Thursday – Natural Gas Preview and Oil Inventory Review Plus Some Words About ROSE

Posted on by zman

Overnight Shanghai posted nearly a 5% bounce giving futures in the U.S. a head start this morning. Jobless claims came in at 570K vs 565K expected but the big number of the week comes tomorrow with non farm payrolls. Retail sales are coming in across the board negative for August this morning but that was expected in most cases. Meanwhile, the OECD said the recovery from the global recession is likely to arrive more quickly than previously thought and that they do not see a double dip in the cards and the ECB has increased its forecast for 2009 and 2010 GDP.

 

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 - ROSE
  6. Odds & Ends

 

Holdings Watch:

  • $10KP II:
    • $4,600
    • 29% Cash

Yesterday's Trades:

  • HAL - Sold the HAL puts taken yesterday, for $1.19, up 15%. After seeing the oil numbers my sense is that oil is going to bounce and I will reposition these puts if that occurs.

  • WLL - Added (5) more of the WLL $50 September Calls for $1.05.

  • ZLT TRADE - Added BEXP at $7.69 to the longer term names. Starter position, so about 1/3 of what I’m willing to own here. Probably won’t add more until we see more well results in a month or so.

 

Commodity Watch:

Crude oil closed unchanged at $68.05, recovering from morning lows after the EIA reported a mixed bag but mostly bullish set of inventory data (see detail section below). This morning crude is trading up over slightly after exceeding $69 earlier this morning.

  • Russia Watch: Russia sets monthly production record in August of 9.97 mm bpd with the start up of the Vankor field.  No wonder OPEC is once again talking to Russia about getting on board with the Cartel concept as they feel Moscow has gotten a free ride on prices off of OPEC's cuts. Funny how that sounds a lot like what Aubrey at CHK said regarding his own curtailments in the face of his peer's willingness to accelerate production growth. 

Natural gas tumbled another 4% or $0.11 to close at $2.72 after forecasts for Tropical Storm Erika started to look increasingly benign.  The front month contract is now down 37% in the last 20 sessions and has had 3 barely positive closes during that time.  The 12 month strip has now sunk to $4.83, and is off 13% over the same time frame. We are due a bounce. This morning gas is trading off another 5+ cents.

 

Natural Gas Preview

  • My number: 60 to 65 Bcf. My sense is that it will take a number under consensus, maybe as much as 10% under it to spark any kind of a rally in gas. 
    • History:
      • Last Week: 54 Bcf Injection
      • Last Year: 92 Bcf
      • 5 Year Average: 64 Bcf
    • Weather: 61 CDDs were in line with year ago levels and slightly warmer than normal
    • Imports: were in line with year ago levels and last week's volumes.
  • Street Consensus: 66 Bcf (from the Reuters survey)

EIA Oil Inventory Review



CRUDE OIL - Smaller than expected number due to a resurgence in imports. This increase was mostly offset by a surprising increase in utilization. I don't expect inputs or imports to maintain these levels for very long.


Crude Imports - Continued the bounce from the swoon we saw two weeks ago; expect imports to flatten in the near term.

 

GASOLINE - Bigger than expected draw which is what I was looking for. Imports returned to their recent trend which provided some help with the draw size as well after a surge last week (typical for this time of year as foreign gas comes ashore for the holiday).

 

 



 

DISTILLATES - Bloated Inventories: Production remains was too stout last week after having trended lower recently. On the demand front we continue to wait for evidence of increased transportation sector data to translate into higher consumption of diesel.


 




Stuff We Care About Today

 

Rosetta Resources -  ROSE - $11.38 close on 9/2/09

Nutshell: Interesting, very gassy story, with strong "story stock" upside potential and quality, seasoned and conservative management. Think of it as a tight gas sand player with upside provided by nascent projects in the both the Eagle Ford and Bakken Shales. I've mentioned this one from time to time as one I've been watching and I've finally gotten my thoughts together enough for a starter piece. It's likely that you will see me do some trades here soon. Valuation  will likely appear to be on the low side given their prospects once gas prices begin to recover. Their Bakken acreage, though large for their size is in the relatively untried wilds (at least as far as Bakken and Three Forks Sanish goes) of north western Montana and while this may give the story some transition to an oilier profile angle realization of that piece of the story is a ways off.

