Welcome To The Second Half! IEA Cuts Supply Forecast And Oil Is On The Warpath

News flash: energy stocks were the best performers in the S&P500 in the first half of 2008. Sorry, I was reading an AP story this morning saying as much and thought it worth commenting upon. Yes it's obvious that aside form the independent refiners energy was the place to be in both quarters of the half. Also obvious is the fact that the closer to the hydrocarbons in the ground your company was, be it oil or natural gas or coal, the better your stock did. The service companies did well too, but paled in comparison to the gains made by the E&P and coal miner names. Again, that's all obvious to anyone who doesn't live under a rock or reads my weekend wrap pieces from time to time, let alone my daily readers.

So why bring it up?

  • First, because this is a new quarter and funds my start allocating dollars towards bottom fishing the weaker components of the S&P (again) and this can ease energy stock prices a bit. The fundamental drivers that drove the out-performance in most parts of the energy complex remain in place and in the case of production growth are often strengthening (at least in the names we haunt). For service companies, the second half should sport even butter fundamentals than the first. So I'm not concerned about a shift away from the "energy sea of love" environment but I am concerned with the fickleness of hot money.
  • Second, because I get lot of kudos for making more money of late than is normal. This kind of performance is not normal over the long term but it does occur from time to time. Profits often lead to less disciplined behavior in terms of entry position size and even the "swing for the fence" mentality that I abhor.  To be honest, my own position sizes have been increasing of late. BUT, I am keeping them in proportion to what they were when my account size was smaller AND I'm tucking away more cash into cash and stock positions.

No advice intended there at all, just letting you know what I'm thinking about as always. Have a great day.

In Today's Post:

  1. Holdings Watch - added to (HK) and (NBR) positions
  2. Commodities Watch - NG imports remain weak
  3. Stocks We Care About Today - The Haynesville Players, (QBIK), (FST), 
  4. Crack Spread Update
  5. Odds & Ends

Holdings Watch - the wiki tab is updated.

  • (HK) - Added July $50 HK Calls (HKGJ) for $2.10. Continuing to hold the September $40 calls and the common here.
  • (NBR) - Added NBR August $50 Calls (NBRHJ) for $2.80.

Commodity Watch:

  • Crude Oil closed  down $0.21 at $140.00 after piercing $143 in pre market trading yesterday as demand concerns and an ever so slightly stronger dollar (dead cat bounce and little more) induced a little profit taking. This morning crude is trading up a little over two bucks.
  • IEA Cuts Global Supply Forecast. The International Energy Agency said that while OPEC spare capacity will rise to 4 mm bopd in the 2009, 2010 time frame, it will fall to minimum levels by 2013 (the end of their 5 year forecast). They cited "significant downward revisions for both non-OPEC and OPEC capacity estimates" since last year's report.

Finally, they decried speculator bashing, as did the Majors yesterday, in as poetic of prose as ever I could have managed writing "often it is a case of political expediency to find a scapegoat for higher prices rather than undertake serious analysis or perhaps confront difficult decisions. Blaming speculators is an easy solution which avoids taking the necessary steps to improve supply-side access and investment or to implement measures to improve energy efficiency."

That sounds a lot better than my "politicians decreeing energy policy is like a pack of monkeys with guns in a candy store full of toddlers" but gets across the same point.

  • Natural Gas closed up $0.16 at $13.35 yesterday. Gas rallied early with oil but failed to follow it back to par on the day when crude retreated. Natural gas continues to be firmly locked in an up trend channel and I think it will only respond to the downside in the near term over an improved import picture (yeah, right) and in the longer term due to higher injections attributable to increasing production volumes (so far no joy there either). So in the near term, day to day movements are likely to track crude with an upward bias when crude fails to provide meaningful direction. This morning gas is trading up a little over a dime.
  • Imports continue to sputter, down 3.2 Bcfgpd from year ago levels. 
    • LNG - ticked back down to 0.7 Bcfgpd, down 2.2 Bcfgpd from year ago levels. It appears that only $15+ gas will be enough incentive to see more tankers land at U.S. regas facilities.
    • Canadian Imports - also inched lower to 7.7 Bcfgpd last week, off 1 Bcfgpd from 2007 levels.
    • I'll talk more about supply changes in tomorrow's post.


Stocks We Care About Today Watch

The Haynesville Players. The following charts depict the relative impact based on a simple and I think conservative set of assumptions regarding Haynesville/Bossier Shale reserve potential versus booked reserves. There are at least another 10 players involved here but their leverage to the play is less although in many cases (like ECA and Shell) their acreage positions are sizable.

  • (HK) rules the game with its newly announced bump in acreage to 275,000 as of yesterday which yields, again with the assumptions outline below, the potential for a 6 fold increase over its current book reserves.
  • (PQ) remains a runner up here (in terms of potential leverage to the play) and in almost undiscovered fashion remains the small cap bargain in the group (see the third table below). Until they talk more about it I doubt many will notice they are even there.
  • (CHK) remains the king of overall acreage here but comes in at "only" a 1 x of its current 11 Tcfe. Good results there on their 2Q call will likely benefit the more play levered names to the left of them in the following chart more than it does (CHK) itself. 


(FST)  Increasing Haynesville Exposure.  Last night (FST) upped its acreage in the play to 90,000 net which it sees as prospective for the H.S., commencing a 10 to 15 vertical well program and promising 2-3 horizontals by 4Q08. No $ talk was included in their release but you can bet the new acres went for near the $10,000 per acre mark. I promise not change the name of the site to Haynesville Brain or some such but you are going to see increasing news flow from the play over the next several months.

