Warming Up

Six new Eagle Ford wells were completed during 2Q and are producing, with an average peak gross daily production rate of 884 barrels of oil equivalent per day (boe/d), trailing the average initial production rate of 1,001 boe/d for PVA's initial 44 wells in the play. A third rig will be added to the play during 3Q. PVA has spud (started to drill) its initial test well in its Viola Lime prospect in Jefferson County, Okla., with results expected during 3Q. PVA holds 9,600 acres prospective to the play.

PVA reported 2Q12 CFPS/EPS of $0.98/($0.23), ahead of our estimates of $0.94/($0.33) and the Street at $0.90/($0.28), with the beat driven by higher liquids production, stronger oil prices, and a production taxes rebate. 2Q production averaged 19.6 million barrels oil equivalent/day (mboe/d), in line with our estimate of 19.6 mboe/d, but with a higher percent liquids cut (45% versus 43%). Operating costs (excluding production taxes) increased 4.5% quarter-over-quarter to $1.28/mcfe (thousand cubic feet equivalent), consistent with growing oil volumes.

Jason Gammel
Macquarie
+44-20-3037-4085 
[email protected]

Royal Dutch Shell's (RDS-A, RDS-B) 2Q11 clean net income of US$6.4 billion was 1% light on consensus and 6% below our estimate. Upstream earnings of US$5.4 billion were essentially in line with our forecast (and 2% ahead of consensus). While 2Q11 production of 3,046 thousand barrel oil per day equivalent (kboepd) was down 2% year-over-year, realizations (both liquids and gas) were better than expected and clean net income of US$1.6 billion in the Integrated Gas division was up 111% year over year. Upstream net income per barrel of US$19.6/barrel oil equivalent (boe) in 2Q11 was marginally ahead of our estimates, an increase of approximately 33% on 1Q11. 

While this strong upstream result was aided by higher trading contributions, we take encouragement from signs that the major projects in Shell's upstream portfolio are progressing to plan. In particular, we note LNG sales volumes of 4.81 metric tons, reflecting the successful ramp-up of Qatargas 4 during the quarter. 

Given our underlying macro assumptions and expectations for a tightening LNG market in Asia-Pacific, we believe similar margins are sustainable over the remainder of 2011 (and beyond). This strong upstream result is especially stark in contrast to BP's near-term operational issues in the Gulf of Mexico.

Clean net income in Oil Products of US$551 million was materially below consensus of US$900 million and our estimate of US$960 million. Shell highlighted especially weak refining margins in Europe and Asia combined with lower volumes due to planned and unplanned maintenance. Group refinery intake of 2.8 million barrels per day (mmb/d) in 2Q11 was down 14% year over year, while refined volumes in Europe were down 20% year over year to 1.1 mmb/d. 

The weak result in oil products was partially offset by clean net income of US$530 million in chemicals, which was 24% higher than our estimate. Despite ongoing margin pressures in refining, management stressed that they now believe their U.S. chemicals business is well placed to continue delivering the strong results reported over the last three quarters.

Michael Gaugler
Brean Murray Carret & Co. 
212-702-6539 
[email protected]

Looking forward, our view is that [Southwest Gas (SWX)] can rectify its issues at [subsidiary] NPL in a timely manner, and that it will benefit from new rates in Nevada and lower interest expenses from a recent refinancing, all of which should allow the company to make our 2013 earnings projection. We're maintaining our Buy rating and $49 target price, based on the shares attaining a P/E level of 17 times our 2013 EPS estimate of $2.87. Our risks to target include regulatory environment, weather impacts, inherent operational risks, and proposed climate change legislation.

SWX expects its General Rate Case filed in April of this year to be wrapped up in October, with new rates taking effect in November of this year. 

SWX is requesting $25.4 million in Southern Nevada and $1.5 million in Northern Nevada, with an ROE of 10.65% and a common equity ratio of 53.6%. It also seeks to continue the revenue decoupling mechanism currently in place.

Taking all of the aforementioned into account, we expect the shares to be range-bound ($41-$45) at least until the 3Q12 results are released in mid-November, at which time management can provide a solid update on NPL with several months under new leadership. At that point an opportunity exists to lower the risk profile, and focus solidly on 2013 for valuation purposes, which we're doing now. We're maintaining our Buy rating and $49 target price, based on the shares attaining a P/E level of 17 times our 2013 EPS estimate of $2.87.