Potential Catalyst: The first of two horizontals in the Eagle Ford Shale has been drilled and the second should be nearing TD. We should have results on at least the first of these by the time of the 3Q conference call. Also, the first test of the Montana Bakken should have spud in the last couple of days.

Potential Risks:

  • They are gassy (95% of production last quarter). Natural gas may remain weaker longer than I think it will.
  • They are relatively unhedged beyond 2009 (see hedge section below).
  • They will likely endure a ceiling test write down with the 3Q09 report due to low gas prices which has the potential to negatively impact their borrowing base (see balance sheet section below) which is up for redetermination in October. They do however have plenty of room to spare a hair cut to their borrowing line in the form of unused capacity.
  • Their Bakken acreage is far from proven and the stock could show some disappointment if their first test in Montana is dry.
  • They filed a $500 million mixed shelf back in May - no plans to issue securities as of their 2Q release but they did say they would do a deal in the event of an attractive acquisition or to develop the EFS and/or Bakken.

The Basics:

  • Current Market Cap: $598 mm
  • Total Enterprise Value:  $806 mm
  • 2008 YE Reserves: 398 Bcfe (valuing the company on 2008 proved alone of $2.03 per Mcfe)

    • 111 Bcfe in California's Sacramento Basin
    • 78 Bcfe in the Rockies  - San Juan Basin, Pinedale,
    • 160 Bcfe South Texas
    • 27  Bcfe Gomex shelf (this probably gets sold)
    • See property breakouts below
  • 08 Production: 53.6 Bcfe for a reserves to production ratio of 7.4 years.  
  • 2Q Production was 146 MMcfepd; 95% gas; broken down as follows:
    • 61 mm/d from S. Tx (Lobo trend);
    • 20 mm/d from Rockies (not drilling in 2009);
    • 41 mm/d from the Sacramento Basin (recompletion effort underway to tap bypassed gas pay uphole);
    • 14 mm/d from the offshore
    • 20 mm/d other

Guidance: 

  • 2009: 130 to 140 MMcfepd, or down about 8% on the mid point from 2008, activity has been constrained to stay within cash flow. A majority of drilling is to the conventional, shallower Lobo trend in S. Texas and to recompletions in the Sacramento Basin in California. Nothing in the guidance for EFS or Bakken althouugh contributions from either should be smallish this year as those are really more concept proving wells at this juncture. Plan is to stay within internally generated cash flow. 

Valuation:

  • 2009:
    • CFPS estimate of $3.16 for 3.6x
    • TEV / EBITDA of 4.4x
  • 2010:
    • CFPS estimate of $3.55 for 3.2x. This is a fairly low number but since the company is not growing at present its probably only a little bit of a discount.
    • TEV / EBITDA of 4.0x

Hedges (as of 6/30/09)

  • 2009: 52.1 MMcfgpd hedged at $7.65; plus 5M mmbtupd with flows at $8; translates to about 40% of remaining 2009 expected production. 
  • 2010: 10 MMcfpgd at $8.31. That's pretty light.

Balance Sheet

  • $50 mm cash at 6/30
  • Long term debt of $298.5, including $100 mm borrowed on a second lien term loan agreement.
  • $600 mm line of credit with a current borrowing base of $375 mm borrowing base now
  • Net debt to cap: 33%.

Management: Good resumes. Two names stand out to me: the president, Randy Limbacher, who was head of E&P for the America's for Conoco and who I came across and respected at Burlington Resources and Ellen DeSanctis, EVP of Strategy and Development who I know from her days at Vastar. Both are very calculating, sharp, and conservative. 

Property Looks - First, the interesting stuff

Eagle Ford Shale: 35,000 net acres in the EFS as of mid 2009, up from 25,000 net acres at the beginning of the year. Properties are scarttered primarily across La Salle and Webb Counties, not far from recent discoveries.

