Monday Night / Tuesday Morning Post

Not to put too fine a point on it but yesterday sucked. And it didn't. Volumes kicked up a notch over the recent hard drubbing but not hard driving levels. I'll be traveling back to the office most of today but will attempt to check in when possible so updates on what is going on will be more than welcome. I've included my notes on the conference and the salient points from individual speakers. I think the points may go further in terms of importance from a macro sense than from a company specific perspective. Stories still matter little, everybody hates the sector, not for fundamental but for "sky is falling" reasons and the energy names, despite being cheaper than the broad market simply had further to fall.

As you can see from the chart below, the market is not putting a lot of effort into the selling. No thoughts about growth in volumes, or hedging, or the cost reduction that comes with those falling prices.



In Today's Post:

  1. Commodity Watch
  2. Stuff We Care About Today - Gleanings from IPAA
  3. Odds & Ends

Commodity Watch:

Crude oil fell with the markets and a once again surging dollar yesterday. China said it will not import gasoline for a second month and that didn't help either. Oil ended the session at a new 8 month low at $87.81, down $6.07.

Natural gas fell as well, it too falling to a new 10 month low, down $0.52 at $6.984. As one of my close confidants said, "you can just hear those Barnett rigs grinding to a halt." If anything this should encourage the parade of capital budget cutting press releases which should in turn bring that natural gas rig count on down and buoy prices. At least that's the theory.

Stuff We Care About Today - Gleanings from IPAA:

(LINE) - If you're looking for a little yield ... look elsewhere.

  • How about an 18.6% yield?
  • For the un-initiated this is a producing property master limited partnership entity, it passes through its earnings to the holder much like a REIT.
  • no need to go to capital markets,
  • good debt coverage ratios,
  • good coverage ratio on that distribution so it looks unlikely to fall just yet.
  • management strikes me as conservative and I'll have a write up hear soon as T-Bills are just about worthless and this name is already down.

(EXXI) - $2.01. Gulf of Mexico shelf players with a couple of swings for the fences in play now.

  • Interesting presentation.
  • High quality CEO Shiller.  I've met with him when he was leading the exploration effort for Ocean Energy in the deepwater Gulf of Mexico under Jim Hacket. He is one oil and gas finding dude.
  • Has one 0.5 Tcfe target that has good mud log shows, 400 feet of pay. Drilling rig has been off site for the last month due to the hurricanes but is about to get busy again and they expect to have wireline logs soon. If successful  this would be a big increase to company reserves.
  • Blackbeard prospect drilling ahead at 32,850 feet, making about 75 a day and while permitted to 35,000 feet, probably only going down to 33,500 feet. Like what they have seen so far in the well, have seen 4 good sands. This is that high risk, ultradeep prospect that never seems to reach total depth but looks sooner now, say next 2 to 3 weeks based on drilling rate but I would not hold breath on results prior to December.
  • Going to have a press release out later this week announcing a 2 year contract for a RDC rig to drill deep to ultradeep prospects like BB. The first will not be ultradeep but instead will be a 25,000 lookalike to Flatrock at MMR.
  • Lots of cash and room on the revolver.

BZP -  $12.39. Presentation looked very good.

  • I’ve liked that story since I first wrote it up and I have no experience with the management but the CEO presented the company well.
  • Not just an oil story either. Lot of stranded gas in those parts….old wells, drilled in the 50s and 60s found gas and at that time you immediately plugged and abandoned them. Just no need for gas. That was then…Now Peru has been growing 8 to 10% per year and needs gas-fired electricity to fuel the economy. They have so far not suffered the world down turn so maybe that idea gets a bit spanked soon. Anyway, they are receiving financing from GE finance and it is coming this week (confirmed) for the initial phase on some electricity capacity they are putting in place onshore.
  • Prices are nice, not your usual stranded gas $2 to $3/ per Mcf but more like $6 which out in the middle of no where is welcome.
  • The original work up is on the reports tab and I’ll be doing an addendum to that one.

HK -  Not a lot new about the company but some interesting comments regarding the current industry environment:

  • CEO Wilson said that people (hedge fund managers) had recently said they were worried about how “real” a play the Haynesville Shale is since no one is talking about it. His response was “why talk when no one cares right now…play very real”.
  • Went on to say that acreage that was going for 25,000 to 30,000 per acre three months ago is now trading hands for $7,500 to $8,000. They are still buying acreage although it sounds like things have slowed greatly.
  • Also said they could further cut their budget by 50% for next year (just cut by a third the other day) and would still grow 20% in 2009.
  • He said there is upside without additional dollars to their 30% estimate for 2009 as the budget stands now. He is not planning to cut more at this time.

