Monday Morning Asian Flu

Fear in China is alive and well with Shanghai opening the week down 6.7% on fears that a wave of IPOs and secondaries will dilute current holders. U.S. equities are so far taking their cue from Asia and selling off on a Monday that brings little news outside of an Oil Service merger in this last week of summer trading.


The Week Ahead:

  • Monday 8/31: Chicago PMI (expecting 47%, last 43.4%; 9:45 EST)
  • Tuesday 9/1: ISM (expecting 50.5%, last 48.9%), construction spending, car sales
  • Wednesday 9/2:  EIA Oil Inventory Report, ADP employment (last -371K), Factory Orders (expecting 2%, last 0.4%), FOMC minutes.
  • Thursday 9/3: EIA Natural Storage Report, jobless claims (expecting 565K, last 570K)
  • Friday 9/4: Payrolls (expecting -250K, last -247K), Unemployment rate (expecting 9.5%, last 9.4%)

In Today's Post:

  • Holdings Watch
  • Commodity Watch
  • Natural Gas Supply Slide Show - Data For June 2009
  • Natural Gas Demand Slide Show
  • Stuff We Care About Today - BHI buys BJS
  • Odds & Ends

Holdings Watch:

  • $10KP II:
    • $6300
    • 36% Cash
  • Current Holdings Tab is updated.


Commodity  Watch:

Crude oil fell nearly 2% last week to close at $72.74. The 12 month crude strip is now trading at $76. This morning crude is trading off nearly $2 as equity futures swoon due to the overnight sell off in Asia.


  • OPEC Watch: The Cartel meets September 9th. This should be a quick meeting were no action is taken but a few, obvious quota violators take a light, meaningless scolding from Saudi Arabia's minister and the group closes with a vow towards stricter quota compliance. OPEC also hopes to enlist Russia, on a non-official basis, in helping control oil supply. In the past Russia has snubbed such requests.

Natural gas fell 6% last week to close at $3.03. The October gas contract is down 30% in the last four weeks. Due to the sharp contango in the futures market the 12 month strip is now trading back above the $5 mark at $5.08 and futures continue to be stronger in the Spring than they do for the winter months which is not typical. This morning gas is trading off 8 cents with oil.


Natural Gas Supply Slide Show - Data For June 2009

Key Takeaways:

  1. Production growth has stalled but volumes are still not really declining.
  2. Offshore Recovery Masked Offshore Declines In The Most Recent Month
  3. YTD Production Is Down 1%
  4. Year Over Year Growth Is Falling Off And About To Go Negative (see the last chart below)---
  5. In a nutshell, another wait and see what next month brings report.

Natural Gas Supply Slide Show - Data For June 2009

Stuff We Care About Today


  • First size deal of the cycle, $5.5 billion
  • 16.3% deal premium is on the small side
  • Deal savings are estimated at $75 mm in 2010 and $150 mm in 2011. Not accretive until 2011 which a little slow.
  • This probably puts targets on some of the smaller names in oil service trading at lower valuations but I doubt it will have much of an impact on pricing at the bigger names.
  • See OIH comments from last week for valuations. My suspicion is that some names like NOV will trade higher on this news.


Odds & Ends

Analyst Watch:

  • (FRO) upped to Market Perform with a $23 target at FBR---

54 Responses to “Monday Morning Asian Flu”

  1. 1
    zman Says:

    TPH saying other pressure pumping names will receive BJS deal glow today. My sense it will not be lasting. They put SWSI, RES and a couple of Canadians up there. Say there is still too much capacity in pressure pumping (true enough). Which is why those moves likely peter out quickly. They say HAL likely long for them which is a bit counter intuitive since HAL will likely be seen as one of the names that will be doing the shopping should we see more service mergers. I still think its a bit early for that and with gas prices so, so, so weak we should see rigs rollover in the U.S., again, and gas leveraged HAL trade lower with them.

  2. 2
    zman Says:

    I put West’s comments on KOG last night on the KOG Reports tab.

  3. 3
    zman Says:

    Oil fought off one attack on $70 that was accompanied by some pretty heavy volumes. Seeing stories out claiming oil is lower on inventory fears for this week’s numbers. Bahhh. It’s Monday and Shanghai fell by the second highest amount in a single day in 15 years. That is why oil is down and why the futures are down.

  4. 4
    zman Says:

    BOP is on vacation, have a feeling its going to be a quiet week.

    I may take some BHI puts but will wait for their post merger call stock reaction. BHI has had a tendency to miss targets in the past, and while they’ve given themselves 2 years to make the deal accretive I could see how a re-rollover in the U.S. natural gas rig count could send them a bit lower. Mulling.

  5. 5
    bill Says:

    NG down below 3 and 29 % for the month of august

  6. 6
    zman Says:

    Bill – yeah, the temptation to hedge the winter strip must be increasing.

