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Monday, October 18, 2010

Daily Energy & Resources Digest 10/18/2010


Halliburton (HAL) reported 3Q10 EPS of $0.58 compared to $0.56 consensus estimate. Revenues of $4,665 mm were slightly above the consensus estimate of $4,636 mm. Although HAL beat the consensus EPS estimate, the results were not as good as some very bullish analysts had predicted, leading to today's selloff. North American strength continued to power earnings, with revenues 13% higher, outpacing the 7% increase in the U.S. rig count. NAM operating income increased 32% sequentially to $573 million, matching its previous record high in 3Q06. Results were driven by pricing gains and utilization remained high. U.S. land offset the expected offshore weakness. International revenues were flat, with margins dropping to 15.6% in 3Q10 from 16.4% in 2Q10. HAL had indicated previously that international would have pockets of weakness, so the unevenly concentrated growth (70% in five countries) was not surprising. The lack of a broad-based recovery impeded efforts to raise pricing across all overseas markets. HAL is adjusting the size and scope of operations in markets where the outlook is uncertain (Mexico) and where it is particularly strong (Iraq). Their only broad positive comment on the international outlook is that pricing power should return in by mid-2011 in most of the key international markets. Bottom Line: North America Service Intensity Keeps EPS on an Upward Path, for the short term. By mid-2011 gradual volume and margins gains internationally should contribute as well. The low margins in Iraq and the absence of deepwater revenues from the Gulf are headwinds.

BP plc (BP) sells Venezuelan and Vietnam assets to TNK-BP. On Friday, Reuters reported that BP was planning to sell its upstream Venezuelan properties to half-owned TNK-BP and this was confirmed today. As has been widely expected, BP announced today that in addition to the Venezuelan assets it is also selling some of its assets in Vietnam. The Vietnam assets include BP's 35% interest in the Lan Tay and Lan Do gas fields, as well as related pipeline and power plant interests. TNK-BP will pay $1.8 billion in cash, with an initial payment of $1 billion due October 29 and completion of the sale expected in 1H11. Combined with previously announced asset sales, BP's total announced sales amount to $10.7 billion, which is more than one-third of its total target of $30 billion in divestitures by year-end 2011.

Seadrill Limited (SDRL) orders two more jackup newbuilds. The second jackup wave continues to build, as Seadrill announced two more spec newbuild jackups with Jurong Shipyard at a cost of $200 million apiece. The rigs will be delivered at the end of 2012/early 2013, and Seadrill has options for four additional newbuilds. These are the sixth and seventh newbuilds since the end of 2009, and jackup costs already appear to be creeping higher. Bottom line: It is expected that dayrates and utilization for high-spec, premium jackups to remain strong, and the latest announcement of spec newbuild orders dovetails nicely with those forecasts.

PetroQuest Energy (PQ) announces $250 million mixed shelf. Last Friday, PetroQuest filed a $250 million mixed shelf to be used for general corporate purposes. The company is currently projected to generate 2010 free cash flow of approximately $20 million after capital expenditures of $110 million, and had a solid cash position of approximately $60 million at the end of 2Q10. Bottom line: PetroQuest typically runs one of the most conservative balance sheets in the small-cap E&P universe, therefore the registration is not surprising as it would provide an extra capital cushion whether fully or only partially utilized.

Quicksilver Resources (KWK) holder Darden family states interest in exploring strategic alternatives. The Darden family (holder of ~30% of Quicksilver) has formally stated a desire to explore strategic alternatives for the company. This could include, but is not limited to, taking the company private. The family did not include its valuation of Quicksilver, but remarked that the transaction would be performed at a fair premium to the stock price (down 16% year-to-date). The Darden family also requested an amendment to the rights plan so another major shareholder who had shown similar interest, SPO Partners, can discuss these strategic alternatives with them. Bottom line: The stock is already responding positively to the news. The likelihood of some form of action materializing is probable given that the Darden family holds three out of seven board seats and SPO holds roughly 15% of the company.

Arch Coal (ACI) EPA delivers another blow to Arch Coal's spruce mine. On Friday, the EPA announced that it is going to proceed as planned and will revoke the permit for Arch Coal's Spruce No. 1 mine in Logan County, West Virginia. While the decision is not final, the EPA believes that the mine would cause irreversible damage to the environment and wildlife. Recall that the Spruce No. 1 mine was originally permitted in January 2007 after more reviews than any permit in the nation. Bottom line: This is another example of the permitting challenges facing U.S. coal companies.

Energy Transfer Partners L.P. (ETP) to expand footprint in Eagle Ford Shale. ETP announced today that it will construct two pipelines in the Eagle Ford Shale in South Texas in order to support recently secured long-term transportation agreements. First, the 24-inch Dos Hermanas pipeline will extend for 50 miles across Webb County, Texas and will have capacity of 400 MMcf/d. Second, the Chisholm pipeline will run from DeWitt County, Texas to ETP's processing plant in LaGrange, Texas. The pipeline's initial capacity of 100 MMcf/d will most likely be expanded to 300 MMcf/d. All in, the two pipelines will consist of more than 130 miles of pipeline capable of transporting up to 700 million cubic feet of liquids-rich natural gas in the Eagle Ford. While the estimated spending to complete the projects was not disclosed, ETP raised over $500 million in August through the offering of 10.9 million common units to use toward funding these projects and the partnership's $800+ million capital expenditure budget for 2H10.

