Today’s Blog – Wednesday 8th April 2015

Introduction

Ramped up company news is now emerging from the Easter break – in particular a potential super-merger (see below).  Of course crude markets never sleep and the action here remains bullish – for just now anyway.

Commodity prices

Crude prices continued their upwards run overnight, with Brent at US$59.10 and WTI at US$52.87.  The recent bull factors of an increase in Saudi prices to Asian customers and the realisation that an Iranian nuclear deal is not imminent continued to affect the market, as did strong US economic data.

In my view, there is a real risk that opposition to any Iranian deal will emerge as a required tenet of true Republican faith on the Presidential campaign trail.  The second formal runner (Rand Paul) has just joined the primary race (with no doubt many others to follow) and this lengthy part of the campaign will be all about who is the purest opponent of Obama and all his works.  This, combined with the expected Israeli opposition to any deal, will mean that a lot of heat and light will be generated opposing the recent in-principle deal, making it harder for the Iranians to conclude a deal will stick.  So I’m not holding my breath on Iranian crude coming back to market later this year.

Henry Hub remains more prosaic, with the price closing at US$2.66 – a slight fall related to warmer than expected weather.

LNG

Credit ratings agency Moody’s have stated that they expect that current low oil prices to lead to the cancellation of many of the proposed US LNG projects.  However, in my view this entirely depends on the business model of the LNG project developer.  The most common model – of selling liquefaction capacity – is entirely independent of commodity prices.  Indeed, Asian and European buyers will see low prices as a reason to buy liquefaction capacity – it is them who are taking gas pricing risk.

NT pipeline to the East Coast

The AFR po-facedly reported today that the above is supposedly on-track to commence construction in 2017 and commissioning in 2018.  Thats what the post-it notes say anyway!

Company news – mega-merger

News emerged overnight that Super-Major Shell and large independent BG Group are in merger (i.e. takeover) discussions, with these said to be “advanced”.  Such tie-ups are often speculated about, but this statement seems material – and could well have  some legal implications under UK takeover laws.

If this takeover went ahead, it would be the largest deal in the sector for many years (if not decades) and would inevitably invite comparisons with the mergers of the 1990s which created the current Super-Majors – and which had a marked copycat aspect to them once they started.  I expect the animal spirits of investment bank M&A teams to be revved up by this news and cases will be put to company’s across the sector that they need to “bulk up”, “get scale”, “be a first mover”, “generate fees for us – oops!”, etc.

Company news – Beach Energy Ltd (ASX: BPT)

BPT put out its first investor presentation under new MD Rob Cole today.  This took a sensible (albeit somewhat boring) strategic approach of focusing on the Cooper Basin.  BPT employees will no doubt have noted the phrase “organisational review” with some trepidation….

Overall, I expect BPT to try and influence Santos more in the Cooper Basin JV over such issues as the potential “monetisation” of mid-stream assets and the optimal allocation of capital. Good luck!

Company news – Woodside Petroleum Ltd (WPL)

WPL today announced a gas discovery in the Pyxis-1 well drilled off North West WA.  A net gas column of 18.5M seems modest – but the location of the well and the composition of the JV means that tie-ing it back into Pluto should be feasible.

Quote of the day

Warren Buffett on some merger scenarios:

“Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence and short on smarts, offers 1¼ shares of A for each share of B, correctly telling his directors that B is worth $100 per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large as his original domain, in a world where size tends to correlate with both prestige and compensation.”

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