26
Mar

Thursday Morning – FLMN, MR

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Market Sentiment Watch:

  • Senate passed the $2T+ Cares Act last night. It moves on to the House where a vote is likely at earliest on Friday. The word "Oil" is not in the bill as far as we can tell and as noted before the provision to refill the SPR was excised.
  • TSA says air traffic is currently at 10% of normal,
  • March new car and truck sales estimated to be down 35.5% YoY by Edmunds (car deals to be epic soon),
  • Unemployment claims in California alone are at 1 mm; today's jobless claims figure will be huge (see below) and next week's payrolls figure will take the first big hit ...
  • ... as will car sales, Chicago PMI, and potential construction sales and home prices.
  • Covid counts are going to look very bad next week as well as the U.S. case count will pass China's probably over the weekend and the reported death's count surpassed last night and appears to be just getting started. Covid statistics links are contained in the right sidebar of the site.  It's not all doom and gloom as there are several sets of treatments being tried now in advance of a vaccine and there does appear to be progress being made to source ventilators.
  • But basically, for the moment, things are pretty shuttered and oil demand is about to fall further off a cliff in the States, Europe, and India even as it begins to recover in China.
  • On the oil front Saudi/Russia continue to be fairly quiet relative to each other. The U.S. is in contact with Saudi via State and Energy Departments.  Clearly run cuts in the U.S. are around the corner.
  • On the natural gas side, winter is over for much of the country and this week is showing summer like temps across a broad swath of the south. Our office was heating early in the week and will have the AC on today. Once again we are happy to exit the heating masking season. Look for another short term supply/demand update in tomorrow's post.
  • Housekeeping Watch: I'll be in and out today, still on Spring Break but less so and it feels like summer here.

In today's post please find:

  • the oil inventory review (smaller than expected build, throughput was better than expected, production was reported as backing off which is positive in that EIA isn't simply marking it higher in the wake fo the recent reset, product demand was soft and will get softer; at this time inventory levels are fine, especially for distillates which are under stored and we note production has shifted to less gas and more distillate production),
  • the natural gas preview (bigger than last week, expect one or two more draws this season and a landing in the upper end of our expected target range for the year (1,800 to 2,000 Bcf),
  • comments and a cheat sheet update for FLMN (multiple price decks run, high implied yield, few trust their guidance at present but that's in the name right now and the balance sheet is fine and set to remain as such),
  • comments on MR's move to address lower oil prices (cut capex sharply but not changing the production guidance range).
  • and some other odds and ends.

Ecodata Watch:

  • We get jobless claims at 8:30 am EST (F = 2.51 mm, last read was 281,000),
  • We get 4Q19 GDP at 8:30 am EST (F = 2.1%, last read was 2.1%),
  • We get advance trade in good at 8:30 am EST (F = -$62.8 B vs last month's -$65.2 B).

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watc​h
  3. Oil Inventory Review
  4. Stuff We Care About Today - FLMN, MR
  5. Odds & Ends

Click the link directly below this to ...  Continue Reading »


23
Mar

Spring Break (sort of) – The Monday to Wednesday Post

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Market Sentiment Watch: Covid-19 response on the market's mind.

  • We had a number of things to say on our group, natural gas, employment in the space and renewables area at the top of posts last Monday, and Wednesday to Friday.  Please take a look if you missed them.
  • OPEC + remained MIA over the weekend after their failure on March 6th,
  • Speaking of failures, at least as of post time, congress, during a crisis, was proving to be much like congress when there is no crisis.
  • The Senate failed to pass a bill over the weekend and the House is now looking at it's own legislation. Another Senate vote is scheduled for 9:45 am EST this morning (no coincidence that's just after the market opens). These is little doubt this vote will fail. We see a failure of coordination to fight Covid-19 at multiple levels in D.C. We see half measures. This is not a political statement but an observation and the markets are obviously observing the same failures.  We see denial by some at the federal and local level with regard to a need for real planning and instead a view of wishful thinking. Do not call it a war and then rely on a scrabble of volunteerism to me critical supplies. Order the supplies. Command the supplies be manufactured. And get the freakin kids off the beaches. Shut it down now so you don't have to shut it down for a lot longer.
  • Non essentials should be prepared to stay at home.
  • We have not been adding to anything in over a month and are not buying anything just yet.
  • Keeping up with Covid-19:

Housekeeping Watch: Spring Break, Corona Style.