TXCO - Will have a write up here next week. Interesting company, lots of moving pieces though.

  • Pearshall Shale (soutwest Texas) is another shale in its nascency, probably two to three years behind the development schedule of the Haynesville. Its still a science project in that while they know the acreage is gas laden, the completion methodolgy is still in a work in progress and only a handfull of wells have been drilled.
  • Two more Pearshall wells will be fraced in the next 3 to 4 weeks. First will probably not be that great as it had mechanical issues now has smaller tubing downhole. The second to be completed may be the best IP to date in the play (over 3.8 mm/d)
  • They have 684 thousand acres in the Maverick basin which containds both the Pearshall and the Eagleford.
  • Overlying this is the Eagleford Shale - they were pretty cagey on details here
  • 'The breakout session was one of the better attended and the questions were centered on the Eagleford potential... they went as far as to say they were pretty encouraged, that it held not only gas but also oil rich and then clammed up. It's overpressure like the Pearshall and the that other other, much hotter play, the Haynesville. Reason for the quiet is two-fold. First, its very early and they don't want to hype it and second, they want to get more acreage. They did comment that their acrage here was acquired long ago and dirt cheap.
  • ...and when I say early, I mean they have re-entered one well, a vertical well drilled by APC which TXCO took horizontal.
  • But like I said there are a lot of moving pieces (there's a heavy oil sand play) and I have some reading to do on just how they fit together in the current price environment.

Odds & Ends

I'll have another post out after the close with more company comments. Again, I'm flying back for most of the day today and would appreciate the occasional market update as I'll have time to fire up the black berry but probably not the laptop.

43 Responses to “Monday Night / Tuesday Morning Post”

  1. 1
    Nicky Says:

    Morning Z – oil volatily pretty insanse -as it is with the broader market!

    There was a rumor of a US plane being brought down over Iranian airspace – at the moment just a rumor – oil shot up of course. Currently at 91.09.

  2. 2
    rlogan1301 Says:

    anyone there?

  3. 3
    reefguy Says:

    Hiding under the growing fog…

  4. 4
    Bleemus Says:


  5. 5
    Eagle Says:

    Is there any logical reason DO is valued greater than RIG? Looks like a Short DO, Long RIG opportunity, but I’m a little gun shy given this market. Thoughts anyone?

  6. 6
    zman Says:

    Just checking in on a layover. Nice to see a little green. Everything I heard yesterday/last night at the conference was 1) get cash flow and capital spending in line.
    2) cap spending coming down…duh
    3) debty companies will have trouble borrowing more…doubel duh.

    Everyone extrapolating not being able to borrow through 2009…seems a stretch that we will be frozen anywhere near that long. Taking a look at the debt laden vs the debt free, not a lot of difference in the performance so far.

    But as managers begin to bottom fish (it will happen some day) they will look for the debt free, live within cash flow names meaning that the EOG’s of the world will probably outperform names like CHK who have in the past lived beyond their current cash flow and in so doing have racked up a big bar tab.

  7. 7
    ram Says:

    ZMAN – Would CLR be an EOG with regards to cash flow that is oily?

  8. 8
    zman Says:

    Eagle – only in terms of share price, RIG is about 4x bigger than DO in terms of total enterprise value. Why the stock has fallen more probably gets back to worry over debt:

    DO mkt cap = $12.2 Bil
    DO enterprise value = 12.0 (mkt cap + debt), in DO’s case they have cash on the balance sheet (like negative debt) giving them a slightly smaller EV than mkt cap.

    RIG mkt cap = $28 Bil.
    RIG EV = $42 Bil. (big pile of debt which has been used to finance their fleet build out in the ultradeepwater capable market)

    I’ll have a list of indebtedness for our usual suspects in Wednesday’s post.

  9. 9
    Dman Says:

    Hi Z,

    my not knowing enough about the debt situations kept me from bottom-fishing yesterday (along with a feeling it might still have been early). A ranking for debtiness in the E&Ps (filtered by Z-knowledge of what the actual significance of different sorts of debt are etc) would be handy. I know I could look things up on Yahoo but my chances of correctly interpreting the balance sheets would be minimal.

