Thursday – Oil Review and Natural Gas Preview


Rant of the day watch: Salazar.

FYI, our new Interior Secretary is considering increasing royalty rates on federal lands from the current range of 12.5% to 18.375%. Salazar said he wanted to understand all the issues, wants to make a decision by the end of the year, and would not venture a guess on how much higher royalties will be headed. He went on to say that an increase in royalties (which come off at the revenue line after transportation expense but prior to production expenses) won't chase away oil production from the States adding that demand from places like China and India will continue to provide impetus for continued drilling in the U.S. He also said that U.S. royalty rates are some of the lowest in the world.

Couple of points on this:

  1. Its true, there are higher royalty rates in some parts of the world but the average royalty rate is thought to be about 12%. Hmmm.
  2. Total take by the government (that's royalties, taxes, and fees) is lowest in Bangladesh at 40%.
  3. U.S. oil production has fallen despite increases in technology that allow extraction of crude from over 7,000 water depths, or 5 miles down, or 2 miles down and then 2 miles over, or from shales once thought to be impermiable. My point is, the easy stuff in the U.S. has been tapped. So I ask you, by putting the pinch on oil companies in the U.S. who have to go to such great lengths to tap smaller and/or much harder to reach/extract targets, do you really think domestic production will be unaffected?

Big Part of Why I Find This Site Useful Watch: I'm not a geologist, geophysicist, engineer, or E&P company president. But they lurk here. Case in point  when asked about  a few slides in GMXR's latest presentation, is the response from Wyoming.


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
  6. Odds & Ends


Holdings Watch:  No trades yesterday.

Commodity Watch:

Crude oil fell early in response to Tuesday night's API numbers and then rallied with the release of bearish look EIA data. The rally was inspired by an uptick in gasoline demand and a reduction in inventories at Cushing. All in all, pretty mixed numbers. I think crude demand rises in coming weeks. Oil ended the day down $1.21 at $52.77. This morning crude is trading up by $1.50 to $2.00 following the GDP and jobs data.

OPEC Watch: Brazil. Brazil has been asked to join the Cartel and yesterday Brazilian President Da Silva reported stated the country will soon join, countering claims by his mines Minister to the contrary. 

Natural gas traded lower with oil ending the day down two pennies at $4.33. The April contract expires on Friday and the May contract is trading at $4.42 with the 12 month strip at $5.20. This morning natural gas is trading up slightly before the storage numbers.

Natural Gas Preview - this could be the changeover week from withdrawals to injections.

  • My number: +/- 10 Bcf
    • History:
      • Last Year: 43 Bcf withdrawal
      • 5 Year Average:  45 Bcf withdrawal
    • Weather: Warm. Heating degree days were 116 last week far below normal of 143 and year ago levels of 139 and the 156 degree days seen in the prior week when we got that 30 Bcf pull from storage.
    • Imports: 8.4 Bcfgpd, down 0.9 Bcfgpd from last week and the year ago week.
  • Street Consensus:  10 Bcf withdrawal.

ZComment: We're pretty much at trough storage at this point given the current mild weather forecast. With that said, gas is hanging out just above $4 per MMBtu and everyone is focused on how fast and ultimately how far we refill storage. In other words, gas has begun to focus on the velocity of the rebound now in storage, that and signs that industrial demand is no longer declining just depressed (the prices are a boon for glass, steel, and fertilizer producers). The one week but sharp rally "feels, seems, (insert your favorite adjective here)" extended. Finger on the trigger on SWN and HK options in the in the morning before the number (I can always buy them back in case there is a storage miracle). Gas seems tired…smart move probably to give it a chance to rest/test $4. This time of year it's not uncommon to see big surprise misses on the part of the Street relative to the EIA number.  If we get a 10 bcf build instead of a 10 bcf withdrawal tomorrow its a short term tragedy for price if not for absolute storage levels. We get more supply numbers next week so that's your next catalyst unless horizontal rigs take another header tomorrow.

EIA Oil Inventory Review:

ZComment: Mixed Bag. Bigger than expected crude build (again) due to higher imports, continued soft refining demand and strong U.S. production. Products saw bigger than expected draw downs as restrained production (long time story for gasoline but a new concept in distillate land) met up with upticks in product demand. Inventories for Crude and Distillates remain bloated. I see a rollover for crude inventories in the next 4 to 8 weeks which should provide pricing support for crude between current levels and probably $45. If we don't see crude roll that likely means gasoline production will be too light to meet demand (which is actually off less than a percent from year ago levels) which will yield rising gasoline prices which again will be provide support for WTI prices. Demand is not dead, just restrained. 


Utilization and inputs: We're at 82% utilization which is low for this time of year and in line with last year's levels. If recent history is a guide, we could see demand jump by as much as 1 mm bopd (7 mm barrels per week) over the next 4 to 8 weeks. I think we see something just under the "sub  rah-rah" levels of last year for refinery inputs (see second graph below) as not as many people are commuting but we will input more crude and make more gas in the Spring ... as usual.






New Graph Watch: I plan to show these once a month as the EIA releases its monthly demand data which is a little more "refined" than the weekly stuff. Note the confirmation of the weekly dip in data above by the monthly low point (January demand) of the following.









Stuff We Care About Today

Overnight Mailbag Watch:

Question: Z, is the weekly CTFC position update available for NG? can you put that in tomorrows post, curious to see how many shorts went away in the mad rush last Thursday. - gaamblor

Answer: Data comes out for the prior week on Friday afternoons. The trend has been towards reducing the net position (longs - shorts) from very net short (over 70,000 contracts) to only slightly net short (around 12,000 contracts) for the non-commercials (speculators) in natural gas. The longs really have not built a position over this positions; it's the shorts that have been evaporating.


