Tuesday Makes Two In A Row?

I find myself saying Wow a lot these days. After 8 straight days of market beatings yesterday set records for index bounces. Energy indexes scored better than market  with simply stunning rallies (XOI up 16.7%, XNG up 20.1%, and OIH up 21.8%). The S&P500 was up a comparatively lackluster 11.6%. Are we out of the proverbial woods? Hardly. But we are making progress in unfreezing the credit markets. The next dip into red will be the real test. Is money willing to come off the sidelines and string 2 or even 3 days together or is this simply a huge headfake rally that will be sold into. Yesterday's close near the high of the day was a good sign. Stories in the Journal that many hedge funds have gone to cash and are sitting on the sidelines is another good sign. But I have little doubt that some profit taking will ensue in the near term allowing for the purchase of some still very low hanging fruit above Friday's lows.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Stocks We Care About Today Watch
  4. Crack Spread Update
  5. Odds & Ends

Holdings Watch: No changes yesterday.

Commodity Watch

Crude Oil rallied $3.49 to $81.19 yesterday as the broad markets jumped and the dollar slumped. This morning crude is trading up another $3+ as the dollar takes it on the chin again.

  • Nigeria Watch: Producing A Lot Less Than We Thought. Nigeria's foreign minister said today production is running 1.5 mm bopd, down from the 2 million bopd stated by the country's oil minister on September 2. 


Natural Gas increased $0.15 to close at $6.69. Gas is following oil higher (but not really keeping up) in early trading. This week's injection will need to start to dip seasonally; if not sub $7 prices will persist until real cold weather arrives.

  • LNG volumes fell to 0.6 Bcfgpd, a third lower than year ago levels. Weak U.S. prices are simply not high enough to drive imports away from Europe and Asia. Goldman actually lowered their forecast for international natural gas prices to a level almost 3x that of current U.S. pricing.
  • Canadian volumes were 8.1 Bcfgpd, in line with the prior week but off 1.4 Bcfgpd from year ago levels.

Stocks & Stuff We Care About Today Watch:

Balacing Costs. The following graphs depict net debt vs market cap (together this gives you enterprise value). These days you want as little of the red bar as possible. The third graph is recent quarter lease operating expense...here you want to be as low as possible. Low debt and low LOE are ideal in this financial flexibility constrained lower commodity price environment. Not that you can base the buy or not to buy decision on just two metrics but again, the current market environment will dictate what hedge funds sitting on the sidelines will feel safe going back into. The charts yell (COG) overall. But given that liquidity (of the stock and not just the balance sheet) will also be a priority, bigger cap (EOG) stands out.

Other Stuff:

(BJS) Affirms Street Views

  • 4Q EPS seen coming in at $0.55 to $0.57; Street currently at $0.56. BJS estimates include a 2 cent non-cash goodwill charge to so the equivalent range is $0.57 to $0.59
  • 4Q revenues to come in ahead of Street views.
  • The investing crowd will eat this kind of press release up during these troubled times.

Crack Spread Update: Not a lot to add to the graph below. 3Q is going to be a bit better than expected but the recent trend has not been friendly, especially in the Gulf Coast as capacity ramps following recent storm outages. This week's big bounce in oil may halt that slide but only a better demand picture for products is going to help margins. I think we get better pricing on the heating oil side but the consumer needs to start react to $3 gasoline in the data soon.



Odds & Ends

Analyst Watch: RJ raised (SU) to Strong Buy, cuts target from C$85 to C$65, Bernstein makes minor downward tweaks to Major oil company price targets.


81 Responses to “Tuesday Makes Two In A Row?”

  1. 1
    ddaley Says:


  2. 2
    zman Says:

    DD – I see you. Big green open on the way. I will likely start dipping more toes in November or longer contracts after the opening run has pulled back a bit.

  3. 3
    elduque Says:

    Thanks for all your hard work. Have a great day!!

  4. 4
    ddaley Says:

    I watch NG by way of UNG.30.32 at the moment. Recent range top is aboout 30.5.

  5. 5
    zman Says:

    Sorry for delay, had a rough reboot. Liking the pullback from the opening highs. Will probably start nibbling shortly. SD and BEXP November calls starting to work.

  6. 6
    zman Says:

    You can always count on Americans to do the right thing – after they’ve tried everything else. ~ Churchill. Heard it on NPR but it applies to the U.S. banking actions today and accounts for why the dollar is falling off the lead.

