From CS this AM
Global Energy Strategy – The Slick Oil
Highlights
· The “Oracle of the Offshore” delivers his newbuild inline with guidance
· EOG Resources (EOG) Analyst Day: Highlights from Press Release
· Massey Energy (MEE): Washington Post unveils several
Morning Activity
European markets pare early losses to trade broadly flat, as strength in financial services stocks offsets weakness in the miners. Economic data a focus with European 4Q GDP unexpectedly coming in flat sequentially, when it rose 0.4%. Elsewhere, Euro Area PMI for March came in at 55.9, broadly in line with market expectations. Heritage Oil drops 8.5% after it announced it would have to drill deeper at its Miran West-2 well in Iraq, adding 4-5 months to its drilling schedule. News of a 3 month delay to the completion of its Ugandan asset sale adds further pressure. Eni SPA (ENI SM) makes 2 new oil discoveries in Angola -- wires. Dragon Oil says will not proceed with previously announced proposed corporate restructuring of the Company. Across the Street, SBM Offshore (SBMO NO) upgraded to buy from hold at Societe Generale; Seahawk Drilling (HAWK) initiated neutral at Macquarie Research; Occidental Petroleum (OXY) remains rated underperform at Bernstein. Important things to watcht today include EOG Resources analyst day kicks off at 9am EST and the Dept of Energy releases petroleum statistics at 10:30am EST. Lastly, don’t forget to register for the Credit Suisse Bakken Mini Conference below!
Company Specific
· The “Oracle of the Offshore” delivered his newbuild inline with guidance. While “labor” went a little over budget, it’s with great pleasure that we welcome Lalitha “Chaya” Jayaram into the world. The little lady was delivered at 1:30 AM on April 7th at NYU hospital tipping the scales at 6 pounds and 5 ounces. Congratulations to the Jayarams!
· EOG Resources (EOG) holds their analyst day today in Houston, which begins at 9am EST. Expectations have been fairly high ahead of this event, but after reviewing the release we see the highlights as slightly lower than investors expectations. Here are some highlights:
1. Reiterated 13% Growth, Did NOT raise outlook
2. 2010 Capex up 65% YoY to be supplemented by $1 Bln Gas Divestitures
3. Well results are very light, but may disclose during presentation 9am EST
4. Accumulated more strategic acreage positions with oil potential
· European E&P Sector Review: Hope and Exploration - Highlighting Inconsistent Valuations
(Tao Ly, David Mirzai)
Our Outperform stocks: In our opinion, investors are not pricing in the risk/reward of the exploration upside on a consistent basis across the group. We rate Premier Outperform, as we believe its growing production base offers an attractive option on a diverse 2010 drilling campaign. We also like Heritage, where we think that success to date and lower technical risk has not yet been priced in relative to potential upside, especially ahead of the Miran East well in Kurdistan. We like Dana's risk/reward profile ahead of two big well results expected in H1 2010 and Tullow's deep exploration portfolio that can create value over the longer term. Afren is less about exploration but continues to offer growth potential in our view.
Our Underperform stocks: We rate Cairn Underperform ahead of the results from the first well in Greenland, as we simply do not think the current share price offers an attractive option for taking on the risk of a dry well. We remain cautious on the lack of diversity in SOCO International's exploration portfolio and think that DNO's risk/reward balance is skewed to the downside following a potential 'political' re-rating on newsflow from Iraq.
· FMC Technologies, Inc. (FTI) said that it has signed a $210 million agreement with Total to build subsea production equipment for the Laggan Tormore field. The scope of the deal includes supply of nine subsea trees, eight wellheads and two six slot manifolds slong with 12 multiphase meters, 10 subsea control modules and associated control systems. The deliveries are expected to start from 1Q11. The contract was expected to be won by FTI and was on their “list,” but still a nice award following the smaller (e.g. ~ $70-80 mln?) US GoM award, where details were not disclosed.
· Anadarko Petroleum Corp. (APC) reported results yesterday from its Wahoo #1 drillstem test in pre-salt Wahoo field in the Campos Basin. Well flowed at a sustained rate of ~7.5 MBbl/d and ~4 MMcf/d, but the rate was limited by equipment and facilities. APC believes the well is capable of flowing in excess of 15 MBbl/d. APC plans to now conduct a drillstem test on its Wahoo #2 well and once that is complete, will drill the Wahoo South exploration well. APC is the operator and holds a 30% WI and DVN holds a 25% WI. Hard to assess results at this stage as the company had not really given any expectations for the well. However, a well drilled from the Jubarte complex to the north has been flowing at about 17-18 MBbl/d for about a year
· Chinese small steel mills with steel blast furnaces less than 400 cubic meters in size are being told by the central government to shut down production by the end of next year, according to China Daily. The State Council, China's cabinet, published a document on Tuesday, saying all steel blast furnaces in this size class will be closed to rein in overcapacity and force upgrades in the industry. This could impact demand and pricing for metallurgical coal producers such as WLT, PCX, MEE, ANR and BTU.
· Massey Energy's (MEE) Upper Big Branch coal mine was written up for safety violations more than 50 times in March. According to the Washington Post, 12 of the citations were for problems with the mine's ventilation system and preventing methane from building up. A former senior regulator says the large number of citations is not unusual, but so many regarding the ventilation system indicate something was not being done right at the mine. Recall there was an explosion at Upper Big Branch 5-Apr in which at least 25 workers were killed.
