Wednesday Morning: HK Analyst Meeting + A Look At E&P Multiples

Commodity Watch:

  • Crude Oil: Advanced to another record high, up $0.77 to $108.67. The dollar was actually stronger and their was peace in the world so you can really only point to the hedgies who have cried, "commodities = safe harbor" for some time now. This morning oil is trading +/- $0.25.
  • China's SPR Watch: China plans to grow their version of the U.S.'s Strategic Petroleum Reserve to 30 days of imported supply or 100 million barrels by 2010. Based on recent import growth of 5% per annum this could equate to 120 million barrels by the time 2010 actually rolls around. Since China is in the early stages of building their SPR (they have constructed 2, at present mostly empty underground storage facilities in each China and are building two more (hello concrete and steel demand)) it is thought that to get to the 120 million barrel level they need to add 100 million barrels just for storage which, depending upon when they plan to get there during the year comes to 120 to 160,000 extra bopd needed.
  • Cheney To The Middle Watch. Given the previous bullet it's a good thing the U.S. is sending Cheney to the Middle East next week to inquire as to increased production from OPEC, lol. Fat chance. Save the airfare.



  • Natural Gas closed flat at $10.02. Bloomberg has the consensus expectation of a 82 Bcf withdrawal for Thursday versus the 104 Bcf pull seen in the year ago period which looks appropriate given the warmer weather and higher production we know to be occurring. This morning gas is trading of a $0.05 to $0.10, the third straight morning it has tried to sell off before the open as Spring-like temperatures pervade.
  • American Gas Association Warns About Impact of New Environmental Legislation. The AGA warned Congress yesterday that current tighter environmental legislation proposed by McCaine and Lieberman could lead to a 10% increase in natural gas demand. The EIA had forecast the same legislation as reducing the call on natural gas but had also assumed that 145 nuclear plants get built in the U.S. in the next 22 years, a laughable number given their current popularity.

Stocks We Care About Today Watch:

  • HK Analyst Meeting - 11 EST. No new slides were available at post time.

E&P's : CF vs Reserve Life: In the past, the trend of these charts has generally been up and to the right, meaning, longer reserve life yields higher cash flow multiples, but production growth is currently sway in most cases in yielding multiple expansion. Case in point is (EOG) which has recently outlined solid, long term double-digit growth albeit with projects that can easily lead to a resumption of the long reserve life nature of this particular beast. Despite (CHK_'s recent rally, it remains the bargain of the group.


Looked at another way ...


...and in the mid caps, growth is definitely king. (HK) and (NFX) remain cheap. (XCO) bears watching here and will be the subject of one of my little book reports soon.




E&P CF vs historic CF Multiples Table


Holdings Watch: No changes yesterday.


Odds & Ends

Analyst Watch: (DVR) upped to overweight at JP Morgan.

102 Responses to “Wednesday Morning: HK Analyst Meeting + A Look At E&P Multiples”

  1. 1
    zman Says:

    DNE – nice delayed reaction, up another 11%. Guess some people wanted to actually read that Jefco report.

    Stocks opening a bit mixed but trying to firm up, CHK about to break back into record territory.

    HK – still no analyst meeting slides.

  2. 2
    zman Says:

    CHK completely breaking out now, all time new high at at 47.30, up 3%, smoking the rest of the group.

    NFX has the same look to its chart.

    HK attempting run on triple top at $19. Today could/should be a very big day.

    Drybulks – no follow through.

  3. 3
    zman Says:

    COP Analyst Meeting highlights. 2% growth which is actually a lot for a major, could have been 3% but they did not want to set off another round of service cost inflation.


  4. 4
    rseidman Says:

    Z: What’s your view of APA?
    I’ve been in this for some time.
    Tine to sell?

  5. 5
    zman Says:

    APA is a good solid, above average growth oily E&P. Depends upon your time horizon on a sell and as you know, I don’t give advice. I think they will, in the very near term, be the beneficiaries of a significant round of Street estimate revisions to the upside. They already look cheap to the group so this may well take the stock well into the $120s. Their story continues to strengthen from quarter to quarter. I play them from time to time for a move in oil as well with calls, rarely puts…I think oil is extended and as such I’m not in them now as they have a pretty strong correlation to crude, strong than many of the gassy stocks to natural gas.