Odds & Ends:

Analyst Watch: (CEO) cut to Neutral at UBS, (PTR) cut to Neutral at HSBC, Jefferies cuts (DRYS) target from $18 to $10, maintains Buy.

Worth Reading Watch: Good piece detailing by country OPEC's current quotas, production (through February), and estimated production surplus of 4.2 mm bopd which I've seen many quote as 6 to 9 mm bopd of recently. The higher numbers give credit to Saudi's coming capacity increase and to the claims of Venezuela which have been dispelled time and time again.

Housekeeping Watch: I will be out of the office on Friday for Spring Break but will put out a short post late tonight or early Friday.

123 Responses to “Thursday – Oil Review and Natural Gas Preview”

  1. 1
    BirdsofpreyRcool Says:

    Credit Market opener —

    Everything is tighter. The continuing claims number on the Jobless Claims looked pretty bad… but, don’t think stocks will care. There seems to be a bias to “buy the dips” right now. That will hold… until it doesn’t. Keep nimble.

    IG12 181 bps (+41 to get to IG11)

    HY11 71.125 pts, a full 1/2 point higher. Very positive.

  2. 2
    zman Says:

    Morning BOP, any comments from the trading desk?

  3. 3
    BirdsofpreyRcool Says:

    Head Trader thinks we bounce around and close higher. But, watch out for Washington Headlines. Basically, need to keep one eye on scrolling headlines and the other on the index levels. Yesterday’s high (around 825 on the SPX) could prove resistance. We get through that — and hold — going higher. We test that — and drop — going lower. But, might try this several times today. So, volatility still King.

  4. 4
    BirdsofpreyRcool Says:

    Tech Trader out on Spring Break.

  5. 5
    zman Says:

    NG down 5 cents now, probably a little fear creeping in over the storage number in an hour.

  6. 6
    elduque Says:

    BDI -26 1714

    TED 106.55

  7. 7
    Dman Says:

    Z – could you give a snapshot of your GMXR thoughts, including a translation of Wyoming’s comments? I’m a little confused on the overall picture.

  8. 8
    Sambone Says:

    By Nick Heath

    LONDON (Dow Jones)–Crude oil futures held on to earlier gains in European
    trade Thursday, as market participants opted to take their directional cue from
    equity markets, despite question marks hovering over the fundamental rationale
    for crude’s recent rally.
    Crude preserved the advances secured on stronger Asian equity markets, with
    European bourses holding near unchanged Thursday. The climb in crude prices
    came despite latest U.S. government data Wednesday revealing U.S. oil stocks
    last week rose to their highest levels in nearly 16 years, reflecting ample
    supplies amid ongoing depressed demand for crude.
    “I really don’t think (the price rise) has anything to do with near-term
    fundamentals, which is why I don’t think it will last. Near-term, there’s still
    weak demand,” said Michael Wittner, head of global oil market research at
    Societe Generale in London.
    At 1128 GMT, the front-month May Brent contract on London’s ICE futures
    exchange was up $1.10 at $52.85 a barrel.
    The front-month May light, sweet, crude contract on the New York Mercantile
    Exchange was trading 77 cents higher at $53.54 a barrel.
    The ICE’s gasoil contract for April delivery was up $1.50 at $467.25 a metric
    ton, while Nymex gasoline for April delivery was up 95 points at 150.45 cents a
    “Without the continued support of equities, crude oil should have more
    difficulties to move above the $55 a barrel mark as the fundamentals aren’t yet
    providing enough evidence of a tightening market,” said Olivier Jakob, managing
    director of Swiss consultancy Petromatrix.
    U.S. government data released Wednesday revealed that a 3.3 million barrel
    increase in U.S. crude stocks last week propelled them to their highest levels
    in almost 16 years. And with an unattractive market environment continuing to
    toll on U.S. refinery utilization, analysts Thursday warned that similar
    developments could be repeated in coming weeks.
    “The crude stock build…reveals continued market imbalance and mounting
    bearish pressures on prices as it lifts already highly inflated stocks to highs
    unseen since 1993,” said Antoine Halff, deputy head of research at Newedge in
    New York. “Crude demand looks set to contract further in coming weeks as
    refiners extend run cuts and maintenance work.”
    Despite less-than-inspiring fundamentals, a recent increase in risk appetite
    may keep crude prices supported near current levels, some suggested. Recent
    U.S. Federal Reserve and U.S. Treasury measures aimed at tackling the financial
    crisis have helped improve financial market sentiment over the last week, while
    macro readings from the U.S. Wednesday – showing that both U.S. durable goods
    orders and new home orders had risen sharply – countered expectations.
    “As long as the increased risk appetite is maintained from the financial side
    we don’t believe oil prices will fall back into the $40’s, even if we believe
    it will still take a couple more months before OPEC cuts show up in reported
    OECD stock draws,” said Torbjorn Kjus, oil market analyst at DnB NOR in Oslo.

    -By Nick Heath; Dow Jones Newswires
    Dow Jones Newswires
    03-26-09 0759ET

  9. 9
    zman Says:

    Basic nutshell on GMXR:

    * Bank line redetermination approaching, they have less than half drawn on borrowing base now, they see it rising, not falling which had been Street’s fears
    * They are getting more bang for the buck than I had thought at this stage in the service cost game
    * They don’t plan to grow production in 2010 vs 2009 with prices at this level.
    *But 2009 and 2010 should see strong reserve growth, which will allow for expansion of the borrowing base.
    * They have a good load of debt on the books (see the orange comp chart on the E&P tab) but its manageable from an interest coverage perspective
    *They are ok on their debt covenants.
    * The stock has been the worst performer of the year in the smalls and mids (of the names I closely track) and it looks to be turning.
    * Next event is late April (3 wells in Haynesville/Bossier) and 1 more in May
    * Wyomings comments pertain to their Haynesville frac efficiencies and future cost of completions in the Haynesville.
    * I’m long the $10 calls

  10. 10
    zman Says:

    Wowfast pullbacks in the gassy stocks with over 30 minutes to numbers. HAL puts help on that front but NBR continues to be a rocket ship.

