RJ EnergyGroup, Tuesday, December 04, 2007 8:25 AM
Daily Update
Yesterday, the energy sector was pulled up slightly as the moderate rise in crude oil offset the 1.2% fall in natural gas prices. Pre-market, oil for January delivery is roughly flat as speculation continues to swirl around regarding whether OPEC will increase production. OPEC, which officially meets tomorrow in Abu Dhabi, is considering increasing production by 500,000 Bbl/day. It should also be noted that a U.S. intelligence report concluded that Iran halted its nuclear weapons program four years ago, which could reduce the geopolitical premium embedded in crude prices. Also of note, Brent crude oil is trading at a premium to West Texas Intermediate for the first time since July. Natural gas is flat pre-market, on speculation that storage is plentiful enough to meet winter heating needs. According to the U.S. Energy Department, storage was 3.53 Tcf for the week ended November 23. For context, the U.S. typically draws about 2 Tcf during the winter season.
Transocean (RIG/$137.55/Strong Buy) Begins Refinancing Program – Issues $8.5 Billion After the merger, Transocean used almost the entire $15 billion from the short-term bridge loan to pay out the special dividend, with the intent on refinancing the loan. Transocean announced last night that they will issue $8.5 billion in senior notes, combined with $1.5 billion from a revolving credit facility, to help refinance the bridge loan. There are two separate issues: $6 billion of convertible bonds maturing in 2037 and $2.5 billion of senior notes partially maturing at 5,10, and 30-year intervals. While the interest rate and conversion rate will not be finalized until the notes are marketed, convertible traders seeking arbitrage from the deal may provide longer-term equity investors an attractive entry point. The stock is down ~4% in pre-market trading this morning.
Parallel Petroleum (PLLL/$19.18/Outperform) Files for Secondary Offering of Two Million Shares. Following Parallel’s $250 million mixed shelf filing in mid-October, the company has filed for a secondary offering totaling two million common shares. Based on yesterday’s closing price, the gross proceeds from the offering would total ~$38 million. This secondary offering follows an increase in the company’s borrowing base under its revolving credit facility from $150 million to $200 million at the end of November, the combination of which should help fund the company’s ongoing aggressive drilling program. For context, under our cash flow assumptions for 2008,and the company’s initial budget, Parallel is likely to outspend its operating cash flow by about $35 million. Bottom Line: While the secondary offering will undoubtedly put pressure on Parallel’s shares today, we remain positive on this resource play story. Operationally, accelerating drilling activity in the Barnett Shale, coupled with stable growth in the Permian Basin and enhanced understanding in the Wolfcamp, set up an encouraging outlook for 2008.
Anadarko Petroleum (APC/$57.22/Market Perform) Announces Oil Discovery in Gulf of Mexico. Anadarko announced an oil discovery at its West Tonga prospect (operator, 37.5% working interest) on the Green Canyon block 726 in the deepwater Gulf of Mexico. The discovery, located in ~4,700 feet of water and drilled to a total depth of 25,680 feet, encountered over 350 feet of net oil pay. Coupled with the earlier Caesar discovery (20% W.I.), the West Tonga prospect gives Anadarko and its partners two significant fields that could potentially be tied back to the Constitution spar. Elsewhere in the Gulf, the company is currently drilling the Atlas prospect (68% W.I.), a 30,000-foot lower Miocene deep test, and the Terrebonne prospect (33% W.I.), a 26,000-foot upper Miocene test. Anadarko remains the largest leaseholder of any independent company in the Gulf of Mexico, with over 150 identified deepwater exploration opportunities.
Patterson-UTI (PTEN/$18.89/Market Perform) Reports Increased Drilling Activity in November. Patterson reported an average of 246 drilling rigs during November, up from 239 last month. This included 233 rigs operating in the U.S. and 13 in Canada. Activity remains significantly lower than last year when the company was operating 295 rigs (281 in U.S. and 14 in Canada). Patterson is now averaging 231 working rigs in the U.S. and 11 in Canada (242 total) in 4Q07, which is relatively in-line with our estimate of 243 for the quarter. Further expected market weakness has led to our Market Perform rating on the stock, although downside appears limited due to the company’s ability to buy back stock. The sequential increase in activity is a positive, and although we are forecasting a modest decline in drilling activity in 2008, high winter natural gas prices are likely to keep activity afloat in the short term while margins continue to trend downward.
