Tuesday Morning – Optimism Dares To Hold On Another Day

Posted on by zman

 Kind of a busy post and I won't delay in getting it out as we are getting a bit of lightning at ZEB headquarters.

 

In Today's Post

  1. Holdings Watch
  2. Commodity Watch
  3. Crack Spread Update - ugly, sort of like SUN here.
  4. Stuff We Care About Today - XCO hits big, big, big Haynesville well, OIH thoughts.
  5. Odds & Ends

Holdings Watch: No changes yesterday.

Commodity Watch:

Crude oil closed up $2.90 to $43.71 on the back of the OPEC president's week end cuts referring to the next OPEC production cut as potentially "severe". A strong equity market did not hurt crude's rally either. This morning crude is trading off slightly as the one day reprieve yesterday is countered by a chorus of voices callling oil lower this morning from trader to reporter to fund manager. The dollar getting a bit of bounce isn't helping either. By the way, the dollar looks increasingly stalled to me and its retreat could lend crude its biggest pillar of support.

  • OPEC Watch: Saudi Arabia, which has said it is seeking a $75 price for a barrel of oil, told oil refiners in Asia it would deepen supply cuts to as much as 10% of contracted volumes in January versus a 5% cut in December. At present, Saudi is thought to running 7% over its current quota.
  • TNK-BP - Cutting Budget. Big Russian oil producer (572 million barrels produced last year or nearly 1.6 mm bopd) cutting budget for 2009 by 0.5 to $1.0 B to a level of $3 to $3.5 billion. You have to start wondering when cuts tip from growth to just replacing production.

 

Natural gas fell $0.18 to close at $5.66 yesterday. The dip ran counter to oil and was attributable to the second bullet point below. Any near term rally in gas futures will be limited in scale and more dependent on sustained cold temps. This morning gas is trading up slightly.

  • Imports: LNG remained flat with year ago levels at 0.7 Bcfgpd, while Canada came in 0.1 Bcfgpd light to year ago levels. Imports were also flat with the prior week.
  • Industrial Demand: Chemicals pressure gas prices. Dow Chemical is trimming production in the face of tough times and will shutter 20 plants and temporarily idle another 180. No word on which plants or what they produce so its pretty hard to gauge the kind of lost natural gas we are talking about here. As a whole, the Chemicals component of Industrial natural gas demand accounts for roughly 5 Bcfgpd of demand. This could be 20% to 25% of that number.

Crack Spread Update. Just when you think they can't get any worse, they do. The following shows the combined gasoline and diesel cracks by region as they spiral lower into the close of the year. While these cracks look awful, consider that gasoline cracks are now negative in all regions of the country save the East Coast where they are running a paltry $1.39 per Barrel. This simply can't continue.


Refiner Multiples. On the whole estimates are still trickling lower week after week after week. The only stock in the group holding its own and actually seeing some minor positive revisions in all three years is (SUN), again where both diesel and gasoline cracks have remained positive. I' ve been commenting positively about these guys as the only one I'd take on were I to go long the group every time I see a bigger than expected draw down of distilllate inventories. I may take a trade there this week depending what expectations look like for distillate inventories on Wednesday (should see the latest on those numbers sometime this morning). The (SUN) doesn't look altogether horrible either. 

Stuff We Care About Today

CHK Follow Up. In a nutshell, yesterday's PR and conference call we everything the Street was looking for dispelling rumors, getting conservative and basically haranging the shorts. Tudor Pickering, Howard Weil, and JP Morgan must have felt the same as they upgrade their ratings either before the call or during it. Yesterday's piece of the post has been added to the CHK notes link on the ZEB Reports tab.