  • Normally, this week of the year (since I've had interns old enough to care) would be Spring Break.
  • I'd be on a beach, on a laptop from time to time, and checking in a few times a day with the site, having posted one week long post.
  • This year things are obviously different.
  • We're not going anyway after cancelling both trips.
  • The interns however are close at hand, really close, and while we are not under lock down we have been instructed too self quarantine through mid week due to intern #1's volunteer duties that put her in corona's way (yeah, no symptoms so far but 41 residents at the facility she helps at tested positive so far).
  • So, here's the deal:
    • I'm going to get out and do some stuff with the interns when the sun is shining,
    • We're going to post a Monday-Wednesday post (this post). This post will expand as the Monday to Wednesday portion of the week goes along, adding sections as needed including but not limited to the oil and natural gas inventory previews,  and I'll be around a lot more than normal during a typical spring break. We'll notify you of additions in the comments section as they occur.
    • We'll then post a Thursday and a Friday post with the inventory slide shows and some cheat sheet updates I want to get done.
    • If you have questions please ask them as I'm here and will either address as usual or add a section to the post (or both).
    • Meanwhile, Steve Martin on Banjo.

In today's post please find:

  • The Week That Was,
  • Subscriber Mailbag,
  • The Five Things,
  • Priority Names,
  • Our Week Ahead,
  • and some other odds and ends (VWDRY).

In case you missed The Wrap please click here.

 

Ecodata Watch:

  • We get Chicago Fed at 8:30 am EST (no forecast, last read was -0.25)

The Week Ahead: 

  • Tuesday - New homes sales,
  • Wednesday - Durable good orders, core capital goods,
  • Thursday - Jobless claims (this is going to rip higher this week), GDP, advance trade in goods,
  • Friday - personal income, consumer spending, core inflation , consumer sentiment.

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watch
  3. The Week That Was
  4. Stuff We Care About Today –  Subscriber Mailbag, the Five Things, Priority Names, MGY
  5. Odds & Ends

Click the link directly below this to ...

Continue Reading »


21
Mar

Wrap – Week Ended 03/20/20

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No trades last week.

The Blotter is updated.

Free Stuff Last Week:

Questions and comments under The Wrap will be addressed in the Monday post.

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20
Mar

T.G.I.F.

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Market Sentiment Watch: Gaining Traction? If you missed our comments yesterday I had few things to say.

  • I've been in the energy space since '96.  This is essentially unprecedented volatility (3rd worst drop for oil in history on Wednesday and unrelated to the weekly inventory report followed by the biggest percentage rally in history yesterday),
  • I watched unemployed oil service workers marchdown Congress Avenue in Austin (pretty sure that was '98). I never want to see that again.
  • This group doesn't ever want a hand out. But they do want a fair deal.
  • The move by the United States to refill the SPR is a half measure at best. The SPR is not set up to accept the kind of crude the DOE is suggesting it will target (small and medium producers) for the purchases. Then just the very nature of the size it can take in is, in the scope of demand destruction and the potential for rapidly rising imports (likely in late April and beyond now), small.
  • And, as far as marching unemployed oil workers go, sadly I don't even think I'll see that kind of march again. Guys I talk to like the money in the field but the volatility is terrible on the family.  Each time they come back to the patch in fewer numbers. And don't bother to ask a geologist if he'd want his kids going to the Colorado School of Mines at the moment at least (I know some who would but others will just shake their heads).
  • It's time for the Administration to look at any coming tsunami of oil from Saudi and Co as anti-competitive dumping.  Saudi is over producing at a time when restraint is called for ... by their very own words ... the day before Russia broke with OPEC+ and Saudi went to war.
  • Contrary to the statements by some who don't look at this stuff daily (and shamefully by some that do within the energy media arena) the U.S. is not energy independent. Drill baby drill is stupid but we don't own any management teams that engage in that. The actions taken this month by foreign players are making the idea of U.S. energy independence any time soon even less of a possibility.  For those of you thinking green energy will take care of that I say sure ... at some point ... well into the future. Even if we go all EVs by 2030, the generation sources by then will be far from 100% green. We are set up strongly to take advantage of that green growth in the portfolio but hold considerable gas and oil positions as well. Again, please see our comments in yesterday's post on just how far away wind and solar are from being able to handle our generation needs.

