Today’s Blog – Friday 10th April 2015

Introduction

The sector remains dominated by the Shell/BG takeover news – and I expect that to continue for some time.  The transaction itself will not be consummated until next year given the form of takeover adopted and various regulatory, etc, issues.

The possibility of further takeover action (e.g. Exxon taking out BP) has temporarily disconnected oil price movements from stock price changes – but in this instance I don’t expect that to continue for some time.

Commodity prices

Brent strengthened overnight to US$56.57 on strong economic news from Germany and the ongoing recognition that a nuclear deal with Iran is far from guaranteed.  The spread with WTI widened, as it fell to US$50.72 as part of the ongoing reactive trend to this week’s particularly strong growth in crude inventories.  Imports of crude to the US are higher than just the balance of domestic demand over domestic production, due to a combination of the availability of storage in the US and its refining industry’s need for crude specs other than light sweet crude.

Henry Hub gas pricing continued a typical Spring weakening, falling to US$2.54.

LNG

The ongoing effect of sanctions and low crude oil prices on Russia’s energy sector was again demonstrated recently, with Reuters reporting that Rosneft seems likely to delay its Sakhalin LNG project by two years.

On the other side of the Pacific, Moody’s put out a report expressing scepticism that few if any of the many British Columbian (BC) based LNG projects will reach FID before 2020.

Shell and BG both are involved in BC LNG projects and I expect them to consider their future in the context of their overall combined LNG portfolio – for instance, the new and larger Shell may wish to push BG’s Lower 48 LNG export project in front of BC projects, or use its FLNG technology on BG stranded gas assets (e.g. off East Africa?), etc.

This merger changes the merit order of potential LNG developments!  Although BG has attractive assets that are non-LNG related (e.g. Brazilian sub-salt crude), I reiterate my view that this deal is strategically all about LNG.  Again in my view, if the legendary Marc Rich was alive today (and he could access a decent balance sheet), LNG is where he would see a great opportunity to shake up the industry and capture arbitrage profits.

Government White Paper

The Australian Federal Government put out an energy white paper earlier this week.  It contained economically rational proposals to improve efficiency by increasing competition, reducing Government ownership, cost reflective electricity tariffs, allowing the sensible development of on-shore gas resources, etc.  All eminently sensible, but clearly politically challenging in the current environment of Frackman, NIMBY-ism, populist minority parties in Upper Houses around the nation, etc.

Company news

News from the ASX has been typically slow for a Friday morning.  The Australian has reported (as we noted yesterday) that the Shell/BG deal could push forward Santos and Origin Energy as potential takeover targets.  These companies have their weaknesses, but they also have LNG projects, which most other independents don’t.

Company news – Oil Search Ltd (ASX: OSH)

OSH issued its Annual Report, AGM Notice, Sustainability Report, etc, today.  Does anyone read anything other than the summary remuneration report in these things?

On the latter, Peter Botten will no doubt be delighted that his compensation is lower than his peers at Santos and Woodside.  Presumably he needs to preside over a 50% reduction in his share price before he can catch up with David Knox…..

Quote of the day

The Government’s White Paper inspired me to dust off a quote from the European Community’s Jean Claude Juncker (from the time of the GFC):

“We all know what to do.  We just don’t know how to get re-elected after we do it”.

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