Wednesday Morning – Oil Preview Plus Coal Plus More – Time For A Bigger Bounce

Print Friendly, PDF & Email



Market Sentiment Watch: Random, conviction-less summer-like trading action. Ben Bernanke speaks to congress this morning and is expected to say market cheering things about the recovery. Hmmm. In energy land things remain fairly quiet away from the BP spill. We've included a coal update in the Stuff section and SSN has a well update (pretty good news) but otherwise not a lot of energy names are talking at the moment which is normal this time of year.  On the ecodata front things are still running pretty slow (we get Wholesale Inventories at 10 am EST and the Beige Book this afternoon) before accelerating into Thursday with jobless claims and Friday with Retail Sales.

Nicky Watch: I think tomorrow may have a downside bias although to be honest I am not expecting huge weakness.  I think over the next few days a slow crawl to the upside.  First resistance is at 1066, then 1070,1072.  Support should be good at 1052.:

"Kick Ass" Watch: President Obama's potty mouth cost BP shareholders $7.4 billion dollars  yesterday so that he could appear to be less unemotional on the issue. One wonders what a Presidential "can of woop ass" would yield. Perhaps a really good bargain for Exxon or Shell.

  • Total loss market cap loss since Deepwater Horizon sank: $78.6 B or 42%.
  • Update on oil and gas recovery last night: Operations appear to be stable. Collection continue at a stabilized daily rate in excess of 15,000 BOEpd.
  • CEO Hayward will testify to congress on June 17th.
  • BP to donate proceeds from oil collect to wildlife rehab.

Watching For Another Leak Watch: Was the DO operated Ocean Saratoga leaking oil yesterday as rumors and one youtube video indicated? Absolutely not. Did DO fall 2.5% yesterday? Absolutely yes.  People need to calm down and the guys in the planes need to take along an expert. Sheesh.  

Collateral Damage Watch: CAM: This was one senators and congressman pilloried as a potential source of blame and liability since Cameron made the BOP which  malfunctioned. Or did it? On the technical briefing from BP yesterday, BP said it may be possible that two pieces of drill pipe were in the riser coming out of the BOP. If that's the case, CAM's BOP was not designed to sheer through two of them (and whatever other junk may have been blown into the BOP during the accident). Shares rose yesterday but are still off a whopping 28% since its April peak.


In Today’s Post:

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

Holdings Watch:

ZCAT (Zman Catalyst portfolio):

  • $7,400
  • 80% Cash
  • Yesterday’s Trades:
    • Added (30) BP $38 June Calls for $0.50 with the stock at 34.55, down 6% on the President’s comments. See site for details but capping efforts continue to progress and I think it is time for me to bottom fish here. I see the catalyst for this trade as continuing improvement in oil recovery. As of this morning’s update, BP was capturing over 15,000 BOEpd from the well.


ZIM (Zman Inefficient Markets portfolio)

  • $5,100
  • 16% Cash
  • Positions are updated on the ZCAT, ZIM, ZLT page.
  • Yesterday’s Trades:
    • NONE

Commodity Watch:


Crude oil rose $0.55 to close at $71.99 yesterday on a slightly weaker dollar. Trading seemed particularly conviction-less.  After the close crude rose further still upon API's release of a semi-bullish inventory report (see below). This morning crude is trading up $1+ on a combination of API results, Chinese export data, stronger equity futures and a weaker dollar. The dollar looks due for a pullback.

  • EIA Short Term Energy Outlook Bullets of Importance Watch:
    • Supply: EIA sees non-OPEC oil production rising 500,000 bopd, was up 660,000 bopd so a pretty good chop.
    • Demand:  EIA still sees demand up 1.5 mm bopd this year and another 1.6 mm bopd in 2011.
    • Moratorium Impact: As an aside, EIA puts the drilling moratorium decline at 26,000 bopd in 4Q and 70,000 bopd or 1.3% of U.S. output in 2011.

Natural gas fell $0.11  to close the day at $4.81 yesterday. Mark that up to profit taking. This morning gas is trading flat.

  • EIA Short Term Energy Outlook Bullets of Importance Watch:
    • Supply: EIA sees higher growth than before for natural gas. Now up 2.1% this year, was 1.3%.
    • Demand: It also sees consumption up 3.8% vs a prior 3.0%.

Early Read On Natural Gas Storage: Street is at 95 BCF for tomorrow’s report.

  • Last Week: 88 Bcf Injection
  • Last Year: 109 Bcf Injection
  • 5 Year Average: 87 Bcf Injection
  • 10 year Hi: 125 Bcf Injection
  • 10 year Low: 73 Bcf Injection


Oil Inventory Preview

API Watch: 

  • Crude: DOWN 4.544 MM barrels. Doubtful EIA reports this big a drop without a marked drop in imports. API saw imports rising and slightly lower utilization so go figure on this one. They did however see a good sized pullback (0.473 MM barrels) at Cushing which would be welcome news for those who like oil hanging out over $70 (I'm in that camp) and they have been directionally in line with EIA much of this year in making that call correctly week to week to week.
  • Gasoline: UP 1.481 MM barrels. I'm expecting higher demand here to take this number lower, not higher.
  • Distillates: UP 3.0 MM barrels. Possible as this is the time of year when we normally see sizable builds in distillates. API comments that demand fell sharply and this would make some degree of sense after the abrupt rally in demand that we've experienced over the last five weeks. I doubt however we'll see a build of this size.

