Friday – Day 1, 2009


This is likely to be another slow day for the market and I plan to save my truly ground breaking work for next week and afterword. First, a look back at the year that was with brief comments:

2008 Was ...

1) ... A Bad Year For Equities. I know, I know... dub. But it was bad for the broad indexes on a very similar basis for energy and non-energy names. Despite having strong fundamentals than the broad markets the Majors and E&P stocks fell roughly as much as the Dow and S&P. Service vastly underperformed and while I've been staying away from most service names and I believe this area will continue to suffer losses as rig counts decline into decade low low levels by early 2Q09, they will probably have a pretty good back half of 2009, especially the deepwater names. 

2) ... Oil's Worst Year Ever. After hitting an all time high mid year oil has not been able to gain much traction unless you count the last week of 2008. 2009 will likely be better. If the global economy stabilizes. To that end, refining cracks will need to improve or the U.S. refiners, and I'm thinking of the mid cap and smaller independent ones here (so everyone on the usual list but VLO and SU could be in for consolidation (very doubtful in the first half) or bankruptcy.

  • Prediction for prices? I hate these as they depend on so many variables and I take in fresh variables daily that add to my thoughts but if I had to guess now I'd say average price for crude of $60 with a year end price of $70 to $80. Higher than current levels of

3) ... Not Too Great For Natural Gas Either. Natural gas suffered first from fear of too much supply and then from a broad based decline in industrial activity. Lower 48 U.S. natural gas production probably grew 7% (excluding the impact of hurricanes Gustav and Ike)  in 2008 which is an unprecedented amount. Past years have seen gas growth close to flat with individual years growing or receding by 1 to 2%. So 2007 and 2008 were outliers brought about by accelerated activity in shale plays. Much of this growth comes from wells which decline at a rate of 80% (or more) in the first year so the only way to get growth each year is to drill more wells, and for that, you have to have gas prices that support level of activity or projects start getting shelved in order of lowest to higher IRR. Gas itself appears to be basing in a range of $5 to $6.25 now but the outcome of January weather will have the first shot at price determination early in the year (very cold = $6.50, very warm = $5) before a decline rig count (see next bullet) can start shoving natural gas production down in the really high decline rate plays.

  • Prediction for price?: Average $6 to $7 with a close of 2009 closer to $9.
  • Prediction of supply growth for 2009: 1 to 2%.

4) ...Busy, Busy, Busy for Rig Operators; 2009 Will Be Less So. New shale plays seemed to spring forth each month and while prices were high, operators dusted off old rigs and had new ones built at pace not seen in a decade as capital discipline was replaced with initial production exuberance. But once prices had peaked and quickly tumbled and the financial markets made borrowing to bridge the gap between capex and cash flow exceedingly painful, operators were forced to cut back on their plans and started laying off rigs left and right, especially as the fourth quarter drew to a close. Now this is mostly a gas rig phenomenon and the numbers in the table don't really do what's going on justice so let me insert a chart here:

  • Prediction for rigs:
    • Gas rigs ultimately fall to around 1,000 by late 1Q, early 2Q.
    • Horizontal rigs: down 50 more from current levels for the year's average of 540 or so. Fund managers will watch for this as a sign that gas supplies don't get too out of hand as the prolific plays are mostly being tapped horizontally
    • Prices will fall.

5) ...Speculator Heaven Until They Got The Wrap For High Commodity Prices And Abandoned Ship. I have a problem with blaming everything on buyers who provide liquidity because you don't like what they buy. If a group of traders bought cars and drove up the price of cars to the benefit of the Big 3 Congress would pin a medal on them. Anyway, while there were some speculative excesses, the sell down of crude that came with a sputtering of the global economy has resulted in literally dozens of delayed large scale oil development projects and countless smaller ones. Also, in the case of natural gas, speculators were short natural gas all year and yet gas rose at high as the mid $13s before tumbling back to earth. The net short position for natural gas is actually at one of its lowest points in the last year.


6) ... A Pretty Normal Year For Peak Gas In Underground Storage. At present, gas in storage is 2.3% below year ago levels (yep, despite all that extra production) and only 2% above the 5 year average for this time of the year. I don't expect the falling rig count to show up in the weekly numbers until March and not in the monthly supply numbers (which are released 2 months after the fact) until April. I do expect a slightly bigger year for LNG imports in 2009 as new supply comes on line but for continued declines from Canadian imports with the effect of imports being flat to slightly higher next year, probably not a supply / demand buster. 

7) ... A Wild and Nonsensical Year For Coal. Just pointing out that while coal pretty much ended the year where it started with both U.S. western and eastern coals actually up 8% YoY, the coal companies got literally slaughtered falling 64%. KOL, the coal ETF, is a rather imperfect way of looking at the group as it contains both suppliers and consumers of various coals but taking a look at the performances of the big U.S. coal miners ACI, BTU, MEE (down 64%, 63%, 61% respectively) confirms a lousy year for the group. Note how close all three of those coals are down pretty much the same amount? Not a lot of though going into stock prices there right now. While steel production is weak at present and while electricity demand is off 1 year to date, the drop in the miners is, in my opinion (which everything around here generally is unless otherwise noted), unwarranted.

8.) ... A Bad Time For Green Energy If Not For Green Rhetoric. This one kills me. Obama wins, talks of 2 to 2.5 million "green collar" jobs and oodles of green for the makers of anything, well, green, and the group falls out of bed because oil did. As the sun shall rise again, so shall the solars. 2009 may not be the best year for them, at least the first half anyway, as global capacity is seen exceeding global demand due to the weak global economy by about 20%. My thought is to go with the low cost producer and the one landing the utility contracts as they are forced to augement their generation capacity with green energy (by the way, that would be FSLR).

9) ...And An Unbelievably Poor Time for Shipping Things Around The Globe. Like oil, dry bulk rates went from all time highs to long term lows. Unlike oil, they really fell apart crashing to levels that are below the cost of operating a ship on a daily basis. When the economy recovers so will these guys. I will be taking a look at whose balance sheet and contract vs spot status put them in the best position for the rebound (and no, its not DRYS I'm thinking of).