  7. 7
    BirdsofpreyRcool Says:

    Credit update: credit had it’s worst day ever last friday. the investment-grade index (IG; the borrowing rate for the highest-rated companies) closed at 205 bps after trading as wide as an unprecedented 230 bps. (To put in context, in better times, this spread is more like 65 bps and a 3 bps move is considered large.)

    There was not much trading in credit yesterday, as the US Govt bond market was closed.

    This morning, the IG index opened at 173 offered, and traded as tight as 170.

    IG is currently 179.

    We want to see this number go down. It will tell us that investors are more comfortable buying corporate bonds. If investors continue to avoid buying corporate bonds (and only buy US Treasury bonds), our economy will come to a standstill as normal, daily business operations are funded in the debt markets (not the equity markets).

  8. 8
    Bleemus Says:

    update from XOM Beaumont. Yesterday I posted that my friend reported that 3 of his 8 units were up and running but I was wrong. Here is more info…

    “we’re the 1st unit in the entire refinery to come up…all the gasoline producing units are still down”

    “my units make ultra low sulphur diesel and heating oil”

  9. 9
    zman Says:

    Bird – thanks very much for the update!

    Bleemus – you too.

    Still sitting on hands on trades. Market may go into a bit of a profit taking mode it seems.

    I plan to start purchases for the $10K Portfolio tomorrow. These trades will be designated “ZTRADE – 10KP” and I will have a separate spreadsheet that tracks positions, cash and total value. I’ve had a lot of requests for this and have balked in the past as I felt that giving positions was more like advice than I wanted to be.

    Let me be clear. There’s no advice here.

    Just passing along what I’m doing and in this case how many contracts and how much cash I’m holding (in the 10KP). Got this cleared with legal and I feel that it will represent an improvement to the site.

  10. 10
    BirdsofpreyRcool Says:

    IG index wider at 180 now. this is 10 bps wider than open (which was about an hour before the stock market opened).

    Just guessing, but we might see some tightening from here (lower number) as credit backed away from it’s opening mark so quickly… if this happens it will help stocks.

  11. 11
    BirdsofpreyRcool Says:

    just printed 178 on the index.

  12. 12
    zman Says:

    Note oil up only $0.60 now from a $3.50 up open. Similar move in natural gas. Group showing some signs of redness.

  13. 13
    zman Says:

    XTO bumped up their hedge position this morning. This should be a signal for those worried about counterparty risk that all is not lost.

    GMXR, GDP, HK, SD all red.

    XOM and CVX red

    SLB red

  14. 14
    zman Says:

    Will send a notice re No 9 out shortly via email, please pardon the redundancy…and also let us know if you are not getting our emails.

  15. 15
    BirdsofpreyRcool Says:

    Because today is an extremely important one to watch the credit market closely, I will continue to post levels on one of the more actively-traded index: the IG (currently known as the cdx11, as it is in it’s 11th version). I promise not to populate the board with these levels in the future. But, I think the next few days in the bond/credit market are absolutely key.

    IG holding at 178. Will be useful to watch which way it breaks from here.

  16. 16
    zman Says:

    Market red…profit taking mode starting up.

  17. 17
    bill Says:

    z do you like any of the coal stocks and where would one find the price of coal?

  18. 18
    Popeye Says:

    BlAmong stocks in the spotlight, BP America Inc. (BP:

    “BP said Tuesday it struck oil at its Freedom Prospect in the Gulf of Mexico in 6,100 feet of water. Appraisal will be required to determine the size and commerciality of the discovery in a well drilled to a total depth of more than 29,000 feet. Shares of BP jumped 1.5% to $47.25”

    Sorry if this is a dupe

  19. 19
    Popeye Says:

    That was Marketwatch not Bloomberg. I’m going back to bed.

  20. 20
    BossmanG Says:

    Bird, appreciate your info on the credit markets! I don’t have a problem with you populating the board…thanks.

  21. 21
    BirdsofpreyRcool Says:

    IG 181 (wider… bad)

  22. 22
    zman Says:

    Bill – I will have some exposure in the 10KP, not sure which name yet…things have been moving a little fast there.

