BAC from this morning....
What happened this week? Please see thoughts below on 1) Utica transactions, 2) News from the Gulf, and 3) Other important news and themes from the week. For performance, a strong week for refiners (+6%), gassy E&Ps (+3%), and offshore drillers (+2.8%), while the major oils (-0.3%), oily E&Ps (+0.6%) and services (+0.9%) underperformed.
1) Utica, Utica, and Utica again (CHK, HES, PETD, DVN)
· Tuesday: During their presentation, CHK detailed their plans to have 16-20 rigs in the Utica by YE 2012 and a JV by October, with a leasehold position to support up to 40 rigs by YE 2014.
· Wednesday: HES announced a JV with CNX for the joint exploration and production of nearly 200,000 acres in the Utica in Ohio for $593mm, or $6,000/acre. The plan calls for HES to generally operate in the liquids rich window, which contains ~80,000 acres… Also on Wednesday, PETD entered the Utica by acquiring 30,000 acres spread across SE Ohio for $50mm, or ~$1.6k/acre. PETD expects to continue its lease acquisition in the Utica with the possibility of increasing its total holdings to 80-100k acres by YE 2012 and is searching for a JV partner… DVN also said they’ve had “some very positive initial results” in terms of permeability in the play.
· Thursday: HES acquires an additional 85,000 acres in the play for $750mm. With Wednesday’s JV with CNX, HES has ~185,000 net acres in the play.
We heard mixed sentiment over the read-through for CHK: on the positive side, the Utica got a proven North American shale player like HES to enter the play at a solid $6k price; on the negative, this is much lower than the $12-16k implied number that CHK believes their acreage is worth. CHK closed +1.9% on Wednesday, underperforming the broader sector 175bps, while HES and CNX were up ~4.5%. PETD was up 26%, as we saw a lot of short covering in a name that previously had no catalysts, and now is one of the handful of ways to play the Utica… Hess’s second announcement put the quick headline math at ~$8,800/acre (but HES noted during their presentation that this also includes Marcellus rights) and HES plans to run a 3 rig program next year. HES closed up 1% Thursday (also lifted by their increased production guidance, see below), only 2nd to CHK of the producers, (+1.4%, had a good size buyer on the desk).
2) News from the Gulf (MMR, RDC, BP, CVX, APC, NE)
· MMR said on Wednesday that the exploration well at its Lafitte prospect in the ultra-deep GoM had been drilled to 27,038 feet and believed it had struck hydrocarbon-bearing sands.
RDC outperformed on Wednesday (+6.6%), likely due to RDC’s exclusive agreement with MMR at drilling depths below 25,000’. Completion and production testing of the Davy Jones well #2 is expected to begin 2Q12. Davy Jones well #1 is expected to be completed and flow tested by year-end 2011.
· BP announced a major oil discovery in a previously untested northern segment of the Mad Dog field in the GoM. Pending confirmation through future appraisal drilling, the total hydrocarbons initially in place in the Mad Dog field complex are now estimated to be up to 4Bboe.
Finally a rare bit of good news for BP… Plus CEO Bob Dudley said the discovery establishes Mad Dog as a giant field rivaling Thunder Horse in size. BP has 60%, BHP has 24% and CVX has 16%.
· CVX announced a new oil discovery at the Moccasin prospect in the GoM. The Keathley Canyon Block 736 Well No. 1 encountered more than 380 feet of net pay in the Lower Tertiary Wilcox Sands.
Still being evaluated but another good discovery. BP has 44% and Samson Offshore has 12.5%.
· Pace of permitting is accelerating… APC CEO Jim Hackett said Wednesday he is “very excited about” the acceleration in the pace of permitting, feeling that the GOM will be among the hottest exploration areas in the next three years. This follows positive commentary from NE on their conference call citing increasing permits in the GOM.
The offshore drillers outperformed on Wednesday, led by RDC and NE. Also to highlight, there were 30 GoM permits issued in August, the most since Macondo. We continue to like offshore drillers, with drilling permits (a leading indicator of the group) in the US tracking +5% in the 3Q. ESV is our favorite name.
· Storms are brewing… As of Thursday afternoon, nearly 15% of crude oil production (~206kbpd) and 7% of natural gas production (362mmcfpd) was shut in the wake of Tropical Storm Lee. Now we have Tropical Storm Nate, expected to become the 3rd hurricane of the season, and Maria also forecasted to strengthen.
3) Other news and views
Refiners:
· SUN exits refining and begins strategic review on the future, planning to sell its refineries in Philadelphia and Marcus Hook.
