Thursday – Natural Gas Preview & Oil Review

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Stimulus Plan #1 Passed The House Last Night. $819 billion in a very partisan vote. Good 10,000 foot view of what's in there can be found here. What's not in there? Apparently money for the post office...get ready to get mail only five days a week. Market bracing for a down open as the memory of yesterday's happenings is quick to fade and we have jobless claims, durable goods (expected down 2.4%), and new home sales on tap on the economic front this morning.

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Natural Gas Preview
  4. EIA Oil Inventory Review
  5. Stuff We Care About Today - PQ
  6. Earnings Watch
  7. Odds & Ends


Holdings Watch: No changes yesterday

Commodity Watch:

Crude oil rose $0.58 to $42.16 yesterday despite a much bigger than expected build in crude inventories. Blame a booming equity market and what appears to be a near term bottom forming in crude for the minor rally and the fact that we saw crude fall 9% the day before. This morning crude is trading off a buck in the early session; blame a slumping set of equity futures indications.

  • OPEC Watch: OPEC Secretary General Abdalla Salem El Badri at Davos says the Cartel is ready to make further cuts and that he believes compliance with the already announced cuts is near 100% (yeah right).  He went on to remard that a price of $40 or even $50 per barrel does not provide enough revenues for producing countries to adequately reinvest in oil production.
  • Aaarrrrrrr Watch: Somali pirates hijacked a Bahaman flagged LPG tanker in the Gulf of Aden. Note to self, cancel vacation there.  This is the third hijacking this month.
  • Chavez Is A Nutbag Watch: The Ensco 69 rig is now being operated by PDVSA and ESV and Venezuela are trying to work things out.
  • The Cost Of Low Oil Prices: from Reuters ~ Shell's oil sands unit, which produces crude from bitumen-drenched soil, swung to a $30 million loss in the quarter, despite a 44% increase in bitumen production, emphasizing how the lower oil price has hit this high-cost business.  

Natural gas fell 3 cents to $4.42 and seems to be hugging that level, +/- $0.25. Gas is trading  up slightly this morning, probably due to bitter cold for much of the U.S. and a storm approacing the northeast that is going to require snow plows by the weekend.

Natural Gas Preview

  • My number: 150 - 155 Bcf
    • History:
      •  Last year: 240 Bcf (on very cold weather)
      • 5 year average: 184
    • Weather: HDDs eased back to 226 last week from 258 the week before.
    • Imports: up 0.8 Bcfgpd from the previous week on small rebounds in both LNG and Canadian piped volumes.
  • Street Consensus: 176 Bcf (from the Bloomberg survey)

ZComment: Hmmm. The Street's estimate of another 176 Bcf draw from storage seems aggressive given the weather. When you look at the fact that imports were up and production from the Gulf of Mexico was likely a touch higher as well from the prior week it seems more likely they've overshot the mark. Comps to last year are tough as the U.S. saw record cold then and industrial demand was still strong. I don''t think gas really gets excited unless we see a number close to 200 so in essence I don't think the market gets excited today as we will remain near the upper end of the range for storage. Later today we get the monthly natural gas supply volumes (for November) which will be much more interesting than this morning's storage report. I think we will see a further signs of flattening in production in places like Texas (if not this month then December data) and declines in Rockies and Mid-Continent state production. I should have the slide show out late this evening or for the Friday post.

EIA Oil Inventory Review


CRUDE OIL - another much bigger than expected addition to inventories as refiners continue to reduce consumption in an effort to boost margins.

GASOLINE - Production of 8.7 mm bpd + Imports of 1.1 mm bpd comes up against demand of 8.6 mm bpd.  Numbers looked a bit squirrely here as imports remained unchanged yet stocks fell slightly.  Gasoline stocks remain near normal levels.

Gasoline Imports Running A Bit High. Imports remained at 1,154 MBpd last week (exactly the same as the prior so so much for your tax dollars at work). Anecdotal evidence suggest imports are running high due to Latin American volumes seeking rejuvenated prices in the States versus weak pricing back home. This bears watching as continued strong imports can sabotage the efforts of domestic refiners to curtail production and bring stocks down.





Stuff We Care About Today

PQ Provides Guidance, Updates Operations - In a nutshell...not as shabby as I'd expect.

  • 4Q Production: 4Q inches up from a ranged of 97  to 102 MMcfepd to 102 to 103. They note December production was 40% higher than January 2008 production.
  • 2009 Production Guidance: 90 to 100 Mcfepd. The mid point of this range would yield growth of 2.5% over 2008's 92.5 MMcfepd. With reduced spending this is not surprising. The resource plays are not economic in the Woodford and probably not in the Fayetteville as of today but they are high decline rate with long production tales. So drill less and you notice the production fall off quite rapidly.  
  • Reserves:
    • 185 Bcfe, up 18% (would have been 34% were it not for price; 93% gas. Reserve replacement of ~ 83% (or 156% were it not for the write down).  This is a little light to reserve growth guidance but I think it will be foregiven as the holdup was only due to low year end commodities.
    • see ceiling test writedown of $94 to $100 mm (not out of the ordinary or bad this year)
  • Operations Highlights:
    • Woodford Shale:
      • Current net production: 40 MMcfepd
      • 3 PQ operated rigs running
      • 3 latest wells showing rates of about 4 MMcfepd, ok, not a big rate there nowadays and lower than the last couple of wells they completed here.
      • completing an 18 frac stage, extended (7,000) foot lateral horizontal well, first two stages flowed at 3.7 MMcfepd which might grab some analyst's attention as they have 16 more stages to go. A little hinky to report the well in pieces and those flow rates are max producition (no choke size given, no period for the text so they are likely 1 day flow rates for all the press release tells you). Still, interesting. 
    • Fayetteville Shale:
      • Current net production: > 9 MMcfepd
      • 5 non-operated rigs running (bet they'd like to see that number fall a bit now given prices)
    • East Texas:
      • Current net production: 15 MMcfepd
      • Palmer Prospect (Cotton Valley lime): 6th well producing 3 MMcfepd, very low operating costs here.
    • Gulf Coast: (exploration)
      • Bluff's Prospect began production in November, currently flowing 16 MMcfepd gross, or 6 MMcfepd net to their interest.
      • No other prospects mentioned in the PR as their first big prospect (the 93 Bcfe Whistling Straits (24% working interest) doesn't spud until May 2009.
  • Hedge Update: 55% hedged at $7.87 per Mcf
  • Capex: $80 to $100 mm. That's a drastic reduction (good idea guys) from the $250 to $260 mm spent in 2008. For them to be able to keep production essentially flat on that budget may be a bit of a stretch and will be highly dependent on their ability to get better rates out of wells in the Woodford.
  • Valuation: Very cheap, probably going to stay that way for awhile with net debt to total cap around 40%. Not sure the flat 2009 vs 4Q rate won't cause some further estimate reductions. I like these guys and the story bears watch but they need higher gas prices to get out of the cellar. Right now, they are in survival mode and I think they will make it but it depends on how long commodities prices stay low.
  • I'll add this to a PQ notes section on the report tab.

