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Market Sentiment Watch: Much quieter week on the economic data front. Should be a quiet week for political news as well with a delay in healthcare maneuvering. Expect a near term pick up in energyland news flow. In today’s post please find The Week That Was, and some other odds and ends.  The ZLT was up 5.2% last week (about 29% in cash) while the XOP was up 4.1% and the OIH was up 5.8%. In case you missed The Wrap you can check it out here.

Ecodata Watch:

• We get Empire State at 8:30 am EST (no forecast, last read was 19.8).
• We get the EIA monthly drilling productivity report before noon.

The Week Ahead: 

• Tuesday – Import prices, home builders’ index,
• Wednesday – Housing starts, building permits,
• Thursday – Jobless claims, Philly Fed, leading economic indicators,
• Friday – no data release scheduled.

In Today’s Post:

1. Holdings Watch
2. Commodity Watch
3. The Week That Was
4. Stuff We Care About Today
5. Odds & Ends

 

Holdings Watch:

ZLT (Zman Long Term portfolio)

• Last Week’s Trades: None
• ​The Blotter is updated.
• Cash is just under 29% of total assets.

Trades under near term consideration:

• Adds to COG.  Likely headed from 2% to to 5%.
• Plan to take JAG to 6% from current ~ 4.5% on substantial pull backs prior to the 2Q17 report.
• Any DJ Basin adds are on hold until 2Q17 reports (combined position in SRCI and XOG is under 3% of total ZLT.
• MTDR is likely to see a bump higher soon.
• Service name additions are under consideration as well.
• Considering parking 5% of cash in VNOM (currently unowned).

ZLT Positions: See primary site (when available). 

Commodity Watch

Crude oil rose 5% to close at $46.54 last week with another better than expected EIA weekly report overcoming an OPEC monthly that was more of a mixed bag. Cushing stocks are now down 10% YoY. OPEC chatter intensified around an emergency meeting set for today and about potentially including Nigeria in the group of countries with production caps. Brent closed up 5% as well while the OPEC basket lost 2%. Please see comments on the EIA Weekly and OPEC in The Week That Was below.  This morning crude is trading flat.

Natural gas rose 4% to close at $2.98 last week on an inline storage injection. The 12 month strip rose 4% as well to $3.05. Storage relative to year ago levels and the five year average tread water for the week. We expect a much smaller injection this week.   This morning gas is trading up 4 cents.

Tropics Watch: Central Atlantic disturbance with 40% chance of near term development.

Weather Watch:

Last week:  

• Cooling Degree Days (CDDs) came in at 84 vs 73 normal and 82 in the prior week.

This week’s forecast:  

• ​This week, CPC predicts CDDs will rise to 96 vs 75 normal.

The Week That Was

Stuff We Care About Today

Other Stuff

• Look for additional Catalyst List updates this week as we prep for the 2Q17 reporting season.

Odds & Ends

Analyst Watch:

• TBA in comments if we see any.

The Main sites, http://www.zmansenergybrain.com and http://www.z4research.com are functioning normally. Please go there. 

Welcome to the backupsite. We had technical difficulties last evening with our primary server. We will be posting here until further notice (which should be soon). Apologies for the bare bones post today but we lost our prepared remarks for Friday when the server dropped.  If you wish to comment on the backup site, you will need to register with the backup site (register below via the login link in the comments field).

Oil closed down 7 cents at $47.96 on Wednesday in a low volatility session after EIA posted the fairly neutral inventory reported outlined below. Later in the day oil directed rigs rose by 3 to 474 vs 555 a year ago. We expect a fairly narrow range and low volume session today with volatility picking back up next week in front of the OPEC meeting. This morning oil is trading off $0.60 early.

Natural Gas rose 4 cents to close at $3.03 after EIA reported the first withdrawal of the season. Just 2 Bcf but the consensus was calling for a positive 7 and while we may still get one more small injection this season on holiday related slack demand we have essentially peaked with the long held expectation band of 3.95 to 4.05 Tcf. We see natural gas remaining within our near term expectations band of $2.80 to $3.10 until we get a more solid handle on the tail end of the winter forecast. This morning natural gas is trading flat.

