Thursday – Natural Gas Preview and Oil Review

Posted on by zman

Flattish futures + worry over new financial system "sweeping change" + summer + U.S. Open + utter lack of energy news + option expiry this week = early onset pinning action. Petrohawk has their shareholders meeting today but no way to listen to the operations overview on the web so its golf watching time until they decide to say something interesting.  

 

 

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 - CLR model
  6. Odds & Ends

 

Holdings Watch:

  • $10KP: $24,700 / 63% Cash / The Wiki Holdings tab is updated

Yesterday's Trades:

  • (KOG) - Added 1,000 shares at $0.9298. Stock is off about 12% as crude retreats with the broad market. This is a starter position and I may add more when we get further Bakken results later this month or early next.

 

Commodity Watch:

Crude oil rose $0.56 to close at $71.03 yesterday after the initial negative reaction to an unexpectedly large build in gasoline stocks was reversed once people took time to actually see that gasoline demand hit its second highest level of 2009 last week (see breakout section below). This morning crude is trading flattish after a trip to $72 overnight, backing off on yet another small bounce in the dollar.

  • MEND Watch: MEND claims to have destroyed a Shell crude trunkline (in a somewhat rare Bayelsa state attack) as part of operation "Hurricane Piper Alpha", their now month long all out war on oil production in Nigeria.

 

Natural gas advanced $0.12 to close at $4.25 yesterday, more than offsetting the prior day's retrenchment, in what appeared to be another round of short covering in front of what most traders see as the last triple digit (and possibly double digit) injection of the season (see breakout below).  Gas now looks like this, sort of a rounded bottom look. This morning gas is trading up another couple of pennies  and I am seeing stories and hearing from folks the (UNG) ETF is behind the recent rally. I think it may have some influence during the roll times but I'd point out that the strip is rising with these moves in the front two months so unless the fund is getting long further out (something I would suggest to them would be a smart move to dampen volatility) there is more at play in the gas market.

  • Tropics Watch: From Accuweather ~ "We continue to monitor an area of low pressure several hundred miles southwest of Acapulco, Mexico, moving slowly west-northwestward. This system has potential to develop into a tropical depression over the next 24 hours."

Natural Gas Preview

  • My number: 100 Bcf Injection. 
    • History:
      • Last Week: 106 Bcf
      • Last Year: 60 Bcf
      • 5 Year Average: 81 Bcf
    • Weather: CDDs of 39 (season high so far, still cool to normal), up strongly from 29 in the previous week but barely more than half of last year's reading. This week the real heat is finally arriving and that should be reflected in next week's report.
    • Imports: up 0.2 Bcfgpd from the prior week (not enough to notice) and down 0.8-- Bcfgpd from year ago levels.
    • Electricity: up 1.2% from the prior week but down 13% from last year, again, it was very hot in this week last year.
  • Street Consensus: 104 Bcf (from the Dow Jones survey)

 

EIA Oil Inventory Review



CRUDE OIL - Bigger than expected drawdown on crude as imports remain low.






 

GASOLINE - Bigger than expected build due to higher production and strong imports.







 


 

DISTILLATES - A slightly smaller than expected build in stocks but the demand picture here continues to be bleak. Ultral-low sulfur diesel (ULSD) continues to bump up against record levels and the only thing I see supporting distillate prices is the expectation that the economy will move into a retail restocking mode ... so far that has not begun.


Demand is normally weaker this time of year as their is no heating oil demand leaving the majority of distillates on the farming, trucking, and exports markets. This year, demand is hovering in the down 10 to 20% YoY range as trucking is stalled and the exports market faces a flotilla of diesel in tankers.


 

Stuff We Care About Today


KOG Watch: I had West and BOP's comments to the notes file here.

As the second quarter approaches I'll be adding models to the site for a few of my most frequented names. The idea is not to peg the Cash Flow per Share number exactly but to highlight where the Street may be a little light and to show the sensitivity of the names to crude and natural gas prices, production, and costs.  Since we were playing around with CLR last night as an example I'm adding them first and this model is still subject to change. A couple of things to note:

  1. sequential production is held to 1% growth. They didn't offer a guidance range but in going back over their transcript it looks like they'll be flat to up slightly as they produced more oil than they sold during the quarter.
  2. the oil and gas prices used in the 2Q09 column are averages quarter to date.
  3. the differential on oil reflects some comments from management as well as from other resources about a tightening of basis in the second quarter.
  4. I held costs flat which should be conservative. In the next few models, where management is in a more guiding mood, I 'll break out cost changes more. 
  5. The street is currently showing an estimate of $0.45 CFPS for 2Q, I get $0.50 with my assumptions.

I'll have a tab up next week under the E&P category at upper left to house all of the models for quick reference.

 

 

Odds & Ends

Analyst Watch:

  • (PDE) upped to Hold at Citi
  • (BHI) started at Market Perform at Wachovia

156 thoughts on “Thursday – Natural Gas Preview and Oil Review”

