Trepidation Tuesday

Caution Watch: Dangerous market conditions ahead. I see headwinds for oil, despite the fact that it will likely cross the $100 mark in coming days, in so doing it will like provoke a token response from OPEC at their December 5th meeting. Further, with the financials dictating the market's direction and with further evidence of their blatant stupidity surfacing in the form of fund bailouts and paper pusher downsizings on an hourly basis I am more and more reluctant to risk further capital beyond a trade or two, and I mean quick trades until December really gets rolling. There will days of green and in the same magnitude as yesterday's 2+% drubbing but until such big swings are the rarity and not the norm I will remain cautious, homeworking some ideas and biding my time. That is all.

Commodity Watch

  • Crude Oil: after a strong start January crude settled $0.48 lower to $97.70. This morning crude is trading off $2.50 to $95.20 on Saudi comments that they are now pumping 9 mm bopd which is in line with levels set for the November production increase. 
  • OPEC Watch: nothing from the group itself but speculation is mounting that Saudi Arabia is pushing for another increase.
  • Vienna's PVM Oil Associates noted that OPEC's seaborne oil exports in the first half of November dropped 340,000 barrels a day from the second half of October to 22.48 million barrels a day ~ from AP.
  • Natural Gas: closed up two cents yesterday to $7.72 is trading down about a nickel this morning with the weak oil market.
  • Imports ... Another low volume week
    • LNG: falls back to 2007 low of 0.6 Bcfgpd
    • Pipeline Imports from Canada:
  • 3Q Production Up 2% for publicly traded companies in the U.S. according to Apache who has more interns than I do.

Options Holdings Watch / Position Update. First let me say that I'm more than a little cautious right now regarding the current market environment.

Exploration and Production: stock outlooks are strong, valuations are exceedingly cheap.


  • (APC): holding my second largest position here in the December $60s. Given the market I don't think they will turn out to be shockingly good performers before expiration
  • (APA): greatest oil leverage among the large cap E&P names, grower, proven track record and cheap. Holding the $100 Dec calls which I may add to and the $110s which I will likely punt soon.
  • (CHK): you know how I feel about Chesapeake but for the new guys, let me emphasize best in class production growth, 92% gas production profile, cheap 4.0x 2008 CFPS which are low, highly hedged at $8+/Mcfe through 2008, will be the #1 producer of natural gas in the U.S. bar none in 2008 (bigger than BP, APC, XOM, etc...), and has gone from capital draining acquisition mode to self-sustaining development mode over the last 6 months, a mode it will stay in through at least the end of 2009. For more on CHK please click here.
  • (NFX): think mid cap version of CHK, somewhat oilier production profile and transitioning to a lower cost beast by simply slicing away higher cost properties. They are in under-promise and over-deliver mode through and through. Also, it's getting high time we see an @NFX publication with drilling updates which could catalyze the shares given a stable market background. I hold a small position in the January $55 calls and the stock.
  • (HK): very low cost small cap E&, rarely disappoints instead frequently exceeding guidance and then guiding higher. From their chart you can tell that the the sub $3B market cap group is getting very little love these days. As you can see from the graph above these guys are cheap and outside the normal range of things. I hold options and the common and will begin writing calls against the common after the next big green day or string of green days should we be so lucky. See stocks of interest below.

DryBulk Shipping: All systems go...straight to zero. The more the fundamentals seem to improve, the worse the group seems to perform. DRYS, EXM and TBSI held a round table discussion yesterday extolling the very strong fundamental underpinnings of the bulk shipping environment but a swooning broader market left all  of them lower on the day with leader DRYS falling yet another 10% to trade just under $70 (the stock traded at $130 on 10/29) and shipping rates, while more volatile than earlier in the year nonetheless, are higher.  

Refiners: The narrowing of the gap between oil and product prices reversed somewhat last week (cracks contracted)-click here for the cracks page. I suspect that this week should see a resumption in more favorable trends for cracks but so far the 4Q has been nothing to write home about.


  • All I hold in the refining patch at present is a position in the VLO $72.50 calls which is near the low end of it historic trading range of forward multiples as you can see in the following table. I'm considering adding positions in TSO (now that Tracinda's has been sicked by TSO's poison pill) and SUN which should have a pretty decent 4Q on tap. 