    You can see prices for coal in the weekend wrap for Appalachia (high btu but dirty) and PRB (Powder River Basin) (low btu, wet, but clean of sulfur). Also you can go here:


    The QL in that script is the coal future base symbol.

  23. 23
    zman Says:

    Profit taking has spread to oil, products, and NG.

  24. 24
    zman Says:

    Thanks Popeye!

    550′ of pay, wow.

    BP operates with a 25% working interest

    NBL has a 37.5% stake in that well so it’s more meaningful to them

    MRO has 12.5%

  25. 25
    BirdsofpreyRcool Says:

    IG 178

    I think credit is watching stocks is watching credit is watching stocks.

    So, stocks might actually lift credit from here (or v/v). VIX still over 50 is a negative, but that can change quickly too.

    Not a very clear roadmap right now.

  26. 26
    zman Says:

    Thanks Bird re credit.

    Earnings season starts in about 2 weeks. I think one of the key questions people should be asking, especially for the smaller cap E&P’s is, “what do you have drawn now, not as of September 30, on your revolver?”


    “what risk do you face with lower commodity prices that the availability on your line of credit will shrink (borrowing base redetermination) to the point that you are either out of room or in technical default.”

    These points should serve to put a near term limit on the smaller names. Not that fundamentals matter but this could dampen the enthusiasm of managers as they look to get back long.

    I have to think that banks, looking at the revolvers will be worried about both commodity prices and their own ability to borrow and force borrowing bases lower.

    CHK exhausted their revolver at the end of September and invested the proceeds in T-Bills while it still could. If the banks redetermine CHK’s borrowing base lower we would definitely see another quick wave lower in the stock. Don’t know if it happens, no way to tell really but I would hope the question gets posed tomorrow at the analyst meeting.

    For smaller, highly drawn companies like XCO, this could proved to be a real problem. Just thinking out loud for now.

  27. 27
    zman Says:

    Tater – brief thoughts on the XNG, XOI, OIH when you have a chance. Looking for a pullback in the names today (got that so far) and maybe into the open tomorrow. Obviously a good sign if we don’t fall completely back into last Friday territory.

  28. 28
    mahout Says:


    Thanks for the IG numbers and all your excellent info and explanations on the credit markets.

    It’s a wild ride, but I have a glimmer of hope now that the Treasury is finally morphing it’s package into something that will actually help the situation.
    I just hope it can all revert back to private capital and enterprise when the banking system and credit markets are reworked and molded into viable shape. You are right. If that doesn’t happen, the economy and the stock market are toast. Happy days are not here again yet, but things are beginning to look up to me, but bear close watching.
    Again, thanks much.

  29. 29
    zman Says:

    FYI, SLB kicks off earnings season this Friday.

  30. 30
    BirdsofpreyRcool Says:

    Thanks, mahout. Appreciate all your comments too.

    For those who follow Don Coxe (most excellent and very seasoned strategist at BMO who is a commodity super-cycle guy), I will summarize his bullish comments, making the rounds today.

    o Don thinks the bear mrkt is probalby over
    o the strategy of investing capital directly into the banks is the right move as it reverses the problems of over-leverage (which is what got us into trouble to begin with)
    o he points out that the UK’s $64B (on a Basel basis) is equivalent to buying $700B of illiquid assets
    o Don told people to scale back their equity exposure on Sept 19th, he is now recommending that investors step back into equities: 1/2 now, 2nd 1/2 when VIX and TED Spread come off their record levels
    o Don recomments buying financials [I haven’t seen that from him before!], commodities (emphasis on ag and energy), EMs, and cap-good techs.

    Don Coxe has a huge following. Mainly b/c he has made a lot of people a lot of money over the last 5 years. His comments will get noticed.

  31. 31
    BirdsofpreyRcool Says:

    and then we have Nouriel Roubini, the NYU professor who predicted the financial crisis in 2006. He said the US will suffer its worse recession in 40 years, causing the rally in the stock market to “sputter.”

    I can see either scenario and it all depends on whether credit can get flowing back into the commercial sector again. (tough call “when”… but, it will someday)

    Roubini is 50 and a professor. Coxe is in his 70s and in markets every day. This is Academia vs Markets at it’s highest level.

  32. 32
    zman Says:

    Thanks Bird, ever read Ravi Batra? He’s been predicting this since the 1987 crash. Of course, he titled the book “The Great Depression of 1990” which takes some of the fire out of his argument, lol.

