Weekly price checks

This was another crazy week for energy equities.  The market in general had a strong week, but the energy sector outperformed the broader market and oil keeps going up.  Gas was weak, but several of the gas E&Ps did quite well.  Notably Southwestern (SWN) and EQT, Ultra and Approach all were up pretty big.  Its interesting, because I would consider these to generally be the lower quality gas companies, with the exception of SWN.  RRC and Cabot, the two premier names, were both flat or off.  RRC is having problems because of their decision to get equity financing.  I continue to consider buying some Cabot, but haven’t done the work yet.  I’m going to try to get in a Marcellus post this week as part of my Cabot prep work.

Standing back from this crazy rally in energy equities of the past few weeks I’m trying to get some perspective on what’s going on.  I feel that I am not very tied in to market sentiment, because I really don’t read any research from the street, or even popular investing articles.  I do think that even as of two months ago there was a conventional wisdom that oil prices were poised to come down.  This was also visible in the futures market, with oil long dated futures trading far below spot.  Unfortunately I cannot see the futures curve without using the NY public library Bloomberg terminals, so I don't have a more recent update, but I would bet that the long end of the curve has come up big.  The spot price move in oil over the past few months has been real, but nothing too spectacular.  Since mid April, WTI moved from 103 and change to 106 and change.  Brent went from 109 to 114.  The S&P is up 5% over that period, and the energy ETFs are up about 10%.  I do think that the E&P equity rally is related to both the overall market rally, the move in oil prices, but also a shift in sentiment about the long term direction of oil.  This sentiment had been rather bearish even recently, but has shifted.  Iraq certainly has a lot to do with this shift, but it isn’t necessarily the whole reason.

Some of the price moves  over the past months are remarkable.  The pure play gas companies all did terrible (Chesapeake now has significant oil production, so I’m not including them in that).  The absolute worst of all was Cabot, the one I am now most inclined to buy right now.  Pioneer might be my first pick to short, if I dared.  

A wild week in energy markets: Weekly prices and a word on Iraq

I know my posts have gotten pretty sparse, but it isn't because I've lost steam, but rather because I've been too busy at work.

What a wild week.  The big news was obviously Iraq.  How could something like the takeover of the second largest city come out of no where like this?  There are five 24 hr news networks and 3 almost 24 hr business news networks, yet this was a complete surprise.  Now Iraq's 3 to 3.5 million barrels a day of production has not been significantly effected yet.  Most of their production and their main export rout is in the fairly secure Shiite controlled south.  But pipelines are easy things to damage.  In the longer term the effect is more significant.  Even if this doesn't degenerate into a wider shiite vs sunni regional war, Iraq was supposed to be a leading source of production growth with some (probably unrealistic) projections of 9 million barrels a day by 2020, which was also the stated goal of the Iraqi oil ministry.  That was always a stretch, but now it seems preposterously unlikely.  I don't have a bloomberg to look at it, but I wouldn't be surprised if the long end of the futures curve moved up even more than the spot price this week.

On the equities front, wow.  In a week that the S&P lost 7/10ths the whole E&P subsector was up with a few notable exceptions.  I was also glad to see Whiting, my biggest position, up an impressive 7.13%, leading the sector after NOG, a very small company which I've included in the coverage only because it is a Bakken pure-play.

The stand out exceptions in these good times are the Marcellus companies.  Range Resources, the dominant company in the Southwestern Sweet spot of the Marcellus, announced they were issuing $500mm of new equity, an exceptionally rare thing to do at present, because of the incredibly low cost of debt.  But right now Range's trailing EBITDA is about a billion and their net debt is about $4b.  4x EBITDA is high debt level and often mentioned as a "not to exceed" level in the E&P world.  Range is growing production at about 20% per year, but there are tremendous capacity constraints in this area, even more so than Northern Marcellus.  Northern Marcellus only has to find somewhere to put their gas.  In the Southwest the gas is wet so they have to find somewhere to put all their NGLs, and especially their ethane, and they are competing for takeaway capacity with the nearby Utica as well.  But that said, I think Range is indeed a premium company that deserves a premium valuation.  The valuation has always just been a bit TOO premium for me.  They are sitting on some of the best wet gas assets in the country, and they could drill their current asset base for decades without having to lease a new acre.


