Chesapeake has high hopes for Ohio Utica Shale

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The second quarter financials for Chesapeake Energy (CHK:NYSE) confirmed that the company believes that the Ohio Utica Shale, which is liquids rich, will be viable economically.

Nine vertical and six horizontal wells drilled in the shale showed successful results, according to the Oil & Gas Financial Journal.

The news source reports that Chesapeake believes that its "industry-leading 1.25 million net leasehold acres in the Utica Shale play could be worth $15 – $20 billion in increased value to the company." Baird Equity Research analysts said that such result in an implied acreage valuation of between $12,500 and $16,667 for each acre.

Chesapeake said that it believes that the Utica Shale "will be characterized by a western oil phase, a central wet gas phase and an eastern dry gas phase and is likely most analogous, but economically superior to, the Eagle Ford Shale in South Texas."

The Associated Press reports that Chesapeake's financials showed earnings of 76 cents per share. Prompting Robert Morris of Citi Investment Research to raise its price target from $35 to $38. 

Noble Energy’s second quarter surpasses expectations

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Noble Energy Inc. (NBL:NYSE) recently announced that it earned $294 million in second-quarter profits, which worked out to $1.61 per share.

According to Dow Jones Newswires, the oil and gas exploration firm's profits were up from $204 million during the same period the year before. Revenue for the quarter was $954 million, up 27 percent.

These figures surpassed the expectations of Thomson Reuters analysts who predicted revenue of just $919 million.

Chief executive officer of the Houston-based company Charles Davidson said that he expects expenditures to rise in the second half of 2011 as development ramps up in a number of areas.

"We are accelerating a number of our development projects and we have also made important additions on the exploration side," he reportedly told investors on a conference call.

This development will reportedly take place in basins in Colorado, West Africa and the Mediterranean Sea, and full-year spending is anticipated to be about $3 billion.

Shares of Noble Energy hit a 52-week high at $98.99, and the low over the same period was $63.80, according to Reuters. 

Clayton Williams adds rigs in Wolfbone formations

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Clayton Williams Energy, Inc. (CWEI:NASDAQ) recently announced that it planned to increase its number of rigs in the Wolfbone formations.

In an attempt to target the the Bone Springs and Wolfcamp formations (Wolfbone) in Reeves County, Texas, the company will increase its rig count from seven to 11.

Clayton Williams has leased 20,000 acres and plans to add even more land through a drill to earn farm-out agreement with Chesapeake Exploration. Clayton Williams will earn 75 percent interest in 640 net acres for every well that it takes Chesapeake to the tanks for a 25 percent interest.

President and chief executive officer of the company, Clayton W. Williams, Jr., said that more data is needed to determine how things will play out.

"Early indications are encouraging, but we need more production data. We are accelerating drilling operations to meet the Chesapeake agreement and to further evaluate our acreage," he said in a release.

Drilling and completion operations have begun on 13 wells.

Reuters reports that Clayton Williams' 52-week high was $109.45, while its low was $41.55.

El Paso’s Ruby natural gas pipeline placed into service

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El Paso Corp. (EP:NYSE) recently announced that the Ruby Pipeline is now in service, which could have a supstantial impact on the natural gas sector, according to analysts.

Analysts with Bentek Energy told Reuters that the completion of the pipeline will likely make the competition between Canadian and Rocky suppliers for part of the Pacific Gas & Electric Company market more fierce.

"Depending on market conditions, this has the potential to significantly shake up natural gas markets in the West," Rusty Braziel, Bentek vice president, told the news source.

The 680-mile, 42-inch natural gas pipeline runs from Opal, Wyoming, to close to Malin, Oregon, according to a release from the company.

Jim Cleary, president of El Paso's Western Pipelines, said that the completion of the pipeline was the culmination of years of work.

"Ruby is across the finish line, completing more than three-and-a-half years of stakeholder outreach and construction," he said. "Going forward, it will continue to deliver long-term economic and environmental benefits, by providing clean-burning natural gas supplies from the major Rocky Mountain basins to consumers in California, Nevada, and the Pacific Northwest."

According to Reuters, El Paso's 52-week high was $21.54 and its low was $10.97. 

Mountainview Energy gains interest in the Medicine Lake prospect

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Mountainview Energy Ltd. (MNVWF:US) recently signed an agreement to greatly increase its holdings in the northern United States.

