Option Investor
Commentary

Profit Taking Hurts

HAVING TROUBLE PRINTING?
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Energy stocks took a hit over the last week but it had nothing to do with the price of oil. Oil continues to wander between $62-$64 on the now current February contract so there was no technical reason for the Oil Service Index to lose nearly -6% or the OIX to lose over -4%. It was simply a case of fund managers selling the winners before year end to capture profits and offset losses in other areas. It still hurts. Last week almost every position was profitable, some extremely profitable. I had planned on selling some calls or adding a few extra puts next weekend to protect against any downdraft in January. I did not expect this bout of selling ahead of the most bullish week of the year. Typically the next 7 days is worth another +1.5% to the indexes as traders employees spend their bonuses in the stock market and the influx of retirement funds swells the coffers of funds. Hopefully last weeks dip will make those stocks look even more appealing to the after Christmas shopping crowd.

There is really nothing new to report this week with the OPEC news behind us and the markets quiet ahead of the holidays. We have a lot of strong positions and OPEC is on our side. We should forget about the energy market for the next week and spend the time with our families instead. Unfortunately I know that won't happen because I can't tear myself away from the market for more than a few hours at a time. I hope you are not as addicted as I am.

Be sure to check for changes to any positions you currently own because I added some puts and some stops. I also added a recommendation line with buy/hold comments for readers wishing to enter or add to our current positions. Note: The recommendations survive the play. For instance we were stopped out of LNG but I would personally enter it again at $26.

I received a Christmas card last year from Enercom that I saved for a future commentary. You are in luck because this is it.

The Night Before Spudding

Twas the night before spudding, when all through the land
Not a rig was available, nor a good rig hand;
The engineers' hopes were falling, they were in despair,
In hopes that a drilling rig soon would be there.

The geologists were nestled all snug in their beds,
While visions of elephants danced in their heads;
The 3-D showed a four-way closure with a bright gas cap,
"We need to drill this one, with multiple pay zones on the map."

When out in the field there arose such a clatter,
The rockhounds sprung from their workstations
to see what was the matter.
Out to the yard they flew like a flash,
Then on to the AMI they all did dash.

The moon on the breast of new fallen snow
Gave luster like a huge gas find to objects below.
When, what to their wondering eyes should appear,
But a red sleigh filled with rigs pulled by eight reindeer.

With a grizzled old driller, so lively and quick,
They new in a moment it must be St. Nick.
More rapid than shear waves, his roustabouts they came,
And he cussed and shouted, and called them by name.

Now Dasher! Now Dancer! Now Prancer and Vixen!
On Comet! On Cupid! On Donder and Blitzen!
Get up to the rooftop, these guys need a rig.
Bring the frac sand, the drill pipe, and drill bits to dig!

And then, in a twinkling, heard up on the roof
The prancing and pawing of each reindeer hoof.
As Santa moved in, and was turning around,
Down the chimney a 4000 H.P. rig with all the bells and whistles came with a bound!

Santa sprang to his sleigh, to the team gave a holler,
And quick they flew, 'cause demob time cost to many dollar.
As they heard him exclaim, heading to the next drill site,
"Happy holidays to all, and to all, keep turning to the right!"


Definitions:

Spudding - To start the well drilling process by removing rock, dirt and other sedimentary material with the drill bit.

Elephant - Slang for a large, new, untapped field.

3-D - Seismic data from closely spaced receiver and shot lines such that there are typically no significant gaps in the subsurface coverage.

Four-way closure - A formation that requires only a top seal to trap the hydrocarbons. All the sides are sealed by dense rock. Typically a four-way represents a strong prospect.

Gas cap - The gas that accumulates in the upper portions of a reservoir where the pressure, temperature and fluid characteristics are conducive to gas. The pressurized gas cap provides recovery motion to the oil below to drive it to the surface once drilled.

Multi pay zones - different geologic layers where hydrocarbons are located. Some wells have only one pay zone typically measured in hundreds of feet or less at the bottom of a multi thousand foot well. To have multiple pay zones means multiple areas in the same hole where oil might be found.

Rock hounds - Petroleum geologists

AMI - Area of Mutual Interest

Shear Waves - A type of vertical seismic profile in which the source is a shear wave source rather than a compressional wave source. Shear waves travel through the earth at about half the speed of compressional waves and respond differently to fluid-filled rock and can provide different additional information about lithology and fluid content of hydrocarbon bearing reservoirs. (lithology - the macroscopic nature of the mineral content, grain size and texture of the rock)

Roustabout - Any unskilled manual laborer on the rig site.

Frac sand - A sand with grains that are hard, evenly sized and nearly spherical in shape which is shot into the surrounding rock by the fracture explosion. Ordinary sand which is irregular in shape will not work because it clumps together easily and blocks the escape of gas into the well bore. Frac sand is mined in the Great Lakes region where it was smoothed by waves over many millennia.

Demob - De-mobilization. Mob or mobilization refers to the army of specialized workers that need to come together at a specific time to assemble all the pieces and get it working. Demob or demobilization requires another army of workers to complete, tear down and distribute the components to a new sites.

Turning to the right - The drill always turns to the right, clockwise, as all the pipes are threaded to the right. Turning left or counter clockwise would cause all the connections on thousands of feet of pipe in the hole to disconnect.


Merry Christmas to all and to all a good night!


Jim Brown


February Crude Chart - Daily

January Gas Futures Chart - Daily

 

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