Volume 05, No. 11 CapitalMarkets - Oil & Gas Assets for Sale · 8/30/2012 · Miller Energy...

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August 30, 2012 • Volume 05, No. 11

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CapitalMarkets 2 August 30, 2012

Upstream Market Movers — Last 30 Days Source: Capital IQ

Company Ticker$/Share 7/30/12

$/Share 8/29/12

% Change

Top

5

Gulfport Energy GPOR $20.94 $26.29 26%

Warren Resources WRES $2.36 $2.92 24%

Triangle Petroleum TPLM $5.62 $6.82 21%

Magnum Hunter MHR $3.77 $4.49 19%

Miller Energy Resources Inc. MILL $3.85 $4.55 18%

Bott

om 5

Lone Pine LPR $2.34 $1.26 (46%)

BP Prudhoe Bay Royalty Trust BPT $116.60 $76.77 (34%)

Quicksilver Resources KWK $4.75 $3.61 (24%)

Abraxas Petroleum AXAS $2.59 $2.00 (23%)

ZaZa Energy ZAZA $3.91 $3.09 (21%)Note: Data includes public, US-based companies operating in the oil & gas space, limited to companies >$100MM market cap & >$1.00/share.

Top five stock winners & losers Gulfport Energy shares are up 26% in August, driven by the company’s eagerly

anticipated first Utica horizontal well results. The well did not disappoint, testing at 17.1 MMcfd of gas and associated condensate and NGLs adding up to 4,650 boepd, well above that of most other results in the young play.

Shares of Warren Resources are up 24% this month on strong Q2 performance. The company had record quarterly oil production and 18% sequential oil sales growth which accounted for over 90% of total Q2 revenues. Warren cut 2012 capex 13% to $62 million, while increasing Q3 oil production guidance 12% sequentially from midpoint to 3,178-3,342 bopd.

Triangle Petroleum has made a gradual 21% share climb over the past month, possibly buoyed higher by strong quarterly production news from several other Bakken E&Ps. Additionally, Imperial Capital initiated coverage of the company with an Outperform rating. Imperial cited high valuation for a proposed QEP Bakken acreage acquisition as a positive indicator for pure-play Bakken operators such as Triangle

and Oasis, which it believes are the most likely takeover targets in the play.

Magnum Hunter shares climbed 19% in August on the company’s strong progress in its shift-to-liquids efforts. While production only grew 3% sequentially to 12,984 boepd, the production mix swung from 35% to 45% oil and liquids with year-end expectations of 60% liquids production. Moreover, the company projected a 2012 production exit rate above 18,000 boepd, a 38% increase from Q2 average.

Shares of Lone Pine Resources fell 37% on August 14 and are down 46% on the month due to discouraging Q2 results. The company cited limited Q2 field activity due to the Canadian spring break-up, and production fell 10% YOY and modestly vs. Q1. Lone Pine also reduced 2012 capex ~19% to C$160-175 million. That said, oil sales volumes rose 14% sequentially and 44% YOY, with liquids now accounting for 32% of total production vs. 28% in Q1 and 21% in 2Q11.

BP Prudhoe Bay Royalty Trust is down 34% this month as other, smaller royalty trusts cut dividends. Several analysts noted the trust was trading at a $2.33 billion market value but had only a ~$1.4 billion projected income stream. They argued the hunt for yield was inflating share prices.

The PLS CapitalMarkets covers the energy finance sector with news and analysis on budgets, spending, financial performance and tracking trends in available capital from commercial banks and other providers.

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ABOUT PLS

•Barclays projects natural gas de-mand could grow 11.3 Bcfd from 2015-2020 with growth gradual enough to prevent significant price spikes. Annual growth over the period as pro-jected would average 2.26 Bcfd/year, while annual growth has averaged 2.51 Bcfd/year over the past five years. Five Bcfd of demand could stem from LNG exports, with four Bcfd through the US and another Bcfd through Canada. Gas power generation is expected to take up another 1.54 Bcfd, new industrial demand could hit 2.2 Bcfd and oil sands production could add 1.2 Bcfd.

•San Isidro Development Co. com-pleted a management buyout and recapital-ization through Wilcox Swartzwelder & Co.

San Isidro has operations in the Eagle Ford and Texas Gulf

Coast, along with a leasehold in the Mon-tana Bakken. Wilcox is a boutique i-bank serving middle-market companies in the energy, industrial and infrastructure sec-tors. Principals have completed over 100 deals worth over $3.6 billion in aggregate.

Capital Markets Briefs

Gulfport’s strong Utica well update pushed shares up 26%.

Triangle is trending higher on thoughts it could be a possible takeover target.

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Volume 05, No. 11 3 energyFinanCe

Pickens gets out of BP & Suncor, slashes SandRidge stakeT. Boone Pickens’ BP Capital Management LP completely liquidated its stake

in supermajor BP, regulatory filings show. The firm’s Q2 13-F filing reflects sale of the company’s ~452,000 share position, which was valued in the prior quarter at $20.3 million. Shares of BP fell 9.9% during Q2, culminating in a $1.4 billion

net loss on the quarter caused largely by major asset writedowns. Pickens began building his BP position in 3Q10 after the April

2010 Macondo spill.Pickens also closed his position in Suncor and cut his $9.3 million stake in

SandRidge by 77% to ~278,000 shares. Data from Q2 also reflected a previously announced full exit from Pickens’ ~499,000-share, $11.56 million (using Q1 data) Chesapeake position in May, reportedly due to falling gas prices. On the

service side, Pickens closed positions in Schlumberger and Halliburton (valued at the end of Q1 at a combined $7,8

million) and pared back stakes in National Oilwell Varco and Weatherford. He also sold $5.0 million in shares of Golar LNG.

Conversely, Pickens moved assets into McMoran Exploration, Anadarko, Apache, EOG, Pioneer Natural Resources, Quicksilver Resources and Southwestern Energy during Q2. He also added over 84,500 shares to a Range Resources position, which was valued at $5.2 million as of Q2.

Huge Chevron cash position creates acquisition buzz With ~$21.2 billion in cash on the books (up 59% YOY and 12% sequentially),

speculation has picked up over what Chevron plans to do with it all. The Wall Street Journal notes the company is now carrying more cash than any other public energy

company with ~18% more than ExxonMobil. The company has benefited largely due to higher oil prices and its limited US natural gas presence.

CEO John Watson said as far back as March (when cash was a comparatively modest $18.9 billion) that “we have the balance sheet to do acquisitions.” Morningstar’s Allen Good said the company might be considering “companies trading at a substantial discount,” presumably referring to beaten-down US gas companies such as Chesapeake. After a recent boardroom shake-up, Chesapeake could be moving toward the block. While the company’s current low share price could certainly be compelling, its complicated financial structure could act as an offset. Deutsche Bank recently speculated that Hess might be an attractive option due to Bakken operations. Oppenheimer’s Fadel Gheit,

at least, thinks that sitting on so much dead money is evidence the company is contemplating an acquisition.

Chevron bought back $2.5 billion in shares in H1 (up 43% YOY), also increasing its quarterly dividend 11% to $0.90/share for what amounts to a ~3.2% yield using recent share prices. Deutsche Bank suggested Chevron could raise the dividend further.

Chevron defends the cash position as a way to reduce risk in a “period of heavy investment,” with liquidity needs diminishing as major Australian LNG and other projects come online over the next few years. Chevron recently noted Australian dollar foreign exchange and rising labor costs have caused it to institute a review of the $43 billion Gorgon LNG project.

Capital Markets News •Harvest Natural Resources an-

nounced two exchange agreements totaling $6.5 million worth of 8.25% senior convertible notes for 1.17 million shares of

privately issued common at an exchange price of $5.60/share. In lieu of cash, Harvest issued an ad-

ditional 59,170 shares in exchange for note-holders foregoing a one-year interest make-whole of $540,457.50. After the exchange, ~$9.0 million of principal in the 8.25% convertibles will remain. Harvest also said it is considering offering up to $75 million in new senior unsecured notes in the future to fund its Gabon drilling program.

•SandRidge Energy announced tenders and consents representing 94.26% of outstanding principal for its previously announced tender offer for $350 million in senior floating rate notes

due 2014. Resulting indenture amendments

will allow redemption of remaining notes with three days notice. Holders who tender prior to expiration of the tender offer on August 31 will receive 97.25% of par value. Barclays is acting as dealer manager and solicitation agent.

•White House spokesman Josh Ear-nest recently confirmed via a news brief-ing that the White House is considering a release from the US Strategic Petroleum Reserve. Earnest said the administration is carefully monitoring the global oil market and global prices, and would “continue to coordinate” with other major economies regarding its findings. Reuters reported US officials were considering the move to keep high energy costs from undermining Iran sanctions.

Capital Markets Briefs

If Chevron retired all debt, it would still have ~$11.2 billion cash remaining.

Chevron paid ~$3.2 billion in 2010 for gas-levered Atlas Energy.

Shell's strong cash position also breeds acuisition buzz.

A&D Transactions Vol.23, No.11

Pickens' BP stake was worth $20.3 million in Q1.

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BP Capital’s stock holdings dropped ~25% to $130 million in Q2.

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CapitalMarkets 4 August 30, 2012•Antero Resources reported a Q2

net loss of $478 million (vs. a $75 mil-lion 2Q11 profit and a $59 million loss in 1Q12), driven largely by a $427 million loss on the sale of its Ar-koma basin assets to Vanguard Natural Resources. Adjusted net income was $22 million (down 52% sequentially). Net production was a record 348 MMcfed, up 57% YOY and 10% sequentially driven largely by new Marcellus and Piceance wells. Gas represented 93% of daily pro-duction with NGLs at 5% and crude 2%.

