Thursday – Welcome To July

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Market Sentiment Watch: Yuck. Ugly. Just no traction in front of Friday's payrolls number. Equities may get a small boost at some point early today from the fact that we are at the year's lows and the second quarter is now dead and buried. But I don't think anyone is willing to take on risk, with volume (conviction) in front of payrolls and a three day weekend. In energy land, we got a good piece of news out of AEZ (see Stuff section) but otherwise, news flow remains at a summer trickle and catalytic events remain on the horizon in the form of a mirage called 2Q earnings season. 

YTD Losses:

  • S&P: Down 8%
  • XNG: Down 11%
  • XOI: Down 17%
  • Crude: Down 8%
  • Natural Gas: Down 16%

Ecodata Watch:

  • Jobless claims came in at 472K vs 455K expected. The jobs market just continues to disappoint.
  • We get ISM and Construction spending at 10 am EST (F = 59% and -0.9% respectively).

Nicky's Roadmap Watch (Ignore at own peril):

I think we are nearing the end of this wave down.  Could come as early as tomorrow, may take until Friday.  Target area 1000 - 1020 ish (futures already there), bounce to 1050 - 75 into 7/8 July, down to 960 area by mid to late July, back to 1020 by end Aug/early Sept, down to 890 by Oct.  All of course to be refined as we go along! A more bearish count would take us straight to about 975 here and then bounce back to 1040.....

Fin Reg Watch: The House passed a financial reform bill last night which will be taken up by the senate by mid July. Not to drink the Republican Cool-aid on this issue but intuitively see this reducing credit availability and increasing the cost of credit for consumers and small businesses as well as being onerous to smaller banks. But at least it's passage will lift one weight of uncertainty for this market to bear.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. EIA Oil Storage Review
  4. EIA Natural Gas Preview
  5. Stuff We Care About Today
  6. Odds & Ends

Holdings Watch ZCAT (Zman Catalyst portfolio)

  • $6,000
  • 99% Cash
  • Yesterday’s Trades: None - this is not a catalyst driven market at the moment.

ZIM (Zman Inefficient Markets portfolio)

  • $2,900
  • 5% Cash
  • Yesterday’s Trades:
    • None

Commodity Watch Crude oil eased $0.31 to close at $75.63 yesterday, due to a stronger dollar. This morning crude is trading off another buck on more Chinese data showing a slowing is in progress. From what I can gather from a variety of sources including some that have recently been on the ground there my sense is that this slowing is overblown. It's nothing like a reversal but instead more a small contraction.

Natural gas recovered 7 cents to close at $4.62 yesterday after the EIA reported a somewhat bullish storage number (see below). This morning gas is trading off 4 cents.

  • Tropics Watch: Alex is in Mexico, everything else is quiet. Note that the pressure on Alex dropped faster than the models predicted, pumping it up to a Cat 2 before landfall and keeping it a Cat 1 long after it came ashore. This is the earliest named storm of the season since 1995. Ominous.

Natural Gas Preview I'm at 65 Bcf today, in line with the Street. Degree days were 8% higher than year ago levels and 38% higher than normal. This week that pulled back to so look for a more normalish injection next Thursday.

  • Last Week: 81 Bcf Injection
  • Last Year: 73 Bcf Injection – supply is probably about 2 Bcfgpd (14 B's per week) higher than it was at this time last year
  • 5 Year Average: 80 Bcf Injection
  • 10 year Hi: 99 Bcf Injection
  • 10 year Low: 60 Bcf Injection

Oil Inventory Review 


Crude: Crude stocks fell more than expected due to a long awaited drop in imports. Look for a 1 mm bopd drop (about 12%) with next week's number due to Alex. More importantly, stocks at Cushing fell for a second straight week as Midwest refiners ran full tilt (about 92%) which is 4% above the national average, helping to offset the flood of Williston Basin crude entering the area.

Gasoline: Demand hit a new high for 2010 last week but this was offset by higher gasoline production and imports resulting in the unexpected build in gasoline stocks. Imports should back off momentarily and production should be about to peak if it has not already. Gasoline demand however should rally for another 4 to 8 weeks.

Distillates: Still bloated but production should fall. Demand has come off the elevated levels of mid Spring and stocks have resumed their normal seasonal incline.







