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Gold/Mining/Energy : Big Dog's Boom Boom Room

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From: aerosappy12/13/2007 2:29:33 PM
   of 204905
RJ EnergyGroup, Thursday, December 13, 2007 8:34 AM
Daily Update

What a difference a day makes. One day after reacting very negatively to the Fed’s decision to lower the discount rate by only 25 basis points, the market rocketed out of the gate yesterday on the news of a new Federal Reserve program to lend banks money. However, the rally seems to have been short-lived as the market gave up a lot of its gains during the trading session. For the day, the broader markets ended in positive territory with the Dow finishing up 0.3% and S&P 500 up 0.6%. While the broader markets slowly lost their excitement over the most recent Fed decision, the crude markets loved the news. Yesterday, crude rose over $4/Bbl (or 4.9%), marking its largest percentage gain in the last 11 months. Also making news yesterday was the DOE report which reported a draw in crude inventories. Crude inventory levels have now fallen 18 of the last 23 weeks. The bullish oil markets helped propel the energy stocks up for the day, with the S&P E&P 1500 climbing 3.3% and the OSX up 2.7%.

The EIA will issue its weekly natural gas report at 10:30 a.m. EST. Our estimates are calling for a withdrawal in the range of 126-136 Bcf, in-line with the consensus range of 128-131 Bcf. Several important factors influencing this week’s number should be: (1) the swing of liquefied natural gas (LNG) cargoes to the Asian and European markets, and (2) declining Canadian imports. If our forecast is right, our year-over-year storage surplus will increase by 15 to 47 Bcf.

Energen (EGN/$66.63/Outperform) Raising Estimates Yet Again. The company increased 2008 EPS guidance by $0.30 from $3.65-4.05 to $3.95-4.35 per share, compared with our estimate of $4.39. The company also released preliminary costs that were meaningfully lower than our estimates – the company expects total operating expense of $2.21/Mcfe in 2008, compared with our estimate of $2.40/Mcfe, and DD&A of $1.24/Mcfe, compared with our estimate of $1.35/Mcfe. Also, production in 2008 is anticipated to reach 102 Bcfe, on the high end of previous guidance of 98-102 Bcfe, and in 2007, the company believes it will exceed its EPS guidance of $4.10-4.20 per share (we are at $4.31).

Callon Petroleum (CPE/$15.30/Underperform) Announces Divestiture of Royalty and Mineral Interests for $61.5 Million. Callon announced that it has agreed to sell certain non-operated royalty and mineral interests for $61.5 million. The interests represent less than 2% of the company’s current proved reserves and are widely spread out over 15 different states. The divested production is approximately 420 Boe/d, less than 6% of current production. Bottom Line: As Callon begins the development of its large Entrada Field, we expect the company will continue to divest non-core properties in order to help fund the large capital outlay needed at Entrada.

Harvest Natural Resources (HNR/$12.54/Outperform) Diversifies With an Interest in a Gabon Exploration Block. The company will acquire a 50% operated interest in the Dussafu Marin Exploration Production Sharing Contract (offshore Gabon) from Sasol Petroleum (SSL/$50.80). The contract includes 680,000 acres with depths ranging from 0 to 1000 feet. The area lies within a proven productive basin with a history of production and infrastructure in place. This addition to Harvest’s portfolio should definitely be a positive for the stock this morning, given a diversification of interests primarily in Venezuela. Under the agreement, members under the contract will enter a three-year second exploration phase, which will be comprised of acquisition/processing of 500 km of 2-D seismic, geological interpretation, and the drilling of a conditional well.

Newpark Resources (NR/$5.44/Underperform) Announces Sale of Environmental Business to Close in the First Quarter. Newpark’s sale of its environmental business will close in the first quarter of 2008, instead of 4Q07 as originally planned. Any material effect to earnings will be part of discontinued operations and therefore not meaningful to the company going forward. Trinity TLM Acquisitions, the acquirer, is conducting further due diligence, but the sale is still expected to close as originally planned. This should not be a factor regarding the share price.

Pioneer Drilling (PDC/$11.82/Market Perform) Switches to December Fiscal Year. Pioneer is switching its fiscal year to December 31 from March 31. The current fiscal year will now run just nine months, from April 1, 2007 until December 31, 2007, and going forward, the fiscal year will run in-line with peers on a calendar basis. Financial reporting for previous periods will not be changed.

Helix Energy Solutions (HLX/$42.65/Outperform) Is Set to Announce 2008 Guidance in Late February . This comes later than the usual guidance given from Helix, due to Cal Dive’s acquisition of Horizon, which brought Helix’s stake in Cal Dive down to ~59% from 73%. We continue to expect Helix to be conservative with their guidance, since they have come up short of production numbers so far in 2007. Once again, this remains one of our favorite long-term names, and any weakness after guidance should provide a great buying opportunity.

