Crude-Oil Futures Settle Up After Steep Two-Day Losses

Crude-oil futures prices, battered in a sharp two-day selloff on demand worries, settled modestly higher Friday, while gasoline futures prices rebounded.

"It seems the blood-letting ran its course and the market's trying to catch its breath," said Gene McGillian, broker and analyst at Tradition Energy.

Front-month U.S. benchmark crude-oil futures prices dropped $4.58 a barrel in the previous two days, ending Thursday at a new 2013 low. Prices barely staggered to their feet after the two-day pounding, in which commodity funds shed their expectations of near-term higher prices, helped by a large jump in U.S. crude-oil inventories.

Market anxieties may not let up next week as the March-delivery contracts for reformulated-gasoline and heating-oil futures expire at Thursday's settlement and the March 1 deadline to break a government impasse and reach a deal to avoid $85 billion in automatic spending cuts looms. Failure to reach a deal likely would unnerve markets, traders said.

Light, sweet crude-oil futures for April delivery on the New York Mercantile Exchange settled 29 cents higher, at $93.13 a barrel. The contract fell 3.4%, the worst weekly performance for Nymex crude since Oct. 26, 2012.

April ICE Brent crude oil, which lost $3.99 over the previous two days, settled 51 cents higher Friday, at $114.10 a barrel. The contract lost 3% in the week, the biggest decline since the week ended Dec. 7, 2012.

Analysts at Goldman Sachs said oil prices are now "in line with fundamentals" after moving too high on "forward-looking survey data generating renewed optimism" on the global economy and oil-demand growth. The reality of "lackluster" hard data on actual demand and weak physical markets for oil brought about the selloff, the analysts said in a note.

Pressure on U.S. crude prices built when the Energy Information Administration reported domestic crude-oil stocks rose by 4.1 million barrels last week, more than twice the expected level. Stocks are now sufficient to meet nearly 27 days of current low demand from refiners, EIA data show. That is the highest level of inventory cover since March 1994, and crude-oil stocks outright are at their highest level for this time of year on EIA data beginning in 1982.

Andy Lebow, senior vice president for energy futures at Jefferies Bache, said U.S. crude now appears set to trade in a range of $90-$95 for the near term, down from the recent $95-$100 span.

Meantime, fireworks may surround the expiration of the March-delivery reformulated gasoline futures contract next week. The contract dropped 9.8 cents a gallon in the previous three days from a 20-week high, before recovering to settle 1.4% higher Friday.

Price volatility is common at this time of year as refiners walk a fine line between producing enough fuel to meet the winter-grade specification for the March contract before switching to the costlier, cleaner-burning summer-grade fuel that meets the April contract specifications.

In the last four trading days of the March 2012 contract, RBOB futures, then at a seven-month high, fell 11.05 cents, or 3.5%.

March-delivery RBOB futures rose 4.31 cents a gallon Friday, to settle at $3.0796 a gallon.

March-delivery heating oil futures, which shed 12.8 cents over the previous four sessions, settled 0.85 cent higher, at $3.1042 a gallon.

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Magellan to Buy Pipelines from Plains All American

Magellan Midstream Partners, L.P. announced Friday that it has agreed to acquire approximately 800 miles of refined petroleum products pipeline from Plains All American Pipeline, L.P. for $190 million.

"This acquisition utilizes Magellan's expertise in transporting and storing petroleum products," said Michael Mears, chief executive officer. "These pipelines are a natural extension of our existing refined products distribution system and provide new markets for Magellan to serve."

Rocky Mountain pipeline system. The acquisition includes approximately 550 miles of common carrier pipeline that distributes refined petroleum products in Colorado, South Dakota and Wyoming. The system includes 4 terminals with nearly 1.7 million barrels of storage.

Magellan also will acquire about 250 miles of common carrier pipeline that transports refined petroleum products north from El Paso, Texas, delivering products to Albuquerque, New Mexico, and transports products south to the Texas-Mexico border for delivery via a third-party pipeline within Mexico.