XCO Lands Whopper Haynesville Well

  • IP of 22.9 MMcfgpd, is the largest initial production from a horizontal well in the Haynesville Shale I've heard of today. It's also the single largest well in XCO company history.
  • After five days of production, the last 24 hour average was 22.5 MMcfgpd
  • This was a pretty good lateral length (4,481 feet) with a massive 3.2 mm pound 9 stage frac job so probably pretty darn expensive for their first well here the economics, though not disclosed in the press release should still be very attractive as I'd bet this is a 10 Bcfe plus well. This is 100% working interest /  75% net revenue interest. 
  • They have 2 more operated and 2 non-operated horizontal wells drilling now and plan to drill 25+ in 2009.
  •  What has held me and the market back from the name? $2.9 billion in debt (net debt to total cap of just over 50%), and even at yesterday's close of $6.38 the stock is still valued at $1.76 per Mcfe on its proved reserves. Six months ago that would have been low but its now a premium to their E&P peers.
  • There have been repeated rumors of an LBO and this first big Haynesville well will likely fuel the rumor fire as they had 120,000 net acres across a broad swath of the Haynesville play at last notice. See slide 11 of their last presentation.
  • I think its worth a trade and will watch it post open to that effect.

Oil Service Thoughts:

  1. Onshore drillers and oil service names - probably approaching a point where the expectation of an 800 rig count drop is priced into the shares if not yet into the 2009 EPS estimes. This time of year the service guys will be compiling their spread sheets on E&P 2009 capital spending. That's not going to be a pretty number relative to 2008. Also, as the year starts anew with lower capital spending numbers in hand at the E&Ps, look for further service pricing pressure. These two factors will likely put one last kybosh on oil service sentiment into year end and early January. Then it will be time to bottom fish.
  2. Deepwater Focused Drillers (DO, RIG, NE) - I still like them. Estimates are off slightly but most of that is tweaks for unexpected service yard time or new rig delivery delays. The momentum for the deepwater contracts appears to have slowed but not rolled over and we have not seen the massive contract cancellations that many people had been fearful of or in the case of the shorts, spreading rumors about. In the end, contracts are pretty tough to break and even harder to do so without large penalties. 

OIH Multiple: Estimates going lower.

Odds & Ends

Analyst Watch: I'll add this in the comments section.

103 thoughts on “Tuesday Morning – Optimism Dares To Hold On Another Day”

  4. bond market slightly better this morning, as the TRB Ch11 filing was much anticipated. I am going to post two indices for the next month or so. The first is the Investment Grade (IG) that we have been following. The second is the High Yield index. The HY index is the most sensitive to flows into (and out of) the bond market, so it will be our best indicator on when investors come back. The tricky thing is that IG is quoted in spread (wider, higher = bad) but HY is quoted in price (higher = good, like a stock price). Bond mrkt people are highly segmented… each mrkt has their own way of looking at things.

    IG 258 -2bps
    HY 74 5/16

    at their worst (just last week), IG was 292 and HY was around 68. So, HY has rallied nicely off the bottom. Still, “normal” in this economic environment should be closer to 90 for HY and 175 for IG

  5. Bird – any thoughts on the couple of bond deals that went yesterday. Not necesarily the FDIC backed stuff but there were a couple of others. Gen Dyn, Shell (i think)?

  8. Reef – no kidding. Those are some shocking big wells at HK.

    What happened to the broad market? I stepped out for coffee a couple of hours back and everything looked greenish.

  13. 1520 – both GD (A) and Shell (AA+) are pretty highly-rated. That said, Shell had to pay +325 bps to the 30 yr to get the deal done. There is really no circumstance (other than global thermo-nuclear war) that would prevent the likes of a Shell placing debt. That said, it’s the largest bond offering that Shell has even done at $2.75B and they termed it out 30 yrs. So, Shell must think it’s a pretty good absolute rate, as 30-yr treasury yields are so low.

    We continue to see a lot of issuance under the FDIC-backed program. This is no surprise.

    In a real test of the credit markets, El Paso announced a $500mm Senior Note offering this morning. This is a big deal as it’s the FIRST junk bond deal since October. It’s pretty conservative for a junk bond, only 5 yr maturity, BB+ rated (highest end of junk), but it will be a good test of the credit waters. Watch for this deal getting done. It will serve as a good data point for us.

  15. Of note, it’s counter-intuitive… but in high yield, the bigger the bond offering, the better it is received (to a point, of course). So, the fact that EP is trying to place $500mm is not remarkable… if they get it done and at what spreads will be what we are looking for.

