Monday Morning And All Is Calm Before The Storm

Capital Budget Watch: I've been waiting for gas drilling budgets to start moving lower with gas prices and while its a little early in the process I have it from a reliable source that this has begun as at least one mid cap E&P Barnett Shale player is pulling in its horns on expanding 2H08 and 2009 drilling activity due to prices. Competition for capital inside E&Ps will become fierce with budgets going to higher IRR projects as gas prices fall. This is the beginning of budgeting season for 2009 and while I would not expect to see a raft of budget PRs until January, news that budgets are starting to slip from recently increased levels will start to make its way into the market place soon. If this has no impact on gas prices expect to see some more public announcements made by big players (CHK) regarding drilling activity. Also see the bullet in the natural gas section on regional prices not holding up as well as NYMEX.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Stuff We Care About Today
  4. Odds & End

Holdings Watch:

  • The Wiki and ZEB Perf tabs are updated.
  • Friday's expiration left me with few positions on the board which is fine with my at present as sentiment towards the energy groups remains negative.
  • Cash and the equities remain my favorite place to park capital until the market settles into a more friendly pattern with options trades only taken in an opportunistic manner (in and out quickly based on news events) or sold against long positions. 
  • While the refining group is starting to look more interesting, trading there is still 1.1 steps forward and 1.05 steps back making making a buck on that trade difficult via options. Continuing to wait for further evidence that the consumer is inspired by lower gasoline prices (I filled up for $3.39 this weekend and felt like a lotto winner but my wife was non-plussed by the discount so I guess reactions to falling prices can vary).

Commodities Watch

  • Crude Oil fell another 1.2% to close at $113.77 last Friday. Crude continues to target the $110 area and is off again this morning despite the likelihood of a hurricane in the Gomex later in the week and a slight retreat in the dollar today. 
    • Tropics Watch:
      • Tropical Storm Fay's expected track.
      • Crown Weather's latest assessment. Sheer to limit intensification beyond a Cat 1 storm with likely land fall on the west coast of Florida mid week.
      • Shell and Marathon have announced the evacuation of a few hundred non essential personnel in advance of the storm.
    • Nigeria Watch: MEND attempts attack on gas plant, fails, loses as many as 12 members by one account.
    • Iran Watch: "The Safir (Ambassador) rocket was successfully launched. All its systems ... are Iranian made," Reza Taghipour, head of Iran's space agency, told state television, adding that a "test satellite was put into orbit." ~ AFP. Normally this event would pop oil as everyone from the US to the IAEA worry over the potential for this delivery system to be of an ICBM nature.
    • Color From Sane On Pemex - if you missed Sane's comments regarding PEMEX over the weekend they are worth the time to read. Click here for the weekend post.
    • Russia/Georgia/BP Watch: BP has halted train car shipments of crude out of Georgia due to rail lines damaged by fighting.


  • Natural Gas gas fell 1.9% last week to $8.09, its lowest level since February 2008. Cool August weather and fears of a coming gas glut continue to fuel the sell off. This morning gas is trading off as much as twenty cents into the high $8.90s on cool weather expectations for the week ahead. I think we are closer to the bottom on gas but that the pendulum may swing as low as $7 before gas gains some footing.
    • Weather Watch: Unseasonably cool weather for August continues. Cooling degree days fell to a March-like 54 last week, far below normal August levels and even further below last year's 87 CDDs.
    • Regional Price Watch: While NYMEX prices get a lot of attention I would point out that some regional price front month contracts are trading much lower than $8. Panhandle (Texas) prices were $6.87 and Northern Rockies gas was at $3.20 as of Friday.  Look for Rockies shut in and drilling curtailment announcements soon.

Northern Rockies Natural Gas Prices Have Fallen Off A Cliff. (prices through 8/15/08)



  • Natural gas rig count update: At 1,586, gas-directed rig counts are at a 23 year high according to Baker Hughes data. Service company 2H08 are not discounting anything like this level of activity and

Stuff We Care About Today:

Rig Thoughts: Too, too cheap.

  • The onshore guys are suffering from the "gas glut" fears and may continue to do so for quite some time, unless we see a snap back  in gas prices soon.
  • The Deepwater stocks are down with the energy groups but the projects these rigs are contracted for are largely unaffected by the recent move in oil prices (and probably entirely unaffected by the move in natural gas prices). These are extremely long lead time projects where rigs are contracted as much as 5 years in advance of the drill bit ever turning to the right. The hurdle rates the oil companies operating these projects use are in the $50 to $70 range, not $140 and I have not heard of/read about a single project getting canned or delayed due to price.
  • The earnings projections for the deepwater players are largely locked in for 2008 and 2009, with 2010 having some swing left in the numbers as some rigs now on contract will roll off and become contracted in that year. This is a generalization but it generally holds true, especially for (RIG) which I see as the cheapest, best bet in the group at present. Look for that $19 EPS number to top $20 before all is done. Tomorrow's post will high light RIG as one of the dance partners for a recovery/stabilization in crude prices.


Odds & Ends

Analyst Watch: Bernstein modestly trims price targets on a number of Majors, E&P and oil service names, RBC starts (KOG) at outperform with a $5 target,



99 Responses to “Monday Morning And All Is Calm Before The Storm”

  1. 1
    Bleemus Says:

    Loren Steffy on Big Oil…..


  2. 2
    zman Says:

    Article on gas glut in Ft Worth Star:


    Basically says there may be a glut, that Aubrey and Papa don’t think there is a glut, that LNG, the company wants to export gas now and doesn’t see gas volumes coming in in the near future.

  3. 3
    zman Says:

    ZTRADE: HAL $35 September Calls for $1.60. Just doing a little repositioning as per the dance list but this may be a bit quick as per the opportunistic mention in today’s post.

  4. 4
    Bob Says:

    Z-Think you meant HAL 45’s?

  5. 5
    zman Says:

    Woops, yep, $45…it’s Monday.

  6. 6
    zman Says:

    Wonder if the last minute pre open rally in oil is due to Musharraf resigning/regional instability increasing?

  7. 7
    Fred Says:

    Bloomberg just reported Jeff Vinik of Magellan is buying WFT.

  8. 8
    zman Says:

    Thanks Fred, Vinik is a Peter Lynch, buy what makes sense kind of guy and obviously not a day trader.

