Daily Energy Digest - 9/23/2010

GST

Gastar Exploration Ltd., Houston, and an affiliate of South Korean investment firm Atinum Partners Co. Ltd., Seoul, formed a joint venture to pursue Marcellus shale gas in West Virginia and Pennsylvania.

Gastar will assign an initial 21.43% interest to Atinum Marcellus I LLC in all of its existing Marcellus shale assets in the two states, totaling 34,200 net acres, and certain producing shallow conventional wells.

Transaction value is $70 million, including $30 million to Gastar at closing and a further $40 million in the form of a drilling carry. After the drilling carry is fully funded, Atinum will own a 50% interest in the 34,200 net acres. Gastar will continue to serve as operator of all Marcellus shale interests in the JV. The transaction is to close within 30-45 days and is contingent on receipt of Korean government agency approvals and other customary closing conditions.

Atinum is to fund its ultimate 50% share of drilling, completion, and infrastructure costs plus 75% of Gastar’s ultimate 50% share of the same costs until the $40 million carry has been satisfied. Gastar and Atinum are pursuing an initial 3-year development program that calls for the partners to drill 1 horizontal Marcellus shale well in 2010, at least 12 horizontal wells in 2011, and 24 horizontal wells in 2012 and in 2013.

An initial area of mutual interests will be established for potential additional acreage acquisitions in Ohio and New York along with the counties in West Virginia and Pennsylvania in which the existing interests are located. Within the initial AMI, Gastar will act as operator and will offer any future lease acquisitions to Atinum on a 50-50 basis, while Atinum has agreed to pay Gastar on an annual basis an amount equal to 10% of lease bonuses and third party leasing costs up to $20 million and 5% of the costs on activities above $20 million. Until June 30, 2011, Atinum will have the right to participate in any future leasehold acquisitions made by Gastar outside the initial AMI and in West Virginia or Pennsylvania on terms identical to those governing the existing Marcellus JV.

Gastar said the JV will allow it to accelerate development of its assets while maintaining a low level of leverage and a high degree of financial flexibility. Gastar said the transaction also realizes a much higher valuation for the assets than what has been reflected in its share price “and thus made a joint venture the least dilutive method to finance development.” Gastar said it may use proceeds from the transaction to help fund Marcellus shale development, future East Texas drilling and development, lease or property acquisition opportunities, and to reduce debt.

Ethanol Interesting Article: "Deficit Hawks Threaten Ethanol's Future," Bloomberg BusinessWeek (http://www.businessweek.com/magazine/content/10_40/b4197028502325.htm). Despite corn ethanol's historically bipartisan support, congressional deficit hawks are becoming increasingly critical of the subsidies and protection given to the industry. The $27 billion industry currently benefits from a $0.45/gallon blenders' tax credit. The credit, which expires at the end of this year, is being targeted as a potential area for Washington to cut back, with the price tag last year totaling $4.7 billion. Meanwhile, ethanol producers are pressing the EPA to move in the opposite direction and approve a 15% blend limit - a significant increase from the 10% limit currently in place. All this is coming to a boil in a tough election year, with Midwestern swing states very much in play. Consider hedged bets on Archer Daniels Midland (ADM) to take advantage of the event opportunity.

Calfrac (CFW.TO) Calfrac announced another long-term minimum commitment contract for fracturing in the Marcellus Shale. This contract is with a 50/50 joint venture between EXCO Resources (NYSE:XCO) and BG Group (LON:BG). To accommodate this demand Calfrac will add $56 million to its capital spending plan, largely to construct another 55,000 of fracturing horsepower that will arrive in Q2’2011.

The new fracturing equipment adds slightly more than 9% to Calfrac’s company wide fracturing horsepower. Based on Q2’2010 results from the U.S. one would expect the new equipment to add approximately $20 million in annual revenue. Recent management comments indicate pricing has continued to increase modestly in the third quarter.

Noble Energy (NBL) announced today that it has sanctioned the Tamar natural gas project offshore Israel. Discovered in 2009, Tamar is operated by Noble Energy and has total recoverable resources estimated at 8.4 trillion cubic feet of natural gas.

Initial development of Tamar will include five subsea wells capable of flowing 200 to 250 million cubic feet per day (Mmcf/d) of natural gas each. Production will be gathered at the field and delivered via two 16-inch flowlines to a new platform, which will be constructed adjacent to the existing Mari-B structure. The Tamar platform will tie into the existing 30-inch pipeline that delivers natural gas to the Ashdod onshore receiving terminal, with an initial processing capacity up to 1.0 billion cubic feet of natural gas per day. The project design and connectivity to Mari-B will also provide for gas injection and withdrawal in the Mari-B reservoir. In addition, the development will allow for significant expansion as the market for natural gas grows.

Charles D. Davidson, Noble Energy's Chairman and CEO, said, "Noble Energy continues to make outstanding progress on our lineup of major projects. We now have key developments underway in each of our core areas and significant growth is rapidly approaching. Tamar represents a critically important project for our Company, our partners, and the State of Israel. Ensuring that we are able to meet the near and longer-term needs of Israel's growing gas market will support the State's continued commitment to natural gas as the energy source of the future."

Gross capital cost for Tamar is estimated at $3.0 billion ($1.1 billion net to Noble Energy). The majority of key project components have been awarded and development drilling is scheduled to commence by early 2011. Project installation is expected to be complete and commissioning initiated in the fourth quarter of 2012.