Other Stuff We Care About Today:

Commodity Watch:

  • Crude rallied sharply Wednesday closing up $5.57 at $44.60 on a bit of late year short covering that got out of control after a slightly bullish set of oil numbers (gasoline and distillate inventories grew at a slower rate than expected) and stocks of crude at Cushing fell as well. This morning crude is giving back $2 of Wednesday's gain as traders take short term profits and the dollar puts on a 1% rally.
    • OPEC Watch: Angola took over as head of OPEC yesterday (OPEC rotates the presidency on something like an annual basis). They are a growing African producer (unlike Nigeria) and new to the Cartel as of Jan. 1 2007 so look for their voice to be somewhat more moderate than recent group pronunciations as they may be likely to look out for number 1 more than they do for the Cartel. The real power still rests with Saudi but this could mean we hear less talk prior to actionable meetings out of the group.
    • Russia Watch: 2008 production fell 0.9%, the first annual drop in a decade. Get used to it. This is the world's second largest oil producer starting to roll over due to natural declines and a lack of enough spending.


  • Natural gas fell 24 cents to end the year at $5.60  after a slightly disappointing gas storage number was released mid day Wednesday. I say slightly disappointment because it was a holiday week in a weak economic setting and the miss was indeed slight. Gas is off a dime this morning. 
    • Russia to Ukraine: Happy New Year, No Gas For You. Unable to come to terms over a debt of as much as $2 billion Ukraine owes to Russian, Medeyev/Putin turned off the pipes during the dead of winter providing heat for a majority of that country and 1/5 of the gas supply to Europe. Russia also increased supplies via alternate routes to Europe but Western Europe pointed out that they have adequate storage of gas to withstand "days but not weeks" of disruptions. Maybe a slight boost here for LNG prices and therefore a very slight boost for U.S. gas prices.


 VLO Announces Reduced Capacity Due To Weak Gasoline Margins.  Valero says it downed fluid catalytic crackers at St Charles and Corpus Christi "indefinitely" due to weak margins. Price takes care of price.


I'll go back to the usual format next week. At that time look for a multiples table tab on the many energy sub sectors we follow around so that I can better keep track of estimate movements within individual groups.

Odds & Ends

Analyst Watch: (SUN) goes from Buy to Hold at Soleil, Piper cuts (CSIQ) to sell, and (ESLR) pick up at Buy at Stanford Research.




95 Responses to “Friday – Day 1, 2009”

  1. 1
    zman Says:

    Strong pre market rally off the lows in crude. Down $3 at one point overnight and $2 less than 30 minutes ago, crude now down 40 cents. Seems to be some appetite on the long side even after Wednesday’s 14% rally.

  2. 2
    tater Says:

    Looks like you didn’t watch much football yesterday. I took some time to go back over the USO in an attempt to get a better understanding of its trading.


  3. 3
    zman Says:

    Watched the USC game and that’s 3 hours of my life I won’t be getting back. My local team had Damion Williams but wouldn’t play him as a freshman so he left. Nice job there.

    Oil green now.

    Feds propose hiking gasoline and distillate taxes by 50% to cover cost of roads because people are not buying enough gasoline.

    Hmmmm. Gasoline has about 18 cents of taxes on it. At $1.50 per gallon that’s 12% and if you up it by 50% that’s another 9 cents. So say gasoline goes up by only the 9 cents, fed taxes would be 27 cents and 17% goes to Fed taxes. That’s equal to the percent of COSTS and PROFITS of the refining industry. Last summer Congress was demanding lower prices and looking into price gouging. I suggest they look at themselves next time prices rise.

  4. 4
    zman Says:

    Woops, nevermind oil green, now off 80 cents in the time it took me to type that last bit. Pretty wild trading.

  5. 5
    Dman Says:

    USO chart looks promising for 1st time in a while. My unreliable volume numbers say that USO had record volume on the 31st at 47.8 million (Z can you confirm?).

    Would think today saw some profit-taking & maybe shorting after the 14% jump, only to see technical traders jump in on the long side. Hoping for a bit of a dip to get back in (but when is hope rewarded?)

  6. 6
    zman Says:

    Morning D. I show 48.8 mm shares on Wed.

    Group uniformly higher, I don’t the energy stocks need a rebound now in oil, just a discontinuation of the plunge. Oil prices will likely go back to keying off ugly data for the next few weeks with short stints of paying attention to OPEC and geo-political.

    Thanks Tater for the USO chart. Another interesting chart for today which I know is a wild one: FSLR.

  7. 7
    Dman Says:

    On the intraday chart, USO has acquired something that looks a bit like a “cup-and-handle” pattern, only this particular cup is designed for aliens … or something … but still that might be good enough.

  8. 8
    Dman Says:

    #6 Yep, stocks rising on the “what, oil not going to zero after all?” effect.

  9. 9
    zman Says:

    and at 30 minutes into the trading day, volumes are below the usual opening trade level except for CHK which seems to be getting a little more interest.

  10. 10
    elduque Says:

    Have you written anything on KWK?


  11. 11
    zman Says:

    Just the odd blurb on KWK now and again. Like them a lot with higher oil prices (better frac spreads) but for now it seems like one that has a lot of debt for this environment (not a debt service problem mind you). I have not really torn apart their hedges and debt schedule or their current plans in some time though.

  12. 12
    Dman Says:

    FSLR chart: I think that’s called a Dr Zeuss flag formation …whatever it is, it looks positive & traders are playing.

  13. 13
    gaamblor Says:

    Z, what was the gasoline demand number and yoy change last week?

  14. 14
    zman Says:

    9.1 mm barrels, slight uptick from the prior week and off 2% from year ago levels.

  15. 15
    zman Says:

    Yep, the FSLR is a wild one, when they like it, they really like it and vice versa.

  16. 16
    elduque Says:

    re 11- one thing that is pretty evident re hedges and debt schedule, that is one thing the market participants don’t do either. A good example being CHK or SD for that matter.