    What about the service names? Presumably debt isn’t a big issue for them nor for their major customers (NOCs & IOCs). Thoughts on that would be appreciated.

  10. 10
    Dman Says:

    Oops I can see my #9 (1st part) is made redundant by #8.

  11. 11
    zman Says:

    Morning Ram

    Re CLR – very low leverage level. They are one of the ones that could go faster in the Bakken and also in their lessor talked about Woodford Shale but have chosen not to for one reason or another.

    They are underspending cash flow through mid year 2008, I’m sure no chance they attempt to exceed it 2009 …not sure I’ve seen a budget there yet but don’t think so. Will check. The one knock on them at this point will be they are 100% unhedged. Its a knock or a good thing, depends on what commodity prices do.

  12. 12
    zman Says:

    Dman – I’ll put some notes with the debt tables. Debt can be a problem for any of them looking to do big projects. Delays delays delays. Building rigs, pipelines, gathering systems, processing plants….lots of talk of delays. Sat with a database information oil service vendor (they sell all kinds of info to the E&Ps to let them know what’s happening where and by who) at lunch yesterday. Said he’s getting push back on sales, no hope of raising rates any time soon. So the debt problem permeates.

  13. 13
    rlogan1301 Says:

    Z – thoughts on UNG at these levels? looking at Nov35 calls

  14. 14
    zman Says:

    See that BEXP had a nice TFS well in the Bakken today, 900 bopd. No one cares with the stock off well over 50% from recent highs. Buy the rumor, sell the group still in motion.

  15. 15
    ram Says:

    Thanks. Safe travels home.

  16. 16
    zman Says:

    RL – let me get back to you in a bit. Probably like it but I need to check a coupla numbers. Yesterday’s carnage did more damage to the gas chart but gas is going to get hit by a veritable tsunami of capex rollback press releases. These will all contain reduced production estimates for gas and some will contain rig count cutbacks and even current production curtailments. So that’s in the “good for gas column” along with things like winter approacheth and gas in other parts of the world still does not want to come to the states.

    In the “bad for gas column” you have the fact that production is still high and that storage could blow out 3.4 Tcf if we get some mild weather in October.

    Still, gas prices are low and those press releases are not issued to manipulate gas prices (well, not entirely) but are due to the fact prices are lower in many places vs the NYMEX #s we see quoted making production from those basins breakeven or worse.

  17. 17
    zman Says:

    Thanks Ram – at 11:27 I have about 30 minutes before I ship out of Vegas so ask more questions now or I go search out the nearest video blackjack machine.

  18. 18
    Dman Says:

    The continued fall in NG is setting up for a monster winter rally. The difficulty is, of course, “rally from what levels”? Hmmm.

    Z – re #12. Yikes, sounds like that is going to have a major effect on production at some point. But then the same goes for consumer industries. Hmmm.

  19. 19
    zman Says:

    Dman – well the good news for gas with regard to the winter is its non-economy dependent. Either use gas or buy blankets from LL Bean. While industrial demand may slack off a bit a cold winter can easily overcome a few months of weak demand from chemical, steel, paper etc.

  20. 20
    Dman Says:

    Z – How about on the oil side: would those debt-permeation delays also affect oil supply (I’m talking globally) at the margins enough to matter?

  21. 21
    Nicky Says:

    The rally in the broader market looks very weak – Bernanke speaking at 1.15.

  22. 22
    zman Says:

    Dman – Re oil supply, well it certainly does nothing to encourage more supply. When you look at sources like Canadian oil sands (big projects indeed) you gotta think delay. Then you have projects offshore that need more rigs to be built to develop them and pipe laid yada, yada, yada. No way to quantify of course but I’ll dig about for anecdotal evidence.

    On the gas side, gotta think LNG projects suddenly going on hold too. Even ones under construction will likely see delays as rates for project financing jump. Some estimates saying revolved rates which are variable are rising 300 bp in recent days. So suddenly your reserve is looking like your average credit card on rate.

  23. 23
    Dman Says:

    HAL getting clubbed relative to other service names. Wonder what that’s about…

  24. 24
    zman Says:

    Notice in energy land what is gaining here. XoM, COp, CVX and biggest of big cap E&P: APA, DVN, EOG,

    Nobody expects the majors to grow and its almost their job not to at this point.

