Energy Finance

On September 24, the first liquefied natural gas (LNG) terminal built on the east coast of North America in 30 years became operational. The $935-million Canaport LNG terminal, built in Saint John, New Brunswick, is also the first LNG receiving and regassification terminal in Canada.

The terminal, with a sendout capacity of 1.2 billion cubic feet per day (enough to heat 5 million homes), and storage capacity of 9.9 billion cubic feet of gas equivalent, is owned by Spain’s Repsol YPF (75%) and Canadian refiner Irving Oil Ltd. (25%).

“Natural gas from Canaport LNG ensures that Irving Oil’s and Repsol’s clients have access to competitively priced and readily available gas,” reports the company. “In the northeastern U.S., Repsol has firm supply contracts with a number of sources that will complement the operations at Canaport LNG.”

Regasified LNG from the Canaport LNG facility will flow through the 145-kilonmeter Brunswick Pipeline to connect the terminal to the existing Maritimes & Northeast Pipeline near St. Stephen, New Brunswick, and from there to other pipelines and markets.

Since March 2009, E&P companies (proxied by Amex Natural Gas Index, AMEX: ^XNG) have outperformed the broader energy sector (proxied by Energy Select SPDR, NYSEArca: XLE) by about 17%, according to Barclay Capital analysts Maneesh Deshpande, Venu Krishna and Kannan Venkateshwar. XLE is dominated by the integrated oil companies that are more dependent on crude prices while the E&P companies are also driven by natural gas prices.

However, this outperformance of XNG is at odds with the analysts’ weak outlook for gas prices and strong outlook for crude. “Using an average historical valuation of 6.0x forward-year cash flows and current stock prices, E&P names appear to be implying gas prices of $7.50 per million Btu, assuming $70 per barrel of crude, or $6.80 per million Btu assuming $80 per barrel of crude,” they report. “In contrast, E&P analysts expect that gas will average $6.0 per million Btu in 2010.”

Meanwhile, Barclay’s oil-equity analysts estimate that oil stocks presently discount a $70 per barrel at current levels. The oil equity analysts expect crude to cross $100 per barrel by 2011 or 2012.

According to the analysts, “In order to express a view on the convergence between stocks exposed to natural gas and crude we recommend the following trade: Long a basket of integrated oil equities and short a basket of natural gas exposed E&P names in a 1:1 ratio.”

On September 25, the Energy Information Administration of the U.S. Department of Energy reported that 18 major energy companies reported a 67% decrease in net income relative to the second quarter of 2008. The fall represents a 62% decrease relative to the second-quarter average for 2004 through 2008, it reported.

Also, returns on sales (net income ÷ revenue) decreased from 7.3% to 4.7% in the second quarter of 2009 due to the 67% decrease in net income.

According to the report, the effects of higher worldwide production of crude oil and natural gas from these companies and European and Asia/Pacific refining margins were “overwhelmed” by the effects of lower oil and natural gas prices, worldwide refinery throughput and domestic refining margins, leading to lower revenues and net income.

“Upstream capital expenditures by these companies declined but by much less than the fall in net income, while capital expenditures for refining/marketing increased slightly,” the agency reported.

How about a stimulus package for these poor guys?

The American Petroleum Institute issued the following statement today from President Jack Gerard on the G-20 economic summit:

“As President Obama prepares to meet with the leaders of the G-20 nations Thursday, he should be commended for noting that climate change is a challenge for both developed and developing nations.

“But his call to ‘phase out fossil fuel subsidies’ is a wrong-headed approach that should be seen for what it really is: A giant tax hike on American consumers.

“With the nation’s economy struggling to begin a recovery, now is not the time to be imposing new taxes that would likely raise energy costs, discourage new production and kill jobs. By raising energy taxes under the veil of eliminating fossil fuel subsidies, oil and natural gas companies would be deprived of the capital they need to invest in exploration and development. That would likely kill jobs, restrict the supply of energy and increase costs to consumers and businesses.

“Advocates of this strategy make the ludicrous claim that so-called subsidies lead to the overproduction of oil and natural gas. And their policy prescriptions would cut or end programs like the Low Income Home Energy Assistance Program and the Strategic Petroleum Reserve. These are ill-conceived ideas that would leave our most vulnerable citizens without heat in the winter, undermine the nation’s energy security and tighten oil and natural gas supplies at a time when the nation needs energy from all sources to fuel a recovery.

