09
Jun
Wednesday Morning – Oil Preview Plus Coal Plus More – Time For A Bigger Bounce
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:
- Holdings Watch
- Commodity Watch
- Oil Inventory Preview
- Stuff We Care About Today – Coal update.
- 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
- Supplies Ebbing: Coal production in the U.S. continues to contract with EIA looking for a 1.8% decline in production this year.
- 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).
- Eastern coal prices remain strong: up 15% year to date and a hot summer (which is expected) should help to support further gains.
- 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,
- 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.
- Regarding China - exports were up 50% YoY for May this morning, signaling continued strength for commodity demand there.
- 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:
- BP To Go Bankrupt? (the accompanying video is worth a watch as well)
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.
June 9th, 2010 at 7:59 amDO 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.
June 9th, 2010 at 8:19 amI’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
June 9th, 2010 at 8:33 amBP 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.
June 9th, 2010 at 8:34 amGeno – thanks for the update, nice beaches there.
June 9th, 2010 at 8:35 amBP 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.
June 9th, 2010 at 8:52 amBEXP 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.
June 9th, 2010 at 8:54 amAs per Nicky’s comments, S&P ran into a wall at 1066.
June 9th, 2010 at 8:55 amBOP — any comments on credit & these:
http://www.businessinsider.com/inverted-death-cross-in-investment-grade-credit-spells-trouble-for-debt-and-equity-markets-2010-6
Also, talk about Long Bond making a “golden cross” last Friday …
June 9th, 2010 at 8:57 amPack – she’s on vacation the rest of the week.
June 9th, 2010 at 8:59 amBought a little BP; falling knife sticking out of my gut at the moment.
June 9th, 2010 at 9:00 amah; didn’t know; thanks, Z.
June 9th, 2010 at 9:00 amZ – 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?
June 9th, 2010 at 9:01 amPack – 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%.
June 9th, 2010 at 9:05 amBP 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.
June 9th, 2010 at 9:09 am#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
June 9th, 2010 at 9:14 am#14
June 9th, 2010 at 9:16 amDitto.
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.
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.
June 9th, 2010 at 9:22 amZ – is the 2 year plan WHX-related or Z-related?
June 9th, 2010 at 9:27 amRe: #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…
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3724280
June 9th, 2010 at 9:28 amEIA Oil Inventory Report
Oil at 74.36 pre report
Inventories
June 9th, 2010 at 9:30 amCrude: down 1.8 mm barrels
Gasoline: unchanged
Distillates: up 1.8 mm
EIA changed their format, having trouble finding demand data….
June 9th, 2010 at 9:31 amI can’t even get into the site???
June 9th, 2010 at 9:33 amEIA 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.
June 9th, 2010 at 9:34 amDman – 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.
June 9th, 2010 at 9:36 amEld
You can get through this link:
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html
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.
June 9th, 2010 at 9:37 amChanges EIA made are lame:
Special File = discontinued.
http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr_notetbl.html
This is far from an improvement.
June 9th, 2010 at 9:41 amweekly product supplied
June 9th, 2010 at 9:48 am19376
9194
1334
3903
627
926
3392
the whole town is corrupt
http://latimesblogs.latimes.com/washington/2010/06/rahm-emanuel-bp-gul-oil-spill.html
June 9th, 2010 at 9:49 amMarket response to oil numbers was confused.
June 9th, 2010 at 9:50 amOil 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.
June 9th, 2010 at 9:52 amRe 28 – MD – thanks, just found it in one of the excel files.
Demand:
June 9th, 2010 at 9:57 amGasoline: OK, trending seasonally higher but no big bump yet.
Distillates: came off only slightly as per comments in post, better than API suggested.
SSN daily chart staring to look much better….
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3724280
June 9th, 2010 at 10:00 amRe 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.
June 9th, 2010 at 10:02 amPQ having quite a day….30 min
http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3724280
June 9th, 2010 at 10:14 amtest
June 9th, 2010 at 10:14 amSite is intermittent, may be down from time to time.
Backup at:
June 9th, 2010 at 10:23 amhttp://zmanbackup.wordpress.com/2010/06/09/wednesday-site-trouble/
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.
June 9th, 2010 at 10:25 amSalazar 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.
Unreal.
June 9th, 2010 at 10:26 amFrom Nicky:
Resistance in this 1074 – 79 area on the SPX. Voodoo gets weaker after 11.30 est. Tomorrow should be another up day.
June 9th, 2010 at 10:33 amObama’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.
http://www.marketwatch.com/story/obama-aims-at-bp-hits-state-pensions-2010-06-09
June 9th, 2010 at 10:38 amEXXI breaking out above the consolidation triangle at 200 day SMA support zone, we need a few more days like this….
June 9th, 2010 at 10:40 amThanks DRL
Is the site still crawling for you guys? I can barely get in myself.