  11. 11
    zman Says:

    Dman – let me know if 9 did it for you or if you want more.

  12. 12
    Dman Says:

    Z – seems you are saying what you said at the start: the redet isn’t going to be a problem. So I guess the market doesn’t like the reduced growth. Mind you the stock is up a lot from the low (in %) & is interacting with the center BB line (daily).

    I guess I was a bit alarmed with Wyo using the word “liars”.

  13. 13
    BirdsofpreyRcool Says:

    KOG — that must have been a heck-of-a-breakfast they hosted at HW. Commander’s Palace kind of stuff. Someone (besides myself) thinks they Will Survive. BUT… clearly one of the dodgier names. Would love to hear that they have moved a completion rig onto their first pad… but, waiting seems to work too. Longer they wait, the higher oil prices and the lower services costs go. So, seems to be the game plan right now.

    These guys have basically no room to manoeuver… so, have to be very very careful with every last dollar in the checking account.

    Would also like to know about any resolution on that 2nd Unit rig… paying the full the severance cost on that would kill KOG right now. That said, they were very very generous with Unit (and all the delays)… so, there is a lot of goodwill built up between the two companies. Don’t think Unit wants to tank KOG over the price of one rig.

    Just a few thoughts.

  14. 14
    Dman Says:

    BTW, they came out swinging with the presentation title “Growing access to capital”. Not shy, apparently.

  15. 15
    BirdsofpreyRcool Says:

    Hear Barney Frank’s voice come on in the background. Wish those guys would take a spring break. Heck, wish they would take a summer, fall, and winter break too.

  16. 16
    zman Says:

    Dman – yep, they know all too well what the concern is. And I hear ya on the percentage bounce but they are still cheap on proved asset value. TEV of $440 mm vs Reserves of 465 Bcfe at year end 2008. So what they have found (proved only, not probables, possibles, or other land) but have not yet produced is worth less than a buck per Mcfe? In an acquisition (were there to be any around, it would go for at least $2 per Mcfe. The Street has a tendency to get wrapped up in production growth and growth is a good thing but with costs and price per Mcfe in mind, not just for the sake of growth. I think pulling back during the low times, holding your acreage by drilling enough to cover it and waiting this out is a better plan that selling a ton more gas this year (which they could do by keeping the Capex up and exhausting their bank line) and then selling that big load of gas at $4.

    SD is sort of in the same boat…

  17. 17
    zman Says:

    KOG – if those wells work, the hysteria may drive it up really quickly, do we have a date pinned down to own by for completion news?

  18. 18
    Dman Says:

    Looking ahead with GMXR, they are now highly hedged and levered, so their share price leverage to NG will be based on reserve growth & associated valuation. Is that a fair statement? Would “mini CHK” be a fair description? But maybe with higher reserve growth prospects.

    It’s not just a question of which of these critters makes it thru the “small gate” the E&P’s are getting squeezed thru (as reef put it). It’s also a question of what sort of critters they mutate into to get thru the gate.

  19. 19
    Sambone Says:

    By Kevin M. Nichols

    NEW YORK (Dow Jones)–Crude oil futures rose Thursday as equities markets
    continued to reflect hopes for an economic recovery.
    A strong rebound could lead to an oil shortage, the International Energy
    Agency’s chief economist cautioned.
    Light, sweet crude for May delivery recently traded $1.51, or 2.9%, higher at
    $54.28 a barrel on the New York Mercantile Exchange. May Brent crude on the ICE
    Futures exchange traded $1.74 higher at $53.49 a barrel.
    Oil supplies are currently robust as the global economic downturn cuts demand,
    with U.S inventories rising 3.3 million barrels to a 16 year high in the week
    ended March 20, according to the Energy Information Administration.
    Futures have risen recently on the prospect that the worst declines in major
    economies may be over. The U.S. economy contracted by 6.3% in the fourth
    quarter, worse than the previous quarter but better than the average analyst
    U.S. equities are set to open higher, in part due to the GDP data. Oil futures
    have been closely tied to sentiment in the equity market recently. Dow futures
    were up 59 points to 7739 recently.
    “We are starting to see a shift in sentiment now that the economic data has
    been coming in better than expected,” said Matt Zeman, head of trading at
    LaSalle Futures in Chicago.
    Oil has settled over $50 a barrel for five straight sessions. Oil production
    has fallen sharply over the last year, as the Organization of Petroleum
    Exporting Countries reduced output and older fields saw less investment to
    prevent natural decline.
    “Once the economy recovers we may be caught for a surprise” by an oil
    shortage, Fatih Birol, the IEA’s chief economist, told Dow Jones, adding that
    “it is too early to jump to conclusions. We have yet to see a clear signal from
    the economy.”
    OPEC has cut production by over 3 million barrels a day since late 2008, and
    members continue to advocate for higher oil prices. On Friday, United Arab
    Emirates President Sheikh Khalifa bin Zayed al-Nahayan said the “fair” price of
    oil is $75 a barrel.
    Front-month April reformulated gasoline blendstock, or RBOB, recently traded
    2.70 cents, or 1.8%, higher at $1.5220 a gallon. April heating oil traded 2.91
    cents, or 2%, higher at $1.4938 a gallon.

