RJ EnergyGroup, Friday, February 01, 2008 8:22 AM
Daily Update
As expected, OPEC rejects consumer calls for more oil, opting to leave production flat until its next meeting in March. Yesterday, the broader markets were up nearly 2% as major bond insurers announced sufficient cash to back their insured bonds, helping allay fears over spillover effects from subprime weakness. Although E&P and midstream/pipeline stocks posted modest gains yesterday, oil service stocks did not join in on the fun, as continued disappointing earnings results have weighted on the OSX (underperformed the Dow by 11% in January).
Flat-lining OPEC production may counter recent bearish DOE reports, where inventories have been steadily building above consensus expectations, and oil may continue to hover in the $90/bbl range. We expect incremental Middle Eastern cargoes to hit the market over the remainder of the first quarter, potentially causing further crude weakness in the short term. Natural gas remains in the $8/Mcf range after a particularly bullish (record-setting) withdrawal yesterday, but difficult comps over the next four weeks should eliminate the ~300 Bcf y/y storage deficits and put pressure on gas prices.
Solar Tax Credit Extension Included in Senate Stimulus Package. On Wednesday evening, the Senate Finance Committee approved a one-year extension of two key federal tax credits for solar power - the Investment Tax Credit (30% of spending on solar systems, without a cap for corporations and with a $2,000 cap for consumers) and the Production Tax Credit (roughly $0.02/kWh for renewable power generation, including solar and wind). The committee, with bipartisan support, decided to add this provision to the economic stimulus package that is currently pending. The two tax credits are currently set to expire at year-end 2008, therefore, the extension would take them through year-end 2009. Recall that last December, a much longer-term extension of the credits fell through in the Senate because the Democrats linked it to a broader energy tax package, which included revenue raising provisions unacceptable to the White House. Bottom line: The overall stimulus package is still being debated, and it is unclear whether the Senate version or the House version (which lacks the credits) will ultimately be enacted. Still, we view bipartisan support in the Senate for extending the credits as a positive, albeit limited, sign of federal backing for the solar industry.
St. Mary Land & Exploration (SM/$35.22/Market Perform) Announces 17% Increase in Proved Reserves; Provides Production Guidance. St. Mary has announced proved reserves of 1,087 Bcfe at year-end 2007, up 17% from 928 Bcfe one year ago. The reserves are 56% natural gas and 77% proved developed. Also, the company preannounced 4Q07 production of 28 Bcfe to 29 Bcfe, which is slightly above our forecast of 27.6 Bcfe. Production guidance for 2008 is 107 to 111 Bcfe, in-line with our forecast of 110.5 Bcfe. After adjusting for the ~12 MMcfe/d of recently divested production, the midpoint implies ~8% year-over-year production growth. For 1Q08, guidance is 27 to 28 Bcfe, slightly above our forecast of 26.5 Bcfe.
Spectra Energy Partners (SEP/$23.75/Outperform) Conducts Open Season on East Tennessee Natural Gas System. The partnership is conducting a non-binding open season on its wholly-owned 1,400-mile ETNG system for 250,000 to 450,000 dekatherms per day (250,000 to 450,000 Mcf/d) in a new pipeline project called the Greenway Project. The Greenway pipeline would move gas from the Appalachian basin in southwest Virginia, West Virginia, and Kentucky to Southeast and Mid-Atlantic markets. The project is expected to cost between $300 million and $500 million depending on the outcome of the open season, which concludes February 29. Spectra has identified $252 million of capital expenditure projects on the Gulfstream system and $89 million identified in other projects it may pursue in the next five years. Looking forward, we continue to believe Spectra encompasses a very visible stream of stable, long-term cash flow; the potential for both organic and inorganic growth; and the financial flexibility to achieve above-average distribution growth. Specifically, we believe Spectra is on track to generate a three-year CAGR in distributions of 11.8% (well above the peer average of 8.5%).