  1. By Nick Heath
    Of DOW JONES NEWSWIRES

    LONDON (Dow Jones)–Crude oil futures edged back below $71 a barrel Thursday
    as market participants mulled economic recovery doubts and Wednesday’s mixed
    set of U.S. inventory data.
    Lackluster financial markets robbed crude of direction, with European equity
    markets steady and the dollar broadly unchanged. Limited support came after the
    World Bank raised its forecast for China’s 2009 economic growth to 7.2% from
    6.5%, but it also cautioned that it was too early to proclaim a robust
    sustained recovery is on the way.
    While crude’s ability to recover from recent falls below the key $70 a barrel
    level continued to offer some technical support, with economy doubts hardening
    and the physical market still well-supplied, crude could struggle to push
    higher in the near-term, some suggested.
    “If I look at fundamentals, stock levels, demand, then I guess we should have
    a decline in the coming months,” said Christophe Barret, global oil analyst at
    Calyon in London. “It was easy to be relatively bullish when prices were at $40
    or $50 because we could see tightening to come in the second half of the year –
    but at $72, it’s difficult to go much higher.”
    At 1137 GMT, the front-month August Brent contract on London’s ICE futures
    exchange was down 37 cents at $70.48 a barrel.
    The front-month July light, sweet, crude contract on the New York Mercantile
    Exchange was trading 32 cents lower at $70.71 a barrel.
    The ICE’s gasoil contract for July delivery was up $5.50 at $584.50 a metric
    ton, while Nymex gasoline for July delivery was down 24 points at 203.02 cents
    a gallon.
    Latest U.S. petroleum data Wednesday failed to provide the markets with
    distinct direction. They showed demand rising but also a continued abundance of
    oil supply in the world’s largest consumer. Crude stockpiles fell 3.9 million
    barrels last week, more than expected, while a 3.4 million-barrel rise in
    gasoline stockpiles exceeded forecasts. Gasoline demand improved but overall
    products demand fell 6% compared with the same period last year.
    “U.S. Department of Energy stats were a mixed bag. Although crude supplies
    fell, stocks still remain above long-term averages while, despite the build,
    gasoline levels are below the average,” said David Hart, oil and gas analyst at
    Hanson Westhouse in London.
    Militant claims of more attacks on Nigerian oil facilities helped support
    prices Thursday, while market participants continued to monitor developments in
    Iran amid protests against Friday’s presidential election results.
    Nigerian militants Wednesday claimed another attack on oil facilities as part
    of a renewed campaign of violence against the oil industry. The Movement for
    the Emancipation of the Niger Delta, or MEND, said it had destroyed a major
    crude-oil trunkline belonging to Royal Dutch Shell PLC (RDSA) in Nigeria’s
    southeast Bayelsa state, although officials at Shell weren’t available to
    confirm this.
    The oil market meanwhile remained largely impassive on developments in Iran,
    the Organization of Petroleum Exporting Countries’ second largest oil producer.
    “Iran’s troubles have not impacted on the oil markets. Perhaps this is
    because, with Obama on the scene, the chances of any aggressive U.S. move are
    seen as considerably reduced or perhaps because there is now 5 million barrels
    a day of spare global crude oil production capacity compared to 2 million
    barrels a day before the recession,” said David Hufton, managing director at
    PVM Oil Associates in London.
    -By Nick Heath; Dow Jones Newswires
    Dow Jones Newswires
    06-18-09 0800ET

  2. z — love the model idea. Great reference point. One request (which you can ignore, of course), could you add lines for Total Gross Debt, cash + equiv, #FD shares o/s, and current stock price? That way, we can keep a TEV (using mrkt value of equity) to EBITDA metric too. I find that ratio very helpful (in addition to CFPS). Thanks!

  4. Saw an interesting headline scroll by… TED Spread at 44 bps. This is the FEAR metric that hit a truly unbelievable 493 bps on Oct 10th.

  5. Thanks Isle – That wasn’t unexpected and is a good thing for expanding domestic gas production into other demand venues as it shows sustainability. Production of the resource base will hinge on applied capital so for now the U.S. can produce as much as it wants for the right price. At present low prices, much of that resource would not be economic.

  6. TechTrader — best trade is 60/40 short this morning… but, a lot of patterns show a late rally.

    So, there ya go… a little bit for everyone.

  9. Energy groups continue to lack footing despite elevated gas and oil prices. I see no reason to add money apply additional capital until the stocks show signs of life here although it feels like a run is just around the very near corner.

  11. Z – stocks like RIG, DO & ATW look (chartwise) like they have some downside consolidating to do (DO more so, ATW less).

    But what do you think of the fundies here?

  13. I’ll be listening to SWN and RRC and may listen to END as well, which I actually have a bit of from a couple years back and higher (see piece on the reports tab, I think it was 2007).

    Dman – they’ve had a good run so consolidation is not unwarranted. On the fundamentals it looks like we’ve seen enough rigs stacked and new builds delayed to keep jackup prices on a slow slide and deepwater pricing more firm. This recent bump in oil prices has allowed some companies to give the go ahead and the fear of contract cancellations seems to be subsiding. I’d add NE to that list as well but probably shy away from RDC and ESV.

    Some green cropping up as the broad markets inch up. Gas numbers in 30 minutes.

  18. Philly Fed…. just to complete the picture… last month (May) it came in at -22.6. So, significant improvement. Sure, the index is volatile… but, direction-wise, it’s been getting better than the sub-40 survey in Feb 2009. Actually, we are back to Dec 2007 levels on this survey (which has been falling since it’s high reading in Jan 2004).

  19. UNG toying with the 100-day line. I think there is a lot of technical evidence (i.e. UNG acting *very* technically) that money is entering the NG market via UNG & this is dominating the action.

  20. Dman – as per comments in the post, I think this is part of the story but we’ve got a “when, not if” story on falling production to consider later in the year that has been talking up the out month strip.

  22. BOP … philly fed; a big so what ?
    What about NY index earlier this week – more impt and negative !

    This is just options expiry nonsense up a 100 down 100 everyone makes some change !

  23. Pack – I never knew you were such a cynic, lol!

    Crude trying to play along in the rally. Hearing / reading lots of talk of sector rotation, into banks, tech and away from energy which I’m told has had a big run. Numbers don’t really bear that out when you look at the leverage to higher commodity prices on the income statements of something like E&P. There’s really been little to no upward movement in the energy names for the last $10 move in crude and nothing for this most recent pop up in natural gas as well. My sense is this rotation will come full circle and “they” will end up owning energy higher than here when it gets its next wind.

  24. PackMan — yep. Big so what. But, just add it to the pile of eco-data. Some good, some bad, some not-as-bad-as-feared. Which way are the scales starting to tilt? For the bond mrkt, we hit the lows in Dec 2008. Stocks in March 2009. No one said it would be straight up from here. No one really knows what the “new normal” looks like. But, if you take the “OMG, WE ARE ALL GOING TO DIE” factor off the table, you can get down to some good old-fashioned sector and stock picking.

    Pick your sector, pick your stock, set a level. Execute your plan. Once the FEAR FACTOR is off the table, it becomes easier to hold a fav stock through mrkt volatility. And — no doubt — this summer will be volatile. Which also means, don’t buy on up days.

    Rant over.

  25. Morning all. I hate it when we see a straight line up – you just know its not sustainable!

  28. BOP … I hear ya.

    Change of subject … KOG … do you have a price objective if what you expect to happen, happens ?

    Bought some the other day, but not at the Z bottom … 1.06.

