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Facts & Rumors 191 May 7, 2016

Expo/Industry events for the next few months

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June 8, 2016
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June 21 – 23, 2016
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Latest facts and a rumor from the Marcellus and Utica Shale

  • Halliburton – Baker Hughes Deal Is Dead.  Halliburton and Baker Hughes, the second- and third-largest oilfield services firms, called off their $28 billion merger Sunday night due to antitrust objections from U.S. and European regulators.

    “Challenges in obtaining remaining regulatory approvals and general industry conditions that severely damaged deal economics led to the conclusion that termination is the best course of action,” Halliburton CEO Dave Lesar said in a joint statement with Baker Hughes.

    The Halliburton-Baker Hughes deal was initially valued at nearly $35 billion but was worth about $28 billion as of Friday due to plunging stock prices.

    Halliburton will pay its now ex-merger partner a $3.5 billion breakup fee, Kallanish Energy reports.

    The deal originally was announced in November 2014, but had been extended several times to try to meet regulators’ concerns.

    “The companies’ decision to abandon this transaction – which would have left many oilfield service markets in the hands of a duopoly – is a victory for the U.S. economy and for all Americans,” U.S. Attorney General Loretta Lynch said.

    On April 6, the Justice Department had filed a lawsuit to block the deal. The European Union also seemed likely to object.

    On April 22, Halliburton gave some preliminary first-quarter figures, postponing its complete quarterly results to May 3 from April 25.

    The sharp drop in oil and natural gas prices has slashed demand for oil services firms. Halliburton, Baker Hughes and No. 1 oilfield services firm Schlumberger have cut tens of thousands of jobs since late 2014.

    We have seen this coming for months.  Let’s hope the workers at both companies will be able move forward.
  • Baker Hughes Outlines Life without Halliburton.  Don’t feel too badly for oilfield services giant Baker Hughes following Sunday evening’s announcement the company and its acquirer, Halliburton, had called off their $28 billion merger.

    $3.5 billion can assuage a lot of pain.

    As part of its plans, the Houston, Texas-based company intends to buy back shares totaling $1.5 billion and debt totaling $1 billion, from proceeds of the $3.5 billion breakup fee.

    On the negative side, Baker Hughes spent $932 million in the last five quarters on merger-related expenses, according to Securities and Exchange Commission filings, Kallanish Energy finds.

    Baker Hughes also intends to refinance its $2.5 billion credit facility, which expires in September 2016, Kallanish Energy learns.

    Monday morning, Day One of getting on with its business life, Baker Hughes also sketched out actions “to reduce costs and simplify its business, enhance its commercial strategy, and optimize its capital structure.”

    The initial phase of the cost reduction efforts is expected to result in $500 million of annualized savings by the end of 2016, Baker Hughes said.

    “The steps are intended to strengthen the company’s competitive position, financial performance and shareholder returns during the ongoing industry challenges of today and for the additional opportunities that will be available when the market recovers,” according to Baker Hughes.

    In an effort to improve its return on invested capital, the company has decided to retain a “selective” footprint in its U.S. onshore pressure pumping business, while preserving the flexibility to expand for the right opportunities.

    “This approach will allow the company to achieve cash-positive operations in a capital-intensive segment that is expected to remain challenging due to overcapacity, commoditized pricing and low barriers to entry,” the company said.

    “Innovation is what we do best and what our customers need the most,” CEO Martin Craighead said. “More than ever, our customers need to lower their costs and maximize production. These objectives align with our strengths in well construction, where we have leading capabilities in drilling services, drill bits and completions, and well production, where we have a unique portfolio with artificial lift systems, wireline services and production chemicals.”
  • Eclipse May Be Putting a Rig in Production.  We have heard this information this week.  If this happens, it will be somewhere in the Utica.  (RUMOR)
  • Chesapeake Making Financial Headway.  Aggressive asset sales, headcount reductions, investment cuts, and project deferrals are among the actions the second-largest U.S. natural gas producer has taken to recalibrate its strategy amid the downturn. On Thursday morning, CEO Doug Lawler and Chesapeake Energy's management team provided an update as to the company's progress in its 1Q16 earnings presentation.