  9. 9
    tomdavis12 Says:

    Z: Great article about LNG exports. Do you have any guess as to a govt time frame for approval? I assume not factored into WS analyst’s models. Do you have any simple way to follow the the strip pricing in Eur and Japan?

  10. 10
    Dman Says:

    Hi Z,

    1. Iran launched a satellite? But hardly any mention in the media. The claim that it is all-Iranian made is interesting. Even on Haaretz I could only find wire-service articles. Nobody is disputing the claim, nor is anyone confirming that they saw the launch. All very weird.

    Only room for one bad guy at a time in media-land and that is Russia just now.

    2. Saw a wire service article saying oil was up on storm worries. Guess that’s why NG is down 2%. All makes perfect sense.

    3. That graph for Rockies NG is amazing. The % crash is much worse than NYMEX. When do they just shut it in?

  11. 11
    zman Says:

    Tom – Europe pricing I get, Japan I don’t have a ticker for but I see it mentioned here and there, nothing lately aside from a $21 mention the other day. Will post price of Europe gas in a second.

    Dman – the Iran thing not getting any play but the way you send something into orbit is the same way you send something over the pole but admittedly less complex.

    Rockies players have got to be considering it now. I took the extreme example and the October month is closer to $4 (still wow down from $9 two months ago). Got to think some guys like BBG will be looking at the numbers and saying why drill more?

  12. 12
    zman Says:

    Tom – actually, I no longer seem to have Europe gas prices. Just saw this story which said June Japan prices were $14. I’ll snoop around for a Europe price.

    This is a story from today reporting Goldman taking down their estimate of winter gas prices and saying gas prices are oversold and in some cases below the marginal cost of production.


  13. 13
    Sambone Says:

    By Brian Baskin

    NEW YORK (Dow Jones)–Crude oil futures traded slightly higher Monday, as a
    tropical storm stayed clear of the oil-producing portion of the U.S. Gulf and
    the dollar steadied against the euro.
    Light, sweet crude for September delivery traded 18 cents, or 0.2%, higher at
    $113.95 a barrel on the New York Mercantile Exchange. Brent crude on the ICE
    futures exchange traded 25 cents higher at $112.80 a barrel.
    Tropical Storm Fay, which began to form in the Caribbean late last week,
    appears headed for the west Florida coast, and is forecasted to make landfall
    Tuesday as a hurricane.
    Fay has an outside chance of heading to the northwest, which would carry the
    storm through the main oil producing region of the Gulf of Mexico. Even then,
    Fay would need to strengthen dramatically to cause the long-term production
    outages that could send oil prices higher.
    Absent a major hurricane or two, oil prices are widely seen heading lower this
    week. Futures dropped 1% last week, and are off 22% since July 14. Not even war
    between Russia and Georgia, threatening one of the world’s largest oil
    pipelines, has been enough to stop the slide. The oil market has turned
    negative over concerns about weak U.S. demand, with prices falling on
    predictions that the economy wouldn’t recover until 2009.
    “There is little this market can throw at us to be as bullish as the existing
    price,” said Peter Beutel, president of trading advisory firm Cameron Hanover.
    The oil market is also watching the dollar, which has strengthened to a level
    versus the euro not seen since February. Investors have bought commodities as a
    means of protecting themselves against the weakening dollar, and are flowing
    out of the oil market as the U.S. currency recovers.
    The euro traded recently at $1.4696, roughly flat for the day. The dollar
    should see a bigger movement Tuesday when the government is scheduled to
    release a key U.S. inflation figure.
    “Dollar-friendly numbers here could see the greenback resume its uptrend and
    pressure energy markets lower,” wrote Edward Meir with MF Global.
    Front-month September reformulated gasoline blendstock, or RBOB, recently
    traded down 54 points, or 0.2%, at $2.8548 a gallon. September heating oil
    traded 1.84 cents, or 0.6%, lower at $3.1007 a gallon.

    -By Brian Baskin, Dow Jones Newswires.
    Dow Jones Newswires
    08-18-08 0917ET

  14. 14
    Dman Says:

    Z – #11 exactly why I’m amazed about the lack of coverage. Sure, sending it up is not the same as accurate targetting on the way down, but nobody up till now has suggested Iran could even attempt an ICBM launch & now they’ve supposedly gone orbital and not a peep from anyone. In shock maybe. After all, this is the same country that has to photoshop its short range launches! From a geopolitics standpoint, the Iranians will of course realize how this will be perceived, not least by Israel which until now had a regional monopoly on space capability.

  15. 15
    Pete Says:

    Z, what is your thinking on NBR common going forward.

  16. 16
    zman Says:

    Thanks Sam. I’ve got the dollar flat to off slightly at present.

    Market growing board with the energy names w/o a real hurricane or a merger.

    Dman – I know, I should add it to the list of things you can ignore on the weekend post. The amount of stuff being ignored at present is getting kind of thick and my sense is that the talking heads are looking to drive things lower into the close of the quarter 6 weeks away to set up some buying and an end of year run from levels that are bargain basement.

    Goldman in that article whacked their LNG imports case which runs counter to all the “global supply is coming” chants I’ve been hearing over the last 2 months. I agree with them and would say not at these prices its not. Also, delays in these projects abound and costs are running higher than expected from Russia to Nigeria so you can bet they are seeking out the highest prices which goes to people like Gazprom and not to parties in the U.S.

  17. 17
    Dman Says:

    NG making new lows but stocks not following suit. Not yet anyways.

  18. 18
    zman Says:

    Pete re NBR – I think long term it is a great, cheap play as rig counts and rates are high now. In the near term, I have a pretty cautious stance, not that business is bad at all but that the perception is that business will come off as E&P’s start shelving expansion plans and rigs get stacked. There is no evidence out there that rigs will indeed get stacked but they may get shuffled from lower to higher return projects. Earlier this year CHK went from drilling lots of Barnett wells to drilling even more in the core and less in the non-core. The net effect was to see rig counts go up. I think we get the same effect this year but on a more regional basis, so if you have Rockies production and Haynesville potential maybe you spend less in the Rockies and more in the H.S.

    Therefore, a company like NBR, which has the high HP rigs needed to drill 15,000 foot measured depth wells (2 miles down, 1 mile over) will continue to see strong and even strengthening demand in this market. But, the perception will be that they will see rigs get stacked with the first Capex cut announcement.

