Today’s Blog – Monday 27th April 2015

Introduction

As noted last week, the oil price is substantially up for the year.  However,the “vibe” in the media and inside many companies, who appear to be only part way through their fore-shadowed redundancy and cost cutting plans, seems to still be that of a US$50 world.

My view is that the oil price could well oscillate for a period before it inevitably responds to demand growth and already built in supply reductions – but if I am wrong and we have already seen the lows, then many companies will still be cutting their capabilities at a time when they should in fact be investing into an upturn.

Commodity prices

The Brent/WTI spread continued to widen at the of last week, with Brent closing up at US$65.28 and WTI down at US$57.24.  Basically, the ongoing Yemeni strife pulled the former whilst data driven US news pushed the latter.  Although (as noted previously), Yemen’s crude production is negligible, the next-to-Saudi location of the country, and its position astride the narrow-ish (18 miles) strait between Arabia and the Horn of Africa, continue to drive concerns about potential Middle Eastern supply disruptions.  This strait is nowhere near as important to global supplies as on the Eastern side of Arabia, but still has a daily crude transit of nearly 5mmbopd.

BHI advised that the US rig count fell 22 last week – a slowing of the rate of decline again.

Henry Hub closed down at US$2.48.  Interestingly, the net rig count above contained a small increase in the number of gas rigs working, which possibly indicates investor views on likely strengthening gas prices later this year.

Government issues

Last week saw the New South Wales courts deliver a judgement against the State, in terms of what was found to be the unlawful shutting down of ASX listed junior Metgasco Ltd’s (ASX: MEL) drilling operations last year.  Completely coincidentally, this shutting down occurred in the lead up to the recent State election.

Metgasco will seek damages and may ultimately seek to exit its position in the State completely if it can secure a good enough deal from the State Government.

No doubt other companies who have invested in New South Wales’ gas sector would love to be able to get out as well – even if they were only paid say half of what they have invested.  What about that Santos and AGL investors?  However, in my view the sums involved to procure such an outcome (>$1B) would be too large to be politically acceptable to the NSW Govt.

LNG

Reuters reported last week that Petronas expects to commence production from the world’s first floating LNG (FLNG) vessel within less than a year.

Also reported last year was ENI’s plans to produce gas from offshore Mozambique using FLNG.  I think the Government Ministers of Mozambique would have to be invited to quite a few bunga-bunga parties before they would permit that to happen….

Company news – Santos Ltd (ASX: STO)

Last week STO hosted a site visit for bankers and large investors to its operations in the Cooper Basin and to the GLNG operations in Queensland.  Feedback from the visitors has generally been that the GLNG project is progressing better than expected whilst the Cooper Basin has been a disappointment (e.g. in terms of high gas development costs).

The Cooper Basin is a relatively small part of STO’s portfolio (in value terms if not in terms of perception, employee numbers, internal efforts, etc).  However, the Cooper is a very large part of the value proposition for the mid-size companies, Beach Energy Ltd (ASX: BPT), Senex Energy Ltd (ASX: SXY) and Drillsearch Energy Ltd (ASX: DLS).  I therefore see the implications of last week’s visit as being bigger negatives for these parties than for STO.

Company news – Cooper Energy Ltd (ASX: COE)

COE announced today very good flow rates from its Sumatran development well, Bunian-3ST2, with a facilities constrained 1,742 bopd being achieved.  COE has a 55% working interest in the well – but it is not clear what its entitlement interest is – likely much less.  Still, this seems a good result for a low-ish cost on-shore well, particularly given COE’s relatively low enterprise value.

Quotes of the day

The Economist on Gazrprom: “Like Microsoft, the company did not grasp the EU’s ferocious prosecutorial powers.”

Russia’s Foreign Minister, Sergei Lavrov: “This set of charges is absolutely inadmissible”.

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