Stuff We Care About Today

AEZ Operations Update:

  • Updates 30 day production rates on wells 2 and 3 in the Bakken

    • Ron Viall 1-25H IP'd at 2,844 BOEpd - made 987 BOEpd average first 30 days
    • Summerfield 15-15H which IP'd 2,799 BOEpd - made 1,046 BOEpd
  • Nutshell: Completion schedule slipping slightly. I'm sure they put this press release out because they had told people the #4 would be done by the end of June and it is now July. Wells 4 and 5 still completions have been bumped back. Like KOG, it is clear that the small operators in the Bakken are having difficulty getting on the frac schedule. I had the #4 well as a late June completion, not late July as they are currently stating. Similarly, the #5 well has been bumped from mid July to early August. Not a big negative but worth noting. If costs rise too, this could become an offset to some of the good news for the smaller names in the group. 

Other Stuff:

  • (QEP) spinout from QST begins trading on its own today
  • SSN - performing well, no word yet on rights offering allocations but I don't expect to get a full load as the arb is massive to the current pricing and people generally don't pass up found money like that.

Odds & Ends

Analyst Watch:

  • Nada.

106 Responses to “Thursday – Welcome To July”

  1. 1
    zman Says:

    BP trying to make a move, up 5% and back over $30 pre market. JB, any new thoughts on the technicals there?

    SSN hit $0.97 pre market which is above the cup and handle high.

  2. 2
    zman Says:

    TAT on the tape saying they will step up their gas directed activity in Turkey. With $9 local ng price, who could blame them?  They have 8 gas wells there now, have prepped another 15 to drill and are now adding 5 more. No word on their oil exploration efforts in the country.

  3. 3
    zman Says:

    EOG – story out saying citations against Marcellus drillers have doubled in the last year. Mentions EOG. Recent weakness is  outpacing the group's …. the GasLand effect.

  4. 4
    zman Says:

    Story on the Marcellus notes that half of the violations come from 5 operators, CHK and TLM in the list but COG and EOG not.

  5. 5
    zman Says:

    SSN moving on good opening volume again, making a run on the $1 mark today. If anyone gets a message on their rights exercise from their broker please let me know. 

  6. 6
    zman Says:

    Eli – I think I just won the SSN at a dollar bet sir.

  7. 7
    zman Says:

    Not that I mind talking to myself but can someone confirm that the site is open for business at the moment? Thanks.

  8. 8
    redjack Says:

    Z re #3, do you have a link to the story?

  9. 9
    DrLink Says:

    For those looking at income Trusts ,ECA launching their ECA Marcellus Trust this morning  (ECT) at $20

  10. 10
    ram Says:


  11. 11
    scoop006 Says:


  12. 12
    zman Says:

    Redjack -long time no chat, how's the boat?


    DRL – Thanks, will add to list of yield to watch

    Ram, Scoop – muchas gracias

  13. 13
    jat Says:

    MS osx analysts were on box saying they spoke with service operators drilling the relief well and that it'll be done within days, seems earlier than pritchard comments yestersday.

  14. 14
    elduque Says:

    Baltic down, TED a little wider

    Dollar down sharply, while crude slipping????

    And good morning to you


  15. 15
    zman Says:

    Jat – would be good news, if I were BP I'd try to quash that as they don't need an early time line they can't make. NBC nightly news had a camera shot of the Pritchard comment last night.

  16. 16
    jat Says:

    BP already quashed early morning

  17. 17
    jat Says:

    it seems the purpose of the london press office is to quash things.

  18. 18
    zman Says:

    Eld – thanks and good morning. Crude being down a headscratcher here other than the China meltdown story continues to gain some followers. I don't buy it. OPEC meets in September and if oil isn't $70 then I expect them to talk very loudly about compliance with Saudi making some cuts to Asian refiners.

  19. 19
    john11 Says:

    DrLink, any idea on expected dividend on the new ECT?

  20. 20
    zman Says:

    Jat – Don't get me wrong, I think they bounce $5 when they are successful (or fall $2 to $3 if they miss on the first shot and it gets out to the press). I took some more a couple of days back.

    Group not acting well, neither is market.