  19. 19
    Dman Says:

    Z, given that there was hardly any LNG being attracted by $13 NG, what are they smoking to expect it to flood in at $8 ?? Seems nutsoid to me, but it is another talking point I guess. Talking points don’t have to be right, they just have to be repeated.

  20. 20
    zman Says:

    Dman – the stocks, even the really gassy ones are tracking oil.

    Shell saying 425 workers evac’d over Fay. No impact on production expected.

  21. 21
    Pete Says:


  22. 22
    zman Says:

    FST acquiring E. Tx assets for $2.54 per Mcfe on the booked reserves. I’ve been using $2.50 to $3.00 / Mcfe for valuing booked reserves. This seemed to be the fair range before the fall in gas prices and this is the latest datapoint so I’m pretty comfortable with last week’s read on names like GMXR where you can buy the reserves for $1.1 B (on this basis) and get the Haynesville acreage for nearly free.

  23. 23
    zman Says:

    Dman – To be clear, the GS guys were expecting more, now expecting much less to come to U.S. Others are still expecting a big up tick in deliveries and they are basing that on a number of projects which are expected to commission next year. My sense is that Gazprom is natural gas like China is for oil and coal, a black hole that sucks up everything in its path.

  24. 24
    zman Says:

    Oil going decidedly red now, products off 2x as oil so no joy in the refining group either.

  25. 25
    zman Says:

    NG looks like $7.50 next stop to me. I may not agree with the sentiment but I’m not going to fight it. Even $7 may be in the cards. Considering an UNG put trade again.

  26. 26
    reefguy Says:

    FST- will listen to call

  27. 27
    zman Says:

    FST call in 1 hour, plan to listen as well. Note they are ramping their rig count.

    A conference call is scheduled for Monday, August 18, 2008, at 10:00 A.M. MT to discuss the release. You may access the call by dialing toll free 800.399.6298 (for U.S./Canada) and 706.634.0924 (for International) and request the Forest Oil teleconference (ID # 60918907). A Q&A period will follow.

    CHK holding the line at $45. May take the calls I wrote on Friday off the table. The Friday – expiration – Monday play is up a little over 20%.

  28. 28
    Sambone Says:

    Hmmm, this gives the warm and fuzzies!

    WASHINGTON (AFP)–Russia has moved short-range SS-21 missiles into South
    Ossetia, possibly putting the Georgian capital Tbilisi in range, a U.S. defense
    official said Monday.
    The development came amid other signs that Russia was adding ground troops and
    equipment to its force in South Ossetia and Abkhazia, strengthening its hold
    over the breakaway regions, officials said.
    “We are seeing evidence of SS-21 missiles in South Ossetia,” the official
    said, speaking on condition of anonymity.
    The official said the short-range missiles should be capable of targeting
    “We’re seeing them solidify their positions in South Ossetia and Abkhazia,”
    the official said, adding that “more troops and more equipment” were evident in
    the enclaves.
    But the official said it was “hard to say” whether Russia has begun pulling
    any troops out of Georgia into the enclaves.
    “I can’t say whether they are actually moving people out right now or not, but
    we do expect them to start moving out. We expect them to move out slowly, so
    this may take some time,” he said.

    Dow Jones Newswires
    08-18-08 1101ET

  29. 29
    zman Says:

    Sam – something else that will be likely ignored by the oil markets. Note that last week, oil dropped as BP reported it was able to get oil through there, albeit in limited amounts by traincar. Today BP reported that Russia had damaged rail lines and apparently deliberately blown up a rail bridge and that oil exports where therefore cut off. No one will care until oil hits the level people are looking for and then suddenly this list of dangerous things and outages will once again matter.

  30. 30
    zman Says:

    Took those CHK written calls off the table. Right here. The Friday – Monday dip phenomenon will get more attention from me next expiration on held positions.

  31. 31
    bill Says:

    Tone seems to be getting better

    Why would chk continue to pay 30 k an acre when they can make a buyout of hk or another company?

    Do you think we will see some offers here?

    Id like to see someone step up to the plate

  32. 32
    zman Says:

    Bill – I don’t know if the tone is improving just yet although I see a few names back in the green as oil came off its lows.

    Re CHK – one thing would be the acreage not being homogeneous across the play. They want what they want and are willing to pay up for it. Possibly no company has just what they are looking for. Also, their currency is beat up and they don’t have the firepower to do a deal right now. I really think the next deal in the area will be a JV or a Major or a larger cap E&P for one of the little players.

    I think on the deal side we are closing in on the time when you see one either for a pure play on something like the Haynesville or for a well positioned but now cheap mid cap or large cap going to a major like COP.

  33. 33
    zman Says:

    Refiners and cracks page updated for latest data. I’ll have comments in tomorrow’s post but last week was another strong week for margin gains. Can’t tell it from the stocks today but I would expect yet another size draw on gasoline this week due to a combination of lower production, lower imports and sustained if not higher gasoline demand. We could also see another draw on distillates. Whether or not the media/traders care beyond the first day’s reaction is anybody’s guess but the data at least in the U.S. is starting to improve on the products inventory side from the low levels we have seen all summer. We also have demand from service stations increasing as they fill their tanks in advance of Labor day travel Sept 1. As prices come off, I would expect to see more families take “statecations”.

  34. 34
    Sambone Says:

    Fay –


  35. 35
    zman Says:

    Thanks Sam – added the hamweather site to the weather tab. I prefer the yellow or orange, more westerly tracks.

  36. 36
    zman Says:

    Just looking around:

    Solar down across the board except for SOLF ESLR, two names I would not touch in the group.

    Refiners down across due to gasoline prices falling today. Seems short sited given the recent rally in cracks and the potential for more gains as demand is sustained by lower pump prices.

    Bulkers up across the board on re-strengthening day rates. Post Olympics expect rate recovery as coal shipments re accelerate.

    Coal stocks up slightly, levels are way off the highs similar in losses to the E&P group.

  37. 37
    tomdavis12 Says:

    Z: Does anyone have the link to the Barron’s article on page 47 re Eric Sprott? I agree very much with his view. I’m not a great webmaster.

  38. 38
    zman Says:

    Tom – I get the WSJ online, not Barrons, what was the article about and I’ll see if I can bird dog it.

  39. 39
    zman Says:

    FST – talking about shortage of 1,500 hp rigs, rigs may be a constraining factor. Takes about 6 months to get a rig built, more strong news for NBR who has some available still and for NOV who builds them.

  40. 40
    zman Says:

    Oil trying to go positive…wait the heck is it thinking, lol.