  30. Pack – I’m not a big fan of price targets, especially with the little guys where the pendulum can swing a lot further than you’d think as new items come to the forefront. Given $75 oil held flat and some larger Bakken wells in these next few tests and their current acreage position I can argue a very broad range of $2 to $4 in 1 to 2 years.

  33. Given the weather, we should see a sub 100 Bcf number next week but we remain very full and demand remains very poor. Doesn’t say much for supply in here either.

  34. That’s MS report on the switch from energy to financials was actually from 6/12, pretty good on them.

    Stocks almost entirely red again, though not getting pummeled. HK remains a slight outperformer. There may be an expectation there that something interesting comes out of their annual meeting. At this point, if I were them, I’d wait for Monday to release any operations update unless they want to get into more details at the meeting in which case they will run into a selective disclosure issue.

  35. FWIW…. thinking about adding to KOG… but, expect mrkt to head lower for a while. If we get a rally, will be closer to the end of the day, as per TechTrader.

    So, basically want the mrkt to sell off for a while. Don’t think i can match z’s 92+ cent trade, but we shall see.

  36. Looking over the storage data, no revisions. One thing to note was the abnormally large injection in the Eastern region. They have had some unusually mild, wet weather which dampens cooling load. The other areas looked more normalish. Its still a bad number.

  37. whole lotta gas out there… was reading a JPMo piece this morning about power generation. Said they think that most (all?) of the switching from coal to nat gas that could go on, has. Coal plants are centrally-located and are large, base-load backbones of the power grid. While nat gas plants are smaller and closer to the end user. Power production from coal has dropped from over 51% in 2000 to under 48% currently. While nat gas has gone from 15% to just under 22% over that same time period. (Nuclear bounces around 20%, pretty consistantly.)

    Anyway, so don’t think we can count on more switching from power plants to use up nat gas. Supply has to come down and/or demand up. However that gets accomplished (economy, hurricane, fewer rigs, less imports, etc.).

  39. By Christine Buurma and Veronica Dagher
    Of DOW JONES NEWSWIRES

    NEW YORK (Dow Jones)–Natural gas futures slid Thursday after the U.S. Energy
    Information Administration reported a build in storage that was larger than
    analysts’ and traders’ expectations.
    Natural gas for July delivery on the New York Mercantile Exchange was trading
    13.2 cents lower, or 3.1%, at $4.121 a million British thermal units Thursday.
    Futures were about 2.8% below where they were trading ahead of the data
    release.
    The EIA reported an injection into storage of 114 billion cubic feet for the
    week ended June 12, surpassing the 104 bcf build analysts and traders had
    predicted in a Dow Jones Newswires survey.
    The five-year average injection for this time of year is 80 bcf, according to
    the EIA. In the same week last year, 60 bcf of gas were added to storage.
    The latest build brings the total amount of gas in storage to 2.557 trillion
    cubic feet, 22.6% above the five-year average and 32.1% above last year’s level
    as of June 12.
    “This should take a little steam out of the recent rally,” said Jim
    Ritterbusch, the president of Ritterbusch & Associates, a Galena, Ill. energy
    advisory firm. “The weather is going to be a key driver as we proceed into rest
    of this month.”
    Forecasters are predicting above-normal temperatures in the Midwest over the
    next two weeks, but below-normal in the Northeast. The National Oceanic and
    Atmospheric Administration said Thursday that it expects Below-normal
    temperatures from July through September in a central U.S. region centered
    around Illinois and Missouri.

    -By Christine Buurma and Veronica Dagher, Dow Jones Newswires

    Dow Jones Newswires
    06-18-09 1051ET

  40. BOP – I used to study that market quite a bit. Lots of variables, very hard to pin that down. We are not nearly the peak of cooling load yet though so a 1% increase over last year for gas (going from 21 to 22% say) is actually quite a pile of gas. There is plenty of excess gas capacity around to soak up lower coal fired production as well. Just need to have the hot summer to do it.

    Nothing really new about today’s storage report, we remain at record levels of storage for this time of year and we are going to get to a new record by the end of the season. The last time we were close to this high was June 2006. At that time, production had noticeably started an upswing and gas was trading mid $6s and went on to the high $7s by August. Just a reminder that prices are not just a function of the current elevated storage level of gas but also about the expectation of future supply which we know to be starting the roll.

  41. Reef – yes, that was the 3.7 MMcfepd IP partially fraced one (500 feet of 3,000 lateral was thought to be producing), the only one they have drilled to date.

  42. z — thanks for filling in some of the blanks in my comment. Yes. Lots of gas can be soaked up by power plants this summer. As the natty gas ones are used more for peaking. Didn’t mean to imply we were running full out on power generation right now. Just that the move away from coal and into nat gas has taken nat gas from 15 to 22%. I didn’t know that. Also, the peak for nat gas-generated power capacity appears to be summer 2006, right at 22%. We fell from there, but are currently back around 21.5%. Your point about moving from 21.5 to 22.0% is valid.

  43. Electricity NG is likely UP over 8% YOY
    Ind is DN YOY 12%
    Can we expect North of 4 TCF storage by end of season

  44. No, don’t have that kind of capacity, probably going to 3.75 to 3.8 Tcf area.

    There is the fear later this summer that we will see a higher number OFO (operational flow orders) due to high line pack on the pipes. This can send prices tumbling as it indicates a glut of gas in the system and comes with charges if the shippers don’t comply to balance the line. It will end prompting more announcements of well shut ins.

  46. NG not exactly falling out of bed, down 14 cents now at $4.11. Got to be frustrating for the shorts and may prompt more covering soon.

  47. Nicky,

    I don’t believe the gold pullback will continue. I think holding this area for 930 signals maybe one more takedown to a low of 915-920 then rally continues for breakout over 1000. Any new thoughts on your end?

  48. re: 44 yes

    Can you elaborate on 45 paragraph 2
    So The EIA storage capacity of 8400
    less base gas 4250 = 4150 is unrealistic.

  49. md – I’ll see if I can find a link to it. You always see a certain number of OFO’s telling customers they need to take more or less gas due to high or low line pack, to keep the integrity of the pipe system in balance. When you see a high number of these issued, like we may closer to the end of summer when we are really full on gas, it can depress regional cash prices and bring the NYMEX price lower. I’ve got a report about that somewhere around here. It’s generally a short lived phenomenon.

