FOMC Wednesday



In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Oil Inventory Preview
  4. Stuff We Care About Today
  5. Odds & Ends

Holdings Watch:

  • $10KP:

    • $19,000
    • 59% Cash

Yesterday's Trades: None

Commodity Watch:

Crude oil rallied $1.74 to close at $69.24 yesterday as the dollar sold off and equity markets failed to. The API inventory report out after yesterday's market close was across the board bearish looking, as one week snapshots got, and crude sold off in after hours trading (see details next section). This morning crude is trading off anywhere from 30 cents to a buck plus on the API numbers.

  • OPEC Watch: Kuwait ~ No production cut for the group at the September meeting. ZComment: They are starting the jawboning a little early it seems. Look for more talk about re-tightened quota discipline in the days and weeks ahead, especially if oil threatens to move into the lower $60s.

Natural gas fell $0.05 to close at $3.88 yesterday in lackluster trading. This morning gas is trading off nearly a dime this morning but that will move with the crude inventory numbers later today.

  • LNG Watch #1 - LNG ticked down last week. We are well below where many E&P analysts have been forecasting we would be on imports. Taking this into account with Canada, we're 2 Bcfgpd light to where they have put imports at this juncture. 

  • LNG Watch #2 - Where is the gas tsnumi? Delayed and Detoured. Problems with Nigeria and Algerian facilities are offsetting incremental production from the Middle East and Russia (which has also been delayed). The recent large volume contracts we have seen penned are with Asian customers, most recently Japan who is taking Exxon's PNG volumes despite the fact that many analysts had been looking for Japan's market for regas to be saturated.


  • LNG Watch #3 -  The globe has capacity to liquefy and ship 27.1 Bcfpgd as of 2008. How much gas is coming on the market in 2009? Estimates vary from 5 to 7 Bcfgpd depending on timing. A little over 2 Bcfgpd has been added so far in 2009. 


Oil Inventory Preview


API Watch: Bearish Looking (from a weekly standpoint) All Around:

  • Crude down 72,000 barrels
    • Imports FELL 737,000 bopd
    • Utilization was said to be up 1.9%
    • These numbers Do Not Jive.
  • Gasoline up 3.7 mm barrels
  • Distillates up 2.3 mm barrels

ZComment: As previously stated, the API's look bearish, at least on the surface. Looking back at last week we had a break in the shadowing pattern of API and EIA data. Last week EIA's numbers showed a much bigger drop in crude stocks and stronger gasoline demand along with low imports, pretty much opposite of what API showed. This week, API's numbers don't really jive as they show higher crude consumption, lower crude imports but essentially flat stocks. Hmmmm. Last week, the market also paid attention to a big build in gasoline stocks for several hours before it skipped to the bottom of the release and actually noticed that gasoline demand hit its second highest level of the year. This week I think traders are likely to check the numbers a little more closely.

Here's what we normally get this time of year:

  • Crude: modest declines from now until the end of the gasoline making (driving) season when we see modest builds as refining capacity utilization drops in preparation for a shift to a higher mix of heating oil produciton as winter approaches. 
  • Gasoline: flat line for the next few weeks then slight decline through Fall
  • Distillates: modest builds now through Fall.

Here's what's important for maintaining bullish sentiment with this report:

  • Gasoline demand of 9.2 mm bopd or better AND a gasoline stocks build that isn't blowout large on the stocks build.
  • Distillates demand - a rebound to at least 3.5 mm bopd. Demand here is absolutely lousy.



Stuff We Care About Today

Deal Watch:

  • PQ Files 10 mm share secondary

    • Says proceeds for general corporate purposes; paying down debt was not listed in the use of proceeds.
    • Dilution: 19.6% / 22.5% if the 1.5 mm shoe is exercised
    • If the deal (with overallottment) prices at $5.50 they stand to haul in about $60 mm after fees which will reduce their net debt to cap from 60 to 47%.
    • Assuming they bump up spending to hold production flat and to complete some gulf coast drilling, and taking the dilution into account their mulitple of 2009 CF remains extremely cheap at 1.7x
    • I continue to own common shares of PQ outside of the $10KP

  • RRC Files $200 mm Shelf
  • BBG Offers $200 mm Seniors
    • proceeds for debt repayment

KOG Operations Update:

  • Wells 3 and 4 see 24 hour production tests at 1,856 and 811 BOEpd.