  • EFS Horizonal #1  - As of August 6th, ROSE was drilling their first horizontal well, the Springer Ranch 1H in La Salle county. Planned to be a 4,000 foot lateral I assume given their progress as of early August this well is at TD and has either been completed or is in process.  This one is located a few miles to the southwest of the most southwestern Petrohawk wells and I would bet would be dry gas.
  • EFS Horizontal #2 - Their second horizontal test is the Gates 05D #9-5H, which is located in northwest Webb County, Texas. this was at 3210 as of same date. This one is further west, close to St Mary Land discovery and a couple of EOG wells that EOG has declined talking about due to leasing concerns.
  • Both wells are 100% WI.
  • ROSE drilled two verticals prior to commencing the horizontal and was enthusiastic about cores taken from these wells showing good EF Shale properties.
  • Their thought is potentially 650 Bcfe net out of 218 wells (spascing of 160 with 4 Bcfe per well gross); the probably have about an 80% NRI here. 

Bakken Shale (230,000 acres on the Blackfeet Reservation in northwestern Montana), in the Alberta Basin, an analog to the Williston Basin.

  • They should be spudding a vertical test any day now (beginniing September) in Glacier county, Montana
  • This first well is desiged to gather information on the Lodgepole, Bakken and Three Forks Intervals.
  • Oil was first discovered in this area in the early 1900s in seeps around copper mining sites. Since then, the Cutbank has produced in excess of 165 mm barrels. The Bakken here is at around 5,000 feet, much shallower than the 9,000+ feet seen in North Dakota.
  • To read up on the playtypes in the area click here. Note the fractured Bakken on the cartoon diagram on slide 7.
  • Lots of acres but until I see some positive results I'd decline to put much value on them.

 

Legacy Property Rundown:

  • South Texas - Primarily Lobo tight gas sand play but also Olmos and other sand trends.
  • Rockies:

    • DJ Basin - think infill represents 350 Bcfe opportunity, at 40 acre spacing now, thinking go to 20s.
    • Pinedale Anticline
    • San Juan Basin
  • Sacramento Basin -"Tight Capay" looking to go into deeper tight gas sequences, see 100 Bcfe potential (have done 6 there, not yet optimized, only 1 of the deeper zones tested, cheap, 650 to 1 mmcfepd). Also looking at uphole opportunities.
  • Gulf of Mexico - small potatoes for them, probably going to get sold.

Odds & Ends

Analyst Watch:

  • (APC) raised to Outperform at FBR
  •  

 

101 thoughts on “Thursday – Natural Gas Preview and Oil Inventory Review Plus Some Words About ROSE”

  4. Dollar strengthening a bit post claims, crude now up barely. NG strengthening which may be an indication of fear on the part of the shorts, who have had season to date very little to fear. Fear of either a downside to estimates injection or fear of coming curtailments next week as companies get back to the business of putting out news releases. We have two E&P related conferences next week, Barclays and Rodman Renshaw and I’d expect people to have to talk about their plans to curtail volumes.

  6. Saw that. Lot of shear and dry air in between here and there. Models from Florida State show that weakening mid Atlantic.

  8. I put out some hk shares I picked up yesterday for sale pre market; just snapped up at 21.60, up 3.8% from yesterday’s close.

    whats up w/ that ?

  9. HK has not responded to me on their conference appearances next week which is an email easiness and ticks me off at Dunlap as I’ve been a loyal HK lackey and holder for awhile now. Their IR site stinks compared to someone like NFX.

  11. Z- HK, sometimes it just pays to put stuff out there pre market … I was surprised that got hit; looking to buy back those shares lower.

  16. Morning all.

    Indices still in wave iv I think with a lower low to come. Areas I am looking for are 989 – 991, 982. Support below that is 978.

    If that count is wrong and the low is already in then we are in a wave ii pulback and should move much higher in short order.

    There is a cycle low due later today. If we see the lower low we should then see at the least a decent bounce to the 1016 area.

  18. Note the market tied resilience in the OIH. Very hard short still. Will be watching for the data each Friday to catch the coming re-downturn in NAM drilling.

  20. 13– atpg i cant wait!!

    i just took some oct 10 calls yesterday.
    I dont understand the debt covenant story but ive read they have something due this year and what comesfist the titan deployment or some new cash

    also, they were willing to sell shares in the 8;s a few months ago so with the price in the 11’s i see that as a possbility

    shorts are into this one, so if they get their debt in order this name could take off

  27. I have 1050 to 1125 as the range. Just checking.

    It still has to cross the downsloping trendline (which it will if it can hold here) and then break resistance at the recent highs but I feel good about the recent action and buying support at 940 so I think breakout is imminent.