Management expects the acquisition to be immediately accretive to the partnership's distributable cash flow per unit, with the potential for additional growth in cash flow from the assets over time.

The acquisition is expected to close in the second quarter of 2013 subject to regulatory approvals. Management expects to fund the acquisition with cash on hand and borrowings under its revolving credit facility, if necessary.

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Fitch Unlikely to Alter Petrobras Credit Rating

RIO DE JANEIRO - Brazilian state-run energy giant Petrobras is borrowing heavily to develop massive new oil fields, but the investments should result in a cash surge that offsets any concerns about the recent rise in the company's debt levels, said Ana Paula Ares, senior director of corporate finance at Fitch Ratings.

Petrobras's finances have come under increasing scrutiny after a series of billion-dollar losses in the company's refining unit, which has been hurt by subsidized imports of gasoline and diesel fuel. The company sells the expensive imported fuels at a loss in the domestic market because of government reluctance to raise fuel prices for fear of stoking inflation.

The losses have undermined Petrobras's earnings and called into question the company's ability to carry out ambitious plans to spend $237 billion through 2016 developing some of the largest oil discoveries made in the past 20 years. With Petrobras spending more than it makes, net debt jumped more than 30% in 2012 from 2011 while the company's cash on hand--once flush with proceeds from a $70 billion share offer in 2010--fell more than 20% to $13.5 billion.

Still, "the deterioration was pretty much in line with what we were expecting," Ms. Ares said in an interview. "At this point, it doesn't impact the rating." Petrobras is in the midst of a significant exploration and investment program, so the increased leverage isn't necessarily a red flag, she added.

Fitch rates Petrobras triple-B with a stable outlook, two notches into investment grade and the same as Brazil's sovereign credit rating. While Ms. Ares doesn't anticipate any changes to the rating over the next 12 to 18 months, a change in the outlook for Brazil's sovereign rating to negative or an unexpected event could lead Fitch to re-evaluate Petrobras, she said.

Part of the credit-rating agency's confidence in Petrobras is based on its potential to quickly boost crude-oil production and reserves in coming years, Ms. Ares said. Petrobras's long history of exploration success, especially the discovery of multibillion-barrel oil fields buried under a thick layer of salt off Brazil's coast, make the company unique among its state-run and private-sector peers, she said.

Petrobras is "able on a yearly basis to replace in reserves the volume it has produced," Ms. Ares noted. Petrobras said that it ended 2012 with reserves of 12.3 billion barrels of oil-equivalent under Securities and Exchange Commission criteria, enough to keep Petrobras pumping oil for 15 years if it never discovered another drop. But the reserve figures currently include only a fraction of the newfound fields and should grow dramatically in coming years.

Petrobras is counting on the new fields to more than double current output to 4.2 million barrels per day by 2020. Fitch, meanwhile, expects crude oil production to start picking up in 2015, which should lead to a recovery in the company's finances as the new output generates cash, according to Ms. Ares.

The political tussle over domestic fuel prices, however, has Fitch watching closely, Ms. Ares said. Fuel-price increases granted in January and last year aren't enough to reverse Petrobras's losses on imports, but the hikes do suggest that the government is paying attention to Petrobras's losses, she said.

"There is a strong incentive for the government to have Petrobras performing and repaying its debt because of the significant financing resources Petrobras will need in coming years to fund its investments," Ms. Ares said.

Petrobras has faced similar situations where it lost money on imports in the past, only to later reap the rewards of selling local fuels at higher prices when international crude oil and fuel prices fell, she noted. The government's focus on fighting inflation, however, means future price hikes are uncertain.

"How politics play out this year will decide whether those price increases will come or not," Ms. Ares said.

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Kreuz's Expanded Fleet Gives 430% Boost to 4Q Profit

Singapore-listed Kreuz Holdings posted Friday a fourth quarter profit ended Dec. 31, 2012, of $5.7 million, up 430 percent from the same period last year. In 4Q 2011, Kreuz reported a net profit of $1.07 million.

