Oil Inventory Plus HK Knocks It Out Of The Park

Bernanke Watch:Ben, Ben, Ben. Damned if you do nothing. Damned if you …do nothing. What does this guy do? “Sources” say the Fed is “organizing liquidity behind the scenes through channels”. From their statement yesterday you’d think a credit crunch was pretty far down the ladder of priorities: inflation, looking attentive on camera, speaking in a way that even you don’t know what you mean, what to have for lunch etc… The market hated it until it loved it.

Gulf Gas Pileup Watch: Three gas pipelines destroyed by an explosion the other day will likely be out of service for another 2 to 3 weeks. The three normally carry a total of 0.6 Bcfgpd in from offshore Louisiana.

EIA Watch #1. Rising Demand For Crude. EIA has revised it’s fourth quarter global demand estimate upwards by 100,000 bopd to 87.4 mm bopd. U.S. demand accounted for 40,000 bopd of the hike. Bear in mind that this is the agency that overestimated demand by 10.5 million barrels (340,000 bopd) when the monthly numbers were tallied against their weekly estimates in the month of May alone.

EIA Watch #2. OPEC Production Continues To Ramp. EIA was busy with the estimates yesterday and concluded that OPEC shipped 30.370 million bopd in July versus 30.01 million bopd in June. For those of you keeping score that’s 360,000 bopd that Opec just added which sort of takes the teeth out of EIA Watch #1. Especially since even the EIA expects OPEC to increase production from current levels in the fourth quarter.

Stocks We Haven’t Forgotten About Watch:

• (OII) - Holy Smokes. I’m up 650% on my remaining half position of August 60s bought 7/18. The stock is up 14% since we mentioned it as one of our favorite plays on MN1.com last Wednesday.

• (CRK) - beat and delivered a 9% gain yesterday. Results were solid and the stock is exceedingly cheap even after yesterday’s gains. I sat this one out and boy do I regret it. I think the stock will continue to appreciate towards $30 (from whence it recently came) over the next week or two with the caveats that the broad market behaves itself and natural gas holds $6 which I view as more and more likely given this extended period of heat.

• (BBG) - beat and beat me over the head. Betting against Bill Barret was my one and only significant miss this earnings season. Looking for a way out on the small speculative position I took two days ago. After listening to the call I realized I got caught a little flat footed on my due diligence here. Note to self: do not bet against good companies / management teams through earnings unless the stock has run spectacularly into earnings and is severely over-valued (and then only maybe!)

• (PTR) - Mainland China listing coming soon. Watching for an entry point. Largely depends on oil prices and I think they still have room to come in a bit, say to the upper $60s but then a bounce is probably in the cards.

• (HAL), (CHK), (NFX), (SWN) - the solid earnings and sold off with everything else group in which Zman has fairly good sized positions. I’m in August and September calls here and while I’m comfortable with the positions the broad market’s ability to whack these stocks has been frustrating. (HAL) in particular seems to be re-igniting the fire under their buyback. (NFX) I expect to retake $50 in short order but I’ll be adding to September or longer dated positions here while opportunistically starting to weedle out of Augusts this week.

• (EOG) - still in the what do people think was wrong with that quarter or the raised guidance camp. To enlighten me leave a note in comments. I’ll be looking at rolling Augusts calls to September this week.

Earnings Watch:

• (HK) Nice Beat. Major operational quarter. Kicked butt with the drill bit.
  • Reported $0.17 versus $0.15E;
  • More importantly reported $0.86 CFPS which is pretty massive for 1 quarter on a $15 stock if you think about it given the their high production growth rate and low cost structure.
  • Revenue $234mm actual vs $228 expected;
  • Production: 324 Mmcfepd (middle of guidance) which is up 151% from a year ago.
  • 3Q production guidance: 322 to 332 Mmcfepd.
  • LOE at $0.59 per Mce is below mid point of previous guidance.
  • Cost guidance remains low and unaltered from last quarter except for per unit G&A which is expected to fall.
  • Operations: 98 out of 100 wells drilled during the quarter successful. 19 rigs running now.
    • Mid-continent region saw 74 of 75 wells successful, seven were Fayetteville Shale, four of those were company operated with nice IPs of 3 mm/d.
    • Gulf Coast 17 of 18 wells successful (Elm Grove and Terryville in La).
    • Permian: 7 for 7.
  • Acquisition: bought a private company in the last week for undisclosed $ with properties in Arkansas, Indiana, and Texas. Adds 32,000 acres to their position in the Fayetteville and gives them a good start in the New Albany. This is in addition to the 32,500 acres acquired in the Fayetteville announced in June (now 80,000 net acres there)
• Fayetteville Shale: Plan 50 operated wells for 2H07 and will participate in another 40 during that time. This is a significant acceleration of activity since the last report. Two wells had multiple simultaneous stimulations (probably by Multifrac) and came in with IPs of 3.5 and 3.8 Mcfgpd. I know this is a small number of wells and the Fayetteville is anything but homogeneous but these are some sweet rates. Ask (SWN) whose last 10 wells averaged IPs of 2.6 Mmcfgpd. They have three rigs running now and expect to be at eight rigs by mid 2008. Wow.

