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ENERGY & POWER

SECTOR OUTLOOK JANUARY 2005


Greg Imbruce Phone: 203-708-5804 gimbruce@jefco.com

Greg Imbruce

Energy & Power Universe


Energy
E&P Drillers Oil Service Propane Refining & Marketing Seismic

Power
IPPs Electric & Gas Utilities

4Q04 Commodity Prices


Commodity and HY strength have combined to push Energy credits to levels never seen before We expect strength to continue as a result of high 4Q04 commodity prices However, bewareNatGas could soften considerably to $4level and crude oil into the low $30s use any weakness as a buying opportunity but limit exposure in short-term to selective names that could be potential takeout plays in 2005s M&A
4Q03 Crude Oil NatGas $31.23 $5.11 4Q04 $48.37 $6.27 Chg. % +55% +23%

NatGas Price ($/Mcf)



$12

Real NatGas price peaked in mid-February 2003 at $20.15, while bottoming in December 1998 at $1.19 Since 1991, Real NatGas price averaged $3.31
Nominal vs. Real NatGas Px (Today's Dollars)
Nominal NatGas Px
$10

Real NatGas Px

$8

$/Mcf

$6

$4

$2

91

92

93

94

95

96

97

98

99

00

01

02

03

04

$100 Crude Oil?


Maybe notbut >$30 in medium-term supported by: Crude Oil priced in USD - USD weakness driving demand as Oil remains relatively inexpensive to rest of world China hyper-growth fueling demand Global Threats Iraq, Iran, N. Korea and the unknowns Reserve uncertainty due to subjective engineering calculations The Political Russia Goes Shopping and erratic Venezuela Excess crude oil capacity going, going, gone (+0.2% per year) Compounding absolute demand growth (+1.5% per year) The Treadmill Initial production declines 20-30% onshore and 45-50% offshore
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Real Oil Price ($/Bbl)


Real oil price peaked in August 1983 at $61.30/Bbl, averaged $53.76 in 1984 and bottomed in December 1998 at $12.42, averaging $30.72/Bbl since 1983.
Nominal vs. Real Crude Oil Px (Today's Dollars)
$70

$60

Nominal Crude Oil Px Real Crude Oil Px

$50

$40

$/Bbl
$30 $20 $10

83 83 84 84 85 85 86 86 87 87 88 88 89 89 90 90 91 91 92 92 93 93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04

Independent E&Ps Drive Market


Lower commodity prices doesnt mean lower activity
HIGH YIELD E&P ECONOMICS Oil NatGas Equiv. Equiv. $/BOE $/MCFE $5.22 $0.87 $1.86 $0.31 $7.08 $1.18 $2.46 $0.41 $9.54 $1.59 $3.06 $0.51 $12.60 $2.10 ($1.80) ($0.30) $14.40 $2.40 $7.50 $1.25 $21.90 $3.65

LOE Prod. Taxes LOE + Taxes G&A Operating Costs Cash Int. Exp. Total Cash Costs Avg. Differential NYMEX Breakeven Avg. FD&A All-In NYMEX Breakeven

Independent E&Ps become the major NA player, driving breakeven higher and supporting long-term $30/Bbl and $4/Mcf as capacity remains tight
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The Disconnect is Connected


Oil Service Boom beginning to emerge due to the E&P industrys completion of the following: M&A Integration Balance Sheet clean-up from 2001-2002 M&A Commodity Prices E&Ps drilled majority of prospects in high NatGas price environment during 2001 Busy prospect building during 2002 2003 Ready to drill

