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Better warn those traders to break out their thermal underwear...Brrr...Now watch the OG stocks run some more.
PAIR OF STORMS, BITTER COLD HIGHLIGHT WEATHER WEEK
By AccuWeather.com News Director Steve Penstone
STATE COLLEGE, PA (AccuWeather.com) -- AccuWeather.com Winter Center meteorologists say a pair of snowstorms and bitterly cold temperatures will affect much of the nation during the week.
The first storm today brought a variety of precipitation from Florida into western and northern Virginia. By Tuesday morning, the hardest-hit areas will have been across northern Virginia into the Delmarva Peninsula and southern New Jersey, where three to six inches of snow will occur before the storm moves out to sea.
Farther south there were Tornado Watches and Warnings through late this afternoon across several counties in North Florida and Southern Georgia as the storm brings heavy rain to the Southeast.
The snow will cause some travel problems overnight and into Tuesday. Motorists can expect icy and snow-covered roads, and flight delays at the major Northeast airports are possible. Any delays at those airports could lead to an accompanying domino effect developing at other airports.
This is forecast to be a fast-moving storm, leaving the D.C. area by 3:00 AM EST, and it will be gone from New York City before the morning rush hour.
Bitterly cold weather has overwhelmed much of the country from the Rockies to the Northeast. The Sunday/Monday overnight low at Chicago's O'Hare Airport dipped to 5 above, positively balmy compared to these record lows farther west:
Moline, Ill.: -4 breaking the record of -2 set in 1886
Cedar Rapids, Iowa: -9 breaking the record of -4 set in 1898
Mobridge, S.D.: -20 breaking the record of -17 set in 1950
Aberdeen, S.D.: -25 breaking the record of -22 set in 1972
The bitter cold shows no sign of easing. Tuesday's high temperatures in the Dakotas and Montana will be in single digits. The mercury will climb into the teens across Minnesota and Wisconsin, and into the 20s through the Great Lakes states.
Winter Center meteorologists forecast the cold will play a major role as the next storm moves out of the Rockies on Tuesday night. By Wednesday night, the storm will have deposited a swath of snow and ice from the Texas Panhandle across Oklahoma, Arkansas and Missouri. By Friday, it will bring snow and ice to the Ohio and Tennessee valleys and the mid-Atlantic states.
The AccuWeather.com Winter Center meteorologists stress the late-week storm will bring snow and ice to a large area of the country from the Rockies to the mid-Atlantic states, causing widespread travel problems, especially in areas that normally do not experience snow and ice this early in the meteorological winter season.
CHK. I'm liking this large nat gas producer particularly with a long winter ahead of us. Earnings are booming with the run up in natural gas prices. Its current market cap is $10.7 billion while the estimated after tax net value of reserves discounted at 10% annually (PV10) is $7.6 billion. However that is based on a NG price of only $5.65. Each 10c increase in NG prices adds $215 million to PV10 reserves value. Next years 10K will likely show a double in current reserve values. While I don't expect the current $12-14 NG price to continue indefinitely, I think long term prices will stay well above $8.
Also note that the CEO has made numerous 100,000 share purchases on the open market over the last 6 months including at prices above current levels. In a recent conference he stated that he believes CHK is a $50 stock selling for $30.
NXG..Anyone else following this canadian copper and gold miner?
Last quarter they earned 4c/ share and had a cash flow of 10c/share. In that quarter they produced 76,000 oz of gold and 16.9 Mil lbs of copper. Their net cash cost of gold was $194/ oz.
In the coming quarter, they expect a big increase in production. 94,000 oz of gold and 24.5 mil lbs of copper. They expected their net cash cost to drop to $75/ ounce (of gold). That is based on Copper at $1.65/lb. Copper prices have been substantially above that and continue to rise. Based on $1.95 average per ounce, it looks like their net cash cost drops clear to about zero. With higher gold prices as well, I'm coming up with about 22c in positive cash flow, and 12c in earnings for the current quarter alone. Not too shabby for a $1.54 stock.
Weather and OG..The link continues: While traders put on their winter coats, OG prices continue to warm up. It should get even colder over the next few days according to Accuweather.
>>AccuWeather.com meteorologists are forecasting the turning of the calendar to December will coincide with the arrival of a blast of arctic weather across much of the country.
Senior Meteorologist John Kocet says an arctic front will produce bands of snow from Illinois to Ohio, with an inch or two falling by tonight.