According to the Oil & Gas Journal, the Cut Bank, Montana-based company signed a letter of intent, which is reportedly binding, to aquire a 20 percent stake in more than 10,000 acres in both North Dakota and Montana.

Specifically, the agreement is for the oil and gas exploration company to gain the interest in 13,400 net acres (67,000 gross acres) in the Medicine Lake prospect, which is located in Divide County, North Dakota, and Richland, Roosevelt, and Sheridan counties, Montana, according to the news source.

The move increases Mountainview Energy's holding in the Williston basin to 25,400 net acres.

According to Bloomberg, Mountainview's stock hit a high in mid-March, trading for slightly more than $2.5 per share. Currently the price for the stock is about 60 cents, up from its 2011 low of 33 cents.

The company has an agreement with a large independent oil and gas company based in the U.S. to develop assets in both the Bakken and Three Forks formations through the use of horizontal drilling, according to the Oil & Gas Journal. 

IHS buys oil and gas reserve software company Seismic Micro-Technology

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IHS Inc. (IHS:NYSE) recently agreed to buy a geophysical software producer for half a billion dollars.

The business information service will pay $500 million for Seismic Micro-Technology, which produces data products and other software that help discover and develop oil and gas reserves, according to Reuters.

The all-cash transaction is reportedly the largest in the history of IHS.

IHS chairman and chief executive officer Jerre Stead said that the acquisition will allow the company to aid its customers in the oil and gas sector.

"The acquisition of SMT will increase the ability of IHS to offer mission-critical geoscience software and data products to customers in our largest end-market, Energy, and give SMT customers the ability to seamlessly access the critical oil and gas information and insight products of IHS," he said. "SMT offers software and solutions to help customers across the globe find and develop new oil and gas reserves, and optimize production from new and existing assets."

According to CNN Money, IHS' stock's yearly high was around $90 and on Tuesday it closed at $78.66 on the New York Stock Exchange.

Black Diamond Group Stock

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Investment Profile and Business Overview (ticker: BDI on the TSX)

The Black Diamond Group (BDI) is one of the most boring companies I’ve ever come across.

They make & rent remote camps for the oilsands workers – from dining rooms to toilets – and supply the temporary office space. There’s no technological edge here. And they do supply some basic well site services as well. Boooooring. No sex appeal. ZZZzzzzzz.

But what a great stock chart.

It’s up 500% in two years, from $6-$30 per share. They pay a steady and growing dividend. Q1 2011 revenue was up 80% over a year ago, as was profits. They have $87.6 M annualized (from Q1) EBITDA of $4.71/share, which equals 6.25x cash flow. BMO has them at 7.4x Price to Cash Flow (Cash flow is slightly different than EBITDA) their estimate, but average in BMO coverage universe is 8.1x P:CF

$2.11 annualized earnings – 13.7x – BMO average is 16.4x – You could argue the stock is still cheap.

When oil looks like it will be trading lower for awhile and gas has a glass ceiling at $5.25, the only sector in the energy patch with pricing power – and therefore earnings power – is the energy services sector.

My colleague, Michel Massaad, who writes his own energy blog at www.beatingtheindex.com, has interviewed management and written up a profile of the company for OGIB subscribers. Neither one of us owns stock in Black Diamond.

Trading Symbols: BDI-TSX
Share Price: $30.50
2011 Revenue: $140.0 million
2011 EBITDA: $50.0 million
Shares Outstanding: 18,500,000
Market Cap: $564,250,000
Dividend: $1.14 per year paid monthly
Yield: ~3.75%

Positives for the Stock:
Provides exposure to the resources sector (oil sands, conventional oil and gas activities, mining) while shielded from the volatility of commodity prices.
Low payout ratio – 25% for Q1 2011 — 25% of the company’s Q1 net income funded the dividend payment for the quarter.
Significant insider ownership – 17%
Significant institutional ownership – 50%
Stock Chart – steady rising trend line
Negatives:
A sharp drop in commodity prices for an extended period of time will hurt the company’s long term contract portfolio
No technology edge – aggressive pricing by the competition could reduce profitability
Any regulatory changes in the oil sands sector could impact new or existing projects
75% of the company’s revenue is out of Western Canada.
Poor liquidity for buying and selling shares
Business Overview

Black Diamond has three business segments:
1. Energy Services
2. Workforce Accommodations
3. Space Rentals

