Monday Morning And All Is Well

Big open on tap; keep your fingers crossed. The market has gone into "hit me with your worst shot" mode and many financial writers are seizing on this as a sign of a bottom. Could be good at least for the Christmas rally this week and next. Oil too is showing fresh signs of life after OPEC's president said over the weekend that the Cartel is getting ready to "wow the market" at its December 17th meeting. Better come with a big number (>2 mm bopd) and most of that from Saudi Arabia or the celebration will be brief. Not to be outdone in wowing the market, President-Elect Barrack Obama was busy over the weekend touting the biggest public works project in 50 years akin to the CCC focusing on bridges, roads, schools and the like so maybe its time to take a look at (X) which has just been savaged since the summer months ($190 to $30 folks!). Finally, CHK did what we were all hoping they would, killing their ill-timed shelf registration and adopting a truly cash flow neutral spending program for 2009. A detailed breakdown of my thoughts and their current valuation can be found in the Stuff We Care About Today Section of the post. 

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Stuff We Care About Today - CHK, COG
  4. Odds & Ends

Holdings Watch: $10KP trades from Friday:

  • XOM April 95 Calls sold (3) for $2.40, down 23%
  • CHK December 10 Calls bought (3) for $2.10 with todays conference call in mind.

Commodity Watch:

Crude oil fell a jaw dropping, absolutely unprecedented 25% last week to close at $40.81. This morning crude is trading up  about $2 on the following.

  • OPEC Watch: On Saturday OPEC President Chakib Khelil said the next round of cuts could be "severe." Khelil refrained from saying just how big the cuts will be but noted that the market should brace itself for a surprise in the size of the cuts and also noted that some analysts are looking for cuts as big as 2 mm bopd. "an output decision that startles markets would help bolster plunging oil rates...The best way is to surprise them," he said.


  • Contango Watch: I've been watching the steep contango in crude futures for some time now. Here's a Bloomberg article talking about one of the potential impacts: hoarding. Shell is renting offshore tanker space to arbitrage the near month out month spread. It's impossible to say how much oil this will ultimately remove from the market but as long as the contango remains in place I would expect more "storage at sea" to take place, temporarily removing barrels from the supply / demand picture.

Natural gas fell 12% to $5.74 last week. I have been thinking gas was trying to form a base in the $6 to $6.50 range last week and despite the drop here I still think it will hold close to $6 before mounting an attack on first $7 this Winter and $8 in early Spring. I think it will become evident that supply from non-conventional sources is quick to fall off as the rig count drops. Industrial demand destruction is the major worry at this juncture and little evidence of it has been seen so far as lower prices for gas seem to be offsetting a crimping of consumption due to lower manufacturing activity. Gas has been trading off another $0.20 since the start of trading in Asia but I would expect a colder than anticipated week last week and forecast and the rally in crude to yield at least a small rally after the open.

  • Weather Watch:
    • Last Week: Colder than expected. HDDs of 192 vs 177 normal and 194 in the year ago week. The forecast had been 175. This 192 reading should result in a withdrawal north of 80 Bcf this Thurday.
    • This week's HDD forecast is not yet available but an Arctic surge is predicted this week and it is expected to be colder than the last two.

Stuff We Care About Today:

CHK Reduces CapEx, Shelves Its Shelf.

Capital Budget Reduction:

  • Drilling budget falls by another $2.9 billion for 2009/10. Rig count will fall from 130 at present to 110 to 115 by early 2009. This is down from a peak of 158 this past summer.
  • Acquisition budget falls $2.2 billion for 2009/10. They are really putting the brakes on buying acreage which should be welcome news to analysts.


  • 2009: 13.5 to 14 Tcfe targeted by end of the year, up from 12.1 Tcfe as of 3Q08. Mid point of guidance and a $3 billion capital budget implies a low, low 2009 F&D of $1.20 per Mcfe. This would be an improvement on the $1.35 F&D cost generated so far in 2008.
  • Note: 2009 year end would still likely see reserves boosted to close to 20 Tcfe

Production Growth: Falls With Spending.

  • 4Q08: volume range unchanged.
  • 2009:  5% growth down from 16% previously
  • 2010: 13%, also down from 16%

Recent Share Registrations Squashed

  • 1St Shelf - Pulled. That's a potential 6% dilution that won't be hitting the market.
  • 2nd Shelf (the so called acquisition shelf). Cut from 50 million shares to 25. This will be used from time to time to pay for lease hold acquisitions. If all 25 mm shares were issued this would represent 4% dilution.
  • ZComment: People obviously hated these deals. Before the today's conference call was announced last Friday, the shares had fallen 51% since the November 26th close, when they announced the stock offerings.

Asset Monetization Update:

  • VPP #4 - Midcontinent - $450 mm for 100 Bcfe (or $4.50 per Mcfe vs CHK's $1.20 per Mcfe F&D cost). They expect to close this one by year end.
  • S. Texas deal is off line. This is now expected to become VPP #5, with a closing date in 1Q09 and a price tag of $450 mm for 80 Bcfe ($5.60/ Mcfe). 

Hedge Update:

  • 2009: 76% of expected gas production hedged $8.20. Only 12% of this hedge position is in the dreaded knockout swaps and those concentrated late in the year.

Closing Thoughts:

  • Reserves / Production: 16 years (that's pretty long and getting longer)
  • P/ 2009 CF = 1.4x. Very low, in fact, in unheard of territory. This is using CHK's new numbers which should be pretty easy to beat and pretty solid given the large hedge position taking a majority of the sting out of lower natural gas prices.
  • The Street has CFPS of $8.84 for 2009 at present and this will have to come down about 8% to get to CHK's new '09 numbers, but again, the stock price has already discounted a much worse scenario at this point.
  • This is pretty much what I was hoping for. Shelving of the primary shelf being key. I'm not surprised by the hit to production and think they have set a very beatable bar given the productivity of the Haynesville Shale. I would have liked to see mention of regional gas curtailments but maybe we'll get color on that on the conference call.