The front will trigger a storm in New England that will spin into eastern Canada by Friday. That will drive a large reservoir of very cold air down across the Great Lakes and the Northeast on Friday, resulting in biting wind chill and heavy lake-effect snow into Saturday. Senior Meteorologist Gerald Mohler says bands of snow totaling 2 to 3 feet will fall in the snow belt areas south of Buffalo and north of Syracuse. According to Mohler the snow won't be as heavy to the lee of Lake Michigan, but up to a foot is forecast for northern Michigan and the U.P.<<
Million dollar question is when will Len decide to quit letting his balls freeze and turn on his gas heater? When he does, it should be time to REALLY load up on the OG stocks...full speed ahead.
LEIX, CEO in a PR yesterday said he expects earnings to be up over 20% from last year which gives them a trailing PE of under 10. Their sonar and GPS products continue to win numerous awards against much larger competition including Garmin. A secondary one year ago killed the upward price movement but cleaned up the balance sheet and gave them the funding to compete with the big boys.
DHB-Brooks can blow all of his own money if he wants to but he better not be using corporate funds to cover the tab for his daughter's $10 million party. He used the company jet to fly Aerosmith in. Apparently the SEC has opened an investigation into how much in corporate funds may have been used for it.
SVL, I owned Silverleaf back when its ticker was SVR as I recall. They sold timeshares but a much larger percentage of their customers defaulted than had been expected back in 2001. Sales people had been more than happy to write up deals on people that were not qualified (bad credit or inadequate income) to earn commissions. SVR's bankers then cracked down on further loans which eventually forced SVR to default on some senior notes as they had a huge negative cash flow.
They then tightened up on their standards and were able to survive that dark period for the company. At least that is how I remember it. It should be in Edgar filings for the company.
It amazes me how well NG stock prices have been tracking current weather temperatures on the east coast. Last week, colder weather brought a nice rise in NG stocks. Today it is much warmer there and look at how their stock prices have dropped.
Colder weather is scheduled to return on Wednesday, so if the pattern continues, tomorrow might be a good time to pick up some stocks in the group.
NXG My link to the marketwatch article did not work. I'll try it again but if that doesn't work there also is a link to it on post #29599 on Yahoo's message board for NXG.
http://www.marketwatch.com/news/story.asp?tool=1&guid={515809FE-4444-4151-A476-1 35AF3A71DC0}&siteid=bigcharts&dist=bigcharts&
NXG and canadian miners. TGB is finally showing some life with copper prices up to $2. NXG, a copper and gold miner now at $1.46 is another one I like. Last Q they had cash flow of 10c and earned 4c on sales of 75,000 oz of gold and 17.2 mil lbs of copper. This qrtr they are projecting a large increase with sales of 94,000 oz of gold and 24.5 mil lbs of copper. Their net cash cost of production is projected to drop to $75/oz vs. $137/oz last quarter. That was based on substantially lower metal prices than we have now so they are virtually guaranteed to see a substantial increase in eps.
Here's a link to a write up in marketwatch about the values in canadian miners with a focus on NXG:
http://www.marketwatch.com/news/story.asp?tool=1&guid={515809FE-4444-4151-A476-1 35AF3A71DC0}&siteid=bigcharts&dist=bigcharts&
It's gonna get cold. which should keep a fire burning under most OG stocks, particularly NG stocks like EPEX. From Accuweather:
One might have a tough time defrosting this gobbler. The door to the arctic freezer will be wide open next week allowing harsh cold to rush down out of Canada. The front will reach the Upper Midwest Monday and be all the way to the East Coast by Wednesday. The core of the arctic air will come into the Midwest, Great Lakes first, then it will make a swing toward the Atlantic States. No doubt, this will be the coldest air mass that the East has experienced so far this season. Furthermore, this may be just the initial stages of a cold weather pattern that persists across the East much of the winter. See the AccuWeather.com 90 day forecast for more details on that possibility. Story by AccuWeather.com expert senior meteorologist John Kocet.
Happy days are here again, my oil stocks are green again, happy days are here again...
(And all it took was the east coast traders having to break out their winter coats.)
Rogue,
The recent pullback in OG prices, not to mention my oil stocks may have been a blessing, since it probably reduced the urgency that government needs to jump in to take care of this problem for us. Talk about political public posturing at the Senate hearings! Yesterday, cold weather has just returned and I also see that NG prices are up today.