June 9th, 2010 at 10:41 amgmxr or gdp or sd.
How would you rate them.
June 9th, 2010 at 10:43 amGold 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!
June 9th, 2010 at 10:54 amone 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.
June 9th, 2010 at 11:02 amre 44
In order, SD, GDP, GMXR. Very different companies, especially SD from the other two.
June 9th, 2010 at 11:05 amZ-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.
June 9th, 2010 at 11:15 amThen term limits-maybe one fixed term for all-(never happen).
June 9th, 2010 at 11:17 amPlease use backup for now.
zmanbackup.wordpress.com
June 9th, 2010 at 11:18 amBP 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.
June 9th, 2010 at 11:29 amHK acting pretty nicely in here. JB?
June 9th, 2010 at 11:29 amBP getting crushed now
June 9th, 2010 at 11:36 amVoted, tnx JB.
June 9th, 2010 at 11:36 amdown $1.50 last 10 minutes wow
June 9th, 2010 at 11:39 amPack – 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.
June 9th, 2010 at 11:42 amZ – could not agree more.
Terrible crisis mgmt by BP …
June 9th, 2010 at 12:03 pmThis appears to be the BP article…
#54 Popeye, thank you…
http://money.cnn.com/2010/06/09/news/companies/simmons_gulf_oil_spill.fortune/index.htm
June 9th, 2010 at 12:05 pmBP trading within .30 of March 09 low.
June 9th, 2010 at 12:07 pmThanks 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.
June 9th, 2010 at 12:10 pmBP 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.
June 9th, 2010 at 12:13 pmS&P corrolation with Oil is amazing (for now). Oil being the leading indicator.
June 9th, 2010 at 12:13 pmWill 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.
June 9th, 2010 at 12:19 pmWondering 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.
June 9th, 2010 at 12:19 pmmd – 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.
June 9th, 2010 at 12:20 pmThe law of unintended consequences make come back to bite USG.
June 9th, 2010 at 12:24 pmIs APC< HAL and RIG off the hook.
If you're right that APC is 25% liable.
Buy BP sell APC shares or options.
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.
June 9th, 2010 at 12:27 pmBP capitulation? Look at the vol…when everyone wants out…but how do buy the options with the implied vol levels where they are?
June 9th, 2010 at 12:30 pmJerome – just waiting for a dead cat bounce. A few more days like this and the stock is a 0.
June 9th, 2010 at 12:34 pmRE: #69 BP…bets here are on the very survival of the company?
June 9th, 2010 at 12:38 pmIs 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.
June 9th, 2010 at 12:39 pmEld – 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.
June 9th, 2010 at 12:41 pmSSN 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.
June 9th, 2010 at 12:43 pmBP…looks like scaplers stepping in on the bid at new lows….
June 9th, 2010 at 12:43 pmSupport at the 1066 area.
June 9th, 2010 at 12:47 pmBP 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.
June 9th, 2010 at 12:48 pmInteresting article re BP cleanup:
http://www.businessinsider.com/heres-the-real-reason-america-refused-international-help-on-the-oil-spill-2010-6
June 9th, 2010 at 12:51 pmBP should qualify for TARP.
June 9th, 2010 at 12:51 pmget 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.
Hi Z, ref 72 What energy news tape?
June 9th, 2010 at 12:52 pmEXXI. 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…
June 9th, 2010 at 12:52 pmGt- 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.
June 9th, 2010 at 12:54 pmre 77 – It boggles the mind.
June 9th, 2010 at 12:57 pmBOP 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
June 9th, 2010 at 12:58 pmthese 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.
Beige Book – modest economic improvement across all areas. Modest must be a synonym for slight.
June 9th, 2010 at 1:04 pmBP…$30 seems to matter, the current intraday inflection point
June 9th, 2010 at 1:09 pmJB – yeah, when it stopped going down at about $30, the bids on the options caught fire.
June 9th, 2010 at 1:10 pmThe 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.
June 9th, 2010 at 1:14 pmRIG APC getting killed. CDS at 575 bp record.
BP recovering a little, CDS as 368 bp.
which means RIG, APC bigger bankruptcy risks.
June 9th, 2010 at 1:24 pmPack – It also makes you like names like EOG more. Onshore. Just no chance of a one well company killer.
June 9th, 2010 at 1:27 pmAnd 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.
June 9th, 2010 at 1:30 pmBP 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
June 9th, 2010 at 1:49 pmRIG heading for 42
June 9th, 2010 at 1:52 pmZ – 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?
June 9th, 2010 at 1:54 pmDman – 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.
June 9th, 2010 at 1:55 pmS&P spiking lower again. Tough market.
June 9th, 2010 at 2:00 pmBP officially down by half since April 22.