EARNINGS SNAPSHOT
K-Sea Transportation Partners LP (KSP/$36.90/Outperform): Recently Enhanced DCF Growth Profile + Attractive Valuation = Compelling Investment. Intraday yesterday, KSP units rallied ~6.5% following the partnership reporting F2Q08 earnings of $0.68/unit. As noted in our comments yesterday, this result was well above the consensus forecast of $0.58/unit and our estimate of $0.64/unit. However, when removing the non-recurring gain of $2.1 million ($0.12 benefit) from legal proceeds settlements, true operating EPU arrived at $0.56/unit, which was $0.02 below consensus. More important than the quarterly result is the improving outlook for K-Sea as the partnership has now fully integrated the vessels from its Smith & Sirius acquisition in 2007. Looking forward, we remain optimistic regarding the forward distribution growth profile at K-Sea, particularly when nine additional tank barges under construction and one ATB come online between now and FY10. Moreover, given the partnership's recently expanded geographic footprint, more diverse cash flow base, and incremental opportunity to enhance its customer book, we believe the best is yet to come for K-Sea.
Arch Coal (ACI/$43.95/Outperform) Strong 4Q07; Leverage to Upside Potential of Coal Markets as 2009 Portfolio Remains Largely Unpriced. Arch Coal reported 4Q07 EPS of $0.56, which compares to our estimate of $0.45 and the Street's estimate of $0.47. Normalized for our tax rate assumption, it would still have been $0.51. Arch Coal sales volume was 33.7 million tons, 2% lower than our estimate and 2% sequentially. Average sales price per ton was $17.48, 9% higher than our estimate and 3Q07. The price increase was a result of larger volume from the CAPP region. Operating cost per ton was $14.60, which was in-line with our estimate. Management has issued its full-year 2008 EPS guidance of $2.00-2.50. EBITDA is expected to be in the range of $680-790. This compares to our current estimate of $2.30 and consensus of $2.45. A bit better outlook than what we had yesterday, as Arch still had one third of its 2008 coal unpriced as of 3Q07. During the quarter, Arch contracted 30 million tons of its 2008 portfolio and 10 million tons of its 2009 contract at significantly higher levels than current domestic steam coal index prices. Arch has between 15-25 million tons (~10-15%) of anticipated 2008 production un-priced. In addition, Arch has 85-95 million tons (~60%) unpriced for 2009 delivery and 95-105 million tons (~2/3) unpriced for 2010 delivery.
Massey Energy (MEE/$37.04/Market Perform) Reports Weak 4Q07; Company Still Shooting for Meaningful Volume Growth Over the Next Three Years. Massey reported 4Q07 EPS of $0.06; however, after normalizing for a number of one-time benefits and expenses and tax rate, the true comparable for 4Q07 EPS was a penny higher at $0.07. This compares to our estimate and the Street's of $0.35 and $0.31, respectively. Total tons sold during the quarter were 9.6 million, down 7% sequentially and 7% lower than our estimate, but 3% higher y/y. Average price per ton was slightly lower than our estimate at $51.84, while average operating cost per ton was slightly above our estimate at $44.14. Overall, weaker metrics across the board led to the soft quarter. Massey anticipates coal shipments to be between 41.5-43 million tons in 2008 with an average realized price between $55-$56/ton ($1-2 higher than prior expectations). Unfortunately, costs are expected to be $44-45/ton, above our low $43/ton estimate. Massey expects total shipments for 2009 to be in the range of 44.0-46.0 million with an average realized price between $57-59/ton. Massey currently has 10 million tons unsold for 2009 or roughly 22% of anticipated production. Of the 10 million tons unsold in 2009, six million tons are metallurgical coal. The company also expects 46.0-48.0 million tons in 2010 at an average price in the mid- to upper-$60s/ton. Clearly, the ability to actually achieve the expected volume growth and to achieve high price realizations will be key to earnings. 2008 capital expenditures are estimated to be $460 million, up nearly 70% from 2007 levels, as the company continues with its previously announced two-year internal expansion and cost reduction plan. Recall that the projects could add an additional eight million tons in 2010 versus 2007, with the ramp-up occurring during 2008/2009.
PRICES
Oil $91.67, down $0.08 pre-market
Gas $8.01, down $0.06 pre-market
Rockies gas price (Opal): $7.71, down $0.02 yesterday
Gasoline $2.51/gal, flat yesterday
Ethanol $2.16, down $0.04 yesterday |