Housekeeping Watch: We know that many who read the site work in the industry. I get emails everyone once in awhile telling me they read daily but I never hear from them otherwise. These are trying times. Our thoughts are with you. If we can do anything to facilitate connections or if you have questions about maybe switching firms and want to know if I have any thoughts positive or negative on your future work please shoot me a note at zman@zmansenergybrain.com.

Covid 19 Watch:

  • Amazon noted positive tests at one of its warehouses yesterday. Expect Prime delays and note that Prime Pantry has been temporarily suspended,
  • Useful link for graphs,
  • Useful link for maps,
  • Italy's death toll surpassed China's.
  • Market is focusing more on potential treatments that would arrive before a vaccine could,
  • California announced a stay home policy for the entire state last night and is projecting >25 mm infected over the next 8 weeks up from the current 1,030 testing positive.
  • Stay safe and good luck to our friends and family. According to worldometer data 95% of currently open cases are classified as mild.

In today's post please find: 

  • the the natural gas review (slightly bigger than expected withdrawal ... "meh" in the face of the storage overhang but see next bullet),
  • the near term supply / demand balance (we'll be glad to get into the shoulder, something I have rarely written but appropriate given this heating season's masking of non heating related demand),
  • comments on VNOM (we don't own it but we model it for our peeps),
  • and some other odds and ends.

Ecodata Watch:

  • We get existing home sales at 10 am EST (F = 5.51 mm, last read was 5.45 mm).

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watc​h
  3. Natural Gas Inventory Review
  4. Stuff We Care About Today - VNOM
  5. Odds & Ends

 

Holdings Watch:

ZLT

  • Yesterday's Trades: NONE
  • The Blotter is updated.

Commodity Watch:

Crude oil rallied $4.85 (23.8%) to close at $25.22 yesterday (the day after a 24% drop) on a combination of deadcat bounce and short covering action and likely on rumors of the story noted in the Texas RRC bullet below. There maybe something to the RRC story and to the idea that tariffs could happen though this needs to be done with care as it would present it's own set of issues (exports, API gravity for domestic refiners come to mind).  Early this morning crude is trading near $27.

  • Texas Watch:  Texas RRC mulls production curbs. Interesting reading from WSJ here.
  • Rig Count Watch:  Expect very near term cliff dive in the oil directed U.S. rig count. YTD the oil rig count is up 13.  This is a function of the 2020 capex reload in the wake of a sharp drop in the second half of 2019.  The downward glide path here is about to resume in earnest.

Natural gas closed up $0.05 at $1.65 on the slightly bigger than expected withdrawal and modestly cooler very near term forecast. This is noise.  We expect a slightly smaller withdrawal next week and could see a small build.   But it will be nice to not have weak heating related gas demand masking the strong elements in the fundamental supply demand picture as noted in the next section and we look forward to the coming shoulder season. This morning gas is trading off slightly.

  • Industrial Demand Watch:  Please Please Please drop a line in the comments section today and in coming days if you see steel, concrete, glass, or other industry facility closures due to Covid-19. Thanks in advance.
  • Rig Count Watch:  Expect continued drop.  The gassy group was already planning on significantly less activity going into the year and had already issued guidance prior to year end and has since cut that guidance. There is no reason for rigs not to continue to decline near term. 

Natural Gas Supply Demand Watch: We've never looked so forward to the shoulder season.