Raising Estimates for Cal Dive (DVR/$13.10/Outperform) With Horizon (HOFF/$17.07) Deal Closed. The Cal Dive acquisition of Horizon Offshore has now closed, and according to the deal’s terms, Cal Dive paid ~$550 million for the company ($9.25 + 0.625 DVR shares/HOFF share). We expect the deal to add ~$0.10 to 2008 EPS, taking the small amount of synergies ($10 million) at face value. The addition of Horizon’s derrick and pipelay vessels make for a good fit within Cal Dive’s diving intensive asset base. Cal Dive will now be able to package the new assets to customers for larger projects. With essentially ¾ of its year-to-date revenues being derived outside of the Gulf of Mexico, Horizon helps to achieve Cal Dive’s goal of international expansion in a single, larger transaction. On a combined basis, the stock is trading at a mere 7.5x 2008 EPS (peer group average is 13x). We have boosted our 2008 EPS estimate to $1.70 from $1.60 and maintained our 2007 EPS estimate, due to the expectation that the acquisition will only affect a small portion of Cal Dive’s 4Q07. We are reiterating our Outperform rating.

Rowan Companies (RDC/$38.88/Outperform) – Activist Hedge Fund Continues to Build Position. Yesterday, RDC stock jumped 5%+, which was probably the result of a strong rally in gas prices, but also a result of the activist hedge fund, Steel Partners, filing its increased position in the stock. The notion is that RDC’s sum-of-the-parts value is higher than its current stock reflects, and activists may want to break the company’s drilling and manufacturing divisions apart (2008 EPS multiple: jackups-8x, manufacturers-15x). RDC currently trades at 8x. Steel Partners now owns almost 10 million shares (or 9%) of RDC, an increase of 1.2 million shares since its last filing. Additionally, Rowan has just announced a contract to supply a jackup kit to an existing newbuild.

Transocean (RIG/$138.66/Strong Buy) Post-Merger New Numbers – Coming Out Strong. We are changing our 2008 EPS number to $15.00 and initiating 2009 EPS at $17.75, which are 10% (consensus of $13.59) and 7% (consensus of $16.55) above the Street, respectively. We believe the company should continue to post strong earnings given our long-term bullish outlook for crude, which will be particularly beneficial to the deepwater space. With an industry-leading 75 floaters [Diamond Offshore (DO/$129.85/Strong Buy) is second with 31], 26 of which are ultra-deepwater, Transocean is in an excellent position to capitalize on further leading edge dayrate growth within the deepwater space. Moreover, a $15.00 2008 EPS number implies a 9x 2008 multiple, ~20% below its floater peers. Recent weakness due to arbitrage traders on the convertible notes announcement has created a buying opportunity.

Kinder Morgan Energy Partners (KMP/$52.95/Outperform): Rockies Express Pipeline Completes Successful Open Season for Northeast Expansion Project. The Rockies Express Pipeline LLC (REX) announced that it has completed a successful non-binding open season for the Northeast Express project, a 375-mile extension of the Rockies Express that would extend the pipeline’s route from Clarington, Ohio to the endpoint in Princeton, New Jersey. REX officials reported that market interest during the open season exceeded the pipeline’s initial design estimate of 1.5 dekatherms per day. REX plans to begin negotiating binding agreements with these potential customers. Subject to sufficient binding commitments and regulatory approvals, the pipeline extension could go into service in late 2010. The pipeline to Clarington will not be fully operable until June 2009; however, this endpoint is already being viewed as a bottleneck, as infrastructure from the endpoint to the Northeast markets is limited. We expect the much needed proposed extension (as demonstrated by the strong open season response) will alleviate bottleneck concerns. Moreover, we believe this extension will give shippers in the Northeast natural gas markets access to Rocky Mountain natural gas supplies at a low-cost fuel rate delivery option, with access to gas storage fields in southwest Pennsylvania.

Interesting article in the Daily Reckoning UK version, “Is Coal Going to be the New Oil?” There is a sustained and tightening squeeze on global supplies of the thermal coal, just as Asia embarks on a massive expansion of planned generating capacity based on coal. China is bringing a new coal-fired station on stream every week with a plan to triple generating capacity to 500 GWs by 2030. India is driving to triple its generating capacity by 2010. South Korea is adding 7.3 GWs in the next several years, Vietnam plans to spend billions on coal power, and Japan is adding 10 new coal-powered stations. A pivotal problem is that China may become a net importer of coal for the first time for a variety of reasons. China has been importing coal in increasing volumes from Australia, India, Vietnam, Mongolia, and North Korea; however, India, the world's third largest coal producer, now needs more of its own coal and is having to import coal itself. Vietnam is under the same pressures. Australia is seriously constrained by capacity problems. There is no short-term fix to Asia's coal problem, and in the longer term, the situation could be nearer to the “peak” oil scene than is generally understood. According to the Energy Watch Group (EWG) and the Institute for Energy (IFE), the price and cost of high energy coal is going to catch up with the prices of oil and gas over the next 10-20 years. Both concluded that global coal reserves are at least 60% lower than suggested 20-25 years ago. About 90% of the world's remaining coal is in just six countries: China, USA, Australia, India, South Africa, and Russia. Given the geological difficulties in developing new fields and the additional infrastructure costs entailed, the world's supply of high grade coal available at anything like today's operating costs is extremely limited.

Oil $93.92, down $0.42 pre-market
Gas $7.50, up $0.06 pre-market
Rockies gas price (Opal) $6.28, up $0.12 yesterday
Gasoline $2.413/gal, up $0.121 yesterday
Ethanol $1.970, up $0.030 yesterday

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