Daily Energy & Resources Digest 10/5/2010

Oil & Gas Reserves - Worldwide oil and gas reserves climbed 3% in 2009 as capital spending declined, IHS Herold reported Oct. 4 in its 2010 Global Upstream Performance Review. The analyst found that the worldwide upstream investments of 224 oil and gas companies decreased 23% last year to $378 billion. During 2009, both oil and gas reserves grew for the first time since 2005, and production increased 1%, driven by a 2.2% increase in natural gas output. Oil reserves, up 3% to 164 billion bbl, reversed a 2-year decline driven mainly by positive reserve additions but also by extensions and discoveries in Canadian oil sands and South and Central America. Natural gas reserves climbed 3.7% despite a record 11.4 tcf in negative reserve additions as the development of unconventional plays in North America and LNG resources in Asia accelerated, IHS Herold said.
The report found that E&P companies slashed capital spending by 40% last year, while the integrated oil companies reduced their investments by 9%. Exploration outlays fell 12% to $62.7 billion, but unproved acquisition costs dropped 71%. A 2% dip in proved acquisition outlays would have fallen 50% were it not for the $20 billion merger of Suncor Inc. and Petro-Canada. “With the recession and ongoing uncertainty in the market last year, companies put acreage acquisition on hold and seemed to focus on their in-house development opportunities,” said the report’s author and director of IHS Herold, Nicholas D. Cacchione. “This decision, I think, reflected their desires to monetize known holdings that can be brought into production much more rapidly than something with a less certain payout several years down the road,” Cacchione said.
The reduced capital spending and higher reserves totals resulted in a near 50% decrease in reserve replacement costs to $11.41/boe and lower finding and development costs to $12.23/boe, IHS Herold said. Strong natural gas reserves additions led reserves replacement rates to the highest level in 5 years, according to the report. IHS Herold expects a modest rebound in 2010 upstream spending. In North America E&P investment increased 30% in the first half of this year, which was more than expected and should result in a 20% increase in spending for the year, said Cacchione. Cacchione added that outside North America, where spending declines were less severe during 2009, he expects upstream investment to climb 10% this year.

Plains Exploration (PXP) announces Eagle Ford acquisition, revealing plans to purchase ~60,000 net acres in the Eagle Ford oil and gas condensate windows, primarily in Karnes County, for $578 million. About a third of these properties are located in a joint operating area between Plains Exploration and EOG Resources (EOG) and have an estimated net reserve potential of 140-175 MMboe. This acquisition is expected to close in 4Q10. Other highlights include plans to exit 2010 with up to 20 new wells in the Los Angeles Basin and up to 40 new wells in the San Joaquin Valley. Also, the company expects the final bids from its deepwater Gulf of Mexico assets over the next month. Bottom line: The stock should respond well - entry into the Eagle Ford at $9,600/acre is a reasonable price, and the purchase is cushioned by both the untapped credit facility ($1.1 billion) and impending sale of Gulf assets.

Brigham (BEXP) gets a 2-for-1 special in the Rough Rider; Three Forks looks good. The company's State 36-1 #2H (first Three Forks test) came online with a very healthy initial production rate of 2,356 boe/d (~80% oil), a record for Three Forks wells west of the Nesson Anticline, and almost exactly in line with Bakken wells in the area (26 have averaged IP rates of 2,421 boe/d). Because the TF and Bakken are separate reservoirs, Brigham has the potential to double its inventory locations in the Rough Rider (up to 362 locations for the TF), which would be very accretive to the company's NAV. The company also announced a small acreage acquisition (10,200 net), a strong Ross well (4,675 boe/d IP), and two in-line Rough Rider wells (average 2,518 boe/d). Bottom line: Look for the stock to outperform on the news.

Geokinetics (GOK) amends credit facility. Geokinetics has secured a waiver on its financial covenants for its revolving credit facility in 3Q10 and amended the covenants for 4Q10. The $40 million facility currently has an outstanding balance of $26 million, and management believes the new covenants in 4Q10 are achievable. Bottom line: Recently announced major contract with PEMEX in Mexico should help the company hit its targets. GOK has fallen ~10% over the past two days on fears this facility wouldn't get amended, and expect the stock to outperform today.

Schlumberger (SLB) builds position in Russia. Schlumberger entered into an agreement with Eurasia Drilling to sell all drilling, sidetrack, and workover rigs currently in West Siberia. In return, Schlumberger will purchase Eurasia's drilling services (directional drilling, cementing, drilling fluids, etc.), which support approximately 80 rigs in the region. Following the transaction, the companies will enter into a strategic alliance in which Schlumberger will be the preferred supplier of drilling services to Eurasia for up to 200 rigs for a five-year period. Bottom line: Schlumberger is expanding on its strength in the Europe/CIS/Africa region by leveraging its ability to provide customized drilling assemblies (the driving force behind its recent acquisition of Smith International).

