Friday – Weekly Gas Storage Review Plus E&P Spotlight Part II

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Jobs Watch: 651,000 vs expected losses of 650,000 for February. Unemployment rose to 8.1% vs a 8.0% expected rise. There were big downward revisions to the job losses for previous months. The only area seen gaining employment was government jobs.


In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. E&P Spotlight Part II
  4. Natural Gas Storage Review
  5. Odds & Ends

Holdings Watch:

  •  LINE - Added for $13.52. 18.7% yield. This is the largest upstream master limited partnership in the U.S. and is hedged 100% on expect oil and gas production for the next 3 years. Can the stock fall further? Sure, but the distribution should be well covered by hedge protected cash flows. See the Feb 26th post using the calendar function on the left hand side of the site for more on my thoughts there.

Commodity Watch:

Crude oil fell as the broader equity markets sold off to fresh 12 year lows. Crude ended down $1.77 to close at $43.61. This morning crude is trading up nearly a buck

  • OPEC Watch: Tanker tracker Oil Movements estimates OPEC crude shipments will fall another 430,000 bopd for the four week period ended March 21. The tracking firm said this would put OPEC on target to be in complete compliance with the December quota cuts sometime in the second quarter.
  • Demand Watch: OPEC, the EIA, and the IEA all release their monthly outlooks next week prior to the OPEC meeting and all are likely to cut global oil demand estimates again.

Natural gas was nonplussed by a "high end of range" withdrawal from storage ending the day down $0.25 yesterday at $4.09. This morning gas is trading down slightly but is still holding the $4 level.


E&P Spotlight Part II. A few more charts for quick reference. Again, no silver bullet here, just getting things into a useful format which allows for a greater ability to quickly look at some risk factors some of the small and mid cap E&Ps are facing. These have been added to the E&P tab. 


Natural Gas Storage Review

ZComment: Obviously a bigger number than I was looking for. In the week before this one just past, heating degree days, on a population weighted basis were 188, vs 186 in year ago week. And from this data we saw a withdrawal of 101 Bcf this year and 157 last year. This implies a 8 Bcfgpd delta (part higher supply, part lower imports, part lower industrial and electrical demand). Then in this past week, HDDs fell to 183 and yet the storage number yesterday came in as it did at 102 Bcf. So either production has dipped week to week or industrial demand is recovering or some other factor is at play. My money is on the latter factor and I think its name is flat commodity prices in the next 3 months and fear of storing gas that just keeps falling in value. When you have contango, rising prices in the future can prompt people to put gas into storage for future sale if the future prices are high enough to warrnet the monthly expense of doing so. But the strip becomes backwardated or just continually inches lower, then you have the oppositie. Sometimes at the end of the storage season we see a bit of a gas storage blow down and given that imports were actually up week to week my sense is that yesterday's apparent rally in demand was financial and not physical.

My Current Gassy Thoughts:

  • I think we are likely to reach trough storage in the 1,500 to 1,600 Bcf in storage
  • That's pretty steep storage but if you look at 2007, we troughed at 1,517 Bcf, peaked the following fall at a very full 3,539 Bcf and still saw gas prices hold up well that winter (in the $7s and $8s) before rallying substantially that spring.
  • Gas prices are more a function of directionality of supply and demand than absolute storage levels. As such, with supply beginning to roll over as we speak (I bet you see more hints of it in the January and certainly in the February numbers when they are released in a little under 2 months) and demand beginning a recovery in May or June depending on the arrival of Summer heat, we are setting up for a pretty sharp reversal, beginning in 2Q and becoming more pronounced a little further down the road.
  • The longer gas prices stay low, the sharper the reversal will ultimately be.
  • LNG remains the 2009 wildcard. New capacity of somewhere between 3 and 7 Bcfgpd are scheduled to come on line over the course of the year and if markets in Europe and Asia don't need excess volumes we could be seeing some of those volumes here. We heard this same story last year and the opposite happened when demand in both Asia and Europe soarded but the economy was healthier then and incremental volumes may find no buyers there.


Odds & Ends

Analyst Watch: BMO ups (WNR) to market perf, (CNQ) upped to outerperform at CIBC, Credit Suisse trimes target for (XOM) from $75 to $70. 

117 Responses to “Friday – Weekly Gas Storage Review Plus E&P Spotlight Part II”

  1. 1
    BirdsofpreyRcool Says:

    z — thanks for all the graphs. Especially like the FCF vs 2009 Budgets.

  2. 2
    BirdsofpreyRcool Says:

    Tech Trader’s Comments — Same game plan as yesterday, looking for a bounce. And much better color pattern (Green) to trade. But worse odds and down to 50/50. So unless you love trading horrible odds on a Friday and ruining your weekend, or unless you are being paid to make a market (with someone else’s money), forget it. It is not worth the (personal) risks. And therefore we are taking a day off (after working all weekend last weekend) for a little R&R.

    Translation: walk the dog, do yoga, go to the gym, add to your wine cellar, do taxes… not worth trying to make a market call today.

  3. 3
    BirdsofpreyRcool Says:

    Friday Humor, worth sharing, from some else’s daily energy email… speaking of “walking the dog”

  4. 4
    zman Says:

    Morning BOP – thanks for the trader talk.

    How’s credit looking.

    Dollar is getting dropped on the jobs numbers (I assume the negative revisions) which should lend a little support to oil and if it continues to bounce of the resistance area at around 90 on the dollar index, making it more likely that OPEC will trim output.

  5. 5
    zman Says:

    Entirely green screen at the open, best advice, take picture, go to beach.

  6. 6
    BirdsofpreyRcool Says:

    The Credit Market is grim. But, I know y’all are probably tired of hearing me say that, day-after-day. So, instead, I’ll just post a few comments from the Best Cross-Asset Class Strategist in the World. From an intra-day blast this morning…

    We’ve written that credit seems to get hit day after day, and today is no exception. In addition, the money market pressure is up a little more. Just for example, the GE bond maturing in December that was bid around 8.25% yesterday is now bid at nearly 9%.

