In this Issue

1. Oil Comments
2. Energy Stock Sector Quick Review
3. Inventory Report Preview
4. A Few Words On Natural Gas Imports
5. Holdings Watch
6. A New Gas Player

Oil continued to recover yesterday while gasoline tried to nose and only traded flat due to more Nigerian production shutterings. June crude closed up $0.71 to $63.17. I expect to remain above $60 in coming weeks as demand for crude (from the refining sector which believe it or not will come back to life in short order) will drive higher prices at Cushing while softening RBOB prices. As evidence I point to the increasingly backwardated RBOB strip.

My sense is that crude will stay north of $60 for the foreseeable future due to a combination of increasing demand, lower than average stockpiles (not in the US but certainly in Europe and Asia), lower than expected non-Opec supply growth, Opec member supply disruptions (Nigeria and Iraq), Opec member supply mismanagement (Venezuela), all caps headlines from Nigeria and Iran, and the fear of hurricane season. Some of these factors are genuine fundamental concerns and some aren't but net net on this is $60+.

The Energy Stocks suffered from a bit of late session profit taking:

• XOI -  a bit extended on valuation but it's looking more and more like profit taking before a breakout.

• XNG - gassy companies are minting money north of $6 per Mcf. The current upper $7s is nirvana for them. ZEB continues to hold calls in (CHK), (CRK) (which couldn't have demonstrated better cost control and production growth last week), (PQ) (Atchafalaya at TD any day now), (HK), and (NFX).

• OIH - ZEB calls in (HAL) and (NE) continue to perform well. I especially like Halliburton paired with Schlumberger here as both are now expected to grow EPS (consensus) in the low 20%s 2007 to 2008 yet (HAL) is trading at a 12x forward multiple to (SLB)'s 16x.

Oil Inventory Reports (from the Dow Joines survey)

• Crude- up 500,000 barrels.

• Gasoline - up 900,000 barrels. Anything short of 90% utilization and/or under a 1 million barrel build in stocks will likely be perceived as bullish. Delving deeper into today's report the bears need:
  • Imports. We also need another import number in 1.2+ mm bpd range to help the bear story for gasoline.
  • Demand has not shown signs of slowing. With the national average now at $3.10 (and over $3 for the reporting period) you'd think the consumer would back off of a bit.

Ironic Quote Watch: Alaron's Flynn said one of the reasons gasoline prices are high is that "refiners ... have had a run of real bad luck. This has been the year of the refinery outage," he said. And "some of the refineries that have been down have depressed the price of the light sweet crude." Comment: Bad luck for whom? In another quote yesterday he remarked about "the market hoping things calm down in Nigeria". Sure. By the by, my usual source for regional crack spreads is running a little late in updating their figures this week. Maybe the trouble is with the extended website maintenance season?Nigeria Watch: 800,000 bopd offline. 2.2 million to go. Don't be surprised to see production fall another 200,000 or so by the end of the month. MEND has vowed to stir up increasing amounts of trouble through May 29 when Obasanjo turns over the  keys to the presidential palace to president Y'Adua. The locals don't like Y'Adua because: 1) he's from northern Nigeria, far from the oil rich swamps of the delta, 2) he's viewed as Obasonjo's chosen successor, 3) of blatantly widespread voting fraud and violence in the April election, and 4) because his message, at least as it's been crafted to date, is very recent Obsanjoesque. Other tidbits from the country overnight.

• (CVX) says it's shut in production to remain offline for 30 days due to security concerns.
• Shell says the villagers that forced the shuttering of its 170,000 bopd last weekend have left the facility. The facility remains shut down at this time.
• MEND blew up the vice president elect's house.

Natural Gas.Range bound in the upper $7s. The over/under on gas storage this week will doubtless be 100 Bcf. Anything short of the triple digit mark and gas will be buoyed all the more. Furthemore, the speculative short position remains near record levels providing an automatic source of "dip buying" volume. See tomorrow's post for the HDD and CDD breakdowns and my guesstimate (hey, it's still the shoulder season) for Thursday's gas number.

• LNG Deliveries Ticked Up Slightly Last Week. LNG imports rose 0.1 Bcfgpd to 3.0 Bcfgpd, a 0.8 Bcfgpd increase relative to year ago levels. The EIA is looking for average LNG imports of roughly 2.2 Bcfgpd this year, up from 1.6 in 2006. Last week Apache reference sources that see LNG hitting peak deliveries of 3.6 Bcfgpd this summer.

If You Build It, They Will Come (if you can keep gas > $6)

So far so good for EIA and other's estimates of the coming wave of natural gas supplies. Regasssification capacity has leapt in recent years but 2007 will be the first to see a marked increase in LNG shipments. Click on chart to view in it's entirity.

Canadian Pipeline Deliveries Continue To Be Diverted. Pipeline deliveries of natural gas from the north remained nearly a Bcfgpd shy of levels typical for this time of  year.

Taken together, natural gas imports are running 0.1 Bcfgpd below year ago levels. While it doesn't seem like much the import situation remains supportive of gas prices. When examined from the perspective of estimated growth in demand from the petrochemicals sector of as much as 1.0 Bcfgpd and an expected hot summer any slip in supply will be supportive of but not necessarily bullish for the natural gas markets.

Holdings Watch:

CALLS:

• (NFX): May $45 Calls were sold for $2.95, a 120% gain in roughly three weeks from their cost of $1.33.  I continue to hold the June $45s. See all my thoughts on NFX here.

PUTS:

• No action yesterday. Still holding the (TSO) $115 and $110 put positions. Yesterday's downgrade of the stock, the fifth in the last seven weeks had little to know impact. I'll repeat this for those of you who aren't daily readers but I think we're closer to the top in terms of both RBOB prices, crack spreads and the refiners who are extended relative to historic forward cash flow multiples.

STOCKS: No action. BPG- starting a nice deadcat bounce recovery however after the over reaction to the lackluster results at one of their pilots.

Odds & Ends

Analyst Watch: (CNQ) cut to neutral at Lehman.

Welcome to new gas player (PINN)!

• New PRB CBM player formed out of (CRZO), (GST) and (MRO) assets and spare change from Credit Suisse.
• Large primarily undeveloped leasehold (308,000 net acres) mostly in the Powder but with ~ 10% in the Green River Basin. 5,000 locations identified.
• 25.9 Bcf proved reserves (which is up from ~20 Bcf as of YE06 largely due to gas prices).
• Lost 5.5% on opening day (May 15th). I wonder why?
  • Massive premium to NAV.
    • 28.9 million outstanding post deal X $9/sh  +  working capital gets you TEV of around $225 million.
    • I get an NAV of just over half that if I'm fairly generous with the value of their in ground reserves and undeveloped acreage.
  • Steep cash flow multiple relative to peers despite fact that PRB here is lower R/P than a lot of the gassy "long reserve life" players.
  • You get to wait the usual 30 days for Street coverage.
• Once this seasons a bit it'll be a good, although thinly traded proxy for Rockies natural gas, replacing the old Evergreen Resources as the purest of the pure gas plays.
• Verdict: I'm waiting for the coverage to start and then waiting some more. They plan to drill 200 to 400 wells per year which should yield decent reserve growth but hasn't in the past. They also own rights on a majority of their acreage to explore for conventional oil and gas at deep depths than the coal formations. This one is worth watching.