Pride (PDE) fleet report - delivers second newbuild drillship. Pride has delivered its second newbuild to BP (BP) in the Gulf of Mexico, and operations (and dayrate) are expected to begin in 1Q11. If unable to drill, it is believed Pride will be able to secure a similar arrangement with BP as it did on its first newbuild. Bottom line: The standby rate on the first rig was essentially equal to that rig's operating margin, and Pride would likely be amenable to such an arrangement on its second rig if it is also unable to drill due to government regulations. Cabot Oil (COG): Solid test results both in the Eagle Ford and Marcellus. The company's second Eagle Ford well came in at 759 bbl/d and 1.0 MMcf/d (20 stage frac), compared with its first well of 334 bbl/d and 0.142 MMcf/d (14 stage frac). Longer laterals are certainly helpful, and the results are certainly validating the company's acreage. In the Marcellus, recent completions have been exceeding flow rates of 20 MMcf/d, unsurprising given the company's resounding drilling success here.

Chevron Corp. (CVX) resumes share buyback. Following a two-year hiatus, Chevron announced yesterday after the close that it would resume share buybacks in the current quarter. The company plans to initially allocate $500 million to $1 billion per quarter for buyback (equating to about 0.5% of shares outstanding per quarter at the midpoint). Recall, Chevron announced in July that it was rescinding its three-year, $15 billion share buyback authorization from 2007 and moving to more of an ad hoc system. With this announcement, Chevron joins the ranks of Exxon Mobil Corp. (XOM) and ConocoPhillips (COP), which also have active buyback programs. The news is clearly an incremental positive for the shares, and depending on the trajectory of oil prices, there is potentially room for acceleration in 2011.

Clean Energy Fuels (CLNE) enters partnership with Pilot Travel Centers. Clean Energy has entered into an agreement to construct, own, and manage CNG/LNG fueling stations at select Pilot Flying J travel centers. Details are fairly vague at this time, as the announcement does not specify the number of centers that will have CNG/LNG fueling capabilities or the financial arrangements. The move to partner with the largest truck-fueling operator in the U.S. (over 550 truck travel centers across 43 states) as a clear positive for Clean Energy in that it should accelerate the broader adoption of natural gas fuels through existing distribution infrastructure. Energy bill uncertainty and potential equity raise could weigh on share price Excluding the current agreement with Pilot, at last report, CLNE had 74 stations in its construction pipeline with about $45 million to be spent by this year, plus still has another $15 million left to pay for its IMW acquisition. The company had about $55 million in cash at the end of the last quarter, and it has access to $20 million in a LOC. Before today’s announcement it was anticipated that CLNE could aim to raise $50 to $100 million in the next few months to support its growth next year. Additionally, it appears that CLNE still prices in much of the benefit of an energy bill, though the outcome of legislation is in question given the partisan political situation in the US.

PAA Natural Gas Storage L.P. (PNG) files with FERC for expansion of Pine Prairie Energy Center (PPEC). The partnership has proposed adding an additional 32 Bcf of working gas storage capacity to the facility that currently has 24 Bcf of working capacity. The plans call for 1) expanding cavern wells #2 through #5 from 10 Bcf to 12 Bcf, and 2) constructing two new 12 Bcf caverns. The expansion would increase PPEC's overall permitted capacity from 48 Bcf to 80 Bcf. Despite weak seasonal spreads, PAA Natural Gas Storage's recent open season to solicit contracts for 2 Bcf of capacity was heavily oversubscribed. The partnership received over 20 bids totaling 25 Bcf of capacity. While volumetric demand was strong, bids came in at lower rates than the partnership was contracting for three months ago. However, despite a difficult natural gas storage market, these operational headwinds appear to be temporary and that this permit filing will put the partnership in a favorable position to add storage capacity at low incremental costs (i.e., ~$8-10 million /Bcf vs. competitive landscape of ~$15-$25 million/Bcf).

Ascent Solar (ASTI) takes another step in commercialization, inks new distribution agreement. Ascent will partner with French developer DisaSolar to integrate its modules into corporate signage and passenger train roofs, two of DisaSolar's specialties, across France. That comes just a month after Ascent announced a similar agreement with Radiant Holding to distribute its building-integrated PV (BIPV) modules in the Chinese market. While neither announcement included timing or financial details, they highlight the company's ongoing shift from development mode to commercial production. To emphasize the company's "graduation," note that the most recent product revenues (2Q10) were just $168,000.