    NG off a dime now. Next set of comps on gas storage going to look pretty bearish as this weather is mild and last year was hot. Imports data for the week is out and LNG remained flat at 0.8 Bcfgd, which is barely keeping the lights on at five plants now in service in the U.S. – good thing intake capacity is double over the next year, lol.

    Imports from Canada ticked up to 9.2 Bcfgpd, still running consistently short of year ago levels.

  41. 41
    tomdavis12 Says:

    Z: Thanks for the effort. The article was an interview with Eric Sprott CEO, Sprott Asset Management. The Title was “A bull on energy, a bear on nearly everything else”.

  42. 42
    zman Says:

    Tom – looks like a guy after my heart. Will attempt to find.

  43. 43
    Sambone Says:

    (From BARRON’S)
    By Robin Goldwyn Blumenthal
    Interview with Eric Sprott
    CEO, Sprott Asset Management

    Eric Sprott is a down to Earth — and controversial — kind of guy. Although
    the 63-year-old recently became a billionaire on paper with the initial public
    offering of Sprott Inc. (ticker: SII.T), the parent of his Sprott Asset
    Management firm, he’s not above drinking soup from a cup in his 27th-floor
    offices in Toronto’s financial district, rooms graced by a sizable collection
    of Canadian art, ancient money and medieval weaponry. Sprott, who started as an
    analyst at Merrill Lynch covering everything but commodities, has become known
    as a savvy natural-resources and energy investor — and he’s bearish on nearly
    everything else.
    Sprott has been criticized for betting on high-risk penny stocks, most
    recently Timminco, a company that claims to have an inexpensive method of
    producing silicon for solar panels. But it’s undeniable that many of his calls
    on uranium and gold have been on the money. His U.S. hedge fund, Sprott
    Offshore, boasts a 32% compound annual rate of return since 2002. In Sprott’s
    case, one might say, all that glitters includes gold. For more on one of
    Canada’s top investment managers, read on.

    Barron’s: You’re a believer in the peak-oil thesis, which says that global oil
    production has topped out. How much time do we have left before the supply
    dries up?
    Sprott: We aren’t going to run out of oil in the next 100 years, but it will
    keep getting harder and more expensive to obtain. Most people don’t even
    realize that production is falling. In 1956, M. King Hubbert, an analyst at
    Shell Oil, said that production in the lower 48 states would go down by 1970.
    Sure enough, 14 years later, it started going down. And it’s kept sliding since
    then. We’ve found over 50% of everything we are going to find here. Once you
    find 50%, you naturally go into a decline. And here we are, 38 years later,
    and, my God, think about the amount of money that’s been spent trying to find
    more! We spend more every year and get no more net production. And the list of
    countries whose oil production has peaked keeps growing, including Russia,
    which for eight consecutive months has had year-over-year declines. Companies
    have the same problem. The latest results from Exxon [ticker: XOM] showed that
    its production was down about 3%.

    Barron’s: But don’t all the new oil-finding and drilling technologies help?
    Sprott: We’ve made great strides in technology; it’s true. Every year, there’s
    something new. We see people get some stripper oil well to go from seven
    barrels a day to 15, by using sonic-resonance or water-flow technology or
    nitrogen injection, or whatever. But technology can simply speed up the
    depletion rate. A big fear is that the largest oil field in the world, Saudi
    Arabia’s Gowar, which brings us just above 4 million barrels a day — 5% of
    global oil — is being depleted. They put 6 million to 7 million barrels of
    water into the formation every day. Oil floats in water, so as the water level
    moves up, the oil rises to the top. Someday, the water level will go above
    where they are producing the oil, and they’ll just get water. There’s not going
    to be a slow decline rate at Gowar. When it finally goes, there’s going to be a
    very quick decline.

    Barron’s: What about natural gas? Hasn’t more sophisticated technology made it
    easier to produce more?
    Sprott: Yes. Fracturing techniques and horizontal drilling have caused things
    to pick up. But with these new discoveries, the first year’s production is
    quite flush, but then there’s a very sharp decline. In the fourth year out,
    production is probably 5% of the first year’s or something like that. But there
    have been some great strikes, in the past decade and particularly the past
    couple of years, in places like the Haynesville Shale in Louisiana and Texas,
    the Utica Shale in Quebec and the Montney Shale in British Columbia.

    Barron’s: Who’s working these fields?
    Sprott: Different companies. In the Haynesville, there probably are 10 major
    U.S. companies. In the Utica, there’s one U.S. company, Forest Oil [FST], and
    one major Toronto company, Talisman Energy [TLM.T]. In the Montney, there is a
    whole bunch of companies.

    Barron’s: What about oil demand? It’s putting pressure on supply, too.
    Sprott: You’re right. I’m not even going to discuss the demand side, but I
    read in a newspaper that 70 million people around the world are joining the
    middle class each year. That means more people using more oil.

    Barron’s: Where is the price of petroleum going?
    Sprott: Long-term, up . . . almost forever. What it goes to, I don’t know. But
    I can see it hitting $200 or $300 or $400 a barrel. And if oil goes up, it will
    drag most other energy-producing products with it. Not that coal and uranium
    don’t have their own fundamentals, but certainly costly oil will make
    alternative energy sources more popular.

    Barron’s: Let’s talk about coal.
    Sprott: The central Appalachian coal price has gone from about $40 a ton to
    around $50 in less than a year. Uranium hit a low of $47 a pound, and it got up
    to $135 and now it’s around $64. There are electricity shortages in lots of
    countries. So, thermal coal is going to continue to have a tremendous
    renaissance, which is great for some U.S. companies. The U.S. is
    self-sufficient in coal, and exports a lot. Many coal stocks have had huge
    rallies, and takeovers of coal companies will provide plenty of opportunities
    for investors. For example, Alpha Natural Resources [ticker: ANR] has already
    agreed to be acquired by Cleveland-Cliffs [CLF], but there’s a rumor that
    ArcelorMittal [MT], the world’s top steel company, might make a bid. [Editor’s
    note: For more on the Alpha deal, see page M10.]