(QBIK) Quick Thoughts -  Impossible to justify the $4.19 close yesterday based on acreage sales to date. They have a little over 6,000 acres in the play and you simply can't get to this market cap with any metrics from recent transactions. But, they are in the heart of CHK and GDP activity in the Haynesville and this gives the stock option value (without the fuse that time gives you on an option). So I continue to hold out for (GDP) and (CHK) results which could drive the stock into silly land. So far, so good. 

Crack Spread Watch. How do you compete with $140 oil and falling (or at least not swiftly rising) domestic gasoline consumption? You don't, at least not well. And I won't bottom fish the group yet. True enough that the forward numbers make the group look cheap ... but I 'd like to see some stabilization in those numbers. No sale yet. 


Odds & Ends

Analyst Watch: (HK) priced target bumped from $42 to $59 at Lehman, overweight rating maintained. Jefco cut (HNR) to hold from Buy. Citi ups (CAM) from hold to buy and cuts (BJS) and (WFT) from buy to hold.



134 Responses to “Welcome To The Second Half! IEA Cuts Supply Forecast And Oil Is On The Warpath”

  1. 1
    zman Says:

    WNR getting a little pre market bump this morning after they announced the suspension of the dividend through 09 and an amended credit facility. As always, I will stay away from these guys but thought it worth noting. Tough times.

  2. 2
    tater Says:

    Posted a chart of UNG. Obviously trades with NATGAS, but it is showing a couple things worth noting.


  3. 3
    SkyKing Says:

    New subscriber – skyking

    I am getting 1 hour old daily posts. Does my account need to be programmed in to see the current posts?
    Latest post visable ‘Zman – WNR getting….’

  4. 4
    zman Says:

    Skyking – Welcome aboard. That comment is 8 minutes old. The site is set to CST.

  5. 5
    SkyKing Says:

    OK, I’m up and running.
    BTW – I like your comment about ‘not swinging for the fence’. Lost a lot of money that way!

  6. 6
    zman Says:

    Sky – words I live by. I always scale into positions and I just about never take big swings. Keeps me out of trouble. These and other pearls to be found in the revised FAQ due out some time in July, lol.

  7. 7
    zman Says:

    PBR says oil workers to stage 24 hour strike over safety and profit sharing. Oil production to be unaffected. This is a union strike and if things don’t go well look for a 5 day strike to follow which would take down some offshore volumes.

  8. 8
    italyinvestor Says:

    Z – I own FST stock for exposure to the Utica, the new Haynesville # are nice and will keep the stock interesting until we have more developments in the Utica. It doesn’t seem to me like a good options stock – what are your thoughts?

  9. 9
    Garyinhou Says:

    Morning Z.. all,

    What are your thoughts on Citi’s effect on WFT this morning.. have +50% in Aug $47.50 calls

  10. 10
    zman Says:

    Italy – not close enough to the story at present to be of much use. Utica angle is interesting but the HS is a ways off and needs more fleshing out on where their acreage is. On the options front I would call it an ok but not great trader. Looks like you’ll have a nice day there today though.

  11. 11
    zman Says:

    Gary – I think its a commission generating call on their part as they initiated coverage on a swath of other companies from SLB to HAL today. Easy pitch for their salesman “hey pal, I made you money in WFT, why not cash out half and take some more SLB”. I think the impact is not lasting but will sting today. I’ll be waiting for a bottom and looking to add. Fundamentals here should continue to improve in 2H.

  12. 12
    crysball Says:

    Regarding PQ, your analysis today indicates PQ has significant HS upside leverage potential.

    Aren’t a significant portion of PQ’s proven reserves offshore GOM? ….would hurricane speculators heavily short PQ [in advance of a hurricane]?

    No GOM Hurrican risk AT PRESENT, however if one pops up on the radar this could be an adverse to any run in PQ………..just a factor to keep in mind for August/September time frame?

  13. 13
    italyinvestor Says:

    Z – I have a pinky finger nail position, so i might be able to buy a cup of coffee off the gain.

  14. 14
    zman Says:

    Crys – re PQ, they are transitioning to a long-lived resource play. 2/3 reserves not in gulf coast, most Arkoma and East Texas. The other third is split between the onshore and offshore. In general, offshore producers rally into a hurricane and only get pinched if there is significant damage to their facilities. Significant damage to other peoples’ platforms will boost gas prices and potentially oil and usually the group. I own them for their Woodford and Fayetteville assets but the H.S. or E Tx Bossier (Carthage) in their case may prove interesting.

  15. 15
    zman Says:

    Broad market inspiring a little profit taking in the group early.

  16. 16
    zman Says:

    Crys – had to go look it up. GOM is 15% of 2008 capex for PQ.

  17. 17
    zman Says:

    tried to add on the HK July’s and missed, not going to chase this early in the day on a light volume holiday week.

  18. 18
    zman Says:

    By the way, if you are new around here welcome and feel free to comment. It’s not normally this slow but we are in the dead of summer and many of our stalwarts are at the beach.

  19. 19
    redjack Says:

    or on their boat…
    …Tropical waves…

    Strong tropical wave has emerged off the coast of W Africa and
    was added to the 01/06z analysis along 16w/17w S of 18n
    estimated to be moving W 15 kt. A 1011 mb sfc low is situated
    along the axis near 11n…very near a recent burst of deep
    convection. This wave is rather vigorous exhibiting well
    defined cyclonic turning and scattered moderate convection
    within 240 nm either side of the axis. This wave will be closely
    monitored for further development.

  20. 20
    Dman Says:

    Z – it’s a bit subjective & I don’t know quite how to put it, but last week I had the impression that PQ was trading with a lot of eyes on it, meaning I just got the feeling that word is getting around that it is cheap to the group. It got pushed down a bit but didn’t want to stay down. Maybe the IBD piece having an effect.