Oil Service:

For now all I hold are calls on deepwater driller (DO). Plan to add (RIG) market willing.

Stocks of Interest:

  • (CRK) picked up a Texas Gulf Coast (Zapata County) producing property package with 57.8 Bcfe for $170 mm or a not altogether unreasonable price of $2.94 / Mcfe. They see potential of another 90 Bcfe via exploration and have a track record of delivering on such musings so you can probably look for some nice F&D prices in the 2008 annual.
  • (HK) buys 24,000 acres in the core of the Fayetteville Shale play for $343 from a number of shale players including (MCF).  They put reserve potential at 500 Bcf (60 Bcfe of which are classified as proved at present). This acquisition was largely paid for by the sale of their Gulf Coast division (swapping high decline rate, high cost properties for long reserve life , lower operating cost assets and greatly increasing HK's drilling inventory).  The Terryville field expansion announced 11/15 was ignored...this may be too but the company has set itself up for repeatable, low risk, low cost, double digit production growth while maintaining a firm grip on the balance sheet. I'll be adding more stock.
  • (PGS) Norway-based Petroleum Geo Services predicts 2008 will be another strong year fro seismic players. The company expects improved pricing due to higher demand will more than offset increased capital spending on technology allowing margins to increase from 50% to 55% next year. Still taking a look at the seismic companies but so far everything points to a strong 2008.

Odds & Ends

Analyst Watch: (BP) and (CVX) upped to outperform at BS, (MRO) increased to peer perform at BS, (PRGN), a shipper, price target cut from $32 to $28 at Cantor.


73 Responses to “Trepidation Tuesday”

  1. 1
    Sambone Says:

    8:13 am EST

    Nymex Down $2 As OPEC Doubts Trigger Selling

    By Nick Heath

    LONDON — Nymex light, sweet crude futures fell by more than $2 in London Tuesday, as expectations the Organization of Petroleum exporting Countries will raise its crude output continued to grow and prompted a wave of selling.

    Comments from Iraq’s oil minister Tuesday added to existing market speculation an output hike will be announced at the OPEC policy meeting in Abu Dhabi next week.

    The news added to pressure on investors to take profits after crude futures neared, but failed to breach new highs Monday. The slide was extended as prices fell through technically significant levels, triggering automatic selling orders.

    “Mainly it is the OPEC news that is getting it going,” said Robert Montefusco of Sucden. Monday’s failure to break above the $99.29 a barrel record high also raised concerns prices might be facing resistance to further gains, he said.

    At 1304 GMT, the front-month January Brent contract on London’s ICE futures exchange was down $1.85 at $93.47 a barrel.

    The front-month January light, sweet, crude contract on the New York Mercantile Exchange was trading $2.07 lower at $95.63 a barrel.

    The ICE’s gasoil contract for December delivery was down $11.50 at $839 a metric ton, while Nymex gasoline for December delivery was down 392 points at 240.22 cents a gallon.

    —By Nick Heath, Dow Jones Newswires

  2. 2
    zman Says:

    RIG / GSF merger closed. Looks like they are going to try to run it up initially. My system is not yet showing adjusted options for the combined entity’

  3. 3
    zman Says:

    Tracinda withdraws $64 offer, stock well below level at which deal was done. Stock is off another 6% after a 7.5% drop yesterday.

    TSO DEC $50 CALLS for 1.90.
    SU DEC $95 PUTS for $3.50

  4. 4
    zman Says:

    broader market will have a lot of difficulty moving higher without the energy complex.

  5. 5
    Sambone Says:

    Off subject – What’s funny is that C got $7.6 billion and the stock is down. That to me is a sign that the bad news is still not out. Market is up on this news alone, so that means it will still go down.

  6. 6
    zman Says:

    Sambone: absolutely agree…people are playing catch a falling knife with a lot of money. Jobless claims starting to come to stage as a topic of discussion.

    thinking 12,500 on the DJIA, something around 1380 on the SPX…Nicky, if you’re around, congrats, this is your kind of day on oil.