  29. Z, I haven’t heard anything, although I think that would probably be the idea. Working on oily Permian Basin names, ARD increased their budget 26% today. I like XEC as fit for APA.

  31. CNBC saying traders saying nat gas could go a lot lower. Um how much lower? I guess we could drop another 2.50!

  32. Gas in storage now 17.3% above year ago level; 17.8% above the 5 year average, down from last week’s numbers as we continue to compress the surpluses. Going to need to see a reversal mid day on a data bearing day or we will just continue to slip.

  33. Nicky – Could be but interesting how they never see a trend reversal coming but ride the pendulum until it has swung way to far.

    NG down 15 cents now at $2.56. Curtailments coming and you can count on a rig re-rollover as well. Not a basin in the U.S. is profitable at these levels on the front month. The forward strip provides a little bit of comfort but the ability to hedge at good prices for the front half of 2010 has evaporated for now.

  34. Where the money went:

    Petrohawk Energy Corp. signed a 23294-square-foot lease in the One Warren Place building at 6100 S. Yale Ave in Tulsa, OK. The 20-story, 480025-square-foot …

  35. I saw that as I keep Goog searches active on my more active names. Not that costly, not sure if they already had an office there and moved or what. Should not be a big deal in terms of dollars.

  36. The money is going to repay revolver debt and to add acreage around existing E.F.S. territory, in new E.F.S. territory with similar rock properties, and to add Haynesville/Bossier acreage in E. Texas.

  37. The surplus in storage to year ago levels has actually been cut in half since April 3

    Vs the 5 year average it has fallen from a 23% surplus at the beginning of May to a 18% surplus now, pretty steady decline there as well.

    Injections continue to run 1.2 Bcfgpd above year ago levels on a cumulative basis since the start of the season. This is not the big kahuna gap we saw early in the season.

    Note that the natural gas names are seeing selective, light buying despite NG’s further demise today. SWN is back to holding that $36 line in the sand and even HK is green … with natural gas off yet another 5%.

  40. Z – I see very little risk in being long nat gas down here. Well to be exact I see 2.50 worth of downside risk! When they realise the trade is done there will be stampede for the exits and it is going to explode to the upside. To hear people speak you would think it was going to zero.

  41. BTW some months ago I gave the 2.50 – 2.76 level and we are there so really not convinced there is much more downside. The wave count is very difficult as essentially in a move like we have seen for v the moves are little stair steps to the downside. That said it will make the turn very easy to see.

  43. In Britain, you’ll recall that a couple years back natural gas went negative for a short time. I have heard people refer to that. The storage situation is quite different in the States than in Europe and the association is quite different. But you have traders very much endeared to a trade that works day in and day out for them without out too much fear and they seem to want to stick to it until the bitter end. I’ve seen Shork call for it to go to 0. I think we see big shut ins in the very near future…like next week.

    Big and mid cap E&P has got to stop growing for the sake of growth and cartel up. There is no reason to sell gas at a loss.

    I absolutely agree with what you are saying, that a massive short cover is on the horizon but it needs a tipping point. I think it will be a intraday reversal after selling reaches a crescendo. Could be today (doesn’t look like it), could be any Thursday on numbers or it could be an announcement by DuPont that, oh by the way, our margins are hugely improved by all this cheap gas. The industrial side of demand is coming back, you can see it in the rail chem car load index. But for now, the NG traders have become complacent in their trade.

  44. Z- re Nicky’s #40 comments, NG E&P stocks haven’t really been killed in past three week’s Nat Gas schmeissing. UNG is trading at an approx 15% premium to NAV, and is subject to CFTC action, likely a negative for that ETF – so clearly not a great investment vehicle. In your humble opinion, what is best way to play the current weakness and potential rebound in Nat Gas prices that will inevitably come some day……..?

  46. Isleworth – I just trade the nat gas contract itself. Its not for the fainthearted although not quite the rollercoaster it was at this level.