Earnings Watch:

  • Today: 
    • MUR, SII, and OXY report this morning. I don't hold any of these at present but plan to listen to the SII call at 11 EST.
    • SII missed there numbers even after adjusting for a charge and I may take puts here but will listen to the call first. This a bits and mud and other oil service parts company and its clear they have not yet felt the impact of lower prices and activity to the extent that they will.
    • SPWRA (solar player #2 that I like after FSLR) reports today after the close with a 4:30 pm EST conference call. I may pick a little up this afternoon and I continue to hold FSLR calls.


  • Tommorrow: ACI, CVX and XOM report. 

Odds & Ends

Analyst Watch: ---

98 Responses to “Thursday – Natural Gas Preview & Oil Review”

  1. 1
    zman Says:

    Just got a message Pickering is at 190 Bcf for today. Hope so. Don’t see it in my numbers but I have a lot of respect for Dan. That might get gas to rally in to the up half of the $4s. Maybe $4.60 but probably not a lot more. Need 200+ to do more.

  2. 2
    zman Says:

    Oil getting clocked on durable goods, down a little more than expected and for the fifth straight month.

  3. 3
    zman Says:

    CVX says Capex in 2009 flat with 2008. Bit of good news for the service crowd in what is a sea of capex reductions by the E&Ps. Can’t wait for Sambone to get back from hiatus.

  4. 4
    elduque Says:

    BDI +22 1036
    TED -1.148 98.74

    Even the most bearish bear has to admit that there is the are some signs of improvement. Cos. able to raise money, credit spreads narrowing and raw materials moving.

  5. 5
    BirdsofpreyRcool Says:

    Good morning.

    Credit made some nice positive moves yesterday. We will see if we can hold onto them, but so far, credit market opening up only a bit weaker than yesterday’s close. Of note: the high yield index had a pretty huge move yesterday, about $1.38. So far this morning, have only given up 25 cents of that move.

    IG 196 +3 bps

    HY $76.125 -0.25

  6. 6
    BirdsofpreyRcool Says:

    Trading Desk = low of morning should be soon after the open for a rally into lunch with low odds.

    will follow up with more color. Basically, go long the open, sell at lunch. Anything can happen this afternoon.

  7. 7
    BirdsofpreyRcool Says:

    Trading Desk For Today: Same game plan. Worse odds. Go long on the morning pullback for the Day after Fed Day Rally into lunch. Look for a few points with below average odds of 55/45. Be sure to tighten stops after any rally in the morning and especially after 11:15 and 12:05. And tighten again at lunch at 1:20. Trading after 2:35 is 50/50.

  8. 8
    BirdsofpreyRcool Says:

    Trading Caveat: a rally off the low doesn’t mean we go positive today… just that we bounce off the morning low.

    Head Trader’s personal opinion: we close at the 50-day MA for SPX on a very choppy day.

  9. 9
    zman Says:

    Elduque – agreed, not the end of the world as we know it. Drybulk rates moving higher.

    BOP – thanks for the trading color. Probably a buying opportunity for XOM. Several of the gassier E&Ps are nicely off their open lows; COG and KWK green.

  10. 10
    BirdsofpreyRcool Says:

    To follow up on Elduque’s comments:

    ‘Panic Mentality’ Eases for Treasurers as Amgen Lures Investors
    2009-01-29 05:01:19.131 GMT

    By Duane D. Stanford, Bryan Keogh and Gabrielle Coppola
    Jan. 29 (Bloomberg) — Conair Corp. Treasurer John Vele moved two-thirds of the hair-care appliance maker’s excess cash to money market funds from government bonds this month to boost his annual return to 1.5 percent from 1.25 percent.
    “If we can pick up yield, well, thank God,” Vele said from his office in Stamford, Connecticut.
    The “panic mentality” that made Vele and other finance executives flee to U.S. Treasuries and tap bank credit lines after Lehman Brothers Holdings Inc. went bankrupt in September has given way to a “cautious” willingness to return to company debt, said Edward E. Liebert, chairman of the National Association of Corporate Treasurers. His group is based in Reston, Virginia.
    The U.S. government’s Troubled Asset Relief program, as well as Federal Reserve purchases of 90-day debt directly from companies beginning in October under the Commercial Paper Funding Facility, have created a new eagerness to test markets for investing and borrowing, said Liebert. He is also treasurer of specialty chemical maker Rohm & Haas Co. in Philadelphia.
    “You would hope we’re through the worst of it,” said Russell Paquette, treasurer of Kent, Washington-based outdoor- gear retailer Recreational Equipment Inc., the nation’s largest consumer cooperative with $1.3 billion in 2007 sales. “The government has stepped in to backstop a lot of the players.”
    Increased returns on cash and lower borrowing costs will help companies survive during what may become the longest recession since World War II, according to Jeff Wallace, managing partner at Boulder, Colorado-based consulting firm Greenwich Treasury Advisors LLC.