    Barron’s: What companies are attractive?
    Sprott: Our biggest coal holding is James River Coal [JRCC], in Virginia. They
    just reported their results for the second quarter, which wasn’t a particularly
    good one. They lost money. Because of contracts, the coal they are selling
    today, or that they sold in this last quarter, they sold for $50 a ton. The
    coal they sell for next year will get $130 a ton. They are losing money —
    maybe $3.60 this year — but their results will get better with each quarter
    from here on. The shares are trading at about two times cash flow. We have
    calculated that the company could earn over $10 a share next year, and the
    story could be even better in 2010. The stock is at 35.

    Barron’s: One thing that you’ve been criticized for is going after a lot of
    Sprott: The best opportunity is the one that is the least looked at. Do I
    really think that Peabody Energy [BTU] is going to outperform James River Coal,
    which is a lot smaller? No, I don’t. I just think that not enough people are
    looking at James River. Most people have never heard of James River, but they
    have heard of Peabody and the top 10 firms. You have to go a little bit under
    the surface and find things that people will recognize later as being good
    value. I first bought James River Coal at $14. We love buying a small company
    that becomes not so small a company. We even have penny stocks, but not a huge
    One is Timminco [TIM.T], a controversial silicon processor traded in Toronto.
    We first bought Timminco at 50 cents. It looked like a classic for us. First
    of all, it’s a tech stock with a technology that has caused them to be a major
    source of material for the solar industry. Very early on, when we were
    aggressively buying it at $1 or $2 or $3, we imagined this company could earn
    $5 a share a couple of years out. We ended up buying 15% of the company at an
    average of $6. It could earn $5 a share. and as commodity prices go up, solar
    becomes a more economic source of power.
    The stock, which had traded above 35 at one point during the past year, got
    hammered last week — it closed around 13 — af- ter its earnings disappointed
    investors, fueling skeptics’ arguments that it doesn’t have a truly inexpensive
    way to make silicon for solar panels. What happened?
    Timminco produced 291 tons in the quarter, 70 of which were compromised. We
    were looking for 300 tons, so it was disappointing. But these things often
    happen in a startup situation; the new technology doesn’t always go as you
    anticipate. We’ll have to see if they can produce it in quantity. If they can,
    there will be tremendous upside. In the past few months, they have had a
    significant extension of an existing contract, and signed a contract with Cali
    Solar, which would have been considered a competitor to Timminco. That in
    itself is a real validation of the company. Q-Cells [QCE.XE], Timminco’s
    biggest customer, has been vocal about the high regard its team that audits
    Timminco’s processes has for the company. Q-Cells recently raised its revenue
    guidance, partially off production coming from Timminco material.

    Barron’s: Have you cut your Timminco position?
    Sprott: No. I’m still by far the largest holder, with 17%. One of our
    portfolio managers sold some of his shares, but a very small part.

    Barron’s: Timminco has contributed huge gains to your portfolio. Could you
    have gone public without it?
    Sprott: Our Canadian Public Equity Fund returned 27% last year, and Timminco,
    which we owned only for a year, was a big winner for us, but not the biggest.
    And it had nothing to do with our return for the first nine years.

    Barron’s: All right, let’s look at the bigger picture. What’s your view of the
    stock market?
    Sprott: We’re in a secular bear market, and there are lots of things that
    might go down for quite a long period, especially if oil starts rising again.
    Just imagine oil at $200. What happens to the airline companies, car makers,
    mobile-home companies, destination-resort companies, casinos, retailers?

    Barron’s: Give us some shorts, please.
    (MORE TO FOLLOW) Dow Jones Newswires
    08-16-08 0007ET

  44. 44
    Sambone Says:

    Sprott: Let’s start with the obvious. You can’t have financial institutions
    levered 30-to-1, which I think is the case in Europe, or 25-to-1, which I think
    is the case in the States, and expect nothing bad to happen. So, we have been
    short the banks for a long time. And the brokers. And the mortgage lenders and
    mortgage guarantors. We typically short stocks, not ETFs or indexes. We’ve been
    short Bank of America [BAC], JPMorgan Chase [JPM] Citigroup [C}, Goldman Sachs
    [GS], Merrill Lynch [MER], Lehman Brothers [LEH], Morgan Stanley [MS], SunTrust
    [STI], Wachovia [WB], Washington Mutual [WM], Capital One [COF]. There’s hardly
    a financial name that we aren’t short.

    Barron’s: If you’re that bearish, what do you see for interest rates and the
    U.S. dollar?
    Sprott: I’ve always believed the dollar should be weaker; the U.S. hasn’t
    faced up to some huge economic concerns, like Social Security, which some
    people think it won’t have enough money to pay for once all the boomers retire.
    As for rates, the greatest mistake that the Federal Reserve made after the
    Nasdaq meltdown and 9/11 was to immediatly cut them. That created this lending
    mania, which is finally ending with the repricing of risk. When everyone
    realizes that there’s a lot of risk, they realize that they must charge more
    than 4% interest to make taking on the risk worthwhile.

    Barron’s: What about housing and gold?
    Sprott: House prices will fall further. People who I respect suggest it’s got
    a long way to go. If my scenario, in which the banking system deleverages
    itself, is right, it causes an even greater problem. You won’t be able to get
    the money to buy a house.

    Barron’s: What about gold?
    Sprott: Well, I believe in gold as a store of value. Gold will appreciate from
    here in any currency. I was just reading a piece about how, if you value the
    Dow in gold, from 2000 to 2008, it’s done nothing. If you’re a Nasdaq investor,
    it’s been even worse. Gold has proven to be very rewarding in this climate, and
    I expect that to continue.

    Barron’s: How do you play it?
    Sprott: We buy gold and silver bullion for about 25% of our funds. And then we
    have another 15% in gold and silver shares. So, that’s 40%. Another 40% of our
    holdings is in energy, and we have probably 10% in cyclicals. The rest is in
    other things, like fertilizer, which I don’t consider a cyclical.

    Barron’s: Which fertilizer stocks?
    Sprott: All little guys, like Athabasca Potash [API.T] and Potash One [KCL.T].
    Another non-cyclical would be in a totally different area. It’s Cal-Maine Foods
    [CALM], a U.S. egg producer. It has a nice dividend, and trades at six or seven
    times earnings, even though it’s run up a lot.

    Barron’s: We wrote favorably about that stock not long ago. But getting back
    to gold, where do you see its price going?
    Sprott: It’s a little like the oil-price question. I don’t know how high it
    will go, but I don’t have a problem thinking it will hit $2,000 an ounce. Check
    back with me in five years.

    Barron’s: Maybe we will. Thanks.