Oil Service Boom


Record commodity prices coupled with hedging open up once uneconomic fields and extend reserve life of mature fields Drilling is the Relative Value Play: $1.30/MCFE F&D vs. $1.75$2.00/MCFE acquisitions Exploratory success rate climbed to 46% in 2003 from 26% in 1984 LNG - Requires major infrastructure for pipelines, production facilities onshore and offshore, LNG tankers, receiving facilities E&Ps Drilling in Deepwater and Deeper Over the last 2 years, 65% of all new reserves worldwide were found in the deep water (1,200+ ft) and total footage drilled +23% in 2003 vs. 2002 Offshore - Ocean Rig recently received a $213k dayrate for its Leiv Eiriksson and Petroleum Geo-Services, a $220-250k dayrate equivalent for its FPSO Petrojarl Varg
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2005s Major Drivers


Oil service boom and record M&A CONVERGE, creating tremendous momentum in the E&P and Oil Service industries. E&Ps Positioned for value creation with ample liquidity and access to capital markets readily available Expect record M&A in 2005 in E&P and Oil Services Unocal Multiple Buyers Financial (Belden & Blake) buyers are new entrant to traditional buyers (Independents, Majors & China) Majors LNG focus will be additional driver to oil service activity Even if we are correct and NatGas softens to $4, we believe this level encourages drilling and services Refining Strength to Continue due to under investment
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Strong Buys & Buys


Company STRONGEST BUYS: Northern Offshore STRONG BUYS: ATP Oil & Gas Calpine Corp. Calpine Corp. Energy Corp. of America Crown Central Petroleum Mission Resources S.Point/Broad River/RockGen (Calpine) Seitel Tiverton/Rumford Power (Calpine) United Refining BUYS: Aquila Baytex Energy Bluewater Belden & Blake Callon Petroleum Energy Partners Hilcorp Energy J Ray McDermott Lone Star Technologies North American Energy Parker Drilling Parker Drilling Shaw Group Venoco Bond Description 10 Sr. Nts. 05 8.818 Sr. Sec. Nts.-1st Lien 09 9.625 Sr. Sec. Nts.-1st Lien 14 8.5 Sr. Sec. Nts.-2nd Lien 10 9.5 Sr. Sub. Nts. 07 10.875 Sr. Nts. 05 9.875 Sr. Nts. 11 9.825 Pass Thru Certs. 19 11.75 Sr. Nts. 11 9 Pass Thru Certs. 18 10.5 Sr. Nts. 12 14.875 Sr. Nts. 12 9.625 Sr. Sub. Nts. 10 10.25 Sr. Nts. 12 8.75 Sr. Sec. Nts.-2nd Lien 12 9.75 Sr. Nts. 10 8.75 Sr. Nts. 10 10.5 Sr. Nts. 10 11 Sr. Sec. Nts.-2nd Lien 13 9 Sr. Sub. Nts. 11 8.75 Sr. Nts. 11 9.625 Sr. Nts. 13 10.125 Sr. Nts. 09 10.75 Sr. Nts. 10 8.75 Sr. Nts. 11 Ratings C / NR NR / NR NR / B+ NR / B Caa3 / NR Ca / NR Caa2 / CCC B2 / B B3 / BB3 / B B3 / BB2 / BB3 / BB1 / B B3 /*- / CCC+ NR / NR B2 / B+ B3 / B Caa1 / CCC+ B3 / BB2 / B B2 / BB2 / BBa3 / B+ Caa1 / CCC+ Amt. O/S USD $MM $143 $184 $785 $1,150 $92 $125 $130 $200 $193 $364 $200 $500 $180 $335 $193 $200 $150 $275 $200 $149 $200 $175 $156 $253 $150 Price 106.0 102.0 101.5 82.0 95.3 96.0 106.3 84.0 107.3 82.0 105.5 139.5 106.8 110.0 102.5 106.6 109.0 113.8 111.8 107.5 102.0 112.1 105.2 112.0 103.0 YTW -78.37% 7.29% 9.34% 13.20% 11.87% 117.85% 8.37% 12.21% 10.20% 13.66% 9.21% 7.79% 7.82% 7.31% 8.18% 8.35% 6.43% 6.58% 8.61% 6.40% 8.24% 7.01% 7.61% 7.02% 8.10% STW (8,075) 455 561 947 864 9,235 462 792 645 793 547 405 442 392 443 460 303 318 486 300 451 328 494 364 435 Duration 0.1 0.7 5.2 3.9 2.0 0.0 4.0 6.9 4.3 3.9 4.0 5.0 3.5 1.8 4.1 3.9 2.9 2.2 3.2 1.3 3.9 3.1 0.8 1.9 4.6