Natural Gas Inventory Review and Oil Inventory Review

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Market Sentiment Watch: No cut by OPEC, analysts, reporters, traders disappointed. Please see our notes from the conference below as there is going to be a lot of press spin on this and not everything was negative.  In today’s post please find the natural gas and inventory reviews and notes and thoughts from the OPEC meeting. It’s going to be an ugly open and we plan on doing some shopping at lower E&P prices but likely not until next week. In our view, we’d rather let oil find a new comfortable trading range before attempting to catch falling knives in good or riskier names. It will be interesting to see if the gassy names see any interest now that OPEC is out of the way (lower oil prices are good for them in some ways). Likely on this shortened session we don’t see a lot of discriminating among E&Ps however. All eyes will be on crude, looking for the reversal of the now 4 month plus long trade against crude to occur.

Ecodata Watch: 

• No economic data release

In Today’s Post:

1. Holdings Watch
2. Commodity Watch
3. Oil Inventory Preview
4. Natural Gas Inventory Preview
5. Stuff We Care About Today – OPEC
6. Odds & Ends

Please click the link right below this toHoldings Watch:

ZMT (Zman Medium Term portfolio):

Yesterday’s Trades: None

ZLT (Zman Long Term portfolio)

Yesterday’s Trades: None

The Blotter is updated.

Commodity Watch:

Crude oil fell $0.40 to close at $73.69 on Wednesday but is trading off $4.50 this morning at $69 after OPEC’s decision not to cut it’s 30 MM bopd official quota (after falling to as low as $67.75 overnight). This is is the expected test of $70 on OPEC inaction on the quota front. Everyone seemed to expect no cut but actually hearing no cut and an oft repeated comment that OPEc will produce 30 MM/d next year is prompting a break down in Brent and WTI and global prices in general to fresh four year lows. Would also not be surprised to see a near term key reversal day (ugly red open, green close) as the move is really just extending prices lower after a rapid and significant down draft in the face of no meaningful fundamental shift since summer. Please see our comments below in the Stuff section.

Oil Inventory Review

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Natural gas closed off five cents at $4.36 on Wednesday as it yoyo’d about before and after the record withdrawal announced a day early due to the holiday. The massive 162 Bcf withdrawal provides a better than expected early salvo in the withdrawal season, something traders will like to see as it provides cover relative to ongoing new record high lower 48 production levels.  This morning gas is trading a dime plus.

Natural Gas Storage Review

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Stuff We Care About Today  

OPEC notes from yesterday’s meeting – augmented where noted.

OPEC Watch: The Opening Address with ZComments as noted in ():

• OPEC said they spoke of improving stability at the last meeting 5 months ago,
• Economic recovery has continued to improve since then
• OPEC sees 3.2% growth in 2014 (global GDP), sees 3.6% growth in 2015.  This is verbatim from the November OPEC monthly,
• OPEC sees 1.1 mm bopd growth to 92.3 mm bopd in 2015 (also unchanged from recent guidance)
• Demand growth mostly from non-OECD countries (this has been the case for quite some time now with no expectation of significant growth from US and Europe),
• OPEC sees non OPEC supply up 1.4 mm bopd in 2015, mostly from North America, some Brazil,
• Oil pricing has changed in last few months, after having been stable for 3.5 years (no kidding)
• The fall in prices may not be completely attributed to oil market fundamentals; stronger dollar and economic uncertainty and speculators have played a roll
• If negative price path continues expansion plans may be put at risk,
• Pricing action suggests market is searching for stability and balance.
• Discussions will focus on balance, looking for the good for consumers and producers alike (boiler plate comment)
• OPEC encouraged by talks with non OPEC producers and agencies like IEA (they later said it’s not about cooperation).

OPEC Watch 2: Closing Address

• Stable oil prices that didn’t affect growth projects and were good for producers is what is being sought (key message, don’t panic)
• Maintaining the 30 mm bopd output level (same level they have had since December 2011)
• Will continue to closely monitor developments in supply and demand (at the current Strip, demand should rise above current estimates)
• Next meeting June 5, 2015 (as expected, not projecting any sense of urgency on prices)

OPEC Watch 3: Post meeting Q&A

• Q) Reuters – are your members pleased with the agreement and do you see members complying?
• A) Ministers are happy.  I’m sure members will comply. Debated prices and fundamentals for 2 to 3 hours. Result of that debate was to say at 30 mm bopd
• Q) Are you happy to let prices drift lower to protect share, is that the signal you are sending?
• A) We don’t want to panic, we’re not sending a signal, prices have been good for a long time, decline of the price does not reflect the fundamentals, again not sending a signal, we have no target price, just a fair price. (I think they are putting a little doubt into NAM capex plans but also not seeing as big a gap next year now as their “Call on OPEC” numbers indicate).
• Q) cooperation with non-OPEC and Russia in particular?
• A) we compare our numbers with them but have no cooperation. (that answer will be seen as a disappointment, especially as it pertains to Russia
• Q) Asked to talk about production specifically in the first half of 2015.
• A) “We cannot produce 30 mm bopd” – this is the cut.  ZComment: Quota cut no, coming production cut yes. They act to balance markets and will do so, as usual in light of seasonal concerns. 