  7. 7
    zman Says:

    by the way, if you guys didn’t notice, that SU trade is the same SUXS trade I was in last month and peeled out of last week around here. Lots of pent up profit taking there I think.

  8. 8
    zman Says:

    Re oil down $2.85 to $3.15 this morning. I think you are going to see increased volatility into theDec 5th meeting. If the ministers can talk oil down towards $90 then are less likely to see another increase in production. Interesting market reaction this morning given that they said nothing about what they are going to do at the meeting.

    The 9 mm bopd Saudi is producing is slightly less than what people thought they were producing. Remember that any further hikes to production would have to largely come from Saudi and they are near their current limit. Estimates for OPEC spare capacity range from 2 to 3 mm bopd normally… some like perma bull Matt Simmons say its less than a million. Either way, Saudi is near their current capacity and they cannot just add another 500,000 bopd to knock prices down, not quickly at least.

  9. 9
    zman Says:

    is this thing on

  10. 10
    freeflow Says:


    im reading – not participating due to work. Keep it up Z. I love your site!!

  11. 11
    zman Says:

    thanks … was afraid I was in here alone talking to myself like some caged oil madman.

  12. 12
    kaman Says:

    WTF….losing my dignity w/ VLO.

  13. 13
    zman Says:

    K – big over reaction to the loss of the Tracinda offer – TSO down 7% and dragging the sector through the mud. Fundamentals for the 4Q and next year should be about the same when they made the offer although you could argue that since it was pre-earnings they held the stock up when it would have fallen more. Still, the group is cheap and cracks are improving today as oil is down more than mogas and much more than HO. Should see another draw in HO tomorrow but the charts for the group only make me want to dip a toe not dive in.

  14. 14
    TTupp Says:

    well officially wished i had bought rig instead of do. huge disparity!

  15. 15
    Sambone Says:

    10:03 am EST

    Oil Prices Fall On OPEC, US Economy Concern


    NEW YORK — Crude-oil futures fell Tuesday on renewed worries about the strength of the U.S. economy and on the prospect of fresh supplies from OPEC.

    Light, sweet crude-oil futures for January delivery recently traded $2.70, or 2.8%, lower at $95 a barrel after falling as low as $94.53.

    Iraq’s oil minister said Tuesday that an oil-production increase of about 500,000 barrels a day was on the agenda for the Dec. 5 meeting of the Organization of Petroleum Exporting Countries.

    “It’s still pretty much an OPEC-driven market at this stage,” said Nauman Barakat, senior vice president at Macquarie Futures USA in New York.

    “I don’t think anyone wants to be too long in the market in front of that meeting,” Barakat added, referring to bets that prices would rise.

    Barakat said that OPEC appears to be attempting to nudge the price of oil down to $90 a barrel, off from a high of $99.29 on Nov. 21. Prices at the lower level would still be nearly $30 above where futures stood at the start of the year.

    Brent crude on the ICE futures exchanged traded at $92.96 a barrel, down $2.36.

    Front and center for both OPEC and the futures market is the troubled U.S. economy, which some believe is finally showing the effects of near-record oil prices.

    Traders have already factored the weakening dollar and tightening supplies into the market, leaving U.S. demand the primary force behind the futures contract, said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. Flynn said he expects a slowdown on the U.S. economy to cut oil demand.

    “Unless we get cold weather or a geopolitical event, we’ve probably priced in the tight supply situation as it is right now,” he said.

    That indicates a muted impact for the U.S. Energy Information Administration’s oil and product inventory data release Wednesday, barring a major surprise, Flynn said. The EIA is expected to announce a 400,000-barrel draw in crude stocks last week, as well as a 1-million-barrel draw in distillates, including heating oil, according to a Dow Jones Newswires survey.

    Front-month December heating oil traded at $2.6620 a gallon, off 4.46 cents, or 1.7%. December reformulated gasoline blendstock, or RBOB, dropped 6.05 cents, or 2.5%, to $2.3809 a gallon.

    Having broken through $95, January futures will test $94 on Tuesday, Flynn said, adding that they could be headed for the high $80s in the next few weeks in the absence of news of a major supply disruption.