    Oct: 2.96
    Nov: 3.98
    Dec: 4.83
    Jan: 5.13
    Feb: 5.21
    Mar: 5.20

    The following is not normal. Usually your summer swoons a bit following the seasonal winter peak. This is the gas market realizing that conventional gas production will continue to slip and that current prices will not be inspirational enough to warrant attempting to offset said conventional slippage via unconventional (shale) drilling acceleration.
    Apr: 5.21
    May: 5.28
    Jun: 5.36
    Jul: 5.68

  7. 7
    zman Says:

    Chicago PMI came in just now at 50% vs 47% expected and 43.4% at last reading. Market tried a little mini rally but seems unimpressed.

  8. 8
    zman Says:


    WLL – Added WLL $50 Call for $1.60 with the stock at $48.60, down 3.4% in a weak market. Tiptoeing into one of the cheapest E&Ps out there, big Bakken focus, with a feeling that the end of $65 to $75 is not here.

  9. 9
    zman Says:

    NG quietly working up off the morning lows, back up to 2.99. Probably the influence of 94 L.


    If you click animate you can see it getting better organized. Tracks are consolidating on a more westerly course now than Bill and Danny.

  10. 10
    TEXWS6 Says:

    BHI owned BJS before ’91 and then sold them due to a scandal involving Parker (pre PXD) leases out in West Texas. Funny how this oil patch is!

  11. 11
    zman Says:

    right, before Mesa.

  12. 12
    zman Says:

    Oil broke $70. Mondays.

  13. 13
    bill Says:

    z here is a good article for you


    U.S. politicians must
    muster the courage to scrap the fable of energy independence once
    and for all. If they continue to lead their people toward the mirage
    of independence and forsake the oasis of interdependence and
    cooperation, only disaster will result.”

    the US political
    elite continue to create an adversarial relationship with oil
    companies (i.e. threats of taxes on windfall profits, accusations of
    price gouging, et cetera).

  14. 14
    zman Says:

    Thanks Bill, will give me something to do today. Shamwow boring. Volumes in most of my names are pathetic and levels are for the most part holding the opening gap down.

  15. 15
    zman Says:

    From the compliance office challenged:

    If we were to look back 4 – 5 months ago and tried to predict production and supply, might you not be surprised today at the persistent supply and the resilient production numbers. What is your biggest fear – concern for E&P space to continue to underperform going forward?

    a) yes. A bit. I would have figured conventional gas production declines would have been more apparent outside of Texas (where they have been). The number of previously drilled but not completed wells is high. E&P companies have made guidance projections which they want to keep and cost projections which they also want to keep. The first despite low prices and the second because of low prices. This means drill a little but complete more of your inventory. As we move into the later part of the year conventional projection declines HAVE TO show up in the data. Conventional production is north of 80% of all gas production in the U.S. It doesn’t grab the headlines but CHK produces a lot more gas via 2 MM/d producers than it does via their 20 MM/d monster big brothers. So it’s not if but when and that is clouded by the uncompleted inventory.

    Re E&P underperforming. Hmmm. XNG up 24% ytd, SP500 up 14% ytd. I don’t think that is too shabby with natural gas off 50% on the year. My biggest fear would have to be a warm winter and/or industrial demand not coming back. See post on Industrial above and not the size of those swings. Industrial demand in the past has been price elastic and normally, you would have had everyone from Dow to Agrium to Nucor upping their intake of gas to scoop the low prices. Not so far, at least as far as the June data shows (with demand down over 2 Bcfgpd from June 08 to June 09). Note however that for the injection season to date we are only off 1.1 Bcfpgd cumulatively. That just about has to be improved industrial demand as the economy picks itself up, if somewhat slowy, it is still picking up. So I guess a warm winter is the biggest problem out there from a “things the companies can’t control” standpoint. From a “things they can control” standpoint, I’d worry about a willingness to go deeper into debt in an unhedged 2010 environment with weak prices to protect acreage for the “long view”. CHK may do this. If we get a double dip at the same time it will be hard on the names that go there.

  16. 16
    bill Says:

    will we have another round of bank line redeterminations?


    3 ng might affect guys on the edge

  17. 17
    baylor3217 Says:

    Is this another buy the dip situation?

    Seems to have been the MO for months. Oil down almost 5%. The last two times this happened in recent weeks, it quickly ripped to the upside.

  18. 18
    zman Says:

    Bill – sure, if gas stays $3 we will see a return to negative redeterminations in October/November. Which is why a lot of folks have done deals over the last three months to raise cash to kill off their revolvers. Probably need to take a look and see who hasn’t done it yet and who is gassy and unhedged.

