Hurricane Ike Hits Tel Offshore Hard Between the Eyes

Chevron (CVX) waited and waited to post which rigs and platforms were damaged or destroyed by Hurricane Ike in September 2008. Weeks go by after Hurricane Ike, TELOZ (TELOZ) announces a good quarterly dividend, and days later ...

TELOZ issues a damage report in a press release dated October 7th, 2008:

TEL OFFSHORE TRUST announces that production from the two most significant oil and gas properties associated with the Trust has ceased following damage inflicted by Hurricane Ike in September 2008. The principal asset of the Trust consists of a 99.99% interest in TEL Offshore Trust Partnership. The Partnership owns an overriding royalty interest, equivalent to a 25% net profits interest, in certain oil and gas properties, including the working interest ownership interest of Chevron U.S.A. Inc. in Eugene Island 339 and Ship Shoal 182 and 183. The information contained in this press release regarding hurricane-related damages affecting the two oil and gas properties is based on information provided to the Corporate Trustee of the Trust by Chevron U.S.A. Inc., the managing general partner of the Partnership.

The platforms and wells on Eugene Island 339 were destroyed by Hurricane Ike. Crude oil revenues from Eugene Island 339 represented approximately 48% of the crude oil and condensate revenues for the royalty properties in 2007 and for the third quarter in 2008. Eugene Island 339 contributed approximately 12% of the revenues from natural gas sales from the royalty properties in 2007 and approximately 45% of the revenues from natural gas sales in the third quarter of 2008. Chevron U.S.A. Inc. is assessing its alternatives and the economic feasibility for restoring production at the property. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Eugene Island 339. Generally, if production ceases from an outer continental shelf lease, like that for Eugene Island 339, production must be restored or drilling operations must commence within 180 days of the cessation, or the lease will be terminated. A lease operator may seek approval from the regional supervisor of the Mineral Management Service to allow additional time to restore production. There can be no assurance that production at Eugene Island 339 will be restored within such 180 day period, or that the lease operator will seek any such extension, or that, if sought, such an extension would be granted, or that, if so granted, that production will be restored within the extended time period.

While Hurricane Ike caused limited surface damage to the facilities at Ship Shoal 182/183, all of the wells at Ship Shoal 182/183 have been shut-in following hurricane-related damage to a third-party transporter's natural gas pipeline. The more productive wells on the properties produce both oil and gas, and there is currently no downstream transmission available for any gas produced from the wells. Crude oil revenues from Ship Shoal 182/183 represented approximately 50% of the crude oil and condensate revenues for the royalty properties in 2007 and for the third quarter in 2008. Ship Shoal 182/183 contributed approximately 77% of the revenues from natural gas sales from the royalty properties in 2007 and approximately 39% of the revenues from natural gas sales in the third quarter of 2008.

Each of Chevron U.S.A. Inc. and the natural gas transporter is assessing its alternatives and the economic feasibility for restoring pipeline transportation. At this point in time, there can be no assurance as to how or when, or if at all, production may be restored at Ship Shoal 182/183.

The Trust will be making its previously announced third quarter distribution on October 10, 2008 to unit holders of record on September 30, 2008. However, based on the damage caused by Hurricane Ike, the Trust's scheduled distribution for the fourth quarter of 2008 is expected to be severely negatively impacted, and there may not be sufficient net proceeds from the royalty properties to make any distribution. Future distributions are also likely to be severely negatively impacted. At this time, the ultimate outcome of these various matters cannot be determined.

What Does This Mean?

Eugene Island 339 platform/rigs are destroyed. 48% oil revenue and 45% gas revenue is gone. TELOZ is responsible for its part of expenses, for well closure expenses, if Chevron (the operator) decides to permenantly close down Eugene Island 339 well heads in the Gulf.

The other major producing properties in TELOZ are Ship Shoal 182/183, and the third party transportation lines were damaged. Investors will have to be patient and wait - to see when transportation lines are resumed. Other options are possible to store oil & gas in tanker ships and shuttle back & forth - but again - it will be up to Chevron (the operator) to decide.

In my opinion, the next three or four distributions will be severely impacted. With EI 339 destroyed, expect half the dividend as historical dividends. And then, with the transmission line damaged for SS 182/183, no oil or gas sales from SS 182/183, expect nothing. TELOZ still has to work with the operator and pay its fair share of expenses.

Therefore I expect a zero to 15 cent dividend for the next three or four quarters. One might consider other oil & gas trusts that are not Ike impacted. Consider MTR, PWE, PGH and HTE. I was able to pick up MTR a week ago, at a very low spot.

Hurricane Ike has hit TELOZ between the eyes!

Stock position: Long MTR, HTE.

Comments

[h20brain:]

Mike Ulrich who is the Trust Officer for TELOZ is also the Trust officer for LL&E Royalty Trust (LRT). Some of LRT's offshore properties were impacted by Rita and Katrinia and an activitst hedge fund has been pressing Ulrich to prusue insurance claims that Ulrich has not collected on for over 3 years! I wonder if TELOZ has similar claims. Also, it seems that LRT may be trading at a substantial discount to the value of its assets according to the 13D filled by Robotti and Co. Check out the letter attached as an exhibit:

www.sec.gov/Archives/e...

2008 Nov 03 10:56 PM