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Swap & Sell Ideas


Amt. O/S USD $MM

Company SWAPS: Out of: Calpine Corp. Into: Tiverton/Rumford Power (Calpine) or Into: Calpine Corp. or Into: Calpine Corp. SELLS: Abraxas Petroleum Magnum Hunter Newpark Resources

Bond Description

Ratings

Price

YTW

STW

Duration

8.5 Sr. Nts. 11 9 Pass Thru Certs. 18 7.82 Sr. Sec. Nts.-2nd Lien 07 8.5 Sr. Nts. 08 9.72 Sr. Sec. Nts.-1st Lien 09 9.6 Sr. Nts. 12 8.625 Sr. Sub. Nts. 07

Caa1 / CCC+ B3 / B NR / B Caa1 / CCC+ NR / NR B2 / B+ B2 / B

$1,991 $364 $494 $2,030 $125 $195 $125

72.0 82.0 92.0 75.0 99.0 114.5 101.8

15.83% 13.66% 14.33% 19.03% 10.56% 4.62% 4.20%

1,210 793 1,127 1,566 685 123 184

4.1 3.9 1.5 2.6 4.9 1.9 0.1

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Northern Offshore Ltd. (NOF)


**STRONGEST BUY **: $143 MM 10% Sr. Notes 05 Offshore Drilling Rigs & FPF

Restructuring Finalized KPMG as Provisional Liquidator recently announced a restructuring plan that will provide USD & NOK Sr. Noteholders ($163 MM) 98% of NEWCOs equity and existing shareholders 2%. USD Noteholders (10s) will receive $14 MM cash payment for the cancellation of a guarantee. We view NOF as excellent platform for growth that is debt-free with $14 MM in cash Creating company at 6x LTM EBITDA ($24 MM) and 3.7x 05E ($40 MM) EBITDA vs. 1015x EBITDA for comparables Strengthening dayrates support business for the Energy Search (Drillship), Northern Producer (Floating Production Platform), and Galaxy Driller (cold stacked) Immediate Catalyst - Expect Talisman Energy (TLM) to extend N. Producer contract (expired 1/6/05 and continues to operate) at $115k dayrate with 2 to 3-year term and generate approximately $25 mm in annual EBITDA

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TIVERTON
STRONG BUY: $363 MM 9% Pass Thru Cert. 18 Calpine Project Debt 2 NatGas Northeast Generating Plants

SLOB - 1st Lien Position on Two Northeast generation assets and Corp. Lease
Guarantee

Quality Generation Assets Total 491 MWs Both baseload NatGas plants with
7,000 heat rate:

TIVERTON - Tiverton, Rhode Island (240 MW); RUMFORD - Rumford, Maine (251 MW)

Self-Amortizing 4-year duration, 5-year avg. life Attractive Yield/Spread 13.7%, +992 bps avg. life spread 11.5% yield in worst-case-scenario in which CPN files BK in 2008 Tiverton and Rumford operated at 80% and 70% Capacity Factors in 2003, respectively

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Crown Central Petroleum (ROSEMO)


STRONG BUY: $125 MM 10.875% Sr. Notes 2/05 Refining & Marketing

Immediate Catalyst 2/1/05 Maturity Update Pension Settled for $45 mm vs $66 mm estimate and Pasadena Sold for $42 mm, in line with our estimate Remaining Assets - Tyler refinery and crude oil and products in inventory We expect partial refinancing of the Sr. Notes and/or Crude Oil Processing Agmt. Creating the refining assets at attractive valuation ($33/Complexity Bbl and 2.1x 04E EBITDA) Free Cash Flow $17 mm 2H04E FCF