For the full year ended Dec. 31, 2012, Kreuz booked a profit of $39.6 million, up 49 percent from one year ago.

Kreuz said in its earnings report that the acquisition of a dynamic positioning construction class diving support vessel in April last year contributed to an increase in gross profit margin, as it reduced the company's reliance on third party vessels.

"The subsea sector is maintaining its current trend of continued growth in the shallow, medium and ultra-deep waters as subsea technology becomes an economically viable solution for increasingly remote or ultra-deepwater fields," the company noted in its disclosure.

"The high demand expected in the subsea sector along with the need to reinvigorate aging offshore fields augur well for Kreuz's subsea construction and installation services, and inspection, repair and maintenance," the company added.

In the Southeast Asian region, oil-rich countries such as Malaysia and Indonesia are placing a renewed emphasis on reinvigorating their aging offshore oil fields. Both of these countries are also looking at promoting exploration deeper offshore and on their smaller oil fields.

Quintella has reported on the upstream and downstream oil and petrochemicals markets from 2004. Email Quintella at quintella.koh@rigzone.com.

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Sembcorp Marine Sees Profit Dip, Admits 2012 Challenging Year

Sembcorp Marine posted late Thursday a net profit for the final quarter of 2012 at $135 million (SGD167 million), down 27 percent from the same period last year. In 4Q 2011, Sembcorp Marine booked a net profit of $185 million (SGD229 million).

Operating profit for the quarter was $120 million (SGD 148 million), down 26 percent from one year ago.

Sembcorp Marine also saw its net and operating profits slide on a full year basis. For the year ended Dec. 31, 2012, the company posted a net profit of $435 million (SGD 538 million) and an operating profit of $448 million (SGD 554 million), down 28 percent and 25 percent respectively.

Sembcorp Marine noted in its earnings release that it was operating in a challenging environment last year. The company ended last year having to grapple with the aftermath of an offshore accident; the Noble Regina Allen (400' ILC jackup) tilted during a jacking system test Dec. 3, 2012. The incident led to some 89 workers being injured.

Sembcorp Marine revealed in its earnings report that the company has a net order book of $11 billion (SGD 13.6 billion) with completion and deliveries stretching into 2019.

"Amid the fragile global environment, the long-term industry fundamentals for the Offshore Oil and Gas sector remain sound underpinned by high oil prices and projected increases in offshore exploration and production spending," Sembcorp Marine said in a statement.

"Yard activity level will remain high over the next two years, supported by Sembcorp Marine's $11 billion net order book. However, margins may continue to normalize. In this rig order cycle, price increase is slower and we believe this is attributed to rising competition for offshore orders," OSK Research's analyst Jason Saw said in an opinion statement.

"The jackup rig replacement theme is still intact but this market segment will see competition from Chinese and Middle East yards," Saw noted.

Quintella has reported on the upstream and downstream oil and petrochemicals markets from 2004. Email Quintella at quintella.koh@rigzone.com.

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Hercules Offshore to Acquire Jackup Ben Avon

Hercules Offshore, Inc. announced the execution of an agreement to acquire the offshore drilling rig Ben Avon (250' ILC) from a subsidiary of KCA Deutag. The purchase price is $55 million in cash. The Ben Avon is a LeTourneau Class 82 SD-C self-elevating drilling rig registered and flagged in Panama. Subject to completion of certain closing conditions, the Company expects the acquisition to close by late-March 2013.

Hercules Offshore also announced that it has signed a Letter of Agreement (LOA) for a three-year rig commitment with Cabinda Gulf Oil Company Limited (CABGOC) for use of the Ben Avon. The Company expects to generate total revenue of approximately $119 million over this three-year period under the contract. Subject to the execution of a mutually agreed drilling contract, the Company expects the rig to commence work as early as May 2013.

