Short Session Friday

Hopefully everyone had a safe and happy first half of the holiday! Now the word for the rest of the week is Football, followed by Exercise. Pretty much everyone needs to watch and do more of each. This will be a short post for a short day as U.S. equity trading closes up shop at 1 pm EST. Why they bother to open the equity markets for 3 1/2 hours is beyond me. Highlights from today's post include some thoughts on CHK's secondary and the rig count (coming down) and a couple of oily projects getting put on hold due to price.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Brief Review of the Oil Numbers.
  4. Stuff We Sort Of Care About Today - rig count plummets
  5. Odds & Ends

Holdings Watch: The wiki and $10KP tabs are updated. The $10KP now stands at $12,200 and 16% cash. Wednesday's trades:

  • (SWN) - Bought (5) $35 December Calls(SWNLG) with the stock up slightly as per my thoughts on the gas storage number in today’s post.
  • Sold (5) SWN $35 December Calls, SWNLG for $3.70, up 105% since entry this morning. Still holding calls at $25, $40 and $45.

Commodity Watch:

Crude oil rallied sharply Wednesday climbing $3.67 to close at $54.44, overcoming a bearish, import bloated crude inventory number, and reversing the prior day's loss. I hate to say it because bottom picking is a fools game but it looks like crude is  trying to put one in around $50 to $55. Very hard to say. Many traders still calling for $40, same guys who said $50 when it breached $60 so I discount their complacency quite a bit. Still think the equity market will dictate direction in crude prices through year end with exceptions made around OPEC meetings.

  • OPEC Watch: Stories flying every which way that OPEC members are cheating, that they will cut at Saturday's meeting, that they won't cut, that Russia will go along with them or won't. Libya's oil minister says a cut at tomorrow's meeting is not out of the question however the head of OPEC has indicated it is too soon to properly judge the reaction to the last cut before cutting again. Guess we'll know by Monday.

Natural gas rallied of its own accord after posting a better than expected withdrawal from storage. Gas closed up $0.49- at $6.88.  A review of the gas storage report can be seen here in the Turkey Day post. Gas continues to be range bound for now and the repeated large swings here also look like bottoming action.At least we know industrial demand is only sagging and not shuttered at this point by the financial crisis. I would not look for gas to rally much beyond $7.50 in the near term unless we score multiple weeks of 180 + HDD readings. I'm not just throwing that number out there either as it will take that kind of cold to keep up with December withdrawals from 2007 which is going to be key in how traders judge the beginning of this season. Last December was warmer than normal so this could be an opportunity for gas to chip away at the bearish sentiment. This morning gas is trading off slightly with oil.


Stuff We Care About Today

Gas Rig count gets slammed. Baker Hughes released their weekly rig count data early due to the holiday. Rigs drilling for gas in the lower 48 states fell 68 from the prior week and are now down on a year over year basis for the first time since May. Rigs have been falling in Oklahoma, Texas, and the Gulf of Mexico along with a small decline in Rockies activity. Only Louisiana continues to rally (Haynesville activity).

Horizontal Rigs Fell Also. I've seen a number of industry watchers comment that as rigs transition to more horizontal drilling the higher initial production from these wells will offset the lower gas rig count. Probably not a good assumption given the size of the fall that's still to come in the vertical rig count but if horizontals roll over as well...watch out production.  

CHK Files Shelf Offering.