And for anyone who thinks $200 oil is ridiculous within 5 years, there's a guy from the article who is willing to make a $5000 bet with you:
..And if you think things are going to get better just because prices have fallen recently--think again. What is occurring is just a reprieve before other energy storms arrive. Prof. Michael Economides, who predicted $65 oil in the summer of 2004, is now predicting $100 oil within a year. By December Economides believes we will see $20 natural gas and $5 diesel fuel by next summer. Economides laments that his predictions of $100 oil no longer impress. On September 15th, in a speech at the Houston Petroleum Club, Matt Simmons talked about $200 oil by 2010. Simmons is so sure of his predictions that he’s willing to bet anyone $5,000 that he is right.,,
Good read about peak oil linked below. Btw, colder weather arrived today for much of the country. I can hear those furnaces going HHHMMMMMM.
http://www.financialsense.com/stormwatch/2005/1014.html
Make that IECE...Tracking too many stocks here plus trying to beat you guys. I do like IECE though. They've turned the corner on profitability, paid down debt from $20Mil to less than $1mil plus big insider buys earlier this year.
IEHC- I just placed an order and picked up 6500 shares. Apparently there were no other orders in. Earned 7c last qrtr vs. 2c a year ago with revs up 27%. Not bad at all for a 46c stock.
VPHM- Insiders have to wait 6 months minimum before they can sell shares after purchasing them. We are just beginning to enter that 6 month window for most of them.
This one has been one of my biggest winners of the year, maybe even numero uno (thanks msgi). I sold out about a month ago though as I am nervous that the market was focusing more on the short term which looks great with increasing demand and very little competition. As that market grows though, it attracts competition. It could be a few years before that competition arrives but VPHM is also amortizing the life of its Vanc purchase over 25 years. That seems an awfully long time, particularly with no patent rights anymore and being in the drug industry. If they lose their pricing power to competition, and/or if they need to accelerate their amortization, profits and the outlook will obviously suffer.
I could certainly be wrong, but I feel that the easy money has already been made on this one.
I agree that since AEY's preferred stock is not convertible without voting rights (unless the company defaults on the interest they are owed for 4 quarters or more) it is basically a subordinated debt there. One could say AEY is overstating their stockholder and understating their debt by $12 Million, but I don't believe it should be figured into diluted share calcs.
BTW, last year AEY also had a convertible preferred outstanding, which is gone now. That was properly figured into the diluted share calculations.
Len-windfall oil profits
I took another look at Exxon, and it took $100 Billion in Revenues to make that $10 Billion in net profits. A 10% profit margin does not seem obscene to me especially considering that OG prices were at record highs in the quarter. I agree that government incentives to increase production are important but not by still more taxes. Open up more areas for exploration, reduce red tape bogging down future projects, and the like but government should keep their greedy grubby fingers off our oil stock profits!
windfall profits tax on oil
Oil execs are now being grilled by Senators on their huge profits. There have been many calls for a "windfall profits tax". Exxon's profits are often talked about at $10Billion last Qrtr alone. What seems to be lost in all this is that for the last quarter alone, Exxon is also paying over $6Billion to the government in income taxes. It seems to me that the government is already collecting their fair share of taxes on those "windfall profits".
Even worse, has anyone ever had a problem with unauthorized trading/ withdrawals using their internet brokerage accounts. Never any problems here, but that could be very scary.
OT: I'm wondering if anyone has had any problems with their credit cards from internet usage? I've never had any problems with Visa/MC although someone has been trying to access my account with Paypal. They have put it on restricted status as a precaution.
A few years ago, I did have some of "access your credit line checks" on a Visa account stolen from my mailbox and cashed for a several thousand. Visa covered the loss. I also asked them to discontinue sending them since the police said mail-theft was an ongoing problem and I never use them anyway. They continue to arrive though. If the bank isn't worried about it and will cover the losses, then I decided not to worry about it either.
TGB- This one is looking cheap to me at 92c. Earnings are coming soon. Company estimated currentQ earnings at 8c in the last CC and copper prices have since risen another 10+%. Stock dropped sharply during last CC when the company talked of possible equity dilution to build a new refinery. Hopefully they listened to the market and will not go that route-should be able to adjust schedule and finance with cash flow and debt assuming copper prices remain robust.