While each division is independent with its own fleet and equipment geared towards answering a specific need, it is not uncommon for all 3 business segments to end up working on the same site cross selling to the same customer. For instance, the Energy Services division would not be the only one to generate revenue from the oil sands sector. All 3 segments are geared towards the energy sector by design and the company is working on expanding its business into the resources sector as a whole which includes mining and forestry

Let’s take a closer look at each of the 3 business segments…

1. Energy Services

Canadian E&P spending (energy producers) is forecasted to increase by 16% to $44 billion this year as companies bankroll projects on the back of high oil prices. Black Diamond exposes investors to all the hot energy plays minus the risks E&P companies take on. The company believes growth in these areas will continue as long as oil prices remain in a sustainable range.

Think of the Energy Services segment as a mobile Canadian Tire store – for our American readers, that would be Lowe’s – which will supply your operations on the ground with almost everything you need.

Surface Equipment Rentals

Black Diamond offers a full range of surface rental assets that would typically support a drilling or completions operation. This is the boring stuff, but is the guts of any well site or oilsands operation – tanks, pumps, water storage, steel walkways etc.

The shale revolution means a lot more horizontal wells. These wells are getting longer and are using more water per well – which means more tanks and containment systems from companies like Black Diamond.

Remote Camps

Energy Services provides housing for drill camps, geologist/engineer quarters and staff quarters in temporary and remote sites. This is different housing than their workforce division or space rental (office) divisions.

Related Services:

And of course, if you want Black Diamond to install and set them up and take them down, that costs extra – just like a drayage company at a convention centre.

The Energy Services division generated 13% of Q1’s gross revenue, and this figure should grow as demand from shale oil and gas plays grows on the back of horizontal drilling and multi stage fracking completion requirements.

When a company can’t count on a technological edge in its services, its profits are as strong as its sales team — which is one of BDI’s strong points. The company has been a first mover when it comes to securing long-term strategic partnerships with 2 first nations in B.C. with lands in the following hot plays – the Montney and the Horn River shale gas plays.

Exploration and production companies need access permits to work on traditional native land. The band can expedite your access permit if you choose to work with them as a preferred partner for your accommodation/equipment needs. The partnership between Black Diamond and the native bands is either through a royalty structure or a 50/50 ownership. So even if a competitor is selected for a services contract in this area they still need to hire the First Nations partnership – which means BDI will still get paid since they own half of the equipment in use.

This move has lead to capturing more than 70% market share in the Horn River natural gas shale play which is buzzing with infrastructure and pipeline projects in anticipation of higher dry gas prices once the Kitimat LNG export facility becomes operational.

These partnerships are not only expected to deliver strong monthly revenues from large and flourishing activity area, they are primarily long term solid relationships with the local community as it provides them with jobs and sustainable benefits in the long run.

Part of its strategy in geographically diversifying its revenue sources, Black Diamond is expanding its business into the US in North Dakota and Montana where there is a chronic shortage in accommodation and service rental equipment. Drilling continues to grow in the Bakken shale oil play thanks to sustained high oil prices.

Editor’s Note: In Part 2, we review Black Diamond’s other business segments: Workforce Accommodations and Space Rentals… along with a full valuation on the company’s stock. The company recently closed a private placement that gives it extra financial flexibility.

Crosstex to expand NGL facilities

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Crosstex Energy LP recently announced that it would be expanding its Eunice natural gas liquids (NGL) fractionation facilities and extending its Cajun-Sibon NGL pipeline.

According to the Oil & Gas Journal, the Dallas-based company is finishing up the permitting process, engineering studies and pipeline routing to accomplish these goals.

A 130-mile pipeline – which will be 12 inches thick – will connect the Eunice fractionation facility with Mont Belvieu supply pipelines, which will increase the company's NGL capacity. Crosstex said that it expects the facilities to be serviceable by the first quarter of 2013 and that it will cost around $200 million.

Crosstex President and Chief Executive Officer Barry E. Davis said that demand in these areas was expanding.

"There is increasing demand for fractionation and NGL handling as producers pursue the development of liquids-rich natural gas shale plays," he said. "We will be able to offer our midstream and producer customers an integrated NGL transportation, fractionation and marketing alternative to Mont Belvieu."

Crosstex also recently entered and agreement with Apache Corp. to open a natural gas processing facility in Texas, according to the Odessa American.

According to Raymond James, NGL streams rich in condensate and butane will likely receive the best pricing.

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