  • Looks like $1B in common stock is offered,
  • and another 50 mm shares are part of a shelf filing. Gives them the ability to sell shares quickly. They usually keep a shelf ready to deploy for equity, preferred equity and debt.
  • Both were filed after the close on Wednesday. They may or may not offer 50 mm shares.
  • Market probably hits the stock pretty good on the open, maybe down to $16.
  • At that price the $1B part of the deal is about 10% dilutive.
  • They have never lived within cashflow but they have recently provided targets to the Street for year end net debt to total cap via deals and not all of those deals may close by 12/31.
  • This gives them the flexibility to raise cash and its better to do it now than after year end as they, along with a lot of other people, may take reserve impairments due to low gas prices.
  • Aubrey will spin this deal as adding fire power to buy cheap leases while the competition is busy playing it safer. Long term (and I mean 5+ years) this probably works well as he will end up selling down his position in places the Haynseville yet again for a multiple of what they are going for today.
  • But near term, Wall Street is likely to punish the risk taker stance given their leverage, a key reason I'm not heavily exposed in the options of any of the "over-leverage for the current environment names".

Callon (CPE) Shelves Deepwater Entrada Project ... Mid Development.

  • And I quote:

"the significantly higher than expected costs incurred to date and commodity prices wihch have decline to less than half of their levels when development operatioins begain in mid-2008, has resulted in a serious decline in project econoiics. After reveiwing all of these factors, the Company has decide to suspend development efforts. Under current economic conditions the Company does not anticipate returning to the project."

  • Wow. Sounds like its time to take the name private (for a third time).
  • Entrada was the big production growth wedge for 2009.  I'd tell you how much but I don't follow them closely and only know first production was due in early 2009. The company pulled their last company presentation from IPAA off their website last night.
  • I can tell you their cash flow was set to double next year and now, that won't be happening.
  • The rig is the Diamond owned, Ocean Victory, 5,500 feet of water capable semi-submersible. It'll be interesting to see what the penalty clause is here as DO has been saying for weeks now, no breaking of contracts has happened yet.
  • This news also reaffirms Pelosi's "$35 oil provides impetus to drill" comment as naive and wrong, deliberately so or not I can't say. Projects are getting canned, from the deepwater to the oil sands, and its because prices are at $50, $35 would be much worse and either way, when the economy recovers, we're headed for much higher ground for oil prices than we have seen so far. 
  • This name has been bashed and it's about to get much worse.

Shell Puts 100,000 bopd Carmen Creek Oil Sand Project On Hold.

  • Looking to redesign the project to improve profitability.
  • Enough said already.  

Odds & Ends

Analyst Watch: To be added in comments.

AirCar - for the economically minded, fashion challenged, and safety oblivious.


37 Responses to “Short Session Friday”

  1. 1
    Pete Says:


    Spinning is what Aubrey is best at ! Ugh

  2. 2
    PackMan Says:

    CHK Press Release today:

    OKLAHOMA CITY, Okla.–(BUSINESS WIRE)–Chesapeake Energy Corporation (NYSE:CHK – News) today announced that on November 26, 2008 it made three filings with the U.S. Securities and Exchange Commission (SEC). The first was a shelf registration statement on Form S-3. This registration statement, which covers Chesapeake’s common stock and preferred stock, was a routine filing and was filed to replace the company’s existing shelf registration statement which will expire on December 5, 2008. The second was an acquisition shelf registration statement filed on Form S-4. Once declared effective by the SEC, the acquisition shelf will enable Chesapeake to issue up to 50 million shares of its common stock in connection with the acquisition of assets, businesses or securities of other companies.

    The third filing is a supplemental prospectus relating to shares subject to Distribution Agency Agreements that Chesapeake entered into with Credit Suisse Securities (USA) LLC, Morgan Stanley & Co. Incorporated and UBS Securities LLC, which serve as sales agents under those agreements. Chesapeake does not anticipate issuing shares under the Distribution Agency Agreements in 2008, but it will consider issuances from time to time in 2009 and beyond as market conditions warrant. The Distribution Agency Agreements provide that Chesapeake may offer and sell shares of its common stock having an aggregate offering price of up to $1 billion through the sales agents. Sales of shares pursuant to these agreements will be made by means of ordinary brokers’ transactions on the NYSE at market prices, in block transactions or as otherwise agreed with the sales agents. Shares sold under the Distribution Agency Agreements will be offered through the prospectus and prospectus supplement filed with the SEC.

