TUESDAY, JULY 31, 2012

SECTOR COMMENTARY

Energy stocks ended mostly lower, following the broader markets as the indices continued to trade modestly lower after yesterday's small losses. The drillers and the oil services were the biggest losers, while the refiners bucked the negative trend and closed higher as Valero Energy increased 5% after reporting strong earnings and said it would spin-off its retail store unit.

W&T Offshore was another stock that rallied strongly, gaining 12%, after posting better-than-expected earnings. The company said that both production and pricing were strong. Additionally, during the conference call the company said that it might spend up to $3 billion on acquisitions by the end of the year.

Crude oil prices fell for a second straight day on expectations that any central bank stimulus may be insufficient to revive economic growth, even as hopes dimmed that the U.S. Federal Reserve will act this week to boost the economy. WTI crude dropped $1.72 or 1.92% to $88.06. "Oil prices are lower on the paradox of slightly better economic data in the form of the Chicago PMI and the consumer confidence reading," said John Kilduff, a partner at Again Capital LLC in New York.

Natural gas futures closed slightly lower by $0.005 or 0.16% to $3.209 after reaching a new seven-month high of $3.277 earlier in the session. The front month contract has gained nearly 15% in the last two weeks, driven by widespread hot weather that spurred air-conditioning demand and slowed storage builds to below average for 13 weeks.

U.S. INTEGRATEDS

(Late Monday) Reuters - Exxon Mobil confirmed on Monday that planned work had wrapped up at its 149,500 barrels-per-day (bpd) refinery in Torrance, California.

Reuters - Exxon Mobil on Tuesday warned of planned flaring at its 149,500-barrel-per-day Torrance, California refinery, according to a filing with the South Coast Air Quality Management District.

INTERNATIONAL INTEGRATEDS

• BP reported 2Q’12 ADS of $1.16.

Reuters - BP Plc reported that a process unit had tripped releasing sulfur dioxide at its 225,000 barrel-per-day (bpd) Cherry Point, Washington, refinery on Monday.

Press Release – BP Plc today reported its quarterly results for the second quarter of 2012. Underlying replacement cost profit for the quarter, adjusted for non-operating items and fair value accounting effects, was $3.7 billion, compared with $5.7 billion for the same period in 2011 and $4.8 billion for the first quarter of 2012. Non-operating items included a number of significant impairments, totaling $4.8 billion on a pre-tax basis, relating primarily to reductions in value of US shale gas assets, certain refineries in the company's portfolio and the decision to suspend the Liberty project in Alaska. BP announced a dividend for the quarter of 8c per ordinary share.

Reuters - BP Plc plans to bring the largest of three crude units at its Whiting, Indiana, refinery offline in the fourth quarter as part of a $4 billion upgrade project at the refinery, the company said in its second-quarter earnings conference call.

Reuters - Nigeria's state oil firm the NNPC and a local company have taken over an onshore oil block operated by Royal Dutch Shell, the NNPC said in a statement on Tuesday.

(Late Monday) Deutsche Bank downgraded Statoil to ‘Hold’ from ‘Buy’.

Nomura increased its rating on Total S.A. to ‘Neutral’ from ‘Reduce’.

Press Release - Marathon Oil Corporation announced today that its subsidiary Marathon Oil KDV B.V. has closed farmout agreements with subsidiaries of Total S.A. under which Total has acquired 35 percent working (43.75 percent paying) interests in the Harir and Safen blocks in the Kurdistan Region of Iraq. With this transaction, Marathon Oil reduces its stake to a 45 percent working (56.25 percent paying) interest in each of the two blocks while remaining operator of the Harir block and exploration operator of the Safen block. A Total subsidiary will become the operator of any development of the Safen block. The Kurdistan Regional Government continues to have a fully carried 20 percent interest in each of the blocks.

US E&PS

• APC reported 2Q’12 EPS of $0.85 versus Thomson Reuters I/B/E/S estimate of $0.77.
• CIE reported 2Q’12 EPS of $(0.11) versus Thomson Reuters I/B/E/S estimate of $(0.09).
• CRK reported 2Q’12 EPS of $(0.43) versus Thomson Reuters I/B/E/S estimate of $(0.34).
• FST reported 2Q’12 EPS of $0.06 versus Thomson Reuters I/B/E/S estimate of $0.05.
• WTI reported 2Q’12 EPS of $0.28 versus Thomson Reuters I/B/E/S estimate of $0.23.