  16. ZTRADE: Regular account.

    Added HK $15 December calls (HKLC) for $2 on this morning’s strong well news in the Haynesville Shale. 6 months ago, news of wells this size would have sent the shares up $10. I added with the stock up struggling to rise $2.

  17. Reef – yeah, looks like it. If the EUR is anything like linear to the IP then these are some big, big wells. If this becomes the norm there will be a 2 to 3 year problem for natural gas prices. I look at those wells and I think sub $1 F&D and a target on the small end of a Gulf Coast exploration well target just 2 years ago. Wow. Game changer.

  18. Putting today’s HK well news in perspective with their guidance:

    3Q production: 315 MMcfepd
    4Q guidance: 355 to 365 MMcfepd

    Today’s 3 wells add about 48 MMcfepd initially after royalties and have that after their first 3 months considering the usual declines.

    So 315 less declines plus say 20 or so for these wells which came on late in the quarter so this doesn’t necessarily insure the quarter by themselves. However, they’d already modeled a good ramp in and nothing like these wells was in the mix. So look for stronger than expected guidance for 2009 (had been 25 to 35% and though I bet they leave it alone, it will become an easier beat with this kind of performance).

  19. For you natural gas fans, this is more bad news for prices. Not only are we shifting rigs to a higher IRR play but man oh man is it beating the pants off what the rigs were producing before. So an 800 rig drop is not going to have the same impact it would have 2 year ago. I think this is what Reef was essentially saying in #3.

    Nice to see a sea of green in energy now with the market still off 100 on the down and 5 on the S&P.

  21. Z,

    My first post here. I have enjoyed your stuff over the past few months. I think you might be overestimating the impact of the Haynesville since according to CHK it appears that they are producing about 100 mmcf/d and HK appears is producing about the same. Also, with Barnett in decline given that every large operator there is dropping rigs like crazy and every single large E&P hammering their 2009 capex I do not see how ~4 bcf/d does not come out of the system by mid-2009? Could you be generous ehough to share your thoughts on where the gas will come from given the decline in drilling? Thanks Bill

  24. Bill – I have held off on being overly generous with assumptions on the H.S. until today’s news.

    CHK’s wells have IP’d around 10 to 12 mm/d pretty consistantly. Same for PVA.

    HK has been in the teens to low 20s and I thought they were in a sweet spot but the wells stretch across a distance of over 30 miles in a straight line, have not yet plotted these.

    Now XCO in Desoto with another 20.

    On the Barnett, not sure when it rolls but I think its more of a 2010 event. Depends on who you listen to. CHK says they will grow it in 2009 and they are big there. DVN I’ve not heard from lately. EOG says their production will fall in 2H09.

    Anyway, infrastructure build out will be key but there is excess capacity now. Just thinking that within 3 years time the Louisiana gas production profile could look more like a smaller version of the Texas hockey stick we’ve seen. With demand lower this will likely put a lid on gas price rallies or at least the sustainability of them. Not saying gas is toast but this is pretty troublesome having a resource play score wells that look like what you get with exploration type risk…without that risk.

  25. Getting some follow through for CHK too. Nice.

    Reef. I tried and failed to get some.

    GDP probably going to rock on the potential again.

  26. Bill/Sportlock- I need to update my Barnett county study and will do that and get back to this in a separate post. Don’t wait more months to ask a question. I realized my tone in the gas comment I initially made was a little over-doomish upon looking back at it.

  27. Now if only someone would drill some bigger Bakken wells to reignite that group of names. BEXP has been trying to lift itself from the ashes for the last 2 days.

  28. z – it appears that the Haynesville is an amazing game-changer. I guess the next milestone will be what the decline curves look like. But, someone like SD (who has exploration risk) has got to suffer in comparision to the CRK, CHK, XCO, GDP’s etc of the world.

    If oil climbs back over $50, but nat gas stays sub-$6, who is going to benefit the most from this? The APD, TRA, CPNs of the world? Also, WG… with the continued need for pipelines.

  30. BOP – they think those decline curves are of the 80% first year variety.

    I think if gas stops going down and oil climbs to $50 plus then the E&Ps will benefit as a group on stock price action as their correlations are pretty tight. I prefer the liquid, non-indebted names as you know but they will all move. Who benefits financially the most would be the hedged gas and unhedged on oil names…not sure who that is off the top of my head. Definitely the pipeline guys, maybe the midstream outfits too if stripping becomes more of a viable option again.