    This remains very similar to the action in June: the beginning of money market panic occurring as stocks get increasingly short-term oversold. Stocks then bounced in July and August before the waterfall decline in September.

    We still can’t say this will play out the same way, but this solidifies the fact that the risk level (of BOTH a sharp up and down move) has increased sharply, while implied volatilities have not kept pace.

  7. 7
    elduque Says:

    BDI +58 2055

    TED -1.561 108.15

    TED spread really widened out yesterday as it was at 104.54 in the morning, so it must have got as high as 109.5.

    BDI continues to improve.

    Whats right? Stuff is continuing to get unstuck or we are going to start another round of credit contraction. Gov’t has got to do something about getting the banks to seem like they are not all going to fail. Meanwhile the trade du jour seems to be beat the hell out of the next bank that get a Moodys downgrade.

    Enjoy the moment.

  8. 8
    Sambone Says:

    By David Bird

    NEW YORK (Dow Jones)–Crude oil futures prices doubled early gains and were
    trading up $1.39 a barrel at $45 as the market weighed signals from OPEC which
    will review oil output policy on March 15.
    Prices held early gains after the U.S. employment report for February showed
    the jobless rate is now the highest since December 1983. February data from the
    Labor Department was in line with expectations, but December and January
    figures were revised to show steeper job losses.
    Analysts said stock markets, with steep losses, had already factored in bad
    news from the data, and could rally, helping crude. The dollar also dipped on
    the jobs data, offering a further boost for the barrel.
    Traders were weighing signs from the Organization of Petroleum Exporting
    Countries amid indications that output cuts are beginning to be felt in the
    Libya’s top oil official, Shokri Ghanem, said all options are on the table at
    the upcoming OPEC talks, but noted that the inventory situation has improved
    and is “not as bearish as it was.” He said OPEC should finish complying with
    already pledged cuts before setting further restrictions.
    Analysts said that fundamentally, OPEC may do enough to tighten the market, if
    it complies with agreed cuts of 4.2 million barrels a day. But they said the
    market may need a psychological boost of further OPEC cuts to hold gains.
    Saudi Arabia effectively raised its official selling prices for crude this
    week, a move which has split market watchers. Some say the world’s largest oil
    exporter is signaling a willingness to make further output cuts and
    discouraging demand by lifting prices, while others said the Saudis are simply
    reacting to a tightening market by adjusting prices.
    Analysts said Friday’s trading may be impacted by moves by U.S. Oil Fund LP,
    which currently accounts for about 23% of all outstanding Nymex front-month
    contracts, as it begins its monthly process of transferring its front-month
    positions to the second-month contract.
    Due to the size of the fund’s holdings, the procedure has helped depress
    front-month prices in previous months, prompting the fund to this month stretch
    the timeframe it carries out the “roll” to four days from one.
    Longer-dated Nymex contracts were showing larger gains than in the front month
    early Friday.
    At 9:14 a.m. EST, April RBOB gasoline futures were up 2.39 cents at $1.3374 a
    gallon and April heating oil was 3.52 cents higher, at $1.1950 a gallon.

    -By David Bird, Dow Jones Newswires
    Dow Jones Newswires
    03-06-09 0924ET

  9. 9
    Garyinhou Says:

    crazy dog..

  10. 10
    zman Says:

    Choices – on that contract cancellation, it was a jackup, surprised we have not seen more. Will be interested to see how they handle it as the talk has always been “contracts are iron clad” along with “we understand conditions are tough and will work with our customers, and we reiterate that contracts are iron clad”. Customer was Petrobel, was at 172K per day. No way they just let them out of it since it ran through mid next year.

  11. 11
    zman Says:

    Sambone, good to have you back in time for movie quote Friday. You first.

  12. 12
    1520sbroad Says:

    z – thanks for the gassy thoughts – and E&P thoughts over the last few.

  13. 13
    Sambone Says:

    Find hungry samurai

  14. 14
    zman Says:

    1520 – just basics to have at hand when the turn comes. Most of it won’t change except on a quarterly basis but I’ll up the metrics with estimates in them pretty frequently.

    Too warm here. Natural gas is very fearful of the shoulder season.

    Saw Sabine Pass LNG will get its final “commission gas shipment” later this month, then says off to the races. My thought …I’ll believe it when I see it. (LNG), the company I did not care for at $40, still don’t at $4. These guys have been preaching the tsunami wave for a long time and 2008 was going to be the big year. Now its 2009 and while there will be more gas around (again), don’t see the benefit of bringing it half way around the world to sell into the weak U.S. market. They added capacity on the concept of “if you build it, gas will come” but we have seen that that is not true, and we already had plenty of spare regas capacity.

  15. 15
    zman Says:

    killbill 2?

  16. 16
    Sambone Says:

    1 more chance, hint – foreign

  17. 17
    1520sbroad Says:

    i think we are back to basics on many fronts.

  18. 18
    zman Says:

    1520s – agreed. What better time to pay attention to them then?

  19. 19
    Sambone Says:

    Hint #2 – “The Magnificent Seven” was based upon this movie.

  20. 20
    zman Says:


  21. 21
    Sambone Says:

    LONDON (Dow Jones)–Organization of Petroleum Exporting Countries’ Secretary
    General Abdalla Salem El-Badri Friday criticized the International Energy
    Agency for calling on OPEC to pump enough oil to keep crude prices at today’s
    low levels while urging increasingly cash-strained OPEC states to keep
    investment projects going.
    “The IEA’s comments are confusing and misleading. Whilst asking for prices to
    remain at $40 (a barrel), it also wants investments to be made that are not
    economically viable at these prices,” El-Badri said in a statement.

    -By Spencer Swartz, Dow Jones Newswires

    Dow Jones Newswires
    03-06-09 1000ET

  22. 22
    Sambone Says:

    US subtitled 1954 – “Seven Samurai”.


    Badass flick!

  23. 23
    zman Says:

    Re 21 – the IEA statements are perpetually “confusing and misleading”. These guys demanded higher production last year because prices were too high and within 6 months were arguing for still higher production but warning of a crash in investment that the now low prices would cause.