Conference Call: 9 EST, available in the "Events" portion of the "Investors" section of their site at www.chk.com.

Other Stuff Today:

COG Reporting Proppant Shortage. Said they are actively seeking deals on proppant for completions in E. Texas. Notable for the likes of (CRR) - ($62 down to $35 in the last 3 months). (CRR) has recently re-opened a proppant manufacturing facility in Louisiana to meet unprecedented demand and despite this the stock has fallen with all other service names. As gas prices have fallen and the rig count has come off  the drilling population has also shifted to the higher return shale plays, many of which seem to perform better with ceramic proppants (higher strength, better flow characteristics than beach sand).

(GMXR) Trims Budget, Still Set to Grow Nearly Trip Digits Next Year:

  • JV with PVA put the breaks on in 2H08, causes company to shave 4q08 volume guidance from 13 to 12.5 Bcfe. This may cause a hiccup in the stock early but it's a non-event.
  • 2009 buget cut 45% due to world-wide gloom and lower gas prices
  • 2009 production guidance now 93%. Speaking to conservatism here, the production growth profile assumes their Haynesville horizontals begin production at 3.4 MMcfepd, not the 7.7 IP of the first well and nothing like many of the 10+ IPs other Haynesville players have recorded. 
  • On last year's proved reserve numbers these guys trade at $1.14 per Mcfe (see those asset sale values CHK is talking about above, this is 1/3 of that) and there is little chance these guys are worth less than $2 even at current pessimistic sentiment levels which would put the stock at $38, not the $18 it currently trades at. 
  • Low debt name with big reserve potential (at least 3 Tcfe) and they will be a juicy target when the credit markets free up.
  • They speak at Southcoast tomorrow at 3:20 EST


Odds & Ends

Analyst Watch: (DVN) upped from Hold to Buy at Jefco in one of the few recent instances of spine growing-itus on the part of the Sell Side.

Housekeeping Watch: Not yet a subscriber? Contact us at zmanadmin@gmail.com to find out how to fix that.


154 Responses to “Monday Morning And All Is Well”

  1. 1
    zman Says:

    Goldman cuts PXD, APC to Sell from Neutral.

    JPM ups CHK to Overweight from Neutral. So Joe is finally satisfied.

    CHK call in 1 hour.

  2. 2
    Sambone Says:

    8:15 (Dow Jones) As crude deflates, Goldman Sachs says the best buys among oil
    and gas companies are those with attractive hedges at higher prices as well as
    exposure to the Haynesville and Marcellus shale basins. On this basis, Goldman
    calls Questar (STR), XTO Energy (XTO), Cabot (COG) and Encore Acquisition (EAC)
    attractive buys. Companies less hedged with a higher cost structure and more
    exposed to oil rather than gas prices are likely to see larger earnings
    declines and cash flow risks, firm says, and recommends selling Anadarko (APC),
    Pioneer Natural (PXD), Canadian Natural (CNQ) and Suncor (SU). (EBW)

  3. 3
    Sambone Says:

    By Nick Heath

    LONDON (Dow Jones)– Crude oil futures bounced back from near four-year lows
    in European trade Monday, boosted by a rebound across Asian and European equity
    markets and on indications that Saudi Arabia is cutting back on its supply.
    Hopes that fresh action by U.S. policymakers – President-elect Barack Obama
    laid out the first details of a stimulus package to prop up the stricken U.S.
    economy over the weekend – could prevent the U.S. from descending into a deeper
    recession helped lift equities Monday, and followed on from a late equity rally
    on Wall Street Friday. Stock indexes have served as a barometer of the health
    of the economy in recent weeks and been a major influence on crude price
    And while much of the oil market’s attention has focused on demand erosion
    linked to a slowdown across the global economy, news from some Asian refiners
    Monday that they will receive 7%-10% less Saudi crude oil than contracted for
    in January was seen lending some stability to crude prices.
    “Oil…has had to catch up to the late (rise) Friday on (U.S.) equities and
    the continued rise today in equity futures,” said Olivier Jakob, managing
    director at Swiss consultancy Petromatrix. “The current pressure on the dollar
    is also providing some support and the newest addition on the fundamentals is
    news that Saudi Arabia is giving some Asian refiners cuts above 5% and closer
    to 10% for some.”
    At 1215 GMT, the front-month January Brent contract on London’s ICE futures
    exchange was up $2.05 at $41.79 a barrel.
    The front-month January light, sweet, crude contract on the New York
    Mercantile Exchange was trading $2.02 higher at $42.83 a barrel.
    The ICE’s gasoil contract for December delivery was up $11.75 at $448.75 a
    metric ton, while Nymex gasoline for January delivery was up 393 points at
    94.05 cents a gallon.
    With prices having continued to fall despite a cut of 1.5 million barrels
    announced at the end of October, market participants are fully expecting the
    Organization of Petroleum Exporting Countries to make another sizable downwards
    revision to its output quotas when it meets in Algeria Dec. 17.
    Bolstering those expectations, OPEC president Chakib Khelil over the weekend
    said the group will agree to a “significant reduction of production levels”,
    The Associated Press reported. He wouldn’t give the cut’s amount but said it
    could be “severe”.
    “When OPEC meets next week, it is not a question of will they cut, but rather,
    how much will they cut?” said Stephen Schork, editor of The Schork Report, who
    predicted a trim of at least 2 million barrels. “Therefore, be on the lookout
    this week for a shortcovering rally, similar to the one we saw two weeks ago in
    the lead up to OPEC’s Cairo meeting.”
    While doubts that some OPEC members will adhere to production cuts had blunted
    the impact of recent OPEC comments calling for reduced output, news Monday that
    Saudi Arabia, the world’s largest producer of crude oil, had notified some
    Asian buyers of a reduction on contracted supply of up to 10% in January was
    significant, analysts said.
    “I think it’s very significant – it shows they’re serious about putting it
    through,” said Helen Henton, head of commodity research at Standard Chartered
    in London. “That’s quite a significant cut, 10%. Saudi Arabia has also been
    quite quiet over the last couple of months. The fact they are now taking quite
    tangible action is positive for prices.”
    -By Nick Heath; Dow Jones Newswires
    Dow Jones Newswires
    12-08-08 0736ET

  4. 4
    Sambone Says:

    Saudi Arabia’s Oil Equation


    OPEC has a math problem.