    Chesapeake’s acquisition shelf registration statement has been filed with the SEC, but has not yet become effective. The shares of common stock registered thereby may not be sold, nor may offers to buy be accepted, prior to the time the acquisition shelf registration statement becomes effective. A copy of the preliminary and, once available, final, prospectus for shares offered pursuant to the acquisition shelf registration statement may be obtained through the SEC’s website at http://www.sec.gov or from Chesapeake by contacting Jennifer M. Grigsby, Corporate Secretary, Chesapeake Energy Corporation, 6100 North Western Avenue, Oklahoma City, Oklahoma 73118, telephone 405-848-8000. This press release shall not constitute an offer to sell or the solicitation of an offer to buy any securities of Chesapeake Energy Corporation in any jurisdiction. Any such offer will be made solely by means of a prospectus meeting the requirements of the applicable securities laws.

  3. 3
    zman Says:

    CPE down $5 at the open to $2.35.

  4. 4
    zman Says:

    Very sloppy trading, big down moves at the open on little volume in E&P, natural gas. Broad market trying to catch a bid now which may mean the stocks go green for little reason as well.

  5. 5
    zman Says:

    Packman – thanks for posting that. That’s what I originally thought but looking at the S3 it looked very much like a secondary, not a shelf. The second one, the 50 mm shelf looked like, well, it looked like a shelf. Sloppy/stupid of them not put out this press release first.

    $750 mm acquisition shelf better be to take out GMXR or the like. If its for assorted leasehold they’ll be trussed up.

  6. 6
    zman Says:

    So, CHK down 18% on a shelf filing. Tempted to take on some January calls. Maybe they take out QBC, that donut hole in their acreage, with part of the “acquisition” shelf. Another musing would be, Aubrey has not started buying back his stake yet. Wonder what he is waiting on.

  7. 7
    zman Says:

    NG getting slammed for 7.5% on no news.

    The 1 to 5 is cold on the east coast and mid west where you want the cold


    The 6 to 10 day forecast is cold over most of the country with no red areas:


    Ok, enough from me, will shut up now.

    Watching CHK for a trade on the real players coming back to town Monday and saying “it was a shelf and you sold it down 22%?!”

  8. 8
    zman Says:

    Somali pirates snag a chemical tanker:


  9. 9
    PackMan Says:

    CHK … boy these crooks can pound a stock when they want to.

  10. 10
    orion Says:

    Got some Dec CHK, over reaction to the downside.

  11. 11
    zman Says:

    Pack – Sounds to me like they are going to dribble out some stock on leasehold. The bigger shelf is just to have it in place. Spreads are pretty narrow for a holiday which helps when trying to make a play on a better Monday. I have Jan $25s in the name now. Toying with adding something closer strike to current price in a December.

  12. 12
    zman Says:

    ZTRADE: $10KP

    Bought (3) CHK December $15 calls (CHKLC) for $2.55 with the stock off $4 at $16.20 after announcing a couple of shelf registrations. Feels like an over reaction as these are potential shares and not a done deal. See post for more thoughts.

  13. 13
    BossmanG Says:

    Z, thought you might like the chk dec $20’s better…

  14. 14
    zman Says:

    Boss – Better leverage on those and the $17.50s but ya never know: 1) how the Street reacts on Monday and 2) if Aubrey buys a small company on Monday. Either one could be a 10% off black Monday sale for the stock which would hurt the higher strikes more.

    Anybody see any reason for the 55 cent skewering of natural gas? Goes against weather and more than gives up Wednesday’s rally in gas caused by the bigger than expected storage number. Volume is about a quarter of Wednesday’s but it is threatening to move January gas into new low territory.

  15. 15
    orion Says:

    I got the chk 20’s, small position.