    • TSB #16-8-7H - (29.5% NRI) - 9,000 foot, 15 stage frac is the bigger IP mentioned above and produced 1,236 bopd over a 7 day period.
    • TSB #16-8-16H (41% NRI) - 4,465 foot lateral with a 5 stage frac drilled from the same pad as the long lateral well.
    • While there was talk of higher rates from these wells floating about, these are very respectable wells for the Bakken and should be easily economic at current oil prices. Over time, most of the Bakken players have seen their well results improve as they gain experience in the play, which is typical for a resource play. Had I not heard whispers of higher numbers here I have been more than a little impressed as I would be from most non-Parshall area wells of this size.
  • Well #5 (TSB #14-33-6H; 41% NRI ) at TD and #6 (#14-33-28H; 41% NRI ) is drilling ahead in the horizontal portion of the well. Both wells are expected to be completed mid 3Q.
  • Wells #1 and #2 which IP'd at 711 and 1,394 respectively were disclosed to have average production of 280 and 447 Bopd for their first 30 days on line.
  • A lot of the numbers above are just for my notes; they also played about with their acreage, selling down a piece of two prospects to net a little cash. I'll sort out a model here soon.



Odds & Ends

Analyst Watch:

  • Sun Trust ups (HK) and (PETD) to Buy.

94 Responses to “FOMC Wednesday”

  1. 1
    Sambone Says:

    By Nick Heath

    LONDON (Dow Jones)–Crude futures reversed some of Tuesday’s gains Wednesday
    on expectations that U.S. government data will reveal gasoline stockpiles rose
    again last week, damaging hopes for stronger summer demand.
    Anticipation ahead of the conclusion of the Federal Reserve’s Open Market
    Committee meeting later Wednesday limited falls, with market participants
    mindful that comments from the Fed could trigger moves in the U.S. dollar, a
    key driver of crude oil prices recently.
    The wait for the Fed – which is due to make its announcement at around 1815
    GMT – could potentially delay reaction to U.S. Energy Information
    Administration inventory numbers due at 1430 GMT. Traders were reassessing
    their expectations for the EIA data after American Petroleum Institute readings
    Tuesday showed a 100,000 barrel draw on oil inventories and a 3.7 million
    barrel increase in gasoline stocks.
    In a Dow Jones Newswires poll, analysts are expecting the EIA to reveal a 1.3
    million barrel draw in crude, and a 1 million barrel build in gasoline.
    “I would suspect that if the [EIA data] is anything like the APIs, then
    selling pressure will come back,” said Jim Rintoul, analyst at London-based
    trade advisory TheOilTrader.com. “The fundamental picture in crude isn’t
    getting any better at all.”
    At 1110 GMT, the front-month August Brent contract on London’s ICE futures
    exchange was down 45 cents at $68.35 a barrel.
    The front-month August light, sweet, crude contract on the New York Mercantile
    Exchange was trading 51 cents lower at $68.73 a barrel.
    The ICE’s gasoil contract for July delivery was up $8.25 at $558.50 a metric
    ton, while Nymex gasoline for July delivery was down 432 points at 185.00 cents
    a gallon.
    A build in gasoline stocks reported last week dented summer driving season
    demand hopes, with the ensuing fall in gasoline futures contributing to crude’s
    drop back below $70 a barrel. The slide in gasoline prices has outpaced crude,
    threatening profit margins for U.S. refiners processing crude into gasoline.
    Another large build Wednesday could cause further damage.
    “It would clearly put more downwards pressure on refining margins, and what
    that implies for the crude market – particularly in the U.S., where 55% to 60%
    of the barrel is made into gasoline – is that refiners are going to be taking
    that much less crude,” said Michael Wittner, head of global oil market research
    at Societe Generale in London. “Weak margins mean weak crude demand, which
    means lower prices.”
    Japanese oil data Wednesday highlighted how demand for crude remains stunted
    in many industrialized economies as a result of the worldwide economic
    Japan’s May crude oil imports fell 18.8% on year to 3 million barrels a day,
    their lowest level in more than 20 years as refiners enforced crude run cuts
    due to continued weakness in industrial demand.
    “This data underlines that situation in the oil market remains weak and that
    the oil price increase over the past months was not driven by improved
    fundamentals, but mainly by market sentiment,” said Eugen Weinberg, analyst at
    Commerzbank in Frankfurt.
    The positive sentiment that had helped bolster crude has continued to erode,
    with questions over the pace of economic recovery increasingly weighing on
    crude and other financial markets in the last week. The Organization for
    Economic Cooperation and Development Wednesday raised its gross domestic
    product forecasts for the first time since 2007 but stressed that the recovery
    will be “both weak and fragile for some time.” It now expects the combined GDP
    of its 30 members to fall by 4.1% this year – compared to March predictions of
    4.3% – and expand by 0.7% in 2010.
    -By Nick Heath; Dow Jones Newswires
    Dow Jones Newswires
    06-24-09 0747ET

  2. 2
    PackMan Says:

    KOG – opinion on what this does for the stock ?

  3. 3
    BirdsofpreyRcool Says:

    KOG — I am the one guilty of passing along the “whisper numbers.” The expectation of higher IP rates were thrown out there by mngmt. But prior to actual well results. Goes to show, no chicken-counting before chick-hatching.

