Image: Newly christened TD #5

Update II: As of 6pm, TD 5, has been upgraded to TS Edouard, with 45 mph winds. Pretty much the ugliest TS I have seen.

Updated: A hurricane hunter reconaissance plane investing the disturbance in the gulf found a low level circulation and has upgraded the system to Tropical Depression #5 as of 5pm. The system will likely be namedTropical Storm Edouard sometime tomorrow, at the latest. Not going to lie, the storm does not look terribly impressive right now (see satellite above), but it does finally have a low level circulation. The Depression is dealing with modest shear and dry air off the continent, which are both inhibiting thunderstorm formation. However, by tomorrow, both are forecast to decrease and should allow for conditions quite favorable for intensification. The current track takes it west, making landfall as a strong 60 mph tropical storm near Houston/Galveston mid-day Tuesday. One of the models, the GFDL, makes it a hurricane before landfall. Based on its current ragged appearance, it has a long ways to go.

Oil and Natural Gas rigs are meant to withstand tropical storm force winds with no problem, so should it remain a modest TS, the Depression should not cause dramatic disruptions. However, it is transversing a very oil-rich part of the gulf, and is poised to make landfall in the petrochemical refining capital of the US in Houston. I would not be terribly surpised to see Oil nudge higher tomorrow.

When the storm is named, I will likely do a larger post. Everything I wrote yesterday (below) on the system still holds true.

Original Post

After a 10 day respite, the tropics are once again heating up, with three areas in the Atlantic that seem poised to develop into Eduard, Fay, and/or Gustav. First, I thought this was rather amusing….

Image: Courtesy XKCD

I will start with the closest to the US and therefore the greatest immediate threat. A cold front stalling near the gulf coast has spun off a surface trough accompanied by a good deal of showers and thunderstorms. A faint “spin” can be seen on long-range Florida radars. That being said, the storm does not have a surface circulation and until it does so, it cannot develop.

Image: Gulf of Mexico Visible Satellite showing surface trough. Cave Texas.

While the models are somewhat lukewarm on developing this system, they do indicate a slow westward drift, followed by landfall somewhere on the north Texas/Louisiana gulf coast early next week. Conditions near the system are quite favorable, with warm sea surface temperatures and low shear. However, if the storm were to sag south too much, it will quickly encounter strong shear that is forecast to remain in place the duration of the storm’s life. The NHC plans to send in a hurricane hunter reconnaissance plane tomorrow, should conditions warrant.

Should the system develop, its short lifespan and proximity to land should limit its intensity to a weak to modest tropical storm. That being said, based on the map below, the storm would be traversing the most oil-rich part of the gulf coast, and could very well cause disruptions.

Image: Map of oil rigs in GOM and forecast track of developing storm

Also, looking back, Hurricane Alicia in 1983, had similar beginnings as this system and rapidly intensified to a Cat 3 before making landfall near Houston. The storm wrecked havoc with oil production, causing an oil spill near Texas City and damaging the many petrochemical plants in Houston.

Image: 1983’s Hurricane Alicia. Poor Houston.

The second storm, tagged “90I” (with “I” standing for “invest”) by the NHC, is located about 400 miles southwest of the Cape Verde Islands. It has sufficient convection and what appears to be a mid-level circulation, but it still lacks a low-level circulation that is needed to develop into a tropical depression.

Image: Current Atlantic Infrared Satellite showing two storm systems.

The computer models are much more aggressive on this one, bringing it to a 90 mph hurricane in 120 hours. Until it develops a circulation, I would put little weight on that forecast. However, it appears that the system is too far south to recurve and will likely enter the Caribbean, so this is one that we will have to watch very closely.

The final storm, “99I,” is, of the three, the one that is closest to being a named storm. Located about 1100 miles east of the Leeward Islands, it has a closed low-level circulation, but only a modest amount of convection around its center. If it can gather more thunderstorms, it will likely be named TD #5 by the NHC, either tomorrow or Monday. However, it is the least likely to impact land, with it already approaching 20 degrees in Latitude, most of the models want to recurve it out to sea east of Bermuda.

Overall, I say there is a 85% chance of having at least one named system by the end of the weekend. Welcome to August.

So, how is this going to affect natural gas prices and how am I going to play it? I don’t know. And I’m not going to. Yet. I learned my lesson from Dolly and am not going to speculate this early. If the system in the Gulf develops, it will be too late to jump in, and I will likely use the bounce in commodity prices to ease out of some of my energy positions. I will keep a close eye on 90I as it heads towards the Caribbean but will resist the urge to buy UNG until things clear up a bit. The best situation would obviously be if both develop. After the Gulf system jacks up prices and moves inland, all eyes would turn to another system heading our way. This could prevent to usual fall-off of hurricane-inflated prices due to a land-falling hurricane.

As for my energy stocks, I currently own 3, RIG, from 140.50, CHK from 53.00, and APA, from 112 that I bought Wednesday as an earnings dice-roll, but have held onto.

Image: Transocean. Piece of shit.

RIG, compared to other energy stocks, hasn’t done terribly much during the oil melt-up, but has participated in oil’s recent pullback, which pisses me off. The stock has a 0.96 Beta and a P/E Ratio of 9.1, making it a pretty safe investment. That being said, should RIG hit 145 I will look to begin selling. RIG reports earnings Wednesday.

Image: Apache. Inteeeresting…

APA, Apache, was an asshole dip-buyer/earnings dice-roll play on my part. The stock had fallen from a May 21^st 52-week high of 150 to as low 105. On Thursday, the company reported earnings of $4.28/share, which beat estimates of $4.07/share. Its profit more than doubled from a year ago to over $1B. However, production fell 3.6% from 2007 to 550,00 barrels a day. After the earnings report, the stock gapped up 5% at $121 but intense selling pressure drove the price down to $112 the same day. I am pretty lukewarm on this stock right now and will wait to see how investors continue to react to the earnings before I adjust my holdings. At the moment, I have a $105 stop and a general target somewhere around $125.

Image: Chesapeake. Hot stuff.

My favorite, and one of my largest positions, energy or otherwise, is CHK, Chesapeake Energy. I am in at an average of $53/share. The company reported earnings Thursday after the close. They reported 0.89/share, barely beating the consensus of 0.87/share. Daily natural gas production increased more than 25% over the past year to 2.328 bcfe. However, due to a noncash after-market mark-to-market loss of $2.085B and oil and gas hedging losses of $455 Million, the company actually recorded a $3.17/share loss on the quarter. However, the company has long discussed this loss and it did not come as a surprise. After the earnings the stock oscillated between +/- 2% on the day, ultimately closing down 1.85% at 49.22. Investors still seem to be digesting the earnings; however, there was notable buying of $60 Aug calls.

Personally, I think the stock has great potential. Aubrey McClendon, CHK’s CEO, has been buying all the shares he can get his paws on. Since January, he has purchased 4.1 million shares, worth $200.1 Million, at a cost basis of 49.25. 750,000 of these shares came at a secondary offering last month at 57.25. Overall, the dude is breakeven right now.

Last week, China National Petroleum Corp (CNPC) indicated that it was interested in bidding for a minority stake in some of CHK’s shale fields. The company valued two of these, one in Arkansas and one in Pensylvania, at $15B each. Considering that CHK’s market cap right now is $28.2B, this bodes well for the company’s future.

Cramer pumped the stock on Friday (again). I won’t be selling on the likely gap up Monday morning.

The company has few oil fields located on the gulf coast. Thus, it will be the beneficiary of hurricanes, but will not have to worry about its own stuff getting wrecked.

Disclaimer: What the hell do I know.