• Louisiana: Terryville Field. Downspacing a portion of the field to 20 acres. They didn’t quantify how much of the field they could expect to downspace but said it could add substantially to the 550 locations they have on 40s. Don’t expect to double here but it should be a nice add to inventories. Also, completing one Gray sand well after another came in at 6.1 mm/d (which is a little above the old average as I recall it closer to 5). These are $2.5 million wells which have typical initial production of 2.5 mmcfepd and an additional $600K gets you deeper to the Gray. Nice. They’ve grown this area from nothing in 2004 to an expected 40,000 Mcfepd in 2007.

• Louisiana: Elm Grove: operated wells IPs of 2 mm/d with program running like clockwork. Second horizontal test came in at 4 mm/d; plan four more by year end. 20 acre infills showing strong results with average IP of 1.5 mm/d.

• Lion Field, Goliad County, Texas. Two big wells added during the quarter.

• Along the Gulf Coast - they drilled several deeper tests (some with (NFX)) and have encountered quite a bit of pay. More later on this druing the conference call.

• Nutshell: Great quarter. Conference Call: 10 est.

• (KWK). Nice beat. Reported $0.38 vs $0.31 expected. Revenues $136 vs 124 expected. Production of 208 MMcfepd is up 11% sequentially and 27% YoY. Looks like an increase in the planned well count for the Barnett. Looking over the short PR and will add details in comments. My earnings calendar left this one off. Damn. Conference call: 11:00 est.

• (FTO) $1.64E ; 1.6B est. Will address in comments.

Crude Oil Report Expectations: Imports have rarely been more key for gasoline prices. Imports dipped last week after hitting record levels in the prior week. If we see a return to 1.5 mm bpd or greater RBOB is bound to sell off mightily.

• Crude: down 2.7 million barrels. I wouldn’t be surprised to see this come in as smaller draw after last week’s super-sized number. These have a way of gravitating towards the mean over time and last week’s was pretty suspect. Of course, it all depends on imports.

• Gasoline: up 900,000 barrels (note that this would put us back into the bottom end of the range of historic storage levels and that usually this is the time of year gasoline stocks are declining). Production should be a little higher than last while demand should be leveling off. Holding imports flat would get you a slightly larger build than the expected one but anything close to a million barrel build will should put supply fears here to rest.

• Distillates: up 1.8 million barrels. In aggregate distillate stocks are above the mid point of the normal range for this time of year and we’re building stocks at least as fast as usual as can be seen in the following graph. Perhaps this fact has been the impetus for a retreat in heating oil prices.

• Refinery utilization: up 0.1%. As always the number will be trotted out as if it has some importance. That being said, a retreat is possible given a handful of closings and reopenings last week that net net could go slightly in either direction. Any dip will be met with “Ah-HAAAA’s” from the “perma bull oil should be at $105″ section of the analytical peanut gallery. Even if production rises. Bear in mind that 3 out 4 guys that will give their honest opinion on CNBC regarding oil are long right now.

Crack Spreads: Auuugah, Auuugah, Dive! Dive! Well, you know my thoughts…

That last chart is new and is pretty interesting in light of the fact that 3Q07 vs 3Q06 estimates for the independent refiners are up across the board. In some of these cases that’s obviously justifiable like (TSO) where they’ve acquired capacity. For the little guys, where nothing much changed (save (WNR) who merged with (GI)), the YoY higher expectations are more likely the result of analysts who have yet to reverse their earlier enthusiasm for cracks which had little chance of maintaining 2Q07s margin momentum.

Note that estimates for (VLO), which are revised on a much more frequent basis, as analysts mark their estimates to the crack market, are already called slightly lower for both 3Q and 4Q relative to year ago levels. As it becomes clear that not only was all of the buck for this year’s bang front end loaded but also that the back half will actually be down relative to year ago levels I think the smaller, higher multiple names will come under further pressure.

An illustration and then I’ll shut up about it.

Odds & Ends

Analyst Watch: Nada.

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