Thursday Morning Thoughts + Newfield Exploration Update

First things first. Gasoline inventories continue to fall as the domestic refining industry continues to have difficulties getting it's act together in the wake of Spring maintenance season. Utilization took an unexpected dip which more than offset a slight build in imports.

The EIA's report of a sizable draw in gasoline stocks (2.7 million barrels)  where a small build was expected drove the energy equity markets into a buying  frenzy at precisely 10:30:01 Eastern time and they never looked back.
First the refiners, then everyone else (even (COP) with their miss yesterday morning) responded with "don't look back" type buying on strong but not massive volume. The XOI and XNG charts have broken out into uncharted territory while the OIH is threatening to and the ZBWI is, technically speaking, going ballistic (as I yell "talk to me Goose" to my remaining refining puts).


Around here we made several changes in the portfolio. We dumped our ill fated and far out of the money sub $100 strike (TSO) puts for bus fare and traded a little (VLO) call position to a 29% gain on the day. I took the last of the (TK) calls off the table for a 170% gain  in 12 days and doubled down on my position in (END) which is still getting little to no respect. The performance page is upated with the latest victories and defeats for all to see.

Natural Gas Continues To Stand Firm In The Upper $7s. I'm still waiting on a little weakness to set in however the gassier E&Ps are leaving the station along with everything else in the energy sector rally.

  • I expect a slight build today ~5 Bcf. This won't do much for the bear case as the year ago week saw a much larger build of 80 Bcf on balmier, more spring-like weather.
  • Street Consensus: unknown at time of plublishing.

Newfield Provides Operations and Guidance Update: I was anticipating and got improved results from the company's Woodford play. Earnings for the quarter were in line after you back out several charges ($0.92 A vs $0.92 E). Guidance looked good (although costs continue to drift higher) and individual areas of operation on the whole appear to performing at least as well as expected.

  • Initial Guidance For 2Q07- In A Word: Up


  • 1Q production came in near the high end of the range at 719 MMcfepd vs guidance of 659 to 732 MMcfepd).
  • Initial 2007 Guidance: This is the first guidance NFX has provided for the year and it equates to 7 to 11% YoY growth for 2007 which should be pretty well received.


  • Costs looked a little high even without the hurricane expense. LOE was a nickle plus out of the top end of the range while G&A strayed a penny over it's top. Hurricane related repair expenses, which ran a whopping $0.68 / Mcfe this quarter are expected to be largely complete following the second quarter after which I'd expect per unit LOE to fall into the $1.05 to $1.20 per Mcfe range.
  • NFX Looks Cheap On NTM Cash Flow. Even with the temporarily higher LOE, a 17% increase in production and a 3% in equivalent realized prices drove CFPS of $2.72, only 3 cents below year ago figures (when LOE was half as much).  Looking ahead (and if this price deck holds) you're looking at a quarterly CFPS run rate > $3.00 per share. Annualize that and NFX is trading below 4.0x NTM CF. That's pretty cheap for a company with a reserve life that should by all accounts enter double digit territory this year.

Core Areas Update:

  • Woodford Shale: Estimated reserve recoveries increased to 3.0 to 3.4 Bcfe for finding costs of ~ $2.25 per Mcfe.  They're standardizing their drilling procedures here and plan to get F&D sub $2 based on current service costs. Nice.