    ‘Stop the Bleeding’

    “This is about stopping the bleeding, not about a thaw in the markets,” said Wallace, whose clients include BP Plc and PepsiCo Inc.
    Investors’ renewed appetite for corporate debt attracted companies such as Bentonville, Arkansas-based Wal-Mart Stores Inc., Thousand Oaks, California-based Amgen Inc. and San Francisco-based Charles Schwab Corp. back to the credit markets.
    More than $118.7 billion in corporate bonds were issued so far in January, up 37 percent from the first 28 days of 2008, according to data compiled by Bloomberg.
    Rising demand to buy debt pushed down overall borrowing costs for investment-grade companies to 7.35 percent on Jan. 14, the lowest since Sept. 18. Yields reached a 17-year high of 9.31 percent on Oct. 30.
    “Our approach was to be very opportunistic and look for a window,” said Pamela Wapnick, Amgen’s vice president and treasurer. The world’s biggest biotechnology company by sales issued $2 billion of 10-year notes with a 5.7 percent coupon and 30-year bonds that pay 6.4 percent on Jan. 13.

    First in a Decade

    Washington Post Co., the newspaper publisher and owner of Newsweek magazine, tapped the bond market for the first time in a decade with $400 million in 10-year, 7.25 percent notes to replace its only outstanding debt, which is set to mature.
    The debt was priced to yield 475 basis points more than Treasuries, below the average spread of 507 basis points for investment-grade media companies. A basis point is one one- hundredth of a percent, used in measuring yield differences between bonds.
    Chief Financial Officer Hal Jones wasn’t available for an interview, spokeswoman Rima Calderon said in an e-mail.
    Even high-yield borrowers saw an opening after the worst year for issuance in at least a decade, Bloomberg data show.
    This month’s sales of junk bonds surged to $5.15 billion as companies took advantage of a six-week market rally to refinance debt.

    Commercial Paper

    Investment-grade borrowers with second-tier debt ratings — or P-2 at Moody’s Investors Service Inc., A-2 at Standard & Poor’s and F2 at Fitch Ratings — are also gaining access to the commercial-paper market. It collapsed in September and revived after the Fed started buying corporate debt in the fourth quarter.
    The $1.69 trillion market of the short-term IOUs, which typically mature in 270 days or less, may be the first to cut a reliance on federal bailout programs. As much as $70 billion of the $245 billion the Fed bought in the first two weeks of its commercial-paper purchases may be rolled over and acquired by investors, according to Barclays Capital in New York.
    Companies are also venturing back into the equity markets.
    Mead Johnson Nutrition Co., the world’s biggest infant-formula maker, plans to raise as much as $690 million in what would be the first U.S. initial public offering since November and the biggest since a $1.36 billion sale by Voorhees, New Jersey-based American Water Works Co. in April.

    Discount Required

    The company lowered its expected price 31 percent from the
    $1 billion it said in December it was trying to raise, according to a regulatory filing by Evansville, Indiana-based Mead Johnson.
    O’Gara Group Inc., a defense company based in Cincinnati, is also looking to pull in as much as $152 million from equity investors. It’s still “early in the cycle,” according to David Menlow, who tracks the market as president of Millburn, New Jersey-based IPOFinancial.com.
    Treasurers see the real possibility that markets could snap closed as they anticipate more loan defaults and losses for the financial services industry, Wallace said.
    “A lot of people are still waiting for the other shoe to drop,” he said.
    General Electric Co. was put on notice Jan. 27 by Moody’s that it might lose its Aaa credit rating if GE Capital, the company’s finance arm, fails to meet a forecast for $5 billion in profit this year.

    GE Rating

    GE Capital sold $29 billion in long-term debt in December and January, $4 billion of it without backing from the Federal Deposit Insurance Corp. That marked the first time a U.S.
    financial company sold bonds without a government guarantee since June.
    Moody’s said it isn’t reviewing the FDIC-backed issues or the company’s top-rated commercial paper.
    Treasurers need to watch their lenders closely for signs of trouble that could put their own companies’ credit and investments at risk, said Jolene Varney, senior vice president of corporate finance for Plano, Texas-based Dr Pepper Snapple Group Inc. Many are monitoring credit default swaps daily to determine which banks could founder, Wallace said.
    “When investors are telling them there is risk with an institution, they are getting out of existing positions,” he said. Finance executives took this approach initially with Wachovia Corp. and now are taking it with Citigroup Inc., he said.

    Corporate Defaults

    Corporate defaults worldwide are projected to rise to 15 percent in the next 12 months as the economy turns “perilous,”
    Moody’s said in a Jan. 14 report, boosting its earlier forecast by almost 50 percent. About 300 companies will fail to meet obligations this year, equivalent to a rate of 25 a month, the New York-based rating service said. The rate was 4 percent at the end of 2008.
    REI’s Paquette “doesn’t see any renewed panic,” even with forecasts for the U.S. recession lasting through at least the first six months of 2009.
    “The markets continue to sort themselves out, but comparatively speaking things have settled down a bit,” he said.
    Falling rates, particularly the three-month London interbank offered rate, or Libor, have helped companies cut interest expense. Iron Mountain Inc. Treasurer Jeff Lawrence no longer must pay half a million dollars a month in interest on a $150 million bank credit line. The Boston-based company tapped it four months ago as an “insurance policy” against the failure of a lender or global financial markets, he said.

    Interest Expense

    Interest payments for the loan eclipsed what the world’s biggest records-management company earned on government securities, where the cash was invested, Lawrence said. Because Iron Mountain reports earnings next month, he wouldn’t disclose the current charge or whether the loan is being paid off.
    Libor slipped to 1.17 percent yesterday, according to British Bankers’ Association data, on optimism that the Fed will introduce emergency programs to revive lending. This is the rate at which banks in London are willing to lend money to each other for a specified time period.
    The spread between Libor and the Fed rate fell to 83 basis points on Jan. 14, the lowest since September, after jumping to as high as 332 basis points on Oct. 10.
    Even with rates declining, finance executives can find better returns away from government debt. At Diebold Inc., some fixed-income investments in the pension plan have been moved in recent weeks from Treasuries to “longer duration, high- quality” corporate bonds “to take advantage of historical spreads and, more importantly, help hedge our pension liability,” said Tim McDannold, treasurer of the North Canton, Ohio-based maker of automated teller and voting machines.
    McDannold didn’t disclose details.
    “The panic is over, but I would say everyone is proceeding very cautiously,” McDannold said. “These remain uncertain times, with expectations of a continued recession for the time being.”