  24. 24
    zman Says:

    Market gains looking more and more fleeting. Probably should have taken that snapshot and hung it up for the day.

    Not much news out.

    PVA is on the tape trimming spending and cutting production guidance due to weak gas prices. Looks like most of the cuts are going to exploration, not resource plays which is what you would expect.

    And they drilled an unsuccessful Bossier (Haynesville well) in E. Texas in Harrison county …can you say hello further pressure on GMXR?

    The bifurcation of the NW LA vs E. TX Haynesville continues.

  25. 25
    Garyinhou Says:

    Start your weekend off right..

  26. 26
    zman Says:

    Nicky or Tater – when you get a spare minute, I’d appreciate a look at the Dollar Index. We made a recent higher high and are now sitting up in pretty rarefied air (at least back to July 2005). Talk out of China is still a preference for oil and other commodities over more treasuries. Seems like only a matter of time with a spiraling budget deficit that dollar goes lower anyway.

  27. 27
    BirdsofpreyRcool Says:

    z — SD tried to sell their Haynesville acreage… and (i guess) didn’t like the bids. Is that acreage in E Tx or LA?

  28. 28
    zman Says:

    Gary – thanks for the chuckle. The problem with those I then “step out” and watch 5 more.

    This is just wow:


    BOP – they voiced a thought to sell that mid 2008 to help pay down debt but then kind acted like they might do something there first, to prove it up a bit before punting at a higher price. Pretty sure it was all E. Texas, will look it up and circle back.

  29. 29
    BirdsofpreyRcool Says:

    z — no problem. I can look it up too… just thinking that they seem to be sinking a little further into an asset value hole. Good guys… I wish them all the best.

    We all need energy prices to turn up. Current price regime is not good for anyone and is only setting up for massive volatility in the future.

  30. 30
    tater Says:

    I’m running out the door, so I don’t have time to update the charts but you can easily just extrapolate the lines out further to the right. The monthly chart for the $USD is the one that I find most useful.


  31. 31
    kyleandy Says:

    z – where u see news on GMXR

  32. 32
    zman Says:

    Kyle – I don’t, that news was on PVA, but they are in the same Bossier/ Haynesville neighborhood.

  33. 33
    zman Says:

    RBC cuts HK price target. From 33 to 31. Rating outperform. Still holding $17.50s and $20 March calls here.

  34. 34
    zman Says:

    Broad market rolling red.

  35. 35
    zman Says:

    NG back below $4

  36. 36
    BirdsofpreyRcool Says:

    There just isn’t any institutional fortitude to stop the stock market decline. For the most part, real buyers remain sidelined, watching the shorts have their way with the market… and especially the banks.

    Of course, news out of Merrill Lynch today re: “discovered trading irregularity” by one of their London currency traders didn’t help (invokes memories of Leeson bringing down the House of Barings in 1995).

    I know, Sambone, I know…

  37. 37
    zman Says:

    I think the market is in “wake me at S&P 600 and we’ll talk” mode.

  38. 38
    BirdsofpreyRcool Says:

    jason — re: your VIX challenge yesterday… the WSJ has an article today that addresses your question quite nicely. Basically, at or near a bottom, the VIX won’t necessarily move in the direction you think it should. So, perhaps it’s not a very good indicator at present.

    Not saying we are “at or near a bottom”… but every day, we sure seem to get closer…

  39. 39
    BirdsofpreyRcool Says:

    z — re#37. Funny thing, Head Trader said the same thing the other day. Basically, “let’s just drop to 600 and get it over with.”

  40. 40
    Jason Says:

    Thanks BOP…I’ll have a look.

  41. 41
    BirdsofpreyRcool Says:

    jason — finance section, inside page. I tried to paste a link… but I guess paying for a print subscription no longer allows you complete access to the on-line addition.

    By the way… anyone notice how the Journal is looking more and more like “USA Today”? Oh, well. Times change.

  42. 42
    zman Says:

    NG augering for a sub $4 close, may get a reprieve from another round of rig count declines in an hour or two though.

    I was thinking today we could get one of those Friday sell off Monday crash type events but the numbers coming in as expected (at least on the Feb employment) seems to have put everyone into go home early mode. The close may still be a bloodbath, impossible to say.

  43. 43
    zman Says:

    And despite the directionless market, Majors and the E&Ps are showing a few signs of life. Oil service is a little more mixed.

    Oil back to up a buck.

  44. 44
    zman Says:

    Has anyone seen a story coming out of EIA about taking another look at year over year gasoline demand. Epperson on CNBC said the EIA now sees it down from year ago levels after having taken another look. I see nothing of the kind on their website.

  45. 45
    zman Says:

    Latest EIA gasoline demand data on their site still shows last week’s gasoline demand at 9.204 mm bopd, up from 9.071 mm bopd.

    By the way, the EIA’s topic of the week is a sort of 10,000 foot flyover of the Bakken.


  46. 46
    zman Says:

    That PVA news just putting the stink all over GMXR, the stock just went single digits.

  47. 47
    BossmanG Says:

    speaking about the WSJ, just saw this for anyone interested, good price?

  48. 48
    zman Says:

    Circling back to SD, their acreage on the E. Texas side of the play where they’ve had some vertical penetrations of the Haynesville. They do have a smaller position in NW La with CHK, drilling or have drilled a well, can’t find an IP so not sure if its completed yet.

  49. 49
    BirdsofpreyRcool Says:

    z — thanks for following up on SD.

    KOG — heard they are starting on their 3rd Bakken well… one with XTO. Don’t know who the operater is, KOG or XTO. Just fyi.

  50. 50
    RMD Says:

    re: 14 is there a site wich has NBP prices or NBP vs. USA nat. gas prices?

  51. 51
    BirdsofpreyRcool Says:

    Bears going after JPMorgan pretty hard today… don’t think Jamie Dimon will take that laying down. Will be interesting to see how he handles this.

    Stablize the financials, you will stablize the market. Until then, all bottoming-bets are off.