    —By Brian Baskin, Dow Jones

  16. 16
    zman Says:

    T – nice 20/20

  17. 17
    zman Says:

    PF has gone majorly bearish, wow

  18. 18
    zman Says:

    Sambone, RIG should be trading when issued,

    still don’t see any options symbols there, stock is all over the map.

    T: it was just up $7, then up $3 2 minutes later, now’s your chance.

  19. 19
    TTupp Says:

    yea back at 10:15

  20. 20
    TTupp Says:

    tso was balzy not much suport for a few bux

  21. 21
    zman Says:

    TSO support looks to me to be 47

    DO at support with RIG breaking to new highs

    BTU moving up

  22. 22
    TTupp Says:

    i got scared and dumped the do calls, may reload at a better strike if it makes a move a few bucks lower, because after all traders will be taking profits here on rig, prob starting later today, if not tomorrow

  23. 23
    TTupp Says:

    is their a 1x od dig/du anyone?

  24. 24
    TTupp Says:

    1x’s for dig/ dug that should read

  25. 25
    TTupp Says:

    your suncor trade looks tasty to me, 5 bux till support looks to me

  26. 26
    TTupp Says:

    maybe to 85.

  27. 27
    TTupp Says:

    apa at very strong support

  28. 28
    zman Says:

    broad market move is based on Financials …now that’s just stupid

    SU – yeah, seems they are woodshedding anything energy that has run hard this year…see CLB.

  29. 29
    TTupp Says:

    z you hear anything about cnq today? off 8%, i think it has somthing to do with albertastan, becuse that issued capex statements today

  30. 30
    zman Says:

    APA – very tempted to add but you need oil to stabilize first.

    early read on oil inventories calls for a 750,000 barrel drop tomorrow

  31. 31
    TTupp Says:

    looks like cop through serious support. its funny just how forward looking stocks are, in this case they haven’t even got a chance to take a look at the ridiculous prices received for oil in q4! already discounting oils return to 80 land!

  32. 32
    TTupp Says:

    wasn’t their an issue that may affect oil imports this week?

  33. 33
    Popeye Says:

    I hope someone here picked up DRYS yesterday (not me).

  34. 34
    zman Says:

    CNQ – yeah, their budget is conservative which doesn’t exactly wow the market with respect to growth potential. Street usually only cares about growth and when you start off with a phrase like “focusing on economic retures is more important than growth at any cost” their eyes glaze over and they hit the exits…stupid buggers.

    P – me too although you would have had to buy in late as that decline got nasty in the last half hour, we’re barely 60% recouped on yesterday’s losses as is.

    T – I don’t know of 1X versions for your arb trade on DIG / DUG, sorry.

  35. 35
    Sambone Says:

    Off subject

    It’s a credit card, not cash!


  36. 36
    TTupp Says:

    d in what post did you give the table on refiners historical forward multiples?

  37. 37
    TTupp Says:

    i mean z

  38. 38
    zman Says:

    T: bottom of this one has the five range of refiner’s fwd multiples. I can post an individual chart vs the PE over on the refiner tab if you’d like to see it for a specific stock.

  39. 39
    zman Says:

    man what a flip floppy crappy market…hard to get excited about much as the moves don’t last beyond lunch.

  40. 40
    ram Says:

    Is there any new that is pushing down DO? I would have hoped that RIG would have pulled up it’s peers. RIG seems to be the only one in the green.

  41. 41
    ram Says:

    It seems everybody was wearing heavy clothing in most of the football games this weekend. Is ng due to rally because of increased consumption?

  42. 42
    Nicky Says:

    Morning all – a nervous energy market I see and if inventories come in more bearish than forecast I reckon we see 90 by the end of the week.

    Is the top in? Well maybe! But this could still be iv with v up to come. Trading much below about 93.70 will argue for a top in which case I reckon we hit 90 and then bounce back to 96 ish before turning lower again.

  43. 43
    Nicky Says:

    Broader market – I think we need another leg lower yet which will take us to the August intraday lows. IF that were to happen we can start to discount the more bullish count which is currently still out there and argues that this move down has been 4 with 5 up to come to new highs. If we take out the August lows then that count is no longer viable and any bounce with be countertrend (although it could be huge!).