Natural Gas Storage Review 

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Stuff We Care About Today

VNOM (unowned) Cheat Sheet and Mini Model Update

  • 2020 production growth essentially cut in half from 32% to 15%,
  • We note that the production mix is unaltered.
  • Company is adding hedges for the first time. See new section in the cheat sheet below for details but know they've gone from no hedges to majority hedged this year and likely next.
  • Long story short at $20 we see 4.6% implied yielder and at $40 we see 10.8%.
  • This is where we are now and this is subject to change. The largest portion of the production guidance drop is 3rd party (non Diamondback related activity). Should FANG (unowned) choose to extend the one month frac holiday meaningfully beyond the month period or otherwise further reduce activity VNOM's volumes could be further reduced, especially later in the year.

Other Stuff

  • We will have the Priority Names section back in the post on Monday,
  • Look for addition cheat sheet updates next week.

Rig Count Watch:

Odds & Ends

Analyst Watch:

  • TBA in comments

19
Mar

Thursday Morning – More food for thought

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Market Sentiment Watch:  The thought of a pandemic with an 18 month or longer duration, possibly characterized by multiple waves has markets on edge.  So grab an extra cup of coffee and dive in.

  1. Jobless claims to spike near term. First the restaurants and bars closed, now Ford and GM are shuttering factories (really good car deals coming if you care) but also looking into producing ventilators. Even the casinos are closing. This will have negative impacts on gasoline, diesel and natural gas demand. It's early to say how much but it won't be small.  Upstream capital cuts will send thousands to the unemployment line before tax day.
  2. Saudi and Russia are still at odds and MIA from the negotiating talbe. Russia again offered an olive branch yesterday, this time in the form of a comment from the Kremlin that they would like to see higher oil prices.  Seems a bit late. Within minutes Saudi responded by reiterating their vow to pump at record rates in April (12 mm bopd from the ground and 0.3 mm bopd from storage we thin).  Brinksmanship has been set to 11.
    1. U.S. rig and active frac spread counts are going to get crushed. After a brief uptick in 1Q20 for the annual upstream capex reload things are going to head back south, rapidly. Frac spreads are a little faster to react and we saw that start last week. Rigs will finish drill ops on the latest well and maybe the pad and then get stacked.   There are 8 to 10 employees per shift (2 shifts) per rig plus 20 or so workers in support at the well site and the company man. Outside figure is 40 paychecks per rig though the last 20 would cover multiple rigs. For the frac spreads, you're looking at 15 per crew and 2 crews and another 20 in support. Call that 50 paychecks per spread. According to API, the industry directly and indirectly supports over 10 mm U.S. jobs.  You might keep them in your thoughts when you see the counts cliff dive. This is a group that never wants a handout.
    2. Developing countries who are oil revenue dependent and who will need cash to fight the virus are set to lose over 85% of their oil revenues.
    3. The next EIA Short Term Energy Outlook in April should show another big downward revision to U.S. output . Note that we've long said EIA will miss the turn lower in U.S. production.  They've shown volumes heading up and to the right well into the future for years now.  And then this month's STEO cut the 2021 forecast by almost 1 mm bopd, largely due to their perception of the impact of lower prices.  We again suggest to EIA that a key missing component of their model is active frac spreads and actual completions vs (modeled rig count) X  (a wells per rig per month assumption) X (a new well productivity assumption) delayed by a short time lag between spud and completion but with an assumption that such wells will automatically be turned to sales. They will not. For many, they will be 15 to 20,000 foot long test tubes that will soak in their fluids, remaining unperfed and unfracced at current prices.
    4.  
  3. Covid Tracker sites, two we watch and find helpful:
    1. Maps and data.
    2. Graphs and data. Both are bookmarked at upper left on the site.
    3. Our sense is the market is waking up to the likelihood that this will not be a one and done event.
      1. Some antivirals are showing positive results in China and Japan. These would be available far before a vaccine.
    4. Rio shows solidarity with the afflicted.
  4. There is a growing cadre of congressman who oppose "bailouts" for the "fossil fuel" industry. Some thoughts:

