Wrap – Week Ended 10/10/08


I somewhat blithely titled Friday's post Forced Liquidation (Freakout) Friday. Sheesh, I didn't mean you Aubrey! I'll have a private post mortem post on the blow up at CHK and thoughts moving ahead later this weekend. 

For a response to comments / questions from yesterday afternoon please see comment #170 on the Friday post. Also, look for a list of bullet proof balance sheets and bullet resistant stories in the Monday post. Not ready to bottom fish the energy groups (or much of anything else) yet but the time is approaching.

On to the wrap:

1) Commodittues Vs Group Performance Mismatch. Yes, everything has tanked in the last several weeks. Big gains in the group have turned into catrostrophic losses and have overshot the mark as financing froze up and rumors completely replaced reality.

  • Oil and natural gas prices are now down 17% and 11% year to date. Gas looks to be putting in a bottom with the recent break below $7 more of a muted knee jerk reacton to oil's panic driven end-of-the-world style decline. 
  • Meanwhile the gassy XNG index is off 42%, service stocks, as represented by the OIH are down 54% and the XOI index, "Big Oil" splits the difference declining  48% year to date.
  • Earnings consensus estimates (or Cash Flow for the E&P stocks) have not come off nearly to the extent the stocks are indicating they will. As always the pendulum swings too far. 

2) Response To Isle's Question (comment #4 below) Re Financial Turmoil and the Price of Natural Gas.

  1. Isle - Two weeks ago I would have said "Natural gas prices in the U.S. will be more dependent on winter weather than any other single factor over the next 3 to 4 months. Supplies are essentially full, production is strong, so its up to weather, as usual to determine Winter pricing". I think the financial meltdown trumps that statement.
  2. The financial melt will have a bigger impact than anyone previously thought. Capex is going to be coming down a lot more. CHK has already announced a second round of cuts and they will be joined by big, medium, and small cap players across the board
  3. The reduction in capex will have a number of impacts:
    1. Rigs will get stacked. NBR and other U.S. focused land drillers have been drilled due to the perception that this will happen. Reality is about to arrive. Look for the gas directed rig count to fall by 300+ rigs in the next couple of months.
    2. Service cost inflation will reverse.
    3. Conventional drilling will dry up. It's higher cost and therefore lower return.
    4. There will be a transition of rigs in the Resource plays (shales) as capital is redeployed from lower to higher return regions. So you will see a shift in rigs from places like the Barnett and Woodford to the Haynesville. This will likely result in a 2009 near term peak for the Barnett as EOG has foreseen and now CHK probably won;t attempt to fight.  It can go higher, later of course.
    5. New and emerging plays like the West Texas Barnett/Woodford will stall. They are largely science projects now and with limited capital budgets look for companies to hit the pause button on this new source of growth. Also, if you thought the Marcellus was going to be slow to get off the ground before due to permitting issues (increasingly an issue up there) , lack of infrastructure and difficult terrain, it can only be delayed more by current events in the financial makrets.
  4. In past years, these cuts and more often curtailments were limited to specific, temporarily sub breakeven basins. This time the malaise is widespread. 
  5. As to demand, it will largely be a function of weather.
    • While the Industrial component of gas demand is just under a third of over overall U.S. gas demand in a given year, winter sees Residential and Commercial space heating related consumption (which is much less economically sensitive) far surpass the industrial requirment.
    • In past recessions and times of higher prices, conservation efforts have made limited headway in reducing demand on the space heating side and industrial demand shrank back in only very limited fashion.
    • Absolute worst case would be the Chemicals component of industrial grinding lower. If all fertilizer production was shut down (not likely to happen but if debt remains frozen I guess conceivable) you'd probably be looking at a little over 1 Bcfgpd of reduced demand. The rest of the Chemicals sub segment might lose another 1 Bcfgpd and you might shave another 1 to 2 Bcfgpd out of rest of the industrial complex (Steel, Paper, Food, Glass etc).
    • Those losses again are worst case and would likely be short lived and could largely be offset by colder weather. My main point is that supply will gain increasing leverage over demand as to price.