  11. 11
    zman Says:

    BOP – do you get the reasoning behind the Fed buying Treasuries? I thought the U.S. had no trouble pitching them right now. Is that not just the left hand taking money from the right pocket? I’m sure there’s a perfectly logically explanation but its easier to ask you than to track it down myself.

  12. 12
    T. J. Says:

    Oh my! “Conoco’s $31.76 Billion Loss Augurs More Oil-Industry Pain”

  13. 13
    zman Says:

    re 12. Gotta love journalists and their headlines.

    All of the loss is due to a goodwill impairment of $25 B for the E&P segment and another $7.4 mm writedown of their Lukoil investment, and finally a smallish impairment for E&P assets. Says little about the state of the business other than prices are low. Those are non-cash items so no impact on what they have available to invest.

  14. 14
    BirdsofpreyRcool Says:

    z – funny. we were having that same discussion over breakfast this morning.

    The Fed and the Treasury have two different funcitons. The Treasury manages the U.S. currency and liability side of the govt, while the Fed is the central banker for our private banking system. When the Fed buys treasuries, they are putting cash into the private banking system. That cash can be used to make loan to entities other than the U.S. Treasury. So, basically, it’s an effort (irrespective of what the Treasury is doing) to put “lendable cash” into the pockets of the private banking system.

    Your gov’ts “monetary policy” at work.

  15. 15
    zman Says:

    T.J. – please check your email.

  16. 16
    zman Says:

    BOP – My money and banking class was some 20 years ago. Thanks.

  17. 17
    zman Says:

    CNBC just said consensus withdrawal for today is 170 Bcf.

  18. 18
    BirdsofpreyRcool Says:

    z – no worries. Just like the credit market, normally we wouldn’t have to even think about this stuff. Like watching sausage being made.

  19. 19
    VTZ Says:

    RDS results are out as well and they are planning on spending 100% of 2008 earnings on 2009 capex.

    2008 Earnings of 31 bln
    2009 Net Capex $31- 32 bln

  20. 20
    BirdsofpreyRcool Says:

    New Home Sales for December were pretty fugyly. Down 14.7% MoM vs down the 2.5% exp’d. Nice to see the mrkt just sort of shrugging that off.

    Just like automotive sales… who wants to buy a house from a builder these days? Wait a week… they get cheaper.

  21. 21
    zman Says:

    CHK trying to go green, bodes well for a rally in HK should we get a not too bad gas storage number, same for SWN. Need the broad market to cooperate too though.

  22. 22
    zman Says:

    … “Wait a week… they get cheaper”

    Pretty much what I was saying last night about potential targets for XOM.

  23. 23
    BirdsofpreyRcool Says:

    IG backing up to 197 1/2 now. But tighter than the 198 1/2 wides of the day.

  24. 24
    BirdsofpreyRcool Says:

    z – deflation at work for ya.

  25. 25
    choices Says:

    DRYS in violation of loan covenants, off 23%

  26. 26
    BirdsofpreyRcool Says:

    IG 197… trying to rally a bit.

  27. 27
    zman Says:

    186 Bcf. Wow.

  28. 28
    BirdsofpreyRcool Says:

    Nice natty gas number!

  29. 29
    zman Says:

    Glad to be wrong…maybe it was the up electricity demand that I discounted I guess to quickly. Like I said, Pickering’s group is pretty good and they were at 190.

  30. 30
    elduque Says:

    When does the Barnett start to drop off?

    Thank you

  31. 31
    zman Says:

    Elduque – Well now, that’s the billion cubic foot question isn’t it???!!!

    It very much depends on who you ask and I think DVN, EOG, and CHK will all tell you different things. EOG at last notice, said mid year which would imply Texas rolls lower a bit soon than that. CHK says they will continue to increase production there (they are #2 in the Barnett) through 2009. DVN is number one ever since acquiring Mitchell way way long ago and I have not seen their recent view but they are more cautious. So when does the overall Barnett come off? Probably around mid year. The non-CHK aren’t drilling as good a well as CHK has been of late, and many of the 17 counties in the play are very drilled up.

    Reef or Wyoming or Mark or anyone else – feel free to weigh in with thoughts here.

  32. 32
    zman Says:

    Natural gas made it up a dime, now up 2 pennies. Just not enough of a draw even though better than expectations. On the positive side, I expect the weather to come back this week (for next week’s withdrawal) to potentially give us the first 200+ Bcf number next week. Its just colder than expected.

  33. 33
    nifkin Says:

    Exxon, Shell Set to Run U.S. Refineries as Labor Deadline Looms
    2009-01-29 05:00:01.12 GMT

    By Jordan Burke
    Jan. 29 (Bloomberg) — Exxon Mobil Corp. and Royal Dutch Shell Plc are preparing to keep their U.S. plants running should the United Steelworkers union call a strike that could affect almost two-thirds of the country’s refining capacity.
    Refiners and the union are negotiating this week on a new labor contract for about 30,000 workers. The current agreement expires at 12:01 a.m. on Feb. 1, and members have already authorized the union to call a strike.
    “We have made arrangements to operate the plants until a successive collective-bargaining agreement is reached,” said Prem Nair, a spokeswoman for Irving, Texas-based Exxon Mobil, the world’s largest fuel maker. “It would be business as usual.
    We don’t anticipate any supply impact.”
    Refiners plan to use managers and other non-union employees if necessary to keep plants operating. Royal Dutch Shell Plc, Europe’s largest oil company, won’t shut any U.S. plants in the event of a strike, spokesman Stan Mays said. ConocoPhillips and Lyondell Chemical Co. said they, too, plan to keep refineries operating. The threat of a strike comes amid declining fuel demand and a recession that pushed the U.S. unemployment rate to the highest level in almost 16 years.
    Valero Energy Corp. and Houston-based ConocoPhillips, the two largest refiners by U.S. capacity, are among companies slowing fuel output after profit margins narrowed. Refiners made gasoline at a loss, as indicated by New York futures prices, for a record number of days in the fourth quarter as fuel prices failed to keep pace with crude-oil costs.
    Regular U.S. gasoline prices at the pump average $1.842 a gallon, according to AAA, the nation’s largest motorist club, down 55 percent from a record of $4.114 reached in July.

