Every Wednesday, EnerCom’s Oil & Gas 360® will deliver media stories, company updates, and research commentary covering the crude oil spectrum. The theme for this week: Brent and WTI – Which Way are They Headed?
CRUDE OIL INVENTORY/’000 bbls (Week Ended 9/21/12)
Current: 365,180
Actual Injection/(Withdrawal): (2,446)
Economist Average Estimate: 882
Previous: 367,626
Click here for the chart with five year averages.
CRUDE OIL IN THE MEDIA
*Investors Refine Bets on Crude Price Gap – Financial Times
Forget the sharp slide in oil prices. What’s really concentrating minds in oil markets is the huge sums at stake in a bet on the direction of Brent and WTI — the world’s most heavily traded crude benchmarks. Here the debate is about more than the prospect of rising Saudi oil output or a jump in US stock. It is not so much about the actual price of oil, but the huge differences in the cost of the two crude streams. For nearly two years oil extracted from the middle of the US and Canada has traded at steep discounts to oil delivered in ocean tankers as North American drillers pump more than pipelines can take to refineries. Now investors including Pimco and Goldman Sachs, the Wall Street bank with the biggest commodities business by revenues, say these discounts will narrow. Others including PBF Energy, a company chaired by refinery investor Tom O’Malley, and oil transport company Magellan Midstream Partners see the discounts lasting for years. This debate matters. At stake are hundreds of millions of dollars worth of trades and investments as well as fees for commodities exchange operators CME Group and IntercontinentalExchange. – Read More
*Brent Crude Oil Falls Below $110 on Euro Zone Crisis – Reuters
Brent crude oil fell more than $1 per barrel to below $110 on Wednesday, weighed down by a stronger dollar, worries over growth and the euro zone debt crisis as Greece faced its biggest anti-austerity strike for months. Greece’s transport system ground to a halt, shops pulled down their shutters and hospitals worked on emergency staff on Wednesday as the country’s two biggest unions protested against a new round of belt-tightening. The strike followed violent protests in Spain, reigniting worries that the euro zone debt crisis is deepening despite efforts by central banks to reflate their economies. A stronger dollar and a weaker euro also depressed oil after the Bank of Spain said Spain’s gross domestic product fell at a “significant rate” in the third quarter. Brent crude oil futures fell 1.3 percent to last trade around $109. U.S. light, sweet crude also fell sharply, dropping to an intra-day low of $90.33, and last traded 1.2 percent at $90 a barrel. – Read More
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*Ruble Drops Most in Week as Crude Oil Retreats, Tax Payments End – Bloomberg
The ruble dropped the most in almost a week as crude, Russia’s biggest export earner, retreated on concern new U.S. stimulus steps won’t boost the economy. The ruble weakened 1 percent to 31.2800 versus the dollar by 4:14 p.m. in Moscow, the most since Sept. 20. The currency lost 0.2 percent versus the euro to 40.1820 and sank 0.6 percent against the central bank’s euro-dollar basket. Crude in New York dropped after a report showed rising U.S. stockpiles and the Federal Reserve Bank of Philadelphia President Charles Plosser said a new stimulus plan probably won’t boost economic growth. Support for the currency declined as the end-of-month tax payment period drew to a close. “Externally, the ruble is influenced by the declining U.S. market and oil,” Alexey Pogorelov, an economist at Credit Suisse AG in Moscow, said by telephone. “Domestically, the corporate tax period is coming to an end.” – Read More
*New Oil Market Regulations Canned Following Opposition – Wall Street Journal
The International Energy Agency and OPEC are natural rivals when it comes to oil policy. But the two international organizations were on the same page recently when it came to one thing: ensuring that new regulations on the oil market don’t come to pass. That’s the rub from a Financial Times report that shows how a strange-bedfellows coalition that also included oil giants Shell and Total put the kibosh on proposed new regulations on oil-price agencies like Platts and Petroleum Argus. The FT got hold of a memorandum from the U.S. regulator, the Commodities Futures Trading Commission, that said the IEA and OPEC would have balked had the regulations gone through. The regulatory body that initiated the change, the International Organization of Securities Commissions, working at the behest of the G-20, has since backed off the plan. The shift means market participants won’t need to submit data on transactions, as had initially been discussed. – Read More