  17. 17
    zman Says:

    El-d. Agreed. They won’t get granular on the group until oil and natural gas and the financial markets stabilize for awhile.

  18. 18
    Nicky Says:

    Good morning all.

    Indices still looking corrective to the upside – looks like it could be an ending diagonal. SPX has resistance at 915 initially.

    Oil – still think we are in wave 4. I was leaning towards us completing wave C on wednesday (of an abc) but it may have only been 3 of C and we could have seen 4 of C this morning and now be in 5 of C up. If correct 5 down will follow.

  19. 19
    zman Says:

    Oil going positive again.

    Coal stocks rallying hard. I’m going to wait until next week to start my buying as this all seems a little too convenient given the lack of financial data available this week.

    Morning Nicky, S&P testing that 915 level now.

  20. 20
    Wyoming Says:

    Good weekend and Happy New Year to all, time to head home.

  21. 21
    Pete Says:


    Is CLR about the best bet on oil if you believe the price will rise and if so does it afford leverage too?

  22. 22
    zman Says:

    Same to Wyo – I’ve got two eyes on this little rally but probably not all day. Nice moves in SU but not really outperforming there.

    The Haynesville player list is outperforming but just barely. Service seems to be the flavor of the day, up 6% on average, as everyone noted how much they were down in 2008 (see table above) relative to the rest of the equity markets.

    Pete – I’m liking SU, CLR, and even EOG as a play on oil. The last 2 are unhedged as to oil volumes. Your riskier plays for oil bounce vs performance in the stocks would be WLL, BEXP, DNR, and BRY. Those last two will start to really jump (at least they should) if oil runs over $50 soon as they are higher cost oil producers.

  23. 23
    pearl1301 Says:

    bought Jan31 puts on USO as a flier…uso has had a huge runup..gotta rest sometime next week

  24. 24
    Pete Says:


    What is your take on the price of oil for the next 30 day. thanks

  25. 25
    Sambone Says:

    Nymex Crude Rises On Russia-Ukraine Gas Spat

    Dow Jones Newswires
    From Market Talk
    Nymex crude claws its way higher, spurred by concerns that Russia’s cutting off natural gas to Ukraine could affect European supplies, says Tom Bentz at BNP Paribas. While gas volumes to Europe are currently normal, any tightening could drive bigger demand for alternatives such as fuel oil, Bentz says, noting that heating oil prices are holding up better than other products. Hopes that OPEC compliance with production cuts will improve are also supporting prices. Nymex Feb crude +37c at $44.97/bbl, Feb heating oil +1.04c at $1.4525/gal.

    Reported Earlier: Oil Down On Profit-taking, Demand Worry
    By Hyun Young Lee


    OTTAWA — Crude oil futures were down Friday, cutting into the end of year gains in the first trading day of 2009.

    Light, sweet crude for February delivery was down 46 cents, or 1%, at $44.14 a barrel on the New York Mercantile Exchange after popping up briefly to $44.71 a barrel. Brent crude on the ICE futures exchange was $1.07 lower at $44.52 a barrel.

    While crude has slipped from Wednesday’s settlement of $44.60 a barrel, it bounced back from the intraday low near $41 as the market opened.

    “There’s an underlying sentiment that we might be close to the bottom,” said Gene McGillian, an analyst at brokerage Tradition Energy in Stamford, Conn. “If the recovery holds, it’s a sign that there are more people willing to take a chance on the long side of the market,” or bets that crude prices will rise.

    While the demand concerns that have plagued the oil market in recent months remain, market participants are more optimistic that the worst may be over. OPEC’s 2.2 million barrel a day production cut — the group’s biggest ever — which came into force Thursday could help shrink the supply overhang, though compliance remains an issue.

    There are also some hopes that the onslaught of bad economic news may be moderating. Wednesday saw better-than-expected data from the U.S. Labor Department, sparking a rally in U.S. equities markets and the oil price.

    “I don’t see anything positive in the next two to four weeks…but we’ve been a bit desensitized to all the bad news,” McGillian said. Traders would likely need to see something out of the ordinary to test the 2008 low of $32.40 a barrel staked out two weeks ago.

    Crude prices plunged nearly 78% from July’s all-time high of $147.27 a barrel to the year’s low, but for those eyeing a move higher, the recovery may already be underway, said Walter Zimmermann, an analyst at ICAP/United Energy in Jersey City, N.J. He sees prices supported at $40.25 a barrel, with key resistance at $46.30 and then $47.45.

    Front-month February reformulated gasoline blendstock, or RBOB, was down 2.58 cents, or 2.4%, to $1.0362 a gallon. February heating oil was down 1.31 cents to $1.4290 a gallon.

    —By Hyun Young Lee, Dow Jones Newswires

  26. 26
    orion Says:

    Z, any thought on CHK, SWN, GMXR besides the nice moves today?

  27. 27
    zman Says:

    Pete – depends a lot on what OPEC does this month and fundamental data out of the U.S. so I’d expect it to be between $35 and $55. I know you can drive a truck through that range or maybe a VLCC but if you are bullish on oil stocks, you really don’t want an unsustainable V back up in prices. I’d like oil to hang out in the $40 to $50 range for the next quarter. The E&P stocks are discounting a price of probably $40 for a 2009 average at this point so as long as we stop the bleed in oil prices, I’m pretty content the stocks can do well here. Unless Asia decides to whither badly now. Stories out this morning showing layoffs in China make the sustainability of this Wed/Fri rally in crude during a holiday week questionable.

  28. 28
    choices Says:

    This rally in energy stks across the board seems very strange to me-it is almost that everyone now believes the decline in oil and gas is over, coal is back in, drillers disregarding drop in rig count. SLB is up very strong. I’m standing here like a deer in the headlights, not willing to buy anything and hold on to SLB.