While I haven't personally verified the numbers in the post below, if I can assume the numbers are legitimate it illustrates how tight the world oil supply/ demand is now and leaves me wondering how increased usage from developing countries will be covered:
Take a look at the following comparisons. It may not be valid to extrapolate these numbers relative to China and India, but some modicum of growth is inevitable.
U.S. oil consumption in 1900 – 1 barrel/per person/year
- U.S. oil consumption in 1970 – 27 barrels/per person/year
- Japan oil consumption in 1950 – 1 barrel/per person/year
- Japan oil consumption in 1970 – 17 barrels/per person/year
- South Korea oil consumption in 1965 – 1 barrel/per person/year
- South Korea oil consumption in 2005 – 17 barrels/per person/year
- China’s current consumption – 1.3 barrels/person/year
- India’s current consumption – 0.7 barrels/person/year
Even 1bpd extra demand from China and India would be 5.5mbpd.
The EIA reports 100,000 bpd of slack supply:
According to the U.S. Energy Information Administration, global oil production hit 84.5 million barrels per day in May (the latest numbers available) and demand in the first quarter averaged 84.4 million. That leaves a margin of about one-tenth of one percent."
Filling Up On Energy Bargains
Ken Kam; Marketocracy Marketscope, 10.14.05, 11:30 AM ET
"Energy demand isn’t going away, so the largest portion of your portfolio should be in energy stocks. Take my advice and fill up on some cheap energy stocks while their prices fall back."
SAN FRANCISCO, CALIF. - I never like paying too much for gas or for stocks. With gas prices well above $3 in California, I’m always looking for gas stations with the cheapest gas. It’s the same with energy stocks.
For months, I’ve been telling you that energy stocks should be a big portion of your portfolio. They are the most strategic component and are smart risk management as a hedge if the economy takes a dive from high oil prices. But if oil prices continue to rise without slowing the rest of the economy, this will be your best performing sector again.
October brings fear and opportunity. Click here for ten stocks to buy on the dip from the best portfolio managers at Marketocracy.
In May, when oil prices dropped 18% and most “experts” were declaring that the oil run was over, I told you to load up. Since then, oil prices have jumped 41%. Now, we’re seeing a similar pullback as some people take profits. But, the same supply/demand imbalance and the minuscule supply buffer problems we’ve talked about still exist. So, as prices fall, this is a great time for you to pick up some energy stocks at a good price.
Like gas stations, some energy stocks are cheaper than others. Let me tell you about three types of energy stocks I’m most excited about.
Some companies drill in the deepest oceans and deal with unstable and unsavory governments to find new oil fields. But higher oil prices are making it profitable to explore for oil much more safely--in fields that were previously considered exhausted.
It turns out there is a lot of oil left in an “exhausted” oil field. When the price of oil is less than the cost of extraction, an oil field is considered exhausted and the proven reserve for that field is set to zero. However, when the price of oil rises above the cost of extraction, magically, the oil reserve reappears on the balance sheet.
At today’s oil prices, a lot of exhausted oil fields are economic again. Oil companies, especially those with a high percentage of exhausted oil fields, have been able to increase their reserves without looking any further than their own books. Companies like Chevron (nyse: CVX - news - people ), Exxon Mobil (nyse: XOM - news - people ) and ConocoPhillips (nyse: COP - news - people ) have a lot, and their stock prices already reflect that.
Today’s oil prices are spurring a lot of activity to reopen old fields. It makes a lot of sense to drill where you know there is oil: You have a pretty good idea of what it will take to get it out of the ground, and you already have the infrastructure needed to get the oil to market.
Houston-based Grey Wolf (amex: GW - news - people ) is a contract driller, operating primarily along the Gulf Coast and into Oklahoma. Grey Wolf has already put back on line 37 of its 40 rigs that had shut down due to Rita. The stock is up 50% in the past year and trades well below its 52-week high of $8.60 hit on Sept. 30. The company’s market capitalization is $1.4 billion.
San Antonio-based Pioneer Drilling (amex: PDC - news - people ) is a contract driller, but does its business on land in Oklahoma and throughout Texas and the Rocky Mountains. Being land based allows Pioneer to benefit from higher oil prices, but buffers it from the shutdowns and service interruptions that plague drillers on marine platforms. The $705 million market-cap company is up more than 100% in the past year.
Refining profits.
For decades, the refining industry has been only marginally profitable. But late last year, when capacity utilization for the 148 active refineries in the U.S. started to push above 90%, it was easy to see that if the economy grew much at all, or if there were any outages for any reason, refining capacity would become a bottleneck and profit margins would greatly improve.