    BP, Valero

    “Given the environment, it’s probably not a terrible thing to see some continued outages,” said Jim Byrne, an analyst at BMO Capital Markets in Calgary.
    The one refiner that said it will idle plants in the event of a strike was London-based BP Plc, Europe’s second-largest oil company. BP doesn’t expect a shutdown of its four U.S. plants because of progress in the negotiations, spokesman Scott Dean said. If a strike is called, it would affect BP refineries that can process 1.3 million barrels of crude a day.
    Valero, based in San Antonio, has three plants that are subject to the negotiations, including operations in Delaware City, Delaware; Memphis, Tennessee; and Port Arthur, Texas.
    The company has contingency plans for a work stoppage, said Valero spokesman Bill Day, who declined to say whether plants would stay open.

    Capacity at Stake

    San Ramon, California-based Chevron Corp., the second- biggest U.S. oil company, may keep operating its plants if a strike occurs. “Employees have a right to strike,” company spokesman Sean Comey said. “We have the right and responsibility to maintain operations.”
    A strike could affect 58 percent of U.S. refining workers and about 64 percent of the nation’s fuel-making capacity, said Lynne Baker, a spokeswoman for United Steelworkers. The current contract was reached in 2002 and was extended in 2005.
    The union’s national bargaining policy calls for higher wages, including a cost-of-living adjustment, as well as full medical, dental and vision-care benefits for workers and retirees. Local unions also may call strikes if they don’t reach agreement on issues such as work schedules and overtime, Baker said.
    One of the locals is Steelworkers District 13-423, which covers members who work at Valero’s Port Arthur plant. It last called a strike in 1980, District 13-423 committee chairman Bobby Hollis said in November.

    Frontier, Husky

    The unions are required to give employers 24 hours notice if there will be a strike, said Lynn Westfall, a spokesman for San Antonio-based refiner Tesoro Corp. Shell, based in The Hague, is serving as lead negotiator for the companies.
    Frontier Oil Corp.’s El Dorado, Kansas, refinery is among plants that could be affected.
    “We have agreements with our union folks that they won’t walk right out the door,” said Kristine Boyd, a spokeswoman for Frontier. “They would at least stay long enough to bring the plant down safely if we got to the point.”
    Boyd declined to say if Frontier had plans to keep the refinery operating if a strike occurred.
    Calgary-based Husky Energy Inc.’s Lima, Ohio, refinery doesn’t face the possibility of a strike by its 200 union workers because their contract doesn’t expire until mid April, said Graham White, a company spokesman.

    Contingency Plans

    Trailers and portable kitchens that might be used to house temporary workers have been delivered to Exxon Mobil’s Beaumont, Texas, plant, the Beaumont Enterprise reported.
    Lyondell Chemical said about 500 of the 950 workers at its Houston refinery are union members.
    “We have developed appropriate contingency plans to supply fuel products to U.S. consumers,” spokesman David Harpole said.
    “We continue to negotiate in good faith.”
    Lyondell inquired about renting shower trailers from Pasadena, Texas-based Precision Structures, Inc., Doylton Davis, Precision’s owner, said in a telephone interview.
    ConocoPhillips has plans to use salaried employees to keep refineries running and could help meet customer requirements with fuel from plants that aren’t affected by the strike, spokesman Bill Stephens said.

  34. 34
    zman Says:

    Market action like watching paint dry. Natural gas up 2 whole pennies. Profit taking in energy is by no means panic level. Losses very small as of yet.

  35. 35
    reefguy Says:

    Barnett- unless you are hedged, you should not be drilling. Hubs taking this gas are more than a dollar bellow Henry Hub. That means net of transportation and compression your netting $3 or less at the wellhead. This gas is costing north of $5 all in F+D. It is hard for me to say, but you let your leases expire.

  36. 36
    BirdsofpreyRcool Says:

    OXY on the tape saying that “gas drilling is unattractive below $5/mcf”… as such, they have suspended some high-cost wells in Tx and Calif.

  37. 37
    Bob Says:

    Z- Question on MLPs…..I re-read your 10/28/08 report. My experience on out sized dividends is that yes you will get a taxable dividend, while getting an unneeded capital loss more than off setting the dividend. LINE jumped after the month old Barron’s rec, and never really fell back. LINE’s dividend has been 63 cents during each of the last 3 quarters, while earnings have dropped from 57 to 49 to a current 32 cent estimate, which is an average payout out of 137%

    On the other hand, EVEP’s earnings have been 1.33, 1.09, and 0.70 est, with payouts of 0.70, 0.75, and 0.75 for a payout ratio of 71%

    Looking at ATN, earnings 0.57, 0.56, 0.53 est, with payouts of 0.61, 0.61, and 0.61, the payout ratio is 110%.

    Stock performance over the above period: LINE: -25%, EVEP: -34%, ATN: – 64%
    Stock Performance YTD: LINE: +8%, EVEP +21%, ATN: +17%

    Overall does not look that enticing without earnings and stock price stabilizing?

    Thanks for any insight

  38. 38
    zman Says:

    Thanks for the color on the Barnett Reef. These guys are victims of their own success.

    Thanks BOP – I find it odd the curtailment press releases have not been swamping the tape.

    Apologies for the lack of typing this morning, but intern #2, a prolific source of natural gas in his own right, is in the office this morning.

    Bob – let me get back at you in a bit.

