Wrap + Monday Morning Post


Hope everyone had a great Easter or at least a good long weekend! Now back to business. First, the weekly wrap table:


Key Wrap Takeaways:

1) In cased you missed it Oil and Gas prices tumbled last week.

  • Is this the start of the end for oil? I don't really think so. I think rather that we're in a bit of a news trough, where the weak economy and its impact on demand (which remains unclear in terms of significance at this time) are causing some nervousness / profit taking on the part of some of the more recent hot money that is only a renter and not an owner of commodities. Oil could see mid $90s in the near term, but I doubt it lasts more than a few days. OPEC would likely move to halt any decline below $90. Meanwhile, the Fed has little choice but to continue lowering rates thereby continuing on its course of dollar abandonment which will be supportive
  • As to natural gas, I think it is closer to being out of steam. A last little bit of strength attributable to minor cold spells in New England and then its the shoulder season doldrums. I'd expect a small rally, which I may take another round of puts on (maybe above $9.50 on May gas with an expected drop into the lower $8s). I'll be pretty patient here as there is still a large short position here and a squeeze could be painful. 

2) Refining Margins Beginning To Eke Out A Gain But Still A Long Way To Go.  Gasoline outperformed crude over the last week. And the stocks, which normally don't trade the cracks as much as they trade with the energy stocks and oil started to take notice. I'll have crack spread comments in tomorrow's piece but for now I'm still avoiding the group.  

Commodity Watch:

  • Crude Oil: Fell 6% last week and is looking to open down $1.20 to $100.60 this morning.
  • China Watch: Demand may be off a tad in the U.S. but the lines for gasoline are growing in China. Gasoline and diesel are being rationed due to high demand as independent refineries shutter their operations over high oil prices. State run facilities are diverting more of their refined product to farming and public transport leaving less product for private consumption.
  • Mexico Ports Watch: Two of Mexico's ports which together export 80% of Mexico's oil delivered to the U.S. were closed Wednesday through Sunday by poor weather. That's long enough to show up in the form of a smaller import number and potentially a draw on crude stocks this Wednesday. 
  • Natural Gas: Fell 8% yesterday and is looking flat to slightly higher this morning around $9.10. I'd expect gas to take its directional cue from weather, then crude in the early part of the week.
  • Weather Watch: Lingering Coolness. Gas-weighted heating degree days came in at 142 vs 135 previously forecast by the CPC. This could provide another 50+ Bcf storage withdrawal and buoy gas prices this week. This week, the CPC is looking for 131 HDDs.

Events This Week & Stocks Of Interest: News is a little thin this morning coming off a long weekend.

(APC) Analyst Meeting On Tuesday. I'll have my usual live blow by blow breakdown of the conference beginning at 8 am EST.

(HERO) Signs $300 MM Jack-up Deal With Saudi. Hercules signed 2 of its jack-up rigs (the 261 and 300 rigs) to 3 year agreements with a total potential revenue value of about $300 million (a little over 1/4 of total company annual revenues). The rigs will be mobilized from the GOMEX to the Middle East in September. Both rigs appear to have been stacked (not working) prior to the press release. Capital One cut the stock to Neutral from Add this morning on the news. 

Should Have News Soon Watch:

  • (HK) - looking for a press release on a couple of horizontal wells possibly as early as this week.
  • (IOC) - Elk 4 well news - between now and ... sometime this spring. The results should be a game changer here either way so I'll be looking at a straddle.
  • (DVN) - "Chuck" prospect drilling news - this large, deep, deepwater Lower Tertiary test could have news out anytime between now and the next couple of months. I'll be looking at call side LEAPS on a strong red day for the group as (DVN) has been uncannily successful in the trend, operates, and has a larger interest here. Last mention was on their 4Q call and the well was then drilling ahead below 30,000 feet. 

Odds & Ends

Analyst Watch: (GW) upped to outperform at Credit Suisse with a $7.50 target, (CAM) upped to outperform at Wachovia, (UPL) picked up at outperform with a $82 price target at Credit Suisse. (TOPS) upgraded price target from $7 to $21 (not a typo) at Cantor Fitzgerald as the company conducts a 1 for 3 reverse split. Reverse splits are one of life's useless machinations (unless you are the banker getting paid a fee for advising on it). 