ZComment: Once again, oil prices have set the bar fairly low for today's EIA report:

  • Gasoline demand should pick up again this week. Vacationers have a definite preference for driving vs. flying this summer.
  • Distillate demand has been up for five weeks and I would expect it to level out here. Anecdotal evidence as well as our survey of truck counts indicate it should have remained strong last week.
  • Cushing inventories should pull back from record highs with this report. If not, Crude may have a tough time hanging onto $70 without help from an S&P rally.

Stuff We Care About Today

Coal Stocks Update

  1. Supplies Ebbing:  Coal production in the U.S. continues to contract with EIA looking for a 1.8% decline in production this year.
  2. Inventories Falling: This decline in capacity began in 2009 due to low prices and continues into this year and will result in declines in inventories at both producer (mine) and consumer (coal fired utility) levels. EIA thinks they drop about 15% which is a big fall in the coal world. The most recent weekly data shows that inventories now stand at 63 days of supply, down from 66 days as of last year (down 5.2% YoY).
  3. Eastern coal prices remain strong: up 15% year to date and a hot summer (which is expected) should help to support further gains.
  4. Coal should benefit from both from the Gulf drilling moratorium and from onshore gas drilling difficulties. This last is more perception than fundamentals driving price but that's common between natural gas and coal,
  5. The group continues to languish due to concern over a Chinese economic deceleration. The average for the companies listed below is a decline of 23% since the beginning of March when some worries about Chinese demand for met coal began to surface. The stocks continued to march higher into early April however with the broad market. Then May came. I'm particularly fond of WLT which is down 33% from it's peak despite continued higher earnings revisions and will look at a position in the ZLT soon there.
  6. Regarding China - exports were up 50% YoY for May this morning, signaling continued strength for commodity demand there.
  7. EPS comments: earnings for the group are up markedly since early March and flat with our last update in May.


Other Stuff:

SSN Well Update:

  • Gary #1-24 H well (their 4th Bakken well) is drilling ahead at 14,768 feet on its way to a total depth of 17,344. Drilled 3,000 feet in the last 2 days in the horizontal section so we're probably at TD by the weekend.
  • SSN commented they've had "continuous oil and gas shows" while drilling the lateral portion of the well so they're on target.
  • I'd expect a completion here and press release of results within 30 days (around July 4th).

Odds & Ends

Analyst Watch:

  • OII - Wunderlich cuts target to $45 from $65, stays at Hold (little slow there fellas)

Interesting Reading Watch:


143 Responses to “Wednesday Morning – Oil Preview Plus Coal Plus More – Time For A Bigger Bounce”

  1. 1
    zman Says:

    Analyst Watch:

    BTU – BMO upgrades on valuation to Outperform. If I go back into the coal sector it is likely to be WLT first, then BTU.

  2. 2
    zman Says:

    DO should get a nice move today on their lack of spill guilt. That and oil being up nearly $2.

    Should obviously be good for the Bakkens.

    Gas trading flat from off earlier. Street at 95 Bcf looks a touch high to me for tomorrow’s number.

  3. 3
    Geno Says:

    I’m in Orange Beach this week they seem to be only booming off the pass nothing in front of the beaches. It took them 3 days to put out 500 yds of boom. Have not seen any oil yet, but the crowd is way down

  4. 4
    zman Says:

    BP off another 2%.

    Everything else catching the morning market bounce. DO catching a disproportionate rally, up 3%.

    SSN opening flat which is a bit odd given the news but the bigger story there is the Niobrara and no word yet on when exactly they will be onto the London Flats re-entry.

  5. 5
    zman Says:

    Geno – thanks for the update, nice beaches there.

  6. 6
    zman Says:

    BP bottom fishers trying to lift it, no success yet, down nearly 4%. We should get another collection update in 10 minutes. Lots more talk in the media about a pre packaged bankruptcy now.

    JB – How’s the WLT look to you? To me that’s a double bottom with China data this week for support.

  7. 7
    zman Says:

    BEXP and AEZ outperforming on the Bakken list. All action is moot before the oil numbers but the AEZ could easily go back to $7 on positive oil data. Oil holding $74, treading sideways with the market as it waits on the EIA report.

  8. 8
    zman Says:

    As per Nicky’s comments, S&P ran into a wall at 1066.

  9. 9
    PackMan Says:

    BOP — any comments on credit & these:


    Also, talk about Long Bond making a “golden cross” last Friday …

  10. 10
    zman Says:

    Pack – she’s on vacation the rest of the week.