  39. 39
    MMarkkk Says:

    Reef: #35…spot on. Latest Tudor-Pickering rig report shows rig utilization falling out the bottom everywhere except Haynesville which is mainly driven by a desire to prove up the play and hold expensive leases. Wells reported in the 20MM/day+ range so they may have a lower threshold. Key is how long it takes for the production decline to catch up with the rig drops. With 60-70% declines in the shales, shouldn’t be too long. BUT, many areas are pipeline constrained so the decline in rigs may have a longer time to impact rates. I’m guessing sooner than mid year, but not much sooner. Demand, though, needs to at least hold its own, if not increase. That’s a problem!

    BOP: thanks for the cusip on the CHK pfds. Thinking about dabbling. Maybe dump some of the common and relieve some of the risk profile.

    Bought shares/sold in the money covered calls on EOG and HK over the last couple of months and paying off nicely. Will return 15-20% over 3-6 months. I’ll take it in today’s market but it takes too much work!! Gotta catch some volatility to make it work.

    CVX spending staying level is a good thing. But, a huge portion of that is focused on major capital projects overseas so it may not help the service companies as much as it helps the engineering/construction side of things.

  40. 40
    zman Says:

    Thanks Mark – good points re pipeline constraints and the CVX capex.

    For the new subscribers around here who don’t know Mark check out the Bio tab at upper left. I haven’t managed to get Reef to pen anything about himself and I’m not one to harass subscribers but he’s a big wheel as well.

  41. 41
    zman Says:

    Crude almost touching positive now; products are up on the after glow of lower than expected inventories yesterday.

    NG up 5 cents. No supply report yet from EIA.

  42. 42
    kyleandy Says:

    just bot some of the new CHK notes at 98.735 from bank of america

  43. 43
    BirdsofpreyRcool Says:

    kyleandy – you paid about a point higher than the institutional offered side on those bonds. That’s about as good as you can expect to do, as an individual investor. Nice buy. Thanks for sharing.

  44. 44
    kyleandy Says:

    bop has been an immense amount of help in my bond buying adventures. thks

  45. 45
    BirdsofpreyRcool Says:

    Vulcan Materials is the next one teed up to sell bonds. They just announced a 2-tranche deal: $250mm 9 yr + $150mm 6 yr notes. These notes are 144a, but VMC has other notes outstanding that are registered.

    This looks to be a bought deal by Goldman Sachs. The 6-yrs have a 10.125% coupon and the 9-yrs have a 10.375% coupon. The sale will close on Feb 3rd.

    VMC senior unsecured debt is currently rated Baa2/BBB+… so, that’s a pretty hefty yield on those notes. They are rated 4 whole steps higher than the CHK 9.5s. Tells you the market is much happier buying E&P debt than anything to do with building materials.

  46. 46
    zman Says:

    BOP – seconding the thanks for all the fixed income thoughts.

    VMC is a pretty interesting story, should be well positioned for the stimulus.

  47. 47
    choices Says:

    #37, Bob, Agree with your analysis-I watch the Canadian Trusts, which has several varieties but the gassy trusts (with some crude) are all I’m interested in. Essentially, one is making two bets, that the distribution will not be cut and the price will stabilize and eventually go up, if and when gas and crude go back up. If NG and crude stabilize with some of the trusts announcing stable distributions out 2 or 3 months, one can receive 15-20% while you wait (taxed as dividends as opposed to interest income with Foreign Tax withholding at 15%-take the foreign tax as credit against US tax if you pay taxes in US). It is definitely a game with a hell of lot of risk (what isn’t these days) and I would not touch a trust with payout ratio over 60-65%.



  48. 48
    BirdsofpreyRcool Says:

    kyleandy – thanks. It was fun to help.

    I think more people should think about buying individual bonds in companies they believe will weather the downturn. Unlike putting your money in a bond mutual fund, you can make the decision to hold through periods of price volatility, clipping the coupon as you wait. Of course, the advantage of a mutual fund is bond holding diversity. But, if an individual can buy as few as 6-8 different company bonds, you have achieved about 75% of the benefits of diversification. And you know/control exactly what you hold.

  49. 49
    zman Says:

    Bob – I spaced on the MLP question. I think LINE is best positioned. So does the Street. Hard for them or any of their peers to grow at present with the markets semi-shut on equity raises. They grow via acquisitions with long lived reserves. If you have to pick one that is “safer” on yield its them as they have been playing it safe on distributions for quite some time and may actually raise the dividend slightly this year. I still have not dipped a toe in there but have been thinking I will as I see what shape the hedge funds who remain are in. They had been getting punished along with all yield vehicles as the hedge funds headed for the exits.

    Market at LOD, Obamastim seems to have worn off.

  50. 50
    BirdsofpreyRcool Says:

    File Under: People Unclear On the Concept

    Steelworkers to Reject Shell Offer, Strike Looms (Update1)
    2009-01-29 17:11:16.311 GMT

    By Aaron Clark
    Jan. 29 (Bloomberg) — The United Steelworkers union said it plans to reject the third contract offer from Royal Dutch Shell Plc covering workers at refineries with about two-thirds of the country’s capacity. The current agreement expires Feb. 1.
    Failure to reach a new accord “poses a real threat of strike action,” Gary Beevers, the Steelworkers’ international vice president in charge of the talks, said in a written message to union members. The offer will be “rejected in at the appropriate time,” Beevers said.
    Shell offered the union a three-year contract with a $500 signing-bonus and a 2.5 percent hourly wage increase in the second and third year, the memo showed. Members would receive a
    75 cent-an-hour pay increase beginning Feb. 1.
    “Shell is optimistic that a mutually satisfactory agreement with USW can be made at this point,” said Stan Mays, a spokesman for Shell. Mays declined to comment further.
    “At this time no location is authorized to extend the collective bargaining agreement without specific authorization from me,” Beevers said in the memo dated yesterday.

  51. 51
    Bob Says:

    Z-Thanks. I was just musing on how LINE can continue to pay out more than they earn, compared to EVEP. Growth via acquistions can help

  52. 52
    BirdsofpreyRcool Says:

    Epic battle being fought at the SPX 850 yardline between the Bulls and the Bears. Who needs the Super Bowl when you can just watch the stock market?