“According to a recent study by Pricewaterhouse Coopers, the oil and natural gas industry supports 9.2 million jobs and in 2007 contributed 7.5% to the gross domestic product. It simply makes no sense to raise taxes that threaten those jobs and undermine one of our nation’s vital economic engines at a time when America needs energy from all sources to fuel a recovery.”

Is this year going to be the year of extreme seasons? Here in Houston, we’ve had triple-digit temperatures during the summer and drought. Now, the first day of Fall, we have torrential rains and a downright cool breeze sweeping down the streets.

Well, why not? We’ve had extreme health care debates, extreme financial markets, extreme well IP results, extreme legislation, and more. We’ve had everything but a hurricane, and there is still time for that.

Will this winter bring a hard freeze and, dare I say it, even snow? It’s not unprecedented, just rare.

It seems likely we will have a cold winter. The weather gods are praying for it. And by weather gods, I mean that group of ExxonMobil employees I saw lifting their beer mugs at the Gingerman and chanting, “Cold! Cold! Cold!” last weekend. Were they celebrating chilly brewskies or do they want their stock price to rise as the temperature drops? Hard to tell.

We’ll have to wait to see what the winter brings, but today, I am happy for the rain. I planted 52 delicate white impatiens in my front garden this weekend, and am glad to see them get a sturdy start before the hot sun returns.

According to a recent notice by Morgan Stanley Research, the analysts are surprised at the strength of natural gas prices.

“Despite a consensus pointing to full storage, supply dislocations and a price-driven uptick in demand (coal to gas switching), prompt month natural gas prices strengthened for the second consecutive week to $3.74/mmbtu,” they report.

The analysts said they’d highlighted a turnaround season for nuclear facilities that started the third week of September, which showed a potential ~1 Bcf/d of incremental gas demand as a result.

They reported, “While NYMEX prices were well supported by cash (trading broadly $0.20-0.30/mmbtu back), we expect the price rise to lose steam ahead. The supply overhang should again weigh on prices, particularly as the market enters October. Further price increases are likely to discourage the coal to gas switching by utilities that will be a key balancing factor for the market into this winter. While the price move looks well supported, we look for volatility (in both directions) to continue.”

Barclays Capital, the investment banking division of Barclays Bank PLC, launched PowerFill+. The system is a suite of online foreign exchange tools to provide order management and access to more liquidity. The new functionality is accessed t4hrough BARX, the firm’s electronic trading platform. It is a free service to give its clients sexecution capability without brokerage fees.

PowerFill+’s main feature allows clients to anonymously work bids and offers. The best bid and offer forms part of the price that users see, enabling BARX to provide all clients with tighter spreads and deeper liquidity, according to the firm.

PowerFill+ is built on the algorithmic capabilities through PowerFill Orders on BARX FX. It enables clients to access a broad range of order types from an order entry screen with the ability to delay orders to a specific time. Order types available include: Take Profit, Stop Loss OCO, Immediate, VWAP TWAP and Call Level.

“Traditionally, platforms offering this level of order functionality charge their clients fees, but PowerFill+ is brokerage free,” said Tim Cartledge, head of BARX FX Trading at Barclays Capital. “Zero brokerage, plus Barclays Capital’s certainty and depth of liquidity, coupled with the extra liquidity resulting from our clients’ own orders, means we are providing clients with an optimal trading environment.”

“PowerFill+ demonstrates Barclays Capital’s commitment to providing clients with outstanding service and reinforces our position as a leader in market innovation,” said Nick Howard, head of foreign exchange and emerging markets distribution at Barclays Capital. “This is a great addition to our BARX platform which is recognized globally for its reliability and stability with a proven track record during times of market volatility.”

According to Barclays, the system has the ability to trade directly from an intraday graph and monitor or edit any unfilled orders. A liquidity ladder shows depth of book and provides key market insight. Also, its order management tool automatically uploads or downloads orderbooks, giving full visibility and control of all orders based on their proximity to market. Real-time fill progress of each order can be seen.

Total working gas in storage rose to 3,458 billion cubic feet (Bcf) for the week of September 14, which is 16% higher than last year, but is down from 17% last week, a fall of 1% this week, according to a report by Michael A. Hall, vice president of oil and gas equity research for Stifel, Nicolaus & Co. Inc.

The week’s injection was in line with the 67 Bcf injection for the corresponding week last year (week-on-week), but well below the 85 Bcf five-year average injection. Year-on-year and the five-year average surpluses started the 2009 summer season at 33% and 23%, respectively, he reports.

