Posted by: zmanbackup | November 9, 2010

Merger Tuesday

Market Sentiment Watch: Slow trading day yesterday continued the recent non-hot out of the gate trend of starting weak and ending strong in energy. Bakken player names continue to ramp production at rates in excess of current Street thinking. Last night’s OAS release and the prior day’s NOG numbers are examples with BEXP and WLL before that. I expect similar strong guidance from KOG in coming weeks. While natural gas is probably nearer the lows than a near term high I don’t believe it is ready for a sustained rally and as such remain heavily weighted towards the oily side.   I do expect a pullback in oil at least to the low $80s on the next equity market swoon / dollar rally but am more than willing to look through the trough on the oily names, perhaps only taking profits in the trading shares in the ZLT.

Merger Watch: Chevron acquires Atlas (ATLS) for $4.3 B. This is a long life (25+ years) gassy reserves (Marcellus) acquisition. As such we should some follow through on other names in this basin and in the gassy realm as it has gotten cheaper to drill on Wall Street than in the field. More of this to come. Notably, the reserves were valued at over $4 per Mcfe on a proved alone basis, but with infrastructure and a large potential reserves number (13 Tcfe vs 1.02 Tcfe proved) CVX was clearly looking to the future and a large position in a key play. Look for RRC and UPL to see big bumps today and then for all things gassy to get smaller pops all the way from SWN and NFX who have nascent positions in the Marcellus to CHK who is the land king in the play.

Ecodata Watch:

  • NFIB small business index (last read 89),
  • Job openings (last read 3.2 mm)

In Today’s Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Crack Spread Update
  4. Stuff We Care About Today – NOG, OAS, Bakken $/Ac snapshot, EGLE, SB, GMXR, CRZO
  5. Odds & Ends

Holdings Watch:

  • ZCAT (Zman Catalyst portfolio):
    • $5,100
    • 98% Cash
    • Yesterday’s Trades:
      • None
  • ZIM (Zman Inefficient Markets portfolio)
    • $4,800
    • 0% Cash
    • Yesterday’s Trades:
      • None

Commodity Watch

Crude oil inched up another $0.21 in quiet trading to close at $87.06 yesterday. I continue to think crude is due for a near term and short lived pullback on the order of 5 to 10%. I will just cut and paste that sentence into next several days of posts. This morning crude is trading up $0.50.

  • Early Read on Oil Inventories:
    • Crude: UP 1.75 mm barrels
    • Gasoline: DOWN 1.0 mm barrels
    • Distillates: DOWN 2.1 mm barrels

Natural gas rose $0.15 to close at $4.09 yesterday. This morning gas is trading another 6 cents.

  • Early Read On Gas Storage: 28 Bcf Injection. This would take us to a record high.
  • Tropics Watch: Nada and the hurricane season is winding down.

Stuff We Care About Today

NOG Wrap

  • Good quarter, good guidance
  • So why did it trail off the early highs pre call and stay down there post call:
    • 1) it’s had a good run so a little profit taking isn’t out of the realm of normal
    • 2) While the growth rate is good, it is not as high as it has been for the last 3 quarters.
    • 3) In my view, the 30 to 35% sequential growth that we have seen of late would not be a responsible goal to set for the entirety of next year but this is probably what some onlookers would have liked to have seen.
    • 4) There is more upside than down side in the current projection of 170% growth for 2011. This 6,500 BOEpd average for 2011 is largely driven by wells already drilled that have yet to be completed. If 2011 activity is higher than what we have seen in the continually rising rig count of 2010 then there is likely upside to the target.

OAS Reports Better Than Expected Quarter With Volumes Based Beat; Acquisition and Strong Finish To 2010.


  • 3Q production came in well above guidance of 4.2 to 5.0 MBOEpd
  • Costs were were on the low end of guidance.
  • Guidance:
    • 4Q Guidance rises from a prior range of 5.5 to 6.5 MBOEpd to a new range of 6.0 to 7.3 MBOEpd. Note that 300 BOEpd of this addition comes from an acquisition detailed below
    • Cost guidance for 4Q is in line with prior
    • No 2011 yet.
  • 5 rigs running – 4 west of the Nesson, 1 east of it, up from 4 rigs total as of the 2Q call and in line with previously disclosed plans.
  • Acquisition:
    • 16,700 acres and 300 BOEpd acquired for $48 mm
    • Without the production this would still be a pretty good deal at only $2,875 / acre. Take into account the production and picking a reasonable point on a flowing barrels basis and the acquisition comes in just over $1,000 per acre which is where the likes of both KOG and NOG have recently disclosed acreage additions.
    • This results in a boost to 2010 capex of $58.5 mm or 22% to a new target of $328.5 mm. Note that the capex raise is solely based on the acquisition price + plus cash needed to drill a well there.
    • Where? In their Hebron area which is in Roosevelt County, Montana.
    • This brings OAS’ total Williston acreage to 308,700.
    • On a Market Valuation (TEV/Ac) this puts OAS at $5,800 / acre, which is the low end of the range amongst the Bakken players list (CLR, WLL, BEXP, NOG, KOG, OAS) (see next section).
    • Well highlights: none but we did note a number of nice wells in recent NOG results including one that came off the Confidential list on Monday, east of the Nesson, the Berry 5493 well, with an IP of 2,410 BOEpd on Monday.
  • Balance Sheet:
    • Still no debt
    • $270 mm in cash