  21. 21
    redjack Says:

     the boat was hauled early this year…it could be a very bad weather year for the tropics.

  22. 22
    RMD Says:

    The number of St. research emails received today is at a record low ( until tomorow's #).

  23. 23
    Jerome Blank Says:

    RE: #1, BP…looks like a channel forming on the daily, let's see if previous resistance at $29 holds as support, if so, topside channel line resistance now at about $31….daily chart added

  24. 24
    zman Says:

    re 21, yeah, concrete bunker of a season.

    RMD – noticed that too, analysts in hiding.

    Pending home sales drop 30%.

    ISM at 56.2%, 59% was forecast.

  25. 25
    zman Says:

    Market seems to be discounting an awful number tomorrow. Forecast now -130,000 but with private sector gaining 115,000.

  26. 26
    zman Says:

    Re ECT yield, trying to track down.

  27. 27
    milepost_43 Says:

    charts clear today….go figure…must have been the hot weather yesterday!!!!!

  28. 28
    cargocult Says:

    As of yesterday Schwab was showing my account having full allocation of SSN shares.

  29. 29
    DrLink Says:

    john- the roadshow they said $2 or 10% upon ipo. First 4 years they have 50% of their production with $5 floors and $6.75 on the upside. 85% of leases held by production.their average wells recently in Marcellus been above expectations at 3300 mcf a day. The trust has a 20 year term…..

  30. 30
    zman Says:

    ECT –

    90% royalty interest off 14 marcellus horizontals with interests from 52 more wells to be added over the next 4 years.

    Half of expected production to be hedged out through 2014

    104.6 Bcf on 9 mm units at $20 = $1.70 / bcfe (not unreasonable)

    Probably a safer deal for ECA than it is for the average investor given the furor over the Marcellus but interesting, will study up on it.

  31. 31
    DrLink Says:

    I know KOG is moving slow but is that a reason to wack it over the head this hard?

  32. 32
    zman Says:

    Thanks DRL – hadn't got that far yet. 10% is enough to keep the trust right where it's at. Will watch it for a dip. Could be one that moves well with natural gas. Glad to see them hedging although those floors are kind of so-so. Nice for ECA to be able to drill wells, and then have a monetization drop down vehicle like this. It's like an ATM for them.

  33. 33
    zman Says:

    DrL – I don't think that's it, just oil. See BEXP where things are going faster than expected getting whacked as well and WLL, which is cheaper than cheap now having fallen $12 in as many sessions. Sheesh. Baby and bathwaterville.

  34. 34
    isleworth Says:

    HK seemingly very cheap here Z. Can you give us a quick update on valuation as you see it?

  35. 35
    elduque Says:

    Does anybody know if the ARD/SD deal is going to go thru.

  36. 36
    zman Says:

    HK – always expensive to the group but cheap for it by historic standards.


    2010: 5.9x

    2011: 4.3x

    They are set to grow 31% this year (and they are likely to outperform) which is pretty much best in class in the small and midcaps, except for SWN at 34% (who I trust to do that level or up to 2% better) and GMXR at 32% (and that could quickly fold with low prices). 

    In a nutshell, the story is singing along, but nobody wants them or E&P for that matter at the moment. Note that recent favorite names like PXD and XEC are not being spared but instead playing catch up in this routing.

  37. 37
    zman Says:

    Eld – my sense is that it happens or we would have seen credible comments surface in the market by now.

  38. 38
    zman Says:

    60 Bcf.

  39. 39
    zman Says:

    Gas was flat prior to the report, now up 8 cents.

  40. 40
    zman Says:

    West – couple of questions for your area.

    1) any sense of why VYOG got their Niobrara so cheap ($300 acre for a decent parcel)

    2) REXX just added 18K net acres, now at 60K net, wondering what price they paid.

    Thanks if you or anyone can help with that.

  41. 41
    zman Says:

    Johnson Rice guy saying hearing BP well close, could be a 4th of July surprise. Nice idea but now the hype is in the market. BP probably trades up now through close no matter the market today and tomorrow.

  42. 42
    VTZ Says:

    Is anyone a buyer/holder of CCJ here for the longterm?