*China Bankrolling Chavez’s Re-Election Bid With Oil Loans – Businessweek
Edelmina Flores thanks God and Hugo Chavez for her apartment in a new housing complex in the Venezuelan president’s home state of Barinas. She might also want to thank the Chinese government. Since 2007, the China Development Bank has lent Venezuela $42.5 billion collateralized by revenue from the world’s largest oil reserves, according to data compiled by Bloomberg from announcements of deals by the Chavez government. That’s around 23 percent of all overseas loans by the state-run lender and more than the $29 billion the U.S. spent rebuilding Iraq between 2003 and 2006. At least $12 billion was promised in the past 15 months, when stagnant oil output and the highest borrowing costs among major emerging markets would’ve made raising capital more expensive. The loans are fueling a surge in spending as Chavez hands out homes to the poor, stocks “socialist” supermarkets with appliances and builds a cross-country railroad — all aimed at winning votes next month in his toughest election battle ever. – Read More
*Russia Proposes Oil Export Tax Cuts – Wall Street Journal
The Russian government has proposed cutting the duty on crude exports from new oil fields in some remote regions, a boost for majors such as OAO Rosneft ROSN.RS and TNK-BP TNBP.RS that rely on tax breaks to raise the profitability of fields set to be launched in the next five years. The potential tax cuts could help bolster crude output in Russia—which vies with Saudi Arabia for the title of No. 1 global producer—and increase tax revenue for the budget by encouraging companies to bring new production on line. Energy Minister Alexander Novak said Monday that the government will provide a 45% discount on export duties for certain volumes of oil from the Eastern Siberian regions of Krasnoyarsk and Irkutsk, the Republic of Yakutia and the Yamalo-Nenets and Nenets districts in the far north, Russian newswires reported. – Read More
*Saudi August Oil Output Was 9.8 Million Barrels, GOR Says – Bloomberg
Saudi Arabia’s daily crude oil production averaged 9.753 million barrels last month and its supply to the market was 9.835 million barrels, according to the Gulf Oil Review. “Sources at the Saudi oil ministry say the kingdom will continue to produce at these levels if needed and remains committed to meeting higher customer demand,” the report said. Maintaining price stability at about $100 a barrel is a key strategic objective for Saudi Arabia, the newsletter said, citing unidentified sources in the country’s oil ministry. The report is published by Petroleum Policy Intelligence, a researcher in Winchester, U.K., founded by Bill Farren-Price. – Read More
*PdVSA Signs Crude Oil Supply Deal With India’s Reliance Industries – Fox Business
Venezuelan state oil monopoly Petroleos de Venezuela, or PdVSA, signed a 15-year crude supply contract with India’s Reliance Industries Ltd. (500325.BY) that will send as much as 400,000 barrels a day to the Asian country over the long term. The contract, inked by officials from both countries, will begin with shipments of 300,000 barrels and increase over time, Oil Minister Rafael Ramirez said. P.M.S. Prasad, executive vice president at Reliance, said the crude will feed India’s Jamnagar Refinery and will help the rapidly growing Asian economy meet its ever-growing energy needs. He said the supply contract could run longer than 15 years. – Read More
*Environmental risk of drilling in Arctic too high, CEO of oil giant Total says – NBC News
Energy companies should not drill for crude oil in Arctic waters because the environmental risks are too high, Total SA Chief Executive Officer Christophe de Margerie told the Financial Times on Wednesday. The newspaper, which operated behind a pay wall, described de Margerie’s comments as the first time a major oil company has publicly criticized offshore exploration in the Arctic. The risk of an oil spill in such an environmentally sensitive area was simply too high, according to de Margerie. “Oil on Greenland would be a disaster. A leak would do too much damage to the image of the company,” he said. Earlier this month, Gazprom OAO delayed the start of oil production at its Prirazlomnoye field, the first Russian Arctic offshore oil deposit to be developed, due to safety concerns. – Read More
*Talisman to produce oil in Vietnam, PNG in next 2 yrs –exec – Reuters