  21. 21
    zman Says:

    QBIK up another 5%, approaching 50% on the common since entry, Although I’d like to hold it through CHK earnings its pretty hard to justify up here. Of course, the pendulum always swings too far …

    BRY continuing to work higher. Like the name for the oil exposure, their tiny position in HS is interesting but not a big driver there although they are looking at more acreage in the area.

    Thanks RJ will start watching it.

    Dman – agreed, glad to own the common, will almost certainly be long calls into 2Q results.

  22. 22
    uop Says:

    cannot interpret your chart: top haynesville players with the red dot:

    the red dot shows the Haynesville acres for the company, HK, and CHK have a lot,
    what is exposure ???

    which 3 have the biggest potential left ?


  23. 23
    Dman Says:

    Red, what is the source there? (Accuweather has got nothing that I can see)

  24. 24
    zman Says:

    Uop – the in the first chart shows leverage to the Haynesville play relative to each companies’ last reserve report and my assumptions which are pretty conservative although we still have little well control in the play (few data points). The red dot shows net Haynesville acreage of the company. The chart is indicating that while CHK has nearly twice the acreage of HK, HK’s acreage means more to them because they are a smaller company. Which 3 have the most left to run? That’s impossible to know but the higher the leverage to the play should translate into stock outperformance if the numbers from the individual wells continue to come in at monster rates. This play is shaping up to be the big brother to the Barnett and not its little sister but only time will tell.

  25. 25
    zman Says:

    Dman – check out crown weather link here and all the links on the weather tab above.


  26. 26
    ram Says:

    Z – Good morning. As the HS players get more expensive, are their buyout possibilties diminishing?

  27. 27
    redjack Says:

    today’s discussion is from the National Hurricane Center @ 8:05 EDT…

  28. 28
    tater Says:

    Anybody know what Stanford Research downgrade of SM is about?

  29. 29
    jazzkool Says:

    Z, I pulled NGS and NXY out of the Investor’s Business Daily 100 published on Monday, got paper on Saturday. Just like their charts. They were up yesterday of course. NGS was up 1.18. NXY was up .60. Down today. Do you see anything you like in either? Other views welcome.


  30. 30
    zman Says:

    Morning Ram – yes, in an absolute sense they are. Also, the small caps have strongly outperformed the mids which have in turn outperformed the large caps. So doing a deal with stock becomes harder from an accretion standpoint on earnings. They are also just simply a bigger pill to swallow. Given the speed with which they have rallied ahead of “confirmed” results in the field the field of acquirors has defnitely been narrowed. I’m now thinking the first acquisition here will be a Major taking out a mid to large cap name. Shell has a size presence in the area and they may step in to take out someone like, oh I don’t know, HK. Just a guess. The bold stroke would be a Major, wanting to look green by gassing up on CHK. COP did this a few years ago with BR and I don’t believe they regret it. But at this point, I have not heard any rumblings of such a move and I think they would have to pay up, say $100 to get it done.

  31. 31
    zman Says:

    SM – see the headline now, don’t think it would be valuation as they are pretty cheap. Thanks for the headsup.

    Jazz – I’m not close to either. Nexen is a quality company but I don’t trade/follow them closely.

  32. 32
    Fiveanddimer Says:

    Nice move in WTI today (over $142). Precious metals also moving higher (gold at $942 and silver at $17.97), despite that fact the the US$ is almost unchanged. It used to be that gold would move up when the US$ moved down. Now it seems to be moving on its own.

  33. 33
    zman Says:

    Tater – note volumes extremely low today in pre holiday trading. Exaggerated moves and head fakes abound.

    Oil is up on the IEA supply story.

  34. 34
    jazzkool Says:

    Thanks, great numbers in the past for NXY but if you don’t follow them, I’ll pass. Thanks,


  35. 35

    VMC – Vulcan Materials

    New annual low. This stock is now below 60.

    What a great franchise, great market area.

    At this point, it’s a great one to accumulate.

    They sit on BILLIONS of tons of stone reserves, ready to ‘harvest’ in some of tghe best high-growth markets in the USA.

    It’s a matter of calling the start of the new cycle. Last month this stock touched 80 on some fleeting good news for home and highway construction.

    VMC is a bellwether of the new cycle and will react quickly. Accumulation in the low -mid 50s will not hurt you.



    P.S.- I do not work for them, I compete against them.

  36. 36
    cargocult Says:

    I just joined the fun. I noticed that you have covered dry bulk shippers in the past. Any reason for the change.

  37. 37
    zman Says:

    Q – thanks for the headsup, great caveat! Do they export stone or is it all local? Are aggregates imported.

    Cargo – Welcome. I follow them but at a distance for now. Bill is the local expert on shipping. I opted to steer clear of them going into 1Q earnings and am still pretty happy to be away. I don’t care for the mo-mo nature of the group, much like solar where everything is either very green or very red based on the BDI and the whims of the Chinese. I revisit from time to time (monthly) but am at present not very enthusiastic about them. But that could change if I hear a good argument.

  38. 38
    kyleandy Says:

    i keep seeing new names. is your subscriber count increasin?/ i can’t imagine u losing any!!!

  39. 39
    tater Says:

    Just a bit concerned as to whether downgrade may drag other names. By the way, the QBIK action was pretty interesting on the chart, pennant breakout, supposed to “fly half-way up the flag pole”, so you may have quite a way to go on the upside.

  40. 40
    jsaun14 Says:

    MMR Post on msg board…Sounds like this fellow might know what he is talking about???

    “When MMR drilled out of the old XOM hole, the mud weight was 18.7#. This is very high mud weight, and if you thought you were going to encounter higher pressures with gas sands, you would shut down. XOM shut down.

    If, on the other hand, you held to a theory that as you drilled deeper and approached your objective sands, the temps and pressures would actually go down – you would continue drilling where others had stopped.