Chief Executive Officer and President of Hercules Offshore John T. Rynd stated, "We are very pleased to be able to acquire the Ben Avon and execute an LOA with CABGOC. With this transaction, we continue to opportunistically expand our international presence and scale, add significant long term backlog and cash flow, and reaffirm our commitment to CABGOC, a key global client, at economics that are beneficial for all parties. The LOA for the Ben Avon replaces our prior contract with CABGOC for the Hercules 185, at a substantial improvement in dayrate and provides for a new full three year term. The Ben Avon is a well-maintained rig that recently completed an extensive five year special survey. Given the good condition of the rig, and its close proximity to the drilling location, we expect to spend only minimal additional capital to get it on contract."

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US, States Mull Extending $16B Oil-Spill Settlement Offer to BP

The U.S. Justice Department and Gulf Coast states are mulling offering BP PLC a $16 billion deal to settle civil claims related to the deadly 2010 Deepwater Horizon incident, according to people familiar with the discussions.

The settlement offer would cover potential fines owed by BP under the Clean Water Act and payments under another process known as the Natural Resources Damage Assessment, or NRDA, the people said. The fines stem from the massive Gulf of Mexico oil spill that ensued from the Deepwater Horizon well blowout in April 2010.

BP's potential Clean Water Act fines could run as high as $17.6 billion, but the company has argued they would likely be less than $5 billion. The NRDA payments could also run into the billions, but they are tax deductible for BP. BP must be found to have been grossly negligent in its role leading up to the blowout and spill to receive the highest penalty. The company argues it wasn't grossly negligent and prosecutors and plaintiffs have a very high bar to clear to prove otherwise.

The potential settlement offer helps illustrate the thinking of federal and state governments about the largest penalty BP faces in the wake of the Deepwater Horizon saga, a figure that has been subject to wildly ranging guesses. But it is far from certain that even if the offer is made, it will bring the U.K.-based oil company closer to a deal.

The first of two Deepwater Horizon trials is set to begin Monday before a federal judge in New Orleans.

It isn't clear if the offer has been formally proposed to BP, which declined to comment. BP said previously it was open to negotiations but that it was fully prepared to start trial Monday. The Justice Department, which also stated earlier this week it was prepared to go to trial, declined to comment as well.

Federal and state officials met in Washington, D.C., last week to work on terms of a settlement offer and continued discussions throughout this week, according to the people familiar with the negotiations.

The people said among the disagreements between the governments are how much of the fines will fall under the Clean Water Act and how much will fall under NRDA. A law passed by Congress would give the states control over 80% of Clean Water Act fines, while NRDA fines would go to specific wildlife and natural habitat restoration projects. Louisiana would likely receive the most NRDA funds since that state's coast line and waters were most directly affected by the spill.

Terms of the offer and settlement discussions could continue even through the beginning of the trial, the people said.

Tuesday, a judge agreed with BP and the Justice Department that 810,000 gallons of the estimated 4.9 million gallons the government has said leaked from the well were successfully captured by spill-response vessels and shouldn't count against any future fines. That ruling effectively reduced the maximum possible Clean Water Act fines by $3.48 billion.

BP previously agreed to a $4 billion settlement of criminal charges related to the blowout on the Deepwater Horizon drilling rig and the ensuing spill, as well as a $525 million civil settlement with the Securities and Exchange Commission. Transocean Ltd. (RIG, RIGN.VX), the owner of the rig, agreed to a $400 million criminal settlement and $1 billion civil settlement for violations of the Clean Water Act.

BP says it is eager to fight it out in court, believing past settlement offers didn't adequately reflect the company's legal position. In an interview with The Wall Street Journal this week, BP General Counsel Rupert Bondy said of the few Clean Water Act cases that go to trial, the per-barrel penalties are significantly less than the maximum allowed. He also noted judges take into account several other factors when determining penalties, such as a company's efforts to address the environmental impacts of the spill.

BP has spent more than $14 billion on spill response and cleanup, paid out more than $9 billion to Gulf Coast businesses and individuals impacted by the spill, and committed billions more to environmental restoration and research.

"Facing demands that we believe are excessive, not anchored in reality or the merits of the case, we are preparing ourselves to start the trial in one week's time," Mr. Bondy had said Monday.

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