54 Responses to “Wrap + Monday Morning Post”

  1. 1
    kaman Says:

    Morning Z-
    I watched HERO last Summer when they acquired TODCO, and by many accounts became the big dog in the GOMEX….but at that time GOMEX was becoming “dead money” with all the action transferring to deep offshore elsewhere. Are they just late to the party with moving jackup rigs to Saudi? cheers-K

  2. 2
    Sambone Says:

    8:44 am EST

    Crude Down As Econ Fears Persist; Trade Subdued

    By Lananh Nguyen

    LONDON — Crude oil futures traded lower in London Monday as fears over a U.S. recession continued to dampen the outlook for oil demand.

    But volumes remained subdued as many participants were sidelined by public holidays across Europe.

    At 1220 GMT, the front-month May Brent contract on London’s ICE futures exchange was down $0.59 at $99.79 a barrel.

    The front-month May contract on the New York Mercantile Exchange was trading $1.09 lower at $100.75 a barrel.

    The ICE’s gasoil contract for April delivery was up $0.75 at $922.75 a metric ton, while Nymex gasoline for April delivery was down 60 points at 259.91 cents a gallon.

    Oil market sentiment was largely bearish Monday as participants shifted their focus back to oil demand. Fears of a U.S.-led global economic slowdown resurfaced last week, prompting a sharp downward correction in energy prices, and market sentiment has yet to recover.

    “The world economy is not looking too good,” and absent any major geopolitical events, prices are unlikely to push through recent highs, said an energy broker in London.

    “If the world is awash with oil again why should (the oil price) be $110 a barrel,” the broker said.

    The near-collapse of investment bank Bear Stearns, and its fallout across the markets, reminded oil traders that sluggish U.S. economic growth could well lead to a significant decline in oil demand, Peter Beutel of Cameron Hanover said.

    “For most of 2008, inconveniences like falling demand had not prevented ‘investors’ from buying crude like it was water in the desert. By Wednesday (last week), the picture had changed enough to allow the real fundamentals to come peeking through,” Beutel said.

    The meteoric rise of oil prices to new record highs March 17 also appeared to be running out of steam as investors took profits, losing confidence in the complex’s ability to make further gains.

    “The large speculative funds have not been buying WTI futures since we crossed the $100 a barrel barrier and have not proven that they could establish new peaks in net length,” said Olivier Jakob of Swiss-based consultancy Petromatrix.

    He cited data from the U.S. Commodity Futures Trading Commission Friday which showed speculators trimming down their long positions for the first time in six weeks, opting instead to build up their short positions.

    “(With) funds reducing their long exposure and open interest still failing to show any structural growth, the investment data is negative for the crude oil flat price,” Jakob added.

    Oil prices were expected to remain volatile this week, with the dollar and equity markets acting as key catalysts for future price direction, said Andy Riddell, an energy broker at ODL Securities in London.

    “Whether this is just a retracement or a longer-term trend change remains to be seen,” Riddell said.

    Speculative funds still possessed large long positions, and “how these funds behave in a market that is not quite so “easy” will be the telling factor in determining (price) direction,” Riddell added.

    Meanwhile, participants were also keeping an eye on gasoil prices.

    “If the oil complex was to lose the recent support of the middle distillates then we would expect to see further weakness on the whole structure as refineries will try to minimize losses by running less (crude),” said Jakob of Petromatrix.

    A fall for front-month ICE gasoil futures below “big psychological barrier” $900 a metric ton would prompt a sharper selloff across the energy complex, a London-based broker said.

    —By Lananh Nguyen, Dow Jones Newswires

  3. 3
    zman Says:

    oil catching new life this morning after a late night session of profit taking,

    gas indeed up on the chilly weather.

    K – re HERO – they should benefit from the recent improvement in gomex rates on their remaining fleet there which is a majority of it. I’m in no hurry and prefer ESV which is doing an increasing amount of work for Pemex and still looks very cheap. they were late leaving the gomex too.

  4. 4
    zman Says:

    Note the Wiki Holdings page is updated:


    Positioning is very light at this time (good sized HK position and positions in APA, APC, and COP). No refiners, drybulks, oil service, solar, or puts of any kind.