  53. 53
    zman Says:

    Bob – most of the upstream MLPs grow via acquisitions. LINE has been particularly adroit with both purchases at low $/Mcfe and sales of their higher operating cost ($/LOE) assets for higher $/Mcfe. Its a nice trick if you can pull it off. Right now asset purchases are what I would call slow at best but when things pick up I would expect them to pluck some low hanging fruit. In the mean time, if you are going to suffer through holding an E&P type stock (and they qualify as the 20th largest gas producer in the U.S. and the largest of the upstream MLPs) then why not get paid nicely and securely (as securely as you can be these days) to wait for the turn? There, I almost talked myself into buying it. Or you can buy bonds.

  54. 54
    Dman Says:

    FWIW – UNG looking scoopy

  55. 55
    kyleandy Says:

    z – re LINE – since they have 110% payout rate, if ng prices remained the same, isn’t the div in danger of being reduced, since they are not making acquistions now?

  56. 56
    zman Says:

    Kyle – they have been well under for quite some time. I haven’t ballparked how long they can keep it at present levels but they were talking about inching it UP within the last 2 months. Will take a look at that.

    Dman – I hear ya. Needs a catalyst. That will come as either press releases (lots of them) talking about price related shut ins or via data (once a month shot there on the gas supply, once a week on the rigs…so far no joy from rig slashing)…it will happen though, just can’t argue against the math of that many rigs going away.

  57. 57
    elduque Says:

    Dman did you say scoopy or poopy. Z I am sure you know the difference.

  58. 58
    zman Says:

    Kyle – they’ve also got good hedge coverage. Half of production with swaps at $8.50, another quarter of production (or thereabouts) with collars with floors at $7.65. Into 2010 they have more volumes hedged at similar levels.

  59. 59
    zman Says:

    Not a lot of volume in our favorite names. HK up 1.25% today as people remember they have better wells than CHK or anyone else in the Haynesville and they tie that to the fact that right now, only the Haynesville is worthy of investor’s consideration (at least that’s the current thinking).

  60. 60
    zman Says:

    This was emailed in by one of our compliance impaired members and is worth noting with regard to LINE:

    Z: Part of the reason for it’s exceptional weakness last year was that they were underwritten by Lehman. When Lehman went under a fair amount of shares were held by Lehman and were forced out causing that move from $16 to $11. S

  61. 61
    zman Says:

    This is one of those days that’s just begging for an end of day bounce. If that happens HK is going to outperform.

  62. 62
    BirdsofpreyRcool Says:

    z – if we continue to defend the 850 yard line, i agree. Will see a bounce into close.

  63. 63
    tater Says:

    You are playing crude with SU and not CLR for the most part? Better option spreads, or some other reason? Is that the price deck thing? (Terms of art, don’t mean to sound so ignorant but it’s hard to cover up when I so blatantly am).

  64. 64
    elduque Says:

    Dman Aside from my attempt at humour, nice call. What maybe a first in a long while, I have made money trading UNG from the long side.

  65. 65
    BirdsofpreyRcool Says:

    BAC trading at HOD. I think we go positive from here. Watch GS…

    IG back to about unch’d at 196

    HY taking it on the chin and giving back all of yesterday’s nice gains at 74 7/8 -1 1/2. Big move. Wrong direction.

  66. 66
    zman Says:

    SU choice based on what looks like a tighter correlation to oil to me and better spreads yes. Oh, and SU tends to outperform CLR on down days as CLR remains unhedged to WTI. And SU benefits (a little) from lower natural gas prices.

  67. 67
    zman Says:

    Elduque, I was laughing on the inside, lol.

    Big contest tomorrow. Not energy related. Multiple winners possible and in fact likely so don’t miss the post. Why because a) I’m bored, b) I like contests with a definite outcome (not like some open ended takeout contests I know of), and c) because I’m a nice guy.

  68. 68
    tater Says:

    Thanks. Also, if anybody cares, take a look at DXO and DTO right now. Both positive. How can you trade something like that? Much rather work an option trade myself.

  69. 69
    zman Says:

    Aubrey McClendon on Mad Money tonight.

  70. 70
    tater Says:

    Any thoughts on XOM? Biggest player out there, so it’s bound to move the market.

  71. 71
    BirdsofpreyRcool Says:

    IG at 193 back to unch’d for the day.

  72. 72
    zman Says:

    XOM – tougher to call than usual. Upstream not good due to pricing, maybe off a little as usual on volumes, refining segment not great but probably better than expected, chemicals division should be ugly. So operationally could be some downside. Cash balance was $38 billion, interested to see where it is now. Everyone wants a deal out of them, probably doesn’t happen yet. May announce stepped up buyback as they’ve had a good appetite for their own shares at these levels. I’m thinking to play or not post the report, if its rosy we are a good distance from that $82 level and I’d easily chase it if their outlook is good.

  73. 73
    zman Says:

    Abysmal pre numbers action out of ACI. Going to hold into the call for a reversal on a better day. Their outlook should be positive.

  74. 74
    Nicky Says:

    Good afternoon all.

    Broader market. Move off yesterdays highs looks corrective – I think we should find a low in this area and move higher again.

    30 year T Bond – just highlighting this as I believe it is nearing the end of its move and may provide a trading opportunity – currently in 5 of 5 and I am looking for it to bottom between here and 126.11 and we should then see a substantial bounce.

    Gold – serious resistance at the 922 – 933 level if it can get there – I am still expecting it to roll over.

    Oil – finely poised….

  75. 75
    tater Says:

    Hi Nicky, thanks for all of your help. So what you’re saying is that oil is ready for the prom 🙂 ?

  76. 76
    Bob Says:

    Choices- Thanks for 47. Do you have a current favorite with a lower payout ratio?

  77. 77
    Nicky Says:

    Hi Tater – count is tricky – I am still favoring that we are in some sort of wave iv correction but if we go much lower than earlier today then clearly we are already in v down. Still expect it to bottom shortly.

