Daily Energy Digest - 9/15/2010

• Denbury (DNR) procures second CO2 source for Rockies enhanced oil recovery (EOR) properties for $115 million. The company will purchase a 42.5% non-operated working interest in the Riley Ridge Federal Unit located in southwestern Wyoming, along with an additional ~28,000 acres adjoining the Riley Unit. Denbury estimates this field to have proved reserves of 185 Bcf of natural gas, 6.6 Bcf of helium, and 1.0 Tcf of CO2, net to the company's interest and expects the production stream from the facility to be 65% CO2, 19% natural gas, 10% hydrogen sulfide (H2S), and 6% helium and other gasses. Although first production from this unit is not expected until late 2011, Denbury believes this unit could provide as much as 130 MMcf/d of CO2 when fully developed and 400 MMcf/d if the additional 28,000 acres are successfully developed (keep in mind Jackson Dome supplies roughly 800 MMcf/d to the company's Gulf Coast properties). Bottom line: Denbury's success in the Rockies largely depends on its ability to secure sources of CO2 in the region, and with this acquisition, Denbury takes another positive step towards developing the ~230 MMBoe of potential oil reserves in the region.
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• Legacy Reserves (LGCY) announces bolt-on acquisitions in Permian Basin and Wyoming. Legacy announced that it has recently acquired $14.9 million in oil and gas properties located in the Permian Basin (75% of the assets) and Wyoming. The acquired properties have 1.0 MMBoe of proved reserves (79% oil and NGLs and 93% proved developed producing) and 220 Boe/d of production, equating to a reserves/production ratio of 12.5 years. The acquisition metrics equate to $67,727 per flowing barrel and $14.9 per proved Boe and compare favorably vs. recent industry transactions. The acquisition is expected to be funded through debt under its revolving credit facility. Year-to-date, Legacy has announced/completed $173 million in acquisitions - setting a new high water mark for the company.
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• EOG Resources (EOG) enters into second $1.0 billion credit facility. The company has entered into a new revolving credit facility that will provide commitments and letters of credit from 14 banks of up to $1.0 billion. The agreement also allows EOG to request an increase of the facility size up to $1.5 billion. This agreement is in addition to the company's existing untapped $1.0 billion credit facility. Bottom line: A much-needed move as spending is to exceed cash flow by over $2 billion (on our numbers). Asset sales should make up for the remainder of the shortfall as the company spends aggressively to build liquids assets.
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• Weatherford (WFT) has debt rating trimmed by Moody's. Yesterday, Moody's downgraded Weatherford's senior unsecured notes to Baa2 from Baa1, reflecting concerns over the company's high debt relative to its peers. Weatherford has over $6.5 billion in debt and a debt to cap ratio of 41% (well above its peer group average of 27%). The company's high leverage is due largely to its debt-fueled, aggressive growth strategy over the past year.
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• Transocean (RIG) fleet report - deepwater rigs leaving Gulf of Mexico. The 12,000' Discoverer Americas is moving from the Gulf of Mexico to Egypt for the duration of the moratorium. The dayrate remains $486,000/d, save for a lower standby rate during the mobilization. Transocean also recently shipped the 7,000' Marianas out of the Gulf of Mexico and to Nigeria, under similar terms (keeps a $565,000/d rate). Bottom line: Recall that a few months ago force majeure was announced on six of Transocean's ultra-high spec floaters. These rigs were two of the six. By getting them out of the Gulf, these strong contracts are maintained, a definite plus for Transocean.
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• Diamond Offshore (DO) fleet report - ultra-deepwater contract cancelled in Gulf of Mexico. Having previously declared force majeure, Anadarko (APC) has now sent notice that it will terminate the $440,000/d contract for the 10,000' Ocean Monarch due to the moratorium. Diamond Offshore disputes the legality of the termination, and a court battle may follow. Bottom line: Anadarko will likely have to pay a termination fee, but they may not be willing to pay a significant portion of the overall contract (a so-called "iron-clad contract").
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• El Paso Pipeline Partners (EPB) announces public offering of 10 million common units. El Paso Pipeline Partners announced that it plans to sell 10 million common units (11.5 million if the shoe is exercised) to the public with the proceeds earmarked for debt repayment and capital expenditures. Management has been quite vocal in that they are targeting two to four asset dropdowns from its parent company, El Paso Corp. (EP) per year. Year-to-date, the partnership has completed two dropdown transactions. At quarter-end, El Paso Pipeline Partners had $520 million drawn on its revolver and $215 million in availability. Additionally, the company has very minimal amounts on near-term debt maturities.
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• Energy Transfer Equity L.P. (ETE) to launch $1 billion public offering of senior notes. The proceeds from the offering will be used to pay down the partnership's existing debt. Energy Transfer Equity currently has a $1.45 billion term loan due November 2012 and a $500 million revolving credit facility due February 2011. Following the offering, the partnership plans to completely pay off the $500 million credit facility and replace it with a new $200 million credit facility. The remaining proceeds will go towards reducing borrowings under the $1.45 million term loan. Recall, we have been modeling for the partnership to refinance both the credit facility and the term loan through an offering of 10-year senior notes with an interest rate between 7.5% and 8.0%. In January 2010, the partnership abruptly withdrew a $1.75 billion offering of senior notes, citing market conditions.
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• Williams Partners L.P. (WPZ) brings fourth processing plant at Echo Spring Facility on line. The expansion project, which was completed ahead of schedule and under budget, will add 350 MMcf/d of processing capacity at the Echo Springs facility in Wyoming. The expansion will provide the partnership with the ability to process expected future increases in gathering volumes in the area which currently stand at 475 MMcf/d. The expansion is also complementary to Williams' recent $424 million acquisition of a 49% interest in the Overland Pass Pipeline. Overland Pass is a 760-mile NGL pipeline that runs from Opal, Wyoming, to Conway, Kansas. Given that all of the NGL equity volumes from the partnership's Wyoming processing facilities are dedicated to the Overland Pass pipeline, the fourth processing plant is a strategic fit for Williams Pipeline's growing asset base in the region.
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• Alpha Natural Resources (ANR) held analyst day. Main highlights are:
• Following ANR's analyst day, there's no change to near-term outlook. Main takeaway was that ANR management continues to target growth via acquisitions...a challenge given the valuation gap (ie ANR trading at a discount to most peers in US and elsewhere). Below are more details on the main takeaways:
• Near-term - No changes to operating targets or estimates. There was very little incremental information on near-term operating outlook. As of Q2, ANR had ~10m tons of eastern steam volumes unpriced for 2011 (or 32% of total eastern volumes), and ~10m tons of 2011 met unpriced. No formal comments on these unpriced positions, and Q & A may suggest that not much contracting activity took place during Q3. Company Strategy - Acquisition focused.Probably, acquisitions would be international (Australia, Canada, and Columbia at the top of their list). US transactions that further enhance export opportunities also a possibility. ANR is willing to use its underleveraged Balance Sheet ($1.5 billion of liquidity and ~$500m of increased leverage by our estimates), and is not focused on one and two-year forward valuation metrics to evaluate potential. Challenge is ANR trades at a fairly significant discount to most public producers, hence deals would likely be dilutive to one and two-year forward multiples. Longer-term coal demand outlook good for international, not good for US. ANR indicated its expectations of CAGR's of 3%-5% in international met and thermal coal demand to 2025. Conversely, of the ~300GW of coal-fired capacity in the US, ANR shared their view that 40GW will likely be eliminated, and another 140GW is requiring investment decisions.