Global oil and gas volume grew 16.3% to 73.8 billion barrels of oil equivalent, or boe, in 2010 and is expected to grow at the rate of 24.4% to reach 91.8 billion boe by 2015. In addition, natural gas production reached an all-time high of 3.929 trillion cubic feet in 2012.
This momentum is going to help Southwestern Energy(SWN, Financial), which is seeking growth by enhancing its drilling activities and expanding in high quality natural gas fields.
First quarter of the Company demonstrated the earnings and cash flow combined from Fayetteville and Marcellus assets. The Company attained record production and earnings infirst quarter, and it is focused to add more value every day through existing drilling and midstream operations while keeping the operating costs low. Southwestern Energy is currently generating 80% of its total production from the Fayetteville Shale region, located in Northern Arkansas, which offers superior quality natural gas. The geography of this region allows for easy gas extraction, which helps the company explore additional natural gas from Fayetteville. The company plans has invested around $900 million to increase Fayetteville Shale production.
Further, the company has around 6,000 well locations in this region ready for drilling activities and it plans to drill nearly 400 wells to 450 wells per year. It currently holds more than 900,000 acres from which it is producing two bcfepd. The company placed 102 wells in the first quarter at the cost of $2.1 million per well, its lowest cost ever. It is expected to use same methodology to drill its future wells, reducing the drilling time from 5.4 days to 5 days. It anticipates the average initial production rate of these new wells to be around 3.3 million cfepd, and the reduced cost will enable the company to beat its hurdle rate.
Renewal Diesels Market
With the steady exhaustion of non-renewable energy sources, demand for renewable energy sources is showing strong growth. Research forecasts global biofuels production will grow at a compound annual growth rate (CAGR) of 6% between 2013 and 2023. The research firms also anticipate that total biofuels production will reach 62 billion gallons by 2023 or 5.9% of global transportation fuel production from fossil sources. Valero Energy’s (VLO, Financial) subsidiary, Diamond Alternative Energy, joined with Darling International (DAR, Financial) to form a Diamond Diesel Green project. The project was completed last, and is ready for operation. The plant will process animal fat and used cooking oil into renewable diesel, which will have properties similar to those of petroleum based diesel.
Darling International has been recycling waste material for 130 years and the company has access to the available feedstock for this project. The processed diesel will contain less carbon and will reduce greenhouse gases by 80%, as compared to petroleum-based diesel. The plant will process 9,300 barrels per day of animal fat and used cooking oil, which will clear Darling International’s inventory.
In addition, this plant will provide high quality diesel, which will help Darling International meet the Renewable Fuel Standard 2, or RFS2, norms. These norms emphasize the reduction of greenhouse gases from the use of renewable fuel. By meeting the requirements of the RFS2 norms, Darling International will receive $1 per gallon of diesel as a tax credit. This project is expected to contribute towards incremental net income margins from 7.7% in 2012 to 8.8% in 2013, followed by 10.5% in 2014.
Other partner, Valero will operate this plant and transport the diesel through its strong network of pipelines. The global demand for renewable diesel is expected to increase from 21 billion liters in 2013 to 24 billion liters in 2014. This plant will produce 530 million liters of renewable diesel, which implies that this project alone will supply 2.1% of global demand, benefiting the company.
Crude oil prices are increasing along with demand and, conversely, natural gas prices are falling. With the high demand for crude oil, Valero monetized the opportunity by opening an additional hydrocracker unit at its existing refinery, St. Charles. Hydrocracking is a technique for refining feedstock into oil products by using pressure in feedstock. This new unit will convert natural gas into crude oil with the Hydrocracker process. Valero has spent $1.6 billion on this project, which will increase the profits of the company by providing high priced crude oil, made with low price natural gas.
Conclusion:
Southwestern Energy is focused to increase its production with varios drilling projects this will benefit the top line in the upcoming quaters.Valero will take advantage of using lower priced natural gas as a feedstock to produce high priced crude oil. Further, Valero is entering a joint venture with Darling International to produce high demand renewable diesel. Looking at the potential of the above companies,
I recommend a buy for all these stocks.