Nutshell: Great quarter, based on better than expected/guided volumes at the top line and lower than expected costs. Going into the quarter I was hesitant to add an options position as I’m still getting used to management’s guidance style. My concern was that the top end of their guidance would generate a slight short fall in my model relative to Street estimates. Given that they completely bagged the Street on guidance, besting the top end of their range by 10%, I now have a better idea of what kind of guys we’re dealing with. Notably they did not provide 2011 guidance now, as is practice with many E&Ps for their 3Q numbers. I expect them to provide guidance between December and the year end call and am looking for triple digit growth at that time. I continue to hold a half sized position in the ZLT after scaling back twice, and may add an options position and/or a trading shares position to this cheapish looking Bakken player name.  OAS currently trades at 27.4x,  12.2x, and 7.4x current Street CFPS estimates for 2010, 2011 and 2012 respectively and I expect all three of the denominators here to migrate northward in the next few weeks.

Conference Call: Today, 10:30 am EST

Acreage In The Bakken: A quick, simple look at valuations:

Other Stuff

EGY Reported Strong Quarter

  • EPS of $0.22 vs $0.19 expected
  • Conference Call: Today, 11 am EST

GMXR Reports 3Q Results … Swing and A Whiff


  • 3Q came in at 4.65 Bcfe vs guidance of 4.6 Bcfe.
  • Guidance: None
  • The gas price induced deceleration continues. Currently looking to sublease a third rig and continue one of their subleases so they are moving to a 1 rig program. Frac dates continue to be difficult to obtain which along with lower activity is probably the reason for the lack of guidance.
  • Reserves:
    • up 24% since year end 2009 to 442.3 Bcfe
    • move is not based on commodity prices but on drilling and new PUD booking rules.
    • TEV / Reserves moves to a paltry (and probably-too-cheap-to-stick-around-if-the-big-caps-start-hunting-in-gasland-on-Wall-Street) $0.56 / Mcfe
    • Notably their numbers for Haynesville work to date are higher than those of their reserve engineers. They point to this as proof that they are moving in the right direction. I’d say they probably need to take a more conservative read on their well EURs until they can convince the third party engineers to go along for ride.
    • The 442 Bcfe is however signed off on by Degoyer, which is no slouching reserve firm so I view the reserves mark up in a positive (read credible) light.
  • Balance Sheet:
    • Net debt to Cap: 36%
    • Cash: $36 mm
  • Hedges:
    • Second half was about 75% hedged at $6.50
    • New hedges for 2011 and 2012. This is up from 0% hedged recently. Puts are now in place for what looks to be almost all of their production at $6.14 and $6.08. While this looks pretty good at first glance not that they’ve also sold puts that will reduce the floors substantially should prices remain weak (Below $4.22 and $4.13 in ’11 and ’12 respectively)
  • Short Interest: Largest in class at 33% short.

Nutshell: I don’t own it, not yet. I will continue to watch it fall.  Asset value is clearly there but with the drilling program screeching to a halt for now this becomes even less sexy and I’d say let the momentum guys who used own the stock capitulate. Given the low $/Mcfe for the reserves and the relatively low operating expenses here one could see a name like LINE, who has recently voiced an interest in gassy over oily plays begin to snoop around. If I were LINE I’d let them fall by another third. Chart sort of looks bottomy but I’ll leave that to JB.

Conference Call: Today, 11 am EST


EGLE reported a beat

  • The 3Q numbers:
    • Revenue of $72.8 mm vs $63 mm
    • EPS of $0.13 vs $0.08
  • Highlights:
    • Utilization 99.9%
    • Results driven by demand for minor bulks and grain shipping
  • CC: Today, 8:30 am EST


SB Reports Shortfall

  • The 3Q numbers:
    • Revenue of $40.8 mm vs $40.2 mm
    • EPS of $0.33 vs $0.39
  • CC: Today, 9:00 am EST

Odds & Ends

Analyst Watch:

  • ROSE – Wunderlich ups target from $28 to $35.
  • RAME – Upped to Outperform at Rodman


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