    When demand for oil is rising, members of the Organization of Petroleum Exporting Countries take extra portions from the expanding output quota pie. But when it falls, as now, they are supposed to share the pain of lower production even as oil prices are declining, a double blow to cash flows.

    As the organization’s biggest member, much of the burden of managing all this rests on Saudi Arabia.

    Yet it also must consider its customers and long-term demand.

    This largely explains OPEC’s recent decision to put off further output cuts, even as crude prices continued sliding. It also is why oil bulls can expect little relief from Riyadh next year.

    Saudi Arabia’s current output quota is 8.5 million barrels a day. After domestic use, that leaves seven million barrels for daily export. Ahmad Abdallah, commodity analyst at financial-services firm GaveKal, points out that Saudi Arabia’s 2008 budget was set at $109 billion. With oil exports accounting for just under 90% of public revenues, that equates to an oil price of $38 a barrel to balance the budget. The OPEC basket price has averaged $98.50 a barrel this year.

    Nymex crude-oil futures, having dropped 17% in the past week alone, now command just $42. The OPEC basket price typically trades at a discount of $5 to $10. Were Nymex crude to average $40 next year, and OPEC crude $35, Saudi Arabia’s 2009 oil-export earnings could drop to $89 billion.

    The problem is, that price forecast may require OPEC to cut perhaps another 2 million barrels a day. If Saudi Arabia contributed half of this, its implied export earnings drop to $77 billion, opening up a big deficit.

    Fortunately for Saudi Arabia, it has stashed a cushion of petrodollars to manage this. It also has other factors to consider.

    Beijing’s decision announced Friday to link domestic fuel prices more closely to international markets is particularly alarming. Subsidies have boosted Chinese demand. Reforming them suggests China, the fastest-growing oil consumer, is getting serious on energy efficiency just as America, the biggest oil consumer, has elected a president pushing the same agenda.

    Saudi Arabia needs to keep the world addicted to oil as long as possible, so giving it a breather with lower oil prices isn’t a bad thing. As a bonus, this also will challenge Iran and Russia, both of which need much higher oil prices to balance swollen budgets.

    So Saudi Arabia has a near term chance to squeeze its biggest regional rival and its main non-OPEC competitor.

    Other OPEC members won’t take this lying down. Many will likely prefer to bust quotas, pressuring prices further.

    For oil bulls, 2009 promises to be as easy as Chinese algebra.

  5. 5
    zman Says:

    CHK called up $2.50 with 20 minutes until their conference call.

  6. 6
    BirdsofpreyRcool Says:

    z – good morning. Timely CHK call on your part Friday. Your relatives will say good things about you in their Christmas letters this week.

  7. 7
    zman Says:

    Except my daughter who I think got in at $54. She’s getting a WII Fit to compensate for the loss.

  8. 8
    BirdsofpreyRcool Says:

    that should keep her from trash-talking ya on the playground!

  9. 9
    zman Says:

    CHK CC #1

    Plenty of liquidity: $1.5 billion cash now, will have $2 to $2.5 billion by year end.

    Build cash by $4 billion next year.

    Live within cash flow if they can’t sell more assets.

    Rumors about succeeding in a low gas price environment are wrong. Look at hedges. 50% hedged for 2010.

    No one else will find as much gas in 2009, much less at $1.20/mcfe.

    At $4 gas, they would have CFPS of $6.50 in 2009.

  10. 10
    BirdsofpreyRcool Says:

    looks to be a huge open for energy. guess we are looking for a nice present from Riyadh. There is a WSJ article on the back page of Sectio C that has a counter argument to all the production-cut happy talk. Only time will tell is OPEC can stem the tide of falling oil prices.

    One thing we didn’t talk about on Friday was China’s announcement of a move toward more mrkt-based pricing of energy. Thought there is that it will slow the growth in Chinese demand. A key factor is the run-up to $150 this summer.

  11. 11
    zman Says:

    CHK CC #2

    Aubrey is very disappointed with stock price for months (hey, me too)

    Capex is finally less than operating cash flow expectation.

  12. 12
    zman Says:

    BOP – China actually mentioned this two weeks ago and they talked about it again on Friday. This helps their refiners (PTR, CEO, SNP) but since its not really new news I think its already priced into oil now. Also, if you remove the subsidy and squelch demand for products a bit, the corollary is that you increase profitability of the so call “teapot refiners” and they will be looking to buy and process more crude as many shut down during the high oil prices of this past Summer. If product prices float they will be looking to reopen.

  13. 13
    zman Says:

    CHK CC #3

    Says the recent filings were a mistake and they apologize for it. Terminating the distribution agreement today.

  14. 14
    BirdsofpreyRcool Says:

    z – I know the China mrkt-pricing talk has been around for a while. Just thought it might have added an extra arrow to the quiver that shot down the energy kids on Friday. It never ceases to amaze me how a stock will still react to something that “everyone knows already.” But, thanks for your follow-up comments.

  15. 15
    BirdsofpreyRcool Says:

    IG opening tighter this morning. 262 currently. -11 to Friday’s official close.

  16. 16
    BirdsofpreyRcool Says:

    CHK up 30% pre-mrkt. Amazing moves for a large-cap stock.

  17. 17
    zman Says:

    CHK #CC 4

    Rumors about unfunded Haynesville leasehold of $1.5 Billion spread by one brokerage firm last week is very far from the truth.

    That 50% hedge in 2010 is at $9.50. Nice.

    Capex cut by 60% in last several months.

    Q&A Starting

  18. 18
    zman Says:

    BOP – used to be large cap, now call it big mid cap, COL.