TED Spread: Weekly Graph: 12/7/84 to 10/10/08


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

  1. 1
    Fiveanddimer Says:

    For a fascinating interview with George Soros on the current market meltdown:


  2. 2
    mnt Says:

    Thanks for the interview. Always interesting to hear what people like Soros think at times like these. On another topic, I am still in complete shock over Aubrey. Margin is a complete killer in these markets. Is this positive or negative for CHK this week ?

  3. 3
    zman Says:

    Rumor T Boone to file personal. No way to confirm but it would not surprise me after this week.

  4. 4
    isleworth Says:

    Z- in your opiion, how does all of this change in E&P landscape affect the price of NG? It seems that there will be a lot less drilling etc, and isn’t that a positive for NG. How do you view a recessionary environment for NG demand?

    Tough questions pal but you the man!!!

  5. 5
    ddaley Says:

    NYT article discussing he market having gone too far, and those “with a sense of history” will find bargains, as cheap as they have been for 25 years.

    “Now some veteran investors, including G. Kenneth Heebner, a mutual fund manager who has one of the best long-term track records on Wall Street, say that the sell-off has gone much too far and stocks are poised to rally powerfully if the downturn is less severe than investors fear.”

    He goes on to cite CHK, “He pointed to Chesapeake Energy, a natural gas producer that he owns in his CGM Focus mutual fund. In July, Chesapeake traded for $63 a share. On Friday, it fell as low as $11.99.”

  6. 6
    Dman Says:

    Soros interview: stunning.

  7. 7
    calvo Says:

    Z – any chance you could include the CFTC data on CL longs vs. shorts in your weekly stats table in the future? I guess this data could be a useful bit of information in the current environment… thanks! 🙂

  8. 8
    john11 Says:

    I am still in shock about Aubrey’s margin wipe-out, it is one of the most stunning things I have seen in 30+ years trading the stock market. If Boone follows I’ll be totally speechless. Truly once in a lifetime stuff.

  9. 9
    zman Says:

    Isle – I have added comments for your question 4 to the weekend post.

    Calvo – will do.

  10. 10
    zman Says:

    OPEC comments to the IMF


    You have to copy the link into the address bar or it won’t work. It looks like OPEC is gearing up for a production cut.

  11. 11
    mnt Says:

    Z – Do you have any views on the fund advisors Kayne Anderson ? I have been thinking about these distressed high yielding MLPs and see that there is an etf ( KYN ) from these guys.

  12. 12
    zman Says:

    MNT – sorry, I don’t know them. Two concerns I have with MLPs in general right now are that:

    1) they generally grow via deal flow. Financing for deals has dried up BUT there are going to be a lot of properties and assets on the market at depressed prices to look at. Conservative balance sheets will have a good shot at picking up their next deal on the cheap.

    2) MLP’s have been the cash repositories of the hedge funds. Now they are being forced to use them like an ATM, killing the group without regard for individual stories.

    3) I plan to do more work in this space with simple models to get a ballpark on distributions. I think once things settle down the double digit yields are going to be snapped up as long as those distributions are seen as safe.

    4) I know of some good MLP managers who have been in the business for multiple decades who have been murdered by the recent fall. Not sure how that MLP is run and it may not matter long term but I think at least selectivity will be key.

  13. 13
    mnt Says:

    Z – Thanks for your thoughts. I am trying to work out when the time comes for buying whether to pick a selection or go with an etf. From what you say in 4 it is probably best to just pick two or three of the best run MLP’s.

    From over here in Europe the mood is incredibly negative, especially friday, makes me wonder if the bounce is near.

  14. 14
    Nicky Says:

    Z – re# 3. T Boone to file personal what? Sorry didn’t understand what you mean.

  15. 15
    zman Says:

    Personal bankruptcy. Chapter 13. That’s the rumor anyway.

  16. 16
    Nicky Says:

    Well according to that Soros interview he wanted to see money directly injected into the banks and that is what the Treasury have said they will do with part of the bailout out money this weekend so he should be happy about that.

  17. 17
    Nicky Says:

    My God Z! That would be unbelievable if it were true.

  18. 18
    BirdsofpreyRcool Says:

    I also wonder what Tom Ward was involved in, that made him sell his producing properties back to SD at fire-sale prices. Good for SD, but bad for Tom Ward.

