Daily Energy Digest - 9/22/2010

Valero (VLO) will develop two new hydrocracking units at its refineries in Port Arthur, Texas and St. Charles, La. Valero will build two 50,000-barrels-per-day units at each facility. Hydrocracking units remove sulfur during the refining process. The new refinery units will allow Valero to produce more diesel and other distillates. Valero officials believe diesel demand will outpace gasoline demand in the near future, says spokesman Bill Day. That’s because diesel fuels commercial trucks and ships. And as the global economy improves, diesel demand should continue to pick up. The Port Arthur project should be completed by the fourth quarter of 2012. The unit will cost $1.5 billion to build. The St. Charles hydrocracker should be completed by the fourth quarter of 2013 at a cost of $1.4 billion to build. Valero expects to pay for the projects using available cash.

Massey Energy Co. (MEE) said production has resumed at a southern West Virginia mine that had been idled while waiting for government approval of its ventilation plan. Massey on Tuesday announced the reopening of the Revolution mine in Uneeda, which had been idle since June 4. The Richmond, Va.-based company said the federal Mine Safety and Health Administration approved a ventilation plan that will push fresh air to the working face along a conveyer belt. The use of so-called belt air requires special approval because conveyers are prone to fires, which would push smoke directly at miners. Revolution produces most of its coal with a longwall mining machine, much like the company's Upper Big Branch mine, where 29 miners died in an explosion April 5.

Natural Gas (UNG) Worldwide demand for natural gas may grow by 1.3-1.6%/year through 2030, according to presentations at the opening general session of the Society of Petroleum Engineers Annual Technical Conference & Exhibition in Florence, Italy, on Sept. 20.

China is one of the countries driving the demand higher. During 2000-09, it experienced a 15.4%/year growth in demand, according to PetroChina Co. Ltd. Pres. Yan Cunzhang.

One note of caution about this growth was expressed by Michael Stoppard, IHS CERA managing director. Stoppard noted that the growth might be less than 1.6%/year if governments in Europe adopt a decarbonization strategy that positions gas as a dirty fossil fuel and clean coal as a green energy. He said that the public needs to hear a louder voice about gas which is abundant, clean, safe, cost competitive, technically producible, and with a good track record for delivery to markets such as electricity and power generation.

Howard Paver, with Hess Corp., noted that Hess has a gas demand growth projection of 1.3%/year to 2035. His estimate translates to needing 4,000 tcf of gas in that period and if this gas is unconventional, it would require the drilling of 1.3 million wells at a cost of about $4.5 trillion, he said.

Sara Ortwein, president of ExxonMobil Upstream Research Co., said worldwide gas is abundant. One estimate is that 20,000 tcf remain to be produced worldwide. Of this, 10,000 tcf is conventional gas, 5,000 tcf is undiscovered gas, and 5,000 tcf is unconventional gas, she said.

Ortwein noted that gas has about 60% fewer emissions than coal and that such technologies as control freeze zone will lower the costs of removing carbon dioxide and hydrogen sulfide from sour gas. ExxonMobil plans to start up this fall its CFZ demonstration plant in La Barge, Wyoming, she said.

Arch Coal (ACI) Following ACI's analyst day, there is no change to the near-term outlook for the company. The highlights of three main takeaways from the presentations are:

1. No change to near term operating targets or estimates: The company reiterated current operating and financial targets for 2010. Regarding its large unpriced positions (55-65 million tons in 2011 and 90-100 million tons in 2012) ACI indicated customer interest has increased over the last two months, however most of this appears to be for the remainder of 2010.

With uncertainty regarding the economic outlook for 2011 (and low nat gas prices) most of ACI's customers are not interested in securing tons beyond 2010. It appears little 2011 contracting has occurred since the company's Q2 update. Few specifics were given about current pricing, however the company reiterated that its large unpriced position gives it leverage to what it sees as a strengthening pricing environment.

2. Preferring Balance Sheet Health over Growth: The company noted it expects to have strong free cash flow over the next few years and indicated its priorities as follows: (a) Improve the balance sheet and continue to pay down debt with available cash while maintaining ample liquidity (b) Improve shareholder returns via dividends and share repurchases, and (c) Growth.

3. Focused on Organic Growth Opportunities, Not Acquisitions: The company noted it is first focused on investing in and improving current operations to enhance profitability. Near term growth will most likely come from the PRB as the company has plenty of spare capacity in the region (capacity of 150-155 million tons of capacity vs. current production of around 125m tons for 2010). ACI remains steadfastly bullish on export opportunities from the PRB into the Pacific market, and indicated it is looking at developing greenfield and brownfield port opportunities on the west coast. Beyond the PRB, longer term ACI expects the Illinois Basin and Montana to become core operating regions. Regarding acquisitions, ACI commented that it historically buys assets on the downswing of the coal cycle, and with coal prices rising does not appear interested in any near-term deals.