  19. 19
    zman Says:

    Baylor – Yeah, still has that same feeling. Get the shorts excited and then shut the door on them. Oil is down due to China. Sets up a little easier day for Wednesday when we should get some pretty solid looking products demand numbers (gasoline and jet fuel for vacation travel and what looks like a pickup in demand from trucking – I keep getting told truck traffic is picking up, sure would make sense that it show up in the diesel numbers).

  20. 20
    zman Says:

    Pretty rare when you see a multi billion acquisition not spark some excitement in a group. OIH down 3%. Only BJS, the acquired, green.

  21. 21
    zman Says:

    NG back above 3 (barely). It’s all due to 94L. I’m around if anyone has anything, just doing some reading on a very boring end of summer Monday.

  22. 22
    zman Says:

    Not even CNBC working today. They keep playing the Leaseman / Dudley interview over and over.

    KOG off to 1.25 on ok volume, saw 1 big buy earlier at the bottom. News is thought to be out there on wells 5/6 any day now.

    Barclays kicks off Fall conferences next week with their Capital CEO Energy/Power conference. I’d expect to see HK give a presentation there but have not seen the pr yet.

  23. 23
    zman Says:

    BOGA files Ch 11


  24. 24
    RMD Says:

    Compliance Challenged: thanks for #15. Thoughtful,as I don’t think the market is considering the downside for those co.s who might be getting it wrong here. Of course if they are wrong, then the June-July ’10 strip is wrong at $5.36-5.68 too.

  25. 25
    zman Says:

    One thing that will help with demand this winter. Utilities are beginning to request rate reductions. Puget Sound Energy today requesting a 17% rate reduction, taking residential gas rates back to 2005 levels.

  26. 26
    zman Says:

    RMD – yep. Combine that with Bill’s comment re redetermination season and you probably have your short list for the Fall. Anyone unhedged with a big piece of their line tapped and gassy is going to get stepped on or is going to have to float debt or shares.

  27. 27
    zman Says:

    Nicky – Joe T on CNBC saying he’s on the sideline with oil, “I’m not saying to short it” but the tape is telling you its going lower.

  28. 28
    zman Says:

    Dollar index bounced off 78 earlier, now down 0.35% at 78.08. Looks weaker to me but it refuses to break down.

  29. 29
    RMD Says:

    back to 15 and 24: DB wieghed in with the short term conundrum;
    Would $4 gas be bearish (because it’s low), or bullish (b/c it’s above $3)?
    In light of the bleak storage outlook (see Figure 1), one of the clients we spoke
    with this week likened the current natural gas situation to a “slow-motion
    trainwreck–” everyone knows prices are in trouble, but there’s not much to do
    other than just watch. The paralysis is compounded by the recent rally in E&P
    equities, as we just hate chasing the stocks (even though the contrarian in all of us
    says “buy E&Ps when gas is below $3”). To wit, while the stocks aren’t “cheap,”
    it’s hard to imagine them underperforming once storage begins to actually decline.
    Our answer is to be selective…
    (Selective = only those which outperform from here.)

  30. 30
    zman Says:

    Just got sent a DB piece saying they see gas storage topping out at 4.05 Tcf. I’m sticking with my 3.7 to 3.85 Tcf target. I think a lot of the Street is moving to the 4+ target.

  31. 31
    Nicky Says:

    Afternoon all.

    This move looks like a zig zag off the highs(ending diagonal?)and to me looks corrective and therefore I think another high is still out there. If c = a then the target is 1014, lower support is at 1006.

    Same pattern for oil which I think also will resolve higher. If a lower level is needed then 69, 67.50 are support levels.

  32. 32
    occam Says:

    re 26: Who would be on your watch list?

  33. 33
    zman Says:

    Nicky – Your boy Terranova sounded about as bearish as I can recall on oil earlier.

  34. 34
    zman Says:

    Occam – working that up now.

  35. 35
    Nicky Says:

    Z re 33 – that figures when he told everyone it was a raging buy as it hit 75 last week! Seriously how does this guy make any money trading oil = he flip flops literally every day. I just don’t see how he can turn from being a raging bull based on fundamentals a few days ago to now being bearish. If he really believed his call of a few days ago he would see this as a buying opportunity. Instead it has spooked him. The sell off in energy today is just a reflection of that overnight move in China imo. As with the indices I still see another move up in oil.

  36. 36
    zman Says:

    Nicky – could not agree more. China down big = market down and oil down big. Nothing more than that to explain today. Did not know he said long at $75 but since it hit to the penny and then richocheted lower it was pretty obvious it was just profit taking. It could get out of hand and break some TA levels but nothing really changed from a fundamental standpoint with last week’s data and we are seeing the beginnings of a pick up in product demand. Need to see more for me to get enthusiastic about prices over $75 but the $65 to $75 range will do quite nicely for the oily names. He actually was speaking bearishly with oil at the LOD near $69 and we are setting to close closer to 70.30. Good indicator that guy is, lol.