    Were all these Oil Guys invested in T. Boone’s hedge fund? (just kidding… I think.)

    Anyway, if you pledge your stock to buy something else, can you really really claim to be a shareholder? I can see both sides to the answer. Clearly, you didn’t think your own stock would crash. But, on the other hand, you used your stock to buy something you thought would go up more, right? Also, uses your stock without having to cash out and pay the cap gain taxes.

    Perplexing times. There is (was) magnitudes more leverage across the entire financial system than anyone thought.

  19. 19
    Nicky Says:

    ‘noise’ that the ECB and EU countries will guarantee all interbank lending – that would be huge.

  20. 20
    Nicky Says:

    One bright light – Cramer is super bearish. Calling for 5883 on Dow by Tuesday – lets hope this is a great contrarian indicator.

  21. 21
    isleworth Says:

    Thanks for the thorough answer Z !!! Still one lingering question – will all of the E&P capital cutbacks cause the huge “oversupply concerns” that had supposedly driven NG from $13 to $7 to diminish?

  22. 22
    Nicky Says:

    EU backing banks
    Euro-zone leaders held an emergency session Sunday to deal with the financial crisis.
    Countries that use the euro will temporarily guarantee future bank debt to encourage lending and ease the credit crunch, according to a draft statement under discussion by European leaders Sunday.

    The declaration says the governments would guarantee “for an interim period and on appropriate commercial terms” new debt issued by banks for up to five years.

    “This scheme would be limited in amount, temporary and will be applied under close scrutiny of financial authorities until Dec. 31, 2009,” it says.

    The leaders of the 15 euro-zone nations held an emergency summit Sunday night in Paris to seek European solutions to the financial crisis engulfing markets worldwide.

    The meltdown dominated summits around the world this weekend.

    The statement also says that one way governments could save banks would include buying big stakes. Whatever is decided Sunday will then be proposed to the full 27-member European Union at a summit later this week.

    British Prime Minister Gordon Brown, who met with France’s President Nicolas Sarkozy before the euro summit, said the plan “would involve not only more cash in the financial market but also a recapitalization of our banking system.

    “And allied to that — something that I believe is absolutely crucial — to begin again the funding of businesses and mortgages with a guarantee given by governments. That can happen and will happen in the next few months,” he told reporters.

    “This is an important moment of the world economy. The eyes of the world are now looking to governments to help restore confidence in the financial market. Decisions that we make in the next few days are decisions that will effect us for many years ahead,” he said.

    Earlier, summit host Sarkozy said, “I expect an ambitious, coordinated plan that brings solutions.”

    German Chancellor Angela Merkel said she hopes leaders can provide a “very important signal for the markets.” “Our goal is to define a coordinated joint action for the euro zone, so that we can in the coming days take national measures that stabilize the financial markets, but that also don’t discredit the individual member states,” she said.

  23. 23
    Bob Says:

    Bloomberg article explains CHK Knockout Swap Contracts in some more detail. CHK holders will not want NG to drop below $6.28 on the last trading day of the month, or CHK would have to sell $3.5B in assets. Also not helping is that Morgan Stanley is CHK largest counterparty.


  24. 24
    Nicky Says:

    FRANKFURT, Oct 12 (Reuters) – Top German financial stocks rose as much as 20 percent in off-exchange weekend trading, suggesting faith among some investors in the steps being taken by governments and central banks to solve the financial crisis. Shares of Deutsche Bank rose more than 20 percent to reach a closing bid-to-ask spread of 37.59-38.899 euros in off-exchange trading on Sunday at German brokerage Lang & Schwarz, from 30.76-30.95 euros in the Frankfurt stock exchange’s electronic orderbook Xetra at Friday’s close. Deutsche Bank is Germany’s biggest bank and a leading European investment bank. Rival Commerzbank gained almost 20 percent to 11.57-11.952 euros from 9.655-9.675 euros, and insurer Allianz advanced 14 percent to 76.27-78.966 euros from 66.94-67.14 euros. “These prices have a certain quality. They are an indication of hope among at least some investors that shares will now move in the opposite direction,” Giuseppe-Guido Amato, analyst at Lang & Schwarz, told Reuters. He said the brokerage’s weekend off-exchange trading facility was used mainly by retail investors and so-called day traders, the latter a category of market players trying to make money on short-term trading strategies

  25. 25
    Fiveanddimer Says:

    Is it a fair perception that the European governments seem to be taking a more immediate, active role in solving the problems in their banking/credit system than we in the US are in solving our problems? That’s the feeling I’m getting. Hard to imagine, but it looks like they have gotten religion, so to speak. We’ll see how the European markets are trading when we get up tomorrow morning.