  • Stiles Ranch Wash play - nothing new in terms of numbers but a cool description of how they're attempting to minimize costs by maximizing rig efficiency.
  • Sarita joint venture with (XOM) announced a high test rate in one well and a record 700 feet of pay in another.  I didn't break this area out in my report on the 19th but all systems are go here.
  • Uinta Basin: 20 acre infill program yielding better than expected results. IPs of 170 bopd gross are much higher than the 100-110 previously announced.
  • Gulf of Mexico current production of 290 MMcfepd looks higher than expected
    • Wrigley - about to commence at 50 MMcfepd (50% wi)
    • Fastball (deepwater GOM) development well saw more pay than expected - 90 net feet of gas pay. Subsea tree installed.
    • Nemo spud. Shallow and deep target tests.
  • North Sea
    • Grove about to commence production. Curtailing production 10 mmcfepd from a potential 60 due to the firesale on gas in the UK right now.
    • 2 dry holes this year (Auburn and Cutter prospects), Seven Seas is currently drilling.
  • Malaysia
    • Abu Field FSO has been moored - expect to commence production late 2Q07 yielding production of ~5,200 net to Newfield's interest under current oil prices.

Odds & Ends

Analyst Watch: None by the time I published. If there are any I'll up date in comments.

Snafu Watch:  Repair shutters Exxon's Beaumont cat cracker for 2 to 3 days (225,000 bpd of gasoline production offline); BP's Toledo refinery, 160,000 bpd  offline for an indeterminant period; a portion of Sinclair's 70,000 bpd Tulsa refinery down for a unit.  Finally, BP announced it had cut production from Prudhoe Bay by some 90,000 bopd (out of a possible 400,000) after a power outage

Earnings Watch: See updates on (XOM), (HAL), (VLO), (SSI) and more in comments later this morning.

(EEE) Watch (aka KFX):   CEO Mark Sexton "departed" last night. CFO Kevin Collins takes the reigns. Both of these guys were excellent at the real Evergreen Resources. Mark was the visionary who took EVG from nothing to the first major CBM pureplay in the Rockies and finally sold it for a pretty penny to (PXD). In my way of thinking this is a major blow to KFX (EEE), no offense meant to Kevin who is an excellent numbers guy. In the press release the company said:

"The Board acted decisively to bring a fresh approach at the top that would best accelerate Evergreen's strategy of optimizing operations at our Wyoming coal refinery, signing definitive agreements for K-Direct plants, obtaining financing agreements and beginning construction of those plants," said Clark, on behalf of the Board.

So it sounds like they haven't done any of that yet. Earnings are due out later today and I want to know a few things: 1) are they continuously producing K-Fuel, 2) have they signed any contracts to build a K-direct plant (if not, how soon), 3)  financing agreements, and 4) what happened with Mr Collins.  If he ever runs an E&P again I'd be in early.

ZEB Stocks of Interest. Performance in the small and mid cap names I've highlighted (snapshots) or done longer reports on since I added company specific reports at the behest of a friend back in February. See all the ZEB Reports to date here.


Alaron Watch Day #7 : Three days left and I'm getting a little nervous .  Flynn made good on one of his of his two 10 day forecasts ($4 gasoline somewhere and $68 oil)  as I heard a rumor that gas topped $4 at a station in San Fransico. The $68 claim ($73 if you want to go with the CNBC headline that fronted the story) may be just too tough a nut to crack this week though.    The Brent to WTI relationship, which was the premise for the higher oil call has not reversed however. These are smart guys, no doubt, but they're always, always, always bullish so I kid them a bit. What about the barrels coming back from Opec? What about the rising production in Nigeria? They're long oil so they go on TV, much like T Boone, and say it's going up whenever CNBC offers them the chance (or do I have that relationship backwards). I don't fault them for that. CNBC however should take a journalism course: too many softballs guys.

46 Responses to “Thursday Morning Thoughts + Newfield Exploration Update”

  1. 1
    Lou Says:

    Good day Z,
    What do you think of SU earning release this morning?

  2. 2
    zman Says:

    Lou – 3 little words: production forecast lowered.

    Once you convert to US they still easily beat expectatons of $0.80 eps but they missed on production is forcing them to: 1) lower guidance and 2) raise per unit cost guidance.

    No word on why they were down QoQ and YoY on production. Upgrade progress looks as promised.