Current storage fell to a 17% surplus relative to the five-year average, down from an 18% surplus last week.

“With two weeks remaining in the traditional cooling season, gas in storage rose to 3,458 Bcf, 16% above (486 Bcf) the year-ago level and 17% ahead of the five-year average,” he reports. “Our model currently suggests a 3.7 Bcf/d tightness in the supply and demand for gas, representing a tightening in the supply-demand balance from last week’s implied 2.1 Bcf/d undersupply. This marks the third consecutive week we’ve seen a tightening. Please keep in mind this variable is somewhat volatile and we still see the general trend of tightening as likely to continue into 2010.”

Hall notes that oversupply and the resulting storage level in the producing regions are at new records and are likely to prompt additional curtailments, shut-ins or company-level storage.

“Clearly, as we press on past records, system pressures will increase forcing curtailments and/or shut-ins. Indeed, further aggravating this trend and likely in part driving the last two weeks of meaningful tightness is pipeline maintenance, which is quickly forcing reduced supply. We note much of this maintenance will wrap up toward the end of September and/or in early October, which could put additional upward pressure on season-ending storage levels,” he reports.

Meanwhile, gas front month (October) is trading at about $3.65 per million Btu, or down about $0.11. “While we view the dramatic weakness in natural gas prices as a long-term buying opportunity, we remain measured in the near term as the current supply and demand balance remains loose,” reported Hall.

Natural gas prices gained ground at all market locations since September 2, according to the Energy Information Administration. The Henry Hub spot price increased $0.47 from a previous price of $2.25 per million Btu. Trading was volatile. Prices fell below $2 at the Henry Hub on Friday, September 4, then rose to $2.72 on September 8.

At Nymex, the price of the near-month gas contract October 2009 delivery increased by $0.11 to $2.829, up about 4% from the previous week’s level of $2.72. While the price of the near-month contract also fell lower during the week before rebounding, price changes in the near-month contract during the report week were less pronounced than they were in the spot market.

As of Friday, September 4, working gas in storage was 3,392 billion cubic feet (Bcf) following an implied net injection of 69 Bcf.

Meanwhile, the gas rotary-rig count increased by 2 to 701 as of September 4, according Baker Hughes Inc., marking the seventh consecutive weekly increase. The total rig count, which includes oil and miscellaneous rigs, rose by 10 to 1,009.

West Texas Intermediate (WTI) oil prices rose slightly on September 10 on the widely anticipated news that OPEC ministers in Vienna would not changed their oil production quotas, writes Tina Vital, integrated oil and gas equity analyst for Standard &Poors Equity Research.

“The strengthening of global oil prices so far this year was welcomed by the ministers as providing support for the energy industry’s investment plans, but they remained concerned about price volatility, which persisted despite high global levels of crude and refined product inventories in the market,” she wrote.

Vital said it appeared to the ministers that global oil prices have become very sensitive to external economic signals, such as the dollar exchange rate fluctuations, stock market movements and unemployment trends. The cartel is expected to reassess the market situation at their next extraordinary meeting to be held in Luanda, Angola, on December 22, 2009.

A key issue for OPEC has been high global oil and refined product inventory levels, she reports, and notes that “the overhang might be reduced by stricter OPEC compliance to its output targets and/or improved economic growth and oil consumption.”

OPEC’s discipline to its production targets is one of the most important factors determining global oil prices in 2009, according to S&P. “However, the rise in oil prices has made it more difficult for the cartel to maintain supply discipline,” reports Vital.

“The IEA had reported OPEC’s compliance to its volume cuts at 66% in August (when WTI oil prices averaged around $71), which is down from 83% in March (when WTI oil prices averaged $48). Still, global economies are showing signs of stabilization, and global oil demand forecasts are being revised upward,” she wrote.

According to Vital’s findings, in August, IHS Global Insight looked for global oil demand to contract 2.09 million b/d to 84.19 million b/d in 2009 (vs. its prior forecast of a 2.21 million b/d cut to 84.01 million b/d), driven by an upward revision to China’s oil consumption to growth of 0.28 million b/d to 8.47 million b/d.

Meanwhile, S&P Asia estimates this pickup in Chinese oil demand is due to a combination of domestic factors, including an economic pickup, commercial inventory builds, and a new pricing policy, she wrote.