  29. 29
    zman Says:

    Orion – They are all at low valuations to cash flow and extremely low valuations to reserve value. GMXR will post the strongest growth this year (nearly doubling in terms of unit volumes), then SWN and lastly CHK although it will remain the U.S.’s largest natural gas producer. All three are low cost gas focused producers. They seem due for a bounce and should benefit as rig counts fall in January. Anything more specific you had in mind?

  30. 30
    Pete Says:


    Thanks, seems like playing SU,EOG and CLR is the better play between EOG and CLR which do you favor?

  31. 31
    zman Says:

    Choices = low volume day so the real players are not in, again, calls the move into question, same goes for the broad market indexes in my book. If we get a sustained follow on move next week then I’ll get a little more enthusiastic. We ARE down a lot and A LOT of money has been on the sidelines. Like lemmings, they will follow moves down to far and then back up. If I miss the bottom by 10% I’m more than happy adding. Fundamentals have been out the window for some time now so strength or weakness begets more of each.

    FSLR through $150 now.

    Orion – GDP probably my favorite smaller gassy name for this debt loathing environment, should be in that list above when thinking about gassy stocks on the move. Also, still think HK could be good for Eagle Ford shale news any day.

  32. 32
    VTZ Says:

    Z – RE 27 – I’m with you. I doubt that this rally has little to do with anything other than people who had sold positions for year end. Especially the way the holidays landed with today being the first full day back.

  33. 33
    orion Says:

    Z, thanks, was debating cashing out on a small day trading rise or holding a bit for longer term through early spring.

  34. 34
    zman Says:

    EOG is safer. Both will get recognition for work in the Bakken, but EOG’s is basically a household name, CLR is going to take a good hit on estimates this year, more than EOG anyway. EOG is not oily (about 82% gas production profile) but it is increasing this %. CLR can outperform on a percentage basis but I think that takes continuously up oil move, otherwise, EOG will likely do better from a purely stock performance perspective. EOG is extremely cheap for EOG, I can’t recall seeing them this cheap before on a forward P/CF or TEV/EBITDA basis, not for the consistent management style, long reserve life, giant prospect inventory vehicle that they are.

  35. 35
    VTZ Says:

    I’m sure most people noticed but the whole uranium group is bucking the energy downtrend as well now.


  36. 36
    zman Says:

    V – I didn’t as I just don’t watch them closely at all. Did you notice SU was actually moving up now?

  37. 37
    pearl1301 Says:

    Z – XOM over 80..does this thing have a chance at 85? holding jan85 calls on them.

  38. 38
    VTZ Says:

    Yeah, I think you’re right that SU should outperform nicely around these levels as the oil prices discounted in the group increses. Once there is any momentum back in the group SU will be one of best names to own. COS.UN for people wanting pure oil exposure and a yield.

  39. 39
    zman Says:

    Re XOM – yes, in my book it has more of a chance of a sustainable move than many of the smaller names and it could do that kind of move next week and still be quite cheap.

  40. 40
    zman Says:

    NG up 6% on cold weekend forecast, getting back all of Wednesday’s losses. SWN responding in kind.

  41. 41
    zman Says:

    Those SU calls are up 50%, I’ll hold into early next week.

  42. 42
    zman Says:

    Rig counts released:

    Natural gas rig count down 80, (falling off a cliff)
    oil count down 18,
    horizontal down 27

    Texas lost 54 rigs.

  43. 43
    pearl1301 Says:

    based on those rig counts, are puts on OIH a good play?

  44. 44
    zman Says:

    Pearl – probably although you could go for a bit more of a targeted approach by going after HAL, SLB or any of the land drillers. NBR up 10% today is tempting but the name is already beat up and its one that will do better than the other land drillers given its higher horsepower fleet. If the horizontal rig count continues to fall (not just vertical gas directed rigs) then two things will happen. Drillers like NBR will fall again and gas prices will rise. Some of the drop may be holiday related as well but we are no doubt headed for lower counts through 1Q.

  45. 45
    Dman Says:

    Finally found a good China source:


    … but haven’t had time to wade thru the econo-speak. From a brief look, it seems Prof Pettis is expecting further downward revision of China’s 2009 growth (current estimates seem around the 6% to 7% range).

    Still, from an energy viewpoint, I would think the market (crude, coal) has already priced in the slowdown. Now if China actually contracts instead of slowing down, that might be another matter.

  46. 46
    1520sbroad Says:

    #40 – SWN – i can’t tell you how disappointed i am that the move in SWN happened today instead of wednesday. double damn.

    That rig count is encouraging.

  47. 47
    zman Says:

    USO up 6% with crude up 2%, that’s odd.

  48. 48
    elduque Says:

    Does anybody have a good report on why EV means anything?

  49. 49
    sportlock Says:


    It seems to me that the the “Texas Gas Miracle” which was responsible for nearly all of the gain is about to reverse itself in a big way. With rigs coming out of the Barnett, the Cotton Valley and the Bossier and the WTO I think we will see a much tighter gas market shortly especially since it seemed production was to plateau in October wtih a higher rig count. Your thoughts?



  50. 50
    zman Says:

    EV being what? Enterprise Value?

    Sport – pretty much in line with my thoughts, I see a tighter gas market in 2H09 as TX and Wyoming back off, NM and OK slide and all the little states that were nobodies in terms of gas production five years ago but have come to recent prominence like AR with the Fayetteville see their rig count fall by half. I also expect the top drillers, which are the big cap E&Ps and not the majors, at least onshore to show much greater capital discipline this year. They will not ramp production back up as fast as they are cutting rigs now even if prices go back to $10 more quickly.

  51. 51
    elduque Says:

    yes, enterprise value

  52. 52
    Dman Says:

    Z – USO slipped from + 14% to +10% yesterday between the NYMEX 2.30 close and the 4PM close

  53. 53
    zman Says:

    TEV – total enterprise value gives a better apples to apples comparison of leveraged and unleveraged companies. If two companies have the same level of debt or no debt than either TEV/EBITDA or P/CF is good to make relative comparisons. I prefer P/CF when debt loads are not excessive and when debt is not much of a concern because it closely akin to P/E and fund managers use it when looking at E&P companies. But right now, when times are financially tight, its good to take a look at the whole capital structure against EBITDA, which is the pre-tax, pre intererst, pre depreciation (which is essentially your finding costs) earnings power of the company. Its also good to compare both measures against historic levels for the same company, hence my comment about EOG being cheap for EOG.