  52. 52
    zman Says:

    RMD – are you looking gas prices around the globe?

  53. 53
    BossmanG Says:

    BOP, any way of finding out the amount of CDS outstanding against GM for example?

  54. 54
    BirdsofpreyRcool Says:

    BossmanG — I’ll check around for you… not sure. At best, would only be a guess, anyway, as CDS are private contracts and don’t trade on public exchanges, yet. Will, tho. And that will help a lot.

  55. 55
    RMD Says:

    re:52 no, just the gas price LNG is referencing in their 3/5/09 release that “NBP prices are coming closer and closer to Henry Hub prices.”

  56. 56
    BossmanG Says:

    Sure, I remember reading back last year there was 65$ billion against 32$ billion debt?
    Still trying to make sense of it…

  57. 57
    zman Says:

    Bossman – good question

    BOP – used your “I haven’t seen a market this bad since tomorrow” line at dinner last night and got one of teachers retirement account money types to snort cabernet. Serves her right after her opening line to me, “so I see oil’s been going down, again”.

  58. 58
    zman Says:

    RMD – don’t know of a free one, the bloomberg endowed may be of help there. I will look into it.

  59. 59
    zman Says:

    RMD – here’s one in pence per therm that is probably close to the balancing point:


    Annoying to convert. Don’t these guys know everything should be valued in dollars? Why the dollar is the last bastion of … nevermind. Will look for another source.

  60. 60
    BirdsofpreyRcool Says:

    BossmanG — had the following exchange with my sell-side CDS expert:

    BOP — is there any way to find out the amount of CDS outstanding against GM?

    Expert — I do not think anybody has a clue.

  61. 61
    BirdsofpreyRcool Says:

    z — #57… great visual! Anything that gets people laughing (in this mrkt) is probably a good thing. Of course, the Cab probably helped.

    thx for sharing.

  62. 62
    BossmanG Says:

    thanks BOP, lol love the response

    so if theres more CDS outstanding then debt, how would that play out? maybe im just a bit confused…

  63. 63
    Sambone Says:

    Is this the bottom?


  64. 64
    zman Says:

    Someone just prompted me to point out that GDP, GMXR, and now PVA all getting less than stellar results in the Haynesville. This may be the cause behind PXP wanting the option of a 2010 out with their deal with CHK.

    I think the first three are part, “oh yeah, they are in Texas, not in the core” and in the case of at least GDP bad luck with completions (I know Gil Goodrich, nice guy but I have in the past referred to him as “one of the gang that couldn’t shoot straight” for being well intentioned but not performing (that was in reference to S. Louisiana several years back)).

    Anyway, my sense is the GMXR beat down is way over done as is the hurt being put on CRK.

    The other way to think about this is that the wells are still costly (call them $9 to $11 to drill still although that will fall a bit this year as rig rates get cut in half and other services fall 20 to 40%) and if we see a lot of the secondary players coming up with less than stellar results the whole the Haynesville gas tsunami will flow out with the same speed it flowed in. Yielding higher gas prices.

  65. 65
    zman Says:

    Re 61. I hope the cab burned going through the nose. She deserved it for that oil shot, lol.

  66. 66
    zman Says:

    Sam – “you’re a funny guy”

  67. 67
    Fiveanddimer Says:

    As I write this note, the DJIA is at 6521 and spot gold is at 942. That makes the DJIA/gold ratio in just under 7. I’m told that this is only the third time in history that this has been the case (although I can’t personnally confirm the accuracy of that statement). I wonder where this ratio goes, before all is said and done?

  68. 68
    jat Says:

    Z, regarding 44, they might be talking about the December monthly data (released on 3/2), which revised downward the preliminary week-by-week DOE demand estimates for that month? If that’s the case, I’m not sure if it really matters since no matter how you slice it the direction of recent YoY gasoline demand comparisons is getting better…

  69. 69
    BirdsofpreyRcool Says:

    BossmanG — best way to answer your question is to get a little personal (but, it makes the point, nicely)…

    The CDS market is like if all the neighbors on your block got together to “bet” on whether or not your house would burn down. Now, normally, you and your insurance company are the only ones who would care.

    But if half your neighbors BOUGHT insurance on your house from half your neighbors who SOLD them insurance on your house, that is like the CDS market.

    Of course, this little exercise in “will BossmanG’s house burn down, or not” does not have to be confined to your block alone… anyone in your community, your city, your country, or around the world can take out or sell insurance on your house. All you need is a counterparty to take the other side of your bet.

    And that, my friends, is how the CDS market works.

  70. 70
    BirdsofpreyRcool Says:

    To make matters even more difficult, this bloomberg article from the other day comments on how CDS complicates any out-of-court bondholder restructuring. Long, but worth reading.

    Darth Wall Street Thwarting Debtors With Credit Swaps (Update2)
    2009-03-05 18:03:12.675 GMT

    By Caroline Salas and Shannon D. Harrington
    March 5 (Bloomberg) — Amusement-park operator Six Flags Inc. and automaker Ford Motor Co. may be pushed toward bankruptcy by bondholders trying to profit from credit-default swaps that protect against losses on their high-yield debt.
    By employing a so-called negative-basis trade, investors could buy Six Flags bonds at 20.5 cents on the dollar and credit- default swaps at 71 cents. If the New York-based chain defaults, the creditors would receive the face value of the debt, minus costs. In a Feb. 27 note, Citigroup Inc.’s high-yield strategists put that profit at 6 percentage points, or $600,000 on a $10 million purchase.
    Investors who bet on the collapse of a company are pitting themselves against traditional debt holders at a time when Moody’s Investors Service projects defaults will more than triple this year to the worst level since the Great Depression. The clash may stall restructuring efforts to prevent bankruptcies, as basis traders may be less inclined to participate in distressed debt exchanges, said Matthew Eagan, an investment manager at Boston-based Loomis Sayles & Co., with $7 billion in high-yield assets.
    “Before, you really had to worry mostly about where you were in the” company’s capital structure, he said. “Now, you have to consider the possibility that you might have this large holder of CDS incentivized to see it go into bankruptcy. It’s something that’s going to come up more and more.”