    If still in iv should move up sharply in a wave c…

  78. 78
    tater Says:

    Thanks much. I was held back in grade school, so it’s always helpful when you get out the crayons for me.
    Is the gold resistance the downtrend line or is that something else?

  79. 79
    Nicky Says:

    Gold downtrend line I have coming in around 915. Again we have been in a sideways consolidation for months so its tricky but the move up off the 680 area has not been impulsive and looks corrective and therefore next move of significance should be down.

  80. 80
    tater Says:

    Didn’t have my gold charts up, going off of memory on the question. I think that the gold idea is the hardest one to get ahold of conceptually. Print lots of money = lower gold demand.
    I guess we’ll have to wait a bit before we can actually see whether the emperor has any new clothes from China.

  81. 81
    zman Says:

    Nicky – do you have a chart marked up you could send me for oil?

  82. 82
    Nicky Says:

    Z – I am working off the charts on my trading platform but will try and put one together for you.

  83. 83
    zman Says:

    Nicky, if you could copy and paste and email it I’ll put it in the morning post (assuming it isn’t a giant of chart). I know a lot of people would like to see your annotated chart view of oil. Thanks in advance.

  84. 84
    Nicky Says:

    Tater – everyone is super bullish on gold which has me on my guard.
    Eventually I think it will go way higher but that’s down the road…

  85. 85
    zman Says:

    beer thirty.

  86. 86
    zman Says:

    BOP when do you expect news from KOG next?

  87. 87
    zman Says:

    AMZN up 8% AH

  88. 88
    BirdsofpreyRcool Says:

    z – re: KOG.

    Back in November, I laid out a schedule, based on a discussion with mngnt, and so far, they are right on schedule. I guesstimated that their first PR would be on Jan 5th, to announce they had TD’d the first well. That PR came out on Jan 8th. So, close enough for me.

    Next date on my guesstimated schedule is to hear about the 2nd well TD-ing on Feb 16th. Maybe we get a Valentine’s gift and hear on the 14th, as they drilled the first well in 38 days, instead of the 40 they originally thought it would take… but, that’s the next public milestone. Mngmt has been very very tight-hole about things, since the first well spud.

    Hearing there is a large seller out there. Don’t know why… could have something to do with low oil prices and small companies. But, KOG has no debt and is partnered with DVN, Hunt, and XTO for a well or two down the line.

  89. 89
    BirdsofpreyRcool Says:

    TRA trading up in a/h on no news. I am expecting one of two things there: CF will up the bid, and/or someone new throws their hat into the bidding ring for TRA.

    CF’s original offer for TRA was too low.

  90. 90
    zman Says:

    Re KOG Thanks.

    Anybody else in the two wells?

    KOG mkt cap about $15 mm unless I’m missing something, no debt right?

    If they have 40,000 net acres and we assume 1 well per section thats 62 locations. Call an average location 300,000 barrels and you get to about 20 mm barrels. That’s middle Bakken only, nothing for Three Forks Sanish potential.

    If they are successful with both wells it seems hard to fathom how DVN or XTO don’t pick them up for a 2x or 3x premium and still pay next to nothing on a $/barrel in the ground basis. I know I’m stretching it to make those assumptions as we don’t know its there yet or how homogeneous it is across the reservation but it seems a worthy expiration free option. Hmmm. Just don’t want to forget about the time line, will put on my calendar to get long a little around the beginning of Feb.

  91. 91
    BirdsofpreyRcool Says:

    z – yes. Hunt is partnering in up to the first 6 Bakken wells, I believe. In the first two wells, KOG has a 60% WI and 49% net revenue interest.

    As of Jan 1st, KOG had 36,000 net acres under lease on the Fort Berthoud Indian Reservation. KOG operates all the leases on the Rez, with the exception of about 9k net acres that are operated by XTO.

  92. 92
    BirdsofpreyRcool Says:

    KOG – on that drilling partnership agreement with Hunt… it covers 7 wells, not 6. Here are the relevant details.

    1st, 3rd, 5th, and 7th wells = KOG pays 20% of the drilling and completion costs for it’s 60% WI

    All other wells = KOG pays its proportional 60% for its 60% WI.

    The first 7 wells must be drilled within 30 months of teh agreement (Nov 2008). The total promote on the wells to be drilled will not exceed $8.5mm to Hunt.

  93. 93
    PackMan Says:

    Z – Why are you an XOM bull at current levels ? Thx.

  94. 94
    PackMan Says:

    sorry; just read 72

  95. 95
    zman Says:

    Pack – don’t know that I qualify as a bull as per 72 above … I’m not in the night before earnings but am willing to listen. In general they are cheaply valued for them, are an easy pick for people needing exposure to energy during these uncertain times, and have a pile of cash to buy back shares with or maybe, just maybe, pick off some cheap asset or company.

  96. 96
    zman Says:

    Hey Pack, call me on the fence to slightly bullish. I kind of like COP better after today’s beat down but only because it is very, very cheap. Don’t own it either, still trying to find time to listen to their CC.

    By the way, I thought Aubrey did a good job of comporting himself on Cramer re his asset sales. In essence he said he didn’t see the economic mess coming and he would make the same wrong call 1 million times again … gotta say, I didn’t see oil dropping $100+ in 6 months either.

    Everybody and their brother is doing a debt deal now, HESS, COP, you name it.

  97. 97
    nifkin Says:

    Newfield Exploration’s proved reserves were 2.95 Tcfe at 31-Dec, +18% y/y
    Substantially all of the reserve additions were from organic drilling programs. Net negative reserve revisions, due primarily to lower commodity prices at year-end 2008, totaled 66 Bcfe. Newfield invested approximately $2.3B in 2008. Total finding and development costs in 2008 were approximately $2.96 per Mcfe, excluding the negative impact of price-related reserve revisions, and $3.31 per Mcfe including the revisions. Due to low commodity prices at year-end 2008, Newfield expects to record a “ceiling test” writedown of approximately $1.8B ($1.2B after-tax) to reduce the carrying value of its oil and gas properties.

  98. 98
    zman Says:

    RMD – should have been more clear, choices not mutually exclusive. If every picks same and wins, everybody gets stuff.

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