The hurricanes knocked 13 refineries offline and Wall Street is now abuzz with talk of the shortage of refining capacity. Some of our largest holdings and biggest winners this year are refining companies and they have performed exceptionally well. Valero (nyse: VLI - news - people ) recently acquired Premcor (nyse: PCO - news - people ) to become the largest refiner in North America. Since the beginning of the year, Valero is up about 135%. Shareholders of Premcor who accepted Valero stock in the merger are up 120% this year. The transaction leaves Tesoro (nyse: TSO - news - people ) as one of the few large independent oil refiners left. Tesoro is up 86% this year, but its below market P/E ratio of 14 makes it a potentially juicy acquisition candidate.
No one wants to live near a petroleum refinery.
Every time someone proposes to build a new refinery, citizens’ groups are formed to file lawsuits under federal environmental laws and state regulations to halt construction. They have been so effective that no new refineries have been built in the U.S. since 1976. Rather than try to run the regulatory gauntlet to try to build a new refinery, it’s been safer, cheaper and easier to buy an existing one. This does not result in any new capacity coming online, but every time an acquisition occurs it seems to establish a new and higher value for existing refineries.
The price gap between sweet and sour crude is widening.
A big reason why Valero has been so profitable is because it is one of the largest refiners of heavy “sour” crude. Valero decided long ago to go after this segment of the market, and it has turned out to be a brilliant strategy. Why? Because there is a widening price gap between heavy “sour” crude and light “sweet” crude. The price gap has ranged between $9 and $20 this year and is currently over $15 per barrel. Last year the price gap averaged around $11, and in 2003, it was only $7.
Refiners churn out the same end products (gasoline, heating oil, distillates, etc.) using either feedstock, but not all refiners have the equipment to process heavy sour crude. That costs a little more (it costs Valero only $1.5 to $2 more for refining sour versus sweet), but those that can are cashing in on the price difference and their stock prices reflect that.
The price gap is widening because there is a big supply/demand imbalance. The vast majority of the world’s oil reserves (75%) are sour crude. Only 25% is sweet, but most of the current oil production (40%) and most of the world’s refineries are geared to sweet. In China, where much of the growth in oil demand is generated, 80% of refining capacity is dedicated to sweet crude. When OPEC turned on 2 million barrels a day of excess production, the world’s refiners turned their noses up because it was largely sour crude.
So, with growing demand for gasoline and other refined-oil products driving the prices and profits for all refiners upward, and with companies like Valero reaping the rewards of a widening price gap between sour and sweet on the upstream side, sour refiners like Valero are going to continue their monster returns.
Energy demand isn’t going away, so the largest portion of your portfolio should be in energy stocks. Take my advice and fill up on some cheap energy stocks while their prices fall back.
Excerpted from the Oct. 2005 issue of Marketocracy Marketscope.
Send comments and questions to newsletters@forbes.com
Char, Digitech, Thanks for the PR on Char's CFO leaving. It is still not showing up on Yahoo or my online broker's newsline nor do I see anything on the RB board yet.
That seems to make them less than forthcoming with the PR CHAR released 10/4, which is 4 days after the CFO left:
The Company is not aware of any operational or managerial changes that would cause such change in the stock price, and the Company remains on track to reach its operational and financial objectives for fiscal year 2005.
I also wonder how CHAR's CEO could have been unaware of the pending sale of Nelson to Lukoil as claimed in the same PR since he also is a senior officer at Nelson.
With that, I sold my remaining shares. It was nice knowing CHAR, but needless to say I did not expect the recent turn of events.
CHAR, Digitech- Their CFO resigning is certainly (bad) news to me. How did you find that out?
EPEX- I ran some #s using the PV 10 values in their 10K.
The after tax PV10 for year end was $217 million. That is based on $6.14 nat gas for all future years, which REALLY understates the value of reserves in the real world.
Assuming an average price of $12.28, the PV 10 increases to $468 mil or $28.36/share. I also increased estimated production and development costs by 20% and tripled estimated income taxes to get that number. Even figuring $10 nat gas, the PV 10 value came in at $366 mil, which is under the current market cap.
Also note that reserves increased by 39% last year and another substantial increase is expected this year as well, so those #s will only grow larger.
Bottom line- I cringed and bought some more this morning. At near $20, this one appears too cheap and should start seeing strength as "old man winter" is coming soon.
