Today’s blog – Wednesday 11 March 2015

Commodity prices

The Brent/WTI spread continued to narrow overnight, with Brent falling more than US$2 to US$56.39 whilst WTI rose to US$48.71.

Given the recent strength in the USD, it is relevant to note that the AUD equivalent of the latter is now ~A$75 – a not unhealthy figure for domestic producers of oil and oil-linked gas.

Respected Houston headquartered investment bank, Tudor Pickering (TPH), yesterday put out a strong bull case for WTI to rebound to US$80 by Q1 of 2016.  The core of the TPH analysis rested on a number of inter-related technical factors, including the very rapid fall in rig utilisation that we have seen even in the high quality basins, new pipelines connecting the Cushing pricing point with larger Gulf of Mexico storage options and refinery demand for various types of crude.

With respect to the latter, TPH noted that various new pipeline connections were in fact now bringing Canadian oil, via Chicago, to Cushing and the Gulf, thereby providing some systemic efficiency gains for refinery utilisation there.  This underlines how the whole partisan political furore in the US about one single pipeline (Keystone XL) misses the point – on both sides of the debate.  Canadian oil eventually gets to market!

Henry Hub was flat again at US$2.73.  My statement of yesterday that oil bears could take some heart from the lack of correlation in recent years between gas rig count and gas production levels was also brought up by no less than Rex Tillerson in the Wall Street Journal last week.

However, an alternative view was published this week by US shale-sceptic Art Berman, who concluded that gas production had held up not because of rapidly increasing shale gas well productivity, but rather primarily because of associated gas from the tight oil plays and the low rate of conventional gas decline.  If he is right and later this year we see a fall in associated gas supply from the tight oil plays at the same time as Gulf LNG exports begin, then the gas pricing consequences could be “interesting” – for US domestic players and international buyers alike.

Australian gas prices

I don’t report much on Australian gas prices, as the publicly available trading prices are for only a fraction of the market and are not representative of the long term contract prices that govern the vast majority of sales.  However, I note a recent report from respected consultancy group Energy Quest, that it has recalibrated its expectations for East Coast domestic gas prices by around one third, down to a band of A$6-A$7.  The fall in oil prices and the resultant reduction in LNG prices is the main driver for this.

My view is that A$6 would not provide much of a return (if any) for the unconventional gas plays in the Cooper Basin, given their spotty history to date and the inherently high cost structures that apply in Australia.

Company news – Strike Energy (ASX – STX)

Speaking of the Cooper Basin, STX put out a presentation this morning which made a well argued case for the market opportunity for new sources of gas on the East Coast.  However, STX’s actual gas resource is still at an emerging stage and in my view the $90M market cap of this company is fairly strong given the maturity and remaining risks for the play.

I think this partially reflects the quality of the company’s Board – and also the presence of a “Sydney” factor.  Although my view is purely qualitative, I think that the few oil and gas companies that are located in Sydney, with immediate proximity to much of the nation’s capital market participants, tend to trade at a premium to their regional peers.

Company news – A J Lucas (ASX – AJL)

I speculated in my blog a few days ago that AJL had acquired interests in three petroleum licences in New South Wales with CBM prospectively from unlisted public company, Apex Energy. AJL announced today that the purchase was in fact from one of its Directors, who had acquired the acreage from Dart Energy post its takeover.

Company news – BP

I’m a few days late with this, but I thought it interesting on a number of fronts – BP’s recent activities in Egypt.  The phrase sovereign risk comes to mind, given issues such as late payments by the Government, the region generally, the country’s demographics, etc.  However, BP has a large and growing presence in the country, and following a recent FID on a major gas development, this week it announced a gas discovery from an offshore well at an impressive 6.400 metres (~21,000 feet) – with a further 1,000 metres to drill (TD of ~24,300 feet!).

Quote of the day

From Goldman Sachs: “It is not obvious to a generalist investor looking at financials of US oil and gas producers that there has been a shale revolution beyond volume growth.

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