    Six Flags Debt

    Six Flags debt is rated Caa3 by Moody’s and CCC+ by Standard & Poor’s, three and five levels above default. Both rankings were put on “negative outlook” last year. Sandra Daniels, a spokeswoman for the New York-based company, didn’t return a phone call seeking comment.
    Ford, the only one of the so-called Big Three U.S.
    automakers to avoid taking federal bailout funds, may run up against basis traders as it seeks to restructure its debt. The Dearborn, Michigan-based car company plans to offer cash and shares to retire as much as $10.4 billion in debt, according to a U.S. regulatory filing yesterday.
    It may be “difficult” for Ford to do an exchange, in part because of investors with basis trades, said Rod Lache, an analyst at Deutsche Bank in New York, commenting last month before the restructuring was announced.
    The parent and its Ford Motor Credit finance arm had a net
    $8.1 billion credit-default swaps outstanding, versus about $54 billion in bonds, according to data compiled by Bloomberg and the Depository Trust & Clearing Corp., which runs a central credit derivatives registry. Bill Collins, spokesman for Ford, didn’t return calls seeking comment.

    Profit Either Way

    “Say you’ve lent $100 million to a company and you had bought $100 million in credit-default swaps,” said Henry Hu, a law professor at the University of Texas in Austin. “In that circumstance, the creditor really doesn’t care whether or not the company goes under.”
    Following a meltdown last year in the relationship between prices on bonds and credit swaps after the Lehman Brothers Holdings Inc. bankruptcy, basis traders often stand to make the most money if companies default. They can also profit by holding the trade until the debt matures or unwinding the position after the market value gap between the bonds and derivatives closes.
    Hedge-fund manager Citadel Investment Group LLC in Chicago and Frankfurt-based Deutsche Bank AG were among firms that piled into trades based on the spread between debt and swaps prices.
    Buying before the Lehman failure and the subsequent seizing up of the corporate bond market, many suffered losses and retreated.

    Deutsche Bank Trades

    Deutsche Bank was among those who held onto trades, forecasting the gap would close and the losses disappear, according to a person familiar with the lender’s trades.
    The German bank made money by owning the debt and credit swaps of Lyondell Chemical Co., a Houston-based oil refiner and chemical producer that went bankrupt in January, the person said.
    Lyondell sought and won a 60-day injunction in New York on Feb. 26 against creditors in an attempt to prevent basis traders from going after its Rotterdam-based parent, LyondellBasell Industries AF SCA, and other solvent units, documents filed in U.S. bankruptcy court in Manhattan show.
    Bondholders with swaps filed objections to the ban, according to the documents. Jonathan Guy, a lawyer with San Francisco-based Orrick, Herrington & Sutcliffe who represents Deutsche Bank, said in court last month that his client owned Lyondell debt and credit derivatives.
    Michele Allison, a spokeswoman in New York for Deutsche Bank, declined to comment, as did Lyondell spokesman David Harpole.

    ‘Empty Creditors’

    “You’re given these control rights under loan agreements or bond indentures on the general assumption that if you’re a creditor, you have an interest in the borrower surviving,” said Hu, who’s written about so-called empty creditors. “Because of things like credit-default swaps, that assumption no longer holds.”
    While basis traders may stymie efforts by companies to stay out of bankruptcy, they’re not the corporate bond market’s Darth Vader, the former Jedi Knight in the Star Wars film series who destroyed a planet and sliced off his son’s hand, according to Brian Yelvington, a strategist at CreditSights Inc. in New York.
    The traders didn’t put the companies into the situation, and derivatives are bringing a measure of efficiency to the market that didn’t exist during earlier recessions, he said.
    “You’ve got more information from a side of the market that didn’t exist before,” he said. “People point at CDS causing all of this volatility. To me, it’s always been there. People haven’t been able to place the bets they would have liked.”

    Creditor Resistance

    For distressed companies such as building materials-maker Louisiana-Pacific Corp., which raised $375 million by selling notes and stock warrants this week, the negative basis also can help generate demand for debt because investors have a cheap way to hedge it, said Bradley Rogoff, a strategist at Barclays Capital in New York.
    Residential Capital LLC faced bondholder resistance to a debt-exchange proposal in December, in part because the investors also held derivatives, Rogoff said in a report that month.
    With more than $2 billion in credit swaps and about $9.3 billion of bonds at the time, according to Moody’s, the Minneapolis-based company enlisted the support of only 39 percent of its creditors, falling far short of its goal of 75 percent.
    During negotiations with creditors, ResCap’s Detroit-based parent, GMAC LLC, threatened creditors to initiate an asset exchange that may have left them with losses on the swaps, according to a written statement released at the time.
    GMAC accepted a taxpayer bailout in late December. Beth Coggins, a spokeswoman for GMAC, declined to comment.

    $47 Trillion

    Credit swaps were created by JPMorgan Chase & Co. more than a decade ago to hedge against losses from bank loans. As dealers made the contracts more standardized, hedge funds, insurance companies and asset managers began using them to speculate on the creditworthiness of companies, sending trading in the swaps up to
    $47 trillion in 2008, according to the latest data from the New York-based International Swaps and Derivatives Association.
    Richard Fuld, Lehman Brothers’ chief executive officer, blamed his firm’s collapse on “destabilizing factors” including credit-derivatives trading in Oct. 6 congressional testimony.
    “People are having a hard time trusting anyone,” said Timothy Coleman, co-head of the restructuring group at Blackstone Group LP in New York. “The motivations on the other side of the table are different.”
    The combined average price on high-yield bonds and swaps dipped to as low as 85.06 percent of face value on Dec. 8, after Lehman’s failure Sept. 15, according to Barclays Capital. Two weeks before the bankruptcy, the cost was 92.13 percent, and rose to 94.12 percent as of yesterday. Investors who had done trades around the bottom would make as much as 15 percent with a default.

