Wrap – Week Ended 05/23/08

My comments will be brief for this weekly wrap as I'm traveling this weekend.

Holdings Watch: I began liquidating some positions early in the week and found myself buying them back lower as the week progressed into redness. Here are the closed trades for the week ended 5/23/08:

• U.S. Steel - X - June $180 calls sold for $12.50, 56%

• Continental Resources - CLR - June $55 Calls sold for $7.30, 192% since entry 5/16
• Continental Resources - CLR - June $50 calls sold for $10.70, up 511% since entry on 4/21

• Newfield - NFX - June $60 calls sold for $8.40, up 105% since entry at the end of April

• Petrobras - PBR - June $110 calls sold for $8.40 (not a typo from the previous line), up 155%

• Halliburton - HAL - June $50 calls sold for $1.73, up 26%

• Diamond Offshore - DO - June $150 calls sold for $4.20, up 14% since entry on 4/23
• Diamond Offshore - DO - June $140 calls sold for $9.00, up 157% since entry on 5/21

• Schlumberger - SLB - June $110 calls sold for $2.80, up 93%

• PetroQuest - PQ - July $17.50 calls sold for $5.30, up 62% since entry on 4/25

 

 

1) Rig Counts Keep Rising, Drilling & Service Costs Bottoming. The U.S. oil directed rig count hit a 10 year high last week. The horizontal rig count hit an all time high. And rigs turning to the right in search of natural gas in the lower 48 are approaching what in a stock chart would be termed a breakout.

• Recent 1Q and investment conference comments have spoken to a geographically widespread bottoming in rig dayrates and the beginnings of an upturn in pressure pumping.
• Tubular prices are in fully rally mode and we have acted accordingly and will up that bet when we get better insight into the ability of the OCTG makers to maintain margins in the face of soaring steel costs.
• See Friday's post for notes on an increasingly likely upturn in Canadian drilling.
• Also note that Mexico has multi-hundred rig bids out in an effort to stave off the seemingly inevitable transition from exporter to importer status. Good luck with that Señors. Without outside assistance I give them 7 to 10 years before they too are dependent on foreign oil.

2) Despite The Red Close To The Week, The Energy Patch Was Still The Place To Be. After recent strong performance in the portfolio, on the Wednesday morning post I wrote that "it would not always be this easy". Wednesday, Thursday and Friday proved me correct as oil skyrocketed, the crude-sicked broad market coughed up recent gains, and the energy patch entered profit protection mode as well. 

• To be sure, the energy patch, especially the E&P component of it is in need of a little digestion period after recent very strong performance up to and through 1Q08 reporting season.
• Valuation multiples however may be improved but they are not stretched and estimates for the names we traffic in around here continue to rise swiftly.
• This rise in numbers is not just due to analyst price decks that shadow crude and natural gas as the two commodities spin higher but also are a function of improving production profiles and cost discipline.
• While I do expect service inflation to heat up again in coming months, the E&P group continues to discount a price deck substantially below the current forward commodity strips, much more of a discount I might add than is usual. 

3) Increasing Service Focus. As a result of Notes 1 and 2 above I have been shifting my weighting to include a greater percentage of service names. See the subscriber portion of the site for details.

4) Refiner Upturn ... ?  Strong export demand for diesel and a U.S. driver who can't seem to lay off the gas pedal (demand was down less than 1% last week despite pump prices that averaged 18% higher than year ago levels) have yielded outperformance in products prices relative to crude giving refiners a break on margins. 2Q08 isn't going to come close to matching year ago levels, except in the northeast, but no one expects it to. We are once again tentatively stepping into this beaten down group.

Have A Great & Safe Long Weekend! On Monday make sure to think about why it is that the market is closed. I will see you all in the comments section on Tuesday.