(Late Monday) Press Release - Anadarko Petroleum Corporation announced a second-quarter 2012 net loss attributable to common stockholders of $380 million, or $0.76 per share (diluted). These results include certain items typically excluded by the investment community in published estimates. In total, these items decreased net income by approximately $804 million, or $1.61 per share (diluted), on an after-tax basis.(1) Cash flow from operating activities in the second quarter of 2012 was approximately $2 billion, and discretionary cash flow totaled $1.951 billion.

Press Release - Cobalt International Energy, Inc. today announced a net loss of $141 million, or $0.35 per basic and diluted share, for the second quarter of 2012, compared to a net loss of $19 million, or $0.05 per basic and diluted share, for the second quarter of 2011. The current quarter included $99 million, or $0.24 per share, in charges for the impairment of expenditures associated with the Ligurian exploration prospect including $42 million in leasehold expenditures and $57 million in drilling related-expenditures for the Ligurian #1 and Ligurian #2 exploratory wells. Of the $99 million in charges, $69 million was incurred in prior quarters.

(Late Monday) Press Release - Comstock Resources, Inc. and Kohlberg Kravis Roberts & Co L.P. announced the signing of a definitive participation agreement providing for the participation of KKR in Comstock's future development of its Eagle Ford shale acreage in Atascosa, Frio, Karnes, LaSalle, McMullen and Wilson Counties in South Texas. Under the terms of the participation agreement, KKR will have the right to participate for one-third of Comstock's working interest in wells drilled on Comstock's 28,000 net acres in exchange for paying $25,000 per acre through a drilling carry for the net acreage being acquired by KKR. Comstock expects to ultimately develop most of its acreage based on spacing units of approximately 80 acres. The agreement will apply to wells spud by Comstock on or subsequent to March 31, 2012. Comstock will retain all of its interest in wells spud prior to March 31, 2012. Subject to certain conditions, KKR has committed to providing drilling carry equivalent to $25,000 per acre for the next 100 wells drilled on Comstock's Eagle Ford shale acreage and can continue to participate in additional wells drilled on the acreage for the same drilling carry.

(Late Monday) Press Release - Comstock Resources, Inc. today reported financial and operating results for the three months and six months ended June 30, 2012. Low natural gas prices continue to adversely impact the Company's financial results in the second quarter of 2012 as Comstock reported a net loss of $10.3 million or 22¢ per share as compared to net income of $3.9 million or 8¢ per diluted share for the three months ended June 30, 2011. The second quarter of 2012 results included a $5.3 million ($3.4 million after tax, or 7¢ per diluted share) impairment on certain natural gas properties as well as a gain of $20.3 million ($13.2 million after tax or 28¢ per diluted share) from the sale of oil and gas properties. Results for the three months ended June 30, 2011 included a gain on sale of marketable securities of $8.5 million ($5.5 million after tax or 12¢ per diluted share).

Wells Fargo raises Concho Resources Inc to ‘Outperform’ from ‘Market Perform.’

Reuters - Energy XXI today provided estimates of its fiscal 2012 year-end reserves and an operations update, including production and recent exploration and development results.

(Late Monday) Press Release - Forest Oil Corporation announced financial and operational results for the second quarter of 2012. Net sales volumes of 335 MMcfe/d were unchanged from the second quarter of 2011 and decreased 1% from the first quarter of 2012 due to 8 MMcfe/d of production downtime associated primarily with third-party plant curtailments in the Panhandle Area. Oil net sales volumes of 8.3 MBbls/d organically increased 27% from the second quarter of 2011 and decreased 1% from the first quarter of 2012. Adjusted net earnings of $7 million decreased 76% from the corresponding 2011 period. Adjusted EBITDA of $122 million decreased 14% from the corresponding 2011. Period. Adjusted discretionary cash flow of $89 million decreased 15% from the corresponding 2011 period.