How cold will it be this winter?
Based on post # 25348, the government is reporting that the weather should be colder than normal-
"This winter will be slightly colder than normal, based on heating degree-days for six months of October through March, the U.S. Energy Information Administration predicted Wednesday."
However from post # 25401, the National Weather Service is predicting a warmer than normal winter.
Take your pick- And I wonder what the farmer's almanac is saying.
Len, Now you have me worried about the market as Cramer is my favorite contrarian indicator. If he says BUY, then watch out below.
NFI, I wonder how much exposure they may have to the damage wreaked by the hurricanes. People whose homes are flooded or destroyed might be tempted to just walk away and let their mortgage company take it over. I'm thinking that I remember something about NFI carrying its own mortgage insurance on high percentage loans as well. If so, there would be more risk. That yield sure is juicy though.
Nat Gas: Len, I understand your point that all the bad news may be priced into NG, but I also think that a pretty good case could have also have been made that last August just before Hurricane Katrina hit that everyone knew that a MAJOR hurricane was coming and there would be widespread damage and destruction. Where the exact center would hit was a variable but the hurricane was so huge that it didn't really matter.
Now take a look at a couple of stocks followed closely by this board: ZENX and PDGE. Both were obvious beneficiaries of a major hurricane hit and yet they both barely moved until after the fact, even though we all knew the hurricane was coming. In fact, Zenx could have still been bought at less than 20c for most of the week following the hurricane. After constant media exposure about the hurricane it peaked at $1.20 and change in the following few weeks. Another stock that has doubled since the hurricane is HOM and don't forget GV which started taking off until the company issued a PR saying they may not get any hurricane related work.
My point is don't underestimate the power of the media. People near freezing in cold winter weather is what makes for popular news stories. NG stocks could get rather frothy this winter as the news media bombards us with such stories. Theres no easy way out of the energy shortage either. I also believe that the gulf shutdowns are worse than is generally believed.
NG prices: A look at NG futures over the next year shows a peak in price of $14.14 in the Jan 06 contract (vs 13.31 for nov05 futures). The price drops substantially to 10.11 in April 06 (end of winter) and then stays in that 10-11 range through the rest of the year. That is what the market is saying and I don't disagree with it although a cold winter could send prices berserk. At $10, the NG companies will be making oodles of money, at least the ones who aren't collared in at low prices.
http://futures.tradingcharts.com/marketquotes/NG.html
Skabar: CHAR, You seem to be familiar with the culture of Kazakhstan and have probably spent some time there.
What do you think the reaction of the Kazakhstan government and population is to having a Russian company come in and buying up a bunch of their natural resources? I have heard that the Russians are very sensitive to outsiders coming in and taking control of their resources. Of course, Nelson and CHAR are foreign companies already but do you think there would be more anomosity against the Russians vs. the canadians (nelson) and USA(Char) or less?
Thanks, Cliff
Coffin Spiral- Title of an interesting article in the new Forbes out today. Warns of coming inflation noting high energy prices and advises getting out of longer term bonds and into blue chips.
What I found especially interesting were comments that high energy prices generally stick around for a long time. Back in 73-74, during the oil embargo, oil prices peaked but only fell 7% in '75 and stayed in that higher range for 5 years.
Then again in 1979-80 when oil prices hit a high of $98 ( inflation adjusted to today's dollars) prices had only fallen 12% a year later.
Today prices are demand induced as it has exceeded supplies and high prices are likely to last even longer. The author also noted that USA refinery capacity has dropped 10% since the 80s while consumption has increased 33%. The last large USA refinery was built 3 decades ago. With all the red tape, and "NIMBY"itis in the USA, it will likely be years before we see any new refinery capacity.
While energy prices took a tumble today which is a good thing as prices are so high they are straining the economy ( OG stocks also took a tumble which is not a good thing for my portfolio though), I don't believe the era of high energy prices is coming to an end here. In fact, when the cold weather hits or even the threat of cold weather hits in the next few weeks, I believe OG stocks will vault right back into favored status with investors and traders.
Here's an article about the coming huge shortage of nat gas. Chemical plants are rapidly coming online but 70% of gulf offshore production is offline and it could be several months before it returns. Now add in the residential heating demand which is just starting to kick in.
Industry sees natural-gas bidding war
Associated Press
NEW YORK - The prewinter buildup of U.S. natural-gas stores has yet to take a big hit from Hurricane Katrina, but that may be about to change.