Noble Energy operates Tamar, offshore Israel in the Matan license, with a 36 percent working interest. Other interest owners are Isramco Negev 2 with 28.75 percent, Delek Drilling with 15.625 percent, Avner Oil Exploration with 15.625 percent and Dor Gas Exploration with the remaining four percent.

The Company is also the operator of Mari-B with a 47.059 percent working interest. Delek Drilling has a 25.5 percent interest, Avner Oil Exploration holds 23 percent and Delek Investment has 4.441 percent.

National Fuel Gas (NFG) National Fuel Gas announced the results from a Marcellus Shale well (100% working interest) in Lycoming County, Pennsylvania. The company-operated well achieved a 24-hour initial production (IP) rate of 15.8 MMcfe/d, on a 28/64-inch choke, resulting in a record flow rate for National Fuel Gas. Moreover, this well was a step-out, drilling in an area that was previously untested, boosting potential proved reserve bookings.

Joint Venture Drilling Results Step Up. In Clearfield County, an EOG (EOG) operated well (NFG 50% WI) flowed at a 24-hour IP rate of 8.9 MMcfe/d. Not only is this well a significant improvement over the previous JV wells (1-4 MMcfe/d IP rates), but it is also one of the highest flow rated wells in the county.

Potential Marcellus Monetization. A large part of the bullish thesis on National Fuel Gas is due to the company's massive Marcellus acreage position. The company is currently utilizing three rigs and plans to add an additional rig shortly. Even with the accelerated drilling pace, National Fuel Gas has a 50-year+ drilling inventory. In order to realize some of those proceeds earlier, the company announced that it has hired an investment bank to explore joint venture opportunities across its acreage. Based on recent Marcellus Shale joint ventures, National Fuel Gas' acreage position could go for between $8,000 and $12,000 per acre.

Enbridge (EEP) Last night, Enbridge Energy Partners (EEP) announced that it has received approval from the Pipeline and Hazardous Materials Safety Administration (PHMSA) for its restart plan for Line 6B. This is the first of two separate approvals required from PHMSA before restart can occur. The second approval, relates to fulfillment of requirements related to appropriate public notifications and third-party monitoring of the restart process.

Late last week, PHMSA issued a Notice of Proposed Amendment to the Corrective Action Order, which was originally issued July 28 to EEP. PHMSA requires that the restart plan include schedules to repair all remaining anomalies identified for action from the 2007 and 2009 in-line inspections within 180 days of the restart, and for Enbridge to perform two in-line inspections of the entire line within 14 days of the restart, and to immediately repair any anomalies that are discovered.

In addition, Enbridge’s plan must include a schedule for the complete replacement of the pipe in the entire St. Clair River crossing to be completed within one year of the restart. Enbridge anticipates that it will meet the restart plan’s requirements and be in a position to return Line 6B to service the morning of Monday September 27, subject to its receipt of final PHMSA approval.

At this point, there is no updated cost estimate. The last update was that EEP would incur charges of $35-$45 million, net of anticipated insurance recoveries and exclusive of fines and penalties. This translates to approximately $7-$9 million (after-tax) in respect of Enbridge 27% interest in EEP, or $0.02/share. In addition,

El Paso (EP) loads up in the Wolfcamp. The company announced this morning that its $180 million bid was the winner for 123,100 net acres ($1,460 per acre) prospective to the Wolfcamp, a mature oil play in the Permian Basin. The acreage was added in Reagan, Crockett, Upton, and Irion Counties (Texas) and brings El Paso's total acreage position in the play to ~135,000. While the Wolfcamp has never been considered premium Permian, El Paso is excited about the untapped potential of this acreage after its technical team's latest round of due diligence. In addition to having multiple pay opportunities on the land, the acreage is in large continuous blocks and has only one royalty owner, which helps to make operations run smoothly.

FMC Technologies (FTI) wins another subsea contract: On the heels of a $520 million subsea award announcement, FMC Technologies has won a $75 million award for the Katla development in the North Sea. The award is one of three additional options included in the previously announced Pan Pandora project awarded to FMC in June. Bottom line: This is a great example of a call-off award that compliments the big project awards. For reference, we are assuming $1.1 billion in subsea orders this quarter.

InterOil Corp. (IOC) renews SEC shelf registration. Following expiration of its prior shelf registration statement last week (originally from 2008), InterOil has filed a renewed shelf with the SEC (equivalent to a preliminary base prospectus in Canada) for the issuance of up to $300 million in debt or equity. This filing does not signify plans for an offering; rather, it simply provides the flexibility to issue securities over a two-year period. As we've noted in the past, having this capital "back up plan" places InterOil in a more competitive position during its ongoing LNG partnership negotiations - with management confirming just last week that the process remains on track for at least one LNG deal by year-end. It's worth underscoring that the prior $200 million shelf expired with $130 million unused.

Energy Transfer Partners (ETP) S&P raises outlook from Negative to Stable; rating remains BBB-. The rating agency cited Energy Transfer's expected completion of the Fayetteville Express Pipeline (FEP) and Tiger Pipeline in 2011 as a primary reason for the change in outlook, which has been negative since August 2009. FEP and Tiger will greatly expand the fee-based portion of the partnership's cash flow mix, while also working to offset the lost revenue from intrastate pipeline assets as a result of narrow natural gas basis differentials.