Wrap – Week Ended 08/01/08


Holdings Watch: July performance was horrible. No two ways about it and I have several August positions that are in sad shape at this time although I'm expecting rebounds in E&P and Oil Service in short order.

Closed Positions for the Week: Didn't take a lot off the table but did add some small positions going into earnings.

  • HK  August $30 Calls, for $5, up 43%.

On To the Wrap:

It was the best of times, It was the worst of times.

The stories coming out of our most frequently trafficked names could not be better.

On the E&P side the strong just get stronger... Finding and development costs continue to fall for the resource players, guidance has largely been up quarter to date, and well results in the Bakken and Haynesville, the two oh so hot until July plays, continues to auger for better than expected ultimate recoveries and a future string of upped guidance. Double digit production growth runs rampant in an industry where flat to up 5% once ruled....

... And yet, the E&P stocks have taken a shellacking, hedge or unhedged, high growth or low growth, leveraged or unleveraged, high reserve life or life on the tread mill that is the decline rate of the Gulf of Mexico shelf, leading edge horizontal shale player to rank wildcatter...the pain has been felt across the spectrum.

On the Oil Service side, the stories are of higher utilization and pricing power. Strength in the U.S. and international markets. Capital spending for both Majors and E&Ps is up with many players raising budget multiple times already in 2008. And again, the names, which are by no means expensive have come off in the extreme during the last four weeks.

My sense is that both commodities are testing near term bottoms...

  • The geopolitical calendar is about to heat up again with Iran.
  • Demand for gasoline is likely to stay loftier than the worst predictions as sub $4 gas allows drivers to really fill up for the first time in months and brag to each other about how little they just paid (there's still time to take that Summer trip!)
  • On the natural gas side, last week was the hottest week of the year so far and its cooling degree day tally will likely be dwarfed by the one for the coming week (116 degrees forecast for Dallas next week).
  • Fears of a natural gas glut next year, while not yet put to bed, are beginning to abate as long standing pillars of growth like the Barnett are seen topping out and new sources are likely to only slowly contribute to future production growth, some of which will eventually be consumed by new sources of demand (see the discussions in Friday's comments section on CNG) . And then you've got the tropics which are literally heating up.

...but I'm not looking for a V-shaped bottom in either Crude of Natural. An end to the rapid commodity price declines and a period of digestion, of consolidative, sideways trading, is in order. And it is during this period, over the next 3 to 4 weeks, that I think the Street grows a spine and really backs some of the beaten down names. This is when the stories and when having a long term thesis really pays off.

Other Items:


10 Responses to “Wrap – Week Ended 08/01/08”

  1. 1
    zman Says:

    Crys – I’ll get back to you with comments on your last on TGIF later this weekend.

  2. 2
    crysball Says:

    By an increase in capital efficiency, I mean not just Higher IRR’s, but with the big production #’s in the Hot Shale Plays they get the capital back more quickly……….the downside is they need greater capital intensity to realize the upsides of higher IRR’s and Capital efficiency.

    If the premise is valid, it would appear the biggest beneficiaries will be the Bakken leveraged plays with TFS potential [CLR,WLL, BEXP] who will have the benefit of crude pricing, plus they get some Nat Gas Liquids and Nat. Gas ……….and two reservoirs [Middle Bakken and TFS] to draw from.

    above IMHO and I defer to your much greater knowledge and experience.

  3. 3
    crysball Says:

    Gazprom expects the price of gas it buys from Central Asia to at least double next year, RIA Novosti reported quoting the Russian gas monopoly’s CEO.

    Alexei Miller discussed the trend for Central Asian gas producers to raise prices with Prime Minister Vladimir Putin.

    “Against the backdrop of high gas prices in Europe, the intentions of Central Asian countries to raise gas purchase prices seem absolutely well-founded. Therefore, we can expect the purchase prices in these countries to more than double in 2009 compared to the levels at which Gazprom has bought gas this year,” Miller was quoted as saying by the governmental press service.

    He said the Gazprom-controlled Central Asia-Center pipeline system would be the most commercially attractive route for the deliveries of Central Asian gas to external markets and added that Gazprom could expand purchases in gas-producing countries for subsequent sales on world markets.

    A major European supplier, Gazprom buys Central Asian gas at lower prices than it sells to Europe. The expected increase therefore promises a knock-on price rise for European consumers.

    Note, while this not ‘new news’ {reported July 9, 2008) it was not widely reported in the US………just further support for high LNG prices in 2009 as European prices must go up.

  4. 4
    crysball Says:


    MIAMI – Forecasters say Tropical Storm Edouard has formed in the Gulf of Mexico and it’s moving west along the Louisiana coast toward Texas.

