E&P company plans relative to production shut ins and future drilling activity.

The short answer seems to be that most companies are not shutting in production; the article specifically cites APC, DVN, NFX as having no plans to shut in. Does say that CHK’s 6% shutin was more of a message to service companies that it’s time for their prices to start falling.

http://www.chron.com/disp/story.mpl/headline/biz/4225885.html

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Mild Winter Expected - So far

Posted by zmann on 30th September 2006

I’ve found AccuWeather to be fairly, well, accurate for summer and winter temps in the Lower 48. Currently their short, medium, and long range (90 day) forecasts all calling for a warmer than normal winter:

http://wwwa.accuweather.com/maps-temperature.asp?partner=accuweather&traveler=0&site=us_&large=0&fday=1&type=temp

You can page through all the time ranges but it stays pretty red (warm) throughout. While I think these guys are pretty good I don’t what is the key driver in their model right now for this warm winter - if it’s the weak but strengthening El Nino then we’ll have to see further strengthening in Pacific SSTs to give their forecast more credibility.

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And you thought hedge funds were evil…

Posted by zmann on 30th September 2006

In the wake of the Amaranth scandal, I found this quote from September 14, 2006 extolling the virtues of hedge funds in the futures marketplace

 ”I believe that there is absolutely no evidence that hedge fund participation in the natural gas futures market causes higher natural gas prices,” said Tom Saal, managing director of Commercial Brokerage Corporation.  Saal argued that hedge funds not only provide insurance to forward prices by adding liquidity, but he said they also reduce volatility by narrowing bid-ask spreads to within pennies rather than dollars.

While there’s some merit to the liquidity argument, the notion that hedge funds taking massive commodity positions (and they truely are massive given the record open interest in positions held by non-commercials by the CFTC) hasn’t had a pronounced impact upon natural gas prices is laughable. What’s this guy selling anyway?

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Upcoming features

Posted by zmann on 28th September 2006

In coming days I will add: 1)  gas inventory graphs, 2) projected next week’s injection/withdrawal estimate in a spreadsheet showing estimate vs reality so I and the  “paid” analysts can be easily tracked, 3) CFTC charts for natural gas non-cokmmerical commitments of traders (all 3 sections will include interpretive opening sections - this may take through the weekend but will be up by Oct 1, I promise).

OPEC commentary will be added members of the Cartel rouse themselves late at night to talk everyone into paying more for some of the cheapest to produce oil on the planet despite current high worldwide inventory levels.

Stock picks/pans will be added continuously beginning now: Despite recent weakness in the front month natural gas futures and a generally downdraft in the 12 month strip, a certain invurnability to falling comodity prices engendered by generally favorable hedge positions  at E&P companies has given WS analysts unprecedented levels of spine. This is not how I will write. Instead I’ll write something more like this: WS Analysts have multiple motives for making Buy recommendations, the least of which is making you, the little guy, money.

Rules of the road for trading options on energy stocks including the hallowed Valero Rule, trademark pending, from the great Phil’s World blog will be referenced shamelessly.

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