Thursday, May 17, 2012

BP fishes, ETP swoops & Chesapeake stumbles

Three corporate stories have caught the Oilholic’s eye over the past fortnight and all are worth talking about for very different reasons. With things improving Stateside and memories of a Russian misadventure fading, oil major BP announced on Tuesday that it had inked two production sharing agreements and aims to begin new deepwater exploration in Atlantic waters off the coast of Trinidad and Tobago. The company is already the Caribbean island nation’s largest oil & gas producer with average production for 2011 coming in the region of 408,000 barrels of oil equivalent per day.
Having been awarded blocks 23(a) and TTDAA14 in the 2010-2011 competitive bid rounds last summer, BP finds itself fishing for crude and gassy stuff in the two blocks which are 2,600 sq km and 1,000 sq km in area respectively. Local sources see the company as a ‘good corporate citizen’ and that ought to be comforting for BP in its march to rebuild trust under Bob Dudley.

While BP’s fishing, Energy Transfer Partners LP (ETP) is smiling having won plaudits around the crude world for its US$5.3 billion acquisition of Sunoco on April 30. A fortnight hence, market commentators are still raving on about the move especially as ETP’s swoop for Sunoco follows on from a clever buyout of Southern Union for US$5.7 billion. These acquisitions make ETP the USA’s second-biggest owner of pipeline assets behind Kinder Morgan whose merger with El Paso is imminent.

Most importantly, the Oilholic believes a swoop for Sunoco diversifies ETP’s pipeline portfolio adding around 9,700 km of oil and refined products pipelines to its existing network of 28,160 km of natural gas and natural gas liquids pipelines. With the move, oil revenues will account for over a quarter of its income. A Moody’s report prior to announcement of the deal suggested that together with Enterprise Production Partners, ONEOK Partners and Williams Partners, ETP was currently in a good place and among those best positioned for organic growth.

Growing production of oil, natural gas and natural gas liquids and higher margins are driving increased earnings and cash flow for midstream companies, especially those with existing gathering and processing or pipeline infrastructure near booming shale plays says the agency. While ETP’s smiling, the situation at Chesapeake Energy is anything but smiles. Under Aubrey McClendon, who co-founded the firm in 1989 in Oklahoma, it grew from strength to strength becoming the USA’s second largest natural gas producer and a company synonymous with the country’s shale gas bonanza. However, in a troubling economic climate with the price of natural gas plummeting to historic lows, Chesapeake has endured terrible headlines many of which were self-triggered.

Two weeks ago activist shareholders forced McClendon’s hand by making him relinquish the post of Chairman which he held along with that of Chief Executive over an arrangement which allows him to buy a 2.5% stake in all new wells drilled by Chesapeake. The arrangement itself will also be negotiated by 2014. The Oilholic finds the way McClendon has been treated to be daft for a number of reasons.

The arrangement has been in place since 1993 when the firm went public so neither the company’s Board nor its shareholders can claim they did not know. Two decades ago Chesapeake drilled around 20 wells per annum on average but by 2011 the average had risen to well above 1500 wells. That McClendon kept putting his money where his mouth is for so long is itself astonishing which is what the attention should focus on rather than on the man himself.

In later years this was largely achieved by borrowing at a personal level to the tune of US$850 million; Reuters reckons the figure is more in the region of US$1.1 billion. However, sections of the US media are currently busy sensationalising the Oklahoma man’s tussles within the company and as if this arrangement has emerged out of the blue.

Furthermore, the macroclimate and falling gas prices are now forcing the energy company’s hand with analysts at Fitch Ratings noting that it faces a funding shortfall of US$10 billion this year. In response, Chesapeake says it plans to sell US$9.0 billion to US$11.5 billion in assets this year. Word from Houston is that the sales of its Permian Basin property in West Texas and Mississippi Lime joint venture are a given by September. Some analysts believe asset sales may cap the figure of US$14 billion; though the view is not unanimous.

While this would help with liquidity issues, a sell-off of those assets currently producing oil & gas would most certainly reduce Chesapeake’s cash flow needed to meet requirements of its existing US$4 billion corporate credit facility secured earlier this week from Goldman Sachs and Jeffries Group. It matures in December 2017, with an interest rate of around 8.5% and can be repaid at any time over 2012 without penalty at par value.

As expected, Chesapeake has suffered a ratings downgrade; Standard & Poor's lowered its credit rating to "BB-" from "BB" citing corporate governance matters and a widening gap between capex and operating cash flow as the primary reasons. There is clear evidence of hedge funds short-selling Chesapeake’s shares.

Industry veteran and founder of BP Capital Partners – T. Boone Pickens – launched a strange albeit very vocal defence of McClendon on CNBC’s US Squawk Box on Wednesday which made yours truly smile. Pickens admitted that he had sold his position on Chesapeake – not because of what is going on but rather that he was very concerned about natural gas prices full stop.

“We got out of natural gas stocks and Chesapeake was one of them. We’re not long on Chesapeake now. Aubrey (McClendon) is a great Oklahoman and Chesapeake is a great company for Oklahoma City generating jobs and investment. Aubrey is a visionary…don’t bet against him…They’ll pull it off. You bet against Aubrey and you’ll scratch your loser’s ass,” said the industry veteran.

You have got to hand it to Pickens! If he's got something to say, there is no minding of the "Ps" and "Qs" – so what if its live television! As a former CNBC employee, the Oilholic wholeheartedly enjoyed Pickens’ soundbite and agrees that Chesapeake should make it out of this mess! However, bad headlines won’t go away anytime soon and its partly their own fault. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pipeline warning sign, Fairfax, Virginia, USA © O. Louis Mazzatenta/National Geographic. Photo 2: Chesapeake well drilling site © Chesapeake Energy.

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