•Atlas Resource Partners reported Q2 adjusted EBITDA of $16.6 million (up 5% YOY and 23% sequentially). Produc-tion was a record 62.5 MMcfed (up 71% YOY and 57% sequentially), supported by

recent Barnett acquisitions. Gas was 93% of production. Presi-dent Matthew Jones said the

company had commenced its Barnett drill-ing plan on the July closure of Atlas’ Titan Operating LLC acquisition, and was begin-ning drilling in its new development areas including the Mississippi Lime, Utica and Marcellus. Atlas projects a ~50% YOY 2013 distribution increase at $2.30-2.45/unit.

•Cimarex Energy reported Q2 ad-justed net income of $70.4 million, down 51% YOY and 35% sequentially on lower oil (down 12% YOY), NGL (36%) and gas prices (49%). Production was 590.1 MMcfed, up marginally YOY and down 2% sequen-tially. However, oil production was up 8% YOY (although down 3% sequentially) to 28,686 bopd. Production was hurt by Cana-Woodford ethane rejection. Overall production was 54% gas, 29% oil and 17% NGLs. Cimarex raised Permian/Mid-Con oil production growth guidance from 20-27% to 28-32% due to strong drilling results.

•EV Energy Partners reported Q2 adjusted net income of $23.5 million (down 8% YOY and 17% sequentially). Production was 162 MMcfed (up 47% YOY due to 2011 acquisitions and 2% sequentially). Total operating costs rose 58% YOY to $85.6 million, with LOEs rising 38% to $24.9 million. EVEP launched its Utica monetization process, which is moving forward as planned, at the end of Q2.

Earnings & Capex Briefs Capital Market News

Crude likely to outperform sector in crisis, TPH saysWith all eyes on Israel and Iran, Tudor, Pickering, Holt & Co. examined

performance of WTI and various industry segments in the one-month period following the “Arab Spring” Egyptian turmoil and Libyan uprising periods last year for comparisons. Overall, oil outperformed the industry.

The best sector segment performer in both events was onshore domestic oil-levered E&P companies. Majors performed well, but

not as well as domestic onshore operators. The oilfield service segment and international E&Ps fared worst. Refiner performance depended on whether onshore vs. LLS/Brent spread narrowed (negative) or not. Midstream companies were largely flat in both periods.

In the Egypt scenario, WTI rose 14% from $85/bbl during the month following, while onshore oily E&Ps rose 15%, oilfield services rose 9% and offshore and international E&Ps lagged.

In Libya, WTI rose 13% from its $90/bbl start-point. While onshore oil-levered up-streamers rose 5% in the first week, they ended the month down 1% (vs. the S&P which fell 5%). All other segments fell by month’s end, as well, with only oilfield services un-derperforming the S&P. TPH rationalized the better moves during the Egypt scenario by noting its overall smaller contribution to global supply and thus actual impact on markets.

Looking forward, Tudor anticipates a reaction closer to the Libya scenario should hostilities commence, due both to

Iran’s larger contribution to global crude supply and the likely higher starting price for crude as between the scenarios. Tudor again sees onshore E&Ps (both oil and gas) win-ning compared to beta for the rest of the sector because of asset safety, with expected un-derperformance from services due to its leverage to international operations. The i-bank said refiners were a bit of a toss-up, as the spread could widen, but crude prices could get so high as to hurt overall demand, potentially harming the cycle for the segment.

Tudor reiterated its position that supply shock driven price moves are not good for energy stocks, because long-term performance relies on sustainability of prices and the overall sector cycle. Neither benefit from a crisis.

Onshore domestic oil-levered E&Ps benefited most from prior recent crises.

Regardless of short term, a crude crisis shakes confidence in the sector.

Concho upsizes public debt offering to $700 million Concho Resources announced and priced a $700 million public offering of senior

unsecured notes due 2023 at par to yield 5.5%. The offering was upsized 75% from an initially proposed $400 million. Net proceeds will be used to repay a portion of outstanding debt under Concho’s credit facility, which stood at $1.4 billion as of July 2 (reflecting Concho’s ~$1.0 billion Three Rivers acquisition). The offering represents a 28%

increase to Q2 long-term debt of $2.52 billion. Joint book-running managers are JP Morgan, Merrill Lynch, Barclays and Wells Fargo.

Concho also reported Q2 adjusted net income of $80.5 million, down 29% YOY and 26% sequentially. Results were hurt by a temporary widening of the Midland-to-Cushing crude spread, as well as lower NGL and gas prices. Operating costs also rose YOY on higher LOEs, workover and labor costs, partially offset by lower oil and gas taxes. Production was 74,521 boepd, up 22% YOY but down 1% sequentially. Oil production accounted for 62% of total at 46,027 bopd (up 20% YOY and flat sequentially), while gas production was 171 MMcfd (up 27% YOY but down 4% sequentially). The sequential decline was due to maintenance and expansion work at gas processing and compression facilities in southeast New Mexico. CEO Tim Leach said the Three Rivers acquisition reinforced the company’s strategic presence in the Permian.

Public Debt & Equity

Concho upsized its debt offering 75% to help pay down its Three Rivers buy.

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Volume 05, No. 11 5 energyFinanCeCapital Market News Earnings & Capex Briefs

Cost improvements & infrastructure focuses at EnerComMany operators focused on efficiency at the annual EnerCom conference in Den-

ver, lauding downspacing and pad drilling achievements to increase recovery. The Marcellus seems to be seeing more success from these efforts according to Wells Far-go’s talks with operators, while the Bakken lagged the pack a bit with SM Energy, Oasis and Whiting in the process of moving to pads. SM’s costs may be flat YOY, with drilling costs firm but some softness in completions. Water is also an issue, with

QEP noting it is paying over $1 million/well for flowback water.Robert W. Baird agreed that returns on cost improvements

were more often than not the focus, with growth challenged in many cases. It appears Baird received conflicting impressions vs. Wells regarding the Bakken, saying costs were improving on field-level infrastructure while recoveries also grew.

Overall, producers seemed comfortable with recently somewhat-recovered oil prices, but warn of pending regional infrastructure bottlenecks likely to impact both crude and NGLs. Many producers are also coming around on gas prices with some expressing even bullish sentiments, although exact timing of price recovery is a primary question and volatility is expected during shoulder season as storage capacity nears. Wells Fargo analyst discussions with some gas players including Goodrich Petroleum and QEP indicated they might begin drilling again at $4.50-5.00. Wet gas producers seemed to have consensus regarding propane export outlook next year

and recovering prices, but were mixed re-garding the possibility of ethane export.

Baird noted cautious optimism toward both oil and gas from both investors and producers, but with the clear focus on oil for most and with macroeconomic uncertainty offsetting enthusiasm somewhat. Sentiment for the Niobrara was “meaningfully improved” (perhaps not surprisingly given the venue) on suc-cesses by Anadarko and Noble, with Baird noting smaller operators such as Carrizo, PDC and Bonanza Creek were poised to benefit. Meanwhile, emerging plays including the Utica, Tuscaloosa Marine Shale (a/k/a TMS) and Brown Dense got some positive buzz, as well. While sentiment was still positive regarding the Eagle Ford and Permian, it apparently saw somewhat of a downtick for both plays due to infrastructure (both plays), NGL difficul-ties (Eagle Ford), play inconsistencies (Permian) and “sticky” costs (Permian) contributing.

As for investors, Wells Fargo’s report also noted caution and lack of consensus after a 20% recovery of the EPX since June. There was apparently little margin for er-ror for recent underperformers; Wells Fargo said there was more than one contentious post-presentation Q&A session.

Marcellus sees most cost improvements, mixed opinions on Bakken.

Infrastructure challenges continue to be a concern for many plays.

•Goodrich Petroleum reported a Q2 adjusted net loss of $7.5 million (vs. YOY and sequential losses of $4.7 million and $10.1 million, respectively). Production

was 91 MMcfed (down 20% YOY and 5% sequentially), driven by declining gas production due to

all capex being reallocated to oil produc-tion, which grew 17% sequentially to 2,800 bopd. Production guidance for Q3 is 85-89 MMcfed and 3,200-3,600 bopd (23% of total production).

•Halcon Resources reported Q2 adjusted net income of $2.8 million (vs. $2.3 million in 2Q11 and a $2.7 million

1Q12 loss). The company pro-duced 3,912 boepd (down 6% YOY and 4% sequentially), with

73% liquids. Halcon also announced completion of its GeoResources and East Texas asset acquisitions. Halcon’s credit facility was also amended upward to $1.5 billion and its borrowing base was increased 133% to $525 million.

•Magnum Hunter reported a Q2 ad-justed net loss of $6.6 million, down from $1.7 million adjusted net losses YOY and sequentially. Q2 production was 12,984 boepd, up 162% YOY and 3% sequential-ly. The production mix shifted signifi-cantly vs. Q1, however, with oil/liquids production rising sequentially from 35% to 45% on expectations of exiting 2012 with 60% oil/liquids. Magnum also proj-ects a 2012 production exit rate ~38% above Q2 average to exceed 18,000 boepd. The company also announced a 22% increase of its credit facility borrow-ing base to $260 million.

