RJ EnergyGroup, Tuesday, September 11, 2007 8:20 AM
Daily Update
Energy stocks were little changed yesterday despite the highest single-day percentage gain in natural gas prices in seven months. Pre-market, oil is up after increasing roughly 1% yesterday, as OPEC debates whether to open the taps or leave production unchanged. The latest news from the Vienna meeting is that Saudi Arabia (the world's biggest exporter), the UAE, and Kuwait support a production increase, but are facing resistance from Venezuela, Algeria, and Libya. Natural gas is flat this morning after rising roughly 7% yesterday, the highest percentage gain since January 30, when gas advanced 12%. Prices surged on news that a tropical depression may soon form in the Atlantic and terrorist activity in Mexico disrupted six pipelines. According to Pemex, the country's state-run oil company, the pipeline damage would cut off around 25% of the country's natural gas supply for 24 to 36 hours.
Apache (APA/$79.07/Market Perform) Announces Third Discovery in Offshore Australia. Apache announced that its Brunello-1 well, the company's third consecutive natural gas discovery in the WA-356 permit, tested at 72.5 MMcf/d and 1,230 Bbls/d. This discovery well, which is located 10.6 miles from Julimar-1, is expected to be developed in 2010 or 2011. The Brunello-1 well was drilled to a depth of 12,027 and is expected to hold recoverable resources in the range of 300 billion cubic feet. Apache owns a 65% working interest in the WA-356 permit and operates this offshore block.
GlobalSantaFe (GSF/$72.68/Strong Buy) to Build Ultra-Deepwater Drillship; Delivery in 2H10. GlobalSantaFe just announced that it has contracted Hyundai Heavy Industries to build an ultra-deepwater drillship for ~$740 million with an expected delivery date in September 2010. The price seems to be ~$50 million more than other recent drillship contracts, highlighting the increased scarcity of shipyard slots and available parts and labor. The drillship is an enhanced version of the C.R. Luigs and Jack Ryan drillship class, with a water depth of 10,000 feet, which has the potential to be upgraded to 12,000 feet. GlobalSantaFe, normally a fairly conservative company in regards to newbuilds, will build the drillship without a firm contract, underscoring what we believe will be a strong market extending well into the next decade. Bottom Line: With ample free cash flows, GlobalSantaFe should have no trouble financing this newbuild. Moreover, with a delivery date after the merger, it will provide one more ultra-deepwater rig to Transocean (RIG/$108.31/Strong Buy), which will already own the lion's share of the deepwater capacity. It looks like the rich get richer.
Bronco Drilling (BRNC/$14.73/Market Perform) Releases Monthly Operating Update. Bronco's utilization level for the month of August averaged 78%. This was flat compared to July, and higher than 2Q07's average of 76%. As of August 31, 2007, the average dayrate for operating rigs was $17,394, which was about 2% lower than the 2Q07 average and slightly lower than last months $17,485. As we expected, dayrates continue to feel pressure as natural gas prices struggle and companies attempt to keep utilization rates stable. Utilization for Bronco's workover rigs was reported as 81% in August, down from 83% in July, but above the 78% experienced in 2Q07. The number of marketed workover rigs increased to 35 from 31 in July and 29 in 2Q07, which was in-line with our estimates. This well service business segment is performing well compared to the contract drilling. All in, Bronco's results were relatively in-line with our expectations. We remain cautious due to the weak land drilling market, but a buying opportunity may soon arise as gas prices bottom before the winter. Our full-year 2007 estimates remain about 12% lower than consensus, as we believe the drilling market will begin to pick up sometime next year.
Interesting Article in WSJ p. A2: "OPEC Weighs Modest Increase in Output." With oil prices nearing all-time highs, today's meeting between the members of the Organization of Petroleum Exporting Countries should draw much deserved attention. On the table during the meeting in Vienna is a Saudi-backed proposal to raise the quota level by 500,000 Bbls per day - which represents nearly 2% of total output from the cartel. Interestingly, the 10 members subject to quotas are estimated to have already produced roughly 1,000,000 Bbls per day above the current ceiling last month. The proposed output boost would be largely symbolic, aimed to calm a skittish market that is still assessing the full extent and fallout from the U.S. credit market meltdown. Furthermore, the decision also becomes a timing issue for OPEC, not wanting to suffer the same plunge in oil prices that occurred in 1997, when the cartel increased its output prior to the Asian economic crisis, which cramped demand levels.
Interesting Article in WSJ p. A12: "Mexican Gas Pipelines Attacked Again." For the second time in two months, the leftist guerrilla group, The Popular Revolutionary Army, claimed responsibility for an attack on Mexico's oil and gas infrastructure. Yesterday's terrorist attacks, most of which were in Veracruz in Southern Mexico, involved six detonated bombs that heavily damaged several natural gas pipelines in Mexico. The government is reporting that these attacks caused hundreds of millions of dollars worth of damages. Furthermore, the pipeline damage cut off approximately 25% of the country's natural gas supply. The Popular Revolutionary Army has claimed, in the past, that it would continue its attacks until the Mexican Government releases two of its leaders who the army claims have disappeared or been kidnapped. Bottom Line: At a time when Mexico's oil production is declining rapidly due to natural production declines in the country's Cantrell Field, the country can ill afford to spend "hundreds of millions of dollars" on repairing pipelines from terrorist attacks. The ultimate result of the continued unrest in Mexico will be less capital spent on exploratory drilling and even more rapid production declines in the coming years.
Interesting Article in WSJ p. A15: "Coal Industry Hopes Pentagon Will Kindle a Market." The coal industry in the U.S. is one of the largest in the world, producing about 1.2 billion tons of coal in 2006. It hopes to expand this by another 1 billion tons by 2030 through increased coal-to-liquids production. Several factors restrict the mass implementation of coal-to-liquids plants, however. First, carbon dioxide is produced in the process, and to be environmentally sound, it would have to be recaptured. Crude oil would have to trade above $50 to $55 to make this profitable, vs. $40/bbl for the non-carbon-capturing plant. Secondly, an 80,000 bpd coal-to-liquids refinery would cost about $7 billion to $9 billion to construct according to coal industry estimates - far above the under $2 billion cost of a similarly sized petroleum refinery. Third, the process uses five to seven gallons of water for each gallon of fuel produced, limiting its application in the drier western states. And finally, long-term contracts of more than five years would be necessary to support the construction of a plant, and the military is seen as the best option for securing such a contract. The military is limited, however, to signing contracts only up to five years. Currently the Air Force is supporting legislation to allow it to sign 25-year contracts for supply, even at today's historically high prices for crude. Bottom Line: Proponents of coal-to-liquids technology could almost double coal demand in less than 30 years, but cost and environmental concerns hinder new plant construction and widespread adoption of the technology.
PRICES
Oil $77.60, up $0.11 (1%) pre-market
Gas $5.93, up $0.03 (1%) pre-market
Gasoline $1.98/gal, down $0.01
Ethanol $1.56/gal, up $0.02 |