  43. 43
    VTZ Says:

    Gold is fighting off another short attack right now at the 1224-1228 support band although I'm getting a little worried that it's not making a rally after bouncing off these levels several times.
    It "feels" as though there is both massive churn here and whichever way it breaks out is going to be a big move. I still expect it to break upwards given the extreme currency volatility and the relative strength of the shares.
    One thing for certain is that when it breaks out it will have a lot of room to run because of all the consolidation and the technicals look a lot more "rested".

  44. 44
    VTZ Says:

    …and of course after I type that it breaks down.

  45. 45
    Popeye Says:

    SSN placement shares getting sold? Big vol for so early in the day.

  46. 46
    VTZ Says:

    If it manages to close back above 1224 at a minimum then it has a chance… I'm actually surprised that it didn't just drop 20$ immediately after cracking 1224.

  47. 47
    Jerome Blank Says:

    KOG…anyone aware of any specific fundamental changes, ie: other than mkt, thanks…looking for a buy spot

  48. 48
    zman Says:

    CCJ – I think that is an Occam name.

    SSN – can't be they haven't settled yet. It's probably the market combined with what I was think about which is to sell my original shares (or some of them) and see what I get in the deal. Value at the low end of deal range is over $1 per share with almost all of that being cash.

    KOG – nothing new aside from their ability to complete the wells on timely basis being more in question since the night before last's press release. AEZ confirmed that it's tough to get fracced in the Bakken if you are a minnow at present due to the high level of activity. Last I checked, there were 128 rigs running in the Williston Basin which is a lot. A year ago there were 40.

  49. 49
    zman Says:

    BP – call of the week, thinking it closes higher just on Friday. May very well open lower on Tuesday if no news and I would expect absolutely no news on the well over the holiday.

  50. 50
    cargocult Says:

    WHX just keeps getting tastier, unless they can't keep their dividend up. Are they hedged to anyone's knowledge?

  51. 51
    VTZ Says:

    Today is disgusting… I guess people just can't get enough of that tasty 2.9% for a Japan-style 20 years.

  52. 52
    VTZ Says:

    Meant to say "… people just can't get enough of that tasty 2.9% yield. Get ready for a Japan-style 20 years"

  53. 53
    zman Says:

    Cargo – re WHX

    They are 58% oil

    Oil production is hedged 71% of expected oil produced in 2Q at 76, rising to74% at $76 by 4Q (it rises as the volumes decline)

    On gas they are 64% hedged at $6 in 2Q and 3Q and $7 in 4Q.

    This is all in my model. I backed off my rally in oil assumption later in the year to be more conservative and now have average prices in the model of 72.50 for 2Q (that will be revised tomorrow and upwards), then 75 and 77.50 in 3Q and 4Q which I don't think will be hard to do.

    On that price deck I get 2.42 for this year's distribution which is a 15% current yield.


  54. 54
    zman Says:

    V – Market is discounting a really ugly jobs number. Will be interesting to see if Goldman comes with a new number for tomorrow before the close.

  55. 55
    mimster90 Says:

    I am looking at adding to AEZ, KOG and HK at these lvls.
    thanks Nicky for your levels

  56. 56
    cargocult Says:

    I'm adding a little more WHX, being a yield hog.

  57. 57
    Jerome Blank Says:

    HK sitting right on lower channel line support, EOG holding 200 day SMA support…  

  58. 58
    PackMan Says:

    UGH.   What is this, like 9 straight down days for group. ?
    Someone earlier noted Baltic Dry Index down 25 straight days … is that right ?

  59. 59
    zman Says:

    Not just the group. The S&P is off about 10% in the same period. The group is high beta so you can bet on double the move down when things are like this. XNG is off 14%. Ugly but sort of surprised given the market that it's not worse.

    Re Drybulks, commented yesterday that even the respectable names are now sub $5.