While the storm has knocked out more than 225 billion cubic feet of natural-gas output since hitting the U.S. Gulf Coast, analysts explain that the losses have been nearly offset by a loss of demand caused mainly by the shutdown of gas-intensive petrochemical plants along the Gulf Coast.
The bad news: that demand is coming back on line faster than production, and it is robust enough to weather prices that have doubled in the past two months.
"The overwhelming, vast majority (of lost demand) is due to production capacity being shut in," said Frank Mitsch, a chemical industry analyst at Fulcrum Global Partners. "It's not because gas prices are high."
November natural gas closed Tuesday at $14.224 per million British thermal units, a record high for a front month on the New York Mercantile Exchange and double the price of late July.
According to data provided by authoritative chemical industry observer CMAI Global, about 44 percent of U.S. ethylene cracking capacity was off line on Sept. 30. Those plants primarily use natural gas as a feedstock.
The loss in gas demand caused by the shutdowns would be about 4 billion cubic feet a day, or roughly 28 billion cubic feet a week, according to Kevin Swift, an economist at the American Chemistry Council. That's equal to about half of the lost Gulf output reported by the Minerals Management Service.
According to CMAI Global, over 16 percent of U.S. ethylene cracking capacity is in the process of returning.
"A lot of them are starting up in days," Mitsch said.
Meanwhile, 72 percent of U.S. Gulf of Mexico gas production remains shut down, and a substantial portion of that production will take several months to come back on line, according to the MMS.
The persistent outages - due largely to damage to gas processing facilities and production platforms - raises the disturbing possibility of a resurgence of industrial demand at a time when utilities are trying to top off storage for the winter.
The industry needs to inject an average of 63 billion cubic feet a week to reach total storage by Nov. 1 of 3.2 trillion cubic feet, an important benchmark that futures traders consider when evaluating the adequacy of winter supplies. But average injections, even without a hurricane disruption, are only in the high 50s this time of year.
If utilities want to reach a "safe" level of storage, they may need to outbid chemical companies that are now able to tolerate far higher prices. Since August, for example, U.S. ethylene prices have risen 42 percent, to 58 cents a pound.
What's more, Mitsch estimates that supplies of ethylene, which is normally transported to the Midwest via pipelines, were only able to cover five days worth of demand last week, down from a norm of about 12 days.
Analysts and economists point out that the return of the chemical plants won't necessarily lead to a worse physical shortage of gas, as consumers somewhere will eventually balk at some price.
"I don't think natural gas demand is infinitely inelastic," said Rob Moore, head of energy trading at AIG Financial Products. "It's not oxygen."
Unlike natural gas, chemical products can be imported from overseas, though transportation can be complicated. When the ratio of U.S. natural gas prices to international oil prices gets too high, then Asian and European chemical makers that rely more on petroleum feedstocks can fill the void.
"If gas flies through the moon and oil stays flat, of course a large part of the U.S. industry will become uncompetitive," said Mitsch.
researcher, For OG stocks, reserves are one of the first things I look at. I bought ARD months based on their updated numbers and strong management, even though it's PE was higher than most. SGY is one I'll look at, thanks for mentioning it. I agree with you that larger companies tend to have more conservative valuations- With that, SGY has 4X the market cap of EPEX and also considerable more exposure to those nasty hurricanes with numerous offshore rigs and platforms in the gulf.
researcher, EPEX: While their current market cap is higher than PV10 reserves by 60%, the value of those reserves is based on a $6.18 natural gas price. Compared to most other OG stocks it is relatively cheap.
Compare it to a couple of board favorites here:
FPP has a PV10 of $15 mil (adjusted for before taxes), vs a market cap of $68 mil.
BSIC has a PV10 (again adjusted before taxes) of $19 mil vs a market cap of $52 mil.
Also I don't see EPEX getting hit too hard by hurricane damage. Most (77%) are in South Texas, well out of the hard hit areas. But I would like to see a PR from the company about any damage.
EPEX- Has now lost nearly half of its gains since mid-august. Seems way oversold based on nat gas prices, the gulf situation, and the coming winter heating season. Also note that PV10 value of proven reserves is $250 million and that is based on much lower gas prices. Reinvested a bunch of my CHAR proceeds here this morning. I must say it is a good feeling to have my money invested far out of reach of those damn russian thieves.
What's the ticker symbol on that guy, Bob?