  31. Actually, EOG fits that bill nicely as they have gas hedges but none on oil. Papa was just acting disgusted with himself last week over the fact that he gloated about big Bakken production and no oil hedges months ago and now oil prices have tanked.

  33. CPE: Callon Petroleum: Color on Stock Action
    2008-12-09 15:51:50.840 GMT

    [ Live In Play]

    CPE: Callon Petroleum: Color on Stock Action (2.23 +0.72)

    Shares of Callon Petroleum (CPE) are currentlt trading higher by approx 46.4% following an operations update that was provided before the open. In the press release, the company stated that after previously being shut-in due to third-party downstream transmission line and processing facility damage caused by Hurricanes Gustav and Ike, production has resumed at most of its significant facilities located in the Gulf of Mexico. The company expects remaining shelf facilities, which are shut-in, to be online within the next several weeks. This should bring the daily production rate to approx38 MMcfe\d which equals the company’s pre-hurricane rate. The company reaffirmed its previously issued guidance for the year of 31-35 MMcfe\d. Also, the company stated that Crude oil and natural gas hedges have current cash value in excess of $20 mln.

    Briefing.com, Inc.

  34. CPE – They are one to benefit from higher oil prices when they occur as well as it will trigger a restart at entrada development.

    Oil just rolled red again. Not a lot of conviction in the press and trading community that OPEC will announce a big enough cut next week. Personally, I think OPEC is going to get tricky (bigger, maybe with friends) with the cut.

  35. HK – they may be able to announce another 2 Eagle Ford shale wells prior to year end. I know they are completing or completed on the second well and drilling a third. Just can’t see how that play is in the stock at all right now.

  36. Z,

    I normally go by Bill but I signed up with the sportlock screen name. I did enjoy your Barnett post a month and look forward to an update. The numbers I have be seing shows that with the Fayetteville at ~800 mmcf/d the the Woodford at ~300 the Marcellus at ~150 mmcf/d and the HS at ~300 mmcf/d and the Barnett declining (I do not believe AM’s version of things) it looks like we will only have marginal net production growth from these four plays in 2009. Also, I cannot see how anything works under $7.50 except the core of the core in the Barnett and HS. Just thought I would expand my thoughts…..

  37. Bill – I see 0 growth out of the Rockies, flattish to maybe slight down in Texas next year, down Oklahoma, up big Haynseville (I know, not very precise that), and Appalachia I’m not expecting much out of. Fayetteville will probably inch up in early year as some shut in wells get debottlenecked but then yeah, I agree with your comment, why bust yourself drilling over $6 wellhead there?

  38. GMXR speaks at Southcoast energy conf at 3:20 EST today.

    If anybody has a link to the conference attendees I’d be grateful.

  39. Libya said to be interested in taking a 10% stake ($12 billion) in E. Actually came out of the weekend. Anyway, second big NOC deal with China looking to put $10B to work in PBR yesterday in the form of a loan. Sort of interesting, not sure how to play it although it seems that foreign governments are seeing an opportunity to scarf up cheap assets.

  43. Ok, I’m going to shut up for awhile. Market feels dead. If the broader group goes green I’d look for energy to really scream. Lot of bottom fishing going on and the volumes are really not that light as the news on CHK, HK, XCO is helping to get a little interest going in all the other players.

  44. First day in a long time that stock/credit/treasuries are all basically unchanged (anything less than 200 points on the Dow is the new “unchanged”). So, this makes sense. Sense is good. Sense needs to creep back into the market.

    IG 260

  45. PBR on the tape saying their giant Tupi discovery (sub salt) may work at $40 oil. That’s pretty hard to believe given the infrastructure requirements and massive drilling costs. Maybe they mean if deepwater rates fall from $600 to $300 kpd.

  46. Phil Flynn on natural gas prices right now:

    “If you’ve got Dow Chemical shutting all these plants, it’s definitely going to play into the bearish psychology of the market here a little bit,” Flynn said.