    When the open hole logging tools were stuck on the most recent log run, they were probably getting differentially stuck, because the pressures opposite the sands in the hole were lower than the hydrostatic pressure of the 18.7 mud. (The mud was actually lowered to 18.5 for the log run). The hole was subsequently logged with LWD tools on drill pipe and that is when some of the porosity tools failed.

    MMR has now set a 7 5/8” liner and they are drilling deeper. It is very interesting that the mud weight is now 18#. They set the casing to protect themselves from “lower” pressures. A temp and pressure “regression”.

    If you were “temp/pressure connected” to a formation (if not, in fact, a part of that formation) that was many miles south and covered by thousands of feet of insulating water and salt, you could have similar temps and pressures as that distant formation.

    I do not follow quarterly reports or study the technicals – what I do is follow one of the most exciting shallow water GOM wells ever drilled. “

  41. 41
    kyleandy Says:

    WH having rare good day

  42. 42
    zman Says:

    Tater – agreed re upside on QBIK chart, just sounding a note of caution on the underlying fundamentals. I even got a note, a nice note at that, from a sell side analyst warning me to be careful about investing in QBIK, after he read my post on it on Seeking Alpha. I do appreciate the sell side’s concern for my well being.

    Interesting reversal in NFX on the day, again, no volume.

    SD definitely got a “get out of jail” pass for last Friday’s fire.

    WFT rallying off the beating from the Citi call this morning.

    Jsaun – thanks, almost sounds like something Reef would write but he is on vacation ’til next week.

    WH – I see it. As long as it doesn’t give up $7 I’m fine with holding it into earnings. I’d like to hear what they have to say about tariffs and my send their english speaking IR firm a question about it.

  43. 43
    kiaora Says:

    Tater—what time frame are you use ing for the pennant?

  44. 44
    Fred Says:

    Here’s a contrarian view on GDP, I sold my common yesterday, ty Z:


  45. 45
    tater Says:

    Kiaora – Daily chart, below the UNG post. I wrote up the QBIK chart on Sunday, but I got too busy with HK and XTO and couldn’t get a good entry.


  46. 46
    zman Says:

    Fred thanks for posting. I’ll try to be brief and above board. 1) I’m not defending GDP valuation but I do know management and I have been an E&P analyst which the author has not. It’s CFPS and/or EBITDA , not EPS you look to when valuing these guys.

    The XOM comment is laughable. Talk about comparing apples to asteroids.

    The fair value of $18 is more laughable and there is no support for it.

    His sarcastic tone and lack of industry understanding nearly closed the book on my attention span but I muddled through. He really didn’t need to tell me he was a shorty as it was painfully obvious.

    My last comment would be that the investors in the oil and gas realm are on the whole fairly savvy. There is some froth on top of the group right now, the “hot money” but the underlying big chunks of stock are held by Boston and Houston and NY and Philly types who know their way around a cash flow statement (again the author does not) and understand cash costs. I don’t write about things I don’t understand well (which is why I find it painful to dabble in solar and sometimes in the drybulks) and I think that people that do are at best amusing and at worst dangerous.

  47. 47
    bill Says:

    re 36

    ive lightened up my maratime holding’s to invest in some of the ng ep companies

    as z said, mo-mo is an issue with big runs up and down as hot money enters and exits.

    Most dry bulker names will have great earnings in 2008, the issue is 2009 and beyond as new supply of ships get delivered and potential demand drops due to recession.

    it’s not unusual for a stock to drop 50 % only to gain it back.

    drys, one of my favorites is diverssyfying into ocean rigs and drill ships so is no longer a pure play.

    Right now the group is in a downtrend giving back about 50 % of its gains from the last run up.

    id stay away for the moment and move back in if they get weaker going into q2 earnings release

  48. 48
    zman Says:

    UNT – which has a drilling unit and an E&P arm upping its budget for drilling saying it has acquired more acreage in the Marcellus, Bakken, and has added Haynesville acreage.

  49. 49
    texana Says:

    note on sd. malone mitchell III sold 2 million shares last week he still owns over 10 mil shares. he has bought over 40k ac in the wto that is a lookalike to the pinon field. so he may do some add’l selling to fund this project,he is a private co.

  50. 50
    rseidman Says:

    Z: Your view on NOV, please

  51. 51
    zman Says:

    Thanks Bill.

    Bidding some UNT August and September calls small to start. Like the idea from a quick to catch on standpoint and the stock is fairly inexpensive, well position to take advantage of increased drilling as well as in the right plays on the E&P side.

    NOV I like long term, don’t have an opinion per se at the moment.

  52. 52
    zman Says:

    RS – I’ll look at them for the morning but there is not a lot to not like there other than some analysts may be thinking the valuation is a little rich. Also seeing a lot out of FTI these days, same fundy trends impacting.

  53. 53
    zman Says:

    HK taking a shot at the title going for 48 now. Guess I should have chased but volumes are anemic and will be lower again tomorrow. That and the fact that I have a chunk when you include the Septs and my common holdings.

    CHK moving into position to take out its all time high as well.

    Tex – thanks for the update. Maybe its the next SD like SD was the next CHK.

    WFT back to flat, sorry Citi.

  54. 54
    zman Says:

    Tater – take a look at that UNT chart when you get a chance. I’m about to take on some in the money septembers, have a whopping 1 contract as of now on a partial fill.

  55. 55
    zman Says:

    ZTRADE: Entered UNT August $90 Calls (UNTHR) for $2.85 on capex increase news as their E&P arm targets the Marcellus, Bakken, Haynesville shales, all the right places to be plus their drilling unit should benefit from second half activity increases. This is a little diversification from my NBR positions and provides the optionality of an E&P segment.

  56. 56
    Dman Says:

    Just took starter in some DITM OII calls

    SLB testing $110 today… feeling the pull of earnings on 18 July.

    NOV = gettin’ jiggy ??