•Northern Oil and Gas reported Q2 record adjusted EBITDA of $53.1 mil-lion, up 134% YOY and 19% sequentially on stronger production, partially offset by 2% lower realized prices and higher water production, trucking and disposal costs. Production was 10,412 boepd, up 136% YOY and 22% sequentially. Oil was 93% of production, and up 135% YOY and 23% sequentially, while gas and NGL production rose 158% YOY and 11% sequentially. Northern increased 2012 capex estimates ~$27 million to ~$387 million on 7% higher estimated com-pleted well costs of $8.8 million.

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CapitalMarkets 6 August 30, 2012•Native American Energy Group an-

nounced an $854,138 Q2 reduction in bal-ance sheet debt for a total debt reduction of 17%. Native said it had reached agree-ments with owners of a significant amount of long-term debt, apparently regarding convertible debt priced between $1-2/share. The company said the pricing speaks to creditor confidence in corporate outlook, as well as strengthening its bargaining position in current funding negotiations for future acquisitions. It has also restructured certain license agreements. Going forward, Native is halting additional debt conver-sions to prevent equity dilution.

•Rock Energy Resources announced debt forgiveness totaling $1,327,500 from Rock’s chief Rocky Emery and his family. Emery said he was sensitive to company goals and wanted to do what was best in the interest of shareholders. Vice chairman Mark Harrington said the move was an im-portant step toward making Rock debt-free.

Private Equity Briefs

Marquez in ‘advanced discussions’ for Venoco financing Venoco was advised that chairman Timothy Marquez’s Denver Parent Corp. was

involved in advanced discussions regarding a $436.5 million financing package for Marquez’s $750 million take-private offer. DPC proposes a $21.5 million draw on a new first lien revolver, a $175 million second-lien term loan at Venoco, and a $210 million Venoco asset sale to DPC offset by $240 million in capital raises by DPC including

a VPP on the sold assets. All transactions would be structured to close simultaneously. Closure,

although not certain, is expected on or before September 14.

Shares closed up 15.2% on the news to $10.98, still 12.2% below Marquez’s $12.50/share January bid price, but the move reflects increasing confidence that a deal is possible. Either party may terminate the deal and negotiations after September 14. Venoco has extended the financing deadline, which now sits at August 31, twice as Marquez works

to obtain necessary financing. With the most recent extension, the company pulled the “deal termination date” forward from October 16 to September 14, with special committee chairman Rick Walker justifying the move as a means to reduce uncertainty regarding the deal. As of January 16 (when Marquez made his offer), Marquez owned 50.3% of the company between individual and affiliate ownership.

Earnings & Capex

Marquez must find $240 million in capital after factoring for a Venoco VPP.

Proposed Venoco FinancialsSources AmountVPP Proceeds $210.00

HoldCo Financing $30.00

2nd Lien Term Loan $175.00

TP Revolver $21.50

Total $436.50

Uses AmountPay merger consideration to VQ stockholders $366.00

Pay off VQ Revolver $45.00

Fees & expenses $23.00

HoldCo Working Capital $2.50

Total $436.50

Pro Forma Capitalization ($MM) Amount

Cash 6/30/12 $0.00

PF Revolving Credit Facility $21.50

PF 2nd lien term loan $175.00

11.50% Senior notes $150.00

8.875% Senior notes $500.00

Total Debt $846.50Source: Venoco August 16 Presentation via PLS docFinder www.plsx.com/finder

Shares rose ~15% on latest news with increasing confidence the deal may close.

•Oasis Petroleum reported Q2 adjust-ed EBITDA of $108.5 million, up 70% YOY and 7% sequentially. Production rose 158% YOY and 15% sequentially to 20,353 boepd, beating both estimates and guidance, with 91% oil production. Full year guidance was increased from 18,000-22,000 boepd to 20,500-22.500 boepd on expanded infrastructure development ef-forts, well testing and infill drilling. Oasis in-creased its 2012 capex budget 20% to $1.06 billion on accelerated well activity. Mean-while, Oasis expects to decrease overall well costs by ~10% by YE12, with additional pad drilling-related decreases in 2013.

•Penn Virginia reported a Q2 ad-justed net loss of $10.8 million, vs. $11.9 million losses in 2Q11 and 1Q12. Produc-

tion was 117.1 MMcfed, down 9% YOY and 2% sequentially. However, oil production grew

161% YOY and 4% sequentially to 6,270 bopd. Oil and NGLs were 45% of produc-tion, vs. 24% in 2Q11. Penn said 2012 crude and NGL production would account for 47% of production from a prior 43%. The company discontinued its dividend to improve liquidity and help fund its Eagle Ford drilling program.

Earnings & Capex Briefs

Seadrill revenue up 13% YOY, backlog up 60% in Q2 Seadrill announced new contracts during Q2 totaling $7.6 billion, which increased

backlog 60% sequentially to a company record $20.3 billion. With an average floater contract term of 3.2 years and a burn rate of $1.1 billion/quarter, Seadrill expects to

maintain backlog levels going forward. The company reported Q2 net operating income of $483 million (up 12% YOY and 6% sequen-tially) on revenues of $1.12 billion (up 13% YOY and 7% sequen-

tially). Floater revenues rose 12% YOY to $718 million, while tender rigs also saw strong 34% YOY revenue growth to $183 million.

Seadrill predicts solid forward newbuild demand, saying future global drilling needs can-not be met by new capacity expected to hit the market in 2013-2014. This opportunity should be enhanced by lower costs driven by a cyclical shipyard downturn and lower newbuild pric-es. The company increased its quarterly dividend 2.4% to $0.84/share, proving its optimism.

Private Debt & Equity

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Continental Costs Driving Margins

2009 2010 2011 1H 2012Realized oil price ($/Bbl) $54.44 $70.69 $88.51 $85.40 Realized natural gas price ($/Mcf) $3.22 $4.49 $5.24 $3.96 Oil producon (Bopd) 27,459 32,385 45,121 62,587 Natural gas producon (Mcfpd) 59,194 65,598 100,469 165,611 Total producon (Boepd) 37,324 43,318 61,865 90,189

EBITDAX ($000's) $450,648 $810,877 $1,303,959 $876,392

Key Opera�onal Sta�s�cs (per Boe) (1)Average oil equivalent price (excludes derivaves)

$45.10 $59.70 $73.05 $66.31

Producon expense $6.89 $5.87 $6.13 $5.17 Producon tax $3.37 $4.82 $6.42 $6.16 G&A (2) $2.19 $2.35 $2.36 $2.25 Interest $1.72 $3.34 $3.40 $3.45Total cash costs $14.17 $16.38 $18.31 $17.03

Cash margin $30.93 $43.32 $54.74 $49.28 Cash margin % 69% 73% 75% 74%

Years Ended December 31

1. Average costs per boe have been computed using sales volumes and exclude any effect of derivative transactions. 2. Excludes G&A related to equity-based compensation and excludes relocation expense. Source: Continental August 10 Presentation via PLS docFinder www.plsx.com/finder

Earnings & Capex •Plains E&P missed consensus esti-

mates, reporting Q2 adjusted net income of $54.9 million, down 29% both YOY and sequentially on lower gas production and

pricing YOY and overall com-modity pricing sequentially.

Production was 98,970 boepd, flat YOY but up 12% sequentially. Oil and liquids (61% of total sales) were 59,780 bopd (up 23% YOY and 20% sequentially), while gas was 235 MMcfd (down 22% YOY and up marginally sequentially. Full-year produc-tion guidance was increased 2% from midpoint to 95,000-97,000 boepd, with oil accounting for 57-60% of production.

•Quicksilver Resources reported a Q2 adjusted net loss of $21 million (vs. a $11 million gain in 2Q11 and a $15 mil-lion loss in 1Q12). Production was 359 MMcfed (down 14% YOY and 5% sequen-

tially) with 80% gas. Quicksilver cut planned 2H capex by $50 million, deferring commitments

in the Horn River basin, as it recorded $992 million in gas and NGL asset impair-ments. Chief Glenn Darden said the company was “aggressively attacking costs and capital expenditures” and that Quicksilver had made significant prog-ress on two JV negotiations.

•Sanchez Energy reported Q2 adjusted net income of $61,000 (vs. $960,000 YOY and $1.5 million in 1Q12). Production was ~857 boepd (up 75% YOY but down 7% sequentially) with oil

accounting for 79% of produc-tion. Five wells awaited comple-tion at the end of Q2, with

another 12 wells to be drilled in the Eagle Ford by year’s end. Sanchez expects to maintain production growth as it moves from delineation to development drilling while refining completion techniques. It is also finalizing a new credit facility.


Continental raises capex 30% to spur production growth According to CEO Harold Hamm, Continental Resources is well ahead of plans to

triple production from 2009 to 2014, but is increasing 2012 capex projections significant-ly to support that growth. Hamm said the company was seeing higher production with fewer rigs and should hit the five year target in 1H13, 18-24 months earlier than original-ly planned. Production was a record 94,852 boepd, up 76% YOY and 11% sequentially. Crude accounted for 69% of production and was up 62% YOY. By region, the highest

sequential increases were the North Dakota Bakken, rising 13% to 47,166 bo-epd, and the Anadarko Woodford, which rose 30% to 16,672 boepd.

The company increased full-year pro-duction growth guidance from a previous 47-50% to 57-59%, but also increased drilling capex projections 30% from $2.3 billion to $3.0 billion (up 71% from Continental’s pre-May target capex of $1.75 billion). Continental said it was making the increase due to “accelerated spending to drill high rate-of-return projects in the Bakken and increases

in Continental’s average working interests in the Bakken and Anadarko Woodforw wells, which has helped boost production

growth.” Overall, the company reported Q2 adjusted net income of $123 million, up 14% YOY but down 10% sequentially. Crude price differential forecasts were increased 20% from midpoint to $11-13/bbl, but production expense estimates were pared 15% from midpoint to $5.25-5.75/boe.

