Jefferies- Damage to Gulf Energy Facilities Likely 'Worse Than We Know'
"We could raise our forecast again. Contacts we have made in the diving, pipelay and service sectors suggest that damage to infrastructure is likely worse than any of us knows, and repairs may extend well into 2006, arguing for higher prices than we have forecasted," wrote Jefferies analyst Frank D. Bracken III in an "Equity Research" report on Tuesday.
"Further increases to our price forecast may become necessary, considering that: 1) Katrina moved more directly over infrastructure than did [Hurricane] Ivan, and 2) assessments of damage we received over the weekend [were] alarming," he said.
"We believe Katrina is mostly likely to remove 200-300 Bcf of natural gas from the market in the remainder of 2005, and U.S. gas output will be reduced by 0.2 to 0.4 Bcf/d in 2006 due to damage to important platforms and pipelines, eliminating 75 to 200 Bcf of supplies from U.S. market in 2006," Bracken noted. "We now see U.S. gas storage peaking at 3,050 to 3,150 Bcf on Oct. 31..., leaving the U.S. market tighter going into winter."
Jefferies "[has] severely curtailed production out of most of our Gulf of Mexico producers in September, and to lesser extents in October through December," he said. "We have also reduced our 2006 production estimates for three of our Gulf of Mexico producers, based on damage we know to have occurred and to a lesser extent, damage we expect to be announced." The producers are Remington Oil & Gas, W&T Offshore and Energy Partners.
Despite the severe damage that Katrina inflicted onshore, "we believe that the offshore rig industry actually emerged in fairly good shape with minor damage on several rigs and severe damage on six rigs. In all, it appears that roughly 16 rigs out of 132 active rigs (excluding platform rigs) in the Gulf incurred some sort of notable damage as a result of the storm, with as many as six likely to be total constructive losses," Bracken noted.
"In addition to the jack-up Rowan New Orleans, which has apparently sunk, we have been able to confirm severe damage that will likely result in the total constructive loss of the jack-up Ocean Warwick as well as to four platform rigs. The most extensive damage to a jack-up or floater likely to remain in the active fleet was to the ultra-deepwater semisub Deepwater Nautilus, which incurred significant damage to its mooring system and subsea well-control system. Transocean is uncertain how long it will take to repair damage to the Deepwater Nautilus, but we believe that the rig could be down at least three months."
Although the loss of two jack-ups is not inconsequential, "it appears likely that 90-95% of the Gulf of Mexico rig fleet will likely...return to work within the next two weeks. However, we should also note that getting all these rigs back out in the field and operating them over the next few months will likely prove to be a more costly and time-consuming operation than most think. In our view, the two biggest constraints to the sector near term will be logistics as well as locating and accommodating rig crew employees that have lost their homes and/or family," Bracken said.
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