  16. 16
    zman Says:

    Orion – hear ya small position. Until sentiment starts to turn for those guys all the asset value and cheap leasing now is not going to get much of a nod from Street. Perception is: “same old, I see it, I love it, I want more of it” Aubrey. Analysts would rather he cut production closer to 10% growth in 2009 and 2010 and use the words “free cash flow”.

  17. 17
    Wyoming Says:


    Any thoughts on FRO?

  18. 18
    PackMan Says:

    All good points on CHK.
    Big overreaction.
    Notice how they drove it down to exactly 15.82 on the low, the price they used for the filing fee.
    What a joke.

  19. 19
    zman Says:

    Wyoming – looking at it now. Big miss even on a clean number. Guess goldie was right to start them at sell last week. I’m probably going to do nothing there, the guys at APA are pretty good at calling this one if you have a contact that way. Apache’s management team used to buy and sell this one with uncanny timing.

  20. 20
    zman Says:

    Packman – good observation. Someone thought they were pricing the deal $4+ in the whole this morning, lol. B-team action.

  21. 21
    zman Says:

    I’m surprised DO isn’t getting hit on the chin by the CPE news. Not just the rig hit but also the concept of broken deepwater rig contracts. Same for rest of group. Also surprised that service isn’t doing worse today. Could be an ugly week coming there as people chime in about the rig count. Natural gas down 8.5% today would be baffling on any other day.

  22. 22
    Wyoming Says:

    Strange how UBS went from sell to neutral today too. More bad news popping? I don’t see it or get it. Think I will go drill a well. No let’s see, where did I put that thing. Has anyone seen my rig?

  23. 23
    zman Says:

    its cold stacked

  24. 24
    Wyoming Says:

    Are cold stacks pancakes from Canada?

  25. 25
    zman Says:

    dry stacked

  26. 26
    elduque Says:

    I have a lot to be thankful for in my life. Not the least of which is this website. Z your thoughts and insights have been invaluable (doesn’t mean I haven’t lost my ass over the last few months). In addition, all of you who take the time to contribute, it is appreciated.

    Enjoy the day.

  27. 27
    Wyoming Says:

    Pancakes from Saudi?

    Seriously, you were right the first time, cold and warm stacked. Warm being when we did not get a permit in time or not finished building location and such.

  28. 28
    zman Says:

    Dry stacked are from Canada.

  29. 29
    zman Says:

    Thanks El-D. Makes my day.

  30. 30
    zman Says:

    market putting on rally cap to go for 5th straight up day.

  31. 31
    tomdavis12 Says:

    Z: How do you try to time purchases of a company like NBR? Fundamentals look poor ( rigs declining ). Most of this is not unknown and should be in the price. I know TA is one route, but your timing over the last six months has been excellent. Just looking for some nuggets from the Z-master.

  32. 32
    zman Says:

    Tom – you way too generous. No doubt the onshore drillers and N. American tied service names have been beaten down. I do not want to own it until rigs are down by at least 200 more, maybe around year end. Then yea, gotta say enough is enough. Could be some hefty tax loss selling there too.

  33. 33
    md Says:

    Did you review the monthly EIA Product supplied 17796 and inventories for Sept. 1705. One would think it has to be more accurate than the weekly.

  34. 34
    Dman Says:

    z – thin market, I guess NG is just tracking crude as it has mostly done for the last few months.

    CHK: is it too cynical to suggest that Aubrey wouldn’t mind a lower price for when he buys back in?

  35. 35
    zman Says:

    md – doing that for the weekend. Street won’t care about the monthly’s look at inventory but the gas production ex offshore was pretty strong.

    Dman- no, not too cynical at all.

  36. 36
    zman Says:

    Gotta get to a tailgate. Be safe, good luck, and have a happy weekend.

  37. 37
    zman Says:

    NYMEX trading post equity market close showing a pretty good rally in oil; actually going green as I type this….people betting on a Saturday cut. OPEC has done a good job of downplaying expectations and I’ll have the results out in the weekend wrap. Again, have a good one!

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