Subsequently, Continental an-nounced a $1.2 billion private offering of 5% senior unsecured notes due 2022, priced at 102.375% of par for a yield to worst of 4.624%. The offering was upsized 71% from an initially announced $700 million. Net proceeds will be used to repay borrowings under Continental’s revolver and for general corporate purposes. The issuance amounts to a 53% increase to Q2 long-term debt of $2.25 billion. The new notes came as an extension of a prior March 2012 issu-ance of $800 million in similar notes, which Continental subsequently exchanged for $800 million in publicly registered, but otherwise identical, notes.

2012 capex projection up 71% ; production growth forecast raised 49%.

Continental’s ND Bakken & Anadarko Woodford production growing fastest.

Private debt offering was upsized 71% to $1.2 billion.

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•Superior Energy announced a subsidiary issued notice of redemption for $150 million in 6.875% senior notes due 2014 on August 21. The subsidiary also

extended an offer to exchange $800 million in publicly-registered 7.125% senior notes

due 2021 for the existing $800 million worth of privately issued but otherwise identical notes. The offer was extended from August 16 to August 22, with 99.7% of notes already having been received when the extension occurred.

•Southwestern Energy reported 2Q adjusted net earnings of $90.8 mil-lion, down 46% YOY and 16% sequen-tially driven by lower realized gas prices (down 27% YOY and 11% sequentially post-hedges). Production was 1.5 Bcfed, near the upper range of guidance, up 12% YOY and 3% sequentially. Fayetteville production of 1.33 Bcfd was up 13% YOY and 4.5% sequentially, despite a 0.5-1.0 Bcf offset caused by extreme heat in Ar-kansas. Southwestern recorded a $936 million pre-tax asset impairment, also caused by lower gas prices.

•Vanguard Natural Resources reported Q2 adjusted net income of $8.7 million (down 45% YOY and 60%

sequentially). Production was 12,338 boepd (down 7% YOY and 9% sequentially). Gas production

dropped 31% YOY; oil rose 2%. Crude was 61% of the mix, gas was 27% and NGLs were 12%. Post-hedging impacts, gas prices were down 24% YOY, crude was down 2% and NGLs were down 32%, with “dramatic” sequential liquids rev-enue declines. As of August 1, Vanguard had borrowed 74% of the $975 million borrowing base under its revolver.


Oilfield Service Briefs

Chesapeake cuts capex & plans asset salesThe company said its midstream acquirer would assume the commitment, but until

the deal is done there will be some resulting overhang.Second quarter realized prices were $3.77/Mcfe, down 38% YOY and 6% sequen-

tially. As a result of the impact of these lower prices, Chesapeake took a 4.6 Tcfe reserve writedown to its Barnett and Haynesville assets, a 7% decrease vs. year-end 2011. The

company shut in another 330 MMcfd in production in Q2, matching Q1’s curtailment, but said it does not intend to make any addi-

tional curtailments. Chesapeake also cut its 2013 exploration drilling budget 75% vs. prior estimates to $250 million, alongside plans to cut a previously announced 47 operated gas rigs this year to eight by year’s end. Instead of a planned 200 total rigs at the beginning of 2013, CEO Aubrey McClendon said the company now plans on 100. McClendon said gas prices would probably need to exceed $5/mcf before gas becomes competitive with oil opportunities priced at ~$90/bbl.

SunTrust Robinson-Humphrey analyst Neal Dingmann said the gas rig cut was more aggressive than expected. No matter how much they cut, however, Chesapeake is still likely to remain a top two national gas producer according to Wunderlich’s Jason Wangler, if only because no one else is trying to grow gas production at these prices.

Adjusted net Q2 adjusted income was a meager $46 million, down 92% YOY and 66% sequentially. Production was

3.808 Bcfed, up 25% YOY and 4% sequentially, with gas at 79% of total production (down from 84% YOY and 81% sequentially). Meanwhile, oil production was 13% of total, up from 9% YOY and 11% sequentially. The company projects an 18% YOY production increase for 2012 – including asset sales -- to 3.855 Bcfed at midpoint (80% gas), followed by a 1% YOY increase in 2013 to 3.895 Bcfed. Management projects gas production to drop 7% YOY in 2013, to be offset by 32% higher liquids production.

Meanwhile, certain Barnett leaseholders, MDU Barnett LP and Oil & Gas Working Interests LP, filed suit against the company in relation to its Founder Well Participation Plan, alleging CEO Aubrey McClendon received preferential treatment in his 1-2% well interests in the “sweet spot” of the play. The leaseholders assert Chesapeake was contractually obligated to offer them a similar opportunity to participate. They also assert Chesapeake otherwise consistently underpaid on the leases.

Chesapeake Cash Flow Outlook SummaryYE 2012E YE 2013E

Operating cash flow ($MM)1 & 2 $3,200-3,250 $3,750-4,750

Well costs on proved & unproved properties ($8.000-8,500) ($5,750-6,250)

Acquisition of unproved properties, net ($2,000) ($400)

Investment in oilfield service, midstream & other ($2,800-3,100) (850-1,100)

Subtotal of net investment ($12,800)-($13,600) ($7,000)-($7,750)

Asset sales & other transactions $13,000-14,000 $4,250-5,000

Interest, dividends & cash taxes ($1,100-1,350) ($1,000-1,250)

Total budgeted cash flow surplus $2,300 $0-7501. A non-GAAP financial measure defined as cash flow provided by operating activities before changes in assets and liabilities. We are unable to provide a reconciliation to projected cash provided by operating activities, the most comparable GAAP measure, because of uncertainties associated with projecting future changes in assets and liabilities. 2. Assumes NYMEX prices of $3.00-$3.25 and $3.25-$4.25/Mcf in 2012 and 2013, respectively; oil prices of $90/bbl in 2012 and 2013.Source: Chesapeake August 7 Presentation via PLS docFinder www.plsx.com/finder

Chesapeake shut in another 330 MMcfd of gas production in Q2.

CHK slashed 2013 exploration capex from ~$1.0 billion to $250 million.

Continued From Pg 1

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Volume 05, No. 11 9 energyFinanCeMidstream Capital Markets

•ConocoPhillips and Origin Energy are “working with” JP Morgan to assist in the sale of a 15% stake in their $20 billion

Australia Pacific LNG project, ac-

cording to Bloomberg, which cited three anonymous sources. Origin previously announced plans to cut its stake from 37.5% to 30%, while one of the sources

said Conoco would do the same. Origin told Bloomberg the companies were close to

hiring an investment bank and were in final stages of discussion. One source said Asian buyers may be interested.

•Plains All American Pipeline LP’s GP approved a 2-for-1 unit split, to occur Oc-tober 1. As of August 15, PAA had 163.957 million common units outstanding.

Asian wealth funds pump $1.0 billion into Cheniere

China Investment Corp. and the Government of Singapore Investment Corp., the sovereign wealth funds of the two nations, have invested ~$500 million

each in Cheniere Energy Partners’ Sabine Pass LNG export facility via Blackstone,

according to anonymous Financial Times and Reuters sources. The State of Louisiana has also invested funds in the project via Blackstone. FT said that because China’s $482 billion fund is a passive investor through Blackstone, it will have no direct influence on Cheniere.

Through a previous arrangement, Blackstone was slated to purchase up to $1.5 billion in “Class B” units of Partners to complete the $2.0 billion equity portion of the total $5.6 billion cost of Sabine Pass. Blackstone had already purchased $500 million of the units. Cheniere formally announced its decision to proceed with construction on August 9. Hornbeck completes $300 million notes offering

Hornbeck Offshore completed a private offering of $300 million in 1.5% convertible senior notes due 2019. The underlying offering was for $260 million in notes, but initial purchasers fully exercised an option for $40 million in additional notes. Net proceeds were $290.8 million. The notes are convertible to cash, common Hornbeck

shares or a combination thereof at a rate of 18.5718 shares per $1,000 in principal (or $53.85/share, a 37.5% premium to Hornbeck’s common August 7 $39.16/share closing price).

Separately, Hornbeck entered warrant transactions with parties including affiliates of the note purchasers resulting in $48.2 million in gross proceeds. The warrants have a strike price of $68.53/share (75% above Hornbeck’s common August 7 closing price) and cover the same number of shares of common as

contemplated by the convertible notes.Hornbeck used ~$73 million in

combined proceeds from the note offering and the warrants sale to fund convertible note hedge transactions with counterparties including affiliates of its note purchasers. The hedges include call options priced to limit stockholder exposure to dilution should the notes ultimately be converted.

Hornbeck plans to use remaining net proceeds, along with other sources of cash, to retire its $250 million in 1.625% senior convertible notes due 2026, which are first subject to repurchase at holder’s option in November 2013, and subject to corporate redemption thereafter. Alternatively, Hornbeck may use remaining proceeds for retirement of other debt or to fund vessel acquisition, construction or retrofitting.

The offering represents a 35% increase vs. 2Q12 long-term debt.

Plans to use proceeds to retire $250 million in 2013 convertible debt.