    Distressed Debt

    Idearc Inc., a Dallas-based publisher of phone directories, may come up against bondholders hedged with credit swaps, said people familiar with basis trading. The company may be forced into a distressed debt exchange or pre-packaged bankruptcy after hiring Merrill Lynch & Co. and Moelis & Co. to advise on its capital structure, Moody’s wrote in a Feb. 9 note.
    Credit-default swaps protected a net $1.15 billion of Idearc debt from default as of Feb. 20, according to the Depository Trust. Idearc has $2.85 billion of bonds outstanding.
    At the start of November, investors could buy the company’s
    8 percent notes due in 2016 at 15.5 percent of face value. They could also purchase credit swaps protecting the bonds from default for seven years for 68 percent of face value, in addition to a 5 percent annual premium.

    Gross Payout

    The gross payout would be 16.5 percentage points if the company were to default. That gap has since narrowed to 5.75 percentage points, according to data from CMA DataVision and Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
    “We intend to look closely at all available opportunities to strengthen our balance sheet and improve our risk profile,”
    said Andrew Shane, an Idearc spokesman who declined to discuss specific options for the company.
    Because the gap between bond prices and swaps converged, many basis traders may have been prompted to exit their positions and take profits. The combined price of Ford’s 7.45 percent notes due in 2031 and five-year credit swaps, for example, has jumped from about 96 percent of face value two months ago to more than
    107 percent today, CMA and Trace data show.


    In 2008, companies got investors to exchange $29.7 billion of bonds in a record 13 trades, according to Edward Altman, a professor at New York University’s Leonard N. Stern School of Business. Altman created the Z-score mathematical formula that measures a company’s bankruptcy risk.
    Debt exchanged last year was more than three times the total amount from 1984 through 2007, said Altman. “Firms appear to be scrambling to avoid bankruptcy like never before,” he wrote in his annual report on defaults, published last month.
    “Defaults are one of several ways that basis holders can benefit, so it would not surprise me if names with high concentrations of basis holders encounter resistance in their efforts to restructure,” said Michael Anderson, a high-yield debt strategist at Barclays Capital in New York.

  71. 71
    zman Says:

    Re 68. I think that’s it.

  72. 72
    zman Says:

    Oil rigs down 19
    Gas rigs down another 54 (that’s just whopping)
    Horizontals down 9

    Canada shed 95 rigs to 299 vs 623 a year ago.

    North America is now down 956 rigs (-39%) from year ago levels.

  73. 73
    zman Says:

    GMXR down 15.5%, too much like piling out, with the high short interest you know the rumor mill is spinning hard here, especially after the PVA news which the shorts will point to in calling to question GMXR’s production growth profile. I’m not in but I’m going to be later in the month.

  74. 74
    sportlock Says:

    Z, down 73 rigs total with 54 being gas and 9 horizontals….. A huge drop of 58 total rigs in Texas. I am starting to think this is going to lead to a ridiculous spike in gas at some point. We are now back to 2003 levels for gas rigs and there seems to be no let up. I think we saw the first glimpse of real supply destruction in this week’s EIA number. While one week is not a trend I do think it is worth watching. Your thoughts are appreciated.
    Thanks Bill

  75. 75
    reefguy Says:

    EPL- just filed 8K- Noncompliance with MMS to post additional $16.7 MM performance bond. Failure to do so by March 27, 2009 means all operated wells in SOUTH Pass Blocks 27,28 will be shutin by MMS. BK…BK…Bk

  76. 76
    BirdsofpreyRcool Says:

    reef — EPL… you called that one a while back, didn’t you. What was the weakness there? Just too much debt? or, bad customer base / cost structure…

  77. 77
    reefguy Says:

    BOP- To much debt and $15/Bbl lifting cost, and they got Hurracained again as all their assets are in South LA in the mud or offshore. The bonding issue is a real and growing issue for all the small E and P on the shelf. Most have posted in by LC’s from their revolving bank lines. The dramatic redeterminations in those lines, and the MMS’s dramatic(tripling) of bond requirements means not many will survive.

  78. 78
    zman Says:

    EPL – its hard to be on the Gulf of Mexico shelf with that much debt (75% debt to cap) with gas prices this low.

  79. 79
    reefguy Says:

    z- How many rigs we down to in US?

  80. 80
    BirdsofpreyRcool Says:

    thanks guys. guess DPTR is next….

  81. 81
    zman Says:

    Back in a former life I used to track production on the shelf vs the deepwater (by platform which I might add I’m not about to do again) and during these down phases in price you’d see this stuff happen and just hammer the shelf players. I don’t think it touches the deepwater but there is plenty of gas coming in from the Shelf.

  82. 82
    zman Says:

    US at 1170

    offshore has held flat at 50 but that won’t last.

    Oil 241
    Gas 916

  83. 83
    reefguy Says:

    DPTR- Kirk K. has no value hear or at the Sands…

  84. 84
    reefguy Says:

    BOP- next is TMR,EPEX,DNE,TXCO, about 10 more in June…

  85. 85
    zman Says:

    All of those shelf players feeling the pinch CPE, SGY, MMR, WTI.

    SGY getting just crushed.

  86. 86
    zman Says:

    Reef – cheap assets if there were any buyers.

  87. 87
    BirdsofpreyRcool Says:

    reef — sadly, so true.

  88. 88
    zman Says:

    Oil by the way up $1.80 and going to close over $45. Stocks not really paying attention to that but the sentiment is moving more and more towards another OPEC cut. Iran showed the Cartel what inaction would look like on Monday when it said there would be no cut and crude fell 10% in a heart beat. With all three major demand predicting sources out next week and cutting demand before the OPEC meeting the group will be able to easily justify its coming cut.

  89. 89
    BirdsofpreyRcool Says:

    More on the financial topic du jour — The CDS and other OTC derivatives.