  6. 6
    zman Says:

    Spitzer quit

    Get the t-shirt here:

    oil numbers in 10 minutes…anybody home?

  7. 7
    Denise Says:

    Good morning-
    My ace T/A lady says give the rally some room to run
    A lot of chatter that we successfully tested the intraday lows of Jan.by a number of sites
    Another comment by J Saut -Raymond James
    “a 90% up day occuring quickly after a 90% down day suggests a couple of month rally
    And saw in the Dallas paper T Boone’s fund down 14% in Feb because of his short oil/nat gas stance

  8. 8
    yona Says:

    Sic Semper Tyrannis

  9. 9
    zman Says:

    D – agreed on the potential for a rally, not that things are “all better” but the heard moves for more than a day, we have a 3/4 point cut coming next week as long as CPI doesn’t crash the party Friday.

    Yona = lol.

    5 minutes to inventories.

    HK no slides yet

    CHK up on a Cramer lightening round call last night…still, I agree with him on buying the dips there.

  10. 10
    zman Says:

    crude: up 6.2

  11. 11
    Popeye Says:

    No rally on my screen.

  12. 12
    T-Tupp Says:

    pretty oil bearish eh

  13. 13
    zman Says:

    big imports number: 10.5 mm bopd.

    oil is fighting going lower but you gotta think it can’t hold these levels on this kind of inventory number.

  14. 14
    zman Says:

    ZTRADE: Out SU $105 for $3.10, up 72%

  15. 15
    yona Says:

    got hurt buying on API which came out first:

    C -458
    G -3695
    D -2686

  16. 16
    zman Says:

    down oil rallying market, energy not included today…looks like they are taking about half to a third of yesterday’s gains in the stocks back.

  17. 17
    T-Tupp Says:

    is that crude +458k ? they are a joke

  18. 18
    zman Says:

    API is a survey not an estimate, so really its just who you chose to believe.

  19. 19
    apbd Says:

    I come to bury Client # 9, not to praise him.

  20. 20
    zman Says:

    Nat gas exactly marking crude again…like the two have anything to do with each other.

  21. 21
    T-Tupp Says:

    i tried to change my used name on here to client #9 but it wouldn’t let me edit

  22. 22
    zman Says:

    Nat gas below 9.86 (9.88 down 0.12 now) would be a good start. Then 9.62, then 9.64.

  23. 23
    BigJim Says:


    Hope all is going well. Thanks for the email alerts on trading. What do you think about CHK and breakout?

  24. 24
    zman Says:

    CHK is still cheap, more analysts are getting on board with the fact that they are out of the acquisition business and into the development business now…the technical breakout is underway and they could add another multiple 1.0x of 2009 CFPS which would take the stock into the high $50s without putting them out of line with the group. Also, more analysts are marking up their gas price estimates for the year and the strip price would tip these guys in excess cash flow territory…not CHK’s usual plan. So either they step up capex (which could yield even faster growth) or they start paying down debt faster.

  25. 25
    zman Says:

    just listening to the HK conference. Slides are out in an 8k. Everything good so far. Big potential, very cheap to its peers.

  26. 26
    zman Says:

    HK about to rock.

    Horizontal Taylor sand wells in Elm Grove field, should be another 2 completed in next two weeks. 3rd drilling, these can add big rate fast.

    New Shale Play. Now talking about a deeper (10.500 to 13,000 feet) Shale Play at Elm Grove, 200 feet thick, rock work says its viable. Encana is in the area.

  27. 27
    zman Says:

    Crude down only $0.30 now. Speculators just won’t turn loose of it.

  28. 28
    T-Tupp Says:

    does anyone know the deal with the two strikes for the XLE options?