    He’s not wrong but you have to love the level of detail involved in the proclamation.

  47. NG just popped a dime to barely go green. At some point people have to say enough is enough. The bearish stuff is already in the number. People will only produce at a loss for so long and lots of people around the country, especially in the mid continent and in the Rockies are producing at a loss right now.

  51. Credit Suisse on the tape cutting price target on CHK from $31 to $20. His gas price deck for 2009 is $8.25 so the price target makes absolutely no sense to me. If someone has that text I’d like to read it.

  52. EL- D. I need to compile a list of those ETF’s and put them on the screens tab, especially ones like that that are priced like an option themselves.

  53. Ok, got the CS piece. They just made my stupid spineless analyst list.

    They are calling NAV $29 on a long term natural gas price of $9 and then taking a 30% discount to that to come up with their $20 target. How they can come up with a net asset value that low on 12 Tcfe of reserves is simply beyond me. Forget the 2P and 3P reserves and acreage and midstream and the value of the carries from their JVs. As I read on their NAV is a proven only NAV and they actually value the company as it stands today, unproved reserves, debt and all at $55 per share. But they simply don’t use that figure. Unreal. Furthermore, they say CHK did everything people wanted them to do yet remain neutral despite the fact that by their own admission CHK is trading at a steeper discount to their NAV than the other E&Ps and has over 33% upside to their target (something we in the business refer to as a Buy unless you don’t like making 33% on your money in this market). Great job guys, why bother coming to work at all.

    They freely model out EBITDA and CF growth next year say the stock should be trading at under 2x cash flow. In what world would that be? Their deck for next year is $8.25. Just nonsense.

  55. Thanks guys! I got the report from 3 of you while I was typing 53. Sorry for the rant there but the complacent analyst in this market is a coward in my book. Get off the pot.

  56. There used to be an online depository for most of the major research houses reports called “multex”. Is it still around and in what form?

  57. Managed to book a miniscule profit for the UNG calls from yesterday. Feels lucky to get out of it whole. But OTOH, with NG up *after* the DOW news and the monster well news, is it telling us something? Hmmm.

  59. El-D – I remember Multex from way back, it had several of the smaller and mid sized houses’ research on it. Have not seen them about in awhile.

    Dman – the indicator for a turn should be when you see me go bearish.

    Ram – good morning, how so?

  63. You have no ax to grind – yet. You call them as you see them by the numbers and only numbers.

  64. Buyside was fun, investment banking was not and I like to sleep sometimes, Sellside was educational at first and later too … constrictive. I like the Myside I work for now.

  65. Some of the analysts probably don’t understand the price either but trust the market more than aubrey at this point

    What do you think about aubreys claim that CHK will have CFPS ~6.50 at $4 NG for 2009? that doesn’t seem to add up if you factor in that all the knockouts for 09 would trigger and they’d owe a good amount on the written puts.

  66. Gaam – I think the number works. If the knockouts are in the tail of the year as they say then they probably don’t get triggered, even if the average for the year is $4.50. Prices that low would cause production to fall off a cliff later in the year and run up of $1.50 to $2.00 per Mcf into year end making the knockouts a non-event. Even if they are triggered they are only for 9% of total expected gas production so I don’t think he’d be far off the mark. I’ll run it through a simple model to check in the next day or so but I think its fair.

    Here ya on the trust issue. He has told them all more than once that he’s switching from acquire to exploit mode and then along came the Barnett or along came the Haynesville and there we go spending dough. So that I understand. But the basic value equation is still there and the stock has been discounting a firesale of assets that was never in the cards. He said time and time again they can cut rigs back if prices get weaker and that’s what they’ve done. Moreover, they can cut again and still get a majority of their Haynesville leasehold into HBP status within 3 years.

  68. 3-month US T-bills are trading at a NEGATIVE rate of 0.01%

    So, the US govt is being PAID to issue debt. And people think credit is getting back to normal? No way. No how. Not yet.

  69. BOP – What do you make of the Treasury selling $32B in 4 week Tbills for 0% yield and the fact that $128B was chasing that opportunity?

  71. ram – this is the kind of “history in the making” that I would prefer not to see. The petrifying “fear of risk” is still dominating the bond markets. Amazing stuff.