  3. 3
    sane Says:

    Diecient artice on the $4 Gasoline hype

    $4 Gas? Fat Chance


  4. 4
    zman Says:

    VLO – nickle beat and large share repurchase authorized. We’ll see if it’s enough to keep the refiners up.

    They said Mckee now at half cap of 85,000 is expected to be at 150,000 by the end of 2Q. That’ll be a little hard on the gasoline market since last guidance was back to full by year end.

  5. 5
    zman Says:

    Thanks Sane,

    I agree with Schork. The demand calc is a little whack. After talking with EIA their are estimates in their that may or may not make sense.

    Like holding exports flat when prices here rise b/c you’re using a month old number broken into weeks since you don’t survey the data weekly. As you hold exports flat in the calc it reduces supply which taken together with estmates change in stocks, which is much lower thant the survey change in stocks (as the API does), it yields a higher gasoline demanded number.

  6. 6
    zman Says:

    RBC took its price target for BHI from $89 to $100. There’s nothing like hindsight for the broker and a meet twice reduced earngings for the company.

  7. 7
    zman Says:

    HAL beats, buys UK service company focused on UK, mid east , Asia pac

    says conditions in the US drilling enviro are improving

  8. 8
    bill fraser Says:

    i see ng falling back to 7.50, im going to sell into strentgh

  9. 9
    sane Says:

    I think the problem with the EIA report is that it is part survey part estimation. And if you are basing your estimation part off of the survey part, you run into a situation where your margin of error in the estimation parts will increase by magnitude compared to the survey margin of error. If your survey’s margin of error is large then your estimates are going to have an even larger margin of error.


  10. 10
    zman Says:

    Tupp – Nice call re VLO. That buyback is going to propel them today.

  11. 11
    zman Says:

    Sane – I agree. The EIA a lot of smart people on staff but too many statisticians/mathematicians.

    The system is flawed b/c they don’t simply require electronic polling of stocks on a weekly basis. I used to talk to them all the time and a lot of the data that goes into their monthlies is suspect (and therefore, subject to revisions for up to 24 months!)

  12. 12
    zman Says:

    Bill F – I had thougt so and I still hold out some hope but the comps are getting more difficult and we’re approaching “hurricane mania season”. One little swirly and it’s $8-9.

  13. 13
    sane Says:

    US drilling conditions improving? That is a an about face from the dire predictions a couple of months ago.


  14. 14
    Stephen Says:

    On NFX, I sold my stake at the open, I mean they lost $160 million on derivative expenses in a quarter, when they only expected to make $119 million from their oil and gas businesses.

    That’s not hedging, that’s playing the markets, speculation. I’m going to listen to the conference call to see how they can justify that.

  15. 15
    zman Says:

    Stephen – that’s a non cash item. You add it back to net income to get operating cash flow. It’s just a mark to market accounting issue. No big deal. See near the bottom of the press release.

  16. 16
    zman Says:

    sold the other half of yesterday’s VLO calls @ $2.75

  17. 17
    zman Says:

    Newfield rolling higher, admittedly with the group, been trying to get some Junes to add to my May calls but to no avail as I’m too much of a cheapskate.

  18. 18
    Kevin Says:


    You know what amazes me, when traders/investors don’t know how to take profits and buy back in lower. Sure, it doesn’t work all the time but, you must let the market come to you unless there is a breakout of sorts, then go with the move. Aaple for instance. I sold in AH’s because we all know institutions aren’t going to chase a stock higher and it needs to correct a bit. I’m looking to get back in piece by piece in the next few weeks. I dunno, maybe I’m the crazy one. SOrry this is off topic a bit (oil), I sold some VLO this am. Are you looking to get in for the driving season now or do you think the refiners will finally show a build in the next few weeks to temper prices? Thanks K.

  19. 19
    zman Says:

    K – I’m treating the refiners as a trade to played from both sides.

    NFX up now. I can’t believe I didn’t get anything done. Oh well, own the stock, own some May calls.

