OIL in relation to OSX...
Although if you graph them the correlation looks much higher, I just ran daily correlation for OSX vs. 12 month crude and nat gas strips using the corr matrix function on bloomberg. Here are the results:
OSX vs 12 mos CL strip
01= .44
02= .38
03= .10
04= .46
05= .54
06= .58 (last 1 mos = .64, last 3 = .58, last 6 = .49)
01 until today = .40
OSX vs 12 mos NG strip
01= .26
02= .33
03= .37
04= .39
05= .39
06= .48 (last 1 mos = .44, last 3 = .40, last 6 = .45)
01 until today = .29
Speaking of correlation, if you graph US rig counts vs nat gas prices since '01, it would lead one to believe nat gas should actually be much higher today, closer to $10 (that is just a visual observation, not a scientific calc. using regression analysis).
I prefer focusing on the nat gas strip as it relates to equity prices. 12 mos ng strip closed at $8.14 and has bounced 17% since its low of the year of $6.94 on 9/27. High, by the way is $10.80 on 1/02/06. Why is nat gas moving up in the manner it is, given storage levels? Fundamentally, very hard for me to explain myself. Trader in me says it is as simple as more buyers than sellers, thus fundamentals don't matter. Find it hard to imagine and fund willing to place significant short bets, given we are entering winter and one very cold week could change the storage issue dramatically. That doesn't mean smaller bear bets will be placed near-term and prices are likely to come under pressure given 2 week forecast.
No doubt expenses are running rampant in the service space, but in my opinion, the major expense items are temporal issues and indicative of an industry that has significantly underspent for many years and is running at peak capacity. One cannot expect drillers to quickly bring cold stacked rigs back into market, find/train qualified labor and get parts from the likes of NOV when they just aren't there to be had without delays and not see expenses go up. Eventually these issues with subside and yet term contracts will remain. I cannot speak intelligently to management comments in 99/01, but I do like to hear most drillers say they refuse to build new rigs without the benefit of a term contract that will provide adequate returns and often has cost adjustment mechanisms.
Again from bberg, I took a look at EV/EBITDA since 1999 for following companies. Here are current multiples and low's over that timeframe:
NE = 10.14 vs 9.58 in '01
SLB = 13.5 vs 12.2 in '01
RIG = 18.65 vs 9.76 in '01
BHI = 9.86 vs 9.99 in '99
DO = 9.46 vs 10.12 in '01
NBR = 6.89 vs 8.39 in '01
HAL = 8.55 vs 4.62 in '01 (asbestos issues)
I'd like to hear the argument that either the single name or OSX/OIH fundamental valuations are significantly too high given those numbers (other than RIG perhaps). Now the equity mkt is a fwd looking animal and even if RIG says their customers are saying (as they did) that deepwater drilling projects work with current dayrates with oil down to $40, if oil did drop that far, the sector would get hit hard. Fortunately, the fwd cruve for crude is above $60 pretty much for the next 5 years. Further, I don't think share contract and reduced float can be dismissed.
Saying that because the price of nat gas or oil was X in 1999 or 2001 and OSX way Y price, thus it should be Z today, really oversimplifies things and you seem much too smart to believe that argument on its face alone. Certainly is concern over nat gas prices, imo, but 50% of OSX weighting is from RIG, BHI, NE, SLB, NOV, GSF, which at worst are generally more oil levered than nat gas levered and certainly very internationally focused thus should trade on NA nat gas alone. I also believe the service preponderance of shale plays in the US and service intensive nature of these plays is being understated.
Only trying to contribute my 2 cents, greeny and appreciate hearing all opposing views, including yours, as it only makes me sharper in my trading decisions. For the record, I am levered long using calls on service co's and nat gas e&p's (NE, CHK, GRP, NBR, HAWK, HAL) with one long term buy/hold (SWN). To be honest, the pending above normal weather scares me a bit, but I think all that money that flowed out of energy and into retail/consumer a few months ago may realize the goldilocks scenario isn't as pretty as once expected and assuming the commercial side of the economy helps offset consumer weakness (i.e. walmart nov sales), at least some of that money will flow back into the sector and help offset what will likely be lower NG prices in near-term.
regards |