From here SUN’s investment case revolves around an ill-defined Retail growth strategy while the absence of SunCoke elevates earnings volatility. We acknowledge that the decision to sell/close refining is a wild card, but we suggest incremental value from after tax inventory sales would add just $2-$3 to our assessed value… Closing its refining business vindicates our view that these are challenged assets. We view this as a reason to take money out of SUN and into our preferred names. The stock was up 3% on the news (and we have buyers on the desk off the announcement).
· VLO said they will hit over $2 in 3Q EPS and talked positively about their Meraux and Pembroke refinery purchases.
What about SUN’s refineries? VLO reiterated that they are happy with their exit from the East Coast refining market. I think the $2 3Q number and over $4 for the year was impressive, with VLO closing up over 4% on Thursday. (Consensus is $1.45 for the 3Q but a little stale.)
· HFC announces $100mm share repurchase program (just ~1% of shares outstanding). This follows the recent announcement of a $105mm special dividend and a subsequent share split to reset the base share price more inline with its peers and increase liquidity in the market.
Doug Leggate remains Neutral on the name. With plausible risks to the Brent-WTI differential and a share price that has seemingly followed the rapid expansion in the spot differential, we are wary of chasing HFC higher from here.
· TSO adds an additional 290 retail stations to its existing 1,200 stations.
E&P/Integrateds:
· HES confirmed a 50% increase in Bakken production, as they raised their 80kbpd production target by 2015 to 120k, along with the overall medium-term portfolio guidance of 3% to 3-5%.
The Bakken production increase is exactly what Doug Leggate was looking for, but a little sooner than we expected. Overall optimistic presentation from HES, including that mgmt confirmed a “best practice” change in completion design on 12 producing wells has resulted in IP rates that are nearly double legacy guidance. By employing a combined plug & perf and sliding sleeve completion, the number of frac stages has increased from 22 to 38, with a commensurate increase in IP rates from 550-750boepd to 800-1600boepd.
· TLW hits a home run at Zaedyus, hitting 72m of oil pay in three horizons (main fan 39m of light oil plus 19m of intermediate oil and 14m of heavy oil) with good quality reservoir, opening up a new basin for the industry. While there is much more work to do appraising this extensive new basin, Zaedyus proves the idea of a Jubilee field-type of play in Northern LatAm.
Reflecting the Zaedyus results and starting to de-risk other prospects in the block (particularly the Bradypus prospect), Alejandro Demichelis raised our NAV/PO by 55p to 2050p. The stock is up ~15% in London.
· ECA announces divesture of Piceance midstream assets for $590mm to a private company. Year to date proceeds from dispositions are $600mm net. The company indicated that it is on track to meet or exceed $1-2B of disposition proceeds around year-end.
ECA is down ~25% since the end of July, out of sync with the broader Canadian Seniors and the relative downside between WTI. The asset sale of $590mn and the potential to exceed the $2B in asset sales will backstop its balance sheet. We await further announcements around potential JVs and future asset sales and liquid rich developments to move the needle.
· FST announces the spin-off of LPR and special stock dividend to shareholders.
Good to see them doing this sooner rather than later, but nothing new here, so surprised FST closed up nearly 10% on Wednesday. Stock still struggling to get above $20 (after breaking through $40 in February).
Services:
· HAL buys Multi-Chem Group, the #5 player in Specialty Chemicals with an estimated $225mm of revenue (~5% of market).
BHI is #1 ($2B biz, 45% share) and SLB is #4 ($300mm biz)… HAL had no exposure to specialty chemicals market and now can provide the chemicals for pumping and cementing, optimizing their pumping portfolio. Strategically a great fit for HAL. Terms are not disclosed but likely modestly accretive to EPS, with HAL’s global platform offering a lot of running room for Multi-Chem’s North America focused business… During their presentation, said that international progress continues to be steady and that pressure pumping will be a near $40B market in 2011.
· SDRL gets four-year contract for UDW West Hercules for $787mm.
If we take out the mobilization ($50mm), looks like we see a $500kpd+ day rate (~$505), although Statoil’s release says $490k… While Becker has been highlighting that a $500k+ number would be a catalyst for the group, since this contract was in Norway, it doesn’t quite stack up. Operating costs in Norway North Sea are about $60k higher than average.. So a net margin basis, this is a slight positive for SDRL (spot rate contract with long/attractive duration), but nothing really new for the group. Would need to see a $550k range # if in Norway or Australia (higher op costs), or high $400s # in Brazil (PBR toughness and taxes below 5%) to compare to the $500k number Becker is looking for in the Gulf and other regions… Best performing offshore driller today.
· CAM signed a contract extension with PBR for aftermarket services in offshore Brazil and is expected to generate more than $150mm in revenue to Cameron over the next three years.
Good data point for CAM which is back below the $50 mark, but nothing to move the needle. |