Press Release - Magnum Hunter Resources Corporation announced today an operational update on each of the Company's upstream unconventional resource plays for the second quarter of 2012 which includes (i) the Eagle Ford Shale, (ii) the Williston Basin, and (iii) the Appalachia/Marcellus/Utica Shales. Additionally, the Company provided an operational update for the Company's midstream division, Eureka Hunter Pipeline, LLC ("Eureka Hunter"). Magnum Hunter achieved a record average production rate of 12,893 barrels of oil equivalent per day ("Boepd") during the second quarter of 2012. This represents a 161% increase from the production reported for the second quarter of 2011. Although second quarter 2012 production only represents a 2% increase on a Boepd basis as compared to first quarter 2012 production, the Company's oil/liquids production increased 32% to 5,862 Boepd in the second quarter of 2012 from 4,454 Boepd in the first quarter of 2012. This substantial growth in oil production is consistent with the Company's strategic shift in its focus as it relates to its capital budget program.

Press Release - Marathon Oil Corporation announced today that its subsidiary Marathon Oil KDV B.V. has closed farmout agreements with subsidiaries of Total S.A. under which Total has acquired 35 percent working (43.75 percent paying) interests in the Harir and Safen blocks in the Kurdistan Region of Iraq. With this transaction, Marathon Oil reduces its stake to a 45 percent working (56.25 percent paying) interest in each of the two blocks while remaining operator of the Harir block and exploration operator of the Safen block. A Total subsidiary will become the operator of any development of the Safen block. The Kurdistan Regional Government continues to have a fully carried 20 percent interest in each of the blocks.

Capital One cut its rating on Southwestern Energy to ‘Neutral’ from ‘Add’ based on valuation.

(Late Monday) Press Release - W&T Offshore, Inc. today announces financial and operational results for the second quarter of 2012. Some of the highlights include: For the second quarter of 2012, production volumes averaged 48,610 barrels of oil equivalent per day, or 292 MMcf of natural gas equivalent per day, representing a 6.8% increase over the same quarter in 2011. Production volumes were split 33% oil, 13% natural gas liquids ("NGLs") and 54% natural gas. Our average realized sales price was $106.04 per barrel for oil, $44.27 per barrel for NGLs and $2.49 per Mcf for natural gas. Revenues for the quarter were $215.5 million. Oil sales represented 71% of total revenues while NGLs represented 12% and natural gas represented 17% of total revenues. Net income was $53.6 million and earnings per share were $0.70. Excluding special items described below, net income was $21.0 million and earnings per share were $0.28 per share.

OIL SERVICES

• SPN reported 2Q’12 EPS of $0.83 versus Thomson Reuters I/B/E/S estimate of $0.82.

(Late Monday) Press Release - Superior Energy Services, Inc. announced net income from continuing operations of $142.8 million, or $0.90 per diluted share, and net income of $141.9 million, or $0.89 per diluted share, on revenue of $1,243.3 million for the second quarter of 2012. Non-GAAP adjusted earnings from continuing operations was $131.6 million, or $0.83 per diluted share, and excludes a $17.9 million pre-tax gain on sale of an equity-method investment.

DRILLERS

Press Release - Ensco plc took delivery of the seventh and final rig in the ENSCO 8500 Series® on 30 July at the Keppel FELS shipyard in Singapore, where all the rigs in the series have been built. The rig is contracted to Anadarko for work in the U.S. Gulf of Mexico starting in December.

REFINERS

• MPC reported 2Q’12 EPS of $2.53 versus Thomson Reuters I/B/E/S estimate of $2.51.
• VLO reported 2Q’12 EPS of $1.50 versus Thomson Reuters I/B/E/S estimate of $1.43.

Press Release - Marathon Petroleum Corporation today reported second quarter net income of $814 million, or $2.38 per diluted share, compared with net income of $802 million, or $2.24 per diluted share, in the second quarter of 2011. For the second quarter of 2012, net income adjusted for special items was $867 million, or $2.53 per diluted share, compared with net income adjusted for special items of $819 million, or $2.29 per diluted share for the second quarter of 2011.

(Late Monday) Press Release - Phillip D. Brady, president of the National Automobile Dealers Association, has been named senior vice president of Government Affairs for Phillips 66.

Reuters - Sunoco Inc plans to restart the gasoline-making fluid catalytic cracker at its 330,000 barrel per day Philadelphia refinery on Tuesday, a source familiar with operations said.