Berry Petroleum (BRY/$40.69/Market Perform) Forecasts Double-Digit Production and Reserve Growth in 2008. Berry announced that it expects to have an average production rate of approximately 30 MBoe/d in 2008, above our current production estimate of 29.1 MBoe/d. Also, the company has set an initial 2008 capital budget of $295 million, which is expected to be fully funded through cash flow from operations. Berry believes this capital spending level will allow the company to increase proved reserves by 30 MMBoe, resulting in F&D costs of approximately $10/Bbl (or $1.67/Mcfe), which is very attractive compared to its peers. In 2008, the company plans to invest the majority of its capital budget in the development of heavy oil projects. Bottom Line: This is positive news from Berry as the company positions itself for a return to double-digit production growth. Furthermore, due to its large drilling inventory of heavy crude, the company is uniquely positioned to see a gross margin increase as crude prices continue to diverge from gas prices. Look for the Berry’s stock price to react positively to today’s news.
CONSOL Energy (CNX/$57.35/Strong Buy) – Revisiting Our Upgrade We upgraded CNX on 11/20/2007 from Outperform to Strong Buy at $50.18 and still like the stock today for the following reasons. First, coal export trends, Consol is signing two to three-year deals for export steam coal, and we expect met coal to be similarly strong. Second, strengthening prices, Consol is seeing higher prices as a result of export interest and international prices — prices are in the mid-$50s to $60s for steam, higher for met vs. year-to-date all-in prices of just over $40/ton. Third, Consol is in a particularly good position to benefit from these two trends as NAPP is the largest steam coal export region in U.S. and Consol accounts for over two-thirds of the NAPP market. Consol also has an interest in the Baltimore terminal providing both access and revenue enhancement. It should also be noted that Consol’s open tonnage position has a somewhat limited amount open for 2008, but about 42 million tons open (out of 72 million tons) for 2009 (~10% open for 2008, ~60% open for 2009). Finally, the stock had pulled back, providing a great valuation entry point. The stock has moved up about 15% since the upgrade, but the valuation attractiveness still remains. The stock is now trading at 6x EV/EBITDA on 2008, considerably cheaper on 2009 (only 4.2x) vs. peer group at 7.6x EV/EBITDA on 2008 and 6.4x on 2009. The short-term catalysts are running out (conference presentations), but we still think this is the right name to be positioned heading into next year, especially as we get quarter-to-quarter updates on 2009 contracted pricing – the real driver of our enthusiasm.
Global Partners (GLP/$26.60/Market Perform) Can Increase Credit Facility by $100 Million.
An 8-K filed with the SEC yesterday indicates Global Partners has amended its credit facility to allow it to borrow up to an additional $100 million upon request. Total borrowing will then amount to $750 million under the revolving credit facility, which could be used to fund potential acquisitions and growth projects. Recall that Global has plans to expand capacity from its current 8.2 million barrels to 9.2 million barrels by mid-2008, through such initiatives as the Long Island Acquisition, Port of Providence JV, and construction of 230,000 barrels of new refined product tankage. Global is taking steps to increase its footprint and grow distributions. However, given the current yield of 7.2% (only slightly above group mean of 7.0%) and three-year distribution CAGR of 7.6%, we view the units as fairly valued and maintain our Market Perform rating.
As Major Climate Change Conference Begins, Australia Signs Kyoto Protocol. Yesterday marked the start of the UN climate change conference in Bali, the objective of which is creating a roadmap to a global carbon reduction treaty, a successor to the Kyoto Protocol. Kyoto is set to expire in 2012, and among its limitations is the fact that it only covers industrialized countries, not major emerging markets like China and India. The U.S. has also refused to ratify Kyoto, citing its incomplete scope. This week, however, Australia joined Kyoto, fulfilling a campaign pledge of the new Prime Minister, Kevin Rudd. The U.S. is now the only major industrialized country not to be part of Kyoto, and it is safe to say that Washington will be even more isolated in arguing against a binding “Kyoto II” without Australian backing. Bottom line: As we have previously discussed (see our industry briefs from November 13 and 26), Australia’s new government is set to enact a series of pro-renewables policies, which are bullish for solar and wind companies. We will also be monitoring the UN conference for signs that a major carbon treaty can overcome opposition. If such a treaty were to place a firm price on carbon, this would raise the all-in cost of conventional power generation, enhancing the relative economics of solar and wind.
PRICES
Oil $89.33, up $0.02 (flat) pre-market
Gas $7.25, up $0.04 (0.4%) pre-market
Rockies gas price (Opal): $5.43
Gasoline $2.25/gal, down $0.01
Ethanol $1.95/gal, flat
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