    That said, the results were good. And it looks like KOG increased their net acres on the FBIR by about 550 acres. That is almost another entire well location. ALL the acreage on the FBIR is leased. So, if a company wants to get or increase ownership in the area, they either have to make deals or do buy-ins/outs.

    KOG is making cash flow now, has cash and partnerships that allow them to continue their drilling program without taking down debt, and is steadily proving up their acreage holdings. That is good stuff. Also, their $10 differential to Nymex includes all shipping/transportation costs. So, getting better pricing on their barrels than I feared. Overall good report. But not of the same caliber that was picked up by the Teddy Bear Cam. And THAT is disappointing.

  4. 4
    zman Says:

    Pack – it’s positive. With the little ones like this guessing the magnitude of the move is next to impossible. But they are moving in the right direction and moving ahead with their plan, two things people like to see in names big or small. Two more wells helps to de-risk the acreage and will generate more cash flow. But I can’t guess the move today (indications are slightly up) as some people are just in for the wells and may sell as they wanted a certain IP and didn’t get it.

  5. 5
    BirdsofpreyRcool Says:

    PackMan — KOG stock is worth more than $1. z’s estimate of $1.65 (if i recall correctly) is based on assumptions that shouldn’t change (either up, or down) with this report. The fact that they added a few acres helps the valuation. The fact that they have $7-8mm in drilling partnership commitments, helps too. So, just need to get the science of completion down and keep drilling wells. Lynn said that they have about 5 yrs of drilling program ahead of them, so there is ample time and projects to build shareholder value here. Still unhedged too. So, will trade like a high-beta barrel of oil.

  6. 6
    zman Says:

    Looks like AXC.to Addax Petro is going to Sinopec. I’d expect to see a wave of Chinese oil firm buying in the next year as they seek to tie up African, South American and potentially Canadian oil reserves

  7. 7
    BirdsofpreyRcool Says:

    KOG — in no uncertain terms, their operational update was positive.

  8. 8
    elijahwc Says:

    Addax is gone.

    China Petroleum (Sinopec): Addax Petroleum announces C$52.80 per share cash offer by Sinopec (70.80 ) : Addax Petroleum announced that it has entered into a definitive agreement with Sinopec pursuant to which Sinopec has agreed, subject to the terms of the Support Agreement, to make an offer to acquire all of the outstanding common shares of Addax Petroleum by way of a negotiated take-over bid for C$52.80 per common share in cash.

  9. 9
    zman Says:

    BOP – assuming #5 and #6 come in successfully I’ll probably derisk their acreage again in my Back of Envelop NAV.

  10. 10
    zman Says:

    Eli – Addax was one of the first company briefs I did at your prompting for this site, way back in March 2007.


    I guess the Chinese liked it too.

  11. 11
    BirdsofpreyRcool Says:

    z — i thought your risk-weighting was a bit severe (for this particular resource play). But your intuition to be conservative was SPOT ON. Congrats. “Show me the production, I’ll give you credit” = correct approach.

    The fact that they swapped around some acreage (but ended up with a tad more, it appears) also reduces KOG’s exposure to any one well and increases their exposure to the entire FBIR area. So, that is also a “de-risking” of sorts… on a minor level.

    Stock should trade up. Unless oil trades down.

  12. 12
    zman Says:

    KOG – for a midget it at least used to be actively covered. BOP, do you have an indication of who on this list is still active?

    RBC, Cannacord, First Albany, BMO, AG Edwards. Given the price level and the recent rally in oil prices, and the four good wells and more drilling, I would think that some of the analysts might high grade the name for the risky crowd.

  13. 13
    zman Says:

    BOP – you are the one that made the good call on KOG, I just a benefactor.

  14. 14
    zman Says:

    Stocks backing off the open which makes sense in front of EIA. See notes in the post…am a bit surprised API numbers don’t have crude off more than this, could be last week’s results which didn’t match up well between the two groups are being taking into account today, especially since API’s numbers don’t seem to line up well on the crude side.

  15. 15
    zman Says:

    BOP – Any word from HT or TT?

  16. 16
    BirdsofpreyRcool Says:

    Let check in with the trading desk… we were busy discussing a couple of event-driven sits this morning (incl KOG).

  17. 17
    BirdsofpreyRcool Says:

    TechTrader = 60/40 long, look to buy a dip in the first hour

    (on Fed days he is usually long going into announcement, then goes home)

  18. 18
    zman Says:

    Sometimes you have to marvel at the timing of analysts. I wonder today at the timing of the suntrust analyst who waited for a low (good timing on his part) but did it prior to oil data which can turn the group and the stock lower, this weekly data looking a little more important than the usual weekly data. I think these guys get a PR out the door soonish and the analyst probably thinks so too. They have a habit of releasing mid 2Q operations updates and we know they have not released results from their 2 biggest Eagle Ford wells yet and the Haynesville unit has been quiet for longer than usual also.

