RJ EnergyGroup, Monday, December 03, 2007 8:03 AM
Daily Update
Crude continues its fall from near triple-digit prices this morning and is now down ~11% since topping $99/Bbl just one week ago. The largest weekly decline in over two years was due in part to expectations that a slowing U.S. economy will reduce demand expectations. Now that prices have fallen below $90/Bbl, OPEC may decide to leave production levels flat when it meets on Wednesday December 5 in Abu Dhabi. OPEC officials, including the Saudi oil minister, have recently reiterated their feelings that oil markets remain well-supplied. This morning, natural gas is trading more than 3% lower; despite data showing that colder than normal weather was reported last week and should finally lead to a significant withdrawal from storage. The two-week forecast, which shows warmer than normal temperatures in the important Northeastern market, is driving prices lower. Service stocks resisted commodity declines last week as the OSX traded relatively flat, while the S&P E&P fell slightly more than 2%.
Newfield Exploration (NFX/$49.85/Market Perform) Releases Data and Predicts Higher Estimated Reserve Recovery on Three “Monster Wells” in the Woodford. In particular, three wells recently flowed to production at rates of 10.3, 9.4, and 12 MMcfe/d. All three of the wells were completed with lateral lengths greater than 4,200’. To date, the company has drilled 10 wells with 3,400’ or more of lateral lengths. These wells, as well as other recent data points, have moved the needle such that F&D costs should move toward $2/Mcfe in the Woodford. To date, Newfield has increased its acreage in the play to 165,000 net (a 10% increase since the last update). Also, gross production has increased by 10% over the past month. From its continuous progression in the Woodford, the company estimates that each frac stage will recover 600 Mcfe of reserves.
Range Resources (RRC/$40.68/Outperform) Increases Dividend. In an indication from management that Range’s financial outlook continues to remain strong, the company raised its quarterly dividend from $0.03 to $0.04 per share. The higher dividend is payable on December 31.
In Venezuela, Chavez Loses a Key Referendum… On Sunday, two major oil-producing countries held votes seen as pivotal for their political future – Venezuela and Russia. The referendum in Venezuela represented the last step in President Hugo Chavez's consolidation of power over the past seven years. A series of constitutional amendments, proposed by Chavez, would abolish presidential term limits, allowing Chavez to stay in power indefinitely. They would also declare Venezuela a socialist republic and give the government greater powers over business and the media. The opposition, which includes several former Chavez supporters, saw this vote as a final chance to prevent the country's slide into all-out dictatorship. The result was a nail-biter, but in the end, Chavez lost 51% to 49%, reflecting public discontent over his power grab. Bottom line: Chavez's first term presented a roughly 30% decline in Venezuelan oil production and the expropriation of foreign-owned oil properties. While he clearly overreached in this referendum, he will remain president through 2012, giving him plenty of time to use other means to advance his anti-business agenda.
…While in Russia, Putin’s Party Wins Big. While the political leadership was defeated in Venezuela, the result was very different in Russia. President Vladimir Putin’s ruling party, United Russia, won approximately 64% of the vote in parliamentary elections. The elections were heavily criticized by opposition groups and the small number of foreign monitors allowed to observe the vote. Together with two other parties seen as pro-Kremlin, United Russia will have a huge majority of roughly 80%, easily allowing it to change the constitution – if it so chooses. Putin is set to step down as president in 2008, but with his party in power, he could continue running the country as prime minister, or change the constitution to allow himself unlimited terms as president (what Chavez tried to do). What is also telling is that the only true opposition in parliament will now be the Communists. Bottom line: Russia is the world’s largest oil producer, and any political volatility there ripples through oil prices. With Putin firmly in charge, there is little risk of a major energy policy shift, but international oil companies should not expect any moderation in Russia’s resource nationalism.
Fuel Efficiency Compromise Removes Major Energy Bill Hurdle; All Eyes on RPS. Late Friday, the Democratic leadership in Congress hammered out a compromise package on automotive fuel efficiency standards, overcoming prior opposition by Michigan Democrats and the Detroit automakers. The broader significance of this compromise is that it paves the way for votes in both the House and Senate on the overall energy bill, which has been languishing in legislative limbo over the past six months. These votes could come as early as this week. This is particularly important for renewable energy, boosting support for which is one of the hallmarks of the bill. Bottom line: While debate around the energy bill remains in flux, we view an increase in the Renewable Fuel Standard (RFS) as a virtual certainty, and this would be positive for ethanol producers across the board. Meanwhile, we view the introduction of the first-ever federal Renewable Portfolio Standard (RPS) for electric power as a 50/50 chance. We believe the RPS could well be the most meaningful component of the entire bill, and it would be extremely bullish for solar and wind companies.
The Baker Hughes (BHI/$80.27/Strong Buy) Rig Count is up 50 from last week to 1,823. The Rig Count is now up 6% y/y.
Weekly ethanol recap. At the end of last week:
The ethanol average rack price was $2.02/gal vs. $1.98/gal one week earlier.
The benchmark CBOT corn price was $3.82/bushel vs. $3.89/bushel one week earlier.
The crush spread, a key measure of ethanol profitability, was $0.66/gal vs. $0.59/gal one week earlier.
Ethanol was running at a $0.24/gal discount to NYMEX gasoline vs. a discount of $0.49/gal one week earlier and the historical average of a $0.40/gal premium.
PRICES
Oil $87.91, down $0.80 (-0.9%) pre-market
Gas $7.04, down $0.26 (-3.6%) pre-market
Rockies gas price (Opal): $5.68
Gasoline $2.26/gal, up $0.01
Ethanol $1.950/gal, down $0.035 |
