Daily Energy Digest - 9/30/2010

Enerplus (ERF) announces conversion to a corporation. Conversion to dividend paying corporation expected to be effective January 1,2011; plans to maintain monthly distribution of $0.18 per unit. Both should be as expected by the market – consistent with the trust’s previous guidance around timing of conversion and distribution; once all conversions are complete, the 8.3% yield at current levels should rank as one of the higher yields among the dividend paying intermediates. ERF has the potential to spend more than cash flow in 2011 – includes the carry commitment on the non-operated Marcellus land; but the trust has a strong balance sheet and expects additional funds from asset dispositions before the end of 2010 – when we spoke with the trust the other day, certainly came away with the impression that they are comfortable with the current distribution. Trust has made significant progress this year in selling non-core assets and expanding its inventory of unconventional opportunities (US and Cdn Bakken, US Marcellus) - just as it said it would; the trust now needs to demonstrate that it can deliver on development – additional operating results over the next 2 – 3 quarters will key.

Coal Update - Eastern and Western thermal coal prices continue to hold the 20%-30% YTD gains as significant inventory declines have brought inventories close to historical average, despite ongoing concerns of the impact of the 30% YTD decline in natural gas prices. Although there are concerns that low natural gas prices will take market share from coal, strong US exports, and potential U.S. industrial production rebounds in Q4 will be sufficient to offset the impact of continued soft natural gas prices. In the near-term, a key determinant will be contract negotiations for remaining 2011 unpriced volumes.

Based on EIA estimates, inventories at the end of Aug. were 160m tons, 24.2% above the previous 10-year average, -16% below prior year levels (EIA flash estimate for July is 166m). On a days of supply basis, inventories totaled about 59 days of consumption at the end of Aug., -17.7% y/y but still +27.1% above the previous 10-year average for August month-end (EIA flash estimate for July is 61 days of supply). (Based on US DOE actuals to July and DOE estimates to Aug.).

Natural Gas Production Update - EIA-914 July data: U.S. Gas Supply Up ~0.17 Bcf/d M/M, No Surprises. Yesterday's EIA-914 released production data for the month of July indicating that the total production for the lower 48 states was up ~0.17 Bcf/d month-over-month to 64.38 Bcf/d. Onshore production was up ~0.3 Bcf/d month-over-month, but was slightly offset by Gulf of Mexico production which slid a little over 0.1 Bcf/d from maintenance on wells, platforms, pipelines, and a tropical storm. New Mexico saw the biggest uptick, +0.2 Bcf/day, after concluding its planned maintenance and resolving wells issues. Bottom line: It looks like the supply delays (pressure pumping, pipeline constraints) that flattened the U.S. supply curve over the past few months were slightly alleviated in July and could continue to re-accelerate in August and September as these delays are resolved. Current 950+ gas rigs drilling are more than enough to grow supply; however, the pace will be determined by the amount of pressure pumping and pipeline capacity that can be added to the oilfield.

Hess Corporation is studying a marginal oilfield in China's Daqing to explore the chances of enhancing output at the huge but aging Chinese oilfield, an industry official said. The joint study agreement on the Yongletoutai field started around June and ends at the of the year, and the U.S. firm has yet to make a final decision whether to proceed to pilot explorations next year, said the Beijing-based source with direct knowledge of the deal. China, the world's no.5 crude oil producer, has been working hard to raise its domestic productions from mostly offshore oilfields as well as developing marginal onshore fields Marginal fields are reservoirs with low output, low pressure and low permeability that need unconventional technologies such as horizontal wells and fracturing to extract the oil, and need relatively high oil prices to become commercially viable. Daqing oilfield, the country's top crude producer, has many of these marginal oilfields after nearly five decades of developments.

New York-based Hess, active in the Bakken shale play in the U.S., is among a handful of foreign firms -- mostly mid to small-tier independents -- working in China's marginal oilfields, industry officials have said. China's total domestic crude oil production is expected to rise an average of six percent this year in its fastest growth in over a decade to top four million barrels per day for the first time in history, according to a Bernstein Research note on Wednesday. Productions in the past few months exceeded the 4 millin bpd mark already, official data have shown.

Deep Water Drilling Update - U.S. Judge Martin Feldman said on Wednesday he would rule quickly on Ensco Plc's (ESV) challenge to the Obama administration's new moratorium on deepwater drilling in the Gulf of Mexico, which was imposed after the BP Plc oil spill. A lawyer for the offshore drilling firm said that the ban on drilling was no different than the first moratorium that the same judge lifted earlier this year and that the government's justification for the new ban was a "sham." Ensco's lawyer Adam Feinberg said that the decision for the new moratorium had been made on June 22 before any new analysis had been done. The agency "cannot base decisions on post-hoc rationalization," he told the court. The Interior Department did not consider the option of not imposing a moratorium either, Feinberg said.The Obama administration first imposed a moratorium on all deepwater oil drilling below 500 feet, but Feldman said it was arbitrary. The Interior Department then imposed a new ban on any drilling that used the same kind of equipment used on the broken BP well. The Interior Department has been battling to keep the moratorium in place until Nov. 30 so that new safety regulations can be implemented to ensure there is no repeat of the BP disaster. The agency hopes to lift it before that date. It will take time for oil companies to adhere to the new requirements that must be met before drilling restarts, Michael Bromwich, head of the department's Bureau of Ocean Energy Management, said earlier this week. Oil drillers and state and local officials have complained that the moratorium has severely damaged the Gulf region's economy, already hit hard by the BP spill. Some idled oil rigs have moved to other jobs in foreign waters.