OPEC Watch 4:  More ZComments.

• This is not the end of the world.  We would have preferred to see a quota reduction to 29.2 to 29.5 mm bopd (to get close to the “Call” on OPEC, but as noted in the post, individual member country allocations are no longer in play, not since 2006, and as noted a number of times, Saudi sees no reason to be the offset valve at the quota level to non-OPEC supply growth.
• However, a small change would have been doable as evidenced by comments from some players pre meeting. I do not buy the argument being made by some that OPEC has lost control of its members or that it has lost power in the market place. They are a third of the market.
• We continue to see OPEC as managing production through the seasonal demand dip of 1H15 to ensure balance.  OPEC is not dumb. They have a good grasp of this (and graph of it).
• While a 0.5 mm bopd cut may have soothed markets it would not have been enough, by itself, to balance markets in 2015.  A bigger cut however might have signaled panic, as was the case in how the market took the 4.8 mm bopd in 4Q08.
• We see more upside than downside from a mid $70’s price level, let alone the sub $70 level WTI traded to just after the meeting. Said that before the meeting and still see that.
• This is not my first rodeo. Recall we had prices trailing lower into YE2014 in a post here at the end of YE2013. Please take a look at it. We’ll have a version out for 2015 close to the end of the year. We do expect lower prices to increase demand. We do expect lower prices to prompt lower spending in the U.S. and to reduce U.S. production growth (see note above in the oil production section of the Oil Inventory slide show – it still will grow but less than expected in estimates currently describing the Call on OPEC).
• When items from the preceding bullet point become plain we expect a modest rebound in prices, the magnitude of which will in large part depend on the moves by US E&P to trim spending/rigs and by the improved global economy on lower energy prices.
• Our near term sense is that 4Q will end in the $70’s not the $60s but near term price projections are not generally our thing. We see 2015 pricing as likely rising as the year progresses as the market takes into account OPEC production cuts that will occur in 1H15.

Odds & Ends

Analyst Watch:

No stock specific comments that we see.

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Tuesday’s Post:

Market Sentiment Watch: Expect low E&P news flow but rising OPEC chatter between now and month end. On the oil watch side of things, prices continue to be suppressed in front of events at the end of the month. Not surprisingly, in E&P, buyers remain on strike. In today’s post please find a couple of cheat sheet updates with notes as we play catchup post quarter.

Ecodata Watch:

• We get PPI at 8:30 am EST (F = -0.1%, last read -0.1%),
• We get the Home builders’ index at 10 am EST (F = 55, last read was 54).

In Today’s Post:

1. Holdings Watch
2. Commodity Watch
3. Stuff We Care About Today – Cheat Sheet Updates (MRD, MTDR)
4. Odds & Ends

Click the link directly below this to …

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Holdings Watch:

ZMT (Zman Medium Term portfolio):

Yesterday’s Trades: None

ZLT (Zman Long Term portfolio)

Yesterday’s Trades: None

​The Blotter is updated.

Commodity Watch

Crude oil eased $0.18 to close at $75.64 yesterday, moving lower with the contraction in Japanese GPD and the commensurate move higher in the dollar index and with a lack of further meaningful commentary out of OPEC players.  This morning crude is trading flat.

• From Russia With Love Watch: Russian oil tsar to attend OPEC meeting. IF other people get to say “this time it’s different” then maybe this time it will be for Russia, who gets the invite to the semi annual meeting but always gives OPEC the high hat as far as actually agreeing to help out at the end fo the day. See story here.

• Early Read on Oil Inventories:

• • Crude: Down 0.4 mm barrels
  • Gasoline: Up 0.2 mm barrels
  • Distillates: Down 2.0 mm barrels

Natural gas jumped $0.32 (8%) to close at $4.34 yesterday on the colder than forecast weather last week and the much colder than normal forecast for this week. The front month now looks like this but we would expect gains to prove fleeting (with a warming spell forecast for the week end. We’ll prolonged cold to sustain prices north of $4 given current record high production volumes.  This morning gas is trading down 4 pennies.