  60. 60
    West Says:

    Sorry,being shoppin; xec, kog, lei, mhr,rose, bexp…….From PETD conference day (3-12-2010)in the Q&A they answered that DJ basin had hot spots that they had heard had gone as high as $500/ac.So maybe a little outdated. They were in a wait and see .They said that there was a lot of hype going on without enough proven information. They had participated in some horizontals but the results had not been anywhere near the EOG well that they mentioned. Also SM had made a similiar comment about the Silo well and that additional information needed to be gathered about the formation before drawing area wide conclusions about the formation. I just happened to speak to a mineral owner there north of the Chivington Field and Northeast of the Silo and 3 months ago he was offered widcat terms: $10/ac, 1/8th, 5yrs with 5yr renew at $20. They are now at $125. I would say that it is very site specfic and if I was betting, I would say that if it is EOG they have some science behind their pricing, they have never been known to pay to much for anything. Any Landman that has ever worked for them will tell you that they are very site specific and press the landmen to get the job done quickly

  61. 61
    zman Says:

    Saw that on Silo. Agreed on EOG. Part of my suspicion its them is the contiguous nature of the acreage and part is that the whole of SSN was not purchased, which would be out of character for EOG, as you say, they are very focused guys and would rather pick and choose instead of pay for the whole including what they don't want.

  62. 62
    zman Says:

    Well, that was quick. TSLA given half of its gains back.


  63. 63
    zman Says:

    The Whale:


  64. 64
    zman Says:

    We're into Nicky's target area.

  65. 65
    zman Says:

    Growing tempted to sell my SSN up here and see what I get allocated, rebuying (or not) when it dips on the flips.

  66. 66
    zman Says:

    Auto sales stalling too. Land of milk and honey around here. V – I read an article last night that said that while there is no law in Canada to prevent subprime mortgage writing, Canadian lenders simply opted not to take on the risk. So no bust like in the States. You guys are smart AND funny.

  67. 67
    zman Says:

    From Nicky:

    If we can fill this mornings opening gap then likely the low is in and we are on our back towards 1075 in short order…..

  68. 68
    zman Says:

    SSN – just thinking out loud. Really kind of a gift horse here. West is not often wrong on Rockies details. I was thinking I had seen a DJ Basin auction with prices going for $3K plus but can't track it down now. The safe thing to do is punt and revisit on the pull back that will come when the shares are cleared for trading. The higher they go before we know what we've got, the sharper the pullback … unless … we get no where near our full allocations. If it appears to be 15x oversubscribed or some such, then you'll have less en mass flipping.

    I am still showing a full allocation but my shares are not tradeable.


  69. 69
    ram Says:

    I just got off the phone

  70. 70
    ram Says:

    …..with a point person focused on the SSN allotment for WFC.  She said there is still no determination yet for distribution.  Other firms are just putting in the amount rwuested into peoples account but that they are not tradeable.  She will be surpised if people will get 20% requested.

  71. 71
    zman Says:

    re 69 …and ?

    NG up 16 cents

    Crude down 4% at 72.40 … doesn't make a whole lot of sense. Noting that BEXP came off the bottom like a shot in the last hour.

  72. 72
    zman Says:

    re 70. Hey, thanks much!

  73. 73
    zman Says:

    That video in #63 above, is about the world's largest super skimmer, said the ship was not yet in the Gulf but it just arrived, story about it on Reuters. Private owner of the new tanker which is 400 yards long took it upon themselves to make it a skimmer a couple of days the ship was commissioned and just after Macondo blew out, made the modifications themselves in Portugal and got it to the U.S..

  74. 74
    ram Says:

    Also, and I don't know how they can administer this quickly, each investor will get a percentage based on their request.  Ex., if its a 20% allocation, it's a 20% allocation of what you own, not what you requested.  If you requested 15,000 shares and own 10,000 shares, you wil get 2,000 shares.  I don't think it can be that automated to figure that out quickly.  I was surprised on how much she was saying.  I didn't mind listening though, she sounded just like Jessica Rabbit.

  75. 75
    VTZ Says:

    RE 66: True but there are limits on down payments (has to be 5% or more and anything less than 25% requires additional lump sum payment upon closing for insurance from the CMHC – Canadian Mortgage Housing Corporation). You can only remove equity that you have paid into your house, not equity that you have "earned" by your house increasing in value.
    Also, all mortgages are generally on 5 year terms where you can opt for fixed or variable rates, but you need to renegotiate rates/terms every 5 years and make any top up payments to requalify for your mortgage as required. You need proof of income here too. No "stated" incomes.
    Also, all loans are full recourse so if you walk away they can go after you for everything you own. There are some other factors too. 
    Happy Canada Day!

