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From the Global Oil and Gas Patch: November 30, 2010

Current positions in the Hedgeye Virtual Portfolio: long LUKOY, long CEO

Chart of the Day……

Daily Oil & Gas Perspectives - nov 30 chart

Key Metrics……

Daily Oil & Gas Perspectives - nov 30 table

North American Energy News……

Husky to Buy Assets from XOM……Husky Energy (HUSKF ADR) – Canada’s 3rd largest oil producer and refiner – will buy ExxonMobil’s (XOM) oil and gas properties in Alberta and British Columbia for $860M.  The deal will add 21,900 boe/d and 113 Mboe of reserves to Husky’s portfolio.  Husky raised its 2011 capex budget by 20%.  The company will raise $1B through an equity offering.  (Reuters)

Hedgeye Energy’s Take: Husky has struggled the last few years to grow through the drill-bit and XOM’s desire to shed non-core and conventional assets fits HUSKF’s immediate needs. Additionally, the company intends to scrap a spin-off of its South China offshore discoveries in Liwan-3 Block and will submit a joint development plan with CNOOC (CEO).

BP to Fund Oil Sands Project……BP (BP) will provide the first $2.5B for the Sunrise oil sands project in northern Alberta, Canada – which it owns a 50% stake in.  They will collaborate with Husky Energy (HUSKF ADR) on the project, which cancelled plans in Southeast Asia to focus on the Canadian sands (see above post).  This is BP’s first major commitment since the Deepwater Horizon disaster.  (Financial Times)

Hedgeye Energy’s Take: As BP is forced to sell assets for Macondo GOM liability, oil sands, as a low political and exploratory risk environment, looks increasingly appealing.  Husky and BP have a joint venture: HUSKF works in the Sunrise oil sands and BP contributes its Ohio Toledo Refinery.

Seadrill Increasing Investment……Led by billionaire John Fredriksen, Seadrill (SDRL) has invested $2B in the past two month on oil rigs, leading the jump in orders as safety concerns over BP’s spill has sparked demand for newer, safer platforms.  Deepwater rig companies like Seadrill and DryShips (DRYS) have ordered 20 deep and shallow-water rigs since BP’s disaster, raising global orders by 22%.  Deepwater rig rates have stabilized after a 30% plunge after the Macondo spill and may return to pre-recession levels in three years.  (Bloomberg)

Hedgeye Energy’s Take: New rig demand is being driven by the need to retire the majority of the existing aging rig fleet, the need for more complex rigs to operate in deeper waters and more remote and difficult terrain, and an increasing concern for operating rig safety post-Macondo.

In U.S. West, Oil Rush could Exacerbate Gas Glut…… The promise of oil and liquids-rich shale plays in the U.S. West has resulted in a rush of E&Ps to the region, and some analysts believe the production of associated gas could exacerbate regional competition in a market already awash in gas.  (Platts)

Hedgeye Energy’s Take: We have voiced this concern in earlier energy notes as a very real issue, that will continue to weigh on natural gas prices into 2012. This is a particular concern in the Rocky Mountain areas that are oversupplied with gas and are hot targets for liquids plays.

World Energy News……

Lukoil Beats Estimates……Russian oil giant Lukoil (LUKOY ADR) reported Q3 net profit of $2.82B vs. Reuters $2.11B.  Revenue and EBITDA also beat estimates and year-ago levels.  The company says it plans to gradually increase their dividend.  The profit increase was due to higher oil prices, a $438M one-off gain, and a large disposal of crude from the company’s inventory, the company said.  (WSJ)

Hedgeye Energy’s Take:  We are currently long LUKOY in the Hedgeye Virtual Portfolio. This 87% oil weighted Company is living within its means, with 2010 net cash flows (NCF) after capital spending expected to grow nearly threefold to ~$7.70/ADR, and 2010 expected earnings to soar ~40% to ~$11.80/ADR. Stock trades at an attractive eight times enterprise value to NCF.

Russia Approves XOM Budget……ExxonMobil’s(XOM) production budget in Russia’s offshore Sakhalin 1 field has been approved by the government.  The budget calls for a long-term development until 2055 under which expenditures are to be $95.3B.  The Kremlin monitors the budget strictly because they share in the revenue – an increase in expenditures leads to a cut in the state’s share of revenue.  (Platts)

Hedgeye Energy’s Take: Despite rumors that XOM would be replaced as the operator in Sakhalin (30% working interest) due to project cost increases, XOM’s technical expertise is too important to the development of the complex offshore Sakhalin fields and will remain the leader there.  The Kremlin realizes how critical production growth from the Sakhalin Fields has been to Russian domestic production – one of their few fields not reporting a net decline.

Anadarko Finds More Mozambique Gas……Anadarko Petroleum Corp (APC) has made its third gas discovery in offshore Mozambique this year, making the total great enough to warrant an LNG development.  This will be East Africa’s first LNG project.  (Platts)

Hedgeye Energy’s Take: Abundant gas resources in offshore East Africa are valuable because the region is an attractive export destination for gas-hungry Asia.

Lou Gagliardi

Kevin Kaiser