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Tuesday, September 21, 2010

Daily Energy Digest - 9/21/2010

Natural Gas (UNG) US natural gas supply should be relatively strong this fall compared to year-ago levels as major pipeline maintenance curtailed volumes last year. According to BENTEK estimates, marketed gas production is currently running around 4.0 Bcf/d ahead of year-ago levels and 0.7 Bcf/d above their early estimates for September 2010.

Penn Virgina Resources (PVR) This morning, PVR and its general partner, PVG, announced an agreement in which PVG would be merged into PVR through an equity transaction that would exchange 0.98 units of PVR for every outstanding PVG unit. At last night's closing price (PVR $24.98, PVG $22.38), this would represent a 9.4% premium to PVG unitholders. All of PVG's IDRs and currently held PVR units would be cancelled in the transaction. Approximately 38.3 million additional limited partnership units would be issued by PVR, and the approximately 19.6 million PVR limited partnership units currently owned by PVG would be cancelled.

The release cites a lower cost of capital, increased liquidity for LP units together with a simpler ownership structure as reasons for engaging in the transaction. The merger must be approved by a majority of PVR unitholders and PVG unitholders. The release notes that PVG has agreed to vote their 37.6% outstanding interest in PVR in favor of the agreement. We note that that public float of PVG represents nearly all of the PVG units currently outstanding. Bottom line: PVR is getting a good deal because it is buying PVG below the yield of other coal general partners.

Global Geophysical Services Inc. (GGS) signs Brazilian contract; announces a large contract in Brazil with Petra Energia. Petra Energia is commencing a ~2,250-square mile land seismic shoot, and may go on to shoot an additional 1,000 square miles. The shoot marks Global Geophysical's entrance into Brazil, and will utilize the company's high quality vibroseis trucks (more efficient than dynamite). Bottom line: The size and scope of the contract is a plus for the company. It is also a positive for the international seismic market as a whole, as the tendering process continues to expand (recall tenders are slowly ramping up after being frozen since late 2009).

Chesapeake Energy's (CHK) inspection of Marcellus wells to take 60 days. The Pennsylvania Department of Environmental Production (DEP) is requiring the company to inspect 171 natural gas wells in Pennsylvania after reports that methane gas leaked into a river and contaminated nearby water wells. All of the wells under review have been drilled, but have not been completed (read: have not been hydraulically fracked) and are not producing gas from the Marcellus Shale formation. Chesapeake believes the source of the problem is the leakage of methane gas from six wells located roughly 2-3 miles northwest of the river. Although the company has yet to discuss the inspection's possible impact on production guidance, this is yet another 'butting of heads' between E&P operators and Pennsylvania residents over the potential impact of natural gas drilling in the region.

Kodiak Oil & Gas (KOG) provides Williston update and results on its latest long lateral well. In Dunn County, the company's Moccasin Creek #13-34-28-1H (9,770-foot lateral, 59% working interest) reached a peak 24-hour production rate of 1,906 boe/d. Unfortunately, this well had minor mechanical issues and was completed with only nine stages at first, and then the remaining 13 stages nine days later. While the initial production rate would have been higher had all 22 stages been completed together, 1,900 boe/d is still a solid well. In addition, the previously announced offset well, the MC #13-34-28-2H which IP'd at 2,055 boe/d, is showing a better-than-expected decline and averaged 1,259 boe/d for its first 30 days. The company is currently running two operated rigs (one in Dunn County and one in Koala Project) and expects to be caught up on its completion backlog (currently only two off schedule) by the middle of next month.

Gulf Island Fabrication Inc. (GIFI) announces major deepwater Gulf of Mexico contract. After falling to its lowest levels since 2005, Gulf Island's backlog should get a nice boost following yesterday's announcement for the authorization of a "major" deepwater topsides fabrication project in the Gulf. Although the company could not disclose the actual amount or who the contract was for specifically, management did indicate that it was bid at what it considers to be good margins. The project will likely start in early 2011 and keep the company's Texas facility busy for the duration. Although it is hard to say exactly how much this will contribute to earnings, we would note that the last time it was awarded a very meaningfully sized project (the Min-Doc platform), the company generated a little over $2 per share in earnings for two consecutive years (2007 and 2008). In addition, the company mentioned that there are still other deepwater and international project bids that are being considered.

BP plc (BP) joins oil spill response group. With the Macondo well permanently sealed, BP now plans to join the Marine Well Containment Company - an emergency response group that was formed in the aftermath of the Macondo disaster. The group is led by Exxon Mobil (XOM) and also includes Chevron (CVX), Conoco Phillips (COP), and Royal Dutch Shell (RDS.A). BP will contribute equipment and technical expertise gained from the Macondo spill. BP's quick action to join the group after the end of the Gulf crisis shows that BP is shifting its focus to trying to rebuild its reputation. Whether BP's membership in this club will make any difference to regulators is debatable, especially considering that the company is already facing tough scrutiny with regard to offshore drilling in Greenland and Libya.

Eagle Rock Energy Partners (EROC) announces further delays in an East Texas processing facility. Eagle Rock Energy Partners announced that its East Texas oil and gas production will be shut-in longer than the 30-45 days originally anticipated due to prolonged maintenance on a third-party processing facility. The repairs and upgrades at the facility were expected to be completed in late September. However, the operator now expects the facility to be back on-line in mid-November. The extended down time is expected to negatively impact Eagle Rock's upstream revenues by roughly $4 million. The partnership plans to utilize its business interruption insurance policy to recapture a portion of the lost revenue. Bottom line: This news may negatively impact our 4Q EBITDA estimate.

Crescent Point Energy (CPG.TO) Yesterday, Crescent Point increased its 2010 capital budget and exit guidance after acquiring more than one million acres in the Alberta Bakken play. The Company entered the play through the acquisition of a private company, land sales and freehold leases. Crescent Point has also increased its landholdings in Saskatchewan by 100 net sections, including 60 net sections in the core Bakken and Lower Shaunavon plays. With the land and company acquisition, Crescent Point has increased its 2010 E&D capital budget by $175 million and its exit guidance to more than 71,000 BOE/d. A $375 million equity issue also announced yesterday will fund the increased spending and a portion of the private company acquisition. Bottom Line: Positive for stock.

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