  19. 19
    zman Says:

    CC Q&A #1

    JV flexibility relative to drilling commitments:

    rig commitments by deal:

    Fayetteville: 20 rigs in 2009 …if they keep it above 20 rigs BP will pay 100% of 2009 costs.

    Haynesville: no requirement to run a certain number of rigs. 50% carry here for a total fo $1.6 billion.

    Marcellus: 75% carried, 4 rigs now, this has makeup and carry forward provisions if they slow (total of $1.2 Billion worth)

    These carry deals just aren’t valued by the market.

    2009: 5% production growth assumes 4, 5, and 6th VPPs get done (excluded from production). If they don’t get 5 and 6 done production growth would be 10%.

  20. 20
    zman Says:

    CHK Q&A #2

    U.S. production underlying decline rate. If rig count were to go to 0, after a lag of 3 to 6 months production would be down 40%.

  21. 21
    zman Says:

    I could sell the December $10 CHKs for more than a double now but I am holding on for a return to the $20s. Sounds like analysts are mostly happy and the case for a much higher number in terms of valuation is very simple for them to make without worry of the deal.

  22. 22
    Dman Says:

    Taking # 20 with UNG at a new low. Tell me how that isn’t a buy here?

  23. 23
    zman Says:

    Dman – Well, I think it is. Caveats being 1) the rig count won’t go to 0 but will fall by at least a third so you can do the math and come up with lower production in 2009 if it stays there for a while and 2) people won’t believe it until they actually see the numbers rolling off so it will begin to be reflected in February and those numbers don’t come out until April. I think as the numbers start to flatten gas will move up but you also have winter to contend with. I’m happier in names like SWN for a gas play or GDP or even CHK (now, finally, at last as they cry mea culpa) than I am in UNG which is the bane of my investing existence.

  24. 24
    zman Says:

    CHK Q&A #3

    Cost declines not included in the modeling. They expect a 20% decline in service costs in 2009 but they are not reflecting it in their operating cash flow numbers just yet.

  25. 25
    zman Says:

    CHK Q&A #4

    Well north of 100 mm/d by end of the year in the Haynesville, this was 55 at last mention in November. 14 rigs now going to 34-35 by end of 2009. This is part of the rig transitioning to higher IRR plays.

    Barnett: set a new production of 825mm/d gross last week.

    Sounds like they come in at upper end of 4Q guidance.

  26. 26
    zman Says:

    CHK Q&A #5

    This year’s underperformance of their stock price vs their best year ever sets up the “mother of all recoveries for a large cap E&P stock”. Sees a 4 or 5 bagger over the next year.

  27. 27
    zman Says:

    By the way FSLR perking back up again out of its base.

  28. 28
    gaamblor Says:

    regarding the CHK knockouts if the price goes under the knockout level does the entire hedge/contract get canceled or is CHK just not covered for the gap between the current price and the knockout price?

  29. 29
    zman Says:

    For the knockouts, if it is triggered, they would get market price for the gas covered by that hedge. They have shifted these lower cost collars to the end of 2009 in hopes of not triggering the knockouts.

  30. 30
    gaamblor Says:

    Do we know what triggers the knockouts? say for example the entire 2009 strip went to 5 for a week and then the month in question bounced back to 6 before the swap was to expire would they get 6 or the swap price?

  31. 31
    gaamblor Says:

    oops also assuming in that example the knockout was 5.75 which is the bottom price they list for 2009

  32. 32
    zman Says:

    Gaam – please check your email.

  33. 33
    zman Says:

    The knockout will be a lower number than the bottom hedge number. Generally they are triggered by the close of the month price.

  34. 34
    BirdsofpreyRcool Says:

    z – just to put it in context, about what % are CHK’s remaining knockout hedges vs anticipated production? thx

  35. 35
    zman Says:

    They are 12% of the 2009 hedges which are 76% of production, so very small at 9% of expected 2009 production.

  36. 36
    BirdsofpreyRcool Says:

    z – thanks.

  37. 37
    zman Says:

    Has anyone had trouble putting comments on the site today or Friday?

  38. 38
    zman Says:

    CHK call just ended, very good call, over 600 in attendance.

  39. 39
    Dman Says:

    Z – I never did find the coal index you mentioned on Quote.com

    I think you said it was CQ. All I can see is Rotterdam & Richards Bay.

  40. 40
    ram Says:


  41. 41
    zman Says:

    Dman, try QL, that’s the main coal future which represents the high BTU Appalachian coals.


  42. 42
    elduque Says:

    z- where does EOG trade on a cfps? Or to put it another way, what price should CHK trade at relative to EOG or APA?


  43. 43
    zman Says:

    Good morning Ram, lets hope for a better week. Liking the Obamarally so far.

    X up $5, wow. Long way back to the highs there.

    Re CHK, their were rumors last week these guys were going bankrupt. This is a function of the slime balls in the short world not having fun in financials any longer. Sure they can short there but that game is done now so they pick a target and run with it. I repeat, no debt at CHK due for five years. CF protected by hedges is more than adequate to make interest payments. Its completely and totally asinine to think bankruptcy here.

  44. 44
    Sambone Says:

    0:36 12/08 *DJ Chesapeake Energy Raised To Mkt Outperform From Mkt Perform By
    Howard Weil

  45. 45
    BirdsofpreyRcool Says:

    TPH also upgraded CHK during the call.

  46. 46
    zman Says:

    EOG is easier to compare to CHK as they are primarily domestic and all W. Hemisphere and gassy. APA is oilier and shorter reserved life as well.

    EOG always trades at a premium to the group on P/CF usually around 8 or 10x next year’s CFPS. This is due to the stability of their model (not a lot of risky exploration play, a successful transition from what they used to call 1s and 2s drilling to more of a manufacturing model) and that long reserve life. At present CFPS for 2009 for EOG is $16.68, down from this year’s estimate of 18.17. That’s due to price as they will growth high single to low double digits next year. That’s 4.3x next year’s number which based on current oil and gas prices is probably a bit inflated. If we haircut the Street number another 15% that gives you a 5.1x number which is more than reasonable for their cash flow and still undervalues the company’s long term potential in its core gas plays and its best in show performance in the Bakken oil play.