  29. 29
    reefguy Says:

    HK Elm Grove shale sounds like Bossier. just below the Taylor sand

  30. 30
    zman Says:


    they said it was between the Bossier and the Smackover

  31. 31
    uop Says:


    your charts are most interestinh:
    glad I have some CHK, HK, with 50 % profit, I think I will let them run further.

    looks like CHK ,APC and XCO have the best potential.
    Did not know XCO,

    what time horizon do you see for these to move up.

    of course, NG still married to oil,
    my shots on oil and NG are not doing well.
    Txs for the good work.

  32. 32
    reefguy Says:

    The only shale there is the Buckner. Start section is Bossier-Haynesville(Cotton Valley Lime)-Buckner-Smackover

  33. 33
    zman Says:

    crude running now, still on the HK call, anybody see anything as a cause?

  34. 34
    zman Says:

    uop – its going to take some time, those charts more useful for stock vs option buying but like to give relative positioning every once in awhile.

    XCO I don’t know. Never followed. Plan to work up. Reef knows I think essentials there and they appear to be an as of yet uncredited participant in the Marcellus.

  35. 35
    zman Says:

    HK should take a break soon, down to talking about the non-core w. Tx stuff. Should allow the analysts a chance to call in and get on their lunch squawk box calls. Stock has not yet moved, think First Call notes here tomorrow morning will be positive.

  36. 36
    zman Says:

    Up a buck at $109.60 …anything?

  37. 37
    ram Says:

    Re #35 Therefore, take advantage of a slight negative pause for those who have not gone as often to the HK well as others?

  38. 38
    zman Says:

    Ram – yep, thinking Aprils though just in case, you never know with this craptastic market. I was hoping for a pop to cast of my March 15s and may add to my
    April 20s

  39. 39
    zman Says:

    HK comments on Fayetteville: they’re sticking with 5 rig program to drill 155 wells (2.5 wells/rig/mo). Could scale up to 8 to 10 rigs easily as they are available at falling prices but they don’t want to outstrip their infrastructure and they want rigs they are used to as they get used to the Fayetteville.

    Also non-proved resource potential numbers went from 2.5 last year to 4.1 Tcfe…pretty nice ramp.

    getting lots of ?s on the Haynesville in the Q&A. Basically saying its early and they say they are being pretty conservative given the data they have… could come up with Huge numbers which they did not use.

  40. 40
    zman Says:

    Fayetteville gross prod ramped from 42 mm/d at YE07 to 70 at present. Think this is 80% nri which is significant on a 300 mm/d total company 2008 expectation.

  41. 41
    zman Says:

    On oil, looks like dollar just fell to an all time low vs the Euro. People are buying oil as an inflation hedge like they used to buy gold.

  42. 42
    redjack Says:

    Z…when you do a workup on XCO, check to see how much of their acreage in the Marcellus that they have the deep rights for. I know all or some remained with EOG.

  43. 43
    Bob Says:

    DRYS target cut by Cantor (The underwriting firm) due to the dilution of the additional shs. Price target is now only 179% above last quote!
    DryShips “buy,” target price reduced
    3:42a.m. – Cantor Fitzgerald
    NEW YORK, March 12 (newratings.com) – Analysts at Cantor Fitzgerald reiterate their “buy” rating on DryShips Inc (DRYS), while reducing their estimates for the company. The target price has been reduced from $121 to $114.

    In a research note published yesterday, the analysts mention that DryShips has recently filed a prospectus supplement, enabling the company to issue up to six million shares from time to time. DryShips’ shares outstanding have risen from 36.7 million at end-2007 to 40.9 million at present, following the issue of nearly 4.2 million shares since the end of 2007, the analysts add. The EPS estimates for 2008 and 2009 have been reduced from $18.15 to $16.56 and from $12.69 to $11.62, respectively.

  44. 44
    uop Says:


    the deltas for april options on apc and others are extremely low, around .5 or less, even for close to ATM options,

    does not sound too exciting, what is going on here??

  45. 45
    zman Says:

    re #40, that’s more like like 50% nri, so operated net is 35 + 7 non op mm/d

    HK: says Ark sev tax is supernaturally low, believe it will go to 7% and that won’t effect them, they’ve been planning on it.

    HK conference just ended. Analysts seemed please if a bit sleepy.