  37. 37
    zman Says:

    Wow. Joe Granville on CNBC saying market will go straight up next two years. Says both September and October will be good (up) months. Wow.

  38. 38
    choices Says:

    NG trading limits deferred on NYMEX-large hedge fund complained.


  39. 39
    zman Says:

    Thanks Choices. Interesting, sounds like they are going to wait until the CFTC rules in Sept or Oct.

  40. 40
    zman Says:

    Energy just drifting, approaching LOD on many names with 1 hour to go in the day.

  41. 41
    zman Says:

    Having a plan for energy needs helps:

    PTR buying into Canadian oil sands projects:


  42. 42
    zman Says:

    BJS – up less than 4% now, with a 16% deal premium announced. Just not a very attractive deal all around in my book.

  43. 43
    zman Says:

    BEXP Bakken news out, will have it in the post tomorrow.

  44. 44
    zman Says:

    Deals heating up, PXD on the tape monetizing some Spraberry reserves.

  45. 45
    occam Says:

    Problem with BOE or MCFE

    From an investment perspective, BOE and MCFE are meaningless. The ratio between the cost of a btu from oil and gas varies so much that it is impossible to tell the value of an asset reported this way. One needs to know much oil and how much gas have been aggregated. I realize that most E&Ps have both, and that it is more trouble to report on both classes of assets, but why can’t they report the percentage that is gas or oil (and NGL, if significant)? If they arrive at the composite number based on price rather than btu, then it is important to know the price points at the time as well.

    Just as an example, look at the BEXP well result reported today. One service listed it as initial production of 1882 boe. That is true on a btu basis, but using current prices, it is really only about 1676 boe equivalent, and that is assuming that they can get as good a price for the gas as for the oil compared with futures market prices.

  46. 46
    occam Says:

    Typo in previous post, boe equivalent for BEXP based on cost would be 1686.

  47. 47
    zman Says:

    Occam – In the Qs and Ks and the quarterly press releases they report oil and gas production broken out as such. Most people reporting IPs on new wells will also list oil in bopd, and gas in Mcfgpd, occasional you get the water as well bwpd. In the Bakken, the wells are predominantly oil and although the gas will come into play as gas gathering infrastructure is expanded. When I model a company I used both. As far as the composite number Mcfe or BOE goes, that is purely a function of volume, nothing to do with price.

  48. 48
    zman Says:

    6 to 1 is the accepted convention. It’s not done on price. All we care about is cash flow so oil barrels times oil prices less differential and same for gas. IPs can be distorted and a longer history is important. Generally people accept that a bigger IP means more recoverable reserves but this may not in fact be the case. Also, you can have bad or partial frac and the IP won’t tell you much about the reserves that could have been recovered from the well, especially if the well is just one of many that will ultimately be drilled on the acreage.

  49. 49
    bill Says:

    pxd sold proved reserves at about 10 per bbl ..thats kind of light isn’t it?

  50. 50
    bill Says:

    bexp up 10 % ah


    how does this play with the useg deal last week

  51. 51
    zman Says:

    Bill – it goes back to the old adage “a barrel is not a barrel is not a barrel”. These reserves are in older, mature fields unless I am mistaken so you are talking water floods to get more barrels out of the ground so it translates into higher lifting costs. Two weeks ago I used $15 per barrel for some Bakken reserves which were all upside on the KOG acreage. I felt this was pretty fair for risking and for the costs to get that acreage developed, so $10 is probably about ok for these as an “in the ground” valuation.

    I’ll have comments out on this deal and the BEXP results in the Tuesday post. Glad to see the news trickle increasing a bit. Look forward to an increasing flow as we approach the end of Summer/end of quarter/Fall conference schedule.

  52. 52
    bill Says:


    good explanation

    i always thought 15 was a good number

  53. 53
    zman Says:

    Bill – I’ll have more tomorrow but you also have to consider that they sold it to an entity in which they have a majority interest and it will essentially allow them to bump that drilling program which was planned to go from 0 now to 10 to 12 by year end by another 2 rigs. Win/win. Should be viewed well. Haven’t run a p/CF on it yet (they said production was 1,300 boepd off the sold and gave the oil/gas split so I’ll wing one) but I’d bet its a pretty steep multiple, definitely bigger than the skinny multiple PXD trades at. Again, win/win. Should boost PXD tomorrow, market willing.

  54. 54
    zman Says:

    Asia slightly higher, crude back over $70

Leave a Reply

Zman's Energy Brain ~ oil, gas, stocks, etc… is is proudly powered by Wordpress
Navigation Theme by GPS Gazette