    -By Kevin M. Nichols, Dow Jones Newswires (Florence Tan in Singapore contributed to this article)

    Dow Jones Newswires
    03-26-09 0927ET

  20. 20
    zman Says:

    NFX just quietly walking higher, ugh, one of my favorite management teams/sets of assets. Chinese premier mentioned today that they are encouraging their companies to go forth and seek acquisitions. NFX makes a lot of sense although I’m sure Congress would have a stroke over the deal. Midcontinent and Rockies gas, Deepwater Gulf of Mexico production, and experience in Bohai Bay…China.

  21. 21
    Dman Says:

    Z – agree about production growth (#16). If you have the financial staying power, why sell energy into this market? The rational thing to do is hang onto it, if you can afford to.

  22. 22
    zman Says:

    Dman – they are so tightly focused on E.Tx/NW La I’d have a hard time calling them anything but a pure gas play on the region. When gas comes back, they should follow nicely even with the hedges.

  23. 23
    zman Says:

    The Journal’s take on O&G industry taxes under the new admin:


  24. 24
    zman Says:

    If we get a draw at all on NG, could get a nice sigh of relief rally. Concern is the reaction to a possible build in storage…really a coin toss today.

  25. 25
    zman Says:

    Dman – right and they are growing reserves sharply in 2009 , little less 2008.

    Build of 3 Bcf

  26. 26
    zman Says:

    Gas off 25 cents immediately, need to see it hold $4.

  27. 27
    zman Says:

    Watching the knee jerk on gas on the tick chart. Gas holding $4.10+ right now.

  28. 28
    BirdsofpreyRcool Says:

    z — re17… don’t have the info to answer that question, yet. They delayed the completion on pad 1 because of the severe winter weather (you can drill in blizzards, just don’t try fraccing in sub-zero conditions). They are drilling on pad 2, in the NW corner of their acreage, closest to Parshall Field (about 6 miles SW, i think). The first well is with partner XTO (4.5k lateral planned), the 2nd well from that pad is with partner Peak (10k lateral planned). Also, Peak is drilling a well in the middle of KOG acreage (on Peak’s leases) that they plan to complete in the TFS… so, KOG gets a free look at the prospectability of that formation underlying KOG’s acreage.

    All good stuff. But needs oil prices back at $60 and Bakken differentials to tighten.

  29. 29
    Sambone Says:

    Black Helicopters


  30. 30
    Dman Says:

    BRY going for a nice walk too.

  31. 31
    zman Says:

    Traders defending $4.05 gas now.

  32. 32
    Nicky Says:

    Good morning all. I have reassessed the counts for the broader market.
    I do not think we are in a wave 3 higher – we would have been much stronger today if we had been. Most likely count to me says that wave 4 down ended yesterday afternoon at 7550 area on Dow. We are now in 5 up and have likely completed 1 this morning and are now in 2 down to around the 7600 area. From there we should see a move higher in 3 of 5, then 4 of 5 down, then one more pop in 5 of 5. This could all complete by early next week which ties in nicely with the cycles (could run a week longer but if so likely we are much higher and the count is that we are still in 3). If this is 5 up then the targets mentioned before are still likely – 8000 – 8300 on the Dow, 835 – 840 on SPX. My preference is for a down close today.

  33. 33
    zman Says:

    Not seeing panic selling in the gassy E&P names although the big caps are now red with DVN, EOG, and XTO in the lead.

  34. 34
    Nicky Says:

    If oil follows the indices then we may see a top between $56 and $58 – the indices would have to run another week I think to see $60.

  35. 35
    zman Says:

    Nicky – Good morning and thanks. Did you see Wyoming’s tool for capturing your screen as a link that you can insert in comments?

    Small/mid cap gas names showing some resilience, its that buy the dips instead of sell the rallies mentality switch that BOP was referring too. Also, on gas, the reaction is just giving back some of last week’s snap back, need to defend $4 for psych but people should realize this time of year is squishy, I was pretty surprised the Street was looking for a 10 Bcf drawdown on that weather but its just hard to judge who is using heat and who decided to wrap themselves in a blanket this time of year.

  36. 36
    BirdsofpreyRcool Says:

    anyway, back to KOG… lots of things can move it. Intital shows in the 2 wells on the 2nd pad. Moving a completion rig onto the first pad. Any leak on Peak’s results on their TFS well. Any property m&a in the area. From what I hear, all the property on the Rez (the FBIR) is leased. So, a lot of companies betting there is something there.

    BTW, thanks to the person who sent me the Stetson Partner’s Fort Berthold presentation. Excellent, excellent info.

  37. 37
    zman Says:

    Referring to yesterday on the REXX comment about an asset sale and valuation of GMXR in #16 above.

    REXX sold 10.7 Bcfe for $17.3 mm = $1.62 / Mcfe (that’s for less prospective Permian acreage than what you’d be talking about were GMXR to be sold).

  38. 38
    md Says:

    This might help for euro NG data


    If you figure out how to download the csv.to excel let me know. It came in scrambled.

    Do check out the Electric flash for NG and industrial figures for Jan.

  39. 39
    BirdsofpreyRcool Says:

    hey, z… on the REXX sale… hate to ask, but where did you get the Bs associated with the sale? I couldn’t find that in the PR yesterday. Good info.

  40. 40
    zman Says:

    md – will have a look.

    BOP – a broker note sent to me by a friend of the site.

  41. 41
    rseidman Says:

    Z: Re 35, I’d like to get the tool for screen capture. Could you please post the link?

