Rob Black's Energy Market Roundup (BHI, KMG, ESV)

by: Rob Black

Kerr-McGee (KMG RETIRED) raised its capital budget for 2006 by $250 million (to about $2.35 billion) to allow for a higher level of drilling and infrastructure activity which should lead to a higher growth profile.

Some $170 million of the increase is targeted to the low-risk drilling inventory in the Greater Natural Buttes area in the Rockies. About $50 million of additional capital is dedicated to upgrading the infrastructure in the Uinta Basin, including the construction of a 250 mmcf/day natural gas processing plant (expandable to 500 mmcf/day) and upgrading the existing gathering system. These changes have raised the expected production growth rates for both 2006 and 2007.

Based on the mid-point of the new forecast range, we look for KMG to show volume growth of about 6% in 2007, and this may be on the conservative side. As a result of this new volume profile analysts have raised 2006 and 2007 estimates (cash flow/share in 2007 up almost $1/share).

An employee of Baker Hughes (NYSE:BHI) was shot dead in Nigeria, raising concern it will take longer than expected for Africa's largest oil producer to resume pumping crude at full capacity.

Clear Asset Managment initiates Ensco (NYSE:ESV) with a Buy and a $60 target. The firm is saying with oil prices over $70 per barrel, more difficult properties have become more economically feasible to drill and ESV has been there to capitalize on this opportunity.

Dept of Energy petroleum inventories report for the week ended May 5 showed gasoline inventories rising above consensus, as materially higher production and imports overwhelmed seasonally robust demand. The very strong industry refined product prices and refining margins motivated producers to maximize supply. Calculations suggests a healthier demand outlook, and while the large week-over-week increase in supply concerns them somewhat, with summer driving season less than one month away and demand holding up relatively well given the high price environment, expect refining margins to stay relatively strong over the next few months.