    Dow Jones Newswires
    08-16-08 0008ET

  45. 45
    Fred Says:

    Z – I found a link to that Eric Sprott Barron’s article Tom was looking for:


  46. 46
    zman Says:

    Thanks Sam

    Housekeeping Watch: We’ve been a pay site for almost a year now and appreciate your patronage. Just a friendly reminder that the first of the Annual subscriptions, the folks who signed up before we even went officially pay, will automatically begin renewing around month’s end.

  47. 47
    zman Says:

    Thanks too to Fred, reading it now. Nice to see someone else mention Russia peaking as they are a bigger producer than Saudi depending on which one of data you are looking at.

  48. 48
    bill Says:

    aubrey of chk on cnbc in 2 minutes

  49. 49
    kaman Says:

    All- Regarding WSJ Online articles, I’ve had success with a “work-around” that I read about…use Mozilla Firefox as your browser, and “spoof” the URL to appear as if from digg.com …try googling this topic, might reveal better description than mine.

  50. 50
    zman Says:

    Sprott makes a good point with the fertilizer names, as their biggest cost is natural gas. AGU, TRA, POT all moving higher today.

  51. 51
    kaman Says:


  52. 52
    zman Says:

    Aubrey on fast money in 2 minutes. Look for him to debunk gas glut due to high decline rates and infrastructure limits, even talk export LNG etc.

  53. 53
    Sambone Says:

    Off subject – Uh, ya I’m ok, just fell and I can’t get back up. Sam warning, check your bank!


  54. 54
    tomdavis12 Says:

    Sam: I bow to your webmastering

  55. 55
    tomdavis12 Says:

    Fred: Thanks also for your fine effort.

  56. 56
    tomdavis12 Says:

    POT recomended by Smith Barney today

  57. 57
    zman Says:

    Aubrey comments, nothing revelational.

    He sees gas bottoming here but he’s also hedged 100% 2009 and 75% 2010, which is up quite a bit from recent filings. He talks a bullish case for the commodity and the size of the hedge confuses people. I think it is smart to take out the risk and just show off three plus years of 20% top line volume based growth.

    He did little to address the fears of a glut other than to say they see demand pick up at $8 from other sources (industrial) which I could have told you.

  58. 58
    Sambone Says:

    All right, troops, line up and try this out.


  59. 59
    zman Says:

    Another director at SD on the tape buying stock, this one bought 75,000 shares for $2.6 mm on 8/12

  60. 60
    VTZ Says:

    I know that I’m late to comment but Sprott is one of my favorite guys to listen to, along with Peter Hodson and John Embry who both work at Sprott.

  61. 61
    tomdavis12 Says:

    Z: From CSFB: Drilling permits rose by 9% in July. Okla +33% New Mexico +104% Calif +34% Texas -8%. A plus for rig suppliers.

  62. 62
    zman Says:

    Thanks Tom, did they mention Louisiana? Those have to be zooming now.

    Everything red again as the only thing that matters is the price of oil. Heard earlier that the broad market off today was the result of a rally in oil to which I would say what rally.

  63. 63
    zman Says:

    Just another lousy day in the energy neighborhood. I won’t do another option trade until this smells much different. Just too much of an abandon all hope feeling in the names right now. Maybe it bounces soon, maybe not. But we are still in the land of little rationale reason for the trading I see going on…lots of people on vacation and very few new positions being added except by people who normally frequent the energy patch.

  64. 64
    Sambone Says:

    Only in America!

    2:15 (Dow Jones) Former SEC Chairman Harvey Pitt teamed up with two others to
    create a website that helps sellers and brokerage firms comply with SEC rules
    on naked short selling, Bull Bear Trader reports. RegSHO.com provides data on
    the short-sell market and hopes to help sellers reduce their costs because
    transactions are done electronically and not over the phone, as is still often
    the case. Clients to the RegSHO.com site pay a $995 monthly fee for standard
    access. “New regulation? No worry. We can solve your problem, for a fee of
    course,” Bull Bear Trader says. “You have to love capitalism.” (SMR)

  65. 65
    tomdavis12 Says:

    Z: Re 61, my source corrects me that was not from CSFB but rather a news story. They did not mention Louisiana. What kind of paper is more interested in reporting New Mexico than Louisiana?

  66. 66
    zman Says:

    Dunno Tom – maybe a local one and while NM is active, LA is much more telling about rig activity coming up.

    Absolute blood bath in the groups and yet on percentage basis not nearly as bad as the old XLF today north the broad market except for oil service which is tied with Dow for the day’s loss.

  67. 67
    zman Says:

    Gold up big today, go figure.

  68. 68
    PackMan Says:

    businesses in south beach evacuated; closed until Wed.

  69. 69
    Sambone Says:

    Z – according to this model, there i a high off NC that will force Fay back into the GOM. Hmmmm

    Hit “FWD” on right


  70. 70
    zman Says:

    Sam – that corresponds to the blue line on your spaghetti track earlier, the one that hit southwest FL and then did an about face into the Gulf.

  71. 71
    zman Says:

    actually the blue and red tracks both indicate a bounce back into the Gulf of Mex although the future market clearly is not buying that.


  72. 72
    zman Says:

    Interesting to see BBG, a company that sells gas at those lousy Rockies prices trading up 5 cents in this market. True it is cheap and I don’t know how hedge but that just seems odd given their proximity to such a weak market. Going to listen to the replay of their Enercom presentation.

  73. 73
    sane Says:

    New offshore oil port off coast of Texas

  74. 74
    zman Says:

    BBG – of course, the stock is down from $60 to $38 in the last 6 weeks like most other names in the group, despite a hedge position of > 50% at prices in the $9 to $10 land but that would mean people are thinking rationally.

  75. 75
    zman Says:

    Thanks Sane … yeah, it really sounds like we are getting off foreign oil, lol.

    Thanks much also for the Pemex comment last weekend.

  76. 76
    sane Says:

    The guy from Pemex was quite interesting, he had a lot to say. His wife and my wife were rolling there eyes though when we started talking oil 😛

  77. 77
    zman Says:

    Sane – hear ya on the eye rolling, get that a lot.