  19. 19
    BirdsofpreyRcool Says:

    KOG — actively covered by Thomas Weisel, Triston, BMO, Raymond James, and KeyBanc. At the high end, KeyBanc has a $2 PT, BMO at the low with a $1 PT.

  20. 20
    zman Says:

    Thanks BOP, at some point soon these guys will start talking more about CF than NAV. Maybe mid 3Q to coincide with the completion of 5,6.

  21. 21
    zman Says:

    HK – Berstein reiterating outperform and $35 target today as well. Could be coincidence, could also be “hey, remember me, I recommended your stock just last week, put ME on the deal team”

  22. 22
    zman Says:

    RMD – message received about analysts and consistently. Silly me that I expect them to remember what they wrote 2 weeks back.

  23. 23
    zman Says:

    SD and KWK – may have to start looking at new positions going into 2Q, both have tumbled in this run down from 6/11.

    KOG – I think the flattish trading post announcement is good. I know people want a pop on news but the flat trade gives analysts time to work through the numbers and reiterate ratings and up targets without feeling like they are chasing the name.

  24. 24
    zman Says:

    Looking to add CLR calls on the oil numbers if positive.

  25. 25
    choices Says:

    Z,BOP-just asking for an educated guess but KOG is cash flow positive now (very good)but would development plans push for a secondary?

  26. 26
    zman Says:

    Choices – yes, at some point you have to figure they’ll be doing one, as BOP mentioned land deal and partnerships help with costs. But a deal is in the cards, especially if they try to keep this pace of drilling up.

  27. 27
    BirdsofpreyRcool Says:

    z — we were trying to buy more KOG on the trading desk this morning… but, it didn’t hit our low-ball bid. Think we saw the sell-off, now it should stabilize a bit higher.

    Nope. No fireworks. But solid results and decreasing risks/increasing cash flow.

  28. 28
    BirdsofpreyRcool Says:

    choices — KOG will definitely do another stock deal. But not until the stock is higher. They have enough cash/assets/liquidty for 2009. Will continue to build reserves and cash flow, before raising more capital.

  29. 29
    zman Says:

    EIA Inventory Report

    Crude: down 3.8 mm barrels
    cushing stocks fell from 29 to 28.2 which should help oil a bit.
    Gasoline up 3.9
    Distillates up 2.1

    Crude imports: up 247,000 barrels, still pretty low
    Gasoline demand: 9.129 mm bpd, lower than I would have liked to see
    Distillate demand: 3.383 mm bpd, still very low.

    Util up to 87.1 – that’s high, in line with API’s increase

  30. 30
    bill Says:

    what would the eur be for those 2 new kog wells..any guesses

  31. 31
    VTZ Says:

    Today could be dollar D-Day!?

  32. 32
    zman Says:

    Adding to 29 – not great, not terrible. A bit surprised to see the refiners crank up utilization into the upper 80%s for the first time this year. That took refiner crude inputs over 15 which is also high for the year.

    The gasoline numbers were poor.

  33. 33
    zman Says:

    V – I was reading about that last night. I kind of got the sense that the things the Fed would have to say that could hurt the dollar would be the same things that hurt the market. It was giving me a headache so I deleted my post intro as you really don’t want to read about currency stuff from me anyway.

    Bill – educated guess would be the shorter lateral in the 400 to 500,000 barrel range. This is based on similar IPs in the area and other company comments. Definitely not bad economics. On the longer lateral I’m ok with 1.7x that figure. Some companies will tell you double the lateral, double the EUR, but that rarely happens, lot more complex than the simple view would indicate.

  34. 34
    bill Says:

    Thanks , not too shabby

  35. 35
    zman Says:

    Oil now down a dime on the day from lower pre inventories. I’d have to guess that’s just the top line number on crude and the decline in stocks at Cushing. FOMC next waypoint.

  36. 36
    VTZ Says:

    Don’t forget the auction too Z. 37 billion in 5-years.

  37. 37
    zman Says:

    V – the $40 billion yesterday went very well, I was surprised to see the dollar stay off after that.

  38. 38
    zman Says:

    Crude now up a dime, gasoline acting as the airbrake. I do not believe we have seen the highs for gasoline for the summer. Next week’s numbers should include a stocking effect at the gasoline stations in advance of the July 4 holiday which is also a pretty good driving holiday.

  39. 39
    PackMan Says:

    Thanks Z & BOP re: kog

  40. 40
    VTZ Says:

    The commentary I’ve seen is saying foreign buyers are moving up the curve because of less uncertainty and improving yields.