June 9th, 2010 at 2:02 pmJB – what does HAL’s candlestick pattern say to you if it closes around about here (-1%) ?
June 9th, 2010 at 2:12 pmZ – 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)?
June 9th, 2010 at 2:14 pmSLB 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.
June 9th, 2010 at 2:16 pmBP – 29
June 9th, 2010 at 2:17 pmRe: #97, Dman, the inverted shooting star at a point like this suggests indecision
June 9th, 2010 at 2:18 pmNicky – S&P just collapsed to your support level at 1056.
June 9th, 2010 at 2:18 pm#88-Pack-where is it possible for the layman to get that info on CDS
Thanks.
June 9th, 2010 at 2:18 pmBP leading the S&P lower…
June 9th, 2010 at 2:19 pmSupport at 1052
June 9th, 2010 at 2:19 pmZ – WFT seems to be well & truly poleaxed… are they really that bad?
Also, with SLB, is their deepwater exposure as minimal as HAL?
June 9th, 2010 at 2:19 pmZ – thought the downside I had predicted was never going to come!
June 9th, 2010 at 2:19 pmThanks JB.
June 9th, 2010 at 2:20 pmDman – 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.
June 9th, 2010 at 2:20 pmNot a lot higher though, will see if I can pin it down for you.
June 9th, 2010 at 2:32 pmRe 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.
June 9th, 2010 at 2:32 pmThanks Jat, thought I’d leave that one alone. Are you hearing anything that you’d call serious regarding a BP takeout?
June 9th, 2010 at 2:34 pm#103-found it in article on yahoo
June 9th, 2010 at 2:38 pmMarket 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.
June 9th, 2010 at 2:39 pmThanks jat. I gather WFT is a favourite hedgie vehicle.
June 9th, 2010 at 2:41 pmHaven’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.
June 9th, 2010 at 2:43 pmZ – but crude still nicely green.
June 9th, 2010 at 2:43 pmWeird 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.
June 9th, 2010 at 2:46 pmEven 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…
June 9th, 2010 at 2:47 pmBP,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
June 9th, 2010 at 2:48 pmjat – OK, so *are* we in a macro upcycle?
June 9th, 2010 at 2:52 pmdo you have your normal thoughtful and mostly right call for ng tomorrow? I might want to load up or load down today.
June 9th, 2010 at 2:53 pmJat – 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.
June 9th, 2010 at 2:56 pmre 122. I’m at 88 Bcf right now. Street last I checked was 93 Bcf, down from $95 Bcf yesterday.
June 9th, 2010 at 2:57 pmPlaying PXD for announcement on JV in the Eagleford shortly.
June 9th, 2010 at 2:57 pmPXD = chart looking pretty resilient
June 9th, 2010 at 3:01 pmjat – no pressure on the macro call 🙂
June 9th, 2010 at 3:01 pmStrange Case:
http://green.blogs.nytimes.com/2010/06/09/the-strange-case-of-station-01/
June 9th, 2010 at 3:03 pmInteresting thoughts:
http://www.zerohedge.com/article/has-bp-sprung-counterparty-risk-leak#comments
June 9th, 2010 at 3:27 pmper fly on the wall.com
TAT files 300 mil shelf offering
June 9th, 2010 at 3:44 pmhttp://blogs.wsj.com/marketbeat/2010/06/09/bp-panic-relax-firm-can-cover-the-clean-up/?mod=yahoo_hs
I wonder how the pension funds are doing this afternoon to include those in the UK.
June 9th, 2010 at 3:50 pmchoices; 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.
June 9th, 2010 at 5:41 pmTATs filing is here…
http://ir.transatlanticpetroleum.com/secfiling.cfm?filingID=1193125-10-136053
June 9th, 2010 at 5:59 pmMim – Was just looking over. Pretty standard to have one in place although this one is pretty broadbrush and large.
June 9th, 2010 at 6:03 pmTAT also filed the following S-3 which I don’t understand.
http://ir.transatlanticpetroleum.com/secfiling.cfm?filingID=1193125-10-136037
Is TAT selling 42 million shares for existing investors as part of the shelf offering?
Please educate me.
June 9th, 2010 at 6:13 pmWill have a look in a bit….
June 9th, 2010 at 6:14 pmRe 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.
June 9th, 2010 at 6:41 pmThanks zman for the analysis.
I wonder if it will be a buying opportunity for the next week or so.
June 9th, 2010 at 8:00 pmMCF discovery at Eloise South
June 10th, 2010 at 2:25 ammcf also wrote down reserves and had interesting comments on gom matter
June 10th, 2010 at 7:22 amBill – 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
June 10th, 2010 at 7:24 amhow “bad” is the reserve write down
June 10th, 2010 at 7:47 amNew 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.
June 10th, 2010 at 7:50 am