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Friday, September 17, 2010

Daily Energy Digest - 9/17/2010

WTI Oil Price Change:
Credit Suisse has adjusted its 2010-2011 WTI oil price forecasts to reflect resilient Non-OPEC
supply and lower OECD and Non-OECD demand estimates going forward. Thus, 2010 WTI has been lowered from
US$79.10 to US$76.90 per bbl while 2011 has been lowered from US$80.00 to US$72.50. Credit Suisse's long-term view
of WTI (i.e., 2012 and beyond) is unchanged at US$80.00. Recent pipeline issues has pushed Canadian heavy oil
differentials to be wider than expected on a near term basis. Over the medium term, however, CS continue to forecast a
relatively narrow WCS differential.

NYMEX Gas Price Changes: Credit Suisse has also adjusted its 2010-2012 NYMEX gas price forecasts given ongoing
productivity gains from shale plays and continued capital flow into the sector. 2010 NYMEX has been lowered to reflect
Q310 actuals while 2011 has been lowered from US$6.00 to US$5.25 per MMBtu. The long term price of US$6.50 is
unchanged but has been pushed out a year to 2013 and beyond, such that 2012 has been lowered from US$6.50 to

Massey Energy (MEE) Cuts 2010 Outlook, but Affirms 2011 Outlook: Citing increased inspection and enforcement activity and the delayed restart of a longwall, Massey now expects 2010 operating results to be at the low end of their previous 2010 guidance. The expectation of improving operations as well as strong early negotiations with met coal customers allows Massey to affirm their 2011 outlook. Bottom line: This has been a challenging year for Massey to say the least. In addition to these ongoing operational challenges, Massey still must contend with potential litigation risks and ongoing headline battle associated with the UBB tragedy. Also interesting to note is that this marks the fourth company to reduce either 3Q or 2H10 production guidance in the past couple of weeks.

Petrohawk (HK) gives operational update in the Eagle Ford and Haynesville shales. Petrohawk announced that two new Black Hawk wells IP'd at 1,700 boe/d and 1,360 boe/d, respectively, raising the average initial production rate of Black Hawk wells to 1,440 boe/d from 1,400 boe/d. These wells are yielding an attractive amount of condensate (~70%), and Petrohawk is likely to increase the rig count from 4-5 to 6-8 by year end 2011. The company also has tightened guidance for Hawkville completed well costs to an amount of $5.5-6.5 million from the previous $4.5-6.5 million range (prior RJ estimate $6m). Also, the first Bossier test at the Whitney Corp well came in at 7 MMcf/d (restricted 14/64" choke, ~8,000 psi) and the company estimated it will yield an 8 Bcf EUR. More encouraging results out of Black Hawk and successful Bossier Shale completion bodes well for future development of 122K net acres prospective for Bossier.

Energen (EGN) to write off the remainder of its Alabama Shale acreage after Chattanooga and Conasauga wells prove uneconomic . The company will write-off a non-cash charge of $14.4 million (after tax) associated with the remainder of its Alabama Shale leasehold. After continued efforts, the company determined the shales are of poor reservoir quality and flow rates from the shallow-interval Conasauga and multi-stage Chattanooga wells were both "insufficient to support economic development." The company will record this non-cash charge (roughly $0.20/diluted share) during the third quarter. Additionally, the company stated that its acquisition in the Wolfberry trend of the Permian Basin is set to close by September 30th, and the company will continue to look for acquisition opportunities. With these shales out of the picture, Energen can now focus its full attention on the development of its Permian properties, where the company continues to experience increased success.

BP plc (BP) relief well reaches target, "bottom kill" to conclude within a week. Two months after the initial cap, BP's relief well intercepted the Macondo well yesterday. With the interception, mud and cement can now be pumped into the annulus to permanently close the well. The bottom kill is expected to wrap up this weekend or early next week. According to tests, the "top kill" efforts from early August already sealed the reservoir from the Macondo well, but the completion of the bottom kill will confirm that the well has been permanently shut in.

K-Sea Transportation Partners L.P. (KSP) Secures Final $15 million of $100 million Direct Equity Investment. Recall earlier this month, K-Sea closed the first $85 million portion of the direct equity placement with KA First Reserve LLC, a partnership between First Reserve and Kayne Anderson. K-Sea has now finalized the remaining $15 million investment, which was previously undergoing review. In exchange for the capital infusion, KA First Reserve LLC will receive 18.4 million convertible preferred units [13.5% coupon with payment-in-kind (PIK) distributions through June 30, 2012, or earlier if a cash distribution is reinstated]. Upon receipt of the equity investment, K-Sea's creditors have agreed to amend the financial covenants on the partnership's credit facility. The partnership has been in violation of these covenants since 8/31/10. While we view the recapitalization favorable as it will allow K-Sea to remain a going-concern, we expect the dilution from the convertible preferred issuance to act as an overhang on the units. Furthermore, the operational headwinds facing K-Sea continue to cloud our visibility into the timing of a possible distribution reinstatement.

SUNCOR (SU) Credit Suisse has revised their 2010/2011 EPS/CFPS estimates for Suncor. Their 2010 estimates go from C$1.93/C$4.56 to C$1.75/C$3.94 while 2011 estimates decrease go from C$2.95/C$5.98 to C$2.86/C$5.57. Target price has been revised from C$50 to C$45 which continues to be based on 8.5x 2011E EBIDAX of C$9,456 million and is set in line with CS's net asset value estimate of C$44/sh.

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