  41. 41
    Nicky Says:

    Morning all. Getting the expected bounce in the indices. We are now up to 50% correction for the spx for the move from 927. Next stop would be 912. Much higher and I think some shorts may start to get a touch concerned and we could see a squeeze all the way back to 927 spx.
    Oil is gonna key of $ and stocks. It looks like the move up we are seeing is corrective but I can’t rule out one more high before a bigger correction.
    $ – needs to break 79.10 – taking a breather right now but it should move lower and we should see new lows.
    Bernanke walking a tightrope this afternoon. I think he will need to reassure the market that he isn’t raising rates any time soon. That should send the $ lower. I see many calling for metals to go higher if $ moves down. It may be the knee jerk reaction but if the Fed are saying we are going to keep rates down because inflation is not a problem then that is bearish for gold. I will add that the 940 – 950 level is pretty key for gold. It moves above here and we could zoom higher. Alternatively if this is a wave ii and we roll over then we will see 880 and lower very quickly.

  42. 42
    choices Says:

    Second Pack’s comment in #39-additional “color” is extremely helpful.

  43. 43
    Nicky Says:

    One more point on indices – if we take out 930 SPX I would think it very bullish and we are off to make new highs.

  44. 44
    zman Says:

    Choices – on that subject …

    So I’m sitting in my office, looking over KOG’s press release and my previous NAV. I note the wide disparity between their net revenue interest in the wells in the pr and my 82% and my coffee deprived brain says, WTF? And I run through the NAV thinking, these guys working interest and therefore their NRI is way lower than I had assumed and therefore my previous conservative NAV is actually too high. So I shoot an email to BOP about it saying I think I botched that model and holy crap, how stupid am I and a minute later I get back an email from him saying, “I think that’s taken care of by using the “net acres””.

    So I’m the dumb one.

    The NAV is fine, in fact at $1.75, using 400,000 barrels per well and only 38 wells due to my risking of the acreage which is probably a bit extreme, it is more conservative than before.

    So you see, I too learn every day from you guys, from the color on the site. Thanks BOP.

  45. 45
    Nicky Says:

    Anyone see Gartman on Fast Money two days ago? He said he had flipped his oil longs to short. Since then its gone up!

  46. 46
    Nicky Says:

    70.30 area is 61.8% retracement of the move off the high to the low.

  47. 47
    PackMan Says:

    anyone like TSO here ?

  48. 48
    zman Says:

    Morning Nicky – is Gartman the older one or the sawed off Mr. Clean? I saw the other guy say he liked oil one day, then it went down for a day and he said he was now “flat on oil”.

    Also, we got your 900 spx, what’s resistance now?

  49. 49
    BirdsofpreyRcool Says:

    z — #44 LOL!!… funny scene! You didn’t have to run your “oh-sh*t” moments by the public eye.

    On the other hand, thanks. That was a hoot!

    I’m going to run your model, line by line, through the data scrubber. I’ll get back to you with the range of values to use for each line. Then we can adjust the risk-weighting as more data and deals come in. I don’t think we will be able to model KOG on cash flow for a while yet. So, worth it to keep the NAV model well-oiled and ready.

    Still laughing at your WTF moment. I have entire DAYS like that, byt the way. 😉

  50. 50
    zman Says:

    Pack – If you made me buy one it would be VLO. West coast cracks have been elevated but have been sliding hard of late, demand very poor out there. Also, TSO brought some capacity back on line recently, seems to be pressuring margins locally. But really, I just don’t like any of them at this time, demand is ok all things considered but inconsistent. Not willing to short em as they are historically cheap and margins are not dead or showing signs of falling. Maybe for a trade here and there. I do own some FTO common for the long term as I think they get taken out.

  51. 51
    bill Says:

    here is an updated presentation for VQ Veneco

    oily name, well hedged, good stuff in package

    Im not in it at the moment but plan to be

    stocks at 7 and company has a slide that say it could be worth 50


    page 17 has economics of various shale plays that you may find interesting

  52. 52
    choices Says:

    Side note: saw a very good interview between kudlow and Elizabeth Warren last eve-good because kudlow let her talk and did not shout her down as he usually does with other guests. Warren indicated she still has serious concerns about the large banks health, the stress tests were not at all stressful with very optimistic assumptions built in-both agreed that some transparency in the credit card market will go a long way-no one understands the provisions now-she linked her additional concern with banks’ health with commercial real estate loans being very risky.

  53. 53
    choices Says:

    additional comment re:kudlow/Warren-Warren says that Treasury is stonewalling TARP IG on document production, slowing possible criminal indictments-Geithner does not forget from where and whom he got the free lunches.

  54. 54
    zman Says:

    Thanks Bill, will look. I find those guys interesting.

    Gotta step out for intern #2’s 6 month check up. Back in an hour. Stocks look to be drifting pre FOMC, should have taken my trade in CLR on the oil report but the report wasn’t really definitive enough for me and there’s still FOMC out there so will likely get a shot if this is the long awaited bounce.

  55. 55
    Nicky Says:

    Z – levels are in #41. Resistance at 909,912,927,930. 930 must hold for the bears.

    Dennis Gartman – you know the big commodity trader.

  56. 56
    DrLink Says:

    pq is now at $3.80 for tonight, is this worth a buy?