Kinder Morgan sells $1.25 billion in bonds to fund buysAccording to regulatory filings, Kinder Morgan Energy Partners sold a total of

$1.25 billion in private debt to help fund a recent $6.22 billion in acquisitions from GP Kinder Morgan, consisting of the Tennessee Gas Pipeline and a 50% stake in El Paso Natural Gas. Partners said the acquisitions would “more than replace” lost cash flow due to pending divestments related to a Kinder Morgan agreement with the FTC pursu-ant to completion of its $38 billion El Paso acquisition. Overall, Partners expects the net

effect to be slightly accretive to distributable cash flow this year and “nicely accre-tive” next year and beyond.

The debt issuances consist of $625 million in 5.0% senior notes due 2042 and another $625 million in 3.45% senior notes due 2023.

Additional funding for the $3.5 billion cash portion of the acquisitions is being pro-vided by ~$650 million in proceeds from a Kinder Morgan Management LLC equity offering and $2 billion in revolver borrowings. Partners plans to use proceeds from the aforementioned FTC-related divestiture (expected before year’s end) to repay its revolver.

Partners is also issuing ~$387 million worth of equity to Kinder Morgan to round out funding, and is assuming ~$1.8 billion in assumed Tennessee Gas Pipeline debt

and $560 million worth of proportional El Paso Natural Gas pipeline debt.

Meanwhile, Goldman Sachs, The Carlyle Group and Riverstone Holdings liquidated another ~$2.0 billion of their col-lective stake in Kinder Morgan via a secondary public offering of 58 million shares at $34.75/share, ~3% lower than the prior day’s close. The sale represents a 34% reduc-tion in the three entities’ total investment in the company and follows a similar ~$2.0 billion sale in June. The present offering has an overallotment option for an additional 8.7 million shares. Barclays and Deutsche Bank are underwriting.

China & Singapore's sovereign wealth funds invested ~$500 million each.

Midstream Capital Briefs

New debt will account for 36% of the $3.5B cash portion of the KMI dropdown.

A $2.0B revolver drawdown will be repaid on sale of Rocky Mountain assets.

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CapitalMarkets 10 August 30, 2012•Cimarex Energy has appointed

Thomas E. Jorden as chairman of the board of directors and CEO.

•Credo Petroleum announced the departure of Alford B. Neely as CFO. Brian Mazeski has been appointed as chief accounting officer, principal financial officer, and principal accounting officer.

•Crestwood Gas Services GP LLC has appointed J. Heath Deneke as SVP and chief commercial officer. Steven M. Dougherty has been appointed as vice president and chief accounting officer.

•Cub Energy announced the departure of Alyson Patrick Beicker as CFO. Wally Rudensky will assume her duties until a replacement is found.

•EnerJex Resources has appointed Douglas M. Wright as CFO.

•Express Energy Services announced the departure of Jim Davis as CFO. John R. Beall has been appointed to replace him.

•Greenfields Petroleum Corp. announced the departure of David G. Gullickson as treasurer, SVP and CFO. A. Wayne Curzadd has been appointed to replace him.

•KLR Group LLC appointed Jason Meek as managing director, Energy Investment Banking.

•L & L Energy Inc. appointed Y.P. Chan to its advisory board.

•Macquarie Bank has appointed Randall Byrne as SVP.

•MicroSeismic Inc. has appointed Mark Murphy as vice-president, Analysis. Mike Mueller has been appointed as vice-president, Technology.

•Newco Energy Acquisition Holding LLC has appointed Jim Lister to its Advisory board.

•Rowan Companies PLC appointed J. Kevin Bartol as executive vice-president, Finance and Corporate Development.

•Santa Fe Petroleum Inc. has appointed Steve Crane as COO.

•Southwestern Energy announced the departure of Greg D. Kerley as CFO. Craig Owen has been appointed to replace him.

People Briefs Midstream Capital Markets

MarkWest ups debt issue 50% in ~$1.0 billion offering In recent weeks, MarkWest Energy Partners has rolled out public debt and

equity offerings grossing $1.05 billion. The midstreamer kicked things off with a $750 million public debt offering of 5.50% senior unsecured notes due 2023. The

offering priced at 99.015% of par, for gross proceeds of $743 million. It was also upsized 50% from an initially proposed

$500 million offering. Net proceeds are being used to repay borrowings under MarkWest’s revolver and for general corporate purposes including capex and general working capital. The offering represents a 38% increase to partnership long-term debt of $2.0 billion, as of June 30. Joint book-running managers were Wells Fargo, BofA Merrill Lynch, Barclays, Citigroup, Goldman Sachs, JP Morgan, RBC, UBS and US Bancorp.

The MLP followed its large debt offering with a 6.9 million unit public equity offering priced at $50.72/unit

for anticipated net proceeds of ~$338 million. Units sold included full exercise of a 900,000-unit 30-day underwriter overallotment option. Net proceeds will be used to fund capex, working capital and other general partnership purposes. Units fell 4.3% the day after the offering was announced, while with exercise of the underwriter option, the offering represents a 5.3% dilution to equity holders. Joint book-running managers on the equity issuance were Barclays, BofA Merrill Lynch, Citigroup, Goldman Sachs, UBS, JP Morgan and RBC.

Williams LP raises ~$1.2 billion to pay down credit facility Williams Partners announced $1.187 billion gross worth of debt and equity

issuances recently, all aimed at paying down outstanding debt under the partnership’s credit facility. It appears that between the two issuances Williams expects to repay

all debt under the facility. Williams noted that if net proceeds from the equity offering exceed the outstanding balance under the facility the remaining proceeds will be used for general partnership purposes.

The larger of the two offerings was Williams’ public debt issuance of $750 million in 3.35% senior notes due 2022. The offering priced at 99.975% of par for gross proceeds of $743 million. The offering represents a 10% increase to partnership Q2 long-term debt of $7.58 billion. Joint book-running managers for the debt issuance were UBS, RBS, Wells Fargo, Credit

Agricole and RBC.The large debt offering was preceded

by announcement and pricing of an 8.5 million unit public equity offering priced at $51.43/unit for anticipated gross proceeds of $437 million. The offering includes a 1.275 million-unit 30-day overallotment option, as well. Units fell 4.2% on news of the equity offering, compared to a 2.5% dilution to equity barring exercise of the underwriter option. Joint book-running managers on the equity issuance are Barclays, BofA Merrill Lynch, Jefferies, Morgan Stanley, UBS, Credit Suisse and Wells Fargo. Co-managers are Deutsche Bank, Goldman Sachs, JP Morgan, RBC and Raymond James.

Williams accrued credit facility debt funding capex and working capital.

The debt issuance was $750 million; equity was $437 million.

$750 million in new debt increases total long-term debt 38%.

MarkWest had $960 million in liquidity under its revolver as of 2Q12.

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Volume 05, No. 11 11 energyFinanCeMidstream Capital Markets

Kayne Anderson completes ~$143 million public offering Kayne Anderson MLP Investment Co. priced and completed a public follow-

on offering of 5,000,000 shares at $29.75/share. Net proceeds of ~$142.8 million will be used to make additional portfolio investments consistent with Kayne’s investment

objectives and policies and for general corporate purposes. The company’s primary investment objective is to obtain high

after-tax returns by investing 85% or more of assets plus borrowings in energy-related MLPs and midstream energy companies, primarily through equity security investments. A 750,000 share underwriter option, exercisable within 45 days to cover overallotments, could gross an additional ~$22.3 million. Shares closed down 4.7% at the offer price of $29.75 on the news, vs. a 6.0% resulting equity dilution. Joint book-running managers were BofA Merrill Lynch, Morgan Stanley, UBS and Wells Fargo.

Eagle Rock raises $84.5 million to fund Texas acquisition

Eagle Rock Energy Partners closed a 10.12 million unit public offering expected to net $84.5 million in proceeds. The offering included

full exercise of a 1.32 million unit underwriter overallotment option. The

base 8.8 million unit offering was priced at $8.72/unit, which on its own would have grossed $77 million. The offering was also upsized 10% from an originally announced eight million units.

Net proceeds will help fund Eagle Rock’s proposed $228 million acquisition of two BP-owned Texas Panhandle gas processing facilities and a related 2,500-mile gathering system. The deal also includes a 20-year fixed fee gas gathering and processing agreement between the companies, to include nearby future-drilled wells for a period of two years

from closing. Eagle Rock anticipates volume growth and integration benefits from the acquisition will support meaningful accretion to distributable cash from 2014 onward. The company recently announced early termination of antitrust review for the deal.

Pending completion of the BP deal (expected in October), proceeds will repay a portion of outstanding borrowings under Eagle Rock’s credit facility. Should the acquisition not be completed, net proceeds will support future acquisitions, capex or other general partnership purposes. Units rose 4.9% on the news vs. what ultimately amounted to a 7.4% dilution to equity interest holders, although shares had dropped the previous day on news of the acquisition. Joint book-running managers are UBS, BofA Merrill Lynch, Citigroup, RBC and Wells Fargo.

Underwriters fully exercised a 13.2 million-unit overallotment option.