  5. 5
    zman Says:

    may take a little PBR which is over beaten up here. Also coal (BTU).

  6. 6
    zman Says:

    ZTRADE: Starting to Add SU $100 April Calls for $2.35

  7. 7
    zman Says:

    ZTRADE: Added HAL April $37.50 Calls for $1.00.

  8. 8
    uop Says:


  9. 9
    uop Says:


  10. 10
    zman Says:

    UOP – mostly market related move, dow up 164, sp up 20 to 1,350.

    oil still off slightly, but NG is up 18 cents. I just picked up SU since it was so beat down last week. HAL should respond to gas.

    HK up most on my screen on a % basis among the producers I closely watch.

  11. 11
    uop Says:

    HK is up nicely, still keeping ???

  12. 12
    zman Says:


  13. 13
    zman Says:

    oil up a quarter now. so much for the transfer trade from commodities to equities. Thought they were jumping the gun on that. NG up $0.23 to $9.30 … not taking puts for another couple of days unless it spikes.

    HK up 5.6%, outpacing a strong group by double.

    Quiet day post 3 day holiday and expiration. Just doing some reading but am around.

  14. 14
    Sambone Says:

    10:14 am EST

    Nymex Crude Dn; Mkt In Wait-And-See Mode On Economy

    By Hyun Young Lee

    OTTAWA — Crude oil futures were lower in subdued trading Monday as traders sit back and wait for clearer direction from the equity markets following last week’s rollercoaster movements.

    Prices bounced up immediately after the floor opened, but are still $10 off last week’s record high and could slip further in the absence of any noteworthy headlines, market participants said.

    The front-month May light, sweet crude contract on the New York Mercantile Exchange was down 55 cents, or 0.5%, at $101.29 a barrel. Brent crude on the ICE futures exchange was flat at $100.38 a barrel.

    A broad sell-off across the commodity markets in the latter half of last week pushed prices down from the record $111.80 a barrel seen last Monday, as the U.S. dollar started to pick up. Investors have used oil and other commodities as a hedge against the battered dollar in recent weeks, but the currency has strengthened recently, with the euro falling to a near two-week low overnight.

    “A lot of people are still eyeing the dollar and what it does,” said Eric Wittenauer, energy analyst at A.G. Edwards. “If it continues to perform well, it may help direct prices back down.”

    The downward trend will likely continue during the course of the day, Wittenauer said, adding that a test of the overnight low just below $99 a barrel “isn’t out of the question.”

    With little immediate direction from the equity markets, concerns over the weakening U.S. economy and its impact on oil demand have taken the upper hand, at least for the moment. Total oil demand in the latest four weeks was down 3.2% from a year ago, according to data from the Energy Information Administration. While demand has been slipping since the start of the year, the market has largely ignored it until now, said Peter Beutel at Cameron Hanover.

    “For most of 2008, inconveniences like falling demand had not prevented investors from buying crude like it was water in the desert,” he said in a note to clients. “By Wednesday, the picture had changed enough to allow the real fundamentals to come peeking through.”

    But the jury is still out on whether this is a major retracement back down below $100 a barrel or if the market is steadying itself for another push higher. Participants are in a “wait-and-see” mode, said Gene McGillian, broker at TFS Energy Futures.

    “The market still hasn’t really found a bottom in the pull back to $100 — we’ll have to see if we can hold above there,” McGillian said. “We’ll wait and see if there are further exits in the commodity markets…I haven’t seen anything substantial in the financial markets this morning, so maybe people will pay a little bit more attention to the fundamentals.”

    He noted that open interest is down to almost the lowest levels seen this year, with players wary of taking a position without clearer signals of which way the market will go, likely from the U.S. inventory report Wednesday.

    Front-month April reformulated gasoline blendstock, or RBOB, was up 1.74 cents, or 0.7%, to $2.6225 a gallon. April heating oil was 1.78 points higher at $2.9950 a gallon.

    —By Hyun Young Lee, Dow Jones Newswires

  15. 15
    uop Says:

    which DVN LEAPS are you interested in ?