  42. 42
    zman Says:

    Here ya go:


  43. 43
    BirdsofpreyRcool Says:

    Headline worth repeating — Fixed 30-yr US Mortgage rate falls to 4.85%, lowest in Freddie records.

  44. 44
    Nicky Says:

    Z – no I hadn’t seen the tool you mentioned. Will take a look.

    Meanwhile for all the bears:


  45. 45
    zman Says:

    Very impressive defense of the $4.05 to $4.10 level on gas, still need a $4 + close but the stocks are not in panic mode. Volumes for gas and the stocks aren’t all that impressive. That changes if the broads roll over. Next data point on gas comes Tuesday with the natural gas monthly.

  46. 46
    zman Says:

    Md – thank much for the Europe gas link. I remembered they had decided to do it but had not seen the site yet, good find. Since the data started this year and gas storage is a seasonal beast it will be difficult to judge how full gas really is for this time of year given we have no comps. But its a data point worth having as you watch what LNG does. I have data for Canada which you’d think would help determine availability of sendout volumes to the U.S. but it doesn’t really correlate this year… in the past when they’ve gotten low up North, less gas has been sent Stateside.

  47. 47
    BirdsofpreyRcool Says:

    Just saw this in a morning note… helps KOG, quite a bit. KOG has estimated that completion costs/well would run $1.5mm on their conf call, 2 weeks ago. Wonder if that included the drop in prices outlined below —

    “Frac prices in the Bakken have recently fallen off a cliff, down 35% YTD.”

  48. 48
    BirdsofpreyRcool Says:

    z — SMH just reiterated their $8 price target for PQ.

  49. 49
    zman Says:

    Thanks BOP, going through a sort of interesting piece on ng supply vs rigs.

  50. 50
    zman Says:

    NG barely trading now, stuck at $4.09. Out months down by a similar 30 cents through the first 6 months, then less further out with Jan 10 gas trading above $6.

  51. 51
    elduque Says:

    BOP What is your take on the corporate market. I keep hearing that until the credit markets unthaw the equity market’s are limited to further upside.

    On the other hand financing has been available for CHK, etc. Banks claim that they had record volumes in Jan Feb for bond sales.

  52. 52
    elduque Says:

    DVN trades like KaKa. Any ideas why?

  53. 53
    zman Says:

    DVN – If you mean today, its probably just noise, worry over a roll in the daily chart. If you mean year to date, duly noted. After the run EOG and APA have had I’ve seen some analyst comments moving DVN up their list of names to buy. Low oil prices hurt the economics of their deep tertiary play in the Gulf and low gas prices hurt them in the Barnett. I had noticed they were wishy washy on disclosing a budget when everyone else was and the Street abhors uncertainty. It could be any and all of that. Don’t think they have a problem and they are a well run company with potential for a lot of upside from here with higher prices but I only loosely follow the name.

  54. 54
    BirdsofpreyRcool Says:

    elduque — yes. January-Feb had huge volumes of corporate bond sales (don’t know about “record”… could be… there was a LOT of pent-up supply). But, you haven’t heard much about credit thawing for the little guys (companies who want to borrow less than $300mm… which is a much larger universe). Saw a summary piece on investment-grade bond spreads this morning that summed it up nicely. Will post below. But, basically, the spreads are still so far outta whack (and predicting default rates that exceed any reasonable assumption) that one has to conclude the credit market is still far from thawed. Making some headway… but, not for most companies — i.e. the smaller ones and the ones who have to rely on bank-debt backing.

  55. 55
    zman Says:

    Market seems stuck in neutral; are we waiting on a press conference or something?

  56. 56
    BirdsofpreyRcool Says:

    This was a good snapshot of the mood of the Investment Grade bond market. And the mood for High Yield is, of course, much worse.

    Some perspective on HG bond spreads — The current spread on HG bonds prices in a default rate of about 45% over 10yrs, which is the average life of the bonds in the index. In other words, if one were to buy all the bond in the index today, funded at Libor, and about 45% of them defaulted over the next 10yrs (at a constant default rate, 20% recovery) one would break even on the investment at the end of the 10yr period. The yield earned would offset the losses in default. For comparison the worst 10yr cumulative default rate on HG bonds since 1980 was 5% (from 1982-1992), so the current implied default rate is about 9x the worst actual default rate over this period (since 1980).

  57. 57
    BirdsofpreyRcool Says:

    “HG” = High Grade (aka Investment Grade)

  58. 58
    Dman Says:

    Market in neutral.

    FSLR, SPWRA, BRY … not so much

  59. 59
    zman Says:

    Yep, I missed this month’s ride on FSLR/SPWRA.

  60. 60
    BirdsofpreyRcool Says:

    Some colour from Head Trader — says that the battleground is at SPX 825. “Hedgies don’t believe this rally and if we hold 825 you will see more money come into the market.”

  61. 61
    BirdsofpreyRcool Says:


    “Tired but resilient” is how equities have been described over the last couple days. SPX +10pts to 823, commodities are relatively unchanged (crude +90c, gold +$6 to $940) as is the USD (DXY +0.2%) and Treasuries are slightly higher across the curve with the 10yr up 2/32nds (30yr making the biggest move +17/32nds). Volumes/activity have quieted down into Q-end and ahead of the Q1 reporting period (which really kicks off the week of Apr 13) but buyers are def present (not necessarily chasing things but using any weakness to get in on long side); not a whole lot of shorts being put on. Sp500 up 1.2% to 824; tech +2.8%, financials dwn -0.3%, HC +0.3%, industrials +3.2%, Consumer Discretionary +3.2% (retailers strong off BBY); consumer staples dwn 0.2%, transports very strong (up 6% as TRAN index breaks above 50day MA); nice to see the rally today being led by industrials, tech, and trans as the financials can take a breather.

