Energy Matters

Nov. 24, 2008

To Whom It May Concern:

I hereby am applying for TARP funding. The following is my application.

Name: First National Bank of Nissa NA

DOB: Just in time

Tax ID No.: 888-4-MONEY

Application amount: $250 billion.

Reason for application: Young mortgage salespeople made commissions and have run off.
A few have offered management bed and breakfast in their 120%-financed homes. Expensive company Christmas party may be cancelled or held at young mortgage salesperson’s home. Fee for rental of home for evening is $10,000. Remaining team may be disappointed if no Christmas party. Seeking something/someone to blame.

What I have going for me: I really do want world peace.

What my references will say: “George Kaiser would have never rolled over like this. Stand up, men, and take responsibility for yourselves!” “I’ve known FNB Nissa for, uh, hum, days, and saving this bank is the key to saving the world’s economy–and world peace.” “Hang on, I just got a call from Hillary.” “Hey, I just got a great rate on my Citi credit card. Did you know that your Macy’s card was bought by Citi and you can use it anywhere, even at Macy’s, now, and just go crazy before filing Chapter 7? Yeah, I got that new Citi card in my mail on Sunday, Nov. 23, just before I got the Fed e-mail notice that it is bailing out Citigroup. Cool, dude! So cool!”

Blue or red bank?: Never blue; always in the red.

Your take on the Texas Tech/OU game: OMG!

Your take on the LSU/Ole Miss game: OMG squared!

What are you doing with existing bank funds? Holding on tight, of course. We have a Christmas party coming up, you know, and who knows what y’all in DC are gonna do, so cash is king!

If you received the TARP funding you have requested, how would your bank contribute to improving the U.S. economy? WaHoo! Instead of all 10,000 of us going to the Caribbean this year, we’ll suffer and just pretend we’re there … at $10,000/evening … at the former salesperson’s 120% financed home. (You should see this place. Did you know they really do make 24K-gold plumbing? Dang, gotta love those loose lending terms.)

Have more questions? Ask me!

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com

Most Americans just don’t get how lucky they are, and in every way. Here’s one example: world oil prices.

Americans’ consumption of total global crude oil output–some 25% of daily world demand–means their conservation or excess use can make a real impact on global oil prices–no matter the demand of China and other countries (still). If Americans reduce consumption just 5%, that is meaningful to global demand; if French consumers reduce consumption 5%, it’s a yawn.

Score: Minus one for U.S. consumers.

And, there is yet another means of how Americans affecting global oil prices–the value of the U.S. dollar. The supply/demand issue has been lost on U.S. consumers. Will they “get” this one?

World crude oil is still traded with the value of the U.S. dollar in the equation. This was painful for Americans earlier this year, when the dollar was weak and crude oil on Nymex jumped to some US$140. But the dollar has strengthened–and in the midst of U.S. financial-services turmoil–and world oil prices have fallen precipitously.

I blogged earlier this year about the new US$5 bill, and how it could double at the time as a $2.50 in Europe. The rate against the Euro was 2-to-1 then (favoring the Euro). The current rate is US$1=Euro$1.26.

Falling global crude oil prices are largely a function of the improved strength of the U.S. dollar. Many energy-industry think-tank experts talk of supply/demand fundamentals, such as that of China, etc.–as contributing to the decline in global oil prices. But they won’t acknowleged the simply currency difference between that of today and six months ago. That would be too simple. Just far too obvious.

Meanwhile, Americans should wonder if what the U.S. is really up to with its TARP and other seemingly Darwinistic responses to the local financial crisis, is to push out other oil-consuming countries and be No. 1 again in terms of to whom Saudi Arabia and the rest answer. The U.S. did it before: In the 1980s, President Reagan made U.S. oil trading open to the public, resulting in a push-down on the new, markets-based price and snapping Russia’s cash-flow pipeline, making Russia cede the whole Cold War game.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com

The Tudor, Pickering, Holt & Co. Securities Inc. research team has picked the pirates for this week’s edition of Friday Humor in their daily e-note. “Modern-day Jack Sparrow (OK, Captain Jack Sparrow)?” they ask. “It isn’t often that solid execution of a plan is a big negative, but this is a clear case of ‘dog catching car.’”