  11. 11
    PackMan Says:

    Bought a little BP; falling knife sticking out of my gut at the moment.

  12. 12
    PackMan Says:

    ah; didn’t know; thanks, Z.

  13. 13
    Dman Says:

    Z – just spent a few minutes on WHX site looking for dividend/distribution info. I’m not smart enough apparently… couldn’t see anything & meanwhile it got jiggy without me.

    Do you have dates for when they pay?

  14. 14
    zman Says:

    Pack – hear ya on the BP, me too at the moment. If I were the president I would want a strong BP around for decades so I could tax, fine, fee them for all of this mess. Part of that is not intentionally beating the stock down so that they have one less currency to use to pay the U.S. but obviously that’s not worth the political points he gains now by being a tough president.

    Dman – quarterly. Next payment should be in about 2 months. I calculate the yield from current at just over 13%.

  15. 15
    zman Says:

    BP to add additional processing capacity of 14,000 bopd. The drillship Enterprise has capacity of 18,000 bopd so if they get this all up and running it should be able to handle the high end of the range of flows. Rumor is they are bringing in a FPSO and a shuttle tanker is due in by Monday. BP flatlining down 3.6%

    Oil numbers in 20 minutes, oil at 74.06, up $2.07.

  16. 16
    Dman Says:

    #14 part 1. I wonder if he does get any points. I mean when you have to be told you should be “angry” … I don’t know how that looks to people. It just looks absurd to me. But maybe people now are resigned to absurdity in government. Guess the banks are lucky they don’t deal in black gooey stuff. They got off lightly!

    part 2. thanks

  17. 17
    md Says:

    POTUS talking POTTY does not make sense. better to suck blood than pick dead bones.
    when BP decides to omit dividend how will it effect the stock.

  18. 18
    zman Says:

    Dman – I’ll have a model on 2011 out on WHX soon. I only plan to hold for 2 years here so another 21 months or thereabouts.

    MD – great question re dividend. I don’t think anyone knows. The stock is acting like it is going away forever. I sort of don’t think so, maybe for a quarter, maybe not. They can afford to do more than one thing and this is one well that may end up costing them $40 billion over 20 years. That’s not a death knell to a company of this scope or at least it should not be. My thinking right now is that the shorts are relentlessly dogging the stock, that it may pop on Friday over speculation that it gets taken out (way too early I think) and BP may start being very vocal about squaring themselves with fisherman and the like as to pay checks before Hayward speaks to congress.

    Oil #s in 10 minutes.

  19. 19
    Dman Says:

    Z – is the 2 year plan WHX-related or Z-related?

  20. 20
    Jerome Blank Says:

    Re: #6 WLT, P&F sell signal but in X’s off support, broadly speaking major support at $65, resistance at $72, added a 30 min chart to help time a position…


  21. 21
    zman Says:

    EIA Oil Inventory Report

    Oil at 74.36 pre report

    Crude: down 1.8 mm barrels
    Gasoline: unchanged
    Distillates: up 1.8 mm

  22. 22
    zman Says:

    EIA changed their format, having trouble finding demand data….

  23. 23
    elduque Says:

    I can’t even get into the site???

  24. 24
    zman Says:

    EIA radically kicked the ass of their stats update. Your tax dollars not working well at all. Dolts.

    Cushing was off 0.45 mm barrels, good to see as expected in the post.

    I have not yet found where they stuck demand.

  25. 25
    zman Says:

    Dman – that’s just my thinking for now given that WHX is a depleting asset and that to keep the yield up the stock is either going to have to fall off or oil is going to have to rally significantly.

    JB thanks much, will have more ?s in a bit, after I sort EIA.

    Oil off slightly from highs now, at 74.12.

  26. 26
    zman Says:


    You can get through this link:


    But they are presenting less data at the 10:30 EST report time, more apparently later. They had said this would be an upgrade. I don’t see their reasoning on that.

  27. 27
    zman Says:

    Changes EIA made are lame:

    Special File = discontinued.


    This is far from an improvement.

  28. 28
    md Says:

    weekly product supplied

  29. 29
    bill Says:

    the whole town is corrupt


  30. 30
    Dman Says:

    Market response to oil numbers was confused.

  31. 31
    zman Says:

    Oil at 74.45, moving with the market now. Cushing coming off is a bit of a help, otherwise the numbers were pretty much in line. I have a call in with EIA to find out where I can get some of my usual datapoints before the more full release of data later in the day.

  32. 32
    zman Says:

    Re 28 – MD – thanks, just found it in one of the excel files.

    Gasoline: OK, trending seasonally higher but no big bump yet.
    Distillates: came off only slightly as per comments in post, better than API suggested.

  33. 33
    Jerome Blank Says:

    SSN daily chart staring to look much better….


  34. 34
    zman Says:

    Re 29 = Wow. I honestly had no idea.