Summit Midstream files for ~$302 million IPO Summit Midstream submitted filings notifying of intent to raise up to $301.875

million in an IPO. The number of units to be sold and price/unit have not yet been determined. Net proceeds will be used to repay outstanding debt under the company’s revolver and make a cash distribution to Summit Investments (sole owner of general partner Summit GP) to reimburse it for capex related to assets contributed to

Summit. Summit had $302 million drawn against its revolver as of Q2. Summit is a gas midstreamer operating in the Piceance Basin and

Barnett shale with ~385 miles of gas gathering line and 147,600 hp of compression capacity. During 1H12, Summit gathered ~909 MMcfd of gas with ~64% containing NGLs extracted by a third party. A substantial majority of revenues are generated under long-term fee-based gathering contracts, with customers including Encana, Chesapeake, Total, Carrizo, WPX Energy, Bill Barrett, ExxonMobil and EOG. Nearly all contracts

are underpinned by AMIs covering ~330,000 acres and ranging from 10-25

years, with 2.5 Tcf of minimum volume commitments through 2020 averaging ~639 MMcfd. It reported $16.7 million in net income for 1H12, on $75.9 million in revenues, compared to $38 million in income and $103.6 million in revenues for all of 2011. Summit added 72% of its total gathering lines and 64% of average daily throughput in October via acquisition of the Grand River gathering system in the Piceance from Encana for $590.2 million, which appears likely to be a significant contributor to revenues going forward.

Summit was formed in 2009 by management and Energy Capital Partners, a $7.0 billion PE firm focusing on North American energy infrastructure. It is currently owned by management, Energy Capital and GE Energy Financial Services. Company chief Steven Newby has over 15 years of oil and gas experience, including positions with SunTrust Corporate Energy and managing a $300 million ING Investment Management energy infrastructure fund.

Summit intends to trade on the NYSE under SMLP. Underwriters are Barclays, BofA Merrill Lynch, Goldman Sachs and Morgan Stanley.

Proceeds will repay revolver debt & reimburse GP for asset contributions.

Summit gathered 909 MMcfd in 1H12.

Average MVC agreement duration is 11.4 years.

Eagle Rock valued BP’s assets at 5.5 to 6.5x estimated 2014 EBITDA contribution.

Read more stories like these on the midstream sector.

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CapitalMarkets 12 August 30, 2012•According to regulatory filings,

Carl Icahn has withdrawn his August 6 $29/share offer to buy the remaining 18% of CVR Energy shares he does

not yet own. Icahn Enterprises said since

making the offer “a number of market conditions have changed, including a significant widening of crack spreads,” and the company no longer considers the transaction feasible. Icahn had previously indicated willingness to pay up to $30/share for the remaining interest after failing to find a buyer for the company during a two-month, 30-company search.

•HollyFrontier announced it would redeem all $199.985 million of its 8.5% senior notes due 2016, paying 104.25% of par for a total overall payment of $208.484 million. Holly will fund the redemption with cash on hand. The redemption represents a 16% reduction to the company’s Q1-reported long-term debt of $1.286 billion. Wells Fargo is trustee and paying agent for the transaction.

Downstream Briefs

Refined Q2 for independents driven by crude spread Barclays noted that independent refiners saw a 29.6% sequential EPS increase and

more than doubled earnings per share YOY. Some of this movement has been driven by aggressive share buybacks (not to mention other cash returns to shareholders) funded by the ongoing significant inland/coastal crude spread. Both Phillips 66 and Tesoro

launched sizeable buyback programs this quarter, while HollyFrontier, Marathon Petroleum and Valero increased dividends, Tesoro reinitiated its dividend and Delek US Holdings and HollyFrontier issued special dividends.

Barclays anticipates a shift toward a LLS/Brent discount could bring about re-valuation of the sector, with refiners supporting higher dividends throughout the cycle. It believes margins will remain higher through Q3 until headwinds including full Seaway reversal, the Motiva expansion restart and other line starts roll out in 1H13.

Downstream held up particularly well last quarter when compared to upstream. Barclays notes Q2 EPS for major oil companies dropped 11.5% vs. Q1 and 16.1% YOY, compounded by future concerns regarding production misses and cost increases. Barclays upstream coverage universe production was down 2% YOY overall, pulled by the supermajors which dropped 3.5% vs. other majors which rose 3.7% YOY. Capex for its upstream universe rose 7.5% YOY (4.7% sequentially), again pulled by supermajors who increased spending 9.8% vs. other majors at 2.7%.

Inergy to distribute ~$525 milion in Suburban units Inergy LP announced plans to distribute 14,048,418 units of Suburban Propane

Partners LP to Inergy unitholders with a record date of August 29 to occur September 14. Inergy received ~14.2 million shares as partial consideration for contribution of

its retail operations to Suburban, and agreed under the contract to distribute ~14.1 million units pro rata to Inergy unitholders. Based on outstanding Inergy units, distribution will be ~ 0.108 Suburban units per Inergy unit.

Suburban units have traded in the $37-38/unit range for most of August. Inergy also authorized repurchase of up to $100,000,000 in common units through

March 31. The program will be conducted through open market transactions, without specific price targets, and may be modified, suspended or terminated at any time.

Downstream Capital Markets

•Anadarko Petroleum announced settlement efforts for its $25 billion litigation with the US government over Anadarko subsidiary Kerr-McGee’s previ-ous unit Tronox were at an impasse and chance of settlement was now remote. The company said “reasonable” loss esti-mates were between zero and $1.4 billion. The high end of the range represents the estimate of $985 million Kerr-McGee was paid when Tronox was spun off in 2005, plus interest. The government accuses Kerr-McGee of fraudulently loading Tro-nox with environmental liability expo-sure before separating it from the rest of the company.

•Exco Resources was fined $47,500 by the Pennsylvania DEP for operation of unpermitted residual waste transfer stations in Lycoming and Sullivan Counties from 2011-2012 in violation of Pennsylvania’s Solid Waste Management Act. Regulators reportedly discovered unapproved and leaking frac tanks as well as waste sand.

Legal & Regulatory Briefs

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SEC freezes assets on Nexen-linked trading charges The SEC obtained a court order to freeze assets of traders it alleges make over $13

million in illegal profits by frontrunning news of the proposed $15.1 billion CNOOC-Nexen deal. The regulator said Hong Kong-based Well Advantage Ltd. and other unknown traders with confidential and “material nonpublic” information regarding the deal hoarded shares of Nexen leading up to the announcement, then moved to liquidate the entire position afterward. Shares of Nexen closed nearly 52% higher on news of the proposed deal.

Well is controlled by Zhang Zhi Rong, who also controls a company engaged in a strategic cooperation agreement with CNOOC. The trades, which SEC called “extremely timely” were being made through accounts in Hong Kong and Singapore. Well bought over 830,000 shares and was up over $7.0 million the day of the announcement. The other traders bought over 676,000 shares, which they successfully sold for ~$6.0 million in gains. The SEC is seeking disgorgement of ill-gotten gains plus interest and penalties.

Fraud a factor for BP spill compensation fund A noteworthy amount of fraudulent claim activity took place targeting BP’s

Gulf Coast Claims Facility set up to help those experiencing damages from the Macondo spill. DOJ data shows ~110 people nationwide have been charged with

defrauding the fund. Former fund administrator Kenneth Feinberg said “anytime you

establish a very generous public compensation program, it will trigger a certain amount of fraudulent activity.” Feinberg said that, of 1.1 million total claims, the facility found ~18,000 applications which “satisfied our suspicions of fraud.” Of those, ~4,000 were referred to the DOJ for criminal review due to containing “doctored” paperwork.

Feinberg said the fraud in absolute terms has been substantial, but modest in relative terms, according to The Miami Herald. The facility said that 414,000 claims to 226,000 claimants were approved, paying out a total of $6.5 billion before the facility was dissolved in March. The majority of denied claims failed for lack of valid documentation and a fraction for fraud.

Legal & Regulatory News •EIG Global Energy Partners filed

in California federal district court to enjoin the acquisition of TCW Group from Societe Generale by funds

managed by Carlyle Group and TCW management. EIG said the deal subverts certain

EIG consent rights granted as part of its consensual 2009 spin-out from TCW. EIG CEO R. Blair Thomas said the injunction was necessary because the parties elected to proceed with the transaction despite awareness of EIG’s position.

•New York Governor Andrew Cuomo recently told reporters the state had no timetable for issuing new frac regulations. Cuomo said he wanted science and facts to dictate the state’s conclusion. A NY Department of Environmental Conservation spokeswoman told Reuters the department’s review was continuing and no decisions had yet been made. In June, the governor said a final report would soon be issued.

•Preferred Financial Holdings of Ohio is paying the SEC $4.5 million for fraud and sale of ~$10 million in unregistered securities. Preferred filed Chapter 11 in response to the SEC suit claiming co-founder and former CFO Michael Bodanza, who was also sued, depicted the firm’s oil and gas assets in a positive light to investors, not disclosing the company’s significant losses from 2007-2010. Investors were purportedly also not informed of the departure of the firm’s COO, nor of the irreparable breakdown of the firm’s only drilling rig (Preferred’s only revenue stream).

•The official Republican party platform is expected to adopt planks calling for an audit of the Federal Reserve and a commission to explore restoring the link between gold and the dollar. It seems likely the moves were made, in part, to appease Rep. Ron Paul, who never officially dropped out of the race to become the Republican nominee and has delegates to pledge. However, platform committee co-chair Rep. Marsha Blackburn told the Financial Times, “These were adopted because they are things that Republicans agree on.”

Legal & Regulatory Briefs

SEC passes foreign payment disclosure ruleThe SEC approved a final rule requiring US multinational companies and

subsidiaries to publicly disclose oil, gas, and mineral development-related payments or series of payments made to foreign governments in excess of $100,000. Payments keyed to exploration, extraction and processing fall under the rule, and may include taxes, royalties, licensing fees, production entitlements, bonuses, dividends and infrastructure improvements. The requirement takes effect in October 2013. The rule was approved 2-1, with Mary Schapiro and Tony Paredes abstaining due to industry ties.