  78. 78
    Sambone Says:

    SENAKI MILITARY BASE, Georgia (AFP)–In the west of Georgia, Russian forces
    Monday seemed in no hurry to begin a withdrawal promised by the Kremlin.
    The Senaki military base was still occupied by Russian soldiers as was the
    base at Teklati, three kilometers away.
    In the early afternoon, nothing indicated the soldiers were preparing to
    leave. Trucks and armored personnel carriers left the Teklati base in the
    direction of the Georgian city of Kutaisi – the opposite direction from which
    they are supposed to leave the country.
    Senaki lies in the west of Georgia, a short way inland from the Black Sea
    coast and closer to the Russian-backed separatist region of Abkhazia than South
    Ossetia, the center of the current conflict.
    Russian President Dmitry Medvedev assured his French counterpart Nicolas
    Sarkozy Sunday that Russian regular forces “will begin withdrawing” from
    Watching the Senaki barracks from afar was Ramaz Aphkhadzi, a lieutenant in
    the Georgian army, dressed in a dark blue T-shirt and jeans.
    “I was in command of a platoon in those very barracks,” the 29-year-old said.
    “We were just one company, 100 men with a mission to hold the base.”
    When Russian planes started bombing the area, the Georgians fired back, he
    said, but the attackers overwhelmed them with MI-24 helicopters, a half-dozen
    T-72 tanks and ground troops.
    “Our superiors gave us the order to quit the base. It was the 11th or 12th of
    August – I don’t remember very well,” he said.
    He estimated that about 30 Georgian soldiers were killed in Russian bombings
    around the barracks, and that about 500 Russian soldiers were now occupying the
    base, including 200 paratroopers.
    Russian vehicles were “coming and going as usual” at the base, he said.
    Monday, at least four helicopters made reconnaissance flights over the Senaki
    In the late afternoon, about 20 loud explosions rung out from inside the base.
    After the explosions, smoke was seen rising from inside the military complex.
    Aphkhadzi said he thought the Russians were blowing up ammunition stocks.
    Under a blazing sun, two Russian soldiers left the barracks on foot to buy
    cigarettes from a small shop nearby. When they returned near the guard station,
    Aphkhadzi followed and chatted with them for a few minutes.
    “They know absolutely nothing. They were asking me what is being said on
    television about the date they will leave,” he said.

    Dow Jones Newswires
    08-18-08 1516ET

  79. 79
    Sambone Says:

    NEW YORK (Dow Jones)–Crude oil futures settled lower for the sixth time in
    seven sessions as a tropical storm steered clear of oil production in the Gulf
    of Mexico.
    Light, sweet crude for September delivery settled 90 cents, or 0.8%, lower at
    $112.87 a barrel on the New York Mercantile Exchange. October Brent crude on
    the ICE futures exchange settled down 63 cents at $111.94 a barrel.
    Futures eased lower as Tropical Storm Fay remained on course to make landfall
    Tuesday morning along the southwest coast of Florida, far away from any oil
    production in the Gulf of Mexico.
    With the storm threat passing, the market returned to its focus on declining
    U.S. oil demand, which has from a record $147.27 a barrel on July 11 to a
    settlement low not seen since May 1. U.S. consumption dropped by 800,000
    barrels a day in the first half of 2008, the U.S. Energy Department reported
    last week.
    “You can’t kick the market up with some weather,” said Michael Korn, president
    of Skokie Energy Corp. “The market looks weak. I still do not see any serious
    buying at these levels.”
    Futures have stabilized since dropping $4.85 to $115.20 a barrel on Aug. 8, as
    oil prices near the psychologically and technically important $100 a barrel.
    Demand lost when prices spiked could begin to return around that point. Some
    members of the Organization of Petroleum Exporting Countries have also
    indicated that they would support cutting production to prevent oil prices from
    returning to single digits.
    Others believe oil is waiting this week for a cue from the dollar, which
    strengthened to a six-month high against the euro last week, but was flat on
    Monday. Oil rose in the first half of the year as investors bought commodities
    as a hedge against the weakening U.S. currency. Oil’s recent slide coincides
    with the dollar’s rapid strengthening.
    “If you start seeing the dollar start falling again, you’ll see crude oil
    running back up again,” said Mark Waggoner, president of Excel Futures in
    Newport Beach, Calif.
    The euro recently traded at $1.4704. Currency markets were quiet, ahead of the
    scheduled release of U.S. producer price data on Tuesday.
    Front-month September reformulated gasoline blendstock, or RBOB, settled 4.50
    cents, or 1.6%, lower at $2.8152 a gallon. September heating oil settled 3.43
    cents, or 1.1%, lower at $3.0848 a gallon.

    -By Brian Baskin, Dow Jones Newswires
    Dow Jones Newswires
    08-18-08 1523ET

  80. 80
    Sambone Says:

    ON the lighter side, D#@* we need it.

    Sam quote – “At least they were tazed together.” Hmm, sounds like my wedding, but I can’t remember!


  81. 81
    zman Says:

    Dow falls due to concerns over financial stocks…who woulda thunkit?!


  82. 82
    Sambone Says:

    HOUSTON, Aug 18 (Reuters) – Chesapeake Energy Corp CHK
    is planning to spin off its natural gas gathering unit but the
    company would not say what form the business will eventually
    In June, the Oklahoma City-based company said it had
    temporarily delayed plans to raise capital through the sale of
    a minority interest in its gas gathering or midstream business,
    a move that had been expected to bring in $1 billion.
    The firm on Monday declined to reveal its plans for the as
    yet unnamed business, offering only that the spinoff was meant
    to extract value from its assets.
    “We are still moving forward making it its own stand-alone
    operation,” said Jeff Mobley, head of investor relations at
    Chesapeake. “What we do down the road remains to be seen.”
    The midstream business would have its own reporting
    statements, be its own legal entity and have its own separate
    financing, Mobley said.
    But first Chesapeake has to receive consent from holders of
    about $2 billion of its debt to allow it to arrange separate
    financing for its midstream business. Chesapeake filed the
    consent solicitation on Wednesday.
    If the bondholders agree, the midstream business, which
    includes gas gathering and processing facilities in the Barnett
    Shale in North Texas and the Fayetteville Shale in Arkansas,
    may end up as a master limited partnership or a separate
    private company.
    Chesapeake is spending heavily to develop new natural gas
    fields such as the Haynesville Shale in northern Louisiana. The
    company plans to spend about $8 billion in 2008 acquiring
    acreage and leaseholds.
    Shares of Chesapeake were off more than 1.3 percent, or 62
    cents, at $44.91 in afternoon trading on the New York Stock
    (Reporting by Anna Driver in Houston; Editing by Daniel

    Mon Aug 18 19:45:06 2008 -GMT-

  83. 83
    zman Says:

    Re CHK, glad to see the MLP concept for the midstream assets back on the table. Without a move up in the commodities it probably won’t catalyze the stock but at least they won’t be selling even more shares at these low levels. I think the next big thing for them will be another JV or even 2 JVs announced prior to 9/30 with the deals structure the same way as their deal with PXP in the Haynesville. Monetizes the assets in the Fayetteville and Marcellus, gets them a carried interest, and puts a dollar figure on their remaining acreage in the plays.