    EIA responded that I should look to the summary PDF and tables 1 and 9 (excel files). I can live with that and appreciate the timely response of an EIA minion. My tax dollars actually at work.

  35. 35
    Jerome Blank Says:

    PQ having quite a day….30 min


  36. 36
    PackMan Says:


  37. 37
    zman Says:

    Site is intermittent, may be down from time to time.

    Backup at:

  38. 38
    zman Says:

    BP lifting nicely now, no conviction that it will last but am holding on for a rally in the most recent set of calls as well.

  39. 39
    PackMan Says:

    Salazar now trying to make BP pay salaries of any laid off oil service workers.

    In other words, BHO wants BP to replace the govt as provider of unemployment benefits, even though it will be the govt thru its drilling moratoriums that will actually cause unemployment.


  40. 40
    zman Says:

    From Nicky:

    Resistance in this 1074 – 79 area on the SPX. Voodoo gets weaker after 11.30 est. Tomorrow should be another up day.

  41. 41
    DrLink Says:

    Obama’s crude rhetoric targets BP, hits state pensions ……

    Commentary: Populist attacks ignore inconvenient truth

    LONDON (MarketWatch) — President Obama’s ramped up rhetoric over the BP oil spill is beginning to have an effect.

    Analysts Wednesday began to show concern for the oil giant’s dividend, with Societe Generale putting the chance of a skip of the current quarter’s payout at 50-50. See more coverage on BP’s dividend cut.

    And company insiders and shareholders are apparently contemplating whether Chief Executive Tony Hayward or Chairman Carl-Henric Svanberg should be offered up as a corporate sacrifice. See coverage on BP insiders preferring Svanberg’s exit.

    But even as the president keeps looking around for somebody’s “ass to kick,” to distract from the botched federal response to the spill, he should be mindful of the law of unintended consequences.

    Because according to data from FactSet Research the evil scum who own BP / (BP 33.64, -1.04, -2.99%) include:

    •The New Jersey Division of Investment (51 million shares)

    •The California Public Employees Retirement System (36 million shares)

    •The Pennsylvania Public School Employees Retirement System (7.1 million shares)

    •The Teachers Retirement System of Alabama (4.5 million shares)

    •The Employees Retirement System of Texas (4.1 million shares)

    •The Ohio Public Employees Retirement System (1.1 million shares)

    •The Illinois State Board of Investment (1.1 million shares)

    •The Indiana Public Employees’ Retirement Fund (0.7 million shares)

    •The Washington State Investment Board (1.2 million shares)

    Of special note, the United Nations Joint Staff Pension Fund holds 21.9 million shares of BP.

    At a time when unfunded state pension liabilities are yet another looming fiscal catastrophe, presidential jawboning against an important holding is hardly helpful.


  42. 42
    Jerome Blank Says:

    EXXI breaking out above the consolidation triangle at 200 day SMA support zone, we need a few more days like this….

  43. 43
    zman Says:

    Thanks DRL

    Is the site still crawling for you guys? I can barely get in myself.

  44. 44
    elduque Says:

    gmxr or gdp or sd.

    How would you rate them.

  45. 45
    VTZ Says:

    Gold tape-painting worked wonders… heard CNBC talking head call it a double top, as predicted yesterday and then another vicious takedown to the 1224 support.

    Shorts are getting desperate!

  46. 46
    elduque Says:

    one of the major problems we have is the derivative market. For example, who has the CDS against BP or how many are there.

    Until we get some handle on that market, we are going to have continued high volatility.

  47. 47
    zman Says:

    re 44

    In order, SD, GDP, GMXR. Very different companies, especially SD from the other two.

  48. 48
    choices Says:

    Z-site very slow-it froze up on me once this AM-I was just going to agree with bill on #29 when it froze up-heh

    Rahmbo is dirty up to his eyeballs but what is new in DC-not a dime’s worth of difference between either party-it is ALL about $$$$$-vote out ALL incumbants.

  49. 49
    choices Says:

    Then term limits-maybe one fixed term for all-(never happen).

  50. 50
    zman Says:

    Please use backup for now.


  51. 51
    zman Says:

    BP rolled back over after Salazar said the U.S. will ask them to pay all out of work oil service hands due to the deep water moratorium. Me thinks the government sees a golden goose it can fleece.

  52. 52
    zman Says:

    HK acting pretty nicely in here. JB?

  53. 53
    PackMan Says:

    BP getting crushed now

  54. 54
    Popeye Says:

    Voted, tnx JB.

  55. 55
    PackMan Says:

    down $1.50 last 10 minutes wow

  56. 56
    zman Says:

    Pack – they have to tell the U.S. govt. no on the oil service payments. That was an Obama decision, not a BP one. The experts Obama hired are not in favor of the moratorium. This is pure fleecing. I know BP made mistakes but they are asking BP to do something that most companies could not possible afford and many companies could have had the same problem. The U.S. can’t simply stick it to them because they’ve got it. At some point the British Govt needs to make a call on this as well as BP is a massive employer.