Earlier this week, Somali pirates hijacked a Saudi Arabian oil tanker offshore Kenya. The tanker contains some $100 million worth of crude oil, and the pirates want $25 million to release it.

In today’s global crisis, here’s something to rally around, and is easily understood. Pirates take things for keeps or for ransom. That’s what they do. There are no CDSs, mortgage-backed securities, TARPS and such to work it out. Want a supertanker? Here’s a supertanker, and give me $25 million. Simple.

The TPH team provide these potential headlines of the unfolding story: Somali Pirates Apply To Become Bank To Access TARP; Paulson: TARP Pirate Equity Is An ‘Investment,’ Will Pay Off; Kashkari Says ‘Somali Pirates Are ‘Fundamentally Sound;’ Moody’s Upgrades Somali Pirates To AAA; HUD Says Somali Dhow Foreclosure Program Had ‘Very Low’ Participation; Somali Pirates In Discussion To Acquire Citibank; and, lastly…Fed Officials: Aggressive Easing Would Cut Somali Pirate Risk.

The team opines, “Kudos to the pirates for thinking big…but demerits for thinking too big as this won’t end well.” Their investment rating for the Somali pirate business is Strong Sell.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com

Hot With the Haynesville shale expected to contribute as much as 7 Bcf a day into an average 60-Bcf/day U.S. gas market, “I think there’s a reason a number of E&P executives are (supporting CNG as a transportation fuel) and LNG exports as opposed to LNG imports,” says Dan Pickering, co-president and head of research for Tudor, Pickering, Holt & Co. Securities Inc. in Houston.

            “This is going to be a big area of gas supply for several years out.”

Pickering and Steve Herod, executive vice president, corporate development, for Haynesville acreage-holder Petrohawk Energy Corp. spoke to Society of Petroleum Engineers members Wednesday evening at an SPE Business Development Study Group program where a large number of attendees for the nearly sell-out program competed for parking at the Four Seasons garage with a Houston HoustonHouRockets basketball game and a rap concert.

The Haynesville is still hot, Pickering says, despite falling natural gas prices and producers’ reduced access to public debt or equity capital. The one bright spot for Haynesville developers in the current capital and commodity-price market? “We do think (falling) service costs are the one clear positive for next year,” Pickering said, his words falling sadly upon the ears of eager service-company representatives in the audience.

Public and private capital is being withheld from the Haynesville play. “(The market) is scared of the funding commitments the Haynesville might require.”

He added that big Haynesville gas will block the movement of South Texas gas to market.

This may be a wash, though, based on comments by Dave Pursell, managing director and head of macro-research for TPH, at Oil and Gas Investor and A&D Watch’s seventh annual A&D Strategies and Opportunities conference in Dallas this Sept. 4. Pursell expects the high-pressure/high-temperature nature of the Haynesville play to take rigs, pressure-pumping, fracturing and other equipment and services from South Texas to northwestern Louisiana and northeastern Texas.

Reduced availability of oilfield services in South Texas could reduce gas output from the region, thus less gas there would be stranded by the Haynesville consuming take-away capacity.

Pickering said, at the SPE event, that operators are reporting that capital access is more important right now than commodity prices. “The credit crisis has everyone spooked.” Producers won’t issue stock at under-NAV prices to fund drilling, and pipeline builders—mostly MLPs—won’t issue units to fund building take-away infrastructure.

“So infrastructure build-out is being delayed by equity markets as well,” Pickering said.

As for natural gas prices, “the only drawback right now to the Haynesville…is it is a tough market…There is too much gas out there…and the Haynesville is not going to make it much better.”