    Scholes Says It’s Time to ‘Blow Up’ Over-the-Counter Contracts
    2009-03-06 17:34:16.298 GMT

    By Christine Harper
    March 6 (Bloomberg) — Myron Scholes, the Nobel prize- winning economist who helped invent a model for pricing options, said regulators need to “blow up or burn” over-the-counter derivative trading markets to help solve the financial crisis.
    The markets have stopped functioning and are failing to provide pricing signals, Scholes, 67, said today at a panel discussion at New York University’s Stern School of Business.
    Participants need a way to exit transactions and get a “fresh start,” he said.
    The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said, referring to credit-default swaps and other complex securities that are traded off exchanges. “One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.”
    Scholes also recommended moving the trading of credit- default swaps, asset-backed securities and mortgage-backed securities to exchanges to allow for “a correct repricing” of the assets. The securities are currently traded between banks and investors, without any price disclosure on exchanges.
    A total of $531 trillion in outstanding derivatives contracts traded over-the-counter as of June, according to the International Swaps and Derivatives Association. They were mostly interest-rate swaps, but also included CDS and equity derivatives.
    “Take the pricing mechanism from the desks in banks, which have made a huge amount of profits over the last number of years, and facilitate price discovery,” Scholes said.
    Scholes won the Nobel Prize for economics in 1997 along with Robert Merton for their Black-Scholes model of pricing options, contracts that give the buyer the right, but not the obligation, to purchase a security or commodity at a later date for a specified price.
    Scholes is now chairman of Platinum Grove Asset Management LP in Rye Brook, New York. The hedge fund was forced in November to freeze investor withdrawals after a surge in redemptions.

  90. 90
    BirdsofpreyRcool Says:

    Quiet board… so, here’s something a bit off-topic. Been waiting to read something like this from our neighbor to the south…

    Chavez Tells Obama He Should Follow Venezuela’s Socialist Path
    2009-03-06 19:33:15.934 GMT

    By Daniel Cancel
    March 6 (Bloomberg) — Venezuelan President Hugo Chavez comments on U.S. President Barack Obama and the state of the U.S.
    economy. He made the remarks today on Venezuelan state television.

    “It’s regrettable the crisis that the U.S. is living through. Millions of workers are being left in the street, thousands of companies are closing, in the U.S. there isn’t a single new infrastructure project. Go look for a highway there, the country has gone bust.”

    “Now President Obama arrived with some announcements, hopefully, but the capitalist model and its perverse values have failed.”

    “I recommend to Obama — they’re criticizing him because they say he’s moving towards socialism — come Obama, ally with us on the path to socialism, it’s the only road.”

    “Imagine a socialist revolution in the U.S. Nothing is impossible.”

  91. 91
    zman Says:

    Hoping I was wrong in 42, not so sure I am.

  92. 92
    BossmanG Says:

    BOP, thanks for clearing things up. So, if you sell a CDS, how do you hedge? Swap?

    If I own the bond, and buy a CDS, i’m hedged against default.

    Sorry, still a newbie…and its friday…long week.

  93. 93
    elduque Says:

    Why the weakness in CHK, SD, anything other than the general mess of a market?

  94. 94
    zman Says:

    Eld – Continuing spiral, the more debt you have the more you get punished.

  95. 95
    choices Says:

    Thanks for the RIG contract comment, Z.

    Just got back-gas heating bills on very old home furnace going thru roof at “these” prices, colder weather in NW,not sure what they would look like if gas prices get back to $8-$9.

  96. 96
    zman Says:

    Choices – chances are you are paying for gas that was priced for last winter as utilities asked for multiple rate hikes last year due to high prices. So next year, your bill should be lower even if / when gas prices are higher.

    But its the summer cost you are really going to have to worry about.



  97. 97
    Sambone Says:

    By Ed Stoddard
    GRAPEVINE, Texas, March 6 (Reuters) – Denise Blackerby is hitting the
    road again.
    When U.S. retail gas prices scaled historic peaks above $4 a gallon
    last year, she found she could no longer make monthly trips from the Dallas
    area to Houston in her Ford Explorer SUV to visit her family.
    “When gas was $4 a gallon, I didn’t go anywhere. Now it’s all good,”
    Blackerby, who is 44 and works in the information technology industry, told
    Reuters as she bought soft drinks at a Shell gas station in Grapevine, a
    town near Fort Worth.
    With U.S. pump prices now averaging below $2 a gallon, she’s making
    those regular Houston trips again.
    As gasoline prices surged to record highs last year, drivers in the
    world’s top energy consumer cut fuel use at the greatest pace since 1983.
    For U.S. consumers pinched by the economic crisis, falling gasoline
    prices have created what some analysts call a sort of “stimulus package”
    that has pumped billions of dollars in disposable income back into their
    The modest increase in demand comes as average U.S. gasoline prices run
    at about $1.93 a gallon, down $1.23 from a year ago and about half the
    price of last July, according to government data issued this week.
    The U.S. Energy Information Administration said Wednesday that demand
    for motor fuel over the four weeks to Feb. 27 hit 9.03 million barrels per
    day, up 2.2 percent from a year ago, as the price drop rekindled Americans’
    famous love affair with their cars and the road.
    Struggling U.S. car makers may see a glimmer of hope in evidence that
    Americans are taking to the highways again.
    In Grapevine, Shell service station owner David Oatman said he reckoned
    his business was up about four percent this year on what it normally would
    Retirees Bob and Debbie Smith, who live on the road year round in a
    recreational vehicle and are currently in Georgia, will certainly be
    putting more rubber to the pavement this year.
    When fuel prices peaked around $4 a gallon, they limited their
    journeys, although now they see no obstacles.
    “Last year we, in the spring time, we thought of driving back home to
    West Virginia from Kentucky. It’s about a thousand miles, but we didn’t
    because fuel was so expensive … It would probably have been $800 in
    fuel,” Debbie Smith said of the cost of filling with diesel the 75-gallon
    tank of their 2006 Monaco Dynasty RV with diesel.
    “This year, with the fuel prices, we’re hoping to get up there in June
    to visit family,” she said in a telephone interview. “We don’t have to
    watch where we travel, we can just go ahead.”
    In Little Rock, Arkansas, Kristy Evans, 41, who was recently laid off
    as a pharmaceutical sales representative, said she was relieved at the
    lower price as she filled up her Dodge SUV at $1.899 per gallon.
    “It’s better now because it used to cost me $60 to fill up. Now it’s
    $38,” she said. But costs remained a concern to her.
    “I have two school-aged kids and there’s a lot of mom-driving, school
    events and after-school sports and things like that. I’m on the road all
    the time, even though I’m not working. It adds up.”