Justice Department lawyer Guillermo Montero argued that the administrative record supporting the moratorium drew its conclusions from the facts considered, though new evidence was being uncovered daily, in a "dynamic process." Judge Feldman said he would reach a decision as soon as possible, but did not offer a date. In a related development, the U.S. Court of Appeals for the Fifth Circuit agreed to dismiss the Obama administration's appeal to try to salvage the original drilling moratorium.

Jefferies cuts Range Resources (RRC) and GMX (GMXR) to hold; MKM Partners initiates RRC with a Buy- Jefferies & Co expects lower gas prices to affect natural gas-weighted companies and cut Range Resources Corp and GMX Resources to "hold" from "buy". Year-to-date gas prices have fallen more than 30 percent to $3.95 per mmBtu (million metric British thermal units), while oil price fell about 4 percent. Analyst Subash Chandra, who reduced gas price estimates for the fourth quarter and full year 2011, said Range Resources could struggle to ramp up its Marcellus shale program without a joint venture or some sort of acreage monetization. He cut the price target on the stock to $40 from $52.

GMX Resources will be hurt by low well productivity in east Texas and will require external financing to fund its drilling by the middle of next year, Chandra noted and cut the price target on the stock to $4 from $7. Echoing similar views, brokerage MKN partners said liquids-rich exploration and production companies will continue to dominate investment returns on average through 2011. However, it initiated Range Resources with a "buy" rating, citing the company's low operating cost structure.

Marcellus Shale Taxation - The Pennsylvania House of Representatives Wednesday passed a bill to tax natural gas extraction in the state for the first time, setting up a showdown in the Republican-controlled Senate.

Several years into a gas-output bonanza that is reshaping the state economy, Pennsylvania is the only major gas-producing state that doesn't levy a tax on natural gas production by companies such as Chesapeake Energy Corp. (CHK), Range Resources Corp. (RRC) and Cabot Oil & Gas (COG). Gov. Ed Rendell, a Democrat, has said the gas industry should pay to help replenish the state's depleted coffers and fund the infrastructure improvements and environmental protections required by drilling, but Senate Republicans and industry representatives say a high tax would drive gas investment to other states.

The bill's fate in the Senate is uncertain. GOP leaders have favored including provisions sought by gas producers, such as a low initial tax rate to allow drillers to recover capital used in exploration and a clause that would force landowners to sell their mineral rights if a certain percentage of their neighbors have already done so. Pennsylvania's natural-gas output has quadrupled since early 2009, from 300 million cubic feet a day to 1.2 billion cubic feet a day last month, according to energy-analysis firm Bentek Energy. As part of a budget deal negotiated with Rendell, legislative leaders agreed in June to meet an Oct. 1 deadline to pass a gas tax, in part to fill $70 million of an estimated $280 million budget deficit.

The proposal passed by the House Wednesday would tax gas drillers 39 cents per thousand cubic feet of gas extracted, with provisions for increases in the fee if gas prices rise above about $5.50 per million British thermal units. The benchmark gas futures contract ended at $3.962/MMBtu on the New York Mercantile Exchange Wednesday. Prices have been pressured lower for much of this year, largely because of increased shale-gas production. The tax is expected to raise $120 million during the rest of the current fiscal year ending in June 2011, and $326 million in 2011-12, according to a report from the House Appropriations Committee.

Rendell and House Democrats had previously called for a tax of 5% on the wellhead value of the gas, plus 4.7 cents per thousand cubic feet extracted. Senate Republicans favored a 1.5% wellhead tax in the first few years--to allow drillers to recover expenses--a rate that would gradually rise to 5%. A technique called hydraulic fracturing, whereby water, sand and chemicals are pumped at high pressure to crack open deeply buried shale formations, has allowed producers to tap massive new reserves. The Marcellus shale, which is thought to hold the most recoverable gas of any U.S. formation, lies underneath much of Pennsylvania, New York and West Virginia.

EnergySolutions (ES) - Announced the discontinuation of the common stock dividends. Management said the capital would be better utilized for debt reduction and reinvesting in the business.

Noble (NE) Fleet Report. It looks like current 2H10 Street estimates need to come down for a number of reasons (BOP recertifications, acquisition moving parts, floater downtime, Mexican jackups, and higher taxes). New contracts included eight months for a 1,500' North Sea floater at $250,000/d (RJ at $200,000/d) and contracts in the $90,000/d range for jackups in the North Sea and West Africa (RJ at $80,000/d). Noble confirmed the previously-announced contracts on two high spec jackups in Saudi Arabia at $132,000/d (stale, signed at start of year) and $237,000/d (well above our $175,000/d estimate). Additionally, Noble announced a two-year, $537,000/d contract on the 7,200 Homer Ferrington is in jeopardy (dayrate not paid since April 24), as arbitration proceedings have begun.