  57. 57
    PackMan Says:

    Z – could not agree more.

    Terrible crisis mgmt by BP …

  58. 58
    Jerome Blank Says:

    This appears to be the BP article…
    #54 Popeye, thank you…


  59. 59
    elduque Says:

    BP trading within .30 of March 09 low.

  60. 60
    zman Says:

    Thanks JB – I saw him making similar comments a couple of days back. Pretty alarmist stuff. I think he’s good although he often gets on something and pursues it doggedly for years (long discussed EIA conspiracy of miss barrels). His book is on my nightstand now and is a good primer on Saudi and the region. They disagree of course with his assessments of reserves there. On this, I don’t see how he could possible know about another slick, the methods used to determine size are too imprecise to really know how big it is. Also, there are damages and there are damages. I don’t think they end up paying the service co’s to to take a 6 month break.

  61. 61
    zman Says:

    BP trading below 1998 levels when oil was $10 / barrel. I wonder at the ability of the U.S., who leased the chunk of sea to BP upon which to drill, to come out blameless.

  62. 62
    REgards Says:

    S&P corrolation with Oil is amazing (for now). Oil being the leading indicator.

  63. 63
    md Says:

    Will POTTYUS demand that BP make the monthly payments for all the underwater mortgages on the Gulf.

    I placed an order for 20 BP $36 calls @.50 this AM. I come back after lunch to find it filled.

  64. 64
    zman Says:

    Wondering if APC has to go the prepacked route. I can’t see how the Administration can exclude them if BP is to pay. They had 25% of the well, non operated could make the difference but really, if they didn’t have a quarter of the costs, the well wouldn’t be drilled would it? Sheesh.

  65. 65
    zman Says:

    md – I took some $37s earlier but am not listing that as a Ztrade because it’s pure guesswork as to what the Admin does next.

    And great question.

  66. 66
    md Says:

    The law of unintended consequences make come back to bite USG.
    Is APC< HAL and RIG off the hook.
    If you're right that APC is 25% liable.
    Buy BP sell APC shares or options.

  67. 67
    zman Says:

    Or just buy CAM, which looks less and less responsible due to the two joints of side by side drill pipe in the BOP.

    Maybe APC is not going to be hooked in for all the costs because they are not the operator or maybe it’s because they are an American company.

    Still holding my HAL on the thought that they are undervalued and overly beaten down but will sell early next week.

  68. 68
    Jerome Blank Says:

    BP capitulation? Look at the vol…when everyone wants out…but how do buy the options with the implied vol levels where they are?

  69. 69
    zman Says:

    Jerome – just waiting for a dead cat bounce. A few more days like this and the stock is a 0.

  70. 70
    Jerome Blank Says:

    RE: #69 BP…bets here are on the very survival of the company?

  71. 71
    elduque Says:

    Is there any chance Salazar was taken out of context. I agree that the financial industry needed to be cleaned up by the administration, but to be so anti-corporate America in the case of BP, would have such enormous impact on inflows into our market, that the unforseen consequences would make the oil spill small in comparison.

  72. 72
    zman Says:

    Eld – I went and found it on the energy news tape. He said it was a damage caused by the spill and the U.S. expects BP to pay all damages caused by the spill.

  73. 73
    zman Says:

    SSN up 5%, good to see people notice the news on their Bakken well is actually good.

    AEZ and BEXP getting carbon copy moves, up 4.45% apiece.

    KOG up 6%.

    So a good day for the Bakkens.

  74. 74
    Jerome Blank Says:

    BP…looks like scaplers stepping in on the bid at new lows….

  75. 75
    Nicky Says:

    Support at the 1066 area.

  76. 76
    zman Says:

    BP briefly below $30, down 13%. I only type it out because I find it hard to believe. At 3.13 B shares outstanding, that’s a daily down grade of $14 B of cap.

  77. 77
    Pati Says:

    Interesting article re BP cleanup:


  78. 78
    md Says:

    BP should qualify for TARP.
    get a $30BN gov’t loan for 15%. Buffet will put in $5BN
    In a year they can sell the shares back and make double their money.

  79. 79
    Gtinvest Says:

    Hi Z, ref 72 What energy news tape?

  80. 80
    Jerome Blank Says:

    EXXI. would sure like to see EXXI close nearer to the highs, as it stands we have a higher high working, good to be a least a little further from the 200 day SMA abyss…

  81. 81
    zman Says:

    Gt- most systems have scrolling news of some kind. Depends on which system you have but my code for energy scrolling news is TR/ENR which gives me DJ, AP, and Reuters to name a few.

    MD – thanks for the chuckle.

  82. 82
    zman Says:

    re 77 – It boggles the mind.

  83. 83
    zman Says:

    BOP sent me this email and asked me to post:

    What Will Make Us Bullish.