    That full gas capacity number sounds a lot higher than I recall. Will look at it as we have added some storage along the Gulf Coast but again, that sounds awfully high. Will also take a crack measuring the build from now to season end in October.

  50. OK… just to be precise… from the JPMo report this morning — nat gas power generation (as a percentage of the entire US Energy production, on a rolling 12 months) hit a peak in summer 2008 at 22%. Dropped to a recent trough of about 21.3 in Jan 2009, and is headed back UP to around 21.5% as of last data point. Can’t tell exactly which month that is from the chart, but looks like March 2009.

    So sorry if i caused any confusion.

  51. Hi VTZ – yes my preference is for maybe a small pullback here and then higher. That said I will be watching the 950 area for signs of failure.

  52. west — you around? my Teddy Bear Cam in the KOG doghouse picked up something… but, it’s a bit fuzzy. Want to compare notes….

  53. take time to listen to crzo presentation.. good stuff on barnett and marcellus and north sea

  54. BOP, no worries, just trying to understand, their point.

    Normal historic breakdown:
    50% coal
    20% natural gas
    20% nuclear
    10% – hydro, solar, wind, oil, and other.

    For the year that amounts to about 18 Bcfgpd per day, but this rises to 25 Bcfgpd (average of last 3 years) in the summer. Capture of share from coal should be higher this summer than last based on prices.

  56. BOP, on another call, I do not have anything right now, will double check if I get a chance. I think they should be moving the fracing equip on the location just about now.

  60. Bill- yep, you can see it in the big injection in the eastern region last week.

    Listening to the GMXR presentation.

  63. Good Morning,
    From the -You gotta luv him -department

    Boone would like to be able to say “I have gas and I would like to be able to set the price!”

    From the desk of T. Boone Pickens
    Hey Army.

    Earlier this year when oil prices had dropped to about $35 per barrel, I was quoted as saying “oil will go to $50 before it goes to $30.”

    I was right. When oil went to about $45 per barrel, I said it would go to $60 before it went back to $40. Then $70 before it was $50.

    I was right again.

    Oil has gone back above $70 per barrel and you can look for it to hang around there for a while. I’ve been in the business for more than 50 years, so I’ve learned a little something about oil and gas. One of the things I’ve learned is: Those who have the oil, set the price.

    OPEC has the oil and it has been saying for several months that it wants the basic price of a barrel of crude to be $75. They’re getting close.

    Kuwait then said that they thought a “fair price for oil” was in the $85 – $100 per barrel range. They’re going to be right, too.

    When you watch the so-called experts on television saying that the price of oil is being manipulated, they’re right. It’s being manipulated by oil producers in the Middle East, Africa, and Central and South America.

    With oil prices going up and gasoline prices at the pump going up just as fast, we have to redouble our efforts to get an energy bill out of the U.S. Congress. Support for the NAT GAS Act (H.R. 1835) continues to grow. We now have nearly 70 bipartisan sponsors and co-sponsors. A companion bill is likely to be introduced in the Senate early next month.

    The private sector is getting the message. Mack Trucks announced the other day that it was moving into the natural gas vehicle sector in a big way in refuse and recycling trucks.

    Groot Industries, Inc., a major waste hauler in the Midwest, has already placed an order for 20 units which will run on compressed natural gas and are scheduled to go into service in the Chicago area by the end of the year.

    Waste Management has been a leader in places like San Diego in moving away from imported diesel to domestic natural gas for its refuse and recycling trucks.

    These trucks are among the highest polluters because they either idle or run about five miles-per-hour all day long. That makes them tremendously inefficient as fuel burners and what they don’t use to move forward, comes right out of their exhaust pipes and into the air around your house, your business and your kids’ schools.

    We have the technology, we have the resource and we have the need. All we are waiting for is the U.S. Congress to express its will and pass H.R. 1835 – the NAT GAS Act – so we can get off foreign oil which will protect our environment, improve our economy and protect our national security.

  64. I did see where it was Kaiser-Francis that did deal with WLL in the Sanish Field. They also did a deal with Tom Ward and SD several months ago and I think they r up 80% on that deal. Thats off the top of my head. It does make me feel better about the whole WLL situation.

  65. west — KOG…. bit confused by the Teddy Cam report. Hearing well #4 (which is #3 completion) IP’d around 1,600-1,700 BOPD. Unless the Teddy got turned upside down, thought that was the 10,000 ft lateral. If so, that IP rate is lower than they were thinking it would be. Also, caught that they still think well #3 (which is #4, to be completed starting this weekend) will be a 2,000+ IP. But, that is the 4,500 ft lateral. So, will wait to see if we can get more details. Could explain the sell-off to 92 cents, tho.

    That was one fat, slow antelope, that z caught there, at 92+ cents.

  69. Er, not that I don’t like Boone, I do & I think he’s genuine. Some here have questioned whether he is, but I’m in no position to know.

    AND, er …not that he isn’t *usually* right about price calls.

    BUT, er, can’t help but notice that he *starts* his homily when oil gets to $35.

    He was kinda wrong about the bit from $120-ish to $35.

    Anyway, now I’ve gotten that vented …

    Denise, what’s the K-man up to?

  70. Wyoming / TexW- would you take a look at slide 17 in the latest GMXR presentation? Looks like they are onto a less clay rich area in the Haynesville than what others have been talking about.

  72. First buy at $1.80, second buy (and first for the $10KP) at $2.36. I’m thinking at least a year hold there.

  73. (slow moment commentary — for all us animal lovers out there… the antelope comment is just more Trading Desk talk. We used to talk about “slow moving deer” and “deer in the headlights”…. it describes a really good buy or sell to — presumably — a somewhat stupid seller or buyer…. and when one is just sitting at one’s desk, not knowing what to do in a trainwreck situation. So, no real antelopes or deer were ever hurt. Just FYI.)

  74. Ya know, EOG drilled quite a few 1,000 to 2,000 bopd wells before they started drilling some 3,000+ wells; they’ve said they are 2 years ahead of everyone else here (which is non-sense) but 1,700 bopd is still quite the economic well for KOG, I these are in the 400 to 600,000 barrel EUR range they’re going to be just fine.