    Thanks Bob. Wish someone cared but at this point they just look like an underwriter with a overly bullish target. Biased in other words, not saying the stock isn’t cheap but when was the last time this group went up 2 days in a row.

    uop – don’t know why that would be, I don’t often mess the greeks but you would assume deeper in the money gets you closer to 1, is that not the case.

  46. 46
    T-Tupp Says:

    uop- an atm option always has a delta of .5 no matter the other inputs

  47. 47
    T-Tupp Says:

    its the percentage chance that the contract will finish in the money by epirary. an ATM option statistically has a 50% chance of moving either way therefore a delta of +0.500 for an exactly ATM call

  48. 48
    zman Says:

    not where I went to school, see GRP at 50.50 with the 50 strike march calls at 0.61 delta


  49. 49
    zman Says:

    Reef – RE: HK they described the Haynesville Shale as a thick shale below 10,000 feet and > 200 feet thick bounded by wells drilled by other operators CHK, ECA, Questar and one of their own with all similar sections on logs. That’s a really big area, bigger than Elm Grove field itself. I though they said 1200 sq miles but must have misheard. I would have thought a new shale play, close to infrastructure (as opposed to the Canadian one EOG released the other day) would have sparked a reaction. Guess I’m wrong.

  50. 50
    ultyguy Says:

    zman – any thoughts on WRES. I’ve owned it for a while now and have made some money selling covered calls. However,it hasn’t participated in the run up in gas over the past few weeks.

  51. 51
    zman Says:

    U – have not looked at them in quite some time although a lot of gassy stocks are in the same boat. The only people who believe these gas prices are new money speculators. Happy to take a look for the weekend?

  52. 52
    T-Tupp Says:

    exactly, its 1% ITM. sing a black-sholes calculator, if it was at $50 with the 50 stike its delta = .50

  53. 53
    reefguy Says:

    Haynesville Shale—-must be lower unit below lime which is a regional marker. I think i might call it upper Buckner.

  54. 54
    zman Says:

    Reef – if we call it Buckner, with IPs from a handful of wells > 2 mm/d which before you get the science honed on completions that such a new play, right under one of their core regions would be worth something…it’s the first they’ve ever talked about…just an odd reaction, that’s all. Maybe the red energy day and the need for time to digest is the problem.

  55. 55
    T-Tupp Says:

    delta deviates a little bit from 0.500 for ATM options for: implied volatility extremes, extremely long expirarys. also, options that expire in a few days like the marches have a high gamma, thus big increases in the delta for smaller movements into the money– like only 1% in the case of the GRP’s. Also, calls vs. puts get squed to the upside when it comes to deltas and pricing models since markets tend to move upwards.

    im going to punch my monitor. its impossible to make money in this market.

    happy trading

  56. 56
    zman Says:

    Hear ya T, your TSO back to $32 level. Refiners getting creamed.

  57. 57
    T-Tupp Says:

    my tso?

  58. 58
    zman Says:

    T – just remember you saying something about it maybe getting back to 32 a couple of weeks ago.

  59. 59
    zman Says:

    today would be a new closing low for it for the past …13 months. Same for VLO, worse for SUN. Bill’s note about a comment the VLO CEO made yesterday about maybe selling 1/3 of their refineries b/c the business stinks is pretty telling. Personally, I think they should all take extended maintenance turns…they are getting killed by 109 oil.

  60. 60
    T-Tupp Says:

    yea. just chosing to forget. i would be rich if i would just sometimes follow my own gut ideas.

  61. 61
    zman Says:

    and the daily defense of natural gas is back in effect, marking oil as it looks to take out 110 on a crude build that was almost 4 times bigger than expected.

  62. 62
    T-Tupp Says:

    yea the oil is total bs at these levels. zero justification

  63. 63
    reefguy Says:

    z I have my team looing at logs south of Elm Grove now

  64. 64
    zman Says:

    Reef – I just want a small override, lol.

  65. 65
    zman Says:

    Market up: check for Dow, flat for S&P
    oil up: check
    gas up: check
    group down: ?