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Seitel Inc. (SELA) STRONG BUY: $193MM 11.75% Sr. Notes 11 US Land Seismic Processor

Relative Yield Play Non-Call, 10.2% +630 bps that could go to 130 if SELA were acquired by large oil service entity Tax Refund - Received $11 mm Tax Refund in 4Q04, boosting cash to $29 MM and total liquidity to over $61 MM Strong Covenants 50% FCF cash flow sweep at Noteholders option, $65 mm CapEx restriction Healthy Financial Results: $87 MM LTM Cash EBITDA Excellent Credit Statistics:

1.5x Net Debt Leverage 3.8x Interest Coverage (Normalized to acct. for higher 3Q04 Interest Expense due to BK)

Increasing E&P Budgets Expect +15-20% YoY CapEx to benefit SELA in 2005

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APPENDIX

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US Rig Count Oil/Gas Mix


NatGas drilling remains E&P focus, however, we should oil become larger component with higher crude prices
Rig Count, U.S. Oil/Gas Mix (Baker Hughes)
2,500

2,000

1,500

1,000

500

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94

95

96

97

98 Oil

99
Gas

00
Miscellaneous

01

02

03

04

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Natural Gas Storage


As result of NatGas drilling focus, NatGas storage +7% (+191 BCF) YoY and +5% (+155 BCF) compared to 5-Yr. Avg. We expect NatGas to drop to below $5/Mcf in the near-term from its current $7+
Natural Gas Storage (BCF)
3,400

2,900

2,400

1,900

1,400

900
2000 2001 2002 2003 2004 5-Yr Avg. thru 2003

400 WK1 WK8 WK15 WK22 WK29 WK36 WK43 WK50

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The Disconnect
Record Oil & Gas Prices, yet metrics point to declining US exploration activity: Seismic Crews plummeted to 481 in 2003, -29% YoY, -33% vs. 2001 and the lowest since the statistic began being recorded in 1977 Wildcats wells are 22% from 2001 and -54% from 1990

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US Offshore Drilling
Offshore Rig count is -7% from last year and -46% from the 181 Offshore Rig peak in January 2001, however, we are beginning to witness an reversal, highlighted by significantly higher dayrates.
200 180 160 140 120 100 80 60 40 20

Rig Count - Offshore Only

93

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99

00

01

02

03

04

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Peak Year Milestones


Data Type Operators of Record Seismic Crew Count Rotary Rigs Active Exploratory Wells Drilled Oil Wells Drilled Gas Wells Drilled Dry Holes Drilled Total Wells Drilled Producing Oil Wells Producing Gas Wells Drilling Costs ($Trillion) Crude Oil Production (000's/bpd) Stripper Well Production (000's/bpd) Petroleum Imports (000's/bpd) Petroleum Demand (000's/bpd) Natural Gas Production (BCF) Natural Gas Consumption (BCF) Natural Gas Imports (BCF) Oil Wellhead Price ($/Bbl) Gas Wellhead Price ($/Mcf) Total Industry Employment (MM) Peak Year 1982 1981 1981 1981 1984 2001 1981 1981 1985 2002 1982 1970 1983 2001 2002 1973 2000 2002 1981 1981 1981 Milestone 13,014 8,172 3,970 17,430 44,472 22,270 26,972 89,234 646,626 357,511 $39 22,648 441,501 11,871 19,761 22,648 23,368 4,008 $31.77 $31.77 1.9

Peak Year Milestones all occurred in the early 1980s except for demand-side data, which we saw peak in 2002

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The Result - Declining Production


2003 Total Production: -0.7% YoY and 1.9% since 2000 and over 15% from the peak in 1979 YoY NatGas Production +0.7%, however, Liquids 2.3%
US Liquids & Gas Production (MMBOEPD)
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NatGas Production (BOEpd)


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Oil Production (MBPD)

