EUR/USD still looks bearish

As you know, I’ve been bullish USD and bearish EUR/USD since about 1.48-1.50. So far, the EUR has had a very strong downtrend. I am guessing that this downtrend will meet some serious support in the 1.27 zone.

In the daily chart above, you can see that EUR/USD is carving out 5-waves to the downside. This indicates that the larger-scale trend is down, and we should stay below the 1.51 high set back in December, 2009. 1.27 shows a nice confluence of trendline and channel support, so I could see the market falling to that level before the market enters a protracted corrective uptrend.

Updated NEP Q4 and 2010 projection

China Northeast Petroleum (NEP) announced their preliminary Q4 production and drilling results today. The results were slightly better then their projections back in November, which I have come to expect from the company as they do a great job of giving solid yet conservative projections. Below are the results for both divisions of the company:

Oil Production

Back in November I projected that the company would produce about 231,000 barrels based on how many new wells they were projecting to add. The company managed to add 5 more wells then expected and must have also completed them more quickly, because actual production was 236,774, about 2.5% higher then my projection. Oil prices during Q4 were also higher then NEP's estimate of $65 for their projections. If we use the average Cinta monthly price from to approximate the price NEP will receive, they should average about $70/barrel for Q4, which translates to revenues of about $16,575mil. Assuming approximately 30% profit margin, their operating profits from production should be about $5mil.

Drilling Services

Tiancheng completed drilling contracts for 60 wells with total drilling depth of 99,161 meters (325,331 feet) in the fourth quarter of 2009. This is very impressive considering that before NEP acquired it, the company had only drilled 80 wells totaling about 106,000 meters during the first three quarters of the year! Assuming that their revenue per meter remained the same in the 4th Q, revenues will be about $13.75mil. Thus I expect profit for this division to range from $4.6mil to $5mil, depending on the profit margin.

Combined Q4 Results

Overall, the company should announce revenues between $30mil and $30.5mil for Q4. Before all the restatements that will happen, I would have projected net income to be somewhere from $9.5mil to $10mil, or about $.35-.36 EPS for the Q. These numbers are clearly better then the estimates I came up with in November. It's nice to see the company continuing to impress in their operations.
Restatements and Potential Dilution

Unfortunately, because of the restatements that NEP will have to do, it will be harder to compare results. Personally, I don't like the way that FASB requires companies to handle in the money warrants because it actually makes it much harder for potential investors to analyze past results. Hopefully the company will do a good job breaking out their operating earnings from the expenses they will be taking on the warrants. I wish I had an idea of how much it will be, but looking at the information given in the press release only made me realize that I have no idea how to figure out the potential impact. I do expect it to be quite large though because we saw the price of the stock almost double during Q4.

One thing that the restatements did cause me to do was to look back through NEP's previous quarterly reports to figure out exactly how many warrants and options are outstanding and at what prices. As of 12/31/09, NEP had 27,715,818 shares outstanding. We know that Lotusbox exercised another 867,438 warrants in January, which I've assumed is all the exercising that will occur in Q1. If I'm correct, then below are all the remaining options and warrants which have not been exercised.



Updated 2010 Revenue and Earnings Estimates

Based on their results and on oil prices so far this year, I have updated my 2010 estimates to reflect my current expectations. I've increased the number of wells I expect NEP to drill in 2010 from 65 to 70, as well as increased to average oil price from $65 to $70 (note that Q1 oil prices are already set at about $73/barrel).
Finally, I've assumed that Tiancheng will drill 100,000 meters each quarter and get paid about $138/meter.



If we throw a PE of 10 on NEPs non-diluted EPS, the price of the stock would be about $13.50. Throwing a PE of 12-15 on their fully diluted EPS would lead to a price of $14-17.50. I think that by the end of this year NEP will be trading above $15 unless we see a tremendous drop in oil prices again like what happened in the late 2008.

Please feel free to post any questions or comments

ABX Update

Here’s a quick update regarding my ABX short trade. As long as prices stay below $42.64, I will remain short.

You can see on the chart above that price is back testing the supporting uptrend line. I believe the market will fail at this level, and then continue it’s sequence of lower highs and lower lows. However, my stop is right above the last major swing high, at $42.64.

Bloggers are very bullish once again

Exhibit 1: http://tickersense.typepad.com/ticker_sense/2010/03/march-1st-blogger-sentiment-poll.html

Exhibit 2:

• Carl Futia: bullish
• White Magic: bullish
• Kevin’s Market Blog: not updated, but posted that if stock trades above 50-day for several days, market should retest highs, I take this as bullish
• Bespokeinvest: bullish, in regards to strong breadth argument
• Slopeofhope: getting gloomy as a bear, turning bullish
• Elliot Wave Lives On: starting to seriously consider the long-term bullish picture, after having expected a bear-market rally for 1 year
• Gary’s Common Sense: bullish, expecting ‘third-leg’ of this bear-market rally
• Evilspeculator: neutral/bearish
• X-trends: bearish

Clearly, the bulls are pretty numerous, but we haven’t even made new highs yet.

Now, look at the chart above. I posted here that the market’s rhythm has changed, because it’s been 18 trading days with no new high (previously, the market always made new highs with 8-10 days of bottoming). Also, you can clearly see that volume has been much lower on the rally, compared to the previous sell-off. Even if we do make new highs, I’m shorting the whole way up. But I think the odds for a drop below 1040 are high.