    A tropical storm warning was in effect Sunday from the mouth of the Mississippi River west to Intracoastal City, La. Tropical storm conditions are expected there in the next 24 hours. New Orleans is not included in the warning area.

    A tropical storm watch was in effect from Intracoastal City to Port Arthur, Texas, including Galveston.

    The center of the storm is located about 95 miles southeast of the mouth of the Mississippi River and about 420 miles east of Galveston.

    It was moving west at about 6 miles per hour with winds of 45 miles per hour. Forecasters say the storm could strengthen in the next 24 hours.

  5. 5
    Petra – ZEBAdmin Says:

    FromCrysball on Friday’s post:

    My attempt at aGrand Summary of the takeaways from the Hottest Shale E&P player conference calls:
    1) The underlying economics of the Oil & Natural Gas E&P business is changing significantly.
    2) They have (or are about to ) ‘CRACK THE CODE’ for realizing very large production #’s [both IP and EUR] from the various new* plays.
    3) As they ‘CRACK THE CODE’ they see a new set of economic variables arising:
    A)continuing significant decrease in F&D costs
    B) Big improvements in economic outcomes [IRR & EUR] coming out of the new Plays
    4) Much of the progress has to do with the accelerating speed of technology transfer & learning curve on methodology of completions, frac’ing, propants
    5) They see a PERMANENT SHIFT in how they DEPLOY CAPITAL…………….given the ‘NEW ECONOMICS’
    A) SIGNIFICANT REDUCTION in new Capex going toward conventional production [including shallow shale’s like Appalachian, New Albany, & Antrim] because the IRR’s do not compare
    B) SIGNIFICANT INCREASE in new Capex to accelerate results in their existing New Shale* plays, even though the per well costs may be far higher [$3 to $6 million depending on completion method & depth]…………..this increase far exceeds the reduction (or reallocation) from other Capex.
    5) Many of the larger E&P players openly CAVEAT their revenue stream will lag the production due to:
    A)Buildout of a gathering / processing system
    B) For Nat Gas, lack of availability of High Pressure pipelines {especially Haynesville]
    C) Tight supply of tubular goods [smaller & medium players]

    Z, would be most interested in your take?

  6. 6
    Petra – ZEBAdmin Says:

    Response to #5 relayed from Z

    1 -2) I agree. Capital and therefore equipment, manpower, is being reallocated at increasing rates from conventional to non-conventional resource plays. We’ve seen this before with coal bed methane plays but the scope of those was much more limited and the San Juan Basin ceased to be a growth vehicle long ago. Also the production rates did not compare to those found in the conventional gas production realm. A sexy CBM well might produce 1 million cubic feet of gas per day (MMcfgpd). Now we have come to expect double digits in the Haynesville and even the Barnett, where the code was cracked by Mitchel in the early 2000s is seeing high single digit rates in Johnson County. So the unconventional plays are now not only manufacturing ops that are incredibly economic but also production growth generating on a company scale.

    3)F&D decline will be related to first mover status. If you ran rather than walked or, better yet, if your leases are held by production from conventional formations then yes, I think you are set for a shift to declining F&D. This is where I buy into Aubrey’s song and dance completely and it is showing up in his numbers. On the other hand, if you chased into the plays without regard for lease prices and are outside the core (which all of these plays have) then the F&D decline theory won’t work for you although we won’t really see the problem until the reserves for 2009 are reported in early 2010.

    4) true.
    5) agree with A, on B I think the number added to the new shales will be much larger than what is being redeployed. If gas prices don’t hold up, this will be less true. But you now see majors (BP and COP) as well as all but one of the big cap E&Ps (watch for Hacket at APC joining the pack soon) adding increasing capital to the plays.
    6) true, all true.

  7. 7
    zman Says:

    Oil up $1+ in Sunday night $126.20 trading on TS Edouard.

    NG up 14 cents to $9.53 up on same and all the heat.

  8. 8
    Bleemus Says:

    Edouard. Expected to be hurricane strength on landfall.


  9. 9
    zman Says:

    Thanks Bleemus, that’s starting to look angry.


  10. 10
    Bleemus Says:

    TRP TransCanada Pipelines gets Alaska nod for pipeline, subsidy – Bloomberg.com (38.60 )

    Bloomberg.com reports TransCanada, Canada’s largest pipeline company, won state approval and a $500 mln subsidy to proceed with plans to build an estimated $27 bln pipeline that will carry natural gas from Alaska’s Arctic region to U.S. markets. The Alaska Senate voted today in favor of the proposal by Calgary-based TransCanada, following approval last month by the House. The company will get a state license to begin studies and early work on the pipeline.

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