Press Release – Valero Energy Corporation today reported net income attributable to Valero stockholders from continuing operations of $831 million, or $1.50 per share, for the second quarter of 2012, compared to net income attributable to Valero stockholders from continuing operations of $745 million, or $1.30 per share, for the second quarter of 2011.

Press Release – Valero Energy Corporation reported today that its Board of Directors authorized company management to pursue a separation of Valero's retail business from the remainder of Valero. The company is currently reviewing several potential separation transactions, including a tax-efficient distribution of the retail business to Valero shareholders. Credit Suisse Securities (USA) LLC is advising Valero in connection with this process.

Reuters - Valero Energy said Tuesday it will bring the hydrocracker at its 290,000-barrel-per-day refinery in Port Arthur, Texas to full rates in the fourth quarter after completing work in the third quarter.

Reuters - Valero Energy Corp said on Tuesday there will be two maintenance turnarounds in the third and fourth quarters of 2012, at its Houston refinery and Pembroke refinery.

Reuters - Valero Energy said it expects to resume normal operations at its 125,000 barrels-per-day refinery in Meraux, Louisiana, at end of August after it performs work on the plant following a fire last week.

MLPS

Press Release - Cheniere Energy Partners LP announced that its Board of Directors has made a positive final investment decision to construct the first two liquefaction trains of the Sabine Pass liquefaction project. FID is subject to the closing of the debt financing, funding of the initial equity investment by Blackstone Energy Partners L.P., Blackstone Capital Partners VI L.P., and certain affiliates, and funding of the remaining equity investment by Cheniere Energy Inc.

Press Release - Enbridge Energy Partners LP declared a cash distribution of $0.5435 per unit payable August 14, 2012 to unitholders of record on August 7, 2012.

Press Release - Enbridge Energy Partners LP announced adjusted net income of $96.8 million for the second quarter of 2012 (adjusted net income per unit of $0.23). The net income was $10.9 million lower than the same period from the prior year primarily due to the recent decline in NGL prices which negatively impacted the earnings of its natural gas business, and was partially offset by the higher transportation revenues from all of the major liquids systems as a result of increased system utilization.

Reuters - Enbridge Inc said on Monday the repair of the 318,000 barrel-per-day Line 14, shuttered after spilling more 1,000 barrels of crude oil in Wisconsin, may be completed as early as Tuesday.

Press Release - Holly Energy Partners LP reported financial results for the second quarter of 2012. For the quarter, distributable cash flow was $34.5 million, up $13.1 million, or 61% compared to the second quarter of 2011. Based on these results, HEP announced its 31st consecutive distribution increase on July 25, 2012, raising the quarterly distribution from $0.895 to $0.910, representing a 5% increase over the distribution for the second quarter of 2011. Net income for the second quarter was $23.2 million ($0.63 per basic and diluted limited partner unit) compared to $19.0 million ($0.69 per basic and diluted limited partner unit) for the second quarter of 2011.

REFINERS

Credit Suisse cuts Boardwalk Pipeline Partners LP to ‘Neutral’ from ‘Outperform’.

Reuters - Buckeye Partners LP said the NORCO west line (151L) was shut down on Monday evening for some work.

Reuters - The U.S. pipeline regulator on Tuesday blocked Enbridge Inc from restarting its Line 14, calling for more testing and evaluation of the pipeline after a spill in Wisconsin last week.

Reuters - Enbridge Inc could get approval from U.S. regulators to restart the Line 14 crude oil pipeline by Wednesday evening after a spill in Wisconsin forced its closure, a local official said.

MARKET COMMENTARY

Stocks edged lower with traders' sights set again on Wednesday's Federal Reserve statement on the economy and a possible new round of stimulus.

TOP NEWS

U.S. home prices rose for the fourth month in a row in May, suggesting the recovery in the housing market continued to gain traction.

Joblessness in the euro zone hit its highest level since the single currency was born, a further sign of economic desperation as hopes erode that the bloc will be saved by its central bank this week.

BP cemented its status as problem child among the world's top oil companies with unexpectedly weak quarterly results, slashing $5 billion off the value of its U.S. assets and undershooting forecasts at operating level.

The refining company Valero posted a higher quarterly profit that topped expectations and said it would split off its retail business.