  47. 47
    gaamblor Says:

    2009 says 93bcf which is 11.5% of the midpoint of production guidance, they also have puts written for 105bcf at 5 to 6

    2010 is the bigger problem for me since they have 321 bcf where they are set to receive 9.58 but can be knocked out “from 5.75 to 7.4”

    this might be a crazy conspiracy theory but it seems to me that the counter parties all have trading desks and its very advantageous to them to keep the selling pressure on nat gas and save themselves a lot of money on these in the next couple years…

  48. 48
    1520sbroad Says:

    #43 – agreed on short rumor creativity. shorts feed on fear not facts. They do provide some nice discounts though.

    i did have some trouble posting friday – thought it was on my end, site was slow to load at times. I did just get new internet connection so it could be me.

  49. 49
    Sambone Says:

    12/08 10:37 *DJ Pickens: Oil Back At $100/Bbl Next Year If Economy Recovers

    10:39 12/08 *DJ Pickens: Not Going Long On Oil Yet, Price Could Fall Further

  50. 50
    zman Says:

    Thanks BOP – thought it was weak of them to downgrade on the shelf registration. I’ve got a lot of respect for that firm and I thought their call was cowardly.

  51. 51
    Dman Says:

    Oops, yes you did say QL. Also I was looking at quote.com, which is not the same deal as quote.barchart.com.

    So roughly speaking, coal is still above year-ago levels. Meanwhile WLT up huge today but way below year-ago.

    Massive infrastructure spends on way…

    X agrees with your post evidently.

  52. 52
    zman Says:

    gaamblor – I hear ya but they can’t keep gas down that long if the fundamentals turn.

  53. 53
    zman Says:

    Thanks Sam – love the Weil as well, very smart guys.

  54. 54
    elduque Says:

    So then CHK at $8 could reasonably be priced at $32???

  55. 55
    zman Says:

    test from IE 7.0

  56. 56
    zman Says:

    Tom – this is from IE 7.0

    El-D – Not sure I understand 54. If you mean could it be worth $32, yes.

  57. 57
    Dman Says:

    Z – to answer your Q. Haven’t had any problems posting (via Firefox).

  58. 58
    Dman Says:

    #56 I think El-D means at $8 NG, CHK worth $32.

  59. 59
    elduque Says:

    I guess what I am trying to figure out, is what multiple to CFPS
    would be deemed reasonable by the market. Obviously from Aubrey’s comments he thinks that the street has its head up you know where. I think he was just about that graphic.

  60. 60
    zman Says:

    Thanks D. I compose in Firefox as I got tired of dealing with the MicroTards long ago.

    Ooohhh. Thanks again D. I’m sure you are correct. At $8 you can tack on another $1 billion or so to next year’s cash flow which you translate into a higher price due to the extra cash flow and a bit of multiple expansion (say triple current) levels owing to the sea-change in sentiment that would occur if gas prices were to be that high. $32 would be a pretty easy number to get to and that’s before you start looking at the end of 2009 reserve accounting change which gets them to 20 Tcfe of reserves.

  61. 61
    zman Says:

    El-d. 4 to 5x is reasonable for CHK given their higher debt load. So if you have $9 of CFPS on that number which is a good ball park then $36 to $45 easy.

  62. 62
    Dman Says:

    IBM recently released a cunning Lynux-based plan to bypass MicroTard’s software in the corporate space. Hope they succeed.

  63. 63
    zman Says:

    Very surprised by the down move in natural gas today. Only off a dime but it has been there since late last night…before the weather numbers for last week came out which were colder than expected as detailed in the post. Hopefully the Street will not be over exuberant in its estimate for a withdrawal this week and we can get some stability in pricing as storage comes off in sync with weather.

  64. 64
    zman Says:

    Auto bailout very likely says White House.


  65. 65
    zman Says:

    Tom – will get to your emailed question in a few minutes.

    Market holding its breath now. Oil back to marking the move in the Dow.

  66. 66
    zman Says:

    BOP – any update on IG?

  67. 67
    zman Says:

    From Tom:

    My last question for today. I have been invested with CHK since 7/04. I have followed the NG market naturally. I am very surprised at the price today considering inventory, weather and crude. My guess is that crude at $40 spooked everyone in energy-land. If you could give some color as to your guess about the timing of rigs coming off and seeing it in the weekly numbers. It seems each week we are still seeing a stubborn extra 5 Bcf. This is allowing those extra supply analysts to not be hit between the eyes that this may not be so. I think you have said it may take til March or April to see supply come down hard. Thoughts?

  68. 68
    zman Says:

    I think your guess is correct re oil’s impact on natural gas.

    As to timing, I think we see a slow slide through year end and then a cliff. We will probably see 400 to 600 rigs drop off in 1Q09.

    As to seeing this in the weekly numbers I think Feb is the earliest you will see a marked reduction in gas production that you can point to. Texas and Wyoming will be the tell tale signs and also Oklahoma (which I think is already showing up).

    As to the 5 Bcf of incremental, its there, net of lower imports for sure, but what’s interesting is that cold weather is roughly equivalent to year ago levels and you are not seeing more than the that 3 to 4 Bcf (again net of imports) showing up in storage. In other words, industrial demand has not collapsed. Note also that as winter progress and people get used to having their heat on in the west, south, and southeast instead of just turning it on when needed, the numbers will bulk up on the withdrawals. Last week is a good example as 61 of the 64 Bcf withdrawn came from the East. That’s won’t continue, especially with more stories of Rockies gas being shut in due to lack of market (pipeline) and low prices.

  69. 69
    Dman Says:

    Comparing oil/gas with gold/silver, it looks like the metals have been been bouncing around on the bottom for a while, whereas energy has only just got down there (if I was to be bold and assume we’re about there now). If we see the metals take off it could be a good leading indicator for energy. I realize it’s just one part of the rich tapestry, but the commodities do tend to trade as a complex to an extent, especially with the looming currency debasement lurking out there somewhere.