  72. OK it is time for me to rant a little. I really don’t know what most investor use for brains. If you just sit back with a little perspective, you just have to own hard assets: oil, gas, fertilizers, wheat, etc. Why they are beaten down so much is beyond me. With all the priming that has been done world wide, we should have the mother of all inflation sometime in the next two years.So why wouldn’t you want to own hard assets now. All it takes is thinking beyond yesterday.

  74. on the CHK trust issue it seems clear that the marketplace doesn’t believe in the basic value equation that Aubrey is laying out.

    I have no idea why or who to believe but betting on management to be right in these types of scenarios doesn’t usually work out.

    also does prices going to sub economic levels ensure production will fall off a cliff? the refiners would beg to differ!

  76. G – good question re the production. It will continue at sub-economic levels albeit with some production curtailments. The main thing that happens is declines are allowed to run wild as capex gets scaled back to reserve maintenance levels. The U.S. natural gas production base will decline about 38% annually without adding new reserves, performing workovers, etc. Much worse for the shales.

  79. Bird – got a read on the last hour from your desk. I’m thinking rebound which if it happens when send the energy groups to close on their HOD. Just starting to think about taking some hits on December positions.

  82. z – trading desk thought we see the high for the day early… drift a bit, then sell off into the close. i should have posted that earlier. so far, they are right… again.

  83. z – i didn’t post that comment earlier b/c they didn’t have a lot of conviction behind the forecast. i’ll see if they are thinking anything different here, for the last hr

  85. ok. fresh read. the low for the day was predicted for 2:10pm EST. The low occurred a bit after that. They are thinking we could close above 900 on SPX… but the only thing they will commit to is that we saw the low already. Doesn’t mean we don’t go up… but not calling for an EOD rally either. That said, they think we end this week higher from here.

    just passing along professional trading desk comments.

  87. desk thinking 898.50 level on SPX should be a test. if we get thru that, could have an EOD rally.

    just passing along comments.

  88. (by the way, an end-of-day rally doesn’t mean we go green… just higher than the lows of the day)

  89. WSJ – Oversight Panel to release critical report of Treasury’s TARP; report raises questions about Treasury’s strategy, TARP’s effectiveness.

    that headline didn’t help… could lead to (yet another) change of direction

  92. Had to thump my screen to make sure it was on. Sluggish trading. Good to see almost all green despite the market and oil (which was really just the market).

    FSLR getting hosed continually today. You’d think and Obama/Gore meet and greet would be good for the king of the solar stocks but not today.

  93. Global Insight projecting 112 Bcf withdrawal this Thursday. Um, seems high, again. Haven’t run all my numbers but the Street got it wrong last week and this seems like a bit of an outlier number. Hopefully the Street average will be lower, otherwise could set up another “disappointing” number.

  94. I show no ratings changes or notes, comments re XCO and HK. Send em if you got them, just curious to gauge the reaction of the darkside.

  96. MasterCard Spending Pulse survey shows gasoline demand UP year over year. First time since April. I knew I could count on the U.S. driver to lead foot it around looking for bargains, jobs, and whatnot.

    The survey indicated demand rose a whopping 0.3% from the comparable week last year.

  101. V – I’ve always liked those guys, never truly dove into knowing the company. Buying back shares and building cash…two things people like to see right now. The guidance on 2009 of 10% looks to be coming a third to half from Gomex production shuttered by Ike/Gustav that comes back next year (20,000 bopd they said which is a big hit). Anyway, maybe I’ll have a listen to their call.

  102. Z,

    I am doing a small study on tired old resource plays and found some interesting data on the EIA website regarding New Mexico NG production. Seems to me the San Juan was the grandaddy of them all before the Barnett came along. Looks like the field is in terminal decline despite contributions from the Lewis Shale. I have been having trouble finding information on production out of the Antrim. Since there is either 1 or 0 rigs in Michigan running I do not think there is much going on… Do you have any sources on Antrim production or Michigan in general? I have attached the link for the NM data.

    Thanks

    Bill

    http://tonto.eia.doe.gov/dnav/ng/hist/n9050nm2m.htm

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