  66. 66
    ultyguy Says:

    Zman- re: wres, any comments would be appreciated whenever you have time. I think like quite a few people here, I’ve also been watching my ung puts erode away. 🙁

  67. 67
    ram Says:

    Is there any truth to an equivalent oil sands find to the right of the Alberta prov. in Sask? If so, who might be a potential growth candidate?

  68. 68
    reefguy Says:

    Oil busting 110 before close?

  69. 69
    ram Says:

    The reason for #67 is that I have been overrun with junk email on this “historic find – Biblical proportions” that could make me wealthier than anyone except ZMAN. All I have to do is subscribe and they will give me the magic stock.

  70. 70
    reefguy Says:

    110 crossed

  71. 71
    ultyguy Says:

    ram – check out BQI. They have own quite bit of land in sask and long the alberta border. Apparently they have confirmed reserves of 1 billion and are doing more drilling to add to that. I’ve been in them for a year and have ridden it up and down during that time via covered calls.

  72. 72
    zman Says:

    Ram – re 67, http://www.greencarcongress.com/2007/08/saskatchewan-ge.html

    Somebody around here you used to talk about BQI quite a bit, it was a while back though. Those plays are outside my area of knowledge.

  73. 73
    zman Says:

    closed NG flat again despite the $110 crude, surprised they couldn’t do better, couldn’t because its 90 in Tx could it?


  74. 74
    ram Says:

    SAMB talked about BQI last October.

  75. 75
    ram Says:

    Thank you.

  76. 76
    ram Says:

    Speaking of BQI, trading is halted for some reason.

  77. 77
    apbd Says:

    Client # 9 resigned minutes ago. He is still negotiating a plea deal. He would look good in stripes.

  78. 78
    apbd Says:

    Client # 9 received all sorts of advice.
    Ted Kennedy told him to take Kristen for a ride on a bridge. Bill Clinton told him to burn the dress. And Al Gore said it was another effect of Global warming.

  79. 79
    zman Says:

    A – ouch!

  80. 80
    Denise Says:

    Z-if you have time over the weekend will you re look at EVEP? What ails it? I am long of course-I can resend the Raymond James write up
    I did see a refiners are going to do the maintenance thing time to buy article today on Cramers site. Vlo

  81. 81
    ram Says:

    If we go from winter to summer – will NG stay high because of AC’s running?

  82. 82
    zman Says:

    Ram – sent email on that.

    D – will do.

  83. 83
    Denise Says:

    Possible explaination for oils rise?
    Reading some chatter that there is speculation that GCC (Gulf Coast Corporation) may use the euro as a reserve currency
    L Lewis points out it may be why we continue to have a bid on oil.If they get rid of dollar peg OPEC starts pricing in euros(in addition there is talk of China reevaluation because of there 11% cpi yesterday and throw in our possible 75 bp cut by the fed

  84. 84
    regale Says:

    Re #67 and #69
    Go to stockgumshoe, and type in the word “oil” in the search box. The search will bring up 3 or 4 stories; my guess is No. 3 is the one you’ve been bombarded with, FWIW.

  85. 85
    zman Says:

    CNBC added that the run is due to contract expiry this Friday. It actually expires next Friday. I think its just 1) a safe harbor for capital cowering from the equity markets’ extreme lameness and 2) being an inflation hedge.

  86. 86
    ram Says:

    Thank you Regale.

  87. 87
    zman Says:

    50/50 chance the nat gas number won’t matter tomorrow. I’m holding my puts (the 40 to 42s are worthless now) and the 47 and 46 will be with any more rally. I read this one wrong and am paying for it. If we get a sharp downspike, through support in the 9.88 level I may take the higher strikes off the table. I think this doesn’t really fall until it does, if you know what I mean. When it does and fails to rally on a dip back to green but instead makes a series of lower lows in a day, then profit will be extreme.

  88. 88
    Denise Says:

    Z-Cramer has been saying NG goes to 16-Where do you think he gets that paticular #?
    Also antidotal-everywhere I look there is a eqiuty NG bullish article-Adami wrote XTO today ect… Cramers and others all rave about chk everyday

  89. 89
    zman Says:

    $100 barrel of oil /6 = $16.67 / Mcf of gas.