    1. We at Z4 Research are generally opposed to bail outs ...  However, moves to support key industries can take a number of forms. We've seen this with autos (loans that were paid back with interest) and we hope to see similar forms for industries like the airline industry (not just cash to an industry that likes to buy shares but not bolster it's balance sheet). Or they can take the form of protective tariffs to prevent deliberate dumping and damaging of domestic interests.   Or they can take the form of forced pooling of entities as we saw with the financial crisis of 2008. Or perhaps some combination of all three would be appropriate for industries deemed vital to national security interests.
    2. ... and while the oil and gas in the U.S. is much maligned ...  But it's cleaner than oil and gas in other countries. Growth in the States has led to modern history lows for oil net imports (imports less exports) and natural gas is well into net export territory. The industry directly employs 10's of thousands of workers and indirectly supports multiples more. It pays taxes. You might not think so as some have said it doesn't but it pays massive amounts of production taxes which are crucial for local economies (everything from playgrounds to services to schools). And it keeps America's lights on. It's not just what goes into your gas tank.  It heats homes, cooks food, and it powers that Tesla. You can't just flick a switch to replace it and if you try by, for instance, implementing a frac ban and half mile nationwide setback, the low prices you enjoy now will slam higher. We read Bernie's plan and it offered no solutions, just an abrupt, price spiking shut off of an American industry that would benefit less clean foreign options. Moreover, if you attempt to go all electric you'll be looking at massive costs to replace package units, water heaters, and gas cooktops. And that leads us to point #3.
    3. ... there is no quick replacement for natural gas. Natural gas is key to heating and power in the U.S.  Here are some basic numbers regarding just the U.S. electrical generation pie followed by an annual generation table to share with friends or people you want to bore/annoy on the internet or at the appropriate social distance in your currently empty super market aisle:
      1. Nukes were 18% of generation in the States last August and are generally stuck at ~ 20% on an annual basis. We use August as that's generally the summer peak for demand (sometimes it's July).  This aging fleet of reactors has been uprated multiple times. I did a lot of work on this at my time at Jefferies and many were on their 3rd uprate back then and as such, the industry has pretty much hit a generation wall. There is no near term possibility of significant further expansion here (I know Biden is a fan of mini reactors and that's interesting) but there is nothing that could be done fast enough to warrant not viewing natural gas as vital as per above.
      2. Coal was 23%. As we have previously detailed the coal fired generation industry is in the dying process. Sites are being shutter monthly and no new meaningful additions are being attempted. Early in the 21st century this was half of U.S. generation but it's dirty in a lot of ways and I've worked on clean coal concepts and a better word for them is schemes. They are simply not start to finish clean.
      3. Hydro is variable each year with a lot depending on snowfall. In the summer months, when U.S. electricity demand is at peak, hydro generation is often down from spring levels. Last August it was just 5% of generation. As a generation source, hydro is generally not being expanded.
      4. Wind was 5% of generation last August. Wind is set to grow rapidly and 3 of our largest positions are now wind tied (turbines, blades, and towers). But it can't come close, any time soon, just talking logistics here, just physical realities, to replacing natural gas. We also note that generation by wind turbines in the summer months is generally lower than the rest of the year.
      5. That brings us to solar. We have a lot of hope for solar.  Solar generation has grown rapidly in recent years and will continue to through the decade and beyond. But solar is tiny and that rapid growth came from a small base level. Utility scale solar power in the U.S. was just under 2% of generation last August.  And the same logistics for growing it that apply to wind apply it. It simply cannot replace natural gas any time soon.

        1. Sidebar:  We have seen a number of fear mongering stories over the last week regarding renewable investments. These stories have ranged from pointing out global social distancing and it's impact of carbon footprints as a reason for coming slack renewable project completion to estimates of billions in projects simply going up in smoke. We have seen no such phenomenon. We have gotten updates in the last two weeks from a number of wind and solar participants and supply chain disruptions range from minor to not yet a factor. We have seen no project cancellations. These are large, bid projects, with months of planning involved, done with PTC safe harbor considerations in mind.  They may see some push out in the calendar due to worker considerations (transportation, installation) but to date we have not seen that and to suggest that billions in planned investment will go up in smoke due to Covid-19 is more fear mongering than reality based. We do see the potential for further subsidy time period extensions and for some governmental stimulus to actually increase renewable investment. We see these stories as feeding into a certain market panic mania underway which is now presenting in the form of far cheaper than 2019 type multiples as names come in from recent highs in shoot first, understand later behavior.
      6. You'll note that oil isn't in the table ... that's because in the U.S. we basically don't use oil to any great extent for generation. 
      7. Meanwhile, natural gas accounted for easily the largest wedge of August 2019 generation (proxy for summer) at 44% of total and averaged 38% last year.
      8. Here's a table with a number of years of generation data. We've boxed certain portions for emphasis:

In today's post please find: 

  • the oil inventory review (better than expected on the headline numbers, strong oil exports (for now) and implied record demand for gasoline for this week of the year),
  • the natural gas preview (small draw expected, likely bigger draw next week). We may see a small build before withdrawals are over. This is normal as the storage pull season winds down. We are on track to land within or now long forecast 1,800 to 2,000 Bcf range. Expect strong gas fired demand in the shoulder and with the start of cooling season but know that commercial demand is now in jeopardy due to facility closures.
  • the capex dashboard (adds several more companies to the list of names slashing budgets),
  • and some other odds and ends.

Ecodata Watch:

  • We get jobless claims at 8:30 am EST (F = 220,000, last week was 211,000).  This is going to zoom higher in coming weeks,
  • We get Philly Fed at 8:30 am EST (F = 8.0, last read was 36.7),
  • We get leading indicators at 10 am EST (no forecast, last read was 0.8%).

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watc​h
  3. Oil Inventory Review
  4. Stuff We Care About Today - Capex Dashboard, Free Posts This Week
  5. Odds & Ends

Holdings Watch:   

ZLT

  • Yesterday's Trades: NONE as we continue to await a more rationale market.
  • The Blotter is updated.

Commodity Watch:

Crude oil fell $6.58 (24.4%, the 3rd largest single day drop on record) yesterday to close at $20.37 despite EIA reporting a better than expected set of weekly data. Please see the EIA Inventory Review section below for details (at the moment U.S. inventory levels are fine for time of year).  Early this morning crude is trading up 12% to ~ $22.80.

  • OPEC+ Watch: OPEC chatter is unusually light.
  • Russia Watch:  Russia's finance ministers sees oil revenues some $40 B light to plan now and his country's budget in deficit. Ya know it's like he didn't see this reaction coming which is odd because most saw a deal with OPEC ... or this.
  • Mid Cush Watch:  Discount to WTI now $4.16 in April and showing a gradual improvement back into premium territory by December.
  • Colorado Watch:  San Miguel County enforces shelter in place ordinance with no cases in the county yet.  In case you are wondering this is far and away from the Wattenberg. We do have to wonder what effect such shelter in place ordinances, should they spread, have on drilling and completion ops.

 

Natural gas closed off $0.125 at $1.604 in a more modest volume session, moving lower with crude, the poor market backdrop, and a warmer forecast out of Maxar.  This is a 24.5 year prompt month low and for once we look forward to getting out of the withdrawal season and into the shoulder when the negative read on heating demand is not present. A warmer than normal spring for natural gas would be welcome.  No change to our thoughts of a landing this spring between 1,800 and 2,000 Bcf. No changes to our thoughts that this is not an end of world type spring trough storage level. At current prices, electricity generation is going to record to epic record. While we expect commercial facility demand reductions to play into electric generation needs we expect that to be distributed across the entire generation sector save nuclear with coal likely taking the brunt of the hit. We are watching closely for signs of weakness in LNG and Mexico export volumes. We expect volumes headed south from Canada to be at record lows this year. We continue to expect that we have seen the current cycle lows for U.S. production with last November's numbers.   In the early morning hours gas is trading flat.

 

Natural Gas Storage Preview

Street is at - 3 Bcf for today's report.   This is rounding error and we could see the first injection of the season today.  Next week we expect a larger withdrawal.

  • Last Week: - 48 Bcf
  • Last Year: - 91 Bcf
  • 5 Year Average: - 63 Bcf

Oil Inventory Review

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Stuff We Care About Today

Capex Dashboard

  • We do not own all of these names, please see our Positions page and blotter for holdings.

Other Stuff

Free Posts This Week:

Odds and Ends

Analyst Watch:

  • TBA in comments

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