  70. 70
    zman Says:

    Dman – agreed. I’d hope the move in the dollar last few days back and forth may be signaling a weakening there. Heard someone on CNBC say that if the dollar weakens now people will worry about inflation. I think that’s pretty far fetched in this environment and it sure would help out the exporters and the commodities.

  71. 71
    zman Says:

    I am just flummoxed by the move in natural gas. Third day in a row to sell off. Could be just technical but it makes little sense here from a fundamental standpoint or from one of simply keying off the last weekly storage number.

  72. 72
    zman Says:

    S&P Equity Research cuts CHK target from $24 to $19. I’d love to see the reasoning behind cutting today if anybody has access to those notes.

  73. 73
    Dman Says:

    In a similar vein:

    X is up 20% after rolling around in a fairly convincing gutter for the last 6 weeks.

    BHP now towards the top of a (much broader) gutter-like arrangement. And wouldn’t you know it, the same can be said of the Shanghai index.

  74. 74
    BossmanG Says:

    Z, was watching some tv clips of fund managers on the weekend and one of them was talking about how he came across a report that basically tried to correlate the speeds of tankers to the drop in crude. Basically said that crude tankers are travelling a certain percentage faster, increasing supply faster then usual…lots of theories going around?

  75. 75
    Dman Says:

    Z – agree on the NG, but I took some UNG calls at around the UNG $23.20 level so I can be pained as well as flummoxed 🙂

  76. 76
    zman Says:

    Boss – they do that from time to time. Often if crude is falling they are told to slow down at some point to help depress inventories.

    Dman – re X, that industry is doing all the right things to right the ship, closing factors left and right. Gotta think that $190 to $30 is overdone. At $190 the stock was not expensive but then the bottom fell out of steel and estimates tanked.

  77. 77
    zman Says:

    Still seeing a lot of profit taking into the early morning moves. EOG has given back a $4+ move after falling $12 last week. And you have Goldman out cutting ratings on big cap E&P names like APC after this big fall we’ve had. Little late guys.

  78. 78
    Dman Says:

    I’m thinking WLT might be an opportunity but it’s a bit hard to jump in after a 20% spike.

  79. 79
    zman Says:

    Market trading like its a holiday week. Guess we can expect this through year end.

  80. 80
    BirdsofpreyRcool Says:

    slow day… stepped out. last quote on IG at 12 noon today:

    IG 264 -9 bps (range today: 257 – 268)

    bond mrkt very very quiet.

  81. 81
    zman Says:

    Thanks guys, someone sent the S&P piece.

    Thanks BOP. Same quiet re equities after the opening flurry.

  82. 82
    zman Says:

    This is the entirety of the S&P research comment. How utterly lame.

    Shares are up sharply today after CHK ends plans to issue $1B in stock and amends acquisition shelf registration to 25M shares from 50M. CHK also cut capex thru ’10 by $2.9B (31%) and reduced production targets by 5%-10% for ’09 and by 10%-15% for ’10. CHK now sees ’09 drilling capex of $2.8B-3.1B, down
    52% from projected ’08 levels. We lower our production growth forecasts to 6% and 11% in ’09 and ’10,
    after estimated ’08 growth of 19%. We reduce our ’09 EPS estimate by $0.23 to $3.31. On revised DCF, NAV
    and relative metrics, we lower our target price by $5 to $19.

  83. 83
    md Says:

    NG BTU parity is above 80% of CL so maybe catch up. But considering the HDD was higher than forecast and that it’s shaping up to a cold winter I would suspect NG to firm up.

    Push comes to shove… You can trade in or sell your 2nd car or SUV but heat and electricity is and will always be a neccesity.

  84. 84
    BirdsofpreyRcool Says:

    i’ll check on the trading desk… see if they have a bias for the last hr. Otherwise, just watching paint dry…

  85. 85
    BirdsofpreyRcool Says:

    z – what % of nat gas consumption is industrial again?

  86. 86
    zman Says:

    Bird, about 30% over a 12 month period. In the winter months a little less as Residential and Commercial demand spike more a % basis than Industrial does to heat space.

  87. 87
    zman Says:

    md – All I can say is that this last decline will probably push rig count down even faster. Local prices uneconomic in many places right now.

  88. 88
    BirdsofpreyRcool Says:

    z – i think people are looking at a continuing slowdown in industrial production as a reason to sell nat gas. I think it’s less about HDD now, more about no one needs chemicals, plastics, power if nothing is going to get built.

  89. 89
    zman Says:

    Bird – that may indeed be the fear. But judging from the last 2 weeks of storage numbers I can tell you that industrial demand has not yet been severely denigrated.

  90. 90
    BirdsofpreyRcool Says:

    trading desk outlook: the gap up this morning took the model by surprise… so, it’s a coin flip on direction for the rest of the day.

    Not a lot of help… but, sounds about right to me.

  91. 91
    Dman Says:

    SPX outperforming USO by 7% since 9.30AM Friday.

  92. 92
    md Says:

    UNG C Dec. 21 @ $2.50.

  93. 93
    Dman Says:

    Z – if the economy has been contracting since last December as the economists are now claiming, why hasn’t industrial NG demand fallen?

  94. 94
    md Says:

    Auto sector – Why would the Gov’t bail out bond holders. If the Gov’t puts in money would they be in 1st position.

  95. 95
    zman Says:

    Dman – hard to say it hasn’t fallen some. September was down 1.5 Bcfgpd for Industrial. But YTD (through Sept which is the latest available) Industrial demand was up slightly. I’m just saying its obviously not fallen apart yet or the numbers would look a lot worse. This week will give us a third good look as the weather was similar to the year ago week again. So we should be 20 to 30
    Bcf short of last year’s injections (very back of the envelope) given the incremental supply.

  96. 96
    md Says:

    Re: Industrial YOY Aug. NG down by 1.5BCF or 10%. How much was weather related, Don’t know. Also maybe the contraction has been on Wall St.
    Sept. will be a good indicator.