SEC projects initial compliance costs for the industry will range between $44 million and $1 billion, with ongoing costs of $200-400 million.

SEC Commissioner Daniel Gallagher, the sole dissenting vote, said the rule would put US companies at severe competitive disadvantage to competitors in Russia, China, Iran and Venezuela. He said it could also force US companies to violate rules in foreign jurisdictions barring disclosure. API agreed the rule would hurt the competitive advantage of US companies as well as US job growth and government revenue.

72% of money went to Fla. & La.; majority of fraud charges in Alabama.

The SEC values the frozen assets at over $38 million.

Initial industry compliance costs could be up to $1 billion.

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CapitalMarkets 14 August 30, 2012•Sinclair Oil will pay the EPA $3.8

million in penalties and spend $10.5 million on pollution control equipment to settle allegations of exceeding

nitrogen oxide emission limits at the company’s 74,000 bpd Sinclair and

24,500 bpd Evansville refineries in Wyoming. Sinclair also allegedly missed compliance requirements regarding a flare gas recovery system in Sinclair. Under a 2008 consent degree, Sinclair agreed to a $2.45 million fine and over $72 million in pollution controls at the two refineries and a third, subsequently divested, plant in Tulsa.

•Valero Energy has sued KBR, KBR subsidiary BE&K, Mustang Engineers and Constructors and Berry Contracting over alleged design, engineering and construction defects which Valero said led to a 2008 tank explosion at the company’s Houston refinery. The explosion caused the leakage of ~3,500 lbs. of sulfur dioxide and health complaints by local residents. Valero said it has so far incurred over $5,000,000 in damages. The suit was filed just before expiration of a statutory deadline, and a Valero spokesman said the company hopes to settle.

Legal & Regulatory Briefs Moratorium-weakened ATP files Chapter 11ATP said cash flow and shareholder value resulting from the additional produc-

tion would have mitigated or prevented the need for the company to enter many of the post-moratorium financings in which it has engaged. Those financings, with relatively high return requirements and monthly payments, exacerbated ATP’s problems. The company sued the US government in June for $68 million in moratorium-related dam-

ages; the case is still pending. That said, ATP has also suffered from disappointing well results,

missed production targets and other execution problems in the GOM and Mediterranean including equipment failures and unanticipated geological difficul-ties over the past few years. The company took steps to free up cash, including payment renegotiation with a Chinese manufacturer, sale of convertible preferred shares, delaying projects and arranging to pay vendors with well royalties, but to no avail. In June, new CEO and former Dynamic Offshore chief Matt McCarroll resigned a week after accept-ing the job, also canceling a one-million-share stock buy.

Judge Marvin Isgur gave ATP prelimi-nary approval of its requested $617.6 million in DIP financing through Credit Suisse and other lenders. Isgur said, “What we have is a situation where the debtor is absolutely out of cash, and the alternatives we are left with are to allow the debtor to proceed in a disorderly or orderly liquidation now or to give the debtor an opportunity to get back on its feet.”

The financing consists of $250 million in new financing (of which Isgur prelimi-narily approved up to $80 million; final approval of the remainder is slated for Sep-tember 20) and a now-approved refinancing of $367.6 million in first-lien debt. The financing will allow ATP to complete a Gulf pipeline for its two Clipper wells, which

tested at a combined 13,700 bopd and 50.2 MMcfd in December. ATP called

the pipeline a very promising low-risk project that would generate “immediate” cash flow and considerable potential value to creditors.

Although it appears ATP will get the money, Isgur said the company was prejudiced under the refi due to a requirement to repay in full in cash. However, he deferred to ATP’s judgment that the risk of that payment was worth the benefits of $250 million in new cash. Isgur also gave ATP discretion to choose its chief restructuring officer, as opposed to deferring to lender approval as originally anticipated. Other lenders include Fortress Credit Opportunities I LP and MSD Credit Opportunity Master Fund LP.

ATP is receiving financial advice from Jefferies and Opportune LLP. Its bank-ruptcy case is being heard in the Southern District of Texas (Houston) Bankruptcy Court.

Financials—Had Isgur not allowed the refi, ATP would have owed an $89 million interest

payment in November. Its Q1 long-term debt was ~$2.0 billion, and its bankruptcy petition showed $3.6 billion in assets and $3.5 billion in debt. Prior to filing, ATP had arranged a $700 million revolver.

In August, ATP received $372 million in bankruptcy loans. It projects $613 million in revenues and payment of $167.5 million to creditors over the next 18 months, according to filings, alongside $210 million in net operating cash flow and total capex of $224 million. ATP said these projections should not be relied on, however, and it would begin publishing monthly operating reports through the court in September.

ATP shares have been in a tailspin from its one-year high of $14.06/share on August 30, 2011. After finishing out a volatile 2011, shares settled in down ~46% from that high in the $7.50 range. In May, shares began a steady decline, recently pushing intraday prices to a one-year low of $0.20/share.

ATP bond values rose on news the DIP financing was likely to occur, according to FINRA’s bond-pricing system Trace.

ATP Oil & Gas (UK) Ltd. is not part of the bankruptcy filing.

Shares peaked above $57 in 2007.

Continued From Pg 1

FOR SALE

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PERMIAN PROPERTY FOR SALE8 -Wells; 8- PUDS;



Anadarko (APC; $70.97 – Aug 16; Outperform; Range: $100-110)Wattenberg Highlighted At Enercom. The play is full speed ahead and continues to

beat expectations. Lower end of resource estimate increased to 1 billion BOE from 500MM with 2,000+ drilling locations. The Codell is performing in lock step with the Niobrara so far and should continue to garner about 25% of drilling activity going forward. With 400 sections in the core and a potential for 12-16 wells per section, an average EUR of 350 MBOE, and an NPV of $8 million, the math is pretty straightforward on how big this asset will be. Production headed towards 100,000 Boe/d around yearend. Company contin-ues to look at JV options for the non-core acreage. With a project the size of Mozambique and the international interest APC has received, we would not be surprised to see the company monetize some portion of the asset in the near future. Probably would not sell the entire inter-est due to the tax leakage, but a farm-in/JV would avoid that and seems to be a likely outcome. No new update on Tronox. At this point, a court decision seems more likely than a settlement, in our view, given the commentary following the quarter. —David Tameron, Wells Fargo

Kodiak Oil and Gas (KOG; $9.09 – Aug 16; Outperform; PT: $12)Management remains confident about its 2012 full year production guidance of

17,000-21,000 boe/d. This guidance is production volume, not sales volume. Recall the difference is due to flared gas volume and it was about 1,302 boe/d during 2Q12. Kodiak sold only 60-65% of its gas volumes during 2Q due to lack of processing capacity. This number has potential to reach 80-85% by 2012 year-end. We believe KOG has suffi-cient liquidity on its revolver and do not anticipate Kodiak to access equity markets in 2012, barring any acquisitions. Based on its current drilling schedule, nearly all Kodiak acreage will be HBP by 2012 year-end. Services availability continues to im-prove in the Williston Basin. KOG is using zipper fracs on multi-well pads to complete wells rapidly. Well cost has decreased from $11.5-$12MM range to $11MM due to water sourcing/disposal efficiencies and pad drilling. Management commented that it is seeing gradual improvement in well costs due to lower service costs and efficiency gains, which are likely to drive 5-10% cost savings in 2H12. —Hsulin Peng, Robert W. Baird

Transocean (RIG; $48.02 – Aug 15; Overweight; PT: $77)The Dayrate Trend is Your Friend; Buy RIG. Transocean released another

positive fleet status report, highlighted by lower downtime expectations and numer-ous favorable extensions at higher dayrates. RIG is currently our favorite offshore driller due to substantial leverage to rising dayrates and compelling valuation (~65% NAV/sh, versus the group at ~95%, ex-SDRL and HERO). Clarity on its Macondo liability and progress on non-core asset divestitures offer further catalysts in the com-ing months, in our view. Good Execution for 2Q Bodes Well for 2012 and 2013: Transocean continues to realize operational improvements and win new con-tracts and extensions at higher dayrates. These trends provide improved visibility and bode well for renewed investor confidence in management’s ability to execute in 2012 and 2013. Transocean downwardly revised its previously disclosed 2013 downtime estimate by roughly two months net. We are increasing our 2013E EPS to $4.80 (from $4.65) reflecting new awards and lower downtime. We are increasing our 12-month price target to $77 from $75. —James C. West, Barclays

Financial Takes

Our CapitalMarkets editors are working hard to keep their fingers on the pulse of the latest funds, pricing, news and professional opinions pertaining to the oil and gas finance sector. Whether it's through a one-on-one interview, heard-it-on-the-street feedback or energy conference coverage, each issue of the CapitalMarkets contains insights about how things are shaping up for current and future financial trends. Below is a round up of current thoughts from some of the sector's well-known analysts and portfolio managers. Read On!

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Find more on energy finance at

Sinopec hit by refining margins & rising oil prices

Sinopec earnings for the first half of 2012 were pressured lower by depressed refining margins. The company’s net profit for the first half of the year dropped more than 40% from the comparable period last year to $3.85 billion.

The low refining margins resulted from a rise of 5.8% in crude cost in the first half. The year-on-year rise in oil cost was more drastic considering the

price of Nymex oil futures was $75.63/bbl on June 30 2011, compared with $84.96/bbl on June 29 2012. Prices have since increased to $96.68/bbl.