    1. Aggressive Asset Divestiture Plan on Track

    Chesapeake Energy announced Thursday that is selling around 42,000 net acres of its Oklahoma STACK acreage to Newfield Energy for about $470 million, which consists of 400 producing wells currently producing 3,800 boepd (55% liquids).

    This is part of the company's 2016 divestiture program, which is targeting $500 million to $1 billion of asset sales by year-end. CEO Doug Lawler said in Thursday morning's 1Q16 earnings call, "We anticipate subsequent divestitures during the second and third quarters."

    All of the company's announced asset sales are expected to close by the end of 3Q. For the expected $950 million in net proceeds closed or signed in 2016, the net impact to Chesapeake's production is forecast to be a reduction of around 35,000 boepd (approximately 60% natural gas).

    2. Capex Focus: DUC Inventory Drawdown

    The company said it's also on track to reduce its capital budget by about 57%- from $3.6 billion in 2015 to $1.3-$1.8 billion this year. Capex was down 75% in 1Q from the same quarter last year. Lawler said Thursday morning that the company's 2016 projected Capex is focused on DUC inventory drawdown.

    3. Marcellus/Eagle Ford "Powerful Assets"

    During the Q&A portion of the call, the Marcellus and Eagle Ford plays were particularly highlighted as "powerful assets." Regarding the Marcellus, management said, "We're ready to invest there when the opportunity presents itself." And regarding the Eagle Ford, Lawler said that's an area where Chesapeake "wants to send capital first" when prices start to recover.
  • Activity Picking up in Northern PA.  Weatherford vans have been spotted in the area.  Weatherford has not been in the Northern PA for a few years.  Also, a number of people are seeing more white pickup trucks in Northern PA.  

    There were 21 PA permits issued this week in PA.  Maybe more drilling is coming.  (RUMOR)
  • Chesapeake to Slowly Start Drilling in the Marcellus and Utica.  Chesapeake Energy Corp. intends to resume drilling Utica Shale wells in eastern Ohio in 2016 and 2017, company officials said on Thursday.

    The cash-strapped company, the No. 1 driller in the Utica Shale, did not say how many Utica wells will be drilled.

    The reason that Chesapeake intends to drill in the Utica Shale is because it can ship the natural gas via a recently opened pipeline to the Gulf Coast and get better prices, he said in an earnings call with analysts and the media.

    Drilling in many shale areas has been sharply curtailed or eliminated because of continuing low commodity prices.

    “We’re pretty happy with our position” in the Utica Shale, Patterson said.

    Company CEO Doug Lawler called the Utica Shale “an incredibly powerful asset.”

    In information released to investors, Chesapeake indicated that in will drill zero to five wells in the Utica Shale in 2016, although 45 to 55 Utica wells will go into production.

    Chesapeake, like many drillers, has wells that have been drilled but are not yet connected to pipelines.

    In the Marcellus Shale in Pennsylvania and West Virginia, Chesapeake intends to drill zero to five wells and to put 20 wells into production.
  • Austrian Company Buying Marcellus & Utica NatGas.  Austrian petrochemicals producer Borealis will import 240,000 mt/year of US shale-based ethane for its crackers in Europe, company CEO Mark Garrett said Wednesday.

    This will be a fraction of the feedstock requirements of Borealis' crackers in Europe and the company will leverage a mix feedstock strategy to run its European crackers, Garrett said in a telephone interview.

    Borealis' 625,000 mt/year ethylene capacity cracker in Stenungsund, Sweden, and 400,000 mt/year cracker in Porvoo, Finland, are able to process a mix of feedstocks including liquids, LPG and ethane.