    Ever since May 3rd when we switched from Bullish to Neutral, clients have
    been asking what will make us bullish again. For those who remember the
    call, after 18 months of being bullish, we switched to neutral because of
    the April ISM Manufacturing. We explained, “All of that being said, we
    believe today’s ISM Report provides the signal that the recovery rally from
    the March 2009 low is essentially over. Although there might be additional
    single digit gains left over the intermediate term, it is unlikely they will
    be compelling enough for opportunity to outweigh the risk.” Our decision
    had nothing to do with Europe’s sovereign debt crisis even though it is a
    risk. As a matter of fact, we believe the U.S. is a likely beneficiary of
    this crisis. The nearly 3% yield on the 10 year and nearly 4% yield on the
    30 year are gift enough, but attractive valuations are now an added bonus.
    Just like most others on Wall Street, we would rather be lucky than good.
    In that same note we stated, “As we noted last night, we do not foresee a
    major down leg, but we do envision a market that marks the time where
    rallies should be sold and dips could be bought.” Instead of dips, it was a
    round of precipitous drops starting immediately, then three days later there
    was the flash crash that briefly took the S&P 500 to a few handles above
    where it settled. The simple fact is that we have never believed the bear
    thesis behind this move, and following a month of selling and many new
    headlines, we still don’t believe it. We have characterized it as, and
    still believe it is, an “Echo Panic.” Nonetheless, we are well aware that
    the market does not care what we think.

    The final line of the May 3rd note was “We need better valuations (lower
    prices or higher earnings) to compel us back into the bull camp.” Without a
    doubt, a short 20 trading days later, the market has undoubtedly provided
    better valuations. When you believe in the fundamental bull case and the
    bear case offers you a sharp correction, you know you are on opportunity’s
    doorstep. There have been a couple of twists in that short time frame.
    First, we believed that if the S&P 500 broke the 1090 level the market was
    entering a behavioral mode, and important long term drivers like valuations
    and earnings will become secondary to short term drivers like daily
    volatility, hence the moniker “Echo Panic.” Second, there was last week’s
    release of the May jobs report. The report was disappointing, but one
    number subject to large revisions is not enough to shift one’s view. The
    good thing is a month into this panic, we have been able to narrow this
    market down to three factors that would move us back into the bullish camp.
    The three factors break down into the following categories: Valuation,
    Behavioral/Volatility and Economic. (To be fair and clear, we could be
    swayed into the bearish camp, but the potential catalysts for such a move
    appear remote at this juncture.)

    Valuation. Simply put, valuations are very attractive. The S&P 500 is
    trading 13x this year’s earnings. If you are conservative and knock off $10
    from next year’s $95 estimate to take it to $85, the S&P 500 is less that
    12x that conservative estimate. For those who choose to hide in Treasuries
    yielding 3.18%, good luck. Those who have staying power and risk management
    are already exploiting the valuation opportunity.

    Behavioral/Volatility. Again investors are witnessing many events similar
    to those that occurred from late 2007-2009. Swap Spreads expanded (although
    from very tight levels), Libor has been rising. Rumors are rampant about
    problems at this institution or that government (although this time it is in
    Europe). Over the short term, fear will certainly overpower fundamentals
    and it is a matter of staying alive in the short time in order to reap one’s
    profits in the long term. Today, the Vix potentially failed its next upward
    move. If it can finally break and stay below 30 for approximately a week,
    it will be as close as you can get to a “coast is clear” signal. It is
    likely the market will be 3%-5% off its lows when that occurs, but the level
    of risk will likely be lower by a multiple of that.

    Economic. The setback of the May jobs report needs to be reversed. The
    weekly Initial Jobless Claims have been a tremendous indicator throughout
    this recovery. They need to resume their downward trajectory. Last week’s
    reading was 453,000 claims. The cycle low was set in February at 439,000.
    Being 14,000 claims away from that level makes one realize how achievable
    new cycle lows are. That being said, the number has been stubborn in moving
    lower and ignoring it has proven perilous.

    There are no hard and fast rules here. We could look for a combination of
    these factors or maybe substitute other factors in, such as AAII sentiment
    or other economic data points. If the facts change (as with the jobs
    report), so may our view. For the time being, this is what we are watching.
    Valuation is in place, Behavioral/Volatility is likely to fall into place in
    coming weeks. Initial Jobless Claims remain stubborn but it is a question
    of when, not if.

  84. 84
    zman Says:

    Beige Book – modest economic improvement across all areas. Modest must be a synonym for slight.

  85. 85
    Jerome Blank Says:

    BP…$30 seems to matter, the current intraday inflection point

  86. 86
    zman Says:

    JB – yeah, when it stopped going down at about $30, the bids on the options caught fire.

  87. 87
    zman Says:

    The buyout gong will get rung again more loudly at the Wall Street Journal. I personally think it is way too early. And I don’t think a U.S. company could get away with it without becoming themselves a target. But BP on an asset basis is exceedingly cheap. If you back out the refining assets and the rest of the balance sheet, you arrive at reserves priced at $5.05 / BOE. You certainly can’t find and develop it for that price (< $1 / Mcfe). If they can find a way to block off some assets for the Gulf, Shell could easily scoop this thing.