  54. 54
    zman Says:

    Thanks D – should have figured it was a holiday related divergence…again.

    Lot of E&P charts looking like the CHK chart. HK, SWN, GMXR, GDP. Just getting back to the top of the base range from early December would mean a large % move for these names over the next couple of weeks.

  55. 55
    italyinvestor Says:

    Z, Thanks for the write-up yesterday. Its going to keep my internet search time down and as a result my wife will be happier.

  56. 56
    zman Says:

    Italy – you give me too much credit, she’s happier because you aren’t dodging bullets these days. Saw earlier 20,000 troops to head to Afghanistan soon.

  57. 57
    elduque Says:

    z if you don’t mind me taking some of your time. EV assumes if I understand it correctly that the market is efficient. I can think of a number of cos. especially in this sector that market value doesn’t even come anywhere near the book value of the company. Why put any store of value on what the market thinks the company is worth?

  58. 58
    Dman Says:

    Z – something I meant to ask: a few days ago you were discussing E&P valuations on a 6/60 price deck for NG/crude. Were these some kind of strip prices that you were referring to?

  59. 59
    Dman Says:

    Z – something I meant to ask: a few days ago you were discussing E&P valuations on a 6/60 price deck for NG/crude. Were these some kind of strip prices that you were referring to? Looks like the current NG strip is just over $6 while crude is at $52. So I wasn’t sure what you had in mind.

  60. 60
    Dman Says:

    Oops sorry about the weird double-post-with-extra-bits

  61. 61
    zman Says:

    E – I use TEV which is market cap + debt less cash and mkt securites. EV is generally mkt cap + debt, either way the market has discounted all of the names severely for low commodity prices but if you look across the table in the Wednesday post you can see that their is a mean of about 4x 2009 numbers, that’s low, with the norm being closer to 5 or 6 and in some cases of long lived assets, higher multiples. If you want to use book or reserve value that’s fine and what a lot of analysts will use in their NAV calcs but NAV only works when their are buyers in the market and we are always discounted to that by 30 or 40% anyway (just historical fact). Then you get into all the differing assumptions you can make about reserves, flat price deck to infinity, escalated deck, future estimated development cost, etc and it will vary from analyst to analyst and manager to manager. EBITDA or Cash Flow is simpler to pin down and since we know historical bounds for multiples of these I go with that first. If the market becomes more functional in terms of M&A activity than I’ll look at some basic NAV math, until then, I look at where everyone stands on P/CF or TEV/EBITDA basis relative to everyone else and then try to see where the estimates are either off from what I’d bet reality will be or where those estimates will move to as prices for commodities and costs for oil services change.

  62. 62
    italyinvestor Says:

    Z – I’m going to take command of a battalion in the 101st Airbone in a few weeks. We’re slated to go to Iraq in 2010 but I think i’ll be heading back to Afghanistan for what will be my fifth trip. I’m going to seriously look into the Afghan citizenship thing this time. I think I have the time in country requirements and it’s the only way I can see making the olympics at my old age :-).

  63. 63
    Sambone Says:

    WASHINGTON, Jan 2 (Reuters) – The U.S. Energy Department
    said on Friday it has issued a solicitation to purchase about
    12 million barrels of oil for the Strategic Petroleum Reserve
    to replace supplies sold following hurricanes Katrina and Rita
    in 2005.
    The department also said it plans to fill the SPR to its
    current storage capacity of 727 million barrels in 2009.
    (Reporting by Ayesha Rascoe)

    Fri Jan 2 19:30:15 2009

  64. 64
    elduque Says:

    sam – I thought they would wait until the price got back up to 140.

  65. 65
    choices Says:

    Does not seem to compute IMO that if the news is out that the rig count is falling like a stone, the drillers are up so strongly today. Have recent prices discounted this drop in rig count or have they been so beaten down that the this is just a bounce-obviously I’m focusing on SLB, where I am underwater-it is up 8% today.

  66. 66
    zman Says:

    Re 58, right, that was in Wednesday’s post. Numbers close to 24 month strip on Crude and deliberately much lighter than the 24M strip for NG. I was basically making the point that even at such a deck, the stocks are a good value, as the stocks have fallen quite a bit more than that and in the case of gas, those stocks in particular have been hedge prices. No one pays attention to hedges in a rising price environment. And in a falling environment there is such a “fire in a crowded theater” mentality that they get disregarded as well. But once prices stabilize (and I’m not sure they have yet but it sort of feels like we could be in for some lower volatility sideways and slightly trending green action for a little while) then the hedges will be one of the things that are again a strong point towards fund managers buying the stocks. When you look at those tables with the red circles from Wednesday you can tell whose hedged and who’s not by who has YoY growth in EBITDA. Names like CHK do; names like unhedged CLR don’t.

  67. 67
    zman Says:

    Choices – today everything is up with the broad market and better commodity prices. I’m sure what you are saying is what a lot of people are today, that the trade is too obvious and the damage has already been done. Over the next three months though, the prices of services will fall and the estimates for the service group will come down more as activity slows. I’ve hesitant to do a lot of trading in the holiday light period because you get these kind of odd moves. What would make sense would be for E&P to be up for 3 reasons (commodity prices up, service prices down, and the SEC gave them the big break they wanted on reserves calculations just last week (and the market could have cared less).

    Anybody watching CNBC today. They had so many guests on early this week and last saying demand is falling off a cliff and so will oil. Just curious if they have gone bullish yet so I know when to sell my longs, lol.

  68. 68
    zman Says:

    Re 62. Be safe (which I’d guess means keep the safety off).

  69. 69
    choices Says:

    OT-Italy, five times is completely over the top. I went to Nam three times and some went four times and we thought that was enough. I admire your committment and more so admire your family-they are truly the warriers and about 95% of the country do know or care what you and your family are going through.