MBOEPD

15

10

76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

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Stranded NatGas to Market


LNG shifting Majors focus, abandoning North America to focus on Stranded Gas Majors have biggest incentive to focus on bringing stranded gas to market Japan, Taiwan and S. Korea receive 95% of NatGas from LNG its 2% in the US Expect shift of North American properties from Majors to the Independent E&Ps

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Capacity to Expand
HY E&Ps Positioned for Value Creation - M&A and Drilling: $7.3 in Total Liquidity: Cash $1.2 B + $6.1 B Available EBITDA: $3.0 B Recent Quarter LTM EBITDA topped a record $10.2 B Healthy Credit Statistics provide asset expansion: 2.4x Total Debt Leverage / 10.2x Cash Interest Coverage 45% Total Debt/Book Cap

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M&A E&P Event Driver


Hedging Drives M&A Expect high activity level due to spread between forward curve and purchase prices, allowing E&Ps to lockin value and support credit profiles Event Catalysts - Takeouts will trigger major capital gains in noncall E&P paper Callon, El Paso Production, EPL, Magnum Hunter, Mission, Range, and Swift are among our favorite takeout ideas Bet on the Lower Quality Names - Higher cost, lower quality names will be biggest gainers due to record FCF gains and ability to hedge at record high prices Industrys Improved Health Relatively low capital costs, high stock values as currency, and immense liquidity improvements will drive M&A and boost asset valuations
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Refining Regional Crack Spreads


Refinery Support - Lack of Capital to upgrade refineries to run cheaper, heavier, and higher Sulfur oil High Cost producers Set Crack Spreads - Refining capacity declines due to EPAs Low Sulfur Content requirements
NYMEX 3-2-1 Crack Spreads
$20 $18 $16 $14 $12 $/Bbl $10 $8 $6 $4 $2

West Coast MidWest Gulf Coast

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

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Refining Nationwide Spark Spreads



$40

Nationwide Crack Spreads appear to have bottomed in 2002. Talk of first new refinery since 1976, planned to be completed by 2009 in Arizona, accessing California market
Cumulative NYMEX 3-2-1 Crack Spreads

$35

Gulf Coast MidWest West Coast

$30

$25

$/Bbl

$20

$15

$10

$5

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1993

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1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

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2004 Jefferies & Company, Inc. All rights reserved. I, Greg Imbruce, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. In December 2004, Jefferies acted as co-manager in a secondary offering of equity for Range Resources. In June 2004, Jefferies acted as co-manager in a secondary offering of equity for Range Resources. In June 2004, Jefferies acted as co-manager of a secondary offering of common stock for Magnum Hunter. In June 2004, Jefferies acted as co-manager of a senior unsecured notes offering for Swift Energy. In December 2003, Jefferies acted as placement agent in an offering of Senior Unsecured Notes for Callon Petroleum. Concluding in August 2004, Jefferies acted as financial advisor to Seitel, Inc. in its Chapter 11 bankruptcy proceedings, lead manager of a rights offering and co-manager of a high yield offering. Jefferies or one or more of its affiliates makes a market or acts as a specialist in the equity of Mission Resources Corp., Seitel Inc. & Calpine Corp. This material has been prepared by Jefferies & Company, Inc. ("Jefferies") a U.S.-registered broker-dealer, employing appropriate expertise, and in the belief that it is fair and not misleading. It is approved for distribution in the United Kingdom by Jefferies International Limited ("JIL") regulated by the Financial Services Authority ("FSA"). The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore except for any obligations under the rules of the FSA, we do not guarantee its accuracy. Additional and supporting information is available upon request. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best judgment as of this date, and are subject to change without notice. Jefferies and JIL and their affiliates and their respective directors, officers and employees may buy or sell securities mentioned herein as agent or principal for their own account. This material is intended for use only by professional or institutional investors falling within articles 19 or 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001and not the general investing public. None of the investments or investment services mentioned or described herein are available to other persons in the U.K. and in particular are not available to "private customers" as defined by the rules of the FSA or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario)."

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