    Other Americans said they remained cautious after forking out to fill
    up last year. U.S. gas prices remain low compared to most developed
    countries but the American lifestyle has long run on cheap gasoline.
    Residents of Atlanta and other cities in the Southeast are particularly
    sensitive to fluctuations in gas prices, which hit $4.75 a gallon last
    September after hurricanes disrupted oil operations along the Gulf Coast.
    “The high price (last year) has had the major impact and it still has
    some effects because people know prices could go up again,” said Ben
    Hoffman, an Atlanta resident. “Now there is an incentive to conserve.”
    Hoffman said planning for a long road trip later in the year would
    still go ahead but he was conscious of the amount of trips he did around
    Atlanta, a city crisscrossed with highways in which owning a car is
    considered essential.
    (Additional reporting by Tim Gaynor in Phoenix, Matthew Bigg in Atlanta
    and Steve Barnes in Little Rock; Editing by John Picinich)

    Fri Mar 6 19:30:14 2009

  98. 98
    choices Says:

    z-OT-that is very possible on gas prices-air unit is as old as the furnace-so we will see-contemplating replacing the whole deal with energy efficient unit if I get out of this constant sea of red with anything left-just bought and moved into older home-knew the risk of older home so cannot whine about it.

  99. 99
    zman Says:

    Choices – hear ya and can sympathize. Mine is about 100, high bills. New windows, more insulation in the attic helps but still nothing in the walls. Pricey gas bills.

    Amazing what low RP ratio and high lifting costs will do to you when commodity prices fall and you have too much debt. SGY from $50 to $1.75 since September.

  100. 100
    zman Says:

    Interesting to see oil trading higher in the late session, closing at a high of week, and a 6 week high.

  101. 101
    BirdsofpreyRcool Says:

    BossmanG — if i sell you a CDS, it’s like i went long the bond credit risk. So, i could short the bond plus go long the appropriate treasury (to immunize the short-interest rate risk), or buy the appropriate CDS index if i wanted to hedge my sale. Or, i just turn around and sell a similar CDS to another counterparty.

    I have a “CDS Primer” I can email you, if you wish. Caveat — don’t try to read it after a long day at work.

  102. 102
    zman Says:

    Who let the rally monkey out of its cage?

  103. 103
    BirdsofpreyRcool Says:

    last seen with Wyoming, i thought…

  104. 104
    choices Says:

    z-I’m embarassed-mine was $250 last month for 25 days of heating (over 9 therms per day)-it is the one thing I did not check completely as seller was very difficult to deal with (said she used 7 therms per day)-house itself not bad, good windows, insulation ok. reasonbly well constructed compared to some of the match boxes they were building here a couple of years ago.

    I know this way off topic but it is late on Friday of a lousy weak-sorry for the ramble.

  105. 105
    BirdsofpreyRcool Says:

    Head Trader said “who wants to be short after the worst week ever for the market.”

    I didn’t know it was the worst week ever… wow.

  106. 106
    zman Says:

    The 2008/2009 gas boom/bust will be the cycle that goes down officially as the Resource Player Killed The Explorationist. Pretty perfect storm for the Shelf guys as you have no asset value floor since credit is toast and secondaries are not to be spent on risk.

  107. 107
    zman Says:

    Head trader must have been speaking from a sentiment standpoint, points and percentages don’t bear that claim out.

  108. 108
    BossmanG Says:

    BOP, definitely interested…sent Z my email addy. Thanks for all the clarifications.

  109. 109
    choices Says:

    BOP-#89-very interesting article-the “expert” even had problems with his hedge fund and valuations-do you we have more impending blow ups from hedge funds because of the collapse of the general market and the shakiness of the credit mkts-prob unfair question but just your educated and experienced opinion would be appreciated.

  110. 110
    zman Says:

    Boss – I sent your email address along to BOP.

  111. 111
    BirdsofpreyRcool Says:

    Head Trader said that CNBC said it was the worst week ever (percentage wise) as he is too lazy to calculate that stuff himself.

  112. 112
    zman Says:

    Glad we did not run down into the close.

    Beerthirty. Actually not terrible trading for the HK and SWN, will be an interesting week next week with the lead up to OPEC and a braod market that really could use a bounce.

  113. 113
    gaamblor Says:

    to put a bow on something….Kass out today reasserting his call from kudlow that the bottom is this week (ie today) and ignoring his statement on real money 2 days ago that it was the bottom

    the lesson as always don’t $@*#ing make bottom calls

  114. 114
    zman Says:

    Well, I’ll calculate it for you in the wrap and if it looks big will dig out its place in history.

    Ok, now its really beerthirty.

  115. 115
    BirdsofpreyRcool Says:

    choices — #109 — my gut says “yes.” On the other hand, there has been an awful lot of leverage that has been wrung out of the hedge fund system. You really need leverage to “blow up.” You can die a natural death (by bad performance and redemptions)… but to really have a good blow up, you need to be sitting on a powder keg of leverage.

    Any HF still in business has deleveraged either voluntarity or involuntarily. There might be some little ones left to “blow up.” But, from here on out, I just think you will see “going out of business” yard sales from HFs. Could explain some weird moves in less liquid stocks.

    Now, banks are still levered, the consumer is still levered, junk market is levered… that is where the blow ups are now, i reckon.

    Sambone — what do you think here?

  116. 116
    choices Says:

    thanks, BOP

  117. 117
    BirdsofpreyRcool Says:

    z #114 — just looking at recent history… the first week of October 2008 was much much worse than this week. Dow was down over 18% that week alone.

    Think Head Trader was only half-listening to something on CNBC.

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