  62. 62
    zman Says:

    A little annoying:

    Latest presentation from SD at Barclays:


    Decent presentation but their is no clear indication they get the debt concern as there are no real balance sheet slides in the thing. I know they get it but it would help to make that clear as this was for today at a fixed income presentation.

    Will look at yesterday’s Weil presentation to see if there is more in there.

  63. 63
    zman Says:

    Re 62. Nope, same presentation. Somebody must have like what they heard today as the stock is outperforming the group. Just seems like a waste of an opportunity to address some fears.

  64. 64
    elduque Says:

    BOP Thanks for the info. How much if any of the credit freeze is caused by the gaming of CDS’s

  65. 65
    BirdsofpreyRcool Says:

    elduque — that’s a tough call. The banks lit themselves on fire with their mortage bets and off-balance sheet structured investment vehicles. CDS is actually a way to help them hedge some of that exposure, used correctly. But, once the banks started to run around with their hair on fire, the Credit Bears were able to use CDS to drench their business suits with kerosene. Funny thing is (well, not that “funny”), a lot of the hedge fund who fanned the flames were made of of people who had put together those “toxic securities” and investment structures while they were at the banks. Those guys just quit their banking jobs and went to hedge funds. So, they truly knew which flaming banks to attack.

    Without CDS, most of the “fun” would have been over after BearStearns went under.

    This is just my opinion. But I look forward to the book, someday.

  66. 66
    BirdsofpreyRcool Says:

    CDS is the reason we are on the hook for AIG. CDS is the accelerant that burned down Lehman and sent Merrill into the arms of BAC and all the investment banks to flip to a commercial bank structure.

    No one should be able to buy life insurance on someone they are not related to or dependent on. That’s what CDS are. Only leveraged. For a nickel, you could buy $100 of life insurance on the funny-looking-guy down the street, then run around telling the neighbors the guy was a mass murderer. This causes everyone to shun him, his employer to fire him, his wife and kids to leave him, and — if you were really successful — for guy to finally collapse from a stress-related heart attack.

    Now, if about 100 people in the neighborhood all took out insurance on the poor guy, that is what the CDS market did to the banking system.

    Tough to make loans, when you’re fighting for your reputation and — ultimately — your life.

  67. 67
    elduque Says:

    It would seem that to eliminate anything but a direct CDS would fix the problem. Sounds to simple!!!

  68. 68
    BirdsofpreyRcool Says:

    George Soros had an op-ed piece in the WSJ this week, proposing the same solution. Not that George and I vote on the same side of the political ballot, but he does get global-macro finance.

  69. 69
    zman Says:

    A little more SD color.

    I thought it was caught up in redetermination fear but am not so sure of that now as the depressing factor, maybe its just gas and the potential for another reduction in capex for 2009.

    They fully expect to keep the borrowing base at $1.1 billion. Feb outstanding there was $565 mm

    They have a couple of tranches of debt that add another $1.7 billion – no maturities before 2014.

    They have no cash (not uncommon for an E&P) but are ok on the working capital covenant and all on the Debt to EBITDAX and EBITDAX to interest covenants.

    Implied value is about $1.70 per Mcfe, strangely close to the REXX sale price. This gives them no credit for their second big field (frog creek) which is undeveloped but discovered next to their core Pinon. And no credit for 36000 acres in the Haynesville and drilling with CHK there.

    Debt to Total Cap is high at 75%; interest coverage is what I’d call poor but will be on the edge of the covenants…that’s probably not a problem and I’ve seen a number of waivers this cycle. They said they have been working with the lead bank to be clear on what they need to have in place to keep the revolver at $1.1 B. But the high leverage in this low commodity price environment is what’s holding the stock back until the redetermination is out of the way.

    As far as will they survive, I don’t think there is much doubt at all that they will, the 85% of 2009 production hedged over $8 ensures that and they can ratchet back capex to keep from significantly expanding the draw on the revolved if the other 15% is impacted by a full year’s gas prices at these levels.

  70. 70
    AAA Says:

    Anyone know what ignited the solar stocks today?

  71. 71
    zman Says:

    AAA – I assume yesterday’s news out of FSLR, that and the fact that this rally is what I’ve been trying to play off and on all year and I happened to be out of the stocks due to expiry. I’d guess but have not seen that an analyst grew a spine (having gone spineless post 4Q numbers during the conference call) and recommended buying the stock but I have not seen that note yet. I’m not going to chase for now.

  72. 72
    BirdsofpreyRcool Says:

    IG12 179 -4bps

  73. 73
    rseidman Says:

    BOP Sorry for my ignorance, but what does #72 mean.

  74. 74
    zman Says:

    NG went ahead and broke $4.

  75. 75
    zman Says:

    1520 – check your email.