  76. west — #72. My thoughts exactly. Another partial completion on the 10k lateral? Don’t know. Also, think the 2,000 is just bopd. But, we shall see. Expect PR to be out by end of next week. Frac’cing well #4 (which is really well #3) starting on Saturday, I think. 2 days to frac, 2 days to IP and study, 2 days to write an operational update… so, next Thurs or Friday is my best guesstimation.

  77. BOP – you’re cracking me up with the teddy bears & antelopes. I think we should sneak a teddy bear into E&P boardrooms (with no webcam, just to confuse ’em) but with a little label saying “secondary bear”.

  78. Refiners uniformly, albeit only slightly, green. Don’t see a reason for it other than they haven’t participated much at all in this year’s rally (pesky craptastic fundamentals). Anyway, good friend, good with charts is highlighting VLO as about to move. I’m not ready to play just yet but I think the impetus to do so may be there if we get another 2 weeks of stronger gasoline demand. Bad news is out of the way, everyone in the sector has done a deal, etc.

  79. Dman — ha! Great idea.

    Wanna know what really goes on in Board Rooms? They get breakfast, sleep through some operational updates, vote on stuff based on how the other guy is voting, and then get down to the REAL business at hand… “So, what time do we tee off today?”

    No lie. A little Teddy Bear told me…. 😉

  80. My three sets of HK Junes are going to be scuds unless the company gets a pr out the door in short order (doesn’t look likely). Bad timing on my part reading the chart on Monday and not catching that turn down when the stock was green against a sea of red. I’ll continue to hold the longer dated calls as I think this move down is noise, however untimely.

  81. Dman,
    Mr K update-he reallocated his sector bets (energy down thinks it is overowned)(last posted in April)He likes the financial and insurance is a new long I can forward shoot me an email Sknitch@earthlink.net

    For the short term he is pretty market nuetral-thinks we will/should have 5-10% pullback(this was before the down days this week)covered short term shorts the other day-

  82. NG a battleground. They can’t even get it to $4, but you’d think they’ll keep at it.

    Z – so overall, money is moving into UNG & hence front 2 months. Smart money is moving into contracts further out. All this is pushing up the strip, which is letting E&P’s hedge. Short term downside risk in front month due to storage etc, but gulf could spin up any day leading to a spike up. Is that about how you see it?

  83. On another note been reading a lot of chatter about a agricultral fungus ug99 which originated in Africa now in India and is transmitted by air. Saying it will end up here in the US and could be devastating to our wheat crop

    Commodity Online
    NEW DELHI : Food industry experts repeated their warnings against the Ug99 fungus, also known as stem rust, that it is likely to spread worldwide again, either through wind-blown spores or carried inadvertently by people

    Agriculture scientists are trying to develop wheat strains resistant to a fungus that has spread from Africa to Iran and is likely to show up soon in India and Pakistan.

    Start trading in commodities from as low as $50. Join now

    Scientists worldwide have begun work on wheat resistant to the latest fungus. But the process may take a decade or so.

    Many termed the new threat as very serious. Scientists said the virus moves in the air and can move in clothing on an airplane.

    Stem rust is a longtime bane of wheat farmers and afflicted wheat’s wild ancestors before that. The United States has had major outbreaks of fungus, most recently in 1962 when more than 5 percent of the crop was killed.

    Resistant strains of wheat apparently overcame the problem. But a new strain appeared in Uganda in 1999 and began spreading from there.

    People starting to buy the ag etf’s in anticipation

  84. BOP – you must be thinking of XOM. No way that happens APC and NFX, hair too onfire all the time for much golf. HK I figure is more into visits to Larry Flynt’s and WRES can’t afford to venture outside the office.

    Dman – yes.

  85. z — can’t speak for ’em all… can only speak for some. But, you’re spot on. (especially the HK comment)

  87. Dman – one thing to note about not being able to sink it to $4. They can of course still do that, but it is taking longer each time to beat gas back down, despite horrible numbers. One thing congress doesn’t get but that the futures market does, is the, um, future. The writing is on the wall for gas production this year and especially next. Delayed well hook ups mute the process but the underlying decline is too steep to cover without a better rig count. So its just a matter of time. End of summer will be volatile but by then we will be getting mid year supply figures that should show more easily discernible declines.

  89. Denise, the best play on wheat I’ve found is GRU (=ETN). Best just meaning it’s got more wheat & less other stuff. There is a pure wheat ETF but it trades in London.

    Do you know any pure ones that trade in the US?

    I didn’t know about the fungus, BTW. There is talk of a large crop this year (globally), but I don’t really have good info on this. Know any good sites for this?

  90. If you want north american wheat, buy Viterra, VT. They are the old Saskatchewan Wheat Pool.

  91. way off topic – anyone here have any timber experience? timber investing? timber sales? friend of mine wound up with a small tree farm in estate settlement

  92. Just an observation on KOG but this kinda sounds like the 1st 2 wells. These numbers work for me , these are still much better wells than r being drld in most of the Bakken outside of Parshall/Sanish. The traders are probably expecting larger #s as u say so we may see some additional selling. I would still think that the long term value is there, especially if the continue to drill and complete on schedule. I guess I had better dig up the Maryland Club coffee can and get ready.

  93. A good friend of mine sold his tree farm 2 years ago. If you have questions, email them and I’ll forward.

  94. West, with that in mind, outside of Parshall area what do you think the average Bakken well first year decline is? Going to run some math on these.

  95. Z, let me look at some of the wells that have come off confidential status and get get back with you. The ones that don’t have many natural fractures are probably 80%. I wonder if the companies might do as they have done in the Barnett and come back after a period of time and refrac. In many areas of the Barnett this method has worked well.

  96. Listening to CRZO now. Hard one to play via options, interesting name, did not realize they were quite so hedged 2009 (100%). This is one of the ones that will be able to essential flip a switch on a lot of uncompleted wells and quickly ratchet production when gas prices recover.

