BP-6 days, Exxon, Shell, BP, BG, Borders and Southern, Aurelian, IGas, and Andy Darke RIP

WTI $98.30 -48c ; Brent $110.68 +21c ; Natural Gas $2.47 -25c

Good morning

US statistics were a bit weaker than expected yesterday with consumer confidence hit and housing numbers a bit worse than forecast, along with another build in crude stocks after which the WTI price drifted a touch.

In international company news Exxon had figures last night which slightly disappointed the market as production missed some forecasts and downstream profits were also adrift of best expectations. A combination of factors led to production falling not least lower gas production after a mild autumn and restrictions on Opec production. The stock fell 2.05% as analysts sharpened their pencils ahead of some forecast reductions.

Shell report figures tomorrow and BP and BG are due next Tuesday and Thursday respectively. On the subject of BP the judge in the Macondo trial has ruled on the Halliburton action in much the same way as he did with Transocean last week. And indeed as per last week both sides claim victory saying that each other will be liable subject to punitive damages and civil penalties, watch this space.

Borders and Southern have confirmed that they spudded the well in the Falklands yesterday and it will take around 45 days. Stand by for some fun and games in them and FOGL as drilling has now commenced.

Aurelian has appointed Greenhill to conduct a strategic review into the company as the directors feel that the share price does not accurately reflect the value of the assets. Any combination of asset sales, a merger or total company sale will be considered. We tend to agree that the share price is too low and the market has been less than sophisticated in taking into account the asset base and the cash position, a 3% rise in the price this morning is pretty miserly too.

IGas

We attended the analysts visit last week and our comments are below.

IGas held a site visit on Friday, Andrew Austin, CEO and John Blaymires, COO led us first to the DOE GREEN site located in Penkth North Warrington.

The site is considered as the Coal Bed Methane laboratory; indeed through the 3 appraisal wells (DG-2, DG-3, DG-4), 3,500 feet of coal was lined at higher levels of gas than encountered previously, due to the faulted nature of the seams. The flowing of the DG-2,3 and 4 wells are expected to start in March. The company is hoping to demonstrate a flow rate of 40 to 60 thousand SCF per thousand foot of lateral of high quality coal bed methane. The CBM was deeper than expected and the company used dual lateral wells crossing the seams. The gas was targeted and showed in 3 seams, London delph, Floridas, and Plodder, from an overall total of 13. The entire production cycle take place within this site, from the extraction of the gas from the CBM to the splitting between gas and water (dewatering) and to the production of gas ready to be commercialised. The water produced is disposed of in the domestic market.

The CBM requires more wells to be drilled than conventional gas; the company is planning to drill its fourth well and they will certainly need more to increase production.

The company is also enthusiastic about its other CBM site, Ince Marshes, where they have drilled an appraisal well (Meehan TXD-1) and encountered 36 feet of net coal. Below that they encountered 1000 feet of shale and found indications of gas in both sections. The company may use the same DOE GREEN technology on its Ince Marshes asset. Because shale gas is not really exploited in the UK and Europe, the company is studying its options for proceeding. (they cannot simply import the US shale gas techniques to UK, but for cost estimates they take the North Sea as a model which, being offshore, implies really high costs and discount that for the cheaper, onshore costs)

The second party of our visit was to the Star Energy site, IGas’ new oil production acquisition. The higher part of its production is from Star Energy’s oil sites, 2,600 boepd from a company total of 2,700 boepd. We visited two oil production sites, located in Welton, where they are producing a light oil from a mature field. Some wells have been producing since 1966 and their production has declined (some of them had been producing around 6 thousand barrels per day) and the company wants to use new technologies which might include stimulation or horizontal wells to increase their production. They produce also conventional gas from their fields which they sell to the domestic market.

Their previous acquisition of Nexen Exploration was part of the same strategy as the new Star Energy acquisition, the company wants to integrate its technical knowledge, they are learning about CBM and they plan to generate a higher margin for the oil and the gas by reducing their costs by making a better choice of refineries and also by reducing their transport costs for both their oil and gas and also for their water.

The company is at a position where it owns valuable assets from which it can generate a pre-determined maximum cash flow from its working programme. As a result the company finds itself in a challenging but promising position and what happens next will depend upon how it manages this opportunity.

Next steps:

• The company wants to be the leader in CBM and Shale and to acquire class leading technical knowledge of both.
• The company is constructing a work program and they will need to establish their priorities between oil production, conventional gas and the unconventional gas production – by determining where it will generate the highest cash flows for the least possible use the market. Nevertheless, it is clear that they would consider financing their work programme by debt, if this is needed.
• The company is expecting to conduct a revised CPR on its assets in summer.
• The company’s objective is to convert its resources in reserves and the DOE GREEN site will help it achieve that via the flow rate announced in one month’s time – by which they expect to demonstrate the commerciality of the CBM.
• The company is still looking to expand its acreage.

Todays and finally is a very sad one as we have to report that Andy Darke, former oil analyst and more recently service company guru died in a skiing accident in Meribel, France on Sunday. Andy was a top guy and friend to many people in the City and beyond and will be sorely missed, all of us that were privileged to have known him as a colleague, a client or indeed a good friend are devastated today.