  57. 57
    zman Says:

    Drlink – I’m continuing to hold PQ here and my predisposition is to add more. I’d like to wait a bit and see how oil reacts to some near term events and I’d like to see natural gas, which they are predominantly a producer of, get some kind of footing.

  58. 58
    zman Says:

    WRES digging itself out of Monday’s pitfall. Oil may be off the peak but the stock is simply overly discounting prices at this point. This was in the teens last summer and with higher oil, their reserve statement will improve markedly.

  59. 59
    zman Says:

    Regarding refiners:

    Here’s Oppenheimer this morning:

    “Oil Refiners – downgrade refiners to Perform, would have been to underperform but stks already down a lot. Q2 should see lots of losses. Possible rebound in demand in 2010, but near term new supply coming on.”

    So I’m not alone in my apathy towards the group, waiting in the weeds.

  60. 60
    zman Says:

    Also got emailed a piece on KOG from Raymond James while I was out, short, basically said good job, 4 for 4, full steam ahead, rah, rah.

  61. 61
    Nicky Says:

    Silver looking very weak – maybe giving the heads up for metals.

  62. 62
    zman Says:

    Dollar rebounding on that auction V

  63. 63
    zman Says:

    Market retrenching before the FOMC. Energy stocks are a bit stronger than during lunch which is odd given the dip in oil following that bond auction. Perhaps equity traders feel 10 down days in a row and 20% off the group is enough given that oil and gas really haven’t moved much.

  64. 64
    zman Says:

    FOMC – unched. no surprise there. sounds like they are not worried about inflation in the slightest.

  65. 65
    zman Says:

    Group hanging in there pretty well despite a sell down in the market back to even on the day. Coin toss on which way they decide to run it into the close so no trades from me today.

  66. 66
    BirdsofpreyRcool Says:

    KOG — CEO (Lynn) is traveling with KeyBanc today, visiting accounts in Boston. So, getting a little color from various meetings and conversations. Apparently, Lynn is surprised that KOG stock did not react much more favorably to the press release this morning. He sees things as progressing along, nicely.

    The one thing that was not in the PR today is that the short lateral (the TSB #16-8-16H) well was a 5-stage frac. 4 of the fracs went off just fine. The 5th frac was “frac’d tight” (or something like that)… means the fractures and proppant did not penetrate the formation. They think the proppant (sand?) is still in the well bore and is keeping the pressure high and the IP results low. Currently running tubing to try to clean that up by this weekend. He still thinks the EUR there will be around 400 mBbls. The long lateral should be around 500-600 mBbls EUR, he thinks.

  67. 67
    zman Says:

    So no thoughts on the Fed statement?

  68. 68
    zman Says:

    Market feels to me like it does not want to really sell off here. Energy is back in favor despite the fed statement which helped to jack up the dollar and sink crude. Could be one of those days where the market takes its time to decide which way to run. If positive, energy will likely outperform 2 to 1 from here. Sitting on hands for now but getting closer to a couple of adds.

  69. 69
    BirdsofpreyRcool Says:

    Mrkt feels like the summer time blues. The BIG RUN is over. It’s not sure where we go from here, so just bobbing around.

    This probably continues until 2Q earnings reports pour in. After that, it will feel like the Wide Sargasso Sea… calm, murky, languid, boring… until after Labor Day.

  70. 70
    BirdsofpreyRcool Says:

    Fed sees no inflation. Too much “slack” in the system. Slack and unemployement will keep across-the-board inflation low low low. However, doesn’t mean US Treasury interest rates can’t head up on supply (vs demand) issues. It just seems Washington can’t stop spending money we don’t have.

  71. 71
    BirdsofpreyRcool Says:

    Fed Keeps Purchases Unchanged, Says Recession Easing (Update1)
    2009-06-24 18:44:30.591 GMT

    By Craig Torres
    June 24 (Bloomberg) — The Federal Reserve refrained from increasing its $1.75 trillion bond-purchase program, said the pace of economic contraction is slowing and predicted inflation will remain “subdued for some time.”
    “Substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time,” the Federal Open Market Committee said in a statement after a two-day meeting in Washington where it also kept the benchmark interest rate between zero and 0.25 percent. The rate will stay at “exceptionally low levels” for an “extended period.”
    Chairman Ben S. Bernanke is watching to see how quickly the economy can recover from the deepest recession in five decades:
    Orders for durable goods unexpectedly rose in May, a government report showed today, while unemployment continues to climb. The Fed also wants to quell concerns that the $1 trillion expansion in its balance sheet will fuel inflation, pushing bond yields higher and crippling any rebound in the economy.
    The Fed said “the pace of economic contraction is slowing” and noted “conditions in financial markets have generally improved.” The central bank added that it “is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”