  97. 97
    md Says:

    Should read down by 1.5BcfPD

  98. 98
    BirdsofpreyRcool Says:

    md – I don’t think the US Govt can unilaterally rewrite contract law (well… they can, i guess, but then the whole world would just fall apart). Once a company’s credit ratios fall below a certain level, then current bond covenants disallow the issuance of senior debt. If senior debt IS issued and violates those covenants, then the bonds can declare an event of default and the company has 30 days (usually) to cure the default. No cure, then existing bonds are due paid in full. A single bond default also causes cross-defaults to occur… So, basically, the entire debt outstanding becomes immediately due.

  99. 99
    zman Says:

    12% rally in the shipping stocks today. Wonder if the riots in Athens will torch any of their headquarters. When not rioting that is a very fun town.

  100. 100
    md Says:

    OOPS again. Z- as you replied. This was Sept.
    Electricity also fell by 1 bcfPD. This could be the ind. (and commercial) component of electricity.

    When drilling drops it would counter the slowdown effect

  101. 101
    zman Says:

    BOP – I think the new car czar will have the power to scrub balance sheets clean with a single stroke. I’d say we need an energy czar who can write an actual energy policy but I’m a total dreamer on that one.

  102. 102
    md Says:

    Is Obama looking to save the bondholders

  103. 103
    md Says:

    Is shipping bouncing on floating contango tanks

  104. 104
    BirdsofpreyRcool Says:

    md – to finish the thought: in order for there NOT to be an event of default, the US govt has to put in $$ that is subordinated to all debt on the lowest level that has covenant protection. Since GM has been a junk bond issuer for a while now, you can bet they have some tighter convenant protection for their bondholders than they would have had when they were an investment-grade company.

    Does this make sense?

  105. 105
    zman Says:

    Dunno, the dry bulks are up sharply, DRYS up 60%, TBSI up 36%. Small bounce in Capesize rates, dips in the other two.

  106. 106
    BirdsofpreyRcool Says:

    z – re #101 i think you’re joking… right? If that is true, that is allowing the legislative and/or executre branch of govt to unilaterally rewrite existing contract law. I don’t think they can do that. Unless, the US adopts something like a Hugo Chavez-type legal structure.

  107. 107
    zman Says:

    …but I would bet the tankers are up on the “storage at sea” story.

  108. 108
    zman Says:

    BOP, yes, I was joking but I do think we are well on way in terms of your last statement.

  109. 109
    BirdsofpreyRcool Says:

    z – phew. you scared me.

    but, no doubt, the US business landscape will look quite different, after all this is over.

  110. 110
    md Says:

    Obama should take a DIP in waiting position. We’re prepared to put money in but we’re not prepared to at expense of taxpayer to the benefit of bondholders.
    Q. Once you bail one out do you bail out all three. Cerberus/Chrysler should be on their own.

  111. 111
    zman Says:

    See, I’m the only one on the site who’s not allowed to have a sense of humor. Man, seriously, the market wants the Big3 bailed out. This afternoon rally on rumors a deal is almost done and last week’s action point to that. Hopefully not a buy the rumor sell the news event. Gas trading unbelievably flat today (down but not a lot of volatility and in the face of big bounce in crude…very odd)

  112. 112
    md Says:

    Assuming an AIG style bailout Which GM bonds are worth looking at.

  113. 113
    reefguy Says:

    71- I agree with CHK, seeing independents laying down , or preped to laydown as many rigs as they can. Barnett, Woodford, and Fayetteville make no return at the current wellhead postings. With so many rigs laying down, we will see a dramatic falloff in everyday tubulars, and frac materials. The specialty stuff for Haynesville will stay in stroong demand. Day rates in basins with big differentials are about to collapse. An estimate of an overall cost reduction of 20-25% in the drilling and completion of these wells has already begun.
    The oil price collapse makes the wolfberry/sprayberry all but non-commercial. Six months of these prices will rollover the gas production curve into a double digit decine. JMHO

  114. 114
    zman Says:

    md – I think F is good on its as long as the other two don’t go down and squash their suppliers. At this point, we might as well make them natural monopolies like utilities. Of course that would mean shutting the borders to imports …. oops, just kidding.

    GDP almost certainly a a gift here. GMXR too. Don’t trust this market and am not going to take them on just yet.

  115. 115
    md Says:

    PUT GM as congress makes em squeal over the next few weeks.

  116. 116
    BirdsofpreyRcool Says:

    md #102. Obama is NOT looking to “save bondholders.” But, he does have to play by the rules of contract law. And current contracts do not allow more debt to come into GM (for example) that would have a priority claim over existing debt. So, if the gov’t wants to put in capital in the form of debt, it has to come in subordinated to current debt. The by-product of that is to make any debt senior to the US govt loan whole. That’s why where you sit in the capital structure of a company’s balance sheet counts. By the way, the tail on the capital structure dog is equity, as you know. No one (except warrant holders) is lower that equity holders. They are the first to benefit from any good the company does, but also the first to go, when the company gets in trouble.

  117. 117
    md Says:

    If GM gets bailed out it puts F at a disadvantage. So it’s got to be both.
    The question is can they let Chrysler out to dry and tell UAW to be happy with what they got.

  118. 118
    zman Says:

    Thanks very much for the color Reef. Agree 100%. I’m hearing a lot of operators rushed to spend remaining capex into year end and that early 2009 will be a wake up call on day rates for the drillers as even those last rigs on job come off. Then we will see the benefits at the E&Ps. The market is hitting the reset button for costs.

  119. 119
    md Says:

    I understand. What I’m siggesting is that the Gov’t tell bondholders that if you want us in you’ll have to take a haircut. Of course the decision is entirely your to make. Can the GOv’t say you got to declare CH.11 and then we’ll be a DIP

  120. 120
    BirdsofpreyRcool Says:

    md – AIG was different. They had investment-grade bond covenants at the time of the govt bailout. So, there was less restrictions on where taxpayer money could come in.