    In August 2014, Borealis signed a 10-year deal to buy shale-based ethane from US company Antero Resources for cracking in its European crackers. The gas will be sourced from the Marcellus and Utica shale formations. The company has already signed a shipping agreement with Navigator Holdings, a liquefied gas logistics company, to transport ethane from Marcus Hook in the US to Sweden.
  • Another Deal in the Appalachian Basin.  EQT Corp. on Monday announced a $407 million deal with Statoil USA Onshore Properties for the right to develop shale gas on roughly 62,500 West Virginia acres.

    The deal includes land in Wetzel, Tyler, and Harrison counties and 31 Marcellus Shale wells, of which 24 are online, and are currently pumping 50 million cubic feet per day (MMcf/d) of natural gas.

    The deal increases Pittsburgh, Pennsylvania-based EQT’s core undeveloped Marcellus acreage by 29%, Kallanish Energy understands. The acquisition also includes drilling rights on an estimated 53,000 acres that are undeveloped and prospective for the deep Utica Shale play.

    Assets include 31 Marcellus wells, 24 of which are currently producing – three complete, not online and four drilled, not complete. The resource potential of the acreage is estimated at 9.2 trillion cubic feet, and 87% of the acreage is either held by production or has lease expiration terms that extend beyond 2018.

    EQT executives last week during the first-quarter analysts’ call said there were asset packages on the market that might be attractive to EQT as it looks to strengthen its core operating area, which includes Southwest Pennsylvania, and northern West Virginia.

    “For the most part, we happen to be focused on transactions that are relatively small in nature,” EQT CEO Dave Porges told analysts last week.

    The Statoil deal allows EQT to more than double the size of the horizontal wells it had planned to drill from land it already controlled. The longer laterals will continue under its new holdings, the company said.

    The transaction is expected to close on July 8.

    We have to wonder if more will follow.
  • Sunbury Pipeline Approved.  Federal regulators have approved a plan to build the Sunbury Pipeline, a 34-mile line through five central Pennsylvania counties that will carry natural gas to a power plant being built along the Susquehanna River.

    The pipeline would service the power plant being built in Shamokin Dam, about 40 miles north of Harrisburg, and will travel through Lycoming, Montour, Northumberland, Union and Snyder counties.

    UGI Energy Services spokesman Kenneth Robinson told the Associated Press the company is pleased with the approval, and that construction should begin after state environmental regulators issue necessary permits.

    The utility said it plans to complete the pipeline in November, with gas ready to flow early in 2017, Kallanish Energy understands.

    The 1,100-plus-megawatt power plant is slated to be completed in early 2018.

    After so many setbacks in the recent weeks, it’s good to see a pipeline approved.  Kudos to UGI.
  • Ultra Petroleum Files for Bankruptcy.  Houston, Texas-based independent producer Ultra Petroleum and seven subsidiaries on Friday filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, the latest oil and gas company to succumb to the prolonged slump in energy prices.

    Ultra listed $1.28 billion in assets and $3.92 billion in debt in court papers filed in Houston and reviewed by Kallanish Energy.

    The producer’s primary assets are gas-producing properties in Wyoming, as well as some assets in Pennsylvania and crude oil properties in Utah, according to Bankruptcy Court papers.

    “The low commodity prices, and especially the low natural gas prices that prevailed in 2015 and have continued through the first four months of 2016, have had a devastating impact,” Ultra Chief Financial Officer Garland Shaw said in a filing explaining events that led to the bankruptcy.

    Court documents show five firms hold at least 5.2% of Ultra’s equity, including Disciplined Growth Investors (9.1% of company equity), Invesco (7.9%), Vanguard (6.7%), Blackrock (5.7%), and State Street (5.2%).

    The largest unsecured investor, owed a disputed $1.46 billion is in the form of private placement notes issued by Ultra Resources in care of Morgan, Lewis & Bockius.