  49. Re, #44,46 In reference to UNG, I have a bit of a different view…for longer term trades there really are few good options available if you are interested in trading directly in the commodity…Nat gas futures are difficult to manage, especially overnight risk, I would day trade only. Also, notice like today, over 47 million shares traded in UNG. There is huge institutional support in this ETF. Someone is finding value here. the NAV issue is a problem, with the premium last night at about 12%… but on a percentage wise basis UNG is traking fairly well. Gas is down, when it goes up, so will UNG

  51. Nicky – I recall your $2.50 call. Good if unfortunate call. I also recall trying to short gas last Spring as it rose ever higher, I think I gave up around $12. With Cramer screaming that the oil gas ratio meant gas had to go to $20. I recall writing that there are two ways for the oil / gas ratio to expand or contract. Gas rising was a choice but its not a causal relationship. Oil falling was the other choice. So now, with gas at 7+ year lows due to high storage, which itself is due to high production but also a crap economy which suppressed demand and a high storage starting point, all of which is temporary, I have to say Wow. In the not too distant future I know we will look back and say, $2.50 (or $2) wow, I can’t believe it got that cheap.

  52. BEXP acting better but on light volume at 7.82, previous 2009 high of $8.05.

    This level would be a new closing high as it has had a tendency to pull back sharply from the $8 level.

  53. ZTRADE:

    SWN – Adding SWN September $36 Calls (TKQIY), slowly, for a near term bounce or stabilization in natural gas which is off another 7% today after in line storage numbers were announced.

  55. Your comments above were same CDD’s and LY 92 BCF vs. 65 TY. A difference of 27 BCF. So injections are DN 3.5 BCFPD YOY.
    What is the story. Can you be more specific as to the YOY variance. You mentioned that it has to do with storage nearing cap. It’s also likely that electricity NG use is higher by say 2.5 BCFPD YOY. Possibly industrial is picking up. But 3+BCFPD drop in surplus seems a big number to me. Will this continue. If so the surplus is whittling down.

    BTW, next week we’ll be comping to Ike’N Gus when dry production dropped 6 BCF for the month.

  57. re: 51 I totally agree.

    Watching the USD which maybe in wave e of 4 for a triangle. ‘If’/when it breaks down in wave v we should get our final rally back to the upside for indices.

    Short term count is difficult on indices. Looks like we are still in iv.

  58. Dr – I do and I don’t. If you know the companies well enough to follow the breakout session Q&A than yes. I go to IPAA OGIS meets and may start going to Enercom. But if all the presentations are webcast (not the breakouts mind you) then that is good for names you are coming up to speed on. It just depends on the level of detail you want.

  59. #55 – i have been to IPAA a number of times in NYC. I would say it was worthwhile – particularly the break out sessions after the formal presentations – good questions from analysts and investors usually come up there. Not sure the format of the RR conference. I live in NJ about an hour from NYC so it isn’t a big deal for me to take the train in – not sure i would feel the same if i had to travel a long way.

  60. Z-what are your views on which deepwater drillers will benefit most from the BP discovery in the Gulf-it prob will be fairly far out in time but I believe PBR locked up a number of drillers last year when they made a large discovery.

    Thanks.

  61. Gold breakout in full force good call Nicky… I thought we might trade around 980 for a while and bounce off resistance at 965.

    Any close around these levels breaks out of resistance and the downward sloping highs.

    Yeehaw?

  62. MD – Its hard to get specific as there is no real time demand or supply data. I use historical relationships and my experience as a demand side gas analyst to “figure” my way through the season.

    We are seeing operational flow orders from the pipeline operators that limit the ability of gas to be injected into storage because the pipes and storage are very full. I can’t just add em up but essentially the producing region storage has been at an all time high for three weeks now and this means pipe operators are telling the E&Ps to send less gas, and will increasingly be telling them to do so under force of $ penalty.

    Agree electricity generation call on gas is almost certainly up. Impossible to quantify electricity usage for natural gas but assume it has come off the lows despite the fact that total generation continues to suffer vs normal levels, part due to the absence of a real summer and part due to the economy. Gas should be stealing share from coal but that is not a quant number either, at least not for me with my limited staff of minions.

    Industrial demand is up.

    As I have been saying for several weeks now, full storage early in the season means smaller injections late in the season. We are seeing that.

  65. Choices – RIG drilled the discovery well so you can bet they are in as the development driller. Probably others but it will be bid out.