    6:1 ratio on btu value of a barrel of oil to a Mcf of gas.

  90. 90
    ram Says:

    Forgive the ignorant question: Why did you buy the UNG puts if people use that rule of thumb?

  91. 91
    ram Says:

    Strike question #90. The jury should disregard #90!!!

  92. 92
    zman Says:

    D – what’s really funny/sad is, the Street, by which I mean the E&P analysts were pretty uniformly bearish on the prospects for natural gas as recently as January for 2008 and 2009, seeing little in the way of catalyst for the commodity.

    Ram – That is a very fair question. The 6:1 ratio is used for calculating reserves. For years and years the spread between the two has been 10:1 or higher. Oil is global, gas is local so they have different fundamental drivers.

    People will say, oh no, not any more, not will all the LNG out there, but LNG is a sliver of our supply versus domestic production, it almost doesn’t count. U.S. gas supply on the other hand grew at a 4% clip last year, usually it is flat to maybe up a percent or 2 but we are awash in gas right now from the shale plays. This is lingering cold winter and guys who know next to nothing about the molecules (that would be Cramer) pumping a story. You can’t have all the big E&P stocks growing digits and have flat (seasonal adjusted demand) and have tightness. In fact, we are STILL ABOVE the five year average for gas in storage at this time.

    Answer 2 would be that I’m stupid.

  93. 93
    reefguy Says:

    IOC- seeling at close, one block of 10,000 offered at 21.65 before close

  94. 94
    kyleandy Says:

    denise i also have EVEP , mainly cause of j. saut. bot more on way down and was tempted to add today but did not. if div is .60 now and guidance has production up 10-15%. with higher prices, unless they’rs totally hedged, think div should go up. let me know if u hear anything. thks

  95. 95
    zman Says:

    Wrote this back on 2/1 re EVEP: pretty much same price where it is now, so the yield should be improving. Since then they issued a strong looking reserve report, will take a look at the hedges here.

    EVEP: MLP focused on production and distribution growth through low cost acquisitions

    * Solid, experienced management,

    * Low cost acquisition of producing assets that themselves are low cost to exploit and operate. Their all-in F&D is about $1.80/Mcfe which is very low.

    * Reserve life is very long at 17 years so you have stability and they seem to be able to keep acquiring similar assets so the distribution should continue to grow unless gas prices (its about 77% ng) just fall out of bed which I don’t expect.

    * Its got an interesting JV with APA in east Texas which could give you a little upside kick that you don’t normal see in an MLP.

    * So far nice history of distribution growth here…look likely to continue. Current yield 8.5%.

  96. 96
    uop Says:


    you have interpreted the situation well:
    how can one expect the ridiculous price movement of oil and BG being dragged along, considering what:

    well, as there is little to trade/invest in with the Bernanke cheaper and cheaper $$$$, money flows into scarcer oil, why would the Gulf states want all those $$$s worth less by the day ?? In a sense, Washington and the Fed are indirectly running the oilprice up, they clearly do not understand the connectivities.

    The problem with options is always that you can run out of time: with the inventories and the weatherchanges coming, April PUTs were, in my judgement better and still are.
    Or should we expect bad weather until May??

  97. 97
    ram Says:

    ZMAN – YOU ARE NOT STUPID. Stupid is right up there with the hanous 4 letter words in our society. The reason there is a lot of us here is because you are SMART. Since there are many of us learning the energy side of investing, once in a while an ignorant question is asked.

  98. 98
    Denise Says:

    Well put(pun intended) Ram-

  99. 99
    Alhambra Says:

    Fingers crossed that street notices TBSI strength…

  100. 100
    T-Tupp Says:

    z on your blogroll your wangs hapy trading lin takes your to phils site (along with his rightful link) hummm. didn’t do that a week ago b4 he blocked his posts from the public. and it brings you to the subscriber page too, weird.

  101. 101
    zman Says:

    will see about fixing it

  102. 102
    zman Says:

    T: what is happy’s correct link?

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