    Absence of Dissent

    Today’s decision was unanimous. The Fed’s $300 billion Treasuries-purchase plan is scheduled to end in mid-September, according to the FOMC statement at the conclusion of the March
    17-18 meeting, when it was announced. The Fed also committed to buy up to $1.45 trillion of housing debt this year. At its current rate, the Fed will reach the $300 billion of Treasuries by late August.
    Total assets on the central bank’s balance sheet grew $1.17 trillion over the past year to $2.07 trillion as the Fed loaned to banks, commercial paper issuers, and purchased bonds outright to support the flow of credit to consumers and businesses.
    “This is a very difficult period,” said Marvin Goodfriend, a former senior adviser at the Richmond Fed who is now an economist at Carnegie Mellon’s Tepper School of Business in Pittsburgh. “The Fed is exposed to a concern about inflation because it hasn’t committed itself to a low-inflation objective, yet the Fed may need the flexibility to expand its balance sheet further if the economy underperforms.”


    Yields on U.S. 10-year Treasury notes are more than 1 percentage point higher than when the Fed announced the purchase program March 18, climbing to 3.69 percent at 2:29 p.m. in New York, from 2.53 percent. While central bankers have indicated they accept the increase as long as it reflects expectations for an economic recovery, a further increase may put such an outcome in jeopardy.
    Mortgage rates have risen in tandem with yields, potentially delaying a rebound in the housing market. The average 30-year mortgage rate increased to 5.59 percent earlier this month, the highest since November, before slipping to 5.38 percent in the week ended June 18, according to Freddie Mac, the McLean, Virginia-based mortgage-finance company.

    ‘Too Low’

    “Looking back, we are all cognizant of what transpired in
    2003 and 2004 when the Greenspan Fed just left the federal funds rate too low for too long,” said Richard Schlanger, a vice president at Pioneer Investment Management in Boston who helps oversee about $13.5 billion in bonds. Bernanke succeeded Alan Greenspan at the Fed’s helm in February 2006.
    Bernanke told Congress during testimony on June 3 that the Fed “will not monetize” U.S. debt, addressing concern that the central bank’s purchases of government debt might be used to finance deficit spending. Measures of overall inflation retreated in April while so-called core prices rose.
    The personal consumption expenditures price index rose 0.4 percent for the year ending April. Oil prices tumbled from an average price of $112 a barrel in April last year to an average of around $50 a barrel the same month this year. Prices minus food and energy rose 1.9 percent for the year ending April.
    “The challenge for us on the Federal Open Market Committee will be to shrink our balance sheet and tighten policy soon enough when the recovery emerges to prevent rising inflation,”
    Richmond Fed President Jeffrey Lacker said in speech in Raleigh, North Carolina, on June 10.
    Inflation expectations have also increased. One such measure, the difference between yields on 10-year Treasuries and 10-year inflation-linked U.S. notes, rose to 1.84 percent yesterday from 1.41 percentage point at the start of last month.

    Revising Forecasts

    Fed officials revised their estimates for growth, unemployment and inflation at today’s meeting. Their new forecasts will be available when the Fed publishes meeting minutes next month.
    Private forecasters expect the economy to grow 1.9 percent next year, with inflation at 1.8 percent, according to the median estimates in a Bloomberg News survey. The unemployment rate will rise further, averaging 9.7 percent for 2010, according to economists in the survey. The jobless rate stood at
    9.4 percent in May, the highest since 1983.
    Job losses and record wealth destruction suggest consumer spending may not sustain the gains reported in the first quarter. Department stores Macy’s Inc. and Dillard’s Inc. and luxury chain Saks Inc. reported on June 4 that sales declined more than forecast in May. FedEx Corp. said last week that profits will trail analysts’ estimates because of an “extremely difficult” economy.

    ‘Still a Recovery’

    “A slow economic recovery is still a recovery, and sooner or later the Fed will take back their emergency rate cuts,”
    said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “As long as the low rates Fed pledge is conditional on the economic outlook, those green shoots are going to drive investors out of bonds.”
    Money-market futures contracts show traders see a higher probability of a Fed rate increase in early 2010 than they did a month ago. Still, current data contain few signs that the economy will rapidly turn from recession to growth and accelerating consumer prices.
    Industrial capacity use rates fell to a record low in May.
    Consumers pulled back on spending in both April and March as falling home prices, tighter credit, and high unemployment reduced confidence.
    “The market sometimes gets ahead of itself, and this is one of those times,” Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania, said before the announcement. “We will see core inflation continue to moderate given high and rising unemployment and excess capacity in almost every corner of the economy.”

  72. 72
    jat Says:

    Following is an interesting take on the FOMC meeting from Bernstein. Sector specialist has made good calls on crude so far this year. A bit verbose, but worth reading:

  73. 73
    zman Says:

    BOP – agreed re boring trading.

    Jat – that link did not come through.

  74. 74
    zman Says:

    re 66, so Lynn’s EURs are in line with industry talk, near the lower end for the shorter lateral. Declines look like they will be in the 80% range year 1.