  76. 76
    zman Says:

    Re 74 = LOL

    75, the proof of income and the recourse part is what caught my attention. Great idea.

  77. 77
    VTZ Says:

    Garth Turner (a former member of parliament who crossed the isle to join a the other party and was later kicked out) has a blog which believes that the housing crisis in Canada is still on the way.
    There are some of the practices that occured in the states, but securitization of mortgages was definitely not occuring here.

  78. 78
    zman Says:

    V – the article I read mentioned a boom in Toronto housing but indicated the bust would be nowhere near like in the U.S.

  79. 79
    zman Says:

    BOP is on vacation until next Wednesday.

  80. 80
    West Says:

    SSN,   I was thinking that % would be 30 to 40 . Under terms of offer, even you only held 10 shares you could buy max offering 22k. Twelve and half million share offering divided by 22,058 is less than 600 offers for option D. So the 20% is also highly likely outcome. Maybe smart money, as usual, has better information……..SD side note, I think ARD is a done deal. SD aggressively buying producing properties along this trend in Ector , Andrews and Gaines Counties. Coffee shop talk is that they are in advanced talks to acquire another large interest in the Fuhrman-Mascho after ARD closes. Other party wants cash deal so they can do like kind trade for properties in Westbrook Field. Price probably $ 200mil which they should be able to handle. My thoughts are that at some point are they going to do some type of JV on their Pinon Field to address liquidity issues.

  81. 81
    zman Says:

    Thanks West.

  82. 82
    elduque Says:

    z- it seems to me that SD is doing a fair amount of right things. What is your take?? I am thinking of taking a shot at it around here.

  83. 83
    isleworth Says:

    Belated thanks Z on the HK thoughts……

  84. 84
    zman Says:

    Rexx deal was prices at $1,000 per acre (Niobrara). Really warming to the idea of selling down my SSN position.

  85. 85
    Popeye Says:

    My original plan for SSN was to put in a sell at .98 on my held shares but the recent valuations gave me reason to pause. If I only get a few k in new shares I may just hang on for a while.

  86. 86
    Jerome Blank Says:

    SSN on a new P&F buy signal with the $1 print…price obj is $2, a few boxes below the long term bear trendline…

  87. 87
    zman Says:

    NG up 30 cents. No one cares.

  88. 88
    Jerome Blank Says:

    Hk held the lower channel line exactly….

  89. 89
    West Says:

    JB, Thanks for the great charts .voted

  90. 90
    Jerome Blank Says:

    RE: #89 West, thank you…we start a new month again today…. 

  91. 91
    zman Says:

    Thanks JB.

    S&P all over the map at the moment.

  92. 92
    1520sbroad Says:

    #91 – big volume day in the index etfs, also big volume in the index etf options.  Everyone and their brother trying to position in front of tomorrow morning at 8:30.  Alot more puts than calls at the moment.  I am in Nicky's camp…

  93. 93
    1520sbroad Says:

    to follow – Nicky's camp in that we are due for a little bounce

  94. 94
    zman Says:

    Gold and oil off about 3%, dollar weaker as well. Weird day.

  95. 95
    bondbuddha Says:

    Thanks JB, voted

  96. 96
    zman Says:

    LINE was on the tape earlier with a smallish Permian acquisition. Good price paid for reserves.

  97. 97
    Jerome Blank Says:

    BP at $29 support….
    RE:#95, bondbuddha, thank you….

  98. 98
    zman Says:

    I'll be in until noon tomorrow, then gone for the long weekend.

  99. 99
    ram Says:


  100. 100
    zman Says:

    re 99. I know, I know. But with technicals large in and charge at the moment I don't feel so bad about it.

  101. 101
    zman Says:

    Market commentary:

  102. 102
    Pati Says:

    Z and West re 70, if we sell SSN now, do you think it will effect our allocation?

  103. 103
    zman Says:

    Re 102. I don't see how it could but I don't know for certain.

  104. 104
    zman Says:


  105. 105
    West Says:

    I don't think so . Pretty good volume in SSN today.

  106. 106
    zman Says:

    ARD says time's up on "go shop" period. No deal other than SD. Board of ARD likes the SD deal. Vote set for July 16th.

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