    I am actually looking for a few more good LEAPS myself

  16. 16
    zman Says:

    uop – Re DVN. Have not narrowed it down yet, something in the money and out at least a year. Want to buy those after a really red few days in the stock ($90 or lower if I can get it). On the Chuck prospect I was thinking something more like near the money July or August calls.

  17. 17
    Dman Says:

    Hi Z,

    just wondering what your current thinking is on HAL, underlying today’s add to the April calls…

  18. 18
    zman Says:

    K – hearing and reading more from fund managers and analysts that they are starting to rewarm to general service. Read a piece last week from Merrill on HAL benefiting from a coming upswing in nat gas drilling in onshore U.S. I think above $8 for long and the stagnant gas-directed rig count starts to rally. Probably the same thinking that’s behind the GW upgrade this am but don’t know for sure. I’m small there for now and my grow, may also take my first look at SLB in over a year on the long side. For now just testing the waters.

  19. 19
    Dman Says:

    Z, re #18. Looking at NBR seems to offer confirmation of the US NG drilling thesis. It seems to be consolidating well off it’s lows in the $25 region and holding only slightly below levels from before the big sector hit last week, i.e. it hasn’t dropped much at all despite being technically oversold (I think the chartists would call that a divergence). Not proposing it as a play, just a possible indicator.

  20. 20
    zman Says:

    D – good point, even the play lacks fundamental legs, ie, counts stay low, rate stay soft, the onshore NG service play seems to be the play of the day, week. Onshore large cap focused E&P doing very well as well but that could just be rebound in NG and the market. Happy with my exposure there and in the small caps for now. Next dip on HK and I buy my final leg (am 3/4 full for what I want there now) and it may not dip but the continuous resurgence after a market related shellacking gives comfort.

  21. 21
    Sambone Says:

    Uncle Phil


  22. 22
    zman Says:

    Upstream reporting threat of strike in Nigeria mentioned last week has been called off. Could soften oil slightly but I doubt much.

  23. 23
    ultyguy Says:

    Z – Any thoughts on the CDN energy trusts. Specifically, PDS (Precision Drilling) and PWE (Penn West Energy Trust). Both have options and high yields, 7%+ and 15%+ respectively. Both have been beaten down but have staged recoveries over the past little while.

  24. 24
    zman Says:

    U – I’m afraid I’m not much of a value add on those trusts. I remember distinctly not liking PDS last Fall when I wrote this:


    will take another quick look for tomorrow’s post.

  25. 25
    Dman Says:

    Z- further thoughts on #18: if the US onshore service market is turning then the current NOV price is madness. The US market was the only segment not on fire in recent quarters. I recall you mentioning talk of a deepwater overhang in the outyears, but to me, given the global oil supply picture, that kind of talk seems to spell buying opportunity.

  26. 26
    zman Says:

    Agreed, there are a number of positions I’d be back into now including RIG, OII, CLB, maybe NOV, ESV if I had a little more faith in the broad market. We’re one bunch of happy investors today, but when GDP comes out later in the week we could be in holy crap land re the economy again. Market needs a prozac and Ben B is running out of doses for us.

  27. 27
    zman Says:

    Drybulks up strong today, especially DRYS, NM, EXM … I’m not ready to go back in there yet.

  28. 28
    uop Says:

    stock up%
    SU 3
    apa 2.6
    cop 2.2
    chk 2.5


  29. 29
    zman Says:

    uop – I’m sure you’re not asking for advice on whether to sell or not so I’ll just say I’m holding my calls in all of those except CHK which I currently don’t hold.

  30. 30
    zman Says:

    crude up $0.30+ to back over $102. Still have 4Q GDP revision on Thursday followed by CPI on Friday. Could be some pretty big whipsaws this week.

  31. 31
    uop Says:


    no buy/sell/hold recom,

    what stops do you use:
    trailing or stop
    at what levels (about 80/85 %)

  32. 32
    zman Says:

    I rarely use hard stops as I find that given the volatility of the energy group I too often get shaken out of trades early. If I’m concerned about something or can’t pay attention to it for awhile I set something like a 80 to 90% stop. Right now all of my current positions except HK and APC are what I call openers and my get doubled or quadrupled before I’m done with them. Or I may never add to them if they run faster than I thought in which case its either all out or half off and time to play with house money or if they simply aren’t working and not a trade I would repeat.