  20. 20
    Kevin Says:

    Gotcha Z. Thanks for the site, many knowledgeable posters here, including yourself.

  21. 21
    zman Says:

    18 Bcf build. I’m off to my kid’s year end program for 30 minutes or so.

  22. 22
    T-Tupp Says:

    Z- im changing professions to a fortune teller…. didnt i say a 5% day, 1/4 of it on open lol– i was like right on the money not to toot my own horn. but thanks for the congrats!

    in the am with you i got in, and at 3pm picked up more (was at 1,000 contracts at close). i saw there was some whispering going on in the stock about numbers, nd aparently someone kew about the trippling of the share repurchase.

    might doubble down on tomorrows dip, that is if my crystal ball is right.

  23. 23
    zman Says:

    I’m back. NFX hit $46. Sweet. Things look pretty much the same from 10:30 when I left.

    N Gas stuck at $7.50 – good call Bill F!

    Tupp – I’ll listen to you more closely from now on for my own good. lol.

  24. 24
    zman Says:

    The nice folks at SeekingAlpha turned bit about NFX into a sort of First Call note which is now available on the ZEB Reports page.

    An email of that link is a perfect gift for friends and family alike! 😉

  25. 25
    T-Tupp Says:

    i think theses latest snafus will play out bigger and longer than they anticipated– they always play them down.

    isnt it funny how VLO hit the exact same close as it did on the same day last year, which is also its 52 wk high lol. no seasonality in energy eh lol.

  26. 26
    dave Says:

    Marathon oil refinery on fire.

  27. 27
    zman Says:

    Took 2x position in HAL May $32.50s for $0.60

  28. 28
    zman Says:

    dave – is that very recent news?

  29. 29
    dave Says:


    Yes, I came back from lunch and it was across the cnbc screen, no volume on at 1:02est or so.

  30. 30
    zman Says:

    May 75 VLO calls at $1.30 as a dt.

  31. 31
    dave Says:

    Dow Jones says small fire MRO in garyville refinery shut down, no comment on output impact

  32. 32
    zman Says:

    ah I got it, small fire, extinguished but the unit is offline

  33. 33
    zman Says:

    Wow – USO getting hammered.

  34. 34
    zman Says:

    here’s a bad sign on the day: doubled by VLO dt at $1.15.

  35. 35
    sane Says:

    Nigeria wants to increase its OPEC oil production quota to 2.75 million barrels a day from the current level of 2.058 million barrels a day, a source at the Nigerian National Petroleum Co. said Thursday.

    “The challenge now is how to convince OPEC to allow us to increase our production ceiling,” he told Dow Jones Newswires on the sidelines of the World National Oil Congress in London.

    “If we are allowed a 2.75 million barrel-a-day production capacity, subject to other security concerns, we could move to that level (of production) on a one-month time lag.”

  36. 36
    zman Says:

    Goes right along with the Shell story from a few weeks ago about gettng production back up and the EIA story from 2 days ago about new field production having offset the MEND-induced shutins.

    That goes in tomorrow’s piece. Thanks Sane!

  37. 37
    sane Says:

    NP Z,

    I think OPEC was retarded to think that with new projects coming online all over and the price of oil so high that the production cuts would be followed through with, or not challenged. This reaffirms to me that their $50 – $60 band is too high. Maybe they should shoot for $40 – $50


  38. 38
    zman Says:

    SU finally acting like you’d think on the lower guidance.

  39. 39
    zman Says:

    I think we’re $50-60 rest of year, maybe an occasional spurt below $50 but nothing sustained.

  40. 40
    zman Says:

    Nice steady buying in a tight range on HK this afternoon. Fingers crossed for an upgrade in morning. They’ve got 113 pages of data to digest although none of the high points changed in the last 2 days since they upped guidance.

  41. 41
    zman Says:

    Actually, I’d bet there’s no upgrade until Monday, tomorrow being a Friday with less of an audience for new ideas.

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