    Between March and early April, Ultra missed a series of principal and interest payments owed to lenders and bondholders. And on April 14, the company was sued by pipeline operator Sempra Rockies Marketing for failing to pay transport fees.
  • Halliburton Has a Tough Quarter.  Halliburton, the world’s No.2 oilfield services provider, reported a first-quarter loss more than three times larger than one year ago, hurt by $2.77 billion in one-time charges.

    Net loss attributable to the company widened to $2.41 billion, from $643 million a year earlier.

    Halliburton booked costs of $378 million related to the Baker Hughes bid. The $28 billion deal was called off late Sunday after both participants realized there was a good chance U.S. and European regulators would not let the deal go through on antitrust grounds.

    Halliburton had, on April 22, reported a 40.5% drop in revenue, to $4.2 billion, for the quarter, Kallanish Energy reports.

    The company said on its earnings call it would consider acquisitions to bolster its weaker businesses as it moves on after the Baker Hughes deal fell through.

    “We are going to invest in those product lines where we’re a little bit weak, and we’ll look at selective acquisitions to round them out,” Halliburton CEO Dave Lesar said on the call.

    Halliburton’s deal for Baker Hughes, valued at $35 billion when it was announced 18 months ago, was called off on Sunday after opposition from U.S. and European antitrust regulators.
  • Wolf Trying to Kill O&G Industry in PA.  Pennsylvania Governor Tom Wolf’s proposed effective shale gas tax rate – severance tax – would be the highest among other large producers and neighboring states, a new analysis by the state’s Independent Fiscal Office (IFO) finds.

    Wolf’s current severance tax proposal equals an 8.5% tax rate over the life of a typical Marcellus Shale well based on the wellhead price of gas, or 6.5% based on the gas hub price.

    (A hub is a place where pipelines come together and product is bought and sold.)

    Both tax rates must be figured by crediting the existing unconventional gas well impact fee of 0.9% at the hub, and 1.1% at the wellhead, Kallanish Energy finds.

    Bottom line: Pennsylvania’s effective tax rate would be 5.6% at the hub, and 7.4% at the wellhead, according to the Independent Fiscal Office.

    That’s compared to a lifetime effective tax rate at the wellhead of 5.4% in Oklahoma, the next highest among comparison states, and 5% and 1.1%, respectively, in neighboring West Virginia and Ohio.

    Other states and their wellhead severance tax rate in the IFO comparison are Arkansas, 4.1% tax, Louisiana, 3.9%, and Texas, 3.9% severance tax at the wellhead.

    Pennsylvania’s current shale well impact fee, approved in 2012 during former Governor Tom Corbett’s term, is tied with Ohio for the lowest lifetime effective tax rate among the seven comparison states, at 1.1 percent.

    The Wolf administration, which would use the new tax to fund education, argues the IFO’s analysis creates an inaccurate impression of drilling companies’ tax burden by failing to consider significant taxes levied by other states that they do not pay here. Drilling proponents in Pennsylvania cite the same argument against a severance tax.

    Drilling industry trade group Marcellus Shale Coalition said the IFO report “demonstrates that Governor Wolf’s energy tax increase proposal would make Pennsylvania the highest natural gas taxed state in the country, with a tax rate a whopping 54% higher than top gas producing states Texas and Louisiana.”
  • Patterson UTI Identifies Upcoming Talent Shortage.  The oil market is suffering its worst slump in decades, brought on by a glut of production. Much of the problem can be traced to a record-breaking surge in U.S. oil production that wouldn’t have been possible without a tremendous amount of debt.

    Many independent drillers outspent cash flow even when oil was $100 a barrel, and made up the difference with bank loans and high-yield bonds. In the meantime, crude is hugging the $40/Bbl range.

    During the downturn in the onshore drilling business, much of the focus has been on all the idle iron. Almost 1,500 US land rigs have been stacked, and many observers are focused on the state of these rigs and their ability to come back should operators look to ramp up activity in shale in a year or two.