Ultra Petroleum (UPL) issues $525 million of senior notes. In a private placement to 17 institutional investors, Ultra priced $525 million of senior unsecured notes at a very attractive yield of 4.65%. The notes have terms of 10, 12, and 15 years, and will be used to repay existing bank debt and to fund drilling activities. While some investors have been concerned about Ultra's debt load on a traditional debt-to-cap metric (which was hurt by low gas prices and impairments in 2009), the pricing of these notes reflects the stability of Ultra's balance sheet. The company is still on track to become free cash flow positive in 2012.

Whiting Petroleum (WLL) amends credit facility. Last Friday, Whiting announced a fifth amended and restated credit facility with a borrowing base of $1.1 billion (unchanged) and an expiration in 2015, which is an extension to its previous April 2012 term. The company has $190 million drawn and $0.4 million of letters of credit outstanding, providing availability of approximately $910 million as of October 14. The next borrowing base redetermination will take place in May 2011.

National Fuel Gas (NFG) announces 32% growth in proved reserves. National Fuel Gas has announced a preliminary (subject to final approval by Netherland Sewell) proved reserve forecast of 699 Bcfe. As a reminder, National Fuel Gas has a September 30 fiscal year-end. Based on the preliminary number, proved reserves increased 32% during the year, resulting in one of the largest organic reserve growth years in the company's history. To put it another way, during the year, NFG added 171 Bcfe of proved reserves, equating to a production replacement ratio (assuming ~50 Bcfe of production) of well over 400%. The company's Marcellus Shale reserves increased from 21 Bcfe at 2009 fiscal-year end to 201 Bcfe. Not unexpected, proved reserves in the company's Gulf of Mexico and California operating areas declined slightly due to the minimal levels of capital spending allocated to those assets. We look for this trend to continue over the next five to ten years as the company develops its 8-15 Tcfe of reserve potential in the Marcellus. Finding & development costs fall under $2/Mcfe. While not all of the numbers have been released, the quick math (E&P capital spending of approximately $370 million) implies that the company's finding development costs for 2010 were close to ~$1.70/Mcfe and were perhaps even lower than that. This is a significant improvement from last year's $2.30/Mcfe, which was negatively impacted by reserve revisions (7 Bcfe). Once again, the highly economical Marcellus Shale drilling program is the reason for the improvement. In Tioga County, where the company has drilled 25 wells, NFG estimates that its horizontal Marcellus Shale well costs are roughly $4 million. In addition, on average, estimated ultimate recoveries (EURs) are 5 Bcfe per well, resulting in an F&D cost of ~$0.80/Mcfe. The company announced that its Marcellus Shale division exited the year at a production rate of 57 MMcfe/d vs. minimal production (approximately 5 MMcfe/d) at the beginning of the year. NFG is now utilizing four operated rigs (three in its eastern acreage and one in the west) to develop its massive 740,000 net acre Marcellus Shale position. At this level of activity, NFG is expecting net production to essentially double in FY11 (100+ Mcfe/d). Bottom line: Even in this bearish natural gas price environment, NFG continues to create shareholder value through the development of its Marcellus Shale acreage.

First Solar (FSLR) Increases Revolving Credit Facility to $600 million. FSLR announced that it has amended its existing senior secured revolving credit facility, increasing it from $300 million to $600 million. The term of the facility, which was oversubscribed, has been extended from three to five years and will mature in 2015. First Solar intends to use the facility for general corporate purposes, including the issuance of letters of credit.

McMoRan Exploration Co. (MMR) said Monday it cut its third-quarter loss by about half, but its revenue fell short of Wall Street estimates as production slipped. The New Orleans-based company, which explores offshore in the Gulf of Mexico and onshore in the Gulf Coast area, reported a net loss of $25.3 million, or 26 cents per share, compared with a loss of $51.9 million, or 60 cents per share, in last year's third quarter. Analysts surveyed by Thomson Reuters had expected a slightly narrower loss of 25 cents per share, on average, in the latest quarter. Revenue fell 13 percent to $94.8 million from $109.5 million. Analysts had expected revenue of $98.7 million, on average. Third-quarter production averaged 146 million cubic feet of gas equivalent per day, compared with 215 million cubic feet of gas equivalent per day in the third quarter of 2009. The company reiterated its expectations for full-year production of 160 million cubic feet of gas equivalent per day, including 140 million in this year's fourth quarter. Last month, McMoRan agreed to acquire the shallow water shelf assets of Plains Exploration & Production Co. for about $818 million in stock and cash. McMoRan said on Monday that it expects to close the acquisition by the end of this year.

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