  97. CRZO – says they are producing 71 mm/d from the Barnett right now, with 90 mm/d awaiting completion (40 net wells).

  98. Dman,
    http://www.uswheat.org has more than I ever wanted to know about wheat-but strangely cannot find mention of ug99. Good global/domestic supply demand report (posted 6/15)on the site

    I have read that many farmers did not get financing for fert/supplies this year so total planted acres are down in the Us

  100. Thanks VTZ & Denise, will check those out.

    Z – when is monthly NG production released?

  101. CRZO – saying 3 months ago they drilled a shallower Barnett well after they realized top of Barnett wasn’t getting fracced. Saying they thought it would be like a Tier 1 producer (about half the EUR of their core wells) but they are saying it is holding up (rate) like a core. They are going to look at it but think they may have a whole higher layer to drill.

  103. CRZO CEO makes the ironic point that North Sea leases they got were free, with no well commitment. Hmmmph.

  104. Bill – thanks for the push to listen to CRZO, thought it was interesting before, think its more interesting now. Sounds like one that runs hard with improved gas prices here but also with increased asset acquisition activity, if they can punt the N.Sea asset for something similar to the END deal at $25 per barrel. Works out to about $150 mm they could then redeploy into Marcellus ops.

  105. west — #93… wow. GREAT POINT. Those numbers sound almost exactly like wells 1&2. However, the Teddy Cam has not been wrong, to date.

    I am checking on the back-up source, as we speak. Will let you know if/when we hear.

  106. west — checking the KOG notes… Well #1 IP’d at 711 BOE/d on a 4,159 ft lateral, but it only got 4 of 8 frac stages off. Well #2 IP’d at 1,394 BOE/d on a 4,169 ft lateral with a 5-stage frac.

    We will find out soon… but, doesn’t sound like an exact repeat of wells 1 & 2.

  107. From the RMOJ Nov/2008: The closest gas pipeline to KOG property is approximately 22 miles to the west and would cost about 3 1/2 million to construct and would now probably be until 2010 to complete if anybody is working on it. As MRO continues to develop Reunion Bay Field north of the Missouri River they will bring a pipeline in which will be much closer to this area. Gas sales would definitely help the economics of the play. Now it is probably just a matter of when they will get a line as there is probably enough supply to support gas line if the price stabilizes.

  109. June 18 (Reuters) – Nigerian militants have carried out a
    series of attacks against oil facilities in the Niger Delta
    since the army launched its biggest offensive in the region for
    years last month.
    Here are some questions and answers about the security
    situation in the Niger Delta, home to Africa’s biggest oil and
    gas industry and one of the world’s largest wetlands.

    IS THE SECURITY SITUATION IMPROVING OR DETERIORATING?
    The main militant group, the Movement for the Emancipation
    of the Niger Delta (MEND), has launched what it calls “Hurricane
    Piper Alpha” since the military offensive, warning it will
    attack oil facilities across the region.
    But the attacks so far appear to have been carried out by
    only one faction — supporters of Government Tompolo, who was
    targeted by the military campaign. Apart from an attack on Royal
    Dutch Shell RDSA.L in Bayelsa state on Wednesday, they have so
    far been largely focused in Delta state further west.
    Industry and security sources say it is virtually impossible
    to fully protect hundreds of kilometres of pipeline running
    through remote swamplands from guerrilla-style attacks and
    expect such strikes to continue.
    But MEND has so far shown itself unable to repeat the sort
    of spectacular raids it launched after it first burst onto the
    scene in late 2005, knocking out more than a quarter of
    Nigeria’s oil output in a matter of weeks.

    WHAT IS THE IMPACT ON OIL PRODUCTION?
    U.S. energy firm Chevron CVX has shut down its
    operations around Delta state after MEND’s first pipeline attack
    in its latest campaign on May 24, halting around 100,000 barrels
    per day of output. nLP693007
    Royal Dutch Shell RDSA.L has said some of its production
    has been halted following Wednesday’s attack in Bayelsa state
    but has given no details. nLI310768
    The insecurity makes it difficult for oil companies to
    repair existing damage to their infrastructure, making a precise
    figure for the overall impact on production hard to calculate.
    Nigerian oil production peaked at around 2.4 million bpd
    before MEND’s biggest attacks in early 2006 and production has
    never fully recovered, with acts of sabotage and pipeline
    bombings continuing ever since.
    Junior Finance Minister Remi Babalola said last week that
    Africa’s largest oil exporter was currently pumping around 1.7
    million bpd, although trade sources have said they expect oil
    exports to average 1.83 million bpd in June.
    The discrepancy is partly due to differences in which
    production streams are classified as condensate.

    WHAT IS THE IMPACT ON THE NIGERIAN ECONOMY?
    Nigeria relies on oil earnings for around 90 percent of
    foreign earnings. The global downturn and lower OPEC export
    quotas are already eating into its revenues.
    Sub-Saharan Africa’s second-biggest economy is likely to see
    its budget deficit widen to around 8.5 percent of GDP this year,
    according to the International Monetary Fund. nL947959
    Any unrest which cuts oil production significantly,
    especially with world oil prices still at around half their $140
    a barrel peak of a year ago, would place even more strain on
    government finances.

    HOW SUCCESSFUL WAS THE MILITARY OPERATION?
    The military offensive in Delta state last month focused on
    “Camp 5” and the community of Oporoza, the base and home
    respectively of Government Tompolo, accused by the military of
    profiting from a lucrative trade in stolen oil.
    Some local rights groups said the armed forces were guilty
    of abuses, saying they had targeted ethnic Ijaw communities, a
    charge denied by the military.
    Thousands of civilians are thought to have fled their
    villages after helicopter raids on Camp 5 and Oporoza, though
    witnesses said they fled out of fear that surveillance aircraft
    would open fire again rather than from actual fighting.
    Tompolo appears to have been isolated by other factions
    within MEND, some of whom have expressed willingness to consider
    an amnesty offer proposed by President Umaru Yar’Adua.
    Public opinion in Nigeria, including in parts of the delta
    where widespread criminality has led to permanent insecurity,
    has largely been supportive of the military offensive.

    Thu Jun 18 18:18:34 2009

  110. BOP, I’m sorry I will have to do a better job of explaining myself. Typing and thinking mutually exclusive. I was thinking more like they messed up 1st frac did good on the second. Sorry about that.

  111. west — no problem. That is what I was thinking too. Somebody (HAL) sent the summer interns out to complete the well… again. Deja vu.