  84. 84
    Sambone Says:

    Tini time!

  85. 85
    zman Says:

    This one mid east Atlantic looks sort of interesting.


  86. 86
    Bleemus Says:

    NMX NYMEX: CME to buy NMX for $8.4 bln after receiving NMX shareholder approval – Chicago Tribune (79.95 -2.16) -Update-

    Chicago Tribune reports CME will buy NMX for $8.4 billion, after receiving approval on Monday creating the world’s largest derivatives market. More than 75% of Nymex members voted for the merger, ensuring that the deal supported by shareholders at both companies will go forward, the CME Group said. Throughout the negotiation process, Nymex members appeared willing to hold out for more money.

  87. 87
    apbd Says:

    Did SD close below its initial offering price? Who would have thunk it?

  88. 88
    Wyoming Says:

    One of our vendors just returned back from the Bakken and talked to him at our wellsite today. Said they were helping EOG complete with plug shooting their wells (easy to master with a little experience). As mentioned earlier, this is the cheapest technique I keep coming back to in my designs. Some of the details he had:

    7,000 BOPD
    7 MMcfd
    Only on 1280 acre spacing
    22 stages, not sure about volumes and rates
    18,000′ md, something like 8,000 TVD, makes about a 10,000′ md lateral.
    Did not know if it was TFS or not.

    Got my own issues we are working through, so I did not get everything down.

    BTW – signed a Barnett lease on my house for $24k/acre, 25% Royalty interest, 3 years and from XTO. CHK said they will no longer persue new leases in the area, they were $21k/acre.

  89. 89
    zman Says:

    Wyo – congrats on the home front lease!

    On the Bakken well, you saying 7,000 bopd as in 7 thousand barrels of oil per day from an extremely long lateral? That’s a lot of stages, what do you figure cost per stage up there. That’s a pricey well but drilled across 2 sections…wow.

  90. 90
    Wyoming Says:

    Got to be ceramic. Just a pot shot based upon a Barnett numbers we played with and a 2 hour pump time (don’t know rate). The ceramics are at least $1.5MM of the completion bill. Throw on ~$1.1MM for the pumping, $300k for wireline & plugs, $120k to mill out, $200k to truck water and tanks. we drill about half of both dimentions, factor in some longer trip times and call it $3mm drill costs, add another $300k for facilities and I would guess ~6.5mm. Strange, about what I think a CHK HS well would be…..

    Keep in mind that most of the vendors I talk to hate doing business with EOG and CHK, not that it really matters. Slow paying invoices and pushes them around. CHK one time told all vendors they will drop 10% of prices are be dropped off of their wells. Kind of company I want handling my $$.

  91. 91
    Wyoming Says:

    How do you know when you have an Aggie on your platform?

    They throw pieces of bread at the helicopters landing on the pad.

  92. 92
    Wyoming Says:

    On CHK HS;

    Keep in mind PXP carry
    Keep in mind CHK rigs and services. Say there is a partner with a 50% WI. The rig bill comes in @ 1MM (fair market value). The partner gets hit with $500k. The actual cost of the rig is 250k for deprecation, compensation, fuel. CHK is basically getting 1mm drill costs for 250k.

    Big medicine.

  93. 93
    zman Says:

    Huh, would have thought drill costs and extra stages would have thrown it up close to $9 to $10mm CWC. WLL has been doing some dual laterals up there for $7 ish but I didn’t think they were that long in TMD. I defer to you on that one. On that rate, the 7 in front of the 000 is a bit of a game changer, as EOG has been punching 3+ for a while now. Going to be takeaway issues out of the basin. Economics get pretty sick with 9 mm barrels of oil in place per section, call it 30% recoverable with 2 sections, you are almost down to $1 per BARREL F&D! Did I do that math right, seems later than it is tonight. Wow, great numbers there. WLL has more exp in the multi lateral game I think but no reason EOG can’t learn it and they are pretty darn good at the horizontal game. Well results like that, and I left out the gas, would be good news fro the Bakken list which continues to slump daily with oil and the really good news is, it will have no impact on global prices.

  94. 94
    zman Says:

    Will tell wife about 91, she has a couple of degrees from UT so it’ll give her a chuckle in the morning.

    On CHK, yeah, and just think when they do it in the Marcellus and Fayetteville. Nice all around. Agreed re “how I want a company to treat my capital” …covetously.

  95. 95
    Wyoming Says:

    EOG does plug shoots all the time in Barnett. They just wanted vendors to show the locals (natives) how to do it properly.

    Increase the # of stages, then decrease the amount of proppant per stage = same completion costs as before.

    Just did it with a 5 stage Barnett last well and a 9 stage Barnett this well.

    It is a function of rate/pressure (HHP), amount of chemicals /gel (Freshwater in Barnett with Friction Reducer) and proppant. The 3 ingredients for a frac.

    The question should be on decline rate, but that takes time and the next play will already be the talk of the street. In today’s case, reason to short good news.

  96. 96
    zman Says:

    Hear ya re shorting good news. CHK or NFX had mentioned something the other day about adding a certain dollar figure per frac stage saying it was not balancing out to even. Just curious to get the total number. Re declines, everything I’ve seen up there one month out has been better than expected, they don’t talk much about the older wells as the analysts and I guess guys like me want to here the next higher rate completion.

  97. 97
    Wyoming Says:

    Smoke and mirrors.

    One more thing to add to the stage deal; we reduced the rate (HHP)and increased the sand and reduced the water volume too. Total cost in the 5 to 9 stage scenario was cheaper.

    Good night, early mornings. Tell your wife Cookem Corns, in the words of one of my daughters.

  98. 98
    zman Says:

    Hear ya, will do, and as always, thanks for the late night color.

  99. 99
    nifty tips Says:

    Georgeson Proxy solicitation services

    Monday Morning And All Is Calm Before The Storm | Zman

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