    Liking the look of NFX here. Coiled up nicely.

  57. 57
    zman Says:

    Re 38 – yes, thanks.

  58. 58
    Popeye Says:

    Cargocult, holding a small position in DRYS and totaly ignorant on the sector so feel free to post any comments you may have.

  59. 59
    zman Says:

    Cargo – I echo Pop’s comment. Anything you have to add there would be great. I’m away from the space but can always come back.

  60. 60
    zman Says:

    I took a call on Sep Unit 80s but only got a part fill before the Augusts hit. Not worth noting the Sep and I will not add more there for now.

  61. 61
    Dman Says:

    One way we can use the drybulks, even without trading them, is that they seem to be one of the most sensitive barometers of the global economy about a year out.

    Broad market suddenly even less happy than usual.

    Z – re #11: Citi needs every commission they can get!

  62. 62
    Dman Says:

    X down 7.5% = ???

    Scoop, you out there?

  63. 63
    ram Says:

    Did somebody say sell the coals now?

  64. 64
    Bleemus Says:

    From the looks of it somebody said sell everything! 🙂

  65. 65
    zman Says:

    Dman – don’t see a reason for it but have not dug about. Lots of reporters off this week as I’m finding trouble get the entire EAI survey. Surely a broker cut it buy not that I see.

    Ram – I only see a positive AP story.

    Market dragging energy lower now. Heck of a way to start the quarter for the broad market.

  66. 66
    ram Says:

    Any other year, isn’t this considered a positive time frame – end/beginning of month and going into a festive holiday?

  67. 67
    zman Says:

    Ram – slow but not sure there is an average answer on direction.

  68. 68
    Dman Says:

    Cramer sez it is -9 on the S&P oscillator (very extreme oversold) … and that was before the open!

    Some fund(s) must be getting liquidated or maybe all the trading programs kicked in …

  69. 69
    scoop006 Says:

    DMAN ,Thinking of selling my “X”$165 puts and buying $175 calls. Do you have any ideas about that trade? TY

  70. 70
    Dman Says:

    Z #65 I’m guessing that would be a broker cut from “buy” to “run for the hills!”

  71. 71
    Dman Says:

    Scoop, I’d be selling the puts all right. Maybe put some of the profits into some calls but I’d like to know what is behind the drop.

  72. 72
    tater Says:

    UNG, QBIK, SLB, and UNT charts. Had a bit of trouble with the chart site, list wouldn’t stay “public”.


  73. 73
    zman Says:

    Possible cause for the drop on X, MT. Iron ore prices going higher.


  74. 74
    scoop006 Says:

    DMAN, I think funds bought X to show it on their books and will now take profits and reinvest proceeds (dare I say it) in financials

  75. 75
    Dman Says:

    #73 & 74 together solve the X puzzle. The iron ore news is not fresh today, this happened last week sometime. But the funds wanted to keep X on the books thru until Jul 1.

  76. 76
    zman Says:

    Goldman whacked their 2Q estimates on the indie refiners, mostly to well below Street levels today.

  77. 77
    scoop006 Says:

    DMAN, OK thanks, sold the X $165 puts @$6.& bought the $175 calls @$6.30

  78. 78
    Dman Says:

    Now I’ve read the bloomberg piece in #73 more carefully I see there was *some* news today, but the ore contracts with the Chinese (Baosteel) are the big cahuna and they were done June 23. If China got a huge price rise, everyone else was always going to get at least that rise.

  79. 79
    Dman Says:

    Scoop, you are one fearless trader!

  80. 80
    Dman Says:

    Got another nibble in on the DITM OII calls. Wonder what the S&P oscillator was reading, maybe “-11” ??

    Does it go up to 11?

  81. 81
    Hoss Says:

    Good site to keep apprised of most steel related headlines.


  82. 82
    Dman Says:

    Just looked at a 2-day chart comparing USO and the DOW and they are mirror images. Worth a look.

  83. 83
    scoop006 Says:

    DMAN, I don’t think so. Just calculated risk/reward ratio. Thought the drop was excessive. Then again would not be possible without the education I have received on this site.

  84. 84
    ram Says:

    I get spammed on Bakken this and Bakken that, but no Haynesville stuff. Is the Haynesville play in the first inning? Is the bakken in the seventh inning? What could be the next area of discovery that analyst will focus on?

  85. 85
    zman Says:

    Ram – I’d say Haynesville is 1st inning, Bakken is top of the second, long way to go in both.

    Next play. Lots of choices but I’ll let you know when I see it. I do remember typing notes on the HK analyst call about the Haynesville and the lack of response from the analysts in the room. I thought it was unreal how bored they were when HK started talking about. Then CHK breaks it as a massive play a couple of weeks later and we are off to the races. So much for efficient markets theory.

  86. 86
    ram Says:

    Thank you Z!

  87. 87
    cadillac Says:


    Are you lurking? If so can you give us one of your fearless forecasts of the broader markets? I find your insights very helpful. Thanks.

  88. 88
    Dman Says:

    Z – # 85 I remember when you posted during the HK call that the analysts seemed to be asleep.

  89. 89
    zman Says:

    Thanks D, knew I didn’t dream that up, lol.

    Stepping out for a haircut, back in 45 min

  90. 90
    regale Says:

    Had you been in the States last Tuesday and Wednesday, you wouldn’t have had to leave your screen to get a haircut, lol . My surmise is that lots of us got trimmed a bit on those 2 days.

  91. 91
    Dman Says:

    Hey Scoop, sold those X calls yet?

  92. 92
    kiaora Says:

    Hey Scoop—thanks for the call on X. Quick $950

  93. 93
    zman Says:

    regale – I hear ya. I was actually flat (slightly up) for the whole of last week which is what I wanted in my absence. Having looked back at the charts it did appear there was some day to day trepidation.