  112. listening to a CLR conf call about the geology/engineering/takeaway capacity in the Bakken/TFS. CLR’s (much touted) acreage bookends KOG’s acres, to the NW, W, and SE. Think the TFS potential is greatly underappreciated in this play. CLR gets it. But, don’t hear many other players highlighting the potential for the TFS. Sounds like TFS IP and decline curve a bit different from Bakken, but ultimate economics could be close to the same.

  113. z- #94 – sorry got sidetracked – i will send some tree related questions at some point over the weekend. My friend just wants to know the rules of the road i thimk.

  116. Re ATW – don’t see any broker comments, news, articles,etc. Do see that it bounced off its 50 day average yesterday.

  117. Occam – taking a ATPG – need to map out the growth, lots of moving pieces (buying and selling percentages of assets) which is the type of story I usually avoid. Good bit of debt too, still looking over.

  118. z — CLR… don’t know if it’s new information (would be surprised). But, they said that if they could generate FCF above their budget this yr, they would use it to add another rig. They completed the 2009 budget in Feb, using $46/bbl strip price. As oil prices are higher than that, they stand to generate “$80-100mm” in CF above budget. They are currently talking to a contractor (or two) about picking up another rig. Nothing done yet, tho.

    Also, got my frac zone question answered. CLR believes their frac job will drain a 1,000 ft x 50 ft rectangle (if you will) centered on the lateral well bore. So, this means that ultimately, their 1,280-acre spacing can drop down to 320s (in the “good areas”) and 640s in the less good areas. This has the effect of increasing the economics. ALSO, they are concentrating on the TFS right now… so, they can double the economics just by drilling a Middle Bakken well on the same acres. Either a Bakken or TFS welll will HBP the acres. Good operational and financial flexibility built into that (can drill two zones when oil prices are high, drill only one to HBP the acreage when they are low).

    This is what i LOVE about this play… there are LOTS of ways to increase the economics of the Bakken/TFS. One other thing, they currently think they are recovering only 8-9% of the oil in place… so, down the road with better recovery methods, it’s just another way this play gets better and better.

    I’m a believer.

  119. BOP – did they voice an opinion about the TFS and m. Bakken being distinct?

    Crude closed green, about 71.30.
    NG closed about $4.08, anything above $4 has to be considered something of a victory for gas.

  120. z — yes. CLR thinks, for the most part, they drain distinct reservoirs. But, just to be on the safe side, they are only assuming non-communication where the distance between the TFS lateral and the MB lateral is greater than 50 ft. Otherwise, their own frac job can make the two formations communicate. Also, they think that in some places where the IP rates are sky-high, natural tectonic fractures allow for communication.

    But very interesting that they are spending so much time and effort on just the TFS right now. For the last yr, it’s been the target zone. Can’t recall how many TFS wells they drilled over this time period (40 maybe?). While they think the EURs will be similar to the MB, they only have about 5 months of production data (on avg) for the TFS wells.

    Also, they are drilling separate verticals to the MB at the same location. To make SURE (and test) that there is no communication between the two formations.

  122. On KOG’s 1st qtr cc that had several questions about the offset TFS well that belongs to Peak. Lynn said that they were watching it and I would assume that they have the inside information with their ami with Peak. As I remember it he said that it had a flatter decline curve but not enough data to make a call. They said for the time being they would continue to evaluate the Bakken.KOG and Peak r suppose to drl a couple of wells west/sw of their present drlg site maybe one of these will be a TFS test. Will catch the replay on CLR, everybody wants to grow up and be like Harold.

  124. CLR — also, reiterated their stance AGAINST putting oil hedges in place. They think oil is headed higher.

  126. Re 125. Thanks, EOG reiterated their hedgeless oil strategy the other day as well. Of course, a year ago, both of them said the same thing, bet they wish they’d hedged the last coupla quarters, hindsight and all.

  127. #127 — seems they use their drilling program as a type of “hedge.” When oil prices high, drill more. Low, drill less. Guess you don’t need to hedge as much, if you have operational flexibility and not an overly-leveraged balance sheet.

  129. BOP – I’m glad they don’t hedge, makes for a more useful trading vehicle. MCF is the same way, they are price takers, let the fund managers worry about hedging, yada, yada, yada.

    Red paint thoroughly dried on my screen, declaring beer thirty early.

  130. z — yeah. ARCO used to be that way too. Don’t hedge. If investors want to buy a barrel, here we are!

  131. BOP, thx for the bear report, I’m thinking we are looking good here whether that is the general opinion or not with KOG.

  132. West — i am very happy with the $1.00 shares i added today. KOG is the purest way to play the Bakken/TFS. And the more i hear about the Bakken/TFS, the more I like the play. For KOG, comes down to oil prices, clean balance sheet, and resolving that 2nd Unit rig. I almost jumped out of my chair to hear CLR say they are snooping around for another rig today. So, don’t think the Unit rig will continue to be a liability for KOG. If it hasn’t been resolved already.

    Unfortunately, today’s Bear Report didn’t include a chapter on Unit Rig Resolution.

  133. z — where was that KOG model you did a while ago? Back when the stock was around 30 cents, if i recall correctly. Just want to see what assumptions you made.

    At this point, I can come up with a value anywhere from $1.60 to $5.00… can’t put a sharper pencil to the value until we get more info.

  134. BOP:
    assumptions were:

    37,500 acres, risked 50% X $1,000 per acre = $18.75 mm
    plus cash of $7.5 at year end
    plus PV10 of proved at 5.3

    less cost of two wells and cost to cancel rigs 1 and 2.

    shares were 90.7 mm out

    all of those assumption no longer hold water.

  135. z — not calling you out on it. I just thought how you valued KOG at the time was clever. Conservative (which is good), but clever. So, wanted to update the data and see what we have now.

    I thought you ran another model that looked at BOE valued around $10/bbl in the ground.

  136. BOP – I did but I didn’t save it. I think I went with EURs of 400,000 and spacing of 640s with half their acreage being good.

    What’s their NRI and fd share count now?

  138. here’s the thing… assume all their acreage is good… or 1/2 acreage is good for MB + 1/2 acreage is good for TFS. Either way, come up with about the same there.