Herod said Petrohawk is putting in its own pipe. The Houston-based E&P is the No. 3 Haynesville acreage-holder (more than 300,000 net) and No. 1 in terms of acreage/EV. “So we are the most pure-play.” Some 50% of the company’s acreage is under lease terms of more than three years, he added. Acreage can be held in the Haynesville by production with one well per section.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com

Derek Butter, Scotland-based head of corporate analysis for energy research and consulting firm Wood Mackenzie, says U.S. natural gas prices won’t bounce back until 2015.

            We hope Butter is wrong. So do some of the 200 WoodMac clients Butter addressed while in Houston this week. His comment is uber-paraphrased, and he plans to provide more details in a full report later. Butter says jaws dropped. It is likely that the mood did as well.

            Is Butter wrong? Some of his estimate is based on a bet that more uncontracted LNG will land on U.S. shores. He adds that some gas producers, such as StatoilHydro, which is buying into the Marcellus shale play, will drill without regard for super-near-term gas prices.

            The view is contrary to that of other seers, who believe that a correction in gas prices is likely in this, the next or another near quarter. Here are a couple of reasons.

– Producers are slashing E&P budgets, and most U.S. oil and gas producers are weighted to gas-targeted capex, so undifferentiated capex cuts would largely affect their gas-drilling plans.

            – Nearly a third of current U.S. gas production is from wells that have been brought online in the past year, notes Union Drilling Inc. chief executive Chris Strong. He addressed attendees at the Rodman & Renshaw annual global investment conference last week in New York.

The U.S. count for rigs targeting gas resources has grown from 200 to 1,500 since 2002, but all of that effort has resulted in roughly the same amount of annual gas supply, he notes.

And, some 6 trillion cubic feet of the 19 trillion of gas produced in the U.S. annually is now made from wells that have been producing less than one year. If the gas-focused rig count falls by 400, as some industry equity analysts suggest, “you’re going to have a significant production impact fairly quickly,” Strong says.

            Furthermore, IHS Herold Inc. analysts John B. Parry and Daniel T. Pratt report that half of the natural gas consumed in the U.S. in 2007 was produced from wells drilled within the previous 40 months. In 2005, half of gas production was from wells drilled in the previous 48 months, they add.

Referring to a graphic accompanying their report, they add, “Should producers rein in their drilling plans, as many are currently doing, the implied production-decline rates could rapidly reverse the current ‘mini-bubble’ and drive natural gas prices higher, economic conditions permitting.”

The opinions of each—Butter on one side; Strong and Parry/Pratt on the other—differ widely. U.S. gas producers are hoping for sooner, and not later.

Of course, there could be a driver of new U.S. gas drilling that is counter to commodity-price fundamentals—strategic drilling for the sake of holding acreage by production, such as in Haynesville and other shale plays.

Still, a year of for-purposes-of-HBP-only drilling is not likely to replace a third of annual U.S. gas supply. Also, the wells can be drilled but don’t have to be put into sales. If increased take-away capacity from these big gas plays is suspended due to capital constraints, there won’t be the pipe to put it in.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com

What’s a few fewer bucks per barrel and half-dollar per MMBtu mean among Shannon Nome’s estimates for 22 U.S. oil and gas producers’ earnings and cash flow per share for this quarter and the full year?

Nome, a Houston-based managing director and senior E&P analyst for Deutsche Bank, ran the 22 E&P stock names she covers through lower average oil- and gas-price forecasts for this quarter and the new EPS and CFPS estimates are down by pennies. “All of our E&P ratings and target prices remain unchanged,” she reports.

With one noteworthy trend: Losing EPS and CFPS estimates for Delta Petroleum Corp. are even worse with the new price estimates. Shares of DPTR are the only ones in her coverage group she has a Sell rating on.

The new price-forecast figures are of averages of $64 for West Texas Intermediate and $7 for Henry Hub gas, down from $70 and $7.50, in this quarter. The price forecasts for 2009 and 2010 are unchanged from figures developed some weeks ago, ranging from $50 to $68 for WTI and $7.50 to $8.50 for natural gas.