  76. 76
    Sambone Says:

    BRUSSELS (AFP)–Two European-owned tankers have been hijacked off the Somalian
    coast and other vessels in the area have been alerted to a pick-up in pirate
    activity, the European Union’s anti-piracy naval mission said Thursday.
    The Maritime Security Center run by the E.U. naval force said that the
    9,000-metric-ton Greek-owned, Panamanian-flagged M.V. Nipayia was seized on
    Wednesday with its crew of 19.
    A Greek Merchant Marine Ministry spokesman said the ship’s Russian captain and
    18 Filipino crew members were in good health and that the boat’s owner, Lotus
    Shipping, had begun negotiations with the pirates.
    The incident was followed early on Thursday with the capture of the
    23,000-tonne Norwegian-owned and Bahamian-registered M.V. Bow-Asir with an
    unspecified number of crew.
    Salhus Shipping, which owns the tanker, said in a statement from Norway that
    the crew numbered 27 members of different nationalities and that they had
    contacted the company after 16 to 18 pirates had come aboard with automatic
    “We have no reports of any injuries,” said company director Per Hansen.
    “We are doing our utmost to ensure the safety of the crew, and have
    established communication lines with naval forces, insurance companies, flag
    state and charterer.”
    Ransom-hunting Somali pirates attacked more than 130 merchant ships in the
    region last year, more than triple the number in 2007, according to the
    International Maritime Bureau.
    Greece, which is home to the biggest commercial fleet in the world, called on
    the European Union “to play a more active role” in cracking down on piracy
    after the latest two boats were captured.
    The Merchant Marine Ministry called on shipping companies “to inform with
    total accuracy and in good time the competent services” about the movements of
    “The pirates are not the only ones with weapons, the international community
    and Greece have them as well,” said Merchant Marine Minister Anastasis
    “And to protect the present and future of our shipping we shall exhaust all
    the margins of intervention.”
    The rules of engagement of the European Atlanta flotilla charged with
    protecting shipping off Somalia allow it to have recourse “to all means
    including force.”

    Dow Jones Newswires
    03-26-09 1356ET

  77. 77
    BirdsofpreyRcool Says:

    rseidman — thank for asking.

    We use the Investment Grade (IG) CDS index as a proxy for investment grade bonds. In this case, we are on the 12th version of this index (which gets updated periodically), hence “IG12.” It’s far from perfect, but direction-wise, it’s a decent intra-day indicator of where corporate bonds are moving.

    Anyway, investment grade bonds are quoted as a spread to treasuries. So, the tigher (lower) the spread, the less “risky” corporate bonds are perceived to be. Well, there are actually 3 dials you turn to get the spread to treasuries, “default” risk is usually the largest component of the spread; but you also have liquidity and maturity components too (i.e. longer-dated debt from the same company trades at wider spreads, all else equal).

    Right not, it’s almost a toss-up, what is driving spreads move, a perception of default risk or the technical driver of liquidity. When there is no money flowing into the fixed income market (liquidity), anyone who has to sell has to price their bond really really cheap (at wide spreads), to attract money.

    So, to conclude this ramble…

    IG12 (investment grade index #12) is offered at 179 basis points over 5 year treasuries. That spread has come in 4 basis points for the day, from it’s open at 183 bps. Meaning, the corporate bond market is rallying and validating the stock market rally.

  78. 78
    1520sbroad Says:

    z – will do

  79. 79
    BirdsofpreyRcool Says:

    CDX IG12 definition (from bloomberg)

    The CDX North American Investment Grade Inces is composed of 125 investment grade entities, distributed among 6 sub-indices: High Volatility, Consumer, Energy, Financial, Industrial, and Technology, Media & Telecommunications. The composition of CDX Indices is determned by a consortium of 16 member banks. CDS indices roll every 6 months, in March and September.

  80. 80
    BirdsofpreyRcool Says:

    (“Inces” = Index)

  81. 81
    1520sbroad Says:

    z – will take care of pronto

  82. 82
    zman Says:

    Thanks 1520.

  83. 83
    rseidman Says:

    BOP Thank you. I’ve learned something

  84. 84
    BirdsofpreyRcool Says:

    rseidman — glad to help. I made it a bit tougher to understand than I meant to… a few typos in here. Hope you can decipher what I meant.

  85. 85
    zman Says:

    Good to be right, bad to not pay attention to your own writing.

    From today’s post on gas thoughts:

    Finger on the trigger on SWN and HK options in the in the morning before the number (I can always buy them back in case there is a storage miracle). Gas seems tired…smart move probably to give it a chance to rest/test $4. This time of year it’s not uncommon to see big surprise misses on the part of the Street relative to the EIA number. If we get a 10 bcf build instead of a 10 bcf withdrawal tomorrow its a short term tragedy for price if not for absolute storage levels. We get more supply numbers next week so that’s your next catalyst unless horizontal rigs take another header tomorrow.

  86. 86
    zman Says:

    Re 85, NG is holding the $4 level on the May contracts which are the ones I’m watching now with April expiring tomorrow. Had I stuck to my plan and sold I’d be buying more of the same contracts back tomorrow using some nice gains. Need a spring break I guess.

  87. 87
    BirdsofpreyRcool Says:

    IG12 180.5 losing a bit of ground here.

  88. 88
    BirdsofpreyRcool Says:

    IG12 182 -1 bps on the day. Corporate credit rally fading a bit more.

  89. 89
    zman Says:

    BOP – any thoughts to add on #69?

  90. 90
    zman Says:

    Bulls coming out of the woodwork (closet) on CNBC.

  91. 91
    BirdsofpreyRcool Says:

    z — re69. No. I was impressed with your credit analyst skills. I think you summed it up nicely.

    But just opened SD’s HW presentation. Will look through it now.

  92. 92
    zman Says:

    BOP – its all geology, about half the size of their old presentations because the street’s “give a crap” meter is on E.

  93. 93
    BirdsofpreyRcool Says:

    Informal survey of fixed income market participants finds only 1 in 10 are bullish. The rest think we head back down in April. But, fixed income people are never a very optimistic bunch. They only believe the coupon will be paid, after it actually lands in the bank.

    A chirpy bond investor is an oxymoron.

  94. 94
    BirdsofpreyRcool Says:

    #92. very well put.

  95. 95
    zman Says:

    … as opposed to us Equity types who are in general natural born optimists.

