ExxonMobil will soon be "cookin' with natural gas" after this week's takeover of XTO Energy.
For a mere $3o billion in ExxonMobil stock and assumption of $10 billion in XTO Energy debt, Exxon is now (pending approval of shareholders and regulatory clearance) the leader in developing cleaner fuel technologies in the United States via natural gas. The pay off will likely be realized in a short term and long term scenario parallel to likely changes in fuel stock dynamics.
The immediate benefit to Exxon is access to recent natural gas hydraulic fracturing drilling technology. XTO Energy has had a steady growth rate of 25% per year for the past several years due to its more efficient drilling and storage techniques that has enabled drilling in shale formations that were previously cost prohibitive. Also, Exxon natural gas inventory stocks receive a nice domestic boost. And, it is only paying $2.96 per thousand cubic feet for XTO's proven reserves of 45 trillion cubic feet of gas.
Longer term, the acquisition of XTO is a major domestic piece of the worldwide nat gas purchases Exxon has been accumulating as it positions itself for an anticipated shift in natural gas as a bridge fuel to eventual non-carbon based fuels.
Not too long ago natural gas was burned off at oil field production operations as a waste product due to its past low market price. The future value of natty gas will be much different, especially if current legislation passes requiring nat gas for government fleet vehicles. Exxon is now well positioned to someday even fuel potential future compressed natural gas vehicles.
Friday, December 18, 2009
Saturday, December 12, 2009
Improving Hedge Strategy Modeling
Energy product producers and sellers are well aware of the cyclical pricing nature of their respective products. The difficulty is in accommodating for outside economic influences that may exaggerate cyclical pricing volatility into hedge analysis modeling. Get the macro economic direction correct and modeling formulas will provide precision timing for enabling profitable hedging strategies.
The foundation for successful commodity energy hedge modeling generally consists of fundamental inputs of supply stocks relative to current and future demand. The future demand component will be more accurately produced by incorporating energy options greeks as a directional compass on market sentiment on macro economic conditions.
Rising put options premium after the underlying futures has regressed from technical resistance, is a good indication to delay locking in long term pricing. However, this is an excellent indicator to sell calls and hedge a long position.
Conversely, rising call options premium after the underlying futures has held support and begun to trend slope positive, is an excellent indicator to lock in fixed pricing to establish a long position on the underlying futures commodity.
The element of risk can never be eliminated. Long Term Capital found this out the hard way when the Black Scholes model they relied upon failed to accommodate tail risk. Having the proper modeling inputs will however, increase the probability of accurately timing a hedging strategy.
The foundation for successful commodity energy hedge modeling generally consists of fundamental inputs of supply stocks relative to current and future demand. The future demand component will be more accurately produced by incorporating energy options greeks as a directional compass on market sentiment on macro economic conditions.
Rising put options premium after the underlying futures has regressed from technical resistance, is a good indication to delay locking in long term pricing. However, this is an excellent indicator to sell calls and hedge a long position.
Conversely, rising call options premium after the underlying futures has held support and begun to trend slope positive, is an excellent indicator to lock in fixed pricing to establish a long position on the underlying futures commodity.
The element of risk can never be eliminated. Long Term Capital found this out the hard way when the Black Scholes model they relied upon failed to accommodate tail risk. Having the proper modeling inputs will however, increase the probability of accurately timing a hedging strategy.
Saturday, December 5, 2009
Will the Energy Complex Be the Next Commodities Group to Unwind?
The US dollar vs. the euro broke $1.49 up channel support Friday that traces back to the euro's steady rise beginning in March of 2009. This uptrend channel also coincides with the pricing pattern of crude, gas and diesel. Does this break in the currency pair signal energy is about to reverse from its uptrend channel?
Should the US dollar continue gaining strength the energy complex would shift to pricing primarily on the fundamentals. With OPEC oil producers selling volumes above agreed upon quotas and non-OPEC producers such as Russia and Venezuela producing at full speed, refiners would need to show a dramatic increase in refinery products utilization rates to avoid a massive oversupply of crude. Refiners are still in hunker down mode with utilization runs under 80%.
In this environment, the crude supply is likely to continue to grow.
Refined products are also well supplied with distillates at a 26 year high and gas hitting 17 year inventory highs. Therefore, should the US dollar continue strengthening, the energy complex is very likely to begin slowly drifting below up channel support seeking a new bottom based on pure fundamentals.
Traders will be monitoring comments from the US Federal Reserve bankers on any shift in policy on target interest rates or monetary easing. The current White House regime will apply pressure on the supposively independent Fed to prevent any change its weak dollar policy. Higher interest rates will create higher costs in funding budget deficits. Knowing this, energy traders will probably not be expecting too much of a drop in crude below its current $75 support handle.
Should the US dollar continue gaining strength the energy complex would shift to pricing primarily on the fundamentals. With OPEC oil producers selling volumes above agreed upon quotas and non-OPEC producers such as Russia and Venezuela producing at full speed, refiners would need to show a dramatic increase in refinery products utilization rates to avoid a massive oversupply of crude. Refiners are still in hunker down mode with utilization runs under 80%.
In this environment, the crude supply is likely to continue to grow.
Refined products are also well supplied with distillates at a 26 year high and gas hitting 17 year inventory highs. Therefore, should the US dollar continue strengthening, the energy complex is very likely to begin slowly drifting below up channel support seeking a new bottom based on pure fundamentals.
Traders will be monitoring comments from the US Federal Reserve bankers on any shift in policy on target interest rates or monetary easing. The current White House regime will apply pressure on the supposively independent Fed to prevent any change its weak dollar policy. Higher interest rates will create higher costs in funding budget deficits. Knowing this, energy traders will probably not be expecting too much of a drop in crude below its current $75 support handle.
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