  75. 75
    BirdsofpreyRcool Says:

    z – #74… i actually think Lynn is trying to be conservative there, estimating EURs. But, market clearly was set up to expect more from today’s report.

  76. 76
    zman Says:

    BOP – I’m not disagreeing, that’s the EUR I used as well, trying to be conservative myself. I would note that E&P stock volumes look to be 60 to 70% of normal today, you would have thought KOG would get a volume spike but people are leery of the market and the group right now. Lot of macro that worries people and that means a consolidation into the bigger names (safety in liquidity). Doesn’t mean I won’t buy more of it.

  77. 77
    Hoss Says:



    Stetson – the original “fractional” didget midget – site is updated. Presentation might add some more colour to your model.

  78. 78
    BirdsofpreyRcool Says:

    Hoss — thanks! The Stetson presentation was one of the best i’d seen, at the time. Will go have a look at the update. Thx for pointing that out.

  79. 79
    zman Says:


    HK – $23 July Calls (HKGT) for $0.60 on the mid, with the stock at $21.25. Just adding a little more leverage in the event they have a PR in store in the next 3 weeks.

  80. 80
    Hoss Says:

    BOP – no problem


    Can you humor me for a moment RE PQ dilution

    June 15, 2009 50,797,349 /50,797,349+ 10,000,000 = ~.84 or 16%
    50,797,349 /50,797,349+ 10,000,000 + 1,500,000 = ~.82 or 18%

    Am I doing this wrong – wondering what numbers you are using to calculate your dilution 19.6/22.5%?

    I was looking back at HK and GMXR secondaries as comparisons and calculated dilution at 8/9% and 21/24% respectively.

    It seems over-allotment runs about 15% across all three of these deals and both HK and GMXR priced within a day or two of announcement.

    Feb 26 after-market close secondary announcement $18.06, priced a day later at a $17.50 ~ 6% discount.

    May 12 after-market close secondary announcement $14.69, priced two days later at $12 ~ 18% discount.

    At their worst, both HK and GMXR were down ~20% within three days of secondary annoucement.

  81. 81
    zman Says:

    Hoss – your numbers are good, I did mine in my sleep, showed the increase in shares not the dilution. I use the increase in shares to chop the CFPS estimates back, which still shows the stock as extremely cheap. I wonder at their decision to bring the deal kind of late in the cycle. To me, two weeks ago was prime time and now we are seeing only a trickle. Prices were quite a bit higher then and while I know that is 20/20 hindsight, they had to know at the time they wanted to do a deal, better to have done with the stock moving up, not down. Since it has been moving down, I think they should have waited a bit. They’re good guys and we’ve chatted a bit in the past. It’s a good, low LOE story that is a bit unexciting at present. I think they are giving themselves some flexibility with regard to 2H09 spending, and I don’t think the name sells down significantly from here. I’d bet they are looking to price at $5.50.

  82. 82
    zman Says:

    Hoss – one other thing is for certain, the investment banks are going to have a seriously high volume 2Q to report.

  83. 83
    zman Says:


  84. 84
    zman Says:

    That was 10 contracts in 79 for the $10KP.

  85. 85
    Hoss Says:



    One more, if you don’t mind.

    You mentioned pricing and that is what I’m curious about. I realize it a quantitative and qualitative approach meaning they ultimately need X amount of dollars and yet they don’t want to bite the hand that has already fed them and may feed them again. On the quatitative side, is there actually a method to the madness such as a % dilution ceiling combined with say a 30/60/90/ DMA closing price or VWAP? or is it simply what the market will bear?

  86. 86
    zman Says:

    Hoss – its more of a feel the market out thing, so its demand. All of these deals of late have been quick, no week long road shows but I’d bet they already have a good idea of what size the market will bear.

  87. 87
    VTZ Says:

    I’m surprised at the market movement today.

  88. 88
    Hoss Says:


    A belated Thank you

    PQ priced @ $3.50 this afternoon

  89. 89
    PackMan Says:

    Z – PQ – how can they expect to price 10M share secondary at 5.50 w/ the stock at 3.70 ?

    They’ll lucky to get 3.50.

  90. 90
    PackMan Says:

    Ha…. just saw 88 after my 89 posted !

  91. 91
    zman Says:

    Pack – obviously it was a typo at $5.50. You price the deal in the hole and it was just over $3.50, so I meant $3.50.

    Hoss – surely you didn’t think I meant $5.50?

  92. 92
    PackMan Says:

    no offense intended by my Q, Z, the 5.50 had me confused.

  93. 93
    zman Says:

    Pack – None taken, just trying to be clear. Probably shouldn’t have used the word obviously.

  94. 94
    PackMan Says:

    BOP: You will be interested in this…


    Treasury apparently is juicing the indirect bid component of Treasury auctions. A recent change in their calculation methodology is resulting in much higher bid to cover figures that may not be credible.

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