Stuff We Care About Today

MRD Cheat Sheet Update

• One of the few names we track and hold that is not only not planning to reduce capex in 2015 but is also a) looking to significantly increase it (by ~ 30% on the mid given the 2015 preliminary budget AND b) still not outspending cash flow.  We would label this combination rare for 2015.
• They remain gassy at 78% of volumes in 3Q14 but have hedges covering about 88% of expected 2015 natural gas production at about $4,
• Much of the current program is proving up acreage outside of their original 3P boundary suggesting a large increase in reserves with the report next April which will help make the name look increasingly cheap in the land of I’m-gassy-and-I-have-monster-wells-in-three-and-maybe-four-stacked-pays-and-I’m-not outstpending-my-cash-flow-and-I-have-excess-liquidity players
• Valuation isn’t wildly compelling here on a TEV / forward EBITDA basis but as with all of gassy names, valuation under depressed pricing scenarios keys more off of the large potential reserve base that is currently only partially delineated.
• We continue to own a half Core position in the ZLT and plan to bolster it opportunistically over time.

MTDR Cheat Sheet Update and Comments

• If oil stays at $80 in 2015, expect them to hold spending flat or just under 2014 levels at $570
• On a flat budget they see growth in 2015 of 50%,
• Balance sheet remains in very good shape at 0.9x debt to 2014E EBITDA,
• Production mix is 57% and should edge slightly higher in 2015; hedges cover only about a quarter of expected oil production next year with floors in the low $80s so that like,
• At $80 oil in 2015, we see debt metrics remaining solid as project EBITDA of roughly $330 mm leading to an entirely manageable level outspend next year (would take debt to roughly 1.5x debt/EBITDA in 2015),
• Value: Never more BOE’s backing up each share and rarely cheap on a flowing BOE basis.
• MTDR remains a Core Position in the ZLT.

Other Stuff

• Look for the Bakken Players update slide show later this week

Odds & Ends

Analyst Watch:

• TBA in comments.

Market Sentiment Watch: The energy groups are taking a pause pre 2Q14 reporting season, continuing the move that began two weeks ago as momentum continues to fade. Gassier names are seeing the most profit taking as natural gas fades due to a slow start to summer and record production levels. In today’s post please find a pre 2Q14 look at OAS and some other odds and ends.  In coming days look for more of pre quarter updates on names we care about.

Ecodata Watch:

• The NFIB small business index came in at 95 vs last month’s read of 96.6,
• We get Job Openings at 10 am EST (no forecast, last read was 4.5 mm),
• We get Consumer Credit at 3 pm EST (no forecast, last read was $27 B).

In Today’s Post:

1. Holdings Watch
2. Commodity Watch
3. Stuff We Care About Today – OAS
4. Odds & Ends

Click the link directly below this to …

break

Holdings Watch:

ZMT (Zman Medium Term portfolio):

Yesterday’s Trades: None

ZLT (Zman Long Term portfolio)

Yesterday’s Trades: None

​The Blotter is updated.

Commodity Watch

Crude oil eased $0.53 to close at $103.53 yesterday, in a quiet, low volume session that added to a week of steady declines. This morning crude is trading flat.

• Libya Watch:  Reuters reports Libyan production is off the recent sub 200 MBopd lows, at 360 MBopd but that production from key fields remain offline.
• Early Read on Oil Inventories:

• • Crude: Down 1.95 mm barrels,
  • Gasoline: Down 0.8 mm barrels,
  • Distillates: Up 0.9 mm barrels.

Natural gas fell $0.18 (-4.1%) to close at $4.23 yesterday after breaking recent trading range support. energy headlines blamed a cooler forecast in some regions.  The front month now looks like this.  Our sense is that without early heat and with recent gains in hand some non-commercial longs (speculators) continue to lock in increasingly small profits. We have not seen a big jump in shorts but the summer looks more iffy now and the rapid erosion of the YoY and 5 year deficits and the move to new highs for production is obviously wearing on trader’s bullish thinking here. Our sense also is that downside will be limited and that lower pricing will help on the electricity generation share front vs coal.   This morning gas is trading off slightly.