  33. 33
    BirdsofpreyRcool Says:

    timing is EVERYTHING!

  34. 34
    zman Says:

    Very heavy early season calendar for the service names with SLB Friday, followed by HAL, NBR, WFT Monday.

  35. 35
    mahout Says:

    BOP #30 and 31,

    Roubini has been right and Coxe has been right. What is a person to do? Play it
    50/50? My old infantry lieutenant friend used to say,”When in danger or in doubt, run in circles scream and shout!”
    I think I’ll just stand aside a little longer and observe this American history unfold before our eyes.

  36. 36
    elduque Says:

    re 30-

    Did Coxe do another conference call?

  37. 37
    BirdsofpreyRcool Says:

    re: Don Coxe. Don’t know. I got an email summary of his changes today. I would guess he did an update call… but, that’s just a guess, as I was not on it.

  38. 38
    BirdsofpreyRcool Says:

    mahout – when in doubt, you’re right… do nothing. (which is why SAC is sitting on his hands right now).

    the VIX, IG index, and TED will let us know.

    But, interesting to see what Roubini/Coxe are thinking.

  39. 39
    BirdsofpreyRcool Says:

    credit mrkt pretty quiet. i think everyone is holding their breath.

    or out to lunch.

  40. 40
    BirdsofpreyRcool Says:

    IG 178

  41. 41
    zman Says:

    Thanks Bird.

    By the way, whoever warned me off the Toshiba laptop…I should have listened to you. Its quickly becoming a boat anchor. POS right out of the box and getting worse by the week. Ugh.

  42. 42
    BirdsofpreyRcool Says:

    hitting the bid… IG 179 now

  43. 43
    BirdsofpreyRcool Says:

    ignore part of that last comment, it didn’t make sense in the context i presented (as i am not quoting the bid side of the mrkt, only the offer)

  44. 44
    VTZ Says:

    Toshiba is the worst. They have good specs and terrible parts… stick to lenovo for stuff like trading.

  45. 45
    BossmanG Says:

    Z…was a fan of toshiba tecra until the 9000/9100 models (5 years back), but they lost their quality after those. I’ve been a fan of ibm/lenovo’s since, last year purchased a t61p…no issues yet.

  46. 46
    zman Says:

    Oil, gasoline, distillate all seen rising with tomorrow’s report.

    Likely to be a reaction to the numbers that may be pretty volatile. Utilization is expected to creep up again and if imports that surged last week don’t hold at these high levels we may actually see crude inventories back off again although I would not expect a big down number. However, if we see a further deterioration in gasoline demand despite the drop in prices and or a bigger than expected drop in crude prices, look out below!

  47. 47
    BirdsofpreyRcool Says:

    (cash) TED update: at 435 bs (down from the record 463 on Friday)

    need to get this number at the very least below 300.

  48. 48
    BirdsofpreyRcool Says:

    3 month US Treasuries now yielding a WHOPPING 0.28%

  49. 49
    Fiveanddimer Says:

    I like Don Coxe also. He was on Jim Puplava’s Financial Sense Online show over the weekend. Here’s a link to the streaming audio:


    It’s the 3rd hour, part 1.

  50. 50
    john11 Says:

    btw..both natgas and oil data coming thursday this week.

  51. 51
    BirdsofpreyRcool Says:

    IG 179

  52. 52
    Fiveanddimer Says:

    Here’s some added perspective on the credit/bond markets. Yesterday I was able to get some great bids on Virginia muni’s that I wanted to sell. (Yes, the bond market was closed yesterday, but apparently that was only for Treasuries.) Today, I tried again to sell more bonds and got virtually no serious bids on a broad array of bonds. So I can confirm BOP’s comments on the poor state of the credit market today.

  53. 53
    zman Says:

    CHK best performer by far (up 14%) in advance of tomorrow’s opening day of their open house. Very hard to judge whether or not it holds up into the conference.

  54. 54
    zman Says:

    Thanks John – had not seen that yet.

  55. 55
    kiaora Says:

    Am I seeing some meaningful rotation south of Cuba or just wishfull thinking.

  56. 56
    zman Says:

    Dow off 200, trouble in paradise?