    Keep your head down and best of luck,


  70. 70
    elduque Says:

    z-thank you for the explanation

  71. 71
    pearl1301 Says:

    wow..xom may get to 85 today..hehe

  72. 72
    zman Says:

    Tom – well said.

    El-d glad it helped. If you guys ever find something unclear or think my answer was flip or too short, let me know and I’ll try a different tack.

  73. 73
    Sambone Says:

    For a slow day, from ritholtz.com

    The 10 Worst Predictions for 2008

    Page 1 of 2

    Posted December 2008

    Prognostication is by far the riskiest form of punditry. The 10 commentators and leaders on this list learned that the hard way when their confident predictions about politics, war, the economy, and even the end of humanity itself completely missed the mark.

    Scott Gries/Getty Images“If [Hillary Clinton] gets a race against John Edwards and Barack Obama, she’s going to be the nominee. Gore is the only threat to her, then. … Barack Obama is not going to beat Hillary Clinton in a single Democratic primary. I’ll predict that right now.” —William Kristol, Fox News Sunday, Dec. 17, 2006

    Weekly Standard editor and New York Times columnist William Kristol was hardly alone in thinking that the Democratic primary was Clinton’s to lose, but it takes a special kind of self-confidence to make a declaration this sweeping more than a year before the first Iowa caucus was held. After Iowa, Kristol lurched to the other extreme, declaring that Clinton would lose New Hampshire and that “There will be no Clinton Restoration.” It’s also worth pointing out that this second wildly premature prediction was made in a Times column titled, “President Mike Huckabee?” The Times is currently rumored to be looking for his replacement.
    CNBC“Peter writes: ‘Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?’ No! No! No! Bear Stearns is fine! Do not take your money out. … Bear Stearns is not in trouble. I mean, if anything they’re more likely to be taken over. Don’t move your money from Bear! That’s just being silly! Don’t be silly!” —Jim Cramer, responding to a viewer’s e-mail on CNBC’s Mad Money, March 11, 2008

    Hopefully, Peter got a second opinion. Six days after the volatile CNBC host made his emphatic pronouncement, Bear Stearns faced the modern equivalent of an old-fashioned bank run. Amid widespread speculation on Wall Street about the bank’s massive exposure to subprime mortgages, Bear’s shares lost 90 percent of their value and the investment bank was sold for a pittance to JPMorgan Chase, with a last-minute assist from the U.S. Federal Reserve.
    ERIC CABANIS/Getty Images“[In] reality the risks to maritime flows of oil are far smaller than is commonly assumed. First, tankers are much less vulnerable than conventional wisdom holds. Second, limited regional conflicts would be unlikely to seriously upset traffic, and terrorist attacks against shipping would have even less of an economic effect. Third, only a naval power of the United States’ strength could seriously disrupt oil shipments.” —Dennis Blair and Kenneth Lieberthal, Foreign Affairs, May/June 2007

    On Nov. 15, 2008 a group of Somali pirates in inflatable rafts hijacked a Saudi oil tanker carrying 2 million barrels of crude in the Indian Ocean. The daring raid was part of a rash of attacks by Somali pirates, which have primarily occurred in the Gulf of Aden. Pirates operating in the waterway have hijacked more than 50 ships this year, up from only 13 in all of last year, according to the Piracy Reporting Center. The Gulf of Aden, where nearly 4 percent of the world’s oil demand passes every day, was not on the list of strategic “chokepoints” where oil shipments could potentially be disrupted that Blair and Lieberthal included in their essay, “Smooth Sailing: The World’s Shipping Lanes Are Safe.” Hopefully, Blair will show a bit more foresight if, as some expect, he is selected as Barack Obama’s director of national intelligence.
    Spencer Platt/Getty Images“[A]nyone who says we’re in a recession, or heading into one—especially the worst one since the Great Depression—is making up his own private definition of ‘recession.’” —Donald Luskin, The Washington Post, Sept. 14, 2008

    The day after Luskin’s op-ed, “Quit Doling Out That Bad-Economy Line,” appeared in the Post, Lehman Brothers filed for bankruptcy, and the rest is history. Liberal bloggers had long ago dubbed the Trend Macrolytics chief investment officer and informal McCain advisor “the Stupidest Man Alive.” This time, they had some particularly damning evidence.
    YASUYOSHI CHIBA/AFP/Getty Images“For all its flaws, an example to others.” —The Economist on Kenya’s presidential election, Dec. 19, 2007

    The week before Kenya’s presidential election, the erudite British newsweekly ran an ill-conceived editorial praising the quality of the country’s democracy and predicting it might “set an example” for the rest of the continent. If only. The ensuing election was rife with examples of voter fraud and ballot-stuffing. What followed was a month of rioting and ethnic bloodshed that left more than 800 dead and 200,000 displaced. The carnage ended in a messy power-sharing agreement between President Mwai Kibaki and his challenger Raila Odinga, leaving the country deeply divided and its government delegitimized

  74. 74
    tater Says:

    Has anybody heard anything of substance about the increase in use of the USO (volume up huge since beginning of Dec)?
    Feel like it is the missing piece to the puzzle, especially in the face of the contango issue.

  75. 75
    zman Says:

    Pearl – look at COP getting that natural gas based boost, that and the fact that it is the cheapest of the names. Volumes pretty light everywhere still but not less than expected.