I feel that the other Marcellus gas producers were down in sympathy with Range, but the situation in the North is totally different.  Cabot, for instance, is growing production while significantly underspending their cashflow.  They also have no debt.  They are now trading at just over 8x analyst consensus 2014 EBITDA (actually 2014 consensus ebitda as of the last time i was on a bloomberg terminal several months ago).  And this for a company that grew 2013 production 50% vs 2012 production and with 2013 capex 10% less than cash flow from operations.  I may pick up a bit of this on Monday, which would be my first trade since starting the blog.

An interesting article on the Canadian Oil sands from rigzone

My goal is to eventually add the larger of the Canadian E&P companies to the coverage list.  Most are traded on the Toronto Exchange, and reporting requirements are very different there.  But I do plan on posting interesting articles I see like this one on the Canadian oil sands.

The oil sands (aka tar sands), is produced by strip mining or in many newer projects by injecting steam into the ground to heat the oil enough and lower its viscosity, so that it can be pumped out of the ground.  The size of recoverable resources is absolutely massive.  A major issue has been transporting it to somewhere it can be refined.  The oil is processed in an "upgrader" locally before it is mixed with a dilutent such as very light condensate (think pentane, hexane) which then allows the upgraded oil to be liquid enough to pipe down to the US Gulf Coast.  In some cases the dilutent originates around the Gulf Coast, and is shipped up to Canada, mixed with the heavy oil, and shipped right back down to the Gulf Coast.  The "high complexity" refineries along the Gulf Coast are ideal for handling this heavy oil.  In this article they note that the increasing production of light oil from the Duvernay and other tight formations in Canada may provide a lower cost source of dilutent and make the oil sands more economical.  The increasing use of crude by rail may also help, since less dilutent is needed compared to pipeline transported crude.  The speculation that canadian oil can be re-exported from the Gulf Coast, as is postulated in this article, doesn't seem particularly likely to me, unless there is something I am missing.  The US has the most complex refineries in the world, ideal for handling heavy oil.  Now we are producing a huge and increasing quantity of light oil from the Bakken, Eagleford and other tight oil formations, as discussed in this recent EIA article.  There is too much light oil and not enough heavy oil in the USA.  Why would we re-export all that heavy oil sands-oil?

 I think that the surplus of light oil in North America will be solved in one of two ways: Congress ending the export ban of American produced crude, or refiners expanding capacity to handle larger volumes of light crude at existing refineries, then exporting products like diesel and gasoline.  Increasing product exports is not well known, but it is now a very well defined trend.  Here is a chart showing product exports since 1980.  This trend should benefit US refiners, who have already been profiting from the healthy, though shrinking, differential for mid-continent oil like WTI vs. seaborne grades like Brent.  Once all the light oil imports have been offset, and we are very near that point now, we may start to see bigger discounts for Gulf Coast light oil (like Louisiana Light Sweet- LLS on bloomberg).  When that happens the Gulf Coast refiners may see even bigger margin expansion.  It almost makes me want to buy Valero.http://www.rigzone.com/

Weekly price update (after missing last week's)

I haven’t been posting much since I’ve been really busy.  This price update is comparing to two weeks ago, which was the last one I did.

So crude oil was down these two weeks, but energy equities rallied big, outperforming the S&P’s impressive 2.5% gain in the past two week.  Gas was up, but remember that gas is far less important to the sector overall because it comprises a relatively small portion of revenues, except for the Marcellus producers, and a few of the largecaps like SWN and CHK.

Of the three that I own, WLL was more or less in line with the sector, and APA and CHK both outperformed.  I’m considering lightening up on CHK.  There are two high quality stocks that I’ve wanted to own for ages, but I hate chasing.  EOG  has just continued to run and run.  COG has been treading water as the market has moved higher so do have my eye on it.  WLL I am very comfortable owning, as I think it remains under appreciated.  I need to do a post on them at some point, but I want to do it in the context of a more general overview of the Bakken.

The Permian basin stocks did very well over the past two weeks.  PXD  is up the most of all the stocks covered, at 8.22%.  I intend to do another post on the Permian basin soon, and have been looking at this company in particular.  As I’ve mentioned several times before, the valuations seem really out of wack here.  The prices have been high for so long and we don't see an appropriate level of growth to justify the valuations in my view.  I have considered short selling PXD, but I think it is dangerous to short a stock that has become divorced from any sort of fundamental valuation, especially in a bull market like this one.