    K – that’s TS Omar, going to the Atlantic on this track:


  57. 57
    BirdsofpreyRcool Says:

    IG 181

  58. 58
    BirdsofpreyRcool Says:

    IG 180

  59. 59
    zman Says:

    Oil closed off $2.30, pretty much trading with the direction and intensity of the Dow.

  60. 60
    BirdsofpreyRcool Says:

    IG 181… trading with stocks now

  61. 61
    zman Says:

    Bird – looks that way. Thanks for the updates today. Glad to still be sitting on hands except for my “pre giant collapse positions”

  62. 62
    jsaun14 Says:

    Could Vaalco (EGY) be interesting again? Funding E&P out of cash flow, lots of room on the revolver and the major drilling program takes place over the next 2 Q’s.

  63. 63
    Bleemus Says:

    UNG (United States Natural Gas ETF) Nov 31 calls (volume: 37.9K, open int: 820, implied vol: ~65%, prev day implied vol: 61%)

  64. 64
    zman Says:

    EGY – have not looked at in a while, will do. I put them in the same category with BPZ and the larger Addax petro which is doing very nicely in the Kurdish section of Iraq.

  65. 65
    BirdsofpreyRcool Says:

    IG 180

    nice to not fall off a cliff today.

  66. 66
    zman Says:

    Bleemus = wow on that volume level. At these strip prices we should see an announcement out of EOG and the remaining gassy N. American players calling for curtailments and budget cuts. EOG had said the 12 month strip price at which they would target the lower end of their growth profile was $8. 12 month strip at $7.32.

  67. 67
    zman Says:

    Pure gas player SWN may be pointing to a move higher in gas as well.

  68. 68
    Pete Says:

    Z, What are your thoughts on the common of PQ going forward?

  69. 69
    tomdavis12 Says:

    Z: Do you have a guesstimate as to how long it will take for the lower capex to be translated into lower weekly injections or bigger withdrawals. I would assume that might be the time that this excessive supply mentality might start to change.

  70. 70
    zman Says:

    Pete – I hold it a little over double current level. I see no reason to bail now but will wait to add until I see a firm level for crude to develop and this financial stuff to get behind us. I’m pretty unlikely to trade calls there given the spread which has always made it tough.

    Tom – Maybe January, depends on how much things slow down. I would suspect that gas firms well before we have definitive proof via storage numbers.

  71. 71
    BirdsofpreyRcool Says:

    Roubini – 1
    Coxe – 0

  72. 72
    BirdsofpreyRcool Says:

    IG 178 close…. 167 – 181 range today

  73. 73
    Bob Says:

    SD’s presentation today in OKC. It includes their hedging schedule:


    GS dropped price target of SD to $15 from $40 earlier

  74. 74
    Coug1984 Says:

    Bob – Thanks for the link. Interesting that they didn’t include anything about cash flow or debt covenants. Contrast to the CHK presentation for tomorrow:


  75. 75
    zman Says:

    CHK presentation – 94 pages, I’ll hit the highlights in tomorrow’s post.

  76. 76
    zman Says:

    Tom – in CHK’s presentation released after the close, they refer to the capex reductions due to both low gas prices and the credit crunch as balancing the natural gas market mid 09 or early 10 at the latest. I stand by my Jan or Feb time frame of seeing it start to show up in the storage numbers around there with a little more certainty as you don’t get balanced overnight.

  77. 77
    Coug1984 Says:

    Z- Do you know how the equity portion of total capitalization figure for CHK’s debt/total cap covenant (p.18 of the presentation) is calculated? If is is based on the market value of the common shares, it would seem that they got very close to tripping that covenant. In my mind that’s the most concerning issue about CHK at this level>

  78. 78
    zman Says:

    Coug – It’s based on stockholder’s equity on the balance sheet. So its debt / (debt plus SE).

  79. 79
    Coug1984 Says:

    Thanks Z. That makes more sense.

  80. 80
    zman Says:

    Coug – I’m on page 63 right now, so far nothing unexpected; good presentation. Morgan Stanley is #4 on the counterparty list, not #1 as some analysts had suggested.

  81. 81
    Coug1984 Says:

    I skimmed it and thought it looked promising as well. Cash flow projections seem heavily dependent on the asset sales but I know there are many private equity firms and pension funds with cash lining up for pipe line deals and would expect them to get that one done — at least. Wonder if the Loomis Sayles guy will be in OK City tomorrow?

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