  26. 26
    Nicky Says:

    Seems like the USA is way behind the curve on this Five….they haven’t even gotten around to guaranteeing all bank deposits here yet which would seem to me absolutely essential in this crisis. Soros was interviewed again on CNN earlier. Said he thought Paulson was being far too slow and really not up to the job. Interestingly even Soros said he himself had been wrong – has been expecting this to happen since 1998! We may end up being grateful Japan has a bank holiday tonight!

  27. 27
    BirdsofpreyRcool Says:

    U.S. Futures are up… a lot.

    George Soros said Paulson was not up to the job? Not surprising. George Soros HATES anything to do with the Bush Administration. While there is much to be said for his position, it is impossible for him to see anything positive in the actions of anyone associated with the current Prez.

    I don’t think expecting something for the last 10 years necessarily makes you the oracle on the subject.

    Sorry… not much of a Soros fan, myself.

  28. 28
    BirdsofpreyRcool Says:

    Of course, we still have 15 hrs until the U.S. mrkts open, so a lot can change. But nice to see some green on the screen… for now.

  29. 29
    ram Says:

    Nicky – 5883 on the dow by this Tuesday? Weren’t you also looking for a bottom around Tuesday?

    ZMAN – Were you still going to comment on CHK?

  30. 30
    Nicky Says:

    well futures are up precisely 34 points from the close as they tanked after the market closed.

    I don’t have an opinion on Soros one way or another. That said I think the current administration’s record speaks for itself! Again I am not a US citizen so can’t vote and have therefore no bias either way. I also wrestle with whether Paulson is in fact as straight up as he would have us all believe. Its difficult to seperate the man from GS. It seems fairly obvious that the market doesn’t trust him! I do have an opinion on the 700 billion bailout – absolute crap. Maybe it was just a desperate man taking desperate measures but if that was the case what was the panic to pass something we were all told needed to be passed in hours or the world was going to end only to hear them now say it is going to be weeks before they put it to work. That Treasury under secretary guy didn’t even seem to know what the problems were and had zero sense of urgency about him. In all honesty they are now giving me the perception that they are way out of their depth with all this.

  31. 31
    Nicky Says:

    Ram that is Cramers call and not mine.

    The markets are due to make a cycle low on October 10th plus or minus 1 – 2 trading days. Only a move above 940 spx would have me start to think that a low was in place and even then its possible we rally to 985 and then retest the lows or a bit lower. To me Ram everything is out of the window right now, fundamentals and technicals to be honest. In a year we have retraced what I was expecting to see in 2 years! I can only give you support levels – 825, 740 – 768, and then not much until the low 600’s.
    I think we could see a positive week this week but thats just my opinion.
    Overall chances are this market finally puts in a low in 2010 at the 500 level maybe even as low as 380.
    Whilst writing my oil call for 80 was blown away to the downside. Further support if needed is 73 – 75.

  32. 32
    BirdsofpreyRcool Says:

    well… we are in kinda uncharted territory, credit market-wise. Unfortunetly, what Paulson proposed has been floating about the bond community as a solution for about a year now. I was truly hoping it wouldn’t come to this. But it did. The credit mrkt is completely frozen. We have never seen anything like this. Unfortunately, desperate times call for desperate measures.

    Sadly, neither Paulso nor the media nor the congress nor the Prez have been able to explain this in a way that non-bond-trading people can understand. It’s not easy to “see” the problem. But, we sadly are standing at the edge of the abyss. Really and truly. The media has called various things “meltdown” and “crunch”… too bad the terms have been overused, b/c we are finally there.

    To sum: unfortuantly we are at the point where the original 2.5 page Paulson plan was the best way to deal with the reality of the situation.

