Holdings Watch: July performance was horrible. No two ways about it and I have several August positions that are in sad shape at this time although I’m expecting rebounds in E&P and Oil Service in short order.
Closed Positions for the Week: Didn’t take a lot off the table but did add some small positions going into earnings.
- HK August $30 Calls, for $5, up 43%.
On To the Wrap:
It was the best of times, It was the worst of times.
The stories coming out of our most frequently trafficked names could not be better.
On the E&P side the strong just get stronger… Finding and development costs continue to fall for the resource players, guidance has largely been up quarter to date, and well results in the Bakken and Haynesville, the two oh so hot until July plays, continues to auger for better than expected ultimate recoveries and a future string of upped guidance. Double digit production growth runs rampant in an industry where flat to up 5% once ruled….
… And yet, the E&P stocks have taken a shellacking, hedge or unhedged, high growth or low growth, leveraged or unleveraged, high reserve life or life on the tread mill that is the decline rate of the Gulf of Mexico shelf, leading edge horizontal shale player to rank wildcatter…the pain has been felt across the spectrum.
On the Oil Service side, the stories are of higher utilization and pricing power. Strength in the U.S. and international markets. Capital spending for both Majors and E&Ps is up with many players raising budget multiple times already in 2008. And again, the names, which are by no means expensive have come off in the extreme during the last four weeks.
My sense is that both commodities are testing near term bottoms…
- The geopolitical calendar is about to heat up again with Iran.
- Demand for gasoline is likely to stay loftier than the worst predictions as sub $4 gas allows drivers to really fill up for the first time in months and brag to each other about how little they just paid (there’s still time to take that Summer trip!)
- On the natural gas side, last week was the hottest week of the year so far and its cooling degree day tally will likely be dwarfed by the one for the coming week (116 degrees forecast for Dallas next week).
- Fears of a natural gas glut next year, while not yet put to bed, are beginning to abate as long standing pillars of growth like the Barnett are seen topping out and new sources are likely to only slowly contribute to future production growth, some of which will eventually be consumed by new sources of demand (see the discussions in Friday’s comments section on CNG) . And then you’ve got the tropics which are literally heating up.
…but I’m not looking for a V-shaped bottom in either Crude of Natural. An end to the rapid commodity price declines and a period of digestion, of consolidative, sideways trading, is in order. And it is during this period, over the next 3 to 4 weeks, that I think the Street grows a spine and really backs some of the beaten down names. This is when the stories and when having a long term thesis really pays off.