Rising fuel costs in China are exacerbated because of the price controls and fuel pricing system.

This narrowed refining margins for all refiners in China because the fuel-pricing system prevented the company from passing the higher costs to consumers. Because refining margins were down cash operating costs rose 5.7% to $22.89/ton.

Sinopec refining margins will remain pressured through the remainder of 2012 because of weak demand for oil products as the economy in China struggles. Beijing-based Sinopec has the largest refining capacity in Asia and the second most capacity globally.

The $3.85 billion in Sinopec net profit for the first half of 2012 exceeded analysts’ expectations of $3.40 billion, despite the drop in profit from last year. The operating profit for the oil-and-gas production segment climbed 17% to $6.37 billion.

In the second half of 2012 Sinopec plans a 2% increase in refining volume to 112 million tons.

International Capital Markets

Analysts' view on select stocksKey: Ticker/Current Price/52-Week Low/52-Week High/Market Cap

Upgrades:•Cabot Oil & Gas (COG/$41.22/$27.77/$45/$8.63B) from Neutral to Overweight. •Copano Energy LLC (CPNO/$30.58/$24.24/$38.03/$2.21B) from Reduce to

Neutral by Global Hunter Securities.•Harvest Natural Resources Inc. (HNR/$8.95/$4.85/$12.75/$335.88M) from

Accumulate to Buy by Global Hunter Securities. •Northern Oil and Gas Inc. (NOG/$16.71/$14.40/$28/$1.04B) from Accumulate

to Buy by Global Hunter Securities. •Plains All American Pipeline LP (PAA/$85.82/$54.90/$88.75/$14.07B) from

Accumulate to Buy by Global Hunter Securities.

New Coverage:•Bonanza Creek Energy Inc. (BCEI/$20.07/$12.39/$22.66/$803.02M) at

Sector Perform by RBC Capital Mkts.•C&J Energy Services Inc. (CJES/$19.69/$12.65/$28.09/$1.04B) at Buy by

Global Hunter Securities.•Cabot Oil & Gas (COG/$41.22/$27.77/$45/$8.63B) at In-line by Imperial Capital. •CGGVeritas (CGV/$28.31/$15.08/$31.48/$4.3B) at Buy by Dahlman Rose.•Cimarex Energy (XEC/$57.66/$46.19/$87.85/$4.95B) at Outperform by Imperial Capital. •CIRCOR International Inc. (CIR/$32.45/$26.61/$42.79/$564.79M) at Buy by

Capstone Investments. •Energen (EGN/$51.76/$37.22/$58.24/$3.73B) at Outperform by Imperial Capital.•Energy Transfer Equity (ETE/$43.84/$30.78/$44.47/$12.26B) at Outperform by

Robert W. Baird.•Energy Transfer Partners (ETP/$42.40/$38.08/$51/$10.4B) at Neutral by

Robert W. Baird.•Gastar Exploration (GST/$1.61/$1.55/$4.45/$101.67M) at In-line by Imperial Capital.

Warburg Pincus & partner back HawkwoodHawkwood intends to target plays with secondary targets (e.g., multi-pay columns)

and also expects to participate in JVs and farm-ins. Hawkwood has set a 3-5 year production target of 3,000-6,000 boepd.

Warburg said Hawkwood’s team has over 230 years of oil and gas and financial experience, with a focus on geosciences, reservoir engineering and land, project and financial management. Hawkwood’s CEO is Patrick Oenbring, who has nearly 40 years of industry experience, largely deriving from positions at ConocoPhillips, Occidental (where he led Oxy Permian) and Harvest Natural Resources (where he served as western ops VP and obtained Uinta Basin experience). Leonard Gurule, a former SVP of Mid-Continent assets at Forest Oil (where he helped develop the company’s Permian and Granite Wash assets) who before that spent many years at Arco, will serve as president and COO.

Teachers SVP Jane Rowe called Hawkwood a compelling long-term value creation opportunity, noting it is being guided by a leading and proven management team.

Warburg, with over $35 billion in AUM, has provided over $6.0 billion in equity to the energy sector over the past 20+ years, and has acted as the lead founding investor for several dozen upstreamers including Newfield Exploration, Bill Barrett, Antero, Laredo Petroleum, Targa Resources and Kosmos Energy. The Hawkwood investment builds on Warburg’s recent leadership of a consortium investing up to $1.125 billion in PE backing in GoM-focused deepwater E&P startup Venari Resources in May.

Teachers, the largest single-profession pension plan in Canada, manages $117.1 billion in assets with $12 billion in invested capital.

Warburg led $1.1 billion PE investment in deepwater E&P startup Venari in May.

Who's Hot, Who's Not

Continued From Pg 1

Better results could come in Q3 from China's economic stimulus programs.

Operating profits for the chemical segment lost $196 million in H1.

Read more on Sinopec & other international energy finance news.

Next InternationalCapital

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Volume 05, No. 11 17 energyFinanCe•Magnum Hunter Resources Corp. (MHR/$4.49/$2.33/$7.71/$761.8M) at

Outperform by Imperial Capital. •Memorial Production Partners LP (MEMP/$17.75/$15.71/$19.09/$394.69M) at

Outperform by RBC Capital Mkts.•Northern Tier Energy LP (NTI/$18.39/$13/$18.94/$1.69B) at Buy by Dahlman Rose.•Oasis Petroleum (OAS/$29.38/$17.99/$35.46/$2.75B) at Outperform by Imperial Capital.•ONEOK Partners LP (OKS/$56.16/$43.05/$61.58/$12.34B) at Neutral by Robert W. Baird.•PDC Energy (PDCE/$28.10/$15.08/$40.26/$833.87M) at In-line by Imperial Capital.•Pioneer Natural Resources Co. (PXD/$98.47/$58.63/$119.19/$12.15B) at

Outperform by Imperial Capital. •Plains All American Pipeline LP (PAA/$85.82/$54.90/$88.75/$14.07B) at

Outperform by Robert W. Baird.•Rex Energy (REXX/$12.50/$8.80/$18/$660.13M) at In-line by Imperial Capital. •Rosetta Resources, Inc. (ROSE/$42.83/$30.42/$54.58/$2.25B) at Outperform by

Imperial Capital. •Saratoga Resources (SARA/$5.44/$4.06/$7.81/$168.51M) at Buy by C.K. Cooper.•SM Energy (SM/$47.21/$39.44/$88.50/$3.07B) at Outperform by Imperial Capital. •Sunoco Logistics Partners LP (SXL/$46.51/$27.39/$44.84/$4.82) at Outperform

by Robert W. Baird.•Triangle Petroleum Corp. (TPLM/$6.82/$3/$8.26/$302.62M) at Outperform by

Imperial Capital.•U.S. Silica Holdings Inc. (SLCA/$11.86/$9.02/$22.14/$627.64M) at Buy by

BB&T Capital Mkts.

Downgrades:•Abraxas Petroleum (AXAS/$2 /$1.86/$4.45/$183.62M) from Buy to Hold by Wunderlich. •Diamond Offshore Drilling Inc. (DO/$66.62/$51.16/$72.80/$9.26B) from Buy to

Neutral by Guggenheim.•ENGlobal (ENG/$0.72/$0.68/$3.40/$1941M) from Buy to Hold by KeyBank Capital Mkts.•Ensco PLC (ESV/$56.64/$37.39/$59.90/$13.15B) from Outperform to

Market Perform by Clarkson Capital.•Pioneer Southwest Energy Partners L.P. (PSE/$25.96/21.34/$31.73/$927.11M)

from Neutral to Sell by UBS. •Robbins & Myers (RBN/$59.87/$31.54/$60.19/$2.55B) from Buy to Hold by

BB&T Capital Mkts.•Robbins & Myers (RBN/$59.87/$31.54/$60.19/$2.55B) from Buy to Hold by

Capstone Investments.•Robbins & Myers (RBN/$59.87/$31.54/$60.19/$2.55B) from Buy to Neutral by

Global Hunter Securities.•Robbins & Myers (RBN/$59.87/$31.54/$60.19/$2.55B) from Buy to Hold

by Maxim Group.•Robbins & Myers (RBN/$59.87/$31.54/$60.19/$2.55B) from Outperform to

Neutral by Robert W. Baird.•Robbins & Myers (RBN/$59.87/$31.54/$60.19/$2.55B) from Buy to Hold by

Stifel Nicolaus.•Rosetta Resources, Inc. (ROSE/$42.83/$30.42/$54.58/$2.25B) from Buy to

Accumulate by Global Hunter Securities. •RPC Inc. (RES/$12.45/$8.75/$17.58/$2.73B) from Hold to Sell by Dahlman Rose.•Shaw Group Inc. (SHAW/$41.95/$18.98/$43.70/$2.77B) from Buy to Hold by

BB&T Capital Mkts.•Ultra Petroleum Corp. (UPL/$20.48/$17.62/$36.72/$3.13B) from Neutral to

Underperform by Sterne Agee.

Key: Ticker/Current Price/52-Week Low/52-Week High/Market CapSource: Yahoo! Finance

Who's Hot, Who's Not

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Latest Service Sector News ` NOV buying diversified Robbins

& Myers for ~$2.5 billion

` CB&I adds power to EPC portfolio in $1.9B Shaw buy

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Volume 05, No. 11 CapitalMarkets - Oil & Gas Assets for Sale · 8/30/2012 · Miller Energy...

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Transcript of Volume 05, No. 11 CapitalMarkets - Oil & Gas Assets for Sale · 8/30/2012 · Miller Energy...