  88. 88
    PackMan Says:

    RIG APC getting killed. CDS at 575 bp record.

    BP recovering a little, CDS as 368 bp.

    which means RIG, APC bigger bankruptcy risks.

  89. 89
    zman Says:

    Pack – It also makes you like names like EOG more. Onshore. Just no chance of a one well company killer.

  90. 90
    zman Says:

    And it makes you question the value of offshore acreage vs risk. If the U.S. is going to react this way to an accident, the smart money will move either onshore or to another int’l coast.

  91. 91
    1520sbroad Says:

    BP option premiums/implied volatility look like March 09 levels. Spreads on their bonds are +450 on their 2015 bonds. They are almost trading as wide as Chesapeake bonds. Wow

  92. 92
    PackMan Says:

    RIG heading for 42

  93. 93
    Dman Says:

    Z – any idea how NOV stands after the mess, i.e. will they lose business due to deepwater standstill or will the rigs simply move elsewhere, so no impact on rig demand?

  94. 94
    zman Says:

    Dman – I read a brief snipit the other day that said they’d see an uptick if more equipment were required for safety. Not sure I buy that a slow down can be good for them.

  95. 95
    zman Says:

    S&P spiking lower again. Tough market.

  96. 96
    zman Says:

    BP officially down by half since April 22.

  97. 97
    Dman Says:

    JB – what does HAL’s candlestick pattern say to you if it closes around about here (-1%) ?

  98. 98
    Dman Says:

    Z – I’m looking at HAL as a way to play both the huge oversold condition in OIH and also a possible NG upswing.

    But of course there is the liability factor, even if we think it isn’t there.

    Is there another critter that might play that role but has no liability issue (real or imaginary)?

  99. 99
    zman Says:

    SLB is the most liquid alternative. It turns out they had a couple of guys that left the rig just before the explosion but I have not heard anything about liability and them.

  100. 100
    PackMan Says:

    BP – 29

  101. 101
    Jerome Blank Says:

    Re: #97, Dman, the inverted shooting star at a point like this suggests indecision

  102. 102
    zman Says:

    Nicky – S&P just collapsed to your support level at 1056.

  103. 103
    choices Says:

    #88-Pack-where is it possible for the layman to get that info on CDS


  104. 104
    Jerome Blank Says:

    BP leading the S&P lower…

  105. 105
    Nicky Says:

    Support at 1052

  106. 106
    Dman Says:

    Z – WFT seems to be well & truly poleaxed… are they really that bad?

    Also, with SLB, is their deepwater exposure as minimal as HAL?

  107. 107
    Nicky Says:

    Z – thought the downside I had predicted was never going to come!

  108. 108
    Dman Says:

    Thanks JB.

  109. 109
    zman Says:

    Dman – It is higher. Also, recall they bought Western Atlas (seismic) years ago and that business I’m sure is likely to suffer as a result of this.

  110. 110
    zman Says:

    Not a lot higher though, will see if I can pin it down for you.

  111. 111
    jat Says:

    Re 106, current zeitgeist on WFT surrounds the TNK BP put. That’s one of the reasons for the worry. Also, normal tactic if you believe the downcycle is a coming with lower oil/ E&P spending is to simply short WFT. High debt, margins generally have suffered worse than peers, etc.

    Note that this isn’t my opinion on WFT risk/reward here (tangible book value in the high single digits, and you’re almost there) but it’s my belief for the reason that WFT is back at $12.00. I have no position in WFT at present.

    For more information on the TNK-BP put, read this from their 10-Q:

    In July 2009, we acquired the Oilfield Services Division (“OFS”) of TNK-BP. In this transaction, we acquired drilling, well workover and cementing services operations in West Siberia, East Siberia and the Volga-Urals region. We issued 24.3 million shares valued at approximately $450 million. In addition, if TNK-BP sells the shares it received in consideration for the transaction for a price less than $18.50 per share prior to June 29, 2010, we are obligated to pay TNK-BP additional consideration in an amount equal to the difference between the price at which the shares were sold and $18.50. We will pay any additional consideration in cash or, at our option in certain instances, in additional shares following such date. We made a preliminary allocation of the purchase price as of the date of the acquisition. We will continue to adjust the allocations until final valuation of the assets and liabilities are completed.

  112. 112
    zman Says:

    Thanks Jat, thought I’d leave that one alone. Are you hearing anything that you’d call serious regarding a BP takeout?

  113. 113
    choices Says:

    #103-found it in article on yahoo

  114. 114
    zman Says:

    Market back to random trading. EOG was loved yesterday and this morning, complete reversal now. Energy starting to follow BP lower. Coals also traded in a broad range today, with WLT up $2+ earlier, now down $1. Very odd moves.

  115. 115
    Dman Says:

    Thanks jat. I gather WFT is a favourite hedgie vehicle.