  44. 44
    zman Says:

    Ram – DO down with OIH which is down with oil. Think it turns with the sector and starts to feel the pull of RIG soon.

    NG down with oil, should see a good sized pull on Thursday which is why gas rallied Monday early before succumbing to oil’s pull. SWN to jump when NG next does.

    Morning Nicky…I think OPEC is testing the rumor waters before the Dec 5 meeting. Of course, the lower oil is by then, the less chance of them cutting.

    early read 750,000 barrels crude, have not seen products yet but you gotta figure on a large draw in distillates.

  45. 45
    zman Says:

    wow, SUXS trade not sucking…amazing…starting to think I was cursed.

    and the TSO seeing some bottom fishers now…that is very cheap for that stock…would like to see West Coasters driver their cars a bit more in tomorrow’s report

    FTO strong

  46. 46
    Nicky Says:

    The only analyst I have read says crude and rbob will have a bigger build than forecast and distillates will be in line.

  47. 47
    zman Says:

    Nicky: did you see what the expectations are: so far all I see is a 750,000 barrel draw for crude.

  48. 48
    ram Says:

    It looks like the RIG options could be trading at the WI price vs. the stock. DEC call 130’s at 3.2 to 3.6.

  49. 49
    Nicky Says:

    Crude – draw of 0.4

    Rbob build of 0.9

    Distillates draw of 1.0

  50. 50
    zman Says:

    Nicky – thanks

    not sure the numbers have much in the way of bullish potential for crude pre OPEC meet unless they are seriously out of line. heating oil I would think would be a little bigger than that given the weather and the lower refinery production and will continue to be big (again weather) until the refiners get back on line. Next week should see an even bigger pull on dist inventories.

  51. 51
    zman Says:

    oil liking $95…not exactly a weak number for the majors, E&P and producers ya know.

  52. 52
    Nicky Says:

    Z – there is an uptrend line which comes in roughly at 94.50 – the bulls won’t want to lose that.

  53. 53
    zman Says:

    CLB tempting but no sale to me.

  54. 54
    zman Says:

    rumor is OPEC mulling 750,000 bopd increase at Dec 5 meeting. I say good luck actually bumping it that much… I think they are rumoring the oil price lower.

  55. 55
    zman Says:

    Nicky – re RBOB. Any reasoning on the bigger than expected build your guy is saying on gasoline…awful lot more people went shopping last week and traveling according to AAA. Historically you get big builds this time of year but demand has been running pretty strong (accepting that you believe demand is up about a 1% using the weekly numbers)

  56. 56
    zman Says:

    Flynn says “high prices are starting to cure high prices” …don’t know how he explains demand being up 0.8% YoY with gaso prices up 40%.

    DO getting slaughtered. No reason other than it was getting slaughtered before and no its getting slaughtered more as the market comes off highs. OIH at good support. Will take another look at that and some other favorites like HAL which are getting knocked about in the morning.

    Oil closing below Nicky’s line.

  57. 57
    Sambone Says:

    Dow looks like it wants to go down now in the past 3 minutes.

  58. 58
    zman Says:

    agreed, energy leading way lower, massive selloff in several names, doubling losses in last 10 minutes

  59. 59
    ychong Says:

    If I were to be bottom fishing oil/gas stocks right now, which stocks do you think provide the best risk/reward at this point?
    (or do you suggest that I wait some more?)

  60. 60
    Sambone Says:

    Y – I’m buying VLO and watching COP. Not sure what the Zman thinks.

  61. 61
    ychong Says:

    Thanks, Sambone. I already have some VLO, so I will consider COP as a buy candidate.

  62. 62
    zman Says:


    Safest course is to let them settle a bit.

    Stocks trading technicals more than anything else with oil the focus for direction.

    COP is cheap…can get cheaper. Like them lots…not touching.

    Refiners: VLO best and cheapest in class. TSO unduly hammered but what isn’t? FTO interesting not getting killed…should be setting up a good quarter. SUN should also have a good 4Q on way.