“Although we have recently moved to a cash-flow-based methodology for valuing E&P stocks, each producer’s asset intensity and prospective NAV still has a strong bearing on the target multiple premium/discount accorded. Our target prices incorporate target EV/DACF multiples based on the merits of a given stock relative to its peer group and its own trading history,” she reports.

She has the following recommendations: Apache Corp. at $76.04, Hold; Anadarko Petroleum at $37.82, Hold; Bill Barrett Corp., $20.33, Hold; Chesapeake Energy, $21.23, Buy; Continental Resources Inc., $22.54, Hold; Delta Petroleum, $5.69, Sell; Devon Energy, $70.14, Buy; EnCana Corp., $44.46, Hold; EOG Resources, $80.63, Hold; Equitable Resources, $30.00, Buy; Forest Oil, $19.80, Hold; Goodrich Petroleum, $27.76, Hold; Quicksilver Resources, $7.78, Hold; Noble Energy, $50.61, Hold; Newfield Exploration, $19.89, Hold; Pioneer Natural Resources, $22.27, Hold; Range Resources, $40.62, Buy; SandRidge Energy Inc., $10.07, Hold; Southwestern Energy Co., $30.26, Buy; Ultra Petroleum, $44.50, Hold; Exco Resources, $7.05, Buy; and XTO Energy, $33.54, Buy.

OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com

Michael D. Bodino, Brian M. Corales and Michael A. Glick have resurfaced—they’re now running energy research for Houston-based investment banker SMH Capital out of the Metairie, La., office. Bodino can be reached at michael.bodino@smhcapital.com and 504-799-3565; Corales at brian.corales@smhcapital.com, 504-799-3570; and Glick at michael.glick@smhcapital.com, 504-799-3569. SMH Capital is a business of Sanders Morris Harris.

Bodino is director of research and senior E&P analyst, covering E&P with Corales. Mark Reichman is covering MLPs, and Bill Conroy is covering oilfield services.

            The triumvirate left Jackson, Miss.-based Coker & Palmer Investment Securities in late September, resulting in that firm’s suspension of its energy-securities research. Bodino and several colleagues, including Corales, left Sterne Agee in August 2005 to join Coker Palmer and launch the research practice. Bodino was previously with Southcoast Capital, now Capital One Southcoast Inc., from 1999-2003, Sterne Agee from 2003-05. Prior to joining Southcoast, he was with San Jacinto Securities Inc.

“Although most market pundits may not consider this a propitious time to launch coverage on the E&P sector, we vehemently disagree,” Bodino reports. “Given the steep market correction, oil and gas company equities now reflect a combination of lower oil and gas prices, lower growth rates and a higher implied equity return. Thus, the risk/reward pendulum for investing in the group has oscillated.

“While current 2009 economic outlooks do not support a strong fundamental oil and gas demand picture, reduced 2009 capital budgets should impact natural gas production in 2010, and, as the U.S. economy recovers, rising consumption could ameliorate another secular industry upturn that could materially buoy energy equities. Until then, there should be ample seasonal trading opportunities. Below are our initial ratings and price targets for 26 E&P companies.”

For SMH Capital’s institutional clients, he has launched coverage of ATP Oil & Gas (target: $13; rating: Neutral); Bill Barrett Corp. ($35; Accumulate); Brigham Exploration Co. ($10; Buy); Cabot Oil & Gas Corp. ($38; Buy); Carrizo Oil & Gas ($56; Buy); Chesapeake Energy Corp. ($40; Accumulate); CNX Gas Corp. ($40; Buy); Comstock Resources Inc. ($55; Buy); Continental Resources Inc. ($35; Buy); Delta Petroleum Corp. ($8; Neutral); Encore Acquisition Corp. ($35; Accumulate); Energy XXI Ltd. ($4; Accumulate); GMX Resources Inc. ($42; Neutral); Goodrich Petroleum Corp. ($44; Buy); Harvest Natural Resources ($17; Accumulate); Helix Energy Solutions Group ($20; Accumulate); Parallel Petroleum Co. ($9; Neutral); Penn Virginia Corp. ($41; Accumulate); Petrohawk Energy Corp. ($30; Buy); PetroQuest Energy Inc. ($14; Accumulate); Plains Exploration & Production Co. ($46; Buy); Quicksilver Resources Inc. ($18; Accumulate); Range Resources Corp. ($50; Buy); Southwestern Energy Inc. ($44; Buy); Ultra Petroleum Corp. ($77; Accumulate); and XTO Energy Inc. ($60; Buy).