    A DIP financing only comes into play after a Chapter 11 is declared. You can’t DIP without declaring BK. And, in a BK, the US Bankruptcy Court takes over as the adjudicator. And the whole thing becomes a food fight for lawyers.

  121. 121
    BirdsofpreyRcool Says:

    md – #119. Yes. The US Govt could say that: “you want our Money, you take a haircut.” But, it’s still up to the bondholders to decide if they want to take the haircut. The Govt can’t force it on them. It’s called a consent solicitation to get bondholders to agree to give up rights. You usually have to get 98+% of holders to agree (if not 100% in some cases). Also, bondholders will never consent to anything if they think they have asset coverage… even if it’s the US Govt asking “pretty please.” BUT, taxpayer $$ could come in senior to the existing capital structure… it’s just that it would take a Chapter 11 filing to make that happen.

  122. 122
    zman Says:

    Nice to see the late afternoon move in the group WITH the broad market. XOM doing well, think we see that snap back up in EOG if the market just stays out of big red days this week. Very cheap here.

    FSLR still breaking out of that base. Back up to 137+ from 80s two weeks ago. Of course 4 weeks ago the stock was tipping $180. Unreal.

  123. 123
    zman Says:

    Tater – if you see this later could I get a read on XOM, its approaching what looks like resistance/break out again.

  124. 124
    zman Says:

    China offers PBR $10 billion loan. Whoa. Game changer there. That’s one to reopen the debt market.

  125. 125
    zman Says:

    I’m betting CHK adds to gains tomorrow. Given the number of upgrades we’ve seen today and by some of their biggest detractors, I’d think the move has legs at least into the upper teens this week or next.

  126. 126
    BirdsofpreyRcool Says:

    z – wouldn’t be surprised to see China make a bid for one of the oilsands guys… China knows what they want to do, 100 years into the future. And they want natural resources, especially energy.

  127. 127
    zman Says:

    Downer for natural gas today.

    Dow Chemical Co. would close 20 plants and temporarily idle another 180 facilities to reign in costs amid the economic recession. That might be worth 1 Bcfgpd.

  128. 128
    zman Says:

    Re China. Absolutely agree. Saudi and China have the longest range economic plans of any two countries I can think of. Maybe SU goes away.

  129. 129
    zman Says:

    Lol, just pulled SU up and see that Goldman cut them to Sell this morning.

  130. 130
    VTZ Says:

    China owns part of the Northern Lights Oil Sands project that Total bought (Synenco). Total only bought the 40% stake, Sinopec owns the rest.

  131. 131
    BirdsofpreyRcool Says:

    wonder if Alberta would prevent China from buying SU… on the other hand, maybe XOM should take a close look. If XOM can cut some sort of tax ceiling agreement with Alberta, it might be worth it to lock up the future reserves for peanuts now.

  132. 132
    BirdsofpreyRcool Says:

    vtz – where are the northern lights oil sands project? is it a mining or in situ operation?

  133. 133
    VTZ Says:

    Mining. It has really low grade ore compared to Suncor, Syncrude and Shell but it’s still a premier operation.

  134. 134
    BirdsofpreyRcool Says:

    any political reason why China would be prevented from buying SU?

  135. 135
    zman Says:

    Not that I know of but I’m not close to Albertan thinking. V?

  136. 136
    VTZ Says:


    Synenco/Northern Lights

  137. 137
    Pete Says:


    What are your thoughts on the price of crude in Jan.

  138. 138
    BirdsofpreyRcool Says:

    VTZ – cool. thanks!

  139. 139
    VTZ Says:

    I don’t think that people in Canada would like the chinese to be owning the largest oil sands producer, but then again Shell is the largest leaseholder and they have no problems with that.

    I think they would rather see Suncor go to Exxon than the Chinese personally but only because it would seem like the more “secure” alternative.

  140. 140
    VTZ Says:

    Keep in mind that royalties are a Provincial authority, not a Federal authority so Alberta has the final say on royalty rate, etc.

  141. 141
    VTZ Says:

    Also keep in mind that almost all of those “proposed” projects shouold now read “proposed but cancelled due to 40 dollar oil” hahaha

  142. 142
    VTZ Says:

    Z – If you ever feel people are interested, go ahead and publish that article.

  143. 143
    zman Says:

    Pete – I don’t know that I have any good ones. I’d say within $10 of current levels probably less than $50. I don’t think there is much of a chance for a 2nd month of rallying in consumer confidence and December unemployment numbers could be really ugly. That’ll keep a lid on gasoline leaving weather to determine heating oil prices but not diesel consumption (also a bummer). So I don’t see impetus for a big demand side driver. The rest depends on the size of the OPEC cut and more specifically how they craft the cut (it’s gotta be largely on the back of Saudi and they really need to get the soviets, ahem, Russians, on board with some kind of restraint which I’d put odds of 1 in 3 on and less that they actually do it). The dollar could lend a little support as it pulls back (should some day at least) but the vague, cloud of demand destruction, will continue to hang over the market. The one hope for oil is really an increase in gasoline demand inspired by low prices…so far not happened but I’m confident in the American driver’s inability to really change their habits.

  144. 144
    zman Says:

    V – I do and I will this week. Gotta go back in email and find it.

  145. 145
    zman Says:

    Re 141. Lolololol.

  146. 146
    Pete Says:

    Thanks ,I just keep thinking OPEC is going to pull all the stops out to boost it up.

  147. 147
    zman Says:

    For you folks in LA or NY/NJ you can apply to test lease the new electric mini for a year. Interesting to see these rolling out faster now.

  148. 148
    BirdsofpreyRcool Says:

    IG 260 bps.

  149. 149
    tater Says:

    XOM – 200 MA is just above so watch for a pull back there


  150. 150
    zman Says:

    Thanks T! I’d be pretty happy with $82.

  151. 151
    zman Says:

    CNBC saying White House not happy with auto bailout bill just as the Dems are sending it over.

  152. 152
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