  33. 33
    zman Says:

    oil diving into the close taking a little of the shine off the group. no news I see.

  34. 34
    zman Says:

    oil closed at LOD around 100.70, trading a little lower post close. heating oil coming off almost exact same percent. gasoline still up. another little improvement for cracks but nothing to write home about. Oil still eying the economy closely. gasoline only outperforming because summer blends are more difficult to make than winter.

  35. 35
    uop Says:

    those HAL calls already lost 20%

  36. 36
    zman Says:

    uop – you can do that with any option, the stock is almost exactly where I bought the calls at this morning, up $0.55. I’m not a day trader so I don’t look at minute by minute like that. I may chose to add to it if it goes down much more but will likely not do it the same day I enter.

  37. 37
    zman Says:

    The SU is down also despite the fact that the stock is up $0.80 now while it was flat when I took the calls. That’s options if you have a reversal in the group intraday. Did you have a point in pointing out how much I’m down in a brand new position on a Monday?

  38. 38
    ram Says:

    Good afternoon ZMAN.

  39. 39
    zman Says:

    Ram – how are you today? Anything working?

  40. 40
    ram Says:

    I am doing fine, thank you. It appears heavy and light construction equip. mfgs. might have bottomed. The EURO is saving alot of peoples bacon right now. Customers are paying higher prices for steel intensive equipment right now.

  41. 41
    ram Says:

    Still hanging on to DNE for the long term?

  42. 42
    zman Says:

    Still like DNE long term, it may take quite awhile for them to get recognition, I would expect at least 6 months but more likely another reserve report (next Spring).

    So no signs of metal demand slowing?

  43. 43
    ram Says:

    Thanks. Metal demand doesn’t seem to taper any more. It appears to plateau and then rise again. It is rising, especialy in high strength steel and stainless steel.

  44. 44
    ram Says:

    Nobody talks about the possibility of the Energy stocks changing the way they can state their assets (I recall it would be a positive thing). Is the appropriate agency still tring to decide?

  45. 45
    zman Says:

    …that jives with recent reading on demand for metallurgical coal. Still think BTU is the best coal play and best met coal play out there. Stock got whacked last two weeks, analysts all went neg on the group, saying they are too far ahead of themselves. They said their was limited upside to coal prices (east = QL/K8) and (west coal = QPP/K8) if you want to see the charts here is the east:
    http://www2.barchart.com/dfutpage.asp?sym=ql. Maybe that does have limited upside but volume growth appears likely if you listen to management and if you look at the Street’s long range numbers, this thing is trading at around 10x 2010 which is kind of inexpensive given the growth rate.

  46. 46
    zman Says:

    ram – I forgot about it b/c I didn’t hear any more. That would be the SEC and I check into it again.

  47. 47
    Popeye Says:

    RE:coal, I saw something over the weekend that the air force wants to get into coal to syn conversion big time.

  48. 48
    ram Says:

    Thank you. Hey SAMB – who do you think the next Bear Sterns could be?

  49. 49
    zman Says:

    Popeye – did they mention Syntroleum?

  50. 50
    zman Says:

    CHK out with news post close: Boosting guidance 08 and 09 ; talking about new 8 new plays.

  51. 51
    reefguy Says:

    CHK Most interesting are the unconventional oil plays. Anybody have a clue what and where?

  52. 52
    zman Says:

    Afternoon Reef – tomorrow should be fun, I’m out CHK now but will get back in. The lead story is the Haynesville Shale in Lousiana that HK was talking about on 3/12 at their analyst meeting and to which nobody paid much attention. CHK says it has more potential for them than for any play the company has participated in to date. That includes the Barnett. Wow. Double Wow. How this could be bad for HK I cannot fathom. They are planning to more than double their size in the play, could be HK needs to go away.

  53. 53
    reefguy Says:

    HK Floyd needs to go to NY with Aubrey and leave a bit richer.

  54. 54
    zman Says:

    Agreed, I’ll have something out on the two late tonight. It would save Aubrey a lot of time to just scoop them up and he’d get some low opex gas with exploratory targets in the bargain.

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