  94. 94
    zman Says:

    Been watching GMXR all day. No news but smells like a rumor which is hard to fathom as they have no plans to drill a horizontal well in the Haynesville this year.

  95. 95
    scoop006 Says:

    DMAN, re #91 no I think it might revisit $180+ this week

  96. 96
    ram Says:

    Z – You leave and come back and what we care about moves up. A recurring theme….

  97. 97
    zman Says:

    Tater – thanks for 72

    HK tapping on $48 which it only briefly breached early yesterday. Still thinking near term test of $50 is in the cards. We lack near term catalysts here from the company until the 2Q call. Non-HS news likely gets some play on that call as well as you’ll recall they do have other plays. See reports tab for the last quarter and new plays including EOG JV in Tx Panhandle which could see some data flow. On the analyst front I expect to see a steady stream of price target upgrades as NAV’s are remodeled from yesterday’s news. Anyone with JPM access who would like to send over their latest comments (and not the rather thin initial note) gets a gold star.

  98. 98
    zman Says:

    Ram – odd isn’t it. One thing that is somewhat comforting is the lack of “abandon ship” mentality one day into the new quarter for the group. Often you’ll see profit taking on the order of 5 to 10% post quarter end, especially after the gains we’ve had. This time, although volume is light, it appear funds are still looking to 2Q reports, as they should, for the next set of catalysts. We’re about 3 weeks out from the first of those reports and estimates and opinions are likely only to improve between now and then. My remaining July calls will be rolled by next week.

    One name I would not be surprised to see early news, at least a tidbit either about the Bakken or the Mancos is NFX. They do have a habit of dropping small gems prior to the quarter before inundating you with the latest Woodford update. They should spud their first dual lateral there soon (2x the reserves for less than 2x the cost dropping F&D into the low $1/Mcfe realm). Huge for a company as busy as they are in the play with a history of high F&D costs.

  99. 99
    Dman Says:

    Scoop, the problem I have with X is that it is the middleman: it has a lot of pricing power just now, but so do its suppliers. How does that work out? I don’t know. So if the recent run up was all about *its* pricing power, maybe there is some room on the downside to take account of its suppliers’ pricing power. Need some insight into the fundies here.

  100. 100
    scoop006 Says:

    Check out volume on DVN July & August calls

  101. 101
    el_vogel Says:

    when does NFX report? Just wondering if I should keep hanging on to my July calls…

  102. 102
    ram Says:

    Everytime someone says “check out volume” I feel compelled to switch the TG website – not sure why.

  103. 103
    scoop006 Says:

    ram, what is the TG website

  104. 104
    el_vogel Says:

    she depicts volume far better than IBD does 🙂

  105. 105
    Dman Says:

    Z – 5 to 10% drops and the end of the quarter? Wow, that’s one to look out for.

    Questions for a quiet day (not sure if today qualifies):

    How would you compare the current energy market with previous periods, i.e. what sort of reference frame can you use. Is this period completely different or just a variation?

  106. 106
    ram Says:

    TG = Trading Goddess

  107. 107
    scoop006 Says:

    DMAN re#77&#99, You make sense. Just sold @&9.10

  108. 108
    VTZ Says:

    Z- Since we are starting to talk a little about reporting and whatnot, how do you think the market will react to CHK’s huge mark-to-market hedging loss this Q?

  109. 109
    Dman Says:

    Wow, some heavy volume in X

  110. 110
    zman Says:

    VTZ – re CHK – its a non-cash item and as such a non-event as it does not impact cash flow.

    Re NFX. They report July 24th so now the July options won’t make it. I will likely sell my July’s next week and I’ve already got a piece of the September 65s. I’d like to see them announce the first dual lateral has spud and some results from the Bakken pre 2Q call, just to spread out the good news. The Malay news and upped guidance should have been a good start but the stock really ignored that.

  111. 111
    Dman Says:

    Z – #98 NFX has been trading dry lately. Doesn’t stay down for long.

  112. 112
    zman Says:

    DVN call volume could be follow through from the upgrade yesterday.

    Definitely making EOG look like more of a bargain with each passing day.

  113. 113
    arodeen Says:

    Z – What other service companies do you think will have the biggest moves at and prior to the SLB earnings call?

  114. 114
    VTZ Says:

    I realize its non-cash and a non-event, but its always what all the headlines read. I was just curious.

  115. 115
    Bleemus Says:

    Thanks to all for a good day. See ya tomorrow!

  116. 116
    zman Says:

    Aro – WFT is like a smaller version of SLB. HAL comes to mind as the cheap price.

    VTZ – I know you know. I just like to make it clear. The headline pullers at Dow Jones should be used for ballast.

    Bleemus – back at ya, nice how the day wrapped up from a psychological as much as a wallet standpoint.

    Can’t say enough how great it is to be back! Beer thirty!!!

  117. 117
    Dman Says:

    VTZ – I recall when I first saw one of these CHK hedging-loss headlines, I was a bit shocked and was expecting my calls to take a hit. The market opened and nothing happened at all.

  118. 118
    zman Says:

    Dman – EOG is where you often see the worst hit (for a few minutes sometimes) and also the best explanation of why it doesn’t matter.

  119. 119
    john11 Says:

    CHK Haynesville deal news with PXP just out.