    On the stocks I like the HK a lot right now, and the SD will get some sparkling coverage BUY ratings just before Christmas (on or about Dec 20)

    If we are talking options I see no reason to get aggressive prior to Dec 5. Lots of stuff looks tempting but just about every toe I’ve put in over the last week has been chewed off.

    best risk reward:
    For a bounce in oil: DNR/ APA
    For a bounce in gas: CHK lowest risk, SWN biggest reward.

    DO should not be down at all today. Looks like support to me.

  63. 63
    ychong Says:

    Z, a good summary. I will look at the stocks you mentioned as well. Thanks, Z.

  64. 64
    zman Says:

    wow XOM just went green

  65. 65
    zman Says:

    had to tie my hand down not to take some more DO and for that matter not to take some RIG long. lets see up 200 on the djia today, which means tomorrow …???

  66. 66
    zman Says:

    y – should have included APC in the gas bounce theory on the low risk side.

  67. 67

    Vulcan Materials

    Hey Z., here’s some information for you, listen to the CEO of VMC talk about the merger of VMC with Florida Rock.
    Vulcan has 44 years of permitted stone reserves [at current production] and Fla. Rock has 60 years. These cos. have some of the best rock market locations in N. America.



  68. 68
    zman Says:

    Thanks Q will listen tonight sure does look like it wants to find a home around $80 for a potential bottom.

  69. 69


    VMC is 12.0 P/E MLM is 16 P/E VMC much more geographically diversified, they have the Yucatan quarry and 3 special ships to transport CHEAP stone to coastal markets that don’t have hard rock from Galveston to Tampa to points up east coast.

    Been a while since I’ve had to time to hang on ZEB. I hope you’re doing well.

    I had some CHK Dec 40s [ugh] at 1.2 and bought triple that today at .15

    But, I’m interested in CHK 35s or 37.5s

    Which strike and which month would you commit to if you were entering a position from scratch?

  70. 70
    zman Says:

    if from scratch the $35s and $37.50s, should have a great 4Q (but not until Feb) and little catalyst until then except for the potential for rising gas prices. The higher strike the further time you want to give…right now no hurry to add lots…its cheap and that’s why less damage done but the group is teetering over prices we simply don’t need to exceed, let alone meet, the numbers.

  71. 71
    freeflow Says:

    Thanks for all your insight today Z – I’m in the CHK Jan’s and I’m rolling to the next month per your advice.

  72. 72
    zman Says:

    Q – when you get a chance, questions re VMC:

    they start the conference by saying they are tied to job growth, household creation etc.

    then they talk about deliveries being flat but op earnings having doubled over the last 4 years.

    sorry but how is this not economically sensitive and how can they continue to grow op inc (or even sustain) if the build is based on pricing.

    It looks like a great company, most admired, last acquisition good and all that, lots of reserves (aggregates) in reserve constricted placed like Florida, California, and Texas. Demand appears set to go through the roof in those key states so maybe that is what keeps pricing high.

    Seeing biggest price increases ever…just reminds me of the bulks and they are cheaper (at least on a NTM basis). Not trying to be negative but I ask a lot of questions, especially about things I know little about. In energy we are happier when production grows at a good IRR than when the price of the commodity rises astronomically and you just hear all the “this time its different” arguments.

    From a technical perspective, and clearly I am not a wizard in that area, it looks like it’s basing at $80. But again, if the economy goes to crap how does this hold up…it seems much more leveraged to highways than housing which is good will public works $ grow faster than the loss on the housing side. I remember TEA21 from some gas demand work I did back early this decade… SAFETEA looks similar in aggregate demand growth generation, would that be a fair statement.

    Anyway…it looks like a great one to buy for the long term (again not sure on valuation for just a trade) but chart looks fine and to sell options against until the cows come home. Given the infrastructure need I’d put it in the same category with water desalination (stuff we are going to need more and more of and very healthy for the IRA)

  73. 73
    zman Says:

    VMC 10 cent change in diesel costs them 6 mm pre tax.

    Higher natural gas prices hurt them as it is a component on their explosive side. I’m guessing ammonium nitrate.

    They said they have trouble predicting these costs. Man do I have a site for them to subscribe to, lol.

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