The group covered 20 E&Ps at Coker Palmer. New to their coverage list are Brigham, Cabot, Comstock, Continental, Encore and Penn Virginia at SMH Capital. They have not resumed coverage of Cano Petroleum, Foothills Resources and Storm Cat Energy Corp. The lattermost is in Chapter 11 bankruptcy protection.

 –Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com

Dallas Mavericks NBA team owner Mark Cuban has been charged by the SEC with trading 600,000 shares (a 6.3% stake) of Montreal-based Mamma.com Inc. based on insider information. The company, now known as Copernic Inc. (Nasdaq: CNIC) owns an Internet search engine.

In June 2004, Cuban was told more Mamma.com shares would be sold in a PIPE offering, which is a deal in which shares are sold at a discounted price and holders are locked into owning them for six or more months. Selling more shares would dilute the value of Cuban’s holding.

“Within hours of receiving this information, according to the complaint, Cuban called his broker and instructed him to sell Cuban’s entire position in the company,” the SEC reports.

Cuban, 50, also owns HDNet and Landmark Theaters. Cuban acquired the 600,000 Mamma.com shares in March 2004, and I-banker Merriman Curhan Ford & Co. suggested the Internet firm raise capital through a PIPE (private investment in public equity) offering. Cuban was invited to participate in the PIPE.

The SEC reports that Mamma.com’s “CEO was instructed to contact Cuban and to preface the conversation by informing Cuban that he had confidential information to convey to him in order to make sure that Cuban understood—before the information was conveyed to him—that he would have to keep the information confidential.”

In a June 24 e-mail, the CEO told Cuban to “Call me pls…ASAP.” Cuban called four minutes later and spoke to the CEO for 8 minutes and 35 seconds. “The CEO prefaced the call by informing Cuban that he had confidential information to convey to him, and Cuban agreed that he would keep whatever information the CEO intended to share with him confidential. The CEO, in reliance on Cuban’s agreement to keep the information confidential, proceeded to tell Cuban about the PIPE offering.

“Cuban became very upset and angry during the conversation, and said, among other things, that he did not like PIPEs because they dilute the existing shareholders. At the end of the call, Cuban told the CEO ‘Well, now I’m screwed. I can’t sell.’”

The executive chairman then wrote to Mamma.com board: “Today, after much discussion, [the CEO] spoke to Mark Cuban about this equity raise and whether or not he would be interested in participating. As anticipated, he initially ‘flew off the handle’ and said he would sell his shares—recognizing that he was not able to do anything until we announce the equity—but then asked to see the terms and conditions which we have arranged for him to receive from one of the participating investor groups with which he has dealt in the past.”

That same day, Cuban called a Merriman sales representative and spoke to him for eight minutes. The SEC reports, “During that call, the salesman supplied Cuban with additional confidential details about the PIPE. In response to Cuban’s questions, the salesman told him that the PIPE was being sold at a discount to the market price and that the offering included other incentives for the PIPE investors. Cuban was very upset and angry about the PIPE during the call.

“One minute after hanging up with the Merriman sales representative, Cuban called his broker in Dallas and told the broker to sell his entire 600,000 share Mamma.com position. He told the broker ‘sell what you can tonight and just get me out the next day.’”