    I have a good friend who runs a convert bond shop…schizophrenic

  96. 96
    BirdsofpreyRcool Says:

    SD slide 3… hate it when they immediately start off crowing about 3P reserves. That 2nd and 3rd P doesn’t pay the bills.

  97. 97
    BirdsofpreyRcool Says:

    #95 LOLOLOL

  98. 98
    BirdsofpreyRcool Says:

    well… there you go… Dow up 125 points, IG12 back to where it started the day, at 182. So, equities chirping. Bonds not playing along now.

  99. 99
    zman Says:

    Kilduff just did a good job of being right on price thoughts (oil going to $60) but wrong on reason (fundamentals don’t matter). That’s just not true. The future pit discount future thoughts. Prices are climbing because demand is well known to be weak, prices are too low to encourage further size-project investment and over the next 4 to 8 weeks we will add seasonal demand from refiners of .75 to 1.0 mm barrels of oil per day at the same time that OPEC is showing remarkable discipline holding to quoates and non-OPEC supply (except for the U.S. and Canada) is having major difficulty. Why have a guest on who throws up his hands and says the fundamentals don’t matter? Makes me want to put on tie and get behind a camera.

  100. 100
    BirdsofpreyRcool Says:

    looking at page 4 of SD… makes me wonder why UPL doesn’t get more respect. That Pinedale decline curve is just as attractive as the Haynesville Shale. Guess it’s the Rockies pricing differential that keeps UPL in the penalty box.

    z — any insights here?

  101. 101
    BirdsofpreyRcool Says:

    SD — presentation pretty light on financials. And milestones. And overall strategic plan. But, other that that, it answered all my questions.

  102. 102
    zman Says:

    re 100 – I never actively followed them so I’d be guessing. Basis has stunk during the downturn especially from the Green River. I get quite a few emails to cover them and its a simple story really so I plan to. If you can run a comp chart, they lay down perfectly with Bill Barret (BBG), also big rockies gas so I’d say its as simple as location.

  103. 103
    zman Says:

    101 = ouch. They will live in my book but too much debt to rally significantly without a recovery in gas prices.

  104. 104
    RMD Says:

    re ; #100 My impression from broker valuation tables is that UPL trades at a big premium to its peers on most valuation measures due to its well productivity and 2P and 3P potential.

  105. 105
    zman Says:

    RMD – I’d agree with that, long live reserves and reserve growth potential helps to provide premium P/CF and TEV/EBITDA. Same to be said of HK, SWN, BBG, RRC etc.

    Its when the long reserve life comes up against high leverage in a time of low prices that we see multiple compression like in GMXR and the trick is to catch that before it turns.

    SWN, HK, HAL, NBR ending the day pretty much flat

    Quote from Intern #1. “sometimes I get addicted to watching that, I kinda like watching that” in reference to CNBC.

    I’ll post a placeholder post for Friday with the charts for gas but otherwise will be away tomorrow for the end of spring break, possibly checking in from time to time. Have a great weekend!

  106. 106
    BirdsofpreyRcool Says:

    RMD — thanks for your thoughts. Hadn’t looked at UPL’s valuations… really just commenting that I rarely hear it mentioned. Wondered why it wasn’t on the radar screen. But, tough to get excited about Rocky Mountain anything… until the transportation differentials are worked out.

  107. 107
    zman Says:

    BOP – which is why I’m hesitant to speak about it as well as I don’t know what kind of basis hedges they have on or when they took them on.

  108. 108
    BirdsofpreyRcool Says:

    z — it’s not like you don’t already cover a heap more names than I can even remember.

    Nice close. SPX closed over it’s 50 day moving average for the 4th day in a row.

  109. 109
    BirdsofpreyRcool Says:

    hey, z… have a GREAT 1-day Spring Break tomorrow. You sure deserve the time off. Enjoy.

  110. 110
    BirdsofpreyRcool Says:

    broker’s comment on UPL today —

    Ultra Petroleum (UPL-Buy $55 PT)

    One of the greatest E&P stories ever told, but still has a tremendous amount of upside in the Pinedale, in addition to the emerging Marcellus play.
    The company currently has 8 rigs running in the Pinedale and plans to move to 5 rigs by mid-year. UPL should benefit from an uplift in price as REXX East enters interim service in April, enabling the company to sell its gas at Chicago Citygate and benefit from a ~$1.30 uplift in price.

  111. 111
    BossmanG Says:

    lol Z, better turn off CNBC


  112. 112
    Wyoming Says:

    Redoubt from space

    Top Vent

    The cool website

    Go to Current volcano activity.

    I used to live across the Cook Inlet from Redoubt for a couple of years.

  113. 113
    Wyoming Says:

    LNG Imports

    Simple steps to BK an E and P company

    BP (Beyond Petroleum)
    Should work well for a new commercial, please change the jingle tune.

  114. 114
    zman Says:

    Re 112

    Top vent shot is stunning

    Re 113 – the LNG comment about 1.1 Tcf of gas coming to the U.S. far fetched. We have the intake capacity sure and there is more capacity this year than last, but that assumes that almost all of the increment comes to the States and we have our biggest year ever with prices this low already that’s unlikely.

    There was more gas available in 2008 relative to 2005 for instance but import fell due to a reactor in Japan going down and China and India and Europe asking for more. Weak State-side pricing kept volumes at bay.

    Yes demand is weaker internationally now but so are U.S. gas prices. I could see a return to an average of 2 Bcfgpd this year but 1.1 Tcf is 3.0 Bcfgpd and that seems like a big stretch given. Also, this is another guy yelling “huge wave of gas in a theater without checking around for the wave of gas that’s not coming from the North. Canada dwarfs LNG shipments as imports go and Canadian imports have been falling despite high storage levels up there.

  115. 115
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