Tuesday Top Off

Yet another record day (well, the intraday high anyway).

But did we pass our test?  I think we did because we had awful hosing data but didn't tank the market (in fact we got a huge dip at 10 and recovered nicely).

We have more awful housing data ahead tomorrow and the dreaded Fed Beige Book but WHR indicates Durable Goods Report may not be a total disaster.  AMZN rocked the after hours with a 10% gain – which will make our spread plays very interesting tomorrow!  Will it be enough to kick-start the Nasdaq?  That remains to be seen…

We also have earnings tonight and tomorrow from: AMZN, BXP, CAKE, CAJ, CRI, LFG, PNRA, RDN, STM, SUNW, TZOO (critical to airlines) and WBSN (tonight) and APD, BUD, BHI, BDX, BOBJ, CBT, CHH, CL, COP, CEG, ECA, ENI, EXC, FFIV, FNF, FCX, FSL, GENZ, GLW, GSK, HMY, HES, HMC (good TM hint), IHP, ICO, ISE, IRBT (vint), KTO, LSI, MTH, MCO, MUR, NYB, NSC, OSTK, PEP, PHM, QCOM, QI, RTN, R, SEE, SII, TASR, BA, TEX, SWK, UAUA, UIS, UPS, GRA, WLP, WEN, XLNX, XTO, ZMH so it will be surprising if anyone even notices economic data amid all these numbers.

While we didn't get stellar performance we did get a starring role from the SOX, which gained 15 for the day, amazingly just shy of a market-leading breakout.  The Transports continue to be hopeless but declining oil prices gave us a glimmer of hope ahead of our airline earnings:

The XAL was saved today by a noon swoon in the oil patch as even a fresh round of Nigerian rebel attacks couldn't attract any more buyers following mediocre reports from BP and OXY. 

Both companies reported decreased production (and last year was after 2 hurricanes!), lower selling prices and higher costs, something none of the energy companies are going to get away from.  Nat gas revenues, however, were up 30% so we need to look at each company's product mix very closely before making our bets.  One that comes to mind right away is SU, which is a net consumer of gas and a net producer of the lowest margin crude on the planet, selling into the world's cheapest market (WTIC).

Will SU be able to justify a very high forward p/e of 17.50 on Thursday?  T Boone's largest holding is trading slightly lower than last year, when it opened at $85 but is still up substantially from it's 2005 open at $40.  We already know revenues will be substantially lower than last year (estimates are $2.3Bn vs. 3.3Bn in Q1 '06) and Q4's .76 per share (vs. Q3's $1.45 and Q2's $2.59) reminded investors why this stock is so volatile with a 25% miss.  Last year they were able to blame a light Q1 on the hurricanes but, as WFMI found out, that excuse only works once. 

SU runs a very capital intensive operation and has generated just $371M of free cash flow in the past 2 years and floated a $600M debt issue on March 21st.  Another thing that bothers me is that production went from 263Kbd in 2004 to 294Kbd in 2006 yet revenues went from $7Bn to $13.5Bn.  OK, fine so they sold the same amount of oil for considerably more money…  But why then, did SG&A go from $1.8Bn to $3.9Bn?  Does it cost more money to sell the same oil for more money or are costs just getting out of control?  What happens if the price of oil goes down?

The price of oil is already down as their 2006 average was $68 per barrel and it's already down to $60.  Even worse, they get paid in rotten American dollars and all their workers insist on being paid in more reliable loonies.  Production averaged 263Kbd last year but the company already warned production was down to 248Kbd in March (that pesky OPEC cutback).  Even with the same production, at $8 per barrel less we'd be looking at $2M per day less profits or $730M less per year and that comes directly off profit.  With a p/e of 14 (based on higher earnings) that would knock $10Bn off the market cap – about 1/3.

Using last year's high of $89, I would guess a fair price for SU to be $62, let's give them $70 assuming they say lots of good stuff about the future.  That's still $10 too low so I like the June $80 puts for $2.78 and you can buy one or two $85s as disaster protection for .60 or 1/2 the number in May $80s for $2.40 – we'll firm it up in the morning, hopefully there will be a nice run up around inventories.

Speaking of alternative energy – Lanza Tech got $3.5M in funding from Khosla Ventures to move forward with their process of producing ethanol from waste carbon monoxide.  Targeting steel mills, this bacteria-based technology may be able to produce over 1Bn barrels of oil per year while curbing green-house emissions, that's a good thing!