· Peabody Energy's (BTU) offer rejected again. Australia's Macarthur Coal (MCC AU) rejected on Wednesday a sweetened A$14-a-share bid by U.S. coal miner Peabody Energy worth A$3.56 billion ($3.27 billion), who is familiar with Australian operations thru their prior acqusition of Excel.
Commodities
EMEA Oil and Gas - Russian oil and gas production in March.
Crude output up 3.3% yoy in March 2010: Russian crude oil production continued to see growth in March, continuing the trend since March 2009. In March 2010 crude oil output rose to 10,082MBD, +3.3% yoy and +0.4% mom. The production was mainly driven by Rosneft's Vankor oil field launched last August and TNK-BP's Verkhnechonsk and Uvat projects. Bashneft continued to surprise on the upside with 20.6% yoy production increase in March 2010. Such a significant growth should be attributed to the restructuring the company is currently going through.
Gas production recovers strongly YoY in March 2010 but is still lower than in the pre-crisis years: March daily gas production was down 6% versus February in line with the seasonal pattern. On the yoy basis Gazprom managed to increase production by 22.8% but was still unable to reach pre-crisis levels: compared to 2007 and 2008 March production was down 6% and 7% respectively. Given the heating season in Russia is over it is highly unlikely that Gazprom will be able to produce 520 bcm in 2010 as it plans.
· LNG Startups: Qatargas 3 Train 6 and Qatargas 4 Train 7 expected to begin producing LNG in September and December of this year, respectively, both facilities have 1.0 Bcf/d of capacity and these are the last two Qatar facilities to start up for awhile
Credit Suisse Events
· Global Energy Strategy – Bakken Mini Conference: May 11th, New York City
Please see attached link for registration:https://secure.csfb.com/conferences/bakkenconf/client/index.shtml
· Credit Suisse 2010 Offshore Technology Conference: May 3-5, Houston
· Credit Suisse Future of Energy Conference: June 2-4 in Washington DC
· Credit Suisse 2010 E&P Focus Day (9th June) and 2010 London Oil and Gas Conference (10th June)
Existing & Developing Themes
· Coal: Continue have a positive long-term structural view for metallurgical coal, but equity shares are now fairly valued (e.g. discounting $200/metric ton). For thermal coal producers, our thesis on fuel switching eroding the thermal coal inventory has played out quicker than expected and now a weak outlook for natural gas prices threatens to divert generation once again away from coal (e.g. natural gas moving below Btu parity). While coal fired generation lost unprecedented market share during 2009, we believe the markets have rebalanced and modest power generation has switched back to coal. We continue to look for industrial activity to increase from trough levels and that coal demand will increase commensurate with that IP recovery, but the rate of change is declining. (March 8, 2010)
· Exploration & Production: Continue to favor oil producers to North American (NAM) natural gas producers. Investors remain focused on the re-set of the NAM natural gas market and global oil supply/demand moving into balance. Natural Gas (Cautious): The willingness for producers to hedge forward production at $6.00 per MMBtu and ability to achieve above average returns poses risk to any meaningful price appreciation. In addition, we see a rebound in cash prices being limited due to fuel switching for power generation (e.g. less demand) and spending behavior (e.g. production) despite an increase industrial demand. Crude Oil (Constructive): OPEC spare capacity has grown, but is less likely to be accessed as members are now ahead of the demand curve. Non-OPEC declines will accelerate over time and industrial demand for products continues to increase faster than expectations. Valuations: Producers are pursuing strategies to divest of non-core assets, which will be used to de-lever balance sheets and fund future capex & growth. With asset market values at a discount to equity valuations today, one must consider the potential dilutive impact of asset sales. On the operational side, advanced drilling and completion technologies continue to unlock more resource and deliver higher initial rate wells. However, we believe investor focus should continue to shift away from 'resource unveiling' to the capital and financing needed for development and cash flow. (October 26th, 2009)
· Oilfield Services: Spending behavior in North America is experiencing the most significant rebound, but thus far has been limited to select product lines (e.g. pressure pumping, directional drilling and high end pipe) and select regions (e.g. Marcellus Shale, Haynesville, etc.). We remain positive and have a preference for NAM focused and Integrated OFS. Land drillers continue to see more broad based increases in day rates even as demand grows for “built for purpose” rigs. We are modestly positive on NAM Land Rigs. Equipment suppliers’ new order books are seeing an uptick in demand from new build land rigs and pressure pumping equipment, but lead times and costs could likely set a ceiling for day rates below prior cycles. Offshore assets such as jackups continue to see a pickup in inquiries and dayrates and oil prices remain resilient. We are constructive on the jackup markets. Meanwhile, deepwater assets could continue to see pressure as operators remain indecisive on larger projects and more uncontracted capacity is set to come online throughout 2011. We are cautious on deepwater offshore assets.
· Independent Refiners: From a long-term investment thesis, we continue to see a very challenging environment for Refiners given: 1) the U.S. refining system’s efficiency gains (e.g. total production is higher with lower utilization); 2) global refinery capacity coming online thru 2010 could displace less efficient U.S. capacity; and 3) U.S. domestic demand remains dismal. However, in the short- to medium-term, investors should appreciate that the surplus capacity in the system is overstated. With a smaller than forecast output gap, there represents opportunities in the group as industrial demand for oil products recovery; global demand absorbs excess capacity; and utilization remains low. (October 26th, ’09)
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