In general, I'm an oil and gas stock (E&P) bull, as you know. The E&P stocks remain cheap despite a recent run, the long term fundamentals point to higher commodity prices, and at present service cost inflation has abated and even reversed in many situations. And the companies I track are getting more efficient at doing what they do. But $100 oil is bad for business from both fundamental and trading perspectives.

• On the fundamental side you have incredible pressure on the economy. This pressure is really no greater than it is at at $98 or $95 or $90 but the perception can be as punishing to the stocks as the reality. For week's now I've heard bears calling for demand destruction and surprisingly there is still little evidence of it but if we routinely see $4 gas this Spring two things will happen: 1) people will find ways to drive less and 2) Vespa sales will skyrocket.

• From a trading perspective, you get the sea of green and sea of red days as the market decides it either loves or hates energy. The "Crowd" enters and exits with a flip, mindless, indiscriminate, and sledgehammerly fashion which I don't care for.

• I spent yesterday taking a little of the Call money off table as you'll see below.
  • Am I early? Probably.
  • Am I expecting and energy bear market? Don't make me laugh.
  • A correction? Not really, no. Let's just say oil and gas have had a pretty good run as have the stocks and this market has show a complete inability to string more than a couple of green days together. Inventories could be a downer today and I wanted to lock in a little of the recent gains.

• I'm not alone in lightening up as the brokers start to pull in their horns as well: E&P Analyst Watch: Ultra Petroleum (UPL) cut to neutral at JP Morgan, Bill Barrett (BBG) cut to Neutral at SunTrust, Citigroup cuts Chesapeake (CHK), Quicksilver (KWK), EOG Resources (EOG), and Southwestern Energy (SWN) to hold from Buy. Guarantee these are valuation calls based on the very recent run in the stocks

Commodity Watch:

• Crude Oil closed up $1.65 at $100.88 (after trading as high as $101.43) on the usual suspects: Turkey/Iraq, OPEC, Nigeria, and the dollar. After soaring to $102.08, crude is trading of slightly to levels just under $101.

• Turkey melts northern Iraq watch: Turkish troops are now reported to be 15 miles over the border (last count was 6) and they are saying they will stay until the job of wiping out suspected rebels is complete. Iraq told Turkey to get out yesterday saying that there would be serious consequences if civilians and infrastructure are harmed.

• OPEC watch: Still set to meet March 5. Various ministers are providing the markets with mixed signals…some indicating speculators are in control of crude prices and that a reduction of quotas may be on the way while others make noises like Libya who said that production would stay where it is unless prices fall below $90. None of them are talking about boosting production.

• • Nigeria watch: Interesting story on Henry Okah, who maybe is and maybe is not the head of MEND. Still no confirmation if he's breathing or not but interesting.
  • Shell says Forcados production to double to 285,000 bopd in April following pipeline repair.
  • Hugo watch: Chavez offers to settle up with XOM regarding the stolen heavy oil project in Venezuela by turning over its 50% ownership in the 50/50 owned Chalmette, Louisiana refinery. Hmm, Exxon (XOM) and Chevron (CVX) get the courts to freeze $12 billion in Venezuelan assets and Chavez offers up half of a 110,000 bopd refinery as a trade?! That's like say, "hey, I've stolen your house but here's a pup tent, now run along". Total foreign oil company investment in the Orinoco project was estimated by Wood McKensie at least $15 billion back in 2006. Half of a scrub refinery, hah!
  • Buzzkill Ben speaks today: The dollar (shown below in terms of Euros) abandoned all hope in advance of yet another ivory tower pep talk. Had this chart been generated this morning instead of last night you'd see it was through the $1.50 per Euro mark for the first time.

  

  • Bodman's folly watch: A DOE representative told the Senate Energy Committee yesterday that they plan to continue adding 70,000 bopd to the SPR (Strategic Petroleum Reserve) despite triple digit crude prices.. DOE person told the Senate today they have no plans on stopping the fill and will reach a record 700.7 million barrels by end of March. What ever happened to "buy low, sell high"? The DOE spokesman went on to say that at 70,000 bopd, its a non event given world consumption of 85 mm bopd. Maybe that's true but its the mentality, I mean come on, on the one hand you beg OPEC to produce more, something they generally do in half to million bopd increments saying its crucial that they produce more so prices fall and the economy doesn't and then you act flip about what constitutes a significant percentage of a potential change in OPEC output.

The EIA ivnentory preview table (expectations taken from the Dow Jones survey)

Zcomment: Last week I plead seasonal ignorance except for the comment that we could see another reduction in refinery utilization and a bigger than expected draw in distillates. I'm not pushing my luck this week by attempting to forecast weekly numbers. Imports may be skewed lower if fog was able to disrupt operations in the HSC so that could give us a smaller build. Balancing that out however is the prospect of yet another drop in crude demanded by refinery operations. I would say that given how tense the crude market is, a draw in crude stocks would yield a whiplash reaction of a spike in crude prices to new highs. Conversely, a larger than expected build should yield a plunge back into double digits and may set up a wave of profit taking.