Whiting (WLL) prices debt offering at attractive rate. Yesterday afternoon Whiting announced that it has priced $350 million of senior subordinated notes due 2018 at 6.5%. The $350 million issue effectively replaces the $370 million of 7.25% notes (due 2012/2013) that Whiting called in August 9th, lowering their weighted average cost of debt capital to 6.71% (including its $250 million of 7% senior subordinated notes due 2014). Whiting has been able to lower its fixed interest costs significantly over the last month by replacing higher-rate debt as well as by calling in the majority of its convertible preferred shares - lowering its annualized preferred dividends from around $21.6 million to just under $0.5 million. Upcoming catalyst: Lewis & Clark well results.

Kodiak (KOG) files $250 million mixed shelf. Following yesterday's Williston Basin update, Kodiak filed an S-3 this morning which gives the company the flexibility to raise up to $250 million via stock, warrants, or debt security offerings. Kodiak recently raised ~$80 million with a mid-August equity offering, which should cover much of the deficit between spending and cash flow in 2011, so this filing is likely more of a maintenance update.

SM Energy (SM) announces increased borrowing base to $1.1 billion from $900 million. The commitment from the banks remains at $678 million, and SM currently has no borrowings outstanding under the facility. If you recall, in late August the company announced plans to sell two different asset packages over the next 12-24 months to generate proceeds in the range of $300-500 million. However, even with the proceeds from these asset sales, SM Energy could outspend cash flow by as much as $650 million over the course of 2010-2011. The increased and untapped credit facility should cushion any cash flow shortfalls and provide sufficient liquidity for the company heading into 2011.

Enerplus (ERF) deal pegs Bakken acreage at $9,800/acre. This morning Enerplus announced a series of acquisitions and divestitures including the acquisition of 46,500 net acres in Dunn and McKenzie Counties. The acreage is located in the Fort Berthold area and was purchased for US$456 million, or roughly $9,800 per net acre. The acreage was likely acquired in a privately negotiated sale, but even so remains one of the highest prices paid for a significant land position in the Bakken. The high mark for state and federal lease sales is around $4,000-$5,000 per acre.

Hercules Offshore (HERO) Fleet Report - Full Utilization for Domestic Liftboats. The company announced a couple one-well jackup contracts in the Gulf of Mexico at $35,000/d (in-line). However, the real story is on the company's Gulf of Mexico liftboats. Utilization was over 90% for the second straight month thanks to clean-up efforts from BP's oil spill. As oil spill-related demand begins to fade in 4Q10, it may be replaced by the need to decommission wells due to the recent NTL (potentially 3,500 wells and 650 platforms over the next three to five years). As a result, Gulf of Mexico liftboat utilization may remain at elevated levels. Bottom Line: Good news for Hercules, as strong liftboat utilization will help offset continued weakness from Gulf of Mexico jackups. The Gulf of Mexico permitting process is still stuck in neutral, and jackup activity will remain anemic until this changes.

FMC Technologies (FTI) Locks in Big $520 million Subsea Contact: FMC will supply 36 subsea trees, wellheads and controls for the CLOV development project offshore Angola. The $14 million per tree price tag is high relative to historical standards. This award could push the inbound orders up to the $1.5+ billion range for the quarter. Bottom line: While it was widely known that FMC was likely the front runner for this award, it is good to see a project of this magnitude finally get awarded and not continue to slide to the right. Revenues for this project are expected to start in 2011.

Enterprise Products Partners (EPD) to provide Anadarko (APC) with suite of midstream services in Eagle Ford shale. Enterprise announced that it has entered into a long-term agreement to provide a comprehensive package of midstream services to Anadarko's Eagle Ford shale operations. The six-year agreement includes firm natural gas transportation and processing services and calls for the construction of a new 17-mile, 20-inch diameter natural gas gathering pipeline. This pipeline will originate at Anadarko's central production facilities located in Dimmit County, Texas, and will connect with Enterprise's existing South Texas pipeline system. The pipeline is expected to be completed in October 2010. Furthermore, NGLs recovered from Anadarko's production in the liquids-rich Eagle Ford shale will be fractionated at Enterprise's facilities throughout Texas. Recall, this news comes on the heels of the partnership's previous announcement that it had signed a long-term agreement to provide similar services to EOG Resources (EOG) in South Texas. As we have said in the past, Enterprise continues to move quickly in developing a leading midstream asset footprint in the Eagle Ford, optimally positioning the partnership to further capitalize on attractive profit opportunities.

Sharp (SHCAY) is acquiring Recurrent Energy, a large, VC-backed U.S. PV project developer, for $305 million, keeping with the trend of module producers moving downstream through acquisitions. Earlier this year, both First Solar (FSLR) and SunPower (SPWRA) made analogous acquisitions - NextLight and SunRay, respectively. The impetus for these and other similar deals is to control a ready-made product pipeline for the producers' modules - Recurrent Energy sports a hefty 2 GW pipeline. Now, with Recurrent snapped up, there are very few pure-play commercial-scale PV developers left in the U.S. The usual characters - First Solar, SunPower, Suntech (STP), Trina (TSL) and Yingli (YGE) - have each been cast as possible future acquirers as the trend continues.