  116. 116
    jat Says:

    Haven’t heard anything, but haven’t really been listening. Just from a pretty simplistic point of view myself, ignoring all valuation, I can’t imagine anyone wanting to step into the BP political quagmire until the well is capped at least.

  117. 117
    Dman Says:

    Z – but crude still nicely green.

  118. 118
    Dman Says:

    Weird moves fit the “behavioral mode” idea from #83.

    So BP is down a lot & HAL gets hit along with it. Did HAL’s situation change? Not really.

  119. 119
    jat Says:

    Even though WFT is cheap I’d rather buy HAL/SLB here with HAL favored. Apart from Macondo and the associated deepwater fallout all of HAL’s product lines are doing really well right now. NAM pressure pumping is just screaming if the E&P companies I’ve just seen are any indication. If it wasn’t for Macondo, I’d bet that HAL NAM margins would’ve been up almost as much in Q2 as they were in Q1 over Q4. Even after adjusting for zero GoM revenue for the next 1.5yrs with associated 65% decrimentals I think they’re incredibly cheap if you believe we’re still in a macro upcycle.

    Guess which are the only two OSX large cap stocks I’m willing to own right now…

  120. 120
    choices Says:

    BP,APC,RIG-My personal opinion (strong FWIW) is that the financial press has nailed one foot to the floor and started running bellowing hysterically (I have not seen much hardnosed realistic analysis as of yet)-Simmons says off the cuff that BP is one month from BK and everyone runs with it-probably too much to expect but maybe the clowns in guberment will realize that BK for any of the companies involved may not be in the best interest of anyone.

    I’ve studied APC’s financials and they have ~$6bil in cash, cash equiv (incl receiveables & $700mil insur

    or it could be Rahmbo’s “never let a crisis go to waste” in play here

  121. 121
    Dman Says:

    jat – OK, so *are* we in a macro upcycle?

  122. 122
    elduque Says:

    do you have your normal thoughtful and mostly right call for ng tomorrow? I might want to load up or load down today.

  123. 123
    zman Says:

    Jat – I hear you on that and I’d add that it will be a good amount of time after that to quantify the spill effects. Say 10 years. The WSJ was musing about some sort of pre packaged deal.

    The APC $700 mm insurance is really on 1/4 of that less a deductible. They would only get the $700 mm if they had 100% of the well. Just food for thought. Even if costs went to $40 B they could weather taking on 25% of the load but it would be hard on the balance sheet and as such, the share price falls.

  124. 124
    zman Says:

    re 122. I’m at 88 Bcf right now. Street last I checked was 93 Bcf, down from $95 Bcf yesterday.

  125. 125
    West Says:

    Playing PXD for announcement on JV in the Eagleford shortly.

  126. 126
    Dman Says:

    PXD = chart looking pretty resilient

  127. 127
    Dman Says:

    jat – no pressure on the macro call 🙂

  128. 128
    dij Says:

    Strange Case:


  129. 129
    Pati Says:

    Interesting thoughts:


  130. 130
    DrLink Says:

    per fly on the wall.com

    TAT files 300 mil shelf offering

  131. 131
    choices Says:


    I wonder how the pension funds are doing this afternoon to include those in the UK.

  132. 132
    PackMan Says:

    choices; I was getting it in a news feed.

    I think you may be able to go to Markit.com and find it; I just rely on the news headlines.

  133. 133
    mimster90 Says:

    TATs filing is here…


  134. 134
    zman Says:

    Mim – Was just looking over. Pretty standard to have one in place although this one is pretty broadbrush and large.

  135. 135
    mimster90 Says:

    TAT also filed the following S-3 which I don’t understand.


    Is TAT selling 42 million shares for existing investors as part of the shelf offering?

    Please educate me.

  136. 136
    zman Says:

    Will have a look in a bit….

  137. 137
    zman Says:

    Re 135 – that is a registration of previously unregistered shares. Basically means they can sell them but doesn’t force them to or mean they will. There is a list several pages down of funds who took part in a Fall 2009 offering of unregistered securities. So it basically wraps up some previous business. You’ll see some shares come out for those who are tired of the play and probably elevated volumes for a week but surely not the whole lot that is being registered.

  138. 138
    mimster90 Says:

    Thanks zman for the analysis.

    I wonder if it will be a buying opportunity for the next week or so.

  139. 139
    zman Says:

    MCF discovery at Eloise South

  140. 140
    bill Says:

    mcf also wrote down reserves and had interesting comments on gom matter

  141. 141
    zman Says:

    Bill – yes, best comments from a CEO on the spill I have yet seen. I put them in the post, will be out in 10 minutes

  142. 142
    bill Says:

    how “bad” is the reserve write down

  143. 143
    zman Says:

    New post is up, it’s not that bad considering that they were trading cheap on a reserves basis anyway. But I would think it hits the stock and creates a buying opportunity.

Leave a Reply

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