Matrix,Gulf of Mexico,Nigeria
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by Kurt Wulff (McDep Associates)
Statoil (STO), the pending partial acquirer of buy-recommended Norsk Hydro (NHY) is buying leases in Alberta thought to contain two billion barrels of bitumen (extra heavy oil), recoverable by steam injection. A dozen of our buy-recommendations have exposure to the upside of Canadian oil sands.
European major ENI (E) is buying the offshore oil and gas assets of utility Dominion Resources (D) for $4.90 a thousand cubic feet (mcf) of proven reserves compared to our estimate of $4.80 an mcf of present value in buy-recommended offshore producer Energy Partners (EPL). A debacle for Bank of Montreal in futures trading following Amaranth last year reinforces our comfort in not trying to outguess the futures market in anticipating short-term natural gas price.
Yet, we believe there is an investment opportunity in buying and holding longer-term natural gas futures as well as in buy-recommended natural gas stocks because the discount to oil looks too wide to us.
by ZMAN (zmann.wordpress.com)
A second week of seemingly bearish gasoline inventory numbers and we get a mega rally in RBOB the next day? I expected a firm crude market on the back of increasing demand for gasoline production and the lofty international prices but a rally to $65? I didn’t see that coming and I think the market is getting a bit frothy at this point. It can easily froth all the way to $70 although the amount of OPEC cheating and huge stockspiles in the US should prompt prices to bounce off that level pretty hard.
Voice of Reason Watch: From Bloomberg~ “Gasoline prices are running ahead of reality because there is no shortage,” Sandy Fielden, Vice President of Energy Products at Chicago-based Logical Information Machines, said yesterday. “Once we get into June and July and realize the sky isn’t falling, prices should ease.” Comment: To say there’s no shortage is a bit of an oversimplification but his point is that gasoline is being priced like we’re going to run out. We’re not.
In short I think this market is a bit overheated. That said, I think it has broken out after a minor correction and will head higher until the list of refinery snafu fits onto one page of the EIA’s nightly summarily. For now, days like yesterday with yet another round of major refinery problems coupled with more problems in NIgeria, (this time word of a labor strike planned to coincide with the presidential changeover) will be the key driver of prices.
Refining infrastructure had a very bad day yesterday (and this week):
- (COP) 146,000 bpd capacity plant in Tx offline for scheduled repairs,
- (BP) 115,000 bpd unit at its Texas City plant for 11 days.
- (MUR) 125,000 shut Thursday for minor maintenance.
- CHS 55,000 bpd Montana refinery shut for 11 days following a small fire.
- (SUN) shut a gasoline pipeline supplying Buffalo for repairs. Always good to
Nigeria Watch:
- Shell appears to be close to restoring 170,000 bopd disrupted by protestors earlier this week in the Ogoni area of the delta
- CVX has restored 90% of an estimated 70,000 bopd that were shuttered by villages late last week.
- Nigerian oil workers are planning to strike May 28-29.
Holdings Watch: What a fantastic day yesterday was! Aside from my now incredibly ill fated remaining May puts in (TSO) and (SU) my collection of gass. Of course a yard gnome could have made money in energy land on the long side yesterday but we had disproportionate gains in several names and started to take some profits. All three subsectors are making new all time highs which is cause for concern although I think they’ll continue to run in the very near term.
- XOI up 1.5% and appears to have broken out on the charts. I’m not a chart guy but large caps are leading the sector higher while valuations remain in check as estimates begin to increase on the back of the stronger than expected price environment.
- XNG up 1.2%. Ditto the above comments alhtough I’d expect the mounting strength in natural gas to start to cause the gassier E&Ps to outperform.
- OIH up 2.4%. Service appears to be free of the woodshed now that activity is picking back up in North America.
CALLS:
- (HAL) - half of a 2x position off taken off the table. An 210% gain in 6 days meets my definition of “too far, too fast.” Given the discount of HAL to its closest rivals and the strong domestic and international fundamentals facing the company I don’t expect the stock to come crashing back to earth anytime soon but this way I get to play with the House’s money.
- (APC) - added a 1x position in August $50 calls on the Icahn news but also because the stock has been too cheap for too long. (APC) raised another $1.2 billion this morning selling stakes in an GOM oil field to Nippon and Mitsubishi.
PUTS:
- (WNR) took my lumps on the second half of my May $40 puts yesterday for a 60% loss. I’m not going to cry over that one as the first tranche was sold for a similiar sized gain back in early April.
STOCKS:
- (CLR) added an initial position at $14.25. See yesterday’s post for my reasoning there.
- (END) - No action but I’m getting questions so let me reiterate the buy and forget nature of this investment. Production is running above plan and they will likely raise production guidance upon release of 2Q numbers. For now all eyes are on their Balgownie prospect where a rig is currently turning to the right. No news for awhile so the moves in the stock are people giving up, new investors coming in etc.
- (SCU) - No action on my part but their decision to take it a little slower in the Fayetteville Shale is giving the stock a haircut. I’m doing a little digging there before making my next move.
See the ZEB performance tab (in the upper right corner of the zmansenergybrain.com site) to see all my current positions.
Welcome To The 2007 Natural Gas Short Squeeze. June natural gas rallied $0.185 to $8.075 yesterday and is trading a dime higher this morning and is looking more and more like a short’s nightmare. We’ll be keeping an eye out for CFTC data late today to see if the shorts had begun to capitulate (at least as of last Tuesday). Given the size of the current short position, the cover push natrual gas into the mid $8s temporarily.
As CNBC will begin reminding everyone next week, hurricane season is just around the corner and the doors won’t be wide enough for all the shorts to jam through if a storm spins up in the Atlantic. This doesn’t necessarily mean good things for the stocks as they often trade in the opposite direction you’d guess (ie down) shortly after the initial surge.
Review of yesterday’s gas storage report: Gas Inventories Remain 21% Above The Five Year Average, But 11% Below Year Ago Levels.
- Storage as of May 11, 2007: 1,842 Bcf
- Max storage for this week in history: 2,080 Bcf (2006). At present gas storage is at it’s 2nd highest level in history for this date.
- We are now down 11% (238 Bcf) relative to year ago storage levels. Due to the slightly larger injection this past week relative to the year ago comparable week we eroded the YoY deficit by a measly 1% (see second chart below).
- We are now 21% (324 Bcf) above the 5 year average which includes 2006’s record levels (see third chart below).
Looking Ahead:
Here’s some quick stats for the period running from mid May through the end of October (the traditional end of the injection season):
5 Year Average Injections: 1,754 Bcf. Taken with current storage that scenario would put us at a pretty bearish / very comfortable 3,501 Bcf in storage, or 51 Bcf over record storage.
- Minimum Injections: 1,370 Bcf in 2002. This would yield storage of 3,117 Bcf.
- Maximum Injections: 2,287 Bcf in 2003. That year saw storage trough at a very low 642 Bcf. This won’t happen with this year’s much higher storage levels going into the injection season.
- Last year we injected 1,370 Bcf into storage during this period which would yield storage of 3.1 Tcf.
I don’t see natural gas trading on average much above or below a range of $7.00 to $8.50 this summer (with spiky trading possible due to storms and the short covering it will no doubt provoke). I’ve said it before and I say it again, the well run E&P mint’s money at those levels. Even the not so well run ones do just fine in that band.
Analyst Watch: (NBR) upped to Add at Calyon, (ATPG) upped to buy at Matrix, (TOPT) upped to hold at Cantor.