    On Patterson-UTI's conference call last week, the company said it has been carefully stacking equipment leaving it well positioned to reactivate iron when it is needed again. The company's bigger concern is human capital and recovering from the industry-wide talent drain.

    "We expect that across the industry, the biggest challenge to reactivating equipment will be associated with recruiting, hiring, and training new employees," CEO Andy Hendricks said last week. "While labor may initially be easy to find, given the magnitude of the workforce reduction in the industry, we expect it will be very challenging for the industry to meaningfully increase the number of personnel quickly, given the magnitude and duration of the downturn."

    With oil prices pushing back up into the mid-$40s and rig count declines stabilizing, this challenge may emerge sooner than some expect. Back in 2015 when oil prices rallied into the low-$60s, Patterson began fielding incoming calls from operators looking to increase activity.

    We aren't expecting any meaningful increase in rig count during 2016, but should an oil price rally allow for growth in 2017 or 2018, the lack of available talent may slow the recovery trajectory. The industry's wholesale downsizing to protect margins has impaired the workforce, scattered talented hands, and damaged the industry's credibility as an employer. Companies may have to throw a lot of money at workers to get them to return in an upcycle, and competition for good hands will be stiff.

    But before the talent drain becomes a problem, it's likely to get a bit worse. More field hands are likely to be released as the rig count drifts sideways and modestly lower over the next few months.
  • Could This Be Another Halliburton – Baker Hughes Deal?  Energy Transfer Equity (ETE) and Williams Cos. Said Tuesday they will alter an administrative requirement for their $20 billion deal to give U.S. regulators more time to complete their review of the merger.

    The new timeline may give Energy Transfer time to renegotiate terms of the deal ahead of the June 28 deadline for the deal to close, people familiar with the matter told Reuters.

Visit our Blog for daily updates on what’s happening in the oil & gas industry.

Rig Count

  • Baker Hughes Rig Count the week of May 6, 2016
  • PA
    • Marcellus 16 unchanged
  • Ohio
    • Utica 10 down 1
  • WV
    • Marcellus 10 unchanged
  • TX
    • Eagle Ford – 34 down 3
  • TX & NM
    • Permian Basin – 139
  • ND
    • Williston – 25 down 1
  • CO
    • Niobrara – 15 down 1z
  • TOTAL U.S. Land Rig Count 388 down 3

PA Permits for April 28, to May 5 2016

      County                  Township      E&P Companies

1.    Elk                       Jones              Seneca
2.    Elk                       Jones              Seneca
3.    Elk                       Jones              Seneca
4.    Elk                       Jones              Seneca
5.    Elk                       Jones              Seneca
6.    Susquehanna        Brooklyn          Cabot
7.    Susquehanna        Brooklyn          Cabot
8.    Susquehanna        Brooklyn          Cabot
9.    Susquehanna        Brooklyn          Cabot
10.    Susquehanna      Brooklyn          Cabot
11.    Susquehanna      Brooklyn          Cabot
12.    Susquehanna      Springville        Cabot
13.    Susquehanna      Springville        Cabot
14.    Susquehanna      Springville        Cabot
15.    Washington        Amwell             EQT
16.    Washington        Amwell             EQT
17.    Washington        Amwell             EQT
18.    Washington        Amwell             EQT
19.    Washington        Hopewell          Range
20.    Washington        Jefferson          Range
21.    Washington        Robinson         Range

OH Permits for weeks ending April 23, 2016

       County       Township    E&P Companies

1.    Belmont       York           XTO
2.    Jefferson      Ross          Chesapeake
3.    Jefferson      Ross          Chesapeake
4.    Jefferson      Ross          Chesapeake
5.    Jefferson      Ross          Chesapeake
6.    Monroe        Salem        Statoil
7.    Monroe        Salem        Statoil
8.    Monroe        Salem        Statoil
9.    Monroe        Salem        Statoil

Joe Barone 610.764.1232
Vera Anderson 570.337.7149

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