    Man is COP cheap down here but so are they all.

    Nikcy – hear ya on a weakish rally if you can even call it that. There is going to be a nice snapback at some point but like Dman says from what point.

  25. 25
    zman Says:

    Re HAL … Ya know, probably nothing more than it was weak early and weakness gets hit. I saw one piece saying they along with SLB and BHI and a couple of others are going to do better than most during a potential down cycle as the international drilling effort is going to take a lot lower oil than $90 to really see the int’l rig count come off. That said, the group is still in “source of funds” land. People are taking gains accumulated over the last couple years in the big names. So one day its up and the next its cashed. No reason, all rhyme as in last verse same as the first. As buying comes back to the e-groups it will be consolidated in names like SLB, HAL, BHI, RIG on the service side, the Majors, and the large cap and lower debt E&P’s. Growth has become a fourth or fifth consideration when looking at what to buy.

  26. 26
    Dman Says:

    Z – #24: are you saying that the gainers listed are because of low debt?

    Gotta agree with Cramer one one point: what’s with the delay in cutting rates? Gotta ask: as the Fed’s balance sheet ballons out, do they need to keep rates higher to avoid collapse of dollar or treasuries market? (I ask that with the barest of understanding of such things).

  27. 27
    zman Says:

    Basic TA on the Dow looks pretty scary.

    XOM looks like a Head and Shoulders to my tech layman’s eye.

    At least COP looks like its in some sort of fat channel from high $50s to mid $60s. Not a lot to cheer there but its something. On the valuation front you’re at 5x 2009 earnings (not cash flow, but fwd and trailing PE). No growth expected YoY now but wow cheap.

  28. 28
    Dman Says:

    Oops once again you’ve already addressed my Q.

  29. 29
    zman Says:

    Dman – in part yes, re debt, as in XOM and EOG but also big, solid, energy names perceived as a lot less risky.

    Gotta hop on plane.

  30. 30
    Dman Says:

    Passing it along: Todd Harrison has been edging into energy exposure but he admits he is usually early.

  31. 31
    zman Says:

    Have a better one…see you after the close.

  32. 32
    Dman Says:

    HAL down 7% on a mild sorta market day. Hedge-fund redemptions anyone?

  33. 33
    rlogan1301 Says:

    anything of interest on why the rest downward spike?

  34. 34
    rlogan1301 Says:

    sorry..recent not rest

  35. 35
    Nicky Says:

    Broader market either doing an ABC for wave 4 in which case we are in B down.

    Or we are already on our way to lower lows in 5…

  36. 36
    hermanmar1e Says:


    I know about their involvement in the Pearsall Shale, I completed those wells. I have a hard time understanding why they keyed in on this play when their cash cow is the Glen Rose!

  37. 37
    Dman Says:


    – fundamentals: the market is still catching up to the dismal state of the real economy (industrials as opposed to financials) as per Z’s comments on the permeation of debt effects.

    – technicals/sentiment/voodoo: there was a kinda-sorta capitulation yesterday but it just doesn’t square with the magnitude of the mess. It was maybe worse than ’87 as some are saying and certainly worse than ’98. But there wasn’t a whole lot wrong in the real economy in those cases.

    We’ve had some panic yesterday but it just didn’t feel extreme enough to me. So today it makes sense to see some downside.

    Some folks who were way ahead of the crisis (Kass, Harrison) are becoming incrementally bullish & it’s hard to argue with that. There are some great bargains out there (not least in energy-land) but will they be even better bargains by week-end?

    To buy or not to buy, that is the question.
    (apologies to Shakespeare)

    Premiums are extreme so I’m thinking maybe some common stock.

  38. 38
    rlogan1301 Says:

    thanks dman..is seems the more Ben talked the worse the market got.

  39. 39
    Dman Says:

    Seeing some very wild spikes in both directions now.

    Every time Ben appears it reminds the market “oh yeah, *that* guy is in charge.”

  40. 40
    rlogan1301 Says:

    strong reversal…been watching the q and there was crap load of large block around 33.14 within a matter of minutes.

  41. 41
    Dman Says:

    Hard fought battle with a lot of stocks staying just above lows from yesterday. So far.

  42. 42
    reefguy Says:

    xco-$7.91 market cap a buck fifty

  43. 43
    john11 Says:

    Nicky..re #35 lower lows 5, any tgt?

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