• Natural Gas traded up $0.02 to just under $9.21, saved from an actual red day by a last minute buying surge. This looks tired to me. This morning gas is trading off slightly this morning.

Told You Them So Watch: Quarters the Street Didn't Like Initially, But I Did

• OII back to levels from before the 4Q release. In my "Anatomy of a Non-Miss Miss" piece I said the numbers weren't bad and contained extraneous, one time hiccups here but it took the stock a full 4 trading days to get back to square one. My pre call $70s are still underwater and I may take them off the table if the stock fails to break on through to new highs in the very near term with the other deepwater favored service companies (FMC Technologies (FTI) in particular). The $65 calls taken during the conference call are:
  • Newfield Exploration (NFX) - continuing to hold calls (and the common) from before the 4Q report. Street appeared to be underwhelmed with finding costs which they should have known were running high after year of the company taking the necessary steps to uncover and dominate a new play. Costs per well continue to fall and NFX looks to be hitting its stride in everything but stock price. The stock has recovered in the last two days (more than the rally in its peers) and its move reminds me of the delayed reaction we saw in APC two weeks ago after earnings.
  • Anadarko Petroleum (APC) - this is one I should have stuck with a little longer after their 4Q report, which was also subject to nuisance selling on the report but I really didn't think it could move as fast as it did (which ties into the same thought on natural gas).

• Holdings Watch - busy day yesterday.

• Halliburton (HAL) - Sold Half the HAL March $37.50 Calls for $0.95, up 111%.
• Apache (APA) - Sold the APA $110 March Calls for average of $6.80, up 94%.
• InterOil (IOC) - Sold all of the March $20 calls for average $3.75, up 29%…not exactly the killing I was looking for but ok and we didn’t get killed. I’ll look at Aprils on a dip because frankly I think people will get tired of waiting on well news.
• DryShips (DRYS) - Entered the March $85 CALLS for $4.10. Still hold the $95 calls from just before the earnings call.
• Transocean (RIG) - Exited Out RIG March $140 calls for average $6.70, up 200%. I may be leaving a little on the table as it looks like it’ll go $140 to me but this did better than I could have hoped in such a short time following the conference call and I’ll be looking to re enter longer dated options on a nice fat red day.

Other Stocks of Interest

Petrohawk Energy (HK) - Reported a beat but left out guidance reiterations or any guidance whatsoever in the PR. There's also no operations update so I guess we are left waiting for the call. The financial metrics of the quarter and year however looked swell:

• Reported EPS of $0.16 vs $0.15 expected ($0.12 to $0.18); reported CFPS of $0.82 vs expected of $0.77.
• Revenues of $227.3 mm vs $223 mm exp.
• 4Q production comes in ahead of guidance: 303 MMcfepd (range was 295 - 300 MMcfepd) and was 87% natural gas. The outperformance here could simply be a variance in timing on the sale of the Gulf Coast division. If it closed a little later than expected you'd have more production from it.
  • Production excluding the Gulf Coast division was 236 MMcfepd for the quarter and 226 Mcfepd for the full year 2007.
• LOE continues to fall: 4Q lease operating expense fell to $0.51 / Mcfe which was better than the guidance range of ($0.55 to $0.65/Mcfe) and down from 3Q levels of $0.56 and year ago levels of $0.60. The company expects this to continue to fall as the high cost Gulf Coast division becomes a memory.
• Production guidance: Waiting for the conference call:
  • 1Q08: not provided.
  • 2008: prior guide was 20% growth to 265-286 MMcfepd (% growth is pro forma the sale of their Gulf Coast division).
• Operations update: Gotta wait call here as well. Look for activity updates on:
  • Elm Grove - just looking for business as usual in this low cost, can't miss play and perhaps results from recent experiments with horizontal drilling here.
  • Terryville - looking for updates on Gray sand and deep Bossier drilling here.
  • Fayetteville Shale - looking for a pickup in activity and results from recent pilot drilling.
• Reserves: Fell slightly from the prior year due to the sale of its Gulf Coast division: At 1.062 Tcfe they're about 1/11th the size of Chesapeake (CHK)).
  • F&D costs of $2.38 (organic - excludes acqusitions) (most of their peers are coming in a little more on the costly side at $2.50+)
  • Reserve replacement: All in replacement of production at 318%; 281% excluding acquisitions. Not bad at all.
• Conference cal: 11 EST.

Odds & Ends

Analyst watch: (UPL) cut to neutral at JP Morgan, (BBG) cut to Neutral at SunTrust, Citi cuts (CHK), (KWK), (EOG), and (SWN) to hold from Buy. Guarantee these are valuation calls based on the very recent run in the stocks. GLNG cut to hold at Jefferies, Solars Yingli Green Energy (YGE), Solarfun (SOLF), JA Solar (JASO), and Trina Solar (TSL) cut to hold at BofA. Citi starts solars Suntech Power (STP) at buy and (YGE) at hold. Among drillers, Lehman takes it price target for ENSCO International (ESV) from $63 to $69.

• Unconventional Energy Still Attractive - UBS  »
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• Time To Consider Oil's Homely Cousin, Natural Gas  »
• Energy Independence: It's About Demand, Not Supply  »

Zman

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