  76. 76
    Sambone Says:

    Page 2

    Brad Barket/Getty Images“New York Mayor Michael Bloomberg will enter the Presidential race in February, after it becomes clear which nominees will get the nod from the major parties. His multiple billions and organization will impress voters—and stun rivals. He’ll look like the most viable third-party candidate since Teddy Roosevelt. But Bloomberg will come up short, as he comes in for withering attacks from both Democrats and Republicans. He and Clinton will split more than 50% of the votes, but Arizona’s maverick senator, John McCain, will end up the country’s next President.” –BusinessWeek, Jan. 2, 2008

    No part of this prediction from BusinessWeek’s “Ten Likely Events in 2008” turned out to be even remotely true. After weeks of hints and press leaks, Bloomberg declared he would stay out of the race, saying that Barack Obama and John McCain showed signs of displaying the “independent leadership” needed to govern effectively. After overturning New York’s term-limits law, Bloomberg seems likely to run for a third term as mayor instead.
    Sean Gallup/Getty Images“There is a real possibility of creating destructive theoretical anomalies such as miniature black holes, strangelets and deSitter space transitions. These events have the potential to fundamentally alter matter and destroy our planet.” —Walter Wagner, LHCDefense.org

    Scientist Walter Wagner, the driving force behind Citizens Against the Large Hadron Collider (LHC), is making his bid to be the 21st century’s version of Chicken Little for his opposition to the world’s largest particle accelerator. Warning that the experiment might end humanity as we know it, he filed a lawsuit in Hawaii’s U.S. District Court against the European Organization for Nuclear Research (CERN), which built the LHC, demanding that researchers not turn the machine on until it was proved safe. The LHC was turned on in September, and it appears that we are still here.*
    JEWEL SAMAD/AFP/Getty Images“The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.” —Arjun Murti, Goldman Sachs oil analyst, in a May 5, 2008, report

    The vaunted predictive powers of Murti, dubbed the “oracle of oil” in a glowing New York Times profile, failed him this time. Oil prices peaked in July at about $147 a barrel before beginning a long decline. Thanks to a decrease in demand because of the global recession, prices are now nearing the $40 mark, and some experts even see $25 as a possibility next year.
    VIKTOR DRACHEV/AFP/Getty Images“It starts with the taking over of South Ossetia and Abkhazia, which has already happened. It goes on to the destruction of the Georgian armed forces, which is now happening. The third [development] will probably be the replacement of the elected government, which is pro-Western, with a puppet government, which will probably follow in a week or two.” —Charles Krauthammer, Fox News, Aug. 11, 2008

    Krauthammer immediately followed this inaccurate forecast (Russia eventually agreed to a cease-fire and pulled out its troops several weeks later, leaving Mikheil Saakashvili’s government in place) by predicting that Ukraine would be next on Russia’s hit list and suggesting that the United States station troops there. As for Saakashvili, his approval rating was at 76 percent in September.
    Mario Tama/Getty Images“I believe the banking system has been stabilized. No one is asking themselves anymore, is there some major institution that might fail and that we would not be able to do anything about it.” —Henry Paulson on National Public Radio, Nov. 13, 2008

    The U.S. Treasury secretary entered November with guns blazing. After much hemming and hawing before Congress a month earlier, he came out with what he called his “bazooka” —a $700 billion mandate to scoop up bad assets from troubled banks. By mid-November, he had already discharged $300 billion in munitions, albeit mostly via the kind of direct equity stakes he had rejected earlier. Unfortunately for Paulson, shortly after his vote of confidence, Citigroup’s stock price plunged 75 percent in one week, closing below $5 for the first time in 14 years.

  77. 77
    Sambone Says:

    Famous last words


  78. 78
    Sambone Says:

    The Worst Predictions About 2008
    Just about everybody got wrong-footed by 2008, but some people’s mistakes were truly spectacular
    By Peter Coy

    Editor’s note: This new version of the “10 worst predictions about 2008” changes three of the 10 based on feedback from online readers and BusinessWeek editors. CNBC’s Jim Cramer and President Bush are still on the list, but with different predictions. Author Shelby Steele is off the list, replaced by a pair of BusinessWeek writers.

    Here are some of the worst predictions that were made about 2008. Savor them—a crop like this doesn’t come along every year.

    1. “A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!” —Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008

    At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8,500.

    2. AIG (AIG) “could have huge gains in the second quarter.” —Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008

    AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.

    3. “I think this is a case where Freddie Mac (FRE) and Fannie Mae (FNM) are fundamentally sound. They’re not in danger of going under…I think they are in good shape going forward.” —Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008

    Two months later, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.

    4. “I’m not an economist but I do believe that we’re growing.” —President George W. Bush, in a July 15, 2008 press conference

    Nope. Gross domestic product shrank at a 0.5% annual rate in the July-September quarter. On Dec. 1, the National Bureau of Economic Research declared that a recession had begun in December 2007.

    5. “I think Bob Steel’s the one guy I trust to turn this bank around, which is why I’ve told you on weakness to buy Wachovia.” —Jim Cramer, CNBC commentator, Mar. 11, 2008

    Two weeks later, Wachovia came within hours of failure as depositors fled. Steel eventually agreed to a takeover by Wells Fargo. Wachovia shares lost half their value from Sept. 15 to Dec. 29.

    6. “Existing-Home Sales to Trend Up in 2008” —Headline of a National Association of Realtors press release, Dec. 9, 2007

    On Dec. 23, 2008, the group said November sales were running at an annual rate of 4.5 million—down 11% from a year earlier—in the worst housing slump since the Depression.

    7. “I think you’ll see [oil prices at] $150 a barrel by the end of the year” —T. Boone Pickens, June 20, 2008

    Oil was then around $135 a barrel. By late December it was below $40.

    8. “I expect there will be some failures. … I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.” —Ben Bernanke, Federal Reserve chairman, Feb. 28, 2008

    In September, Washington Mutual became the largest financial institution in U.S. history to fail. Citigroup (C) needed an even bigger rescue in November.

    9. “In today’s regulatory environment, it’s virtually impossible to violate rules.” —Bernard Madoff, money manager, Oct. 20, 2007

    About a year later, Madoff—who once headed the Nasdaq Stock Market—told investigators he had cost his investors $50 billion in an alleged Ponzi scheme.

    10. “There’s growing evidence that parts of the debt markets…are coming back to life.” —Peter Coy and Mara Der Hovanesian, BusinessWeek, Oct. 1, 2007.


    Coy is BusinessWeek’s Economics editor.

  79. 79
    kyleandy Says:

    italy would love to hear your comments on iraq and afghanistan, on whether we are making progress or just spinning our wheels. i was in Nam 2 tours and declined a third cause i saw little sense why we were there. sounds like choices might agree.