Stuff We Care About Today

OAS Quick Update

• Name continues to perform as expected in 2014 after taking a brief, weather related pause, like many of its Bakken peers, now moving up in the expected “Bakken follows Permians” higher move,
• We see volumes as being on track for a return to sequential growth this quarter as completions play catch-up to drilling and with 16 rigs running and better weather we are looking for a substantial move higher here (street is just above the mid point of quarterly guidance)

​As previously noted, the name is a bit less catalyst driven than many of their peers and they’ve never been the types to press released lots of detailed well results and while that’s not about to change some items of consequence to watch for in the coming quarter include:

• Slickwater completion longer term results and additional lower bench TFS testing will likely be the buzz of the 2Q14 call.  Look for results form the White Unit in their Indian Hills area (northern McKenzie County) that combines both the new completion methods and tighter spacing from the middle Bakken down through the TFS benches 1, 2 and 3 with the 2Q14 call.  Also look for new area tests of slickwater completions with 2Q (some of these are in areas that have been lower EUR for them so it will be interesting to see if they achieve the same kind of uplift as they’ve achieved in the core (up 25+% first 90 days)). This may lead them to up the percentage of acreage where they see economic benefit from slickwater completions, now at 20% of total acreage.
• Additional catalysts are likely to come from increased frac size testing in the deeper core,
• Finally, with the better weather and move to multipad per DSU development we should get confirmation of a further slide in average CWC (although this will increasing be offset by the increasing number of slickwater wells in the mix).

The balance sheet remains strong:

• With debt to TTM EBITDA at 2.7x and liquidity of close to $1.5 B with only ​modest outspend expected this year (much smaller than in past years) and they should arrive at cash flow break even late in 2014.
• There is no need for an equity deal at this time or any time soon barring another significant Williston Basin acquisition (and we really don’t see them leaving the Basin in the near or medium term unless they find a really good deal),

Implied EBITDA per BOE for the quarter using Street estimates is $62.42 which based upon oil prices during the quarter and their hedges and their growth would appear light to us, implying that a meet on oil volumes (pretty likely) will result in a beat for the quarter at the EBITDA line. Not a big to deal us as we don’t invest for quarters but the positive spin from the numbers should be supportive given the run in the run in the shares.​

We’re not looking for increased guidance for 2014 with the 2Q release, either for volumes (expected up 42% (mid point of guidance and exact Consensus at the moment) nor for capex ($1.4 B budget should be intact).

OAS generally reports 2Q results in early August. Typically OAS has not pre-released 2Q volumes.

Valuation

• Rarely cheaper on a TEV / flowing BOE basis at ~ $149,000.
• On a TEV to EBITDA basis they are trading at just under 6x the 2015 estimate which is pretty middle of the range for them (see historic TEV chart in cheat sheet below) and not excessive in our view given the size of the location inventory (17 years even with the current 16 rig program), strong balance sheet, steady approach to growth with decreasing risk and approach cash flow neutral status.

We continue to hold OAS a top 3 position in the ZLT (about 8.5% of the greater ZLT).

 

Other Stuff

 

ECR – Just watching ECR continue to fail lower post IPO.  See our initial too-expensive-for-my-taste piece on it here.

Look for an E&P IPO review soon.

SSN Operations Update:

• Nice monthly sequential increase in production with June moving to 694 BOEpd (86% oil).  Production was 273 BOEpd (68% oil) in January so SSN is making progress on the back of their non-operated effort at North Stockyard,
• They noted their Blackdog well has produced 81,000 bo in 4 months (average 675 Bopd) and is well above their internal gross curve of 52,250 bo (for 4 months) and the curve Ryder uses for their wells at 33,900 bo.  My thought is one well does not a population make,
• 5 more drilled but not yet completed wells are in the queue,
• 8 additional TFS wells are in process,
• Over in the Rainbow Prospect area, CLR has spud the first well.
• Nutshell:  Slowly improving, best in terms of production we’ve seen out of them but no real cause for celebration given the increasingly stretched nature of the balance sheet. No plans to add additional shares and we’ll likely punt into significant strength here as it’s more of a long term distraction than something we want to hold for another 3 years.  We’ll likely see how Rainbow looks and see the outcome of the Permo-Penn test in Goshen WY looks before finally taking leave of the name.

Odds & Ends

Analyst Watch:

• MRD – Barclays initiates at Overweight with a $33 target,
• MRD – Citi starts with Buy and $30 target,
• MRD – Wells starts with Outperform,
• MRD – RBC starts with Outperform and $28 target,
• MRD – Stifel starts at Buy,
• MRD – B of A starts at Buy with $32 target,
• MRD – Raymond James starts at Strong Buy,
• MRD – Howard Weil starts at $33,
• See our original MRD piece here
• BCEI – SunTrust ups target by $12 to $74, stays Buy,
• SYRG – SunTrust ups target by $2 to $15, stays Buy,
• PDCE – SunTrust cuts target by $2 to $63, stays Neutral,
• REXX – KLR cuts target by $2 to $20, stays Accumulate,
• RRC – KLR raises to Hold from Reduce, ups target by a buck to $86