Cuban sold his shares for approximately $13.29 each. The PIPE offering was priced at the end of the following day at $11.89 a share. The stock is trading today at 25 cents.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com

Liquidity is improving, but U.S. cash markets continue to need careful prodding, says Federal Reserve Chairman Ben Bernanke. He testified this morning before the House Committee on Financial Services on the Troubled Asset Relief Program (TARP) and the Fed’s liquidity facilities

“The value of the TARP in promoting financial stability has already been demonstrated…Failure to prevent an international financial collapse would almost certainly have had dire implications for both the U.S. and world economies,” he says.

Nine U.S. financial institutions have received $125 billion in funding; more have applied. The FDIC plans to guarantee non-interest-bearing accounts, and the Fed is providing additional “backstop liquidity to the financial system.”

So far, credit-default-swap (CDS) spreads have improved. “Going forward, the ability of the Treasury to use the TARP to inject capital into financial institutions and to take other steps to stabilize the financial system—including any actions that might be needed to prevent the disorderly failure of a systemically important financial institution—will be critical for restoring confidence and promoting the return of credit markets to more normal functioning.”

As for consumer and business credit, “our recent actions have focused on the market for commercial paper, which is an important source of short-term financing for many financial and nonfinancial firms.”

To loosen the hoarding of cash, the Fed is:

– “Allowing money-market mutual funds to sell asset-backed commercial paper to banking organizations, which are then permitted to borrow against the paper on a non-recourse basis from the Federal Reserve Bank of Boston. Usage of that facility peaked at around $150 billion. The facility contributed importantly to the ability of money funds to meet redemption pressures when they were most intense and remains available as a backstop should such pressures reemerge.”

– “Funding a special-purpose vehicle that purchases highly rated commercial paper issued by financial and nonfinancial businesses at a term of three months. This facility has purchased about $250 billion of commercial paper, allowing many firms to extend significant amounts of funding into next year.”

– And, launching a third program next week to “provide a liquidity backstop directly to money-market mutual funds. This facility is intended to give funds confidence to extend significantly the maturities of their investments and reduce over time the reliance of issuers on sales to the Federal Reserve’s special-purpose vehicle.”

Signs that TARP’s efforts are working? Interbank short-term funding rates are falling, he says, “and we are seeing greater stability in money-market mutual funds and in the commercial-paper market. Interest rates on higher-rated bonds issued by corporations and municipalities have fallen somewhat, and bond issuance for these entities rose a bit in recent weeks.”

He adds, though, that “credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards through October. There has been little or no bond issuance by lower-rated corporations or securitization of consumer loans in recent weeks.”

He concludes that it “is imperative that all banking organizations and their regulators work together to ensure that the needs of creditworthy borrowers are met in a manner consistent with safety and soundness. As capital adequacy is critical in determining a banking organization’s ability and willingness to lend, the joint statement (of banking agencies on Nov. 12) emphasizes the need for careful capital planning, including setting appropriate dividend policies.”

TARP meeting minutes are available at www.ustreas.gov/initiatives/eesa. Transcripts of Bernanke and other Fed officials’ speeches are available at www.federalreserve.gov.

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com

Capex budgets are being pared drastically, including those for Haynesville-targeted wells. But an SPE-BD Study Group* event in Houston this Nov. 19 is not lacking in interested intelligence-gatherers and sight-seers.

The SPE group is hosting Steve Herod, executive vice president, corporate development, for Haynesville-weighted Petrohawk Energy Corp. and veteran E&P analyst Dan Pickering of Tudor, Pickering, Holt & Co. Securities Inc. The program was set up for up to 175 attendees at the regular downtown Four Seasons venue.

As it sold out, the SPE group arranged for larger accommodations–up to 300 — and reopened registration this Wednesday. Stay tuned for Herod and Pickering’s comments.

* Society of Petroleum Engineers, Business Development Study Group (go to http://www.spegcs.org/en/cev/?1400)

–Nissa Darbonne, Executive Editor, Oil and Gas Investor, A&D Watch, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com; ndarbonne@hartenergy.com