    Best guesses:
    FTI probably wins the subsea trees
    OII will get the ROV work and maybe the umbilicals.
    CAM will get a slice.
    And I’m sure SLB and/or HAL will factor in.

    Have not seen a comment on timelines but best guess, going on experience is they say first oil in 5 years and it happens in 7.

    Still think its a bit of a wag to claim it as being so big with one straw in it so far but they didn’t ask me before they wrote the press release.

  67. Isle – I don’t have the file updated but the CFTC short interest on NG looked like that awhile back. Shouldn’t someone in D.C. do something about these awful speculators, driving the price of a commodity to such lows, and unemploying a good chunk of the U.S. energy industry. Oh wait, we like speculators when they are involved in making prices go down. I see. Oh, and we don’t care about “traditional” energy jobs. Sheeeeesh.

  69. UNG rolls over Sept. 14-19.
    We have a spread of 1.20 between Oct. 2.55 and Sept. 3.75 (less the UNG premium). When that spread narrows they may decide to meet half way.

  71. #69 – i can usually manage to find some good wine in NYC. The weather is another story. I would like to make the San Fran IPAA at some point.

  72. #63
    This would mean forced production and/or import cutbacks till end of injection season. At these prices electrical is bound to stay high. Your number of 3.85 TCF seems more realistic than consensus under these circumstances

  73. Md – I think so. My low is still about 3.7 and high is 3.85. Average injections for the season from here would get you to 3.9 Tcf. Fly in ointment would be an extended injection season, one that refuses to die. That’s largely up to weather. Generally injection season ends 8 to 9 weeks from now.

  75. Over long term Oily seems a better bet than Gassy. Aubrey does not have the same punch as Ah-MENDved-injad.

    Obama is not as concerned to be as dependent on Chavez’s buddy Morales in Bolivia for his lithium battery supply.

  82. getting sold off hard relative to the group; don’t see any particular news; wondering if anything up there.

  83. Pack – nothing I see. Best guess is it has held up a little better than other gassy names last few days. So just noise that it is off more today. SWN is flat today after having tumbled earlier in the week. Guess they figure it has discounted this move in gas today.

  84. Dr Link – IMO these conferences are not worth it unless its simply convenient for you; or you want to meet w/ management.

    Or if you like to go to lunches and cocktail parties or whatever entertainment they offer.

  85. I may add back those HAL puts. OIH in la-la land. Hard to see how the Street can continue to push oil service, especially gas leveraged oil service, when their customers are obviously going to be spending quite a bit less, again, next year.

  88. Oct Nat Gas down 7%, Ung currently down 4%, Ung has a tendency to catch up with futures into the close, lets see if it holds up

  90. ROSE looks good on a P&F chart, currently on a buy signal, recently breaking a long term downward trend line, strong support at 11.50, goes on a short term sell signal on a print of 11.00, with long term support again at about 7.50…

  91. GT – I just don’t care for the vehicle. I don’t have a problem with the levels that implies on gas, mind you, but I don’t know what shape the ETF will be in by then given the uncertainty about their future. I own some gassy stocks instead for the distance, less leverage but less risk too for now.

    In common holdings I have CHK, HK, SWN, ROSE, NFX, GMXR, and LINE that are particularly gassy. LINE is 50/50 but its 100% hedged … but it will still participate when gas rallies.

  95. Hi bill…ATPG has an interesting chart, it went on a sell signal sometime in late june, only to very soon rally back to go on a buy signal in August, ($9.50 put atpg back on buy signal), this quick sell signal,then a buy signal can sometimes indicate uncertainty, but the buy signal was strong, it’s a bit extended, so a pull back is highly probable, I would like to buy on a pull back to the 20 day MA support at around 10.00, there is major overhead long term resistance at 14.00-14.50, risk/reward is a factor here

  96. they had a secondary in june which knocked the price down,once that was out of the way the stock recovered

    thank you for your analysis.

  98. maybe found an answer, the cfo is on bloomberg now.. stock hit 12.50 after hours

    says us govt will help ng ..expects oil to be over 100

    say majors will have flat reserve growth.

    talked about growth in company (4 fold)
    was asked about future..said double production next year
    2011 continue that
    2012 chevit more growth

    could get to 1 billion in rev with 100 prices

    company is basically unhedge to higher prices

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