    Interestingly, the most vocal economists against the plan tend to be academics. The ones trying to defend and explain it actually work in the credit markets for a living. As almost everybody in this world does NOT work in bond markets for a living, it’s tough to stand up and defend what Paulson is trying to do.

    But, I’m trying.

  33. 33
    BirdsofpreyRcool Says:

    Nicky, by the way… i do agree that it was hugely disappointing to hear it was going to take “weeks.” Personally, i think that’s what tanked the mrkt a week ago friday.

    I was somewhat surprised Paulson was not able to impliment the “plan” almost immediately. Perhaps it was due to all the addendums that were added… made for a much more complicated process.

    But, no doubt, it was rather astonishing to hear that something we really did need immediately (to instill some confidence and try to calm the fear in the markets) was going to take 4 weeks.

    It’s like the patient had a heart attack and the Doctor said he could perform CPR in a couple of hours. The patient could die on the table, waiting for the doctor.

  34. 34
    BirdsofpreyRcool Says:

    And the patient on the table is NOT the equity market. Equities are just a sideshow at this point. Equities are the tail of the dog. The dog (credit) itself is sick. Stocks could be 2,000 points higher, or 2,000 points lower. It doesn’t make any difference. It’s not about stocks right now.

    Watch the bond market. The best indicator of when the patient is getting better is the TED Spread. Until that is at the very least, below 300 bps, the stock market is just a drunk man, wobbling down the street.

  35. 35
    Nicky Says:

    BOP – agree re credit markets being the ones to watch. Would it be true to say that if bank debt was guaranteed (something the EU is now proposing ) the Ted spread may come down very quickly?

  36. 36
    BirdsofpreyRcool Says:

    Nicky – i would think so. yes.

    basically, the TED Spread is a measure of fear of anything other than US Treasuries (still considered to be the “safest” security out there). So, anything that is perceived as being good for business and instills confidence in markets, would drive the TED lower.

    So, you are absolutely correct.

    I have a TED Spread graphic that I can email you… it’s from my bloomberg so, i am unable to figure out a way to post it here. It’s a truly chilling graph.

    Basically, we are at historically unsustainable levels.

  37. 37
    zman Says:

    Ram – yep, still planning to do a post on CHK later tonight.

    Bird – send the graphic to my email and I will add to the weekend post.

  38. 38
    zman Says:

    Ok thanks, will have it up in a couple minutes.

  39. 39
    BirdsofpreyRcool Says:

    z – just did. use the weekly chart, as it goes back to 1984… you can see that the Crash of 1987 was NOTHING compared to what we are seeing now.

  40. 40
    zman Says:

    The TED Spread chart has been added at the bottom of the post.

    Isle – Re 21…yes.

  41. 41
    zman Says:

    Crude up $3.22 at $80.92, mogas and HO not quite keeping pace but rising as well.

  42. 42
    Nicky Says:

    Thanks BOP.

  43. 43
    zman Says:

    CHK note published.

  44. 44
    md Says:

    The upcoming post with bullet proof balance sheets and stories is appreciated under the new world regime.

    #12 1) seems to be the order of the day for forseeable future.
    Not much love for Soros political bent but Greenspan,Paulson contributions to the state of affairs in allowing Wall St. engineers to play fast and loose under a low int. rate regime cannot be overstated.

    The one things the indie energy stocka have in their favour is that the Uncle Sam will not be taking them over anytime soon.

    What’s likeihood that an XOM will be circling the CHK and HK’s.
    Which players are in play.
    What’s the time horizon.

    My gut feeling is that NG players have more upside than CL on two counts. The BTU/$ ratio which you have not agreed with and implied in that is that economic downturns will hit transportation before it hits home heating. Also there is too much anectdotal evidence pointing to a seachange in new vehicles sales and production pointing to increased gas misers via shift to small car production, diesel and hybrid. These small incremental changes will add up or possibly translate to even greater numbers. While NG price may continue to drop in the short term it will eventually have to strengthen on BTU/$ as production cutabacks takes hold and consumption will stay flat or grow esp. if cars get alternative energy off the power grid or NG.

  45. 45
    md Says:

    PBR – How great is political risk. Did I read it here re: Nationalisation risk. DOes this risk increase in today’s climate.

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