  120. 120
    Bleemus Says:

    CHK Chesapeake Energy and PXP announce Haynesville Shale joint venture (67.36 +1.40)

    The co and Plains Exploration & Production (PXP) announce they have entered into a Haynesville Shale joint venture in North Louisiana and East Texas. PXP has agreed to acquire a 20% interest in Chesapeake’s Haynesville Shale leasehold as of June 30, 2008 for $1.65 bln in cash. In addition, PXP has agreed to fund 50% of Chesapeake’s 80% share of drilling and completion costs for future Haynesville Shale JV wells over a several year period until an additional $1.65 billion has been paid. Chesapeake estimates that its Haynesville leasehold as of June 30, 2008 was approximately 550,000 net acres. As a result of the transaction, PXP will hold approximately 110,000 net acres of this leasehold and Chesapeake will hold approximately 440,000 net acres. Chesapeake plans to continue acquiring leasehold in the Haynesville Shale play and PXP will have the right to a 20% participation in any such additional leasehold.

  121. 121
    VTZ Says:


    Chesapeake Energy Corporation (NYSE:CHK) and Plains Exploration & Production Company (NYSE:PXP) (“PXP”) today announced they have entered into a Haynesville Shale joint venture (the “JV”) in North Louisiana and East Texas.

    PXP has agreed to acquire a 20% interest in Chesapeake’s Haynesville Shale leasehold as of June 30, 2008 for $1.65 billion in cash. In addition, PXP has agreed to fund 50% of Chesapeake’s 80% share of drilling and completion costs for future Haynesville Shale JV wells over a several year period until an additional $1.65 billion has been paid. Chesapeake estimates that its Haynesville leasehold as of June 30, 2008 was approximately 550,000 net acres. As a result of the transaction, PXP will hold approximately 110,000 net acres of this leasehold and Chesapeake will hold approximately 440,000 net acres. Chesapeake plans to continue acquiring leasehold in the Haynesville Shale play and PXP will have the right to a 20% participation in any such additional leasehold.

    The companies currently plan to develop the Haynesville Shale using 80 acre spacing, which could support the drilling of up to 6,875 horizontal wells on the leasehold. Assuming that per well estimated ultimate reserves (EUR) average between 4.5 and 8.5 billion cubic feet of natural gas equivalent (bcfe), the companies’ present Haynesville Shale leasehold could hold net unrisked unproved reserve potential of 23-44 trillion cubic feet of natural gas equivalent (after deducting an assumed average royalty burden of 25%). Chesapeake is currently utilizing five operated rigs in the Haynesville Shale play and anticipates operating at least 12 rigs by year-end 2008, at least 30 rigs by year-end 2009 and up to 60 rigs by year-end 2010. Under this planned rig allocation, the companies anticipate drilling at least 600 wells over the next three years.

    Aubrey K. McClendon, Chesapeake’s Chief Executive Officer, commented, “We are pleased to announce this joint venture with PXP and believe it creates substantial value for both companies. This transaction establishes a $16.5 billion valuation for our Haynesville Shale leasehold, all of which is located in the Core Area of this very significant discovery. We believe it also provides an important validation of Chesapeake’s strategy of being a first mover in discovering and developing new unconventional resource plays. The $1.65 billion in cash we are receiving from PXP and the additional $1.65 billion commitment will help fund a substantial portion of Chesapeake’s Haynesville Shale leasehold, drilling and completion costs over the next few years, providing us with exceptional finding costs from this play of less than $1.00 per thousand cubic feet of natural gas equivalent (mcfe).

    “We have achieved outstanding drilling results in the play to date and believe Chesapeake’s expertise in developing shale plays provides us with an opportunity to see even better results in the months and years ahead. The initial production rates on the eight horizontal wells we have completed have ranged from 5 to 15 million cubic feet of natural gas equivalent (mmcfe) per day on restricted chokes at flowing casing pressures of up to 6,500 PSI. We believe these truly exceptional wells would have been capable of even greater initial production rates if produced on open chokes as Barnett and Fayetteville Shale wells commonly are produced. These production rates and flowing casing pressures, along with our geoscientific and petrophysical analysis of over 70 wells that have penetrated the Haynesville Shale to date, give us confidence that our mid-point EUR estimate of 6.5 bcfe for the Core Area of the Haynesville Shale is currently appropriate. This compares quite favorably to our Barnett Shale Core Area EUR average range of 2.5-3.0 bcfe and our Fayetteville Shale Core Area average range of 2.2-2.8 bcfe. To date, our costs to drill and complete horizontal Haynesville Shale wells have averaged approximately $6.5 million and we anticipate that we will be able to reduce these costs by at least 10% once full-scale development of the play is underway based on other shale play experience.

    “There has been substantial industry interest in our leasehold in the past few months and we chose PXP as our partner because of our long relationship with its management team, its successful record as an effective industry partner in major projects and strong historic presence in the Louisiana energy industry. We look forward to working with PXP on this significant opportunity and generating meaningful new supplies of clean-burning natural gas for American consumers while also benefiting our respective shareholders.”

    James C. Flores, PXP’s Chairman, President and Chief Executive Officer, commented, “Due to PXP’s strong financial position from its high cash flow, conservatively managed balance sheet and recently expanded borrowing capacity under its revolving credit facility, we are in a position to invest in this unique Haynesville Shale play opportunity and to partner with Chesapeake, the premier resource play operator in the U.S. and the dominant driver in the Haynesville Shale play. Chesapeake has amassed the leading leasehold position in the Core Area of the play that could support the drilling of up to 6,875 future drilling locations. In addition, Chesapeake has built a talented, large and experienced geoscientific, land, drilling and engineering Haynesville Shale team.

    “We believe that Chesapeake’s unrivaled experience in drilling and completing shale wells throughout the U.S., its large rig fleet and aggressive Haynesville Shale development program will provide PXP with attractive operational costs of approximately $1.83 per mcfe and, using $8 NYMEX natural gas prices and the median reserve estimate, generates an attractive return on investment while accelerating production and reserve growth significantly beyond our earlier projections. With the addition of the Haynesville Shale position, PXP expects to have organic production growth of greater than 20% compounded annually and reserve growth of greater than 10% compounded annually. We now anticipate our current net proved reserves of 600 million barrels of oil equivalent (boe) will reach approximately 1 billion boe by 2012.”