  139. Also, based on what CLR said about the frac zone, ultimately this will be drilled at 320s.

  140. I assume $2mm cash on BS at 3/31 is gone? Any borrowings, leaving the potential liability of cutting loose the second rig alone for now?

  141. they raised about $7mm cash in this last round, included in the FD shares. Also, at some point, will have a $5mm revolver. But, need to book assets to draw against.

    Just leave the 2nd rig out of it, for now, yes.

  142. This is where I’m at right now:

    37,500 acres risked 35% so 24,375 acres prospective.

    640 spacing. It will probably get smaller but no rush and I’m giving them a lot of credit above by derisking the acreage.

    That gives you 38 well sites

    400,000 BOE EUR per well. That may be low but CLR is still calling the average well 325,000 (their IPs have been smaller but they’ve also drilled a lot more wells) so until I see bigger wells and some consistency in the ability to complete them I think that’s fair.

    Go with $15 per barrel in the ground now, prices are better than they were by quite a bit and I think next year will be higher than here and so on so $15 per BOE is not out of the question for an oil deal in 2010.

    82% NRI and $112 mm shares and assuming no debt and no rig liability gets me to $1.74 per share with the $7mm cash, $1.67 without – I assume they need all of that cash and more to complete wells 3,4,5,6?

    TFS and downspacing are all upside, gravy if they exist. But I’d rather let the results walk the NAV up and not be yelling $4+ from the rooftops when the stock is a buck.

  143. z — thanks! agreed. As i said, i could come up with $1.60 to (shhhhhhhhhhhhhhhhhhhhhhhhh) $5.00. So, just wanted some support for how I was looking at it.

    Thanks. Gives us a current starting point. Add it to the KOG notes, pls.

  145. END OF DAY Overview:

    · Equities update – after a brief late day sell-off, stocks manage to close in the green (up 7.5 points/0.8% to 918). Stocks still suffering from a lack of conviction & major newsflow, coupled w/the quad witch and S&P rebalances coming up tomorrow = makes for a lot of jerky trading and volatility. Volumes remain pretty light. The “safe” groups lead the market – health care, staples, and utilities are all up 2%. In addition to these three, financials are also strong, up more than 1.5% as buyers return following yesterday’s sell-off. Tech, industrials, energy, and consumer discretionary were weak. Hard to tell if the “safe strength” should be viewed as a negative (and a sign of increased risk aversion) or more a reflection of developments in Washington (where health care and climate trade/cap-and-trade appears to be running into some issues). Retailers and semiconductors were the weakest groups today (SOX falls 1.8% and is now ~10% off recent highs).

    · Corporate credit – HY was pretty weak all day (HY12 hit 81 1/8-81 3/8 late in the day – note that late last week HY was up near 86, a pretty steep sell-off over the last few days); IG closed off its wides but was still out a few bp.

    · Treasuries very weak today although rallied fight at 4pmET – at one point late in trading, the 10yr was off more than a full point and the 30yr was off 2 points (both rallied hard right at 4pm though). Some of the items weighing: 1) stronger economics numbers this morning; 2) Market participants also noted some selling from mortgage servicers and mortgage-backed securities portfolio managers (per DJ); 3) larger-than-anticipated auction. The Treasury announced today (@ 11amET) that it will be doing $104B in total sales next week (inc. $40B 2s Tues, $37B 5s Wed, and $27B 7s on Thurs) – this was more than anticipated and set a new record (the prior record was $101B).

    · Euro weakness – the Euro sold-off today (around ~1:45pmET), w/traders pointing to Reuters’ LIBOR headlines and technicals for the weakness. The BBA said Thurs it will change its definition of LIBOR to allow a greater number of institutions to participate in the daily fixing process.

    · CMBS – the rally in CMBS continued for a second day; banks, inc. MS, BAC, and C, have all bought existing CMBS and repackaged the bonds to make them more attractive for investors (DJ).

    · Technicals still getting a lot of attention – 200day is now 904; the 200day and 50day are about to converge (50day now 895) – the 50day hasn’t been above the 200day since ’07. 920 being watched as a resistance level on the upside.

    SP500 Performance Breakdown (source: Bloomberg)

    · Best performing stocks in SP500: SJM, CVH, CI, HUM, CCL, LNC, KEY, FITB, HIG, HBAN.

    · Worst performing stocks in SP500: JCI, LOW, PHM, WYN, NYT, ACS, DHI, LSI .

    · Contributing the most to SP500: BAC, PG, KO, WFC, ABT, PEP, PFE, MRK, ORCL .

    · Weighing the most on the SP500: GE, INTC, CSCO, CVX, IBM, LOW, MSFT, BBY, HD, JCI.

  146. Local Humor/Who We Get To Hire:

    On local radio call in show when topic was animal rights, PETA etc:

    Caller: Well for sure God wants us to eat animals.

    Host: Really, is that in the Bible somewhere?

    Caller: No, it’s obvious. If God didn’t want us to eat animals he wouldn’t have made ’em outta meat!

    Kind of cleared it up for me….

  148. west — it was a broker-hosted conf call… but i will send you the presentation. it’s got a lot of good info (and it’s stuff they have shown before… so, don’t think anything is terribly new).

  149. west — i think it’s time to take a closer look at CLR. There’s a lot more data to parse through than KOG… and it’s hardly an “undiscovered gem.” But, the Bakken/TFS is only going to get better with time. And i like their unhedged strategy + low interest expense use of bank debt.

    Lots of leverage (operational and financial) to oil prices. Only bad = trades at QUITE the premium multiples… 2010 EV/EBITDA is over 11x and Price/Cash Flow is over 10x.

  150. west — z said the email i forwarded to him to forward to you got bounced back. You got the anti-BOP filter on again??

  152. Yep. Barnett is way more complex than the Bakken. But, TX is a geologically more complex and tectonically active area than ND… so, makes sense. I don’t think they even run seismic in the Bakken. Haven’t seen any, anyway. Have you?

  153. CLR is shooting some, not sure how much, not a big cost so not over their whole acreage position or anything close to it.

    BEXP has shot more but I think its Montana side.

  154. Just saw Terranova on Fast Money explain that the rigs being dropped is the inefficient rigs that can’t drill Horizontal. What a WRONG Douche Bag.

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