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Tuesday, September 28, 2010

Daily Energy Digest - 9/28/2010

Nexen (NXY) Last night, Nexen announced the resource estimate of its Appomattox discovery in the Gulf of Mexico first announced in Q1/10. On the back of the discovery well and two appraisal wells, Nexen and its partner Shell have estimated a resource in excess of 250 MMB, with the potential for that estimate to increase with further appraisal drilling. The current drilling moratorium in US waters is scheduled to expire at the end of November, with reports that new rules for offshore drilling could be released by federal regulators later this week, which could be positive for Nexen.

The original discovery well announced in Q1 was drilled in ~2,200 m of water to a total vertical depth of just over 7,500 m, and encountered 160 m or 530 feet of oil pay. An appraisal well was drilled to 7,900 m and encountered over 115 m or 380 feet of pay, followed by a second appraisal well. Additional drilling is planned for the play once the US offshore drilling moratorium is lifted. The Appomattox discovery follows on the discoveries of Shiloh, which was found in 2003, and Vicksburg in 2007. Shell Offshore is the operator of all three discoveries with 75–80% WI, while Nexen has 20–25% WI. Appomattox could support a hub development in the next three to five years, which could also include Vicksburg 6 miles away. As illustrated in Figure 1, Nexen and its partner have identified a further approx. 20 prospects and/or leads along an 85-mile trend in the region.

LDK Solar (LDK) LDK announced yesterday that it has entered in a five year, $8.9 billion strategic financing arrangement with China Development Bank. Weak balance sheet/concerns over lack of strong govt support were the primary bear points driving high short interest levels in the stock. Share price reaction post announcement is consequently understandable. That said, additional equity raise may still be required to repay the convertible bond due next year.

Berry Petroleum (BRY) receives diatomite approval. This morning, Berry announced it had received approval from the California Division of Oil, Gas, and Geothermal Resources (DOGGR) to move forward with the next phase of diatomite development. Recall that the company deferred diatomite production earlier in the year, ramping its recently acquired Wolfberry development instead. Berry will start two rigs in early October and hopes to receive approval for the remaining development over the next six months. Bottom line: Though Berry was able to maintain 2010 production guidance by ratcheting up Wolfberry activity, the diatomite approval clears the way for continued production growth in 2011.

Interoil (IOC) Antelope-2 DST #7: Higher condensate ratio confirmed in second sidetrack. This morning, InterOil announced encouraging results from the seventh drill stem test (DST) at its Antelope-2 well. The test was conducted on the second (deeper) horizontal sidetrack, measuring a stabilized condensate-to-gas ratio of 24-27 Bbls per MMcf of gas. This marks a solid bump up in the liquids yield from its first horizontal sidetrack (DST #5 showed a ratio of 20-21 Bbls/MMcf), not to mention a hefty 60% increase from initial tests at the top of the reservoir. As testing wraps up at Antelope-2, these incremental datapoints are key in the development and design of the planned liquids stripping facility, which is targeting a final investment decision (FID) by March 31, 2011 and first production in 2013.

Newpark Resources (NR) Provides update on Gulf of Mexico operations, minimal impact. Yesterday after the close, Newpark provided an update for expected revenue and operating income loss related to the Gulf of Mexico moratorium in 3Q. The original guidance estimated that only about 5% of total revenues, or $8-9 million, would have been affected by the events in the Gulf of Mexico during this quarter. A larger-than-expected benefit from clean-up work related to its environmental division appears to be able to mostly offset the decreased activity from base operations. This drops the revenues loss assumption to $3-4 million. All in, the effects from this updated guidance should be minimal, as this figure was never expected to be much of a loss from the beginning. Still, this should provide a minimal boost, if any, during this morning's trading.

Bronco Drilling (BRNC) sells discontinued Well Servicing division. Bronco was able to sell over $27 million of idle equipment at auction last week - the bulk of its well servicing equipment, four land rigs, and the components for another four rigs. We had not assumed any of these assets would go back to work, therefore the EPS impact is actually slightly accretive as management will pay down debt with the proceeds. Bottom line: The company should be able to slash its outstanding debt in half to under $20 million. However, the company would still trade at a substantial premium to its peer group due to persistent takeout rumors.

Valero (VLO) announced that the company signed an agreement to sell its 185 mb/d (000's b/d) Paulsboro refinery to PBF Holding Co. for approximately $360 million plus an estimated $275 million for net working capital and inventories. At a nelson complexity of 9.4x and a crude capacity of 166 mb/d, this equates to $231 per daily barrel of complexity, which appears as a reasonable price compared to the group's current average of $386 per barrel of complexity. In the last 2 cyclical troughs in 1999 and 2002, SUN (mostly Northeast refineries) traded at a discount of $21 and $96 per daily barrel of complexity to the group's median average, respectively. Bottom line: This announced asset sale is a slight positive factor for VLO, with selling price largely in-line most expectations.

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