    Jefferies Randall & Dewey acted as advisor to Chesapeake and J.P. Morgan Securities Inc. and Lehman Brothers Inc. acted as advisors to PXP on the transaction.

    Conference Call Information

    A jointly hosted conference call by Chesapeake and PXP management teams to discuss this release has been scheduled for tomorrow, July 2, 2008, at 9:00 a.m. EDT. The telephone number to access the conference call is 913-312-0959 or toll-free

    888-254-2827. The passcode for the call is 2424219. We encourage those who would like to participate in the call to dial the access number between 8:50 and 9:00 a.m. EDT. The conference call will also be webcast live on the Internet and can be accessed by going to Chesapeake’s website at http://www.chk.com and selecting the “News & Events” section or PXP’s website at http://www.pxp.com and selecting “Presentations / Webcasts” in the Investor Relations section.

    Chesapeake Energy Corporation is the third-largest producer of natural gas in the U.S. Headquartered in Oklahoma City, the company’s operations are focused on exploratory and developmental drilling and corporate and property acquisitions in the Fort Worth Barnett Shale, Fayetteville Shale, Haynesville Shale, Mid-Continent, Appalachian Basin, Permian Basin, Delaware Basin, South Texas, Texas Gulf Coast and Ark-La-Tex regions of the United States. Chesapeake’s Internet address is http://www.chk.com.

    PXP is an independent oil and gas company primarily engaged in the upstream activities of acquiring, developing, exploring and producing oil and gas in its core areas of operation: California, Rockies, Gulf Coast, Gulf of Mexico, Texas Panhandle, South Texas and the Permian Basin of the United States. PXP is headquartered in Houston, Texas. PXP’s Internet address is http://www.pxp.com.

    This news release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The companies believe that their expectations are based on reasonable assumptions. No assurance, however, can be given that such expectations will prove to have been correct. A number of factors could cause actual results in the Haynesville Shale play to differ materially from the projections, anticipated results or other expectations expressed in this news release, including drilling risks, uncertainties inherent in estimating reserves and future production and the ability to execute on production and development plans. See “Risk Factors” in the respective companies’ 2007 Annual Reports on Form 10-K and other filings with the Securities and Exchange Commission(SEC) for a more complete discussion of risk factors that could cause actual results to differ from those projected. The companies undertake no obligation to publicly update or revise any forward-looking statements.

    Production forecasts are dependent upon many assumptions, including estimates of production decline rates from existing wells and the outcome of future drilling activity. Although the companies believe the expectations and forecasts reflected in these and other forward-looking statements are reasonable, they can give no assurance they will prove to have been correct. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties.

    The SEC has generally permitted natural gas and oil companies, in filings made with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. The companies use the term “unproved” to describe volumes of reserves potentially recoverable through additional drilling or recovery techniques that the SEC’s guidelines prohibit from appearing in filings with the SEC. These estimates are by their nature more speculative than estimates of proved reserves and accordingly are subject to substantially greater risk of actually being realized. While the companies believe their calculations of unproved drillsites and estimates of unproved reserves are reasonable, such calculations and estimates have not been reviewed by third-party engineers or appraisers.

  122. 122
    VTZ Says:

    Woops, didnt mean to paste all that… accident.

  123. 123
    bill Says:

    no wonder aubrey was buying chk shares

  124. 124
    VTZ Says:

    I see AH bid of 69.80 right now.

  125. 125
    zman Says:

    That ok V, looks like a whale of a deal for CHK. The assumptions I used in my Haynesville shale leverage table this morning are nearly spot on with the second paragraph save the spacing. They are thinking 80s and I was on 60s, but their EUR range of 4.5 to 8.5 (mid of 6.5 Bcfe) comes in a full Bcfe ahead of me so its probably better than a wash. Moreover, the CWC (completed well cost) of $6.5 mm is low , putting F&D costs at about $1/Mcfe which is just knocking the ball out of the zip code.

  126. 126
    VTZ Says:

    Z – Is this CHK’s big Haynesville bomb or do you expect more info to be coming in the CC etc?

  127. 127
    bill Says:

    i just bot another 1000 at 70.

  128. 128
    bill Says:

    the math works out to 6,000 an acre

  129. 129
    scoop006 Says:

    ZMAN- Congrats on the CHK & HK plays.

  130. 130
    zman Says:

    HK trading 49.70 in after market on the CHK news. I’ll have a note out late on the anatomy of the deal.

  131. 131
    zman Says:

    PQ bid $28

    VTZ – this is not what I was looking for but monetization of this sort with a nice carried interest is a masterful stroke in my book. The bombshell I was looking for is IP rates and they may or may not give some on the call tomorrow. Maybe once again they have been given an unwelcome nudge by HK to disclose information.

  132. 132
    zman Says:

    HK trading over $50

  133. 133
    crysball Says:

    More ‘HAIR ON FIRE’ in he Haynesville Shale tomorrow with the CHK/PXP JV.

    Is PXP worth playing for the bounce?

  134. 134
    zman Says:

    Crys – I’m not close enough to their story to say. They are on the cheap end of E&Ps at present and their numbers will be going since they are out of pocketing a good percent of these costs so maybe I should do some more homework here.

    Wyo – Agreed re hedges which are close to 70% and around $8 for 2008 and a similar $ value but lower percent in 2009. Aubrey is figuring on being his own worst enemy in terms of price, growing supply until prices either fall or the U.S. becomes a net exporter of gas. I’d be on the former and not the latter but that soon as the rebuild is off to a poor start. The increased production is not in their guidance and as such is not in their hedges…we’ll see on the 2Q if they are still boosting the volumes but even if they are the recent high prices will drag their avg hedge price higher so its not a bad idea.

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