Talisman Energy Inc will have new crude oil and condensate production coming online in Vietnam and Papua New Guinea in the next two years to meet growing demand in Asia, a company official said on Wednesday. The Canadian company expects to start drilling at the Hai Su Trang and Hai Su Den fields offshore Vietnam in the fourth quarter with crude production to start in the middle of next year, Paul Blakeley, an executive vice president at Talisman, told Reuters on the sidelines of an industry conference. The field’s production will peak at about 15,000 barrels per day (bpd) and its output will be tied to export facilities at neighbouring Te Giac Trang field, said Blakeley, who oversees Talisman’s operations in the Asia Pacific. Soco International PLC operates the 55,000 bpd Te Giac Trang (TGT), or White Rhino, field in block 16-1, lying 100 km (62 miles) southeast of Vietnam’s southern city of Vung Tau. – Read More
*ExxonMobil to Increase Production and Acreage in Bakken Oil Shale Region – XOM Press Release
Exxon Mobil Corporation (NYSE:XOM) today announced an agreement that will significantly increase its production acreage in the prolific Bakken oil shale region in the U.S. states of North Dakota and Montana. ExxonMobil and its subsidiary, XTO Energy, signed an exchange agreement with Denbury Onshore, LLC, a subsidiary of Denbury Resources Inc., to acquire 100 percent of Denbury’s Bakken shale assets, which consist of approximately 196,000 net acres in North Dakota and Montana, with expected production in the second half of 2012 of more than 15,000 oil equivalent barrels per day. The agreement increases ExxonMobil’s holdings in the Bakken region by about 50 percent to nearly 600,000 acres, giving the company a significant presence in one of the major U.S. growth areas for onshore oil production. – Read More
RESEARCH COMMENTARY
*Raymond James Equity Research (9.26.12)
DNR: $2 Billion Bakken Sale Refocuses Strategy on Tertiary Oil
Recommendation: Denbury announced Thursday that it had entered into an agreement with Exxon Mobil (XOM) to sell its Bakken assets (~200,000 net acres) in return for $1.6 billion in cash, and operating interests in Exxon’s Webster Field in Texas and Hartzog Draw Field in Wyoming – bringing the total value of the transaction to be ~$2 billion. The deal implies a premium to large cap peers on a $/flowing BOE, $/proved BOE, and the PV10 of the assets. We estimate unbooked upside of $1.87/share from 90 mmboe of unproved reserves at Webster and Hartzog Draw compared to $1.5-2 billion of value for the Bakken assets sold. Thus, the deal looks positive and accretive to NAV for DNR. We believe the deal creates significant value by shedding non-core assets and receiving cash interest in fields that will benefit from Denbury’s CO2 flood strategy starting in late 2012/early 2013. We are raising our target price to $22 from $20 and reiterating our Outperform rating as a result of our continued confidence in the company’s high-margin tertiary oil program, premium Gulf Coast pricing, and solid strategic execution by management.
Punting non-core assets is the name of the game. Two days after Newfield Exploration (NFX) announced the sale of the rest of its non-strategic Gulf of Mexico assets, Denbury follows suit with a $1.6 billion sale (minus $200-250 million of additional CO2 bought from Exxon) and like kind property exchange. Denbury not only delivered on its plan to shed its Bakken portion, but doubled up by gaining operating interests in two fields (Webster and Hartzog Draw) that play right into its tertiary game plan by being in close proximity to its existing CO2 infrastructure – Webster being 8 miles from the Hastings flood, and Hartzog 12 miles from the Greencore pipeline.
Estimates & Valuation: Our 2013 EPS/CFPS/EBITDA estimates are being adjusted down to $0.59/$2.16/$1,064 million after adjusting for net lost production. We believe this will be a short term hit as volumes are swapped in near term for longer term growth. Shares of DNR currently trade at 8x EV/NTM EBITDA. Our new $22 target price is based on our total company NAV of ~$20.85/share plus the tertiary acceleration and stock buyback upside potential, detailed on page 3. Our target implies a 9.3x EV/NTM EBITDA multiple and 27% upside to current levels.
*Tudor Pickering Holt & Co. (9.26.12)
DOE inventory preview (Brent $109/bbl, WTI $90/bbl). Market more focused on weekly inventory release on the heels of last week’s large (+8.5mmbbls) crude oil build. Crude typically builds only ~1mmbbls/wk in late Sept and early Oct as refinery utilization is impacted by seasonal maintenance. The flip side of low utilization is refined products normally draw. Given the wide spread between WTI and Brent, Cushing stocks are always of interest.
