RJ EnergyGroup, Monday, June 02, 2008 8:24 AM
Daily Update
Now that the Bay of Campeche appears safe from Tropical Storm Arthur, crude is trading lower and has fallen nearly 7% since hitting an all-time high above $135 less than two weeks ago. We still think the long-term supply and demand fundamentals are bullish for crude. The same cannot be said for natural gas prices, which are again trading up today. In the short term, we would not be surprised to see prices remain at lofty levels, although significant downside risk remains late this summer.
The Haynesville Shale: Even Better Than Advertised. While recognizing that many of the publicly-traded producers with exposure to the Haynesville Shale have seen significant appreciation in their share prices since the play was first introduced, we believe that we are still in the early chapters of this story. The flurry of activity on the horizon by a number of operators should provide additional positive data points, which in turn will lead to a better overall understanding of the play's potential. We are taking this opportunity to strengthen our stance on a number of active players in the Haynesville Shale (see our industry brief released this morning for details).
U.S. Gas Production: Same Old Song & Dance, Core Supply Up 4 Bcf/d Y/Y in March. In the latest EIA Form-914 natural gas production survey, released Friday, total U.S. volumes (lower 48 states) for the month of March totaled 61.5 Bcf/d, representing y/y growth of 4.8 Bcf/d (8.5%), a sequential increase of 0.3 Bcf/d (0.5%). Core supply (ex-Indy Hub) is up 3.9 Bcf/d y/y and, in fact, is up 2.9 Bcf/d since October 2007. The primary driver continues to be Texas, which is undoubtedly led by growth from the Barnett Shale.
Whiting Petroleum (WLL/$93.53/Strong Buy) Raises 2Q08 Production Guidance. On Friday, Whiting closed the $365 million acquisition of oil and gas properties in Utah. After allocating $35 million for infrastructure, the purchase multiple of the 115.2 Bcfe of proved reserves was an attractive $2.86/Mcfe. With production from the new assets, Whiting is raising 2Q08 production guidance to 3.75-3.85 MMBoe, above our forecast of 3.74 MMBoe. Bottom Line: With Whiting generating excellent results across its entire portfolio, we continue to believe that it has ample room to exceed its current full-year production guidance.
Targa Resources Partners (NGLS/$26.53/Strong Buy) Files Mixed Securities Shelf. Targa registered with the SEC to sell an indeterminate amount of debt securities and common units. This further enhances Targa's financial flexibility to pursue drop downs from its parent ($2.4 billion in assets). With a Debt/EBITDA of 3.2x (vs. peers of 3.7x), Targa has the capacity to lever up on additional debt in the form of a new term loan or under its revolver ($170 million available). Moreover, as exemplified by 1Q08's 2.0x coverage ratio, Targa has sufficient dry powder from working capital to finance an acquisition should the opportunity present itself (we expect 2H08).
Crosstex Energy (XTEX/$30.69/Market Perform) Educates Public on Barnett's Importance; Outsize Growth at GP. Crosstex joined the Barnett Shale Energy Education Council (BSEEC) to educate the public about the need for midstream natural gas services such as gathering, processing, treating and transmission. Owning 700 miles of gathering and transmission pipeline, and three treating plants with a fourth on the way, the $80 million Bear Creek Processing Plant, Crosstex is a midstream leader in the Barnett Shale. With outsize leverage to XTEX distributions, we think Crosstex Inc. (XTXI/$34.13/Outperform) stands to benefit the most from continued growth with a 17.2% three-year distribution CAGR.
The Baker Hughes (BHI/$88.62/Outperform) Rig Count is Down 12 from Last Week to 1,877. The Rig Count is Now Up 6% Y/Y. The Baker Hughes rig count decreased by 12 last week to 1,877, with a decrease of 14 rigs drilling for gas, an increase of four rigs drilling for oil, and a decrease of two miscellaneous rigs. Overall, we are 154% (1,139 rigs) above the rig count bottom experienced on April 5, 2002, and 7% (103 rigs) above the rig count at the same time last year.
Weekly ethanol recap. At the end of last week:
The ethanol average rack price was $2.75/gal, vs. $2.76/gal one week earlier. The benchmark CBOT corn price was $5.99/bushel, vs. $6.00/bushel one week earlier. The crush spread, a key measure of ethanol profitability, was $0.61/gal, vs. $0.62/gal one week earlier. Ethanol was running at a $0.66/gal discount to NYMEX gasoline, vs. a discount of $0.64/gal one week earlier.
PRICES
Oil $125.76, down $1.60 (1.3%) pre-market
Gas $11.83, up $0.13 (1.1%) pre-market
Rockies gas price (Opal): $7.88
Gasoline $3.35/gal, down $0.06
Ethanol $2.75/gal, flat |