  80. 80
    Sambone Says:

    • 2008 Investment Guides Are HILARIOUS (New York Magazine)


  81. 81
    ram Says:

    ZMAN – Do you recall Nicky’s short and medium term cycles on energy?

  82. 82
    zman Says:

    Ram – I think it was a low near term of $30, don’t recall a high. Will send her an email.

  83. 83
    ram Says:

    Sorry ZMAN – I meant to focus on timing – Short and medium term.

  84. 84
    Sambone Says:

    Ok, boys and girls, I’m outta here! Have a good weekend and we’ll see ya Monday!

  85. 85
    tater Says:

    Wondering aloud if the leverage used to create the “baskets” of USO shares for trading (by the managers of the ETF) creates a situation by which the price of crude futures contracts can be gamed?
    The idea would be along the same lines that many are complaining of where the double short and long ETF’s are making a joke of the major index ETF’s like the SPY?
    Just trying to make some sense of this recent action. I don’t subscribe to the year end/start reasoning as being adequate to explain the volume.
    I’m not saying that everything in the world has to be a conspiracy. I’m just saying that there really appears to be some goofiness going on and I want to figure it out.

  86. 86
    zman Says:

    Msg sent to Nicky. Beer thirty! So far 2009 is more fun than 2008, lol, see you Monday!

  87. 87
    VTZ Says:

    The volume is quite high in all the commodity plays though tater.

  88. 88
    italyinvestor Says:

    I don’t want to clog up the zboard here with stuff but I can send you a note directly if z can bridge our emails. Or I can write up some notes over the next few days and z could post them in a “random file.” My experience is completely in Afghanistan, so my Iraq knowledge is informed, but not first hand.
    My quick thoughts though: We’re seeing success in Iraq – how much,only history will tell, but enough to be able to reduce force and transition territory and responsibility to Iraqi forces. Will it stick after we leave? Probably not as we’d like it or envision it, but the Iraqi’s at least have a chance to get it right. AQ in Iraq has been hammered though and lots of terrorists came to fight and lost significantly. The surge built conditions that enabled our special operators to really crack up the AQ groups in Iraq.
    Afghanistan, we’re winning but doing so slowly. We haven’t had the force size and infrastructure (military and civilian) to project power or maintain presence to win the confidence of the local people. We win every fight, but we can’t control all the ground. We also have to clean up the safehavens in Pakistan (and the leaders who are hiding there) to accelerate the win in AFG.

  89. 89
    kyleandy Says:

    italy thks my e-mail is am5153@msn.com if u have further thoughts.

  90. 90
    tater Says:

    I guess I’m missing it VTZ. I see GLD, DBA, DBB, volume all within normal, possibly even off a bit. UNG up in Dec but nothing like back in Sept. I just find it very odd that here comes Dec and all of a sudden the USO becomes playground of choice. There has to be a reason. It could be as easy as a tax benefit or something simple like that. Doesn’t have to be sinister.

  91. 91
    zman Says:

    Italy – I’m happy to do either. zmanalpha@gmail.com or I can post. Let me know. Ok, gotta run out to get beer I find.

  92. 92
    Jay Reynolds Says:

    Tater – caught DXO (2X crude) up 22% for the day so had to take it. Would love to hear what you figure out with the USO question.

  93. 93
    crysball Says:

    Four hundred years ago, Francis Bacon warned that our minds are wired to deceive us. “Beware the fallacies into which undisciplined thinkers most easily fall–they are the real distorting prisms of human nature.” Chief among them: “Assuming more order than exists in chaotic nature.” Now consider the typical stock market report: “Today investors bid shares down out of concern over Iranian oil production.” Sigh. We’re still doing it.

    Our brains are wired for narrative, not statistical uncertainty. And so we tell ourselves simple stories to explain complex thing we don’t–and, most importantly, can’t–know. The truth is that we have no idea why stock markets go up or down on any given day, and whatever reason we give is sure to be grossly simplified, if not flat out wrong.

    Nassim Nicholas Taleb first made this argument in Fooled by Randomness, an engaging look at the history and reasons for our predilection for self-deception when it comes to statistics. Now, in The Black Swan: the Impact of the Highly Improbable, he focuses on that most dismal of sciences, predicting the future. Forecasting is not just at the heart of Wall Street, but it’s something each of us does every time we make an insurance payment or strap on a seat belt.

    The problem, Nassim explains, is that we place too much weight on the odds that past events will repeat (diligently trying to follow the path of the “millionaire next door,” when unrepeatable chance is a better explanation). Instead, the really important events are rare and unpredictable. He calls them Black Swans, which is a reference to a 17th century philosophical thought experiment. In Europe all anyone had ever seen were white swans; indeed, “all swans are white” had long been used as the standard example of a scientific truth. So what was the chance of seeing a black one? Impossible to calculate, or at least they were until 1697, when explorers found Cygnus atratus in Australia.

    Nassim argues that most of the really big events in our world are rare and unpredictable, and thus trying to extract generalizable stories to explain them may be emotionally satisfying, but it’s practically useless. September 11th is one such example, and stock market crashes are another. Or, as he puts it, “History does not crawl, it jumps.” Our assumptions grow out of the bell-curve predictability of what he calls “Mediocristan,” while our world is really shaped by the wild powerlaw swings of “Extremistan.”

  94. 94
    Zman’s Energy Brain ~ oil, gas, stocks, etc… » Blog Archive » Wrap – Week Ended 1/02/09 Says:

    […] Friday – Day 1, 2009 […]

  95. 95
    zman Says:

    Weekend Wrap post is up.

    Crysball, you’ve just about got me convinced I should pick up a copy of Swan. Now here’s one for you

    “A Conspiracy of Papers” by David Liss. I’m a big historical fiction reader, this one revolves around the 1700s London financial markets and the hatred of stock jobbers, very Holmesian feeling to the writing. Anyway, an appropriate read after the Madoff scandal.

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