Today’s Blog – Friday 1st May 2015

Introduction

A slightly earlier than normal blog today, with further feedback on yesterday’s Santos Ltd (ASX: STO) AGM below.

In the wider world, possible concerns over changes to the Saudi system of royal succession that I mentioned yesterday may over-hang the longer term oil market.  Google searches for the likes of “agnatic seniority” (the Saudi system for the previous 60 years) and “primogeniture” (the usual European system) have probably gone up in recent days.

One of the benefits of a royalty based political system should be that the process of succession is clear.  That’s the theory anyway, but a glance at history would indicate that its usually more like the Game of Thrones than the House of Windsor.  The changing of the rules by the new King to favour his family invites all his successors to do the same – and massively increases the scope for intrigue amongst the large Saudi royal family.  The Iranians will have taken note and may destabilise accordingly.

Commodity prices

Crude again firmed overnight, with Brent at US$66.78 and WTI at US$59.81.  The fall in the US$ no doubt helped, as did Middle Eastern issues such as the above.

Henry Hub also finished up at US$2.73 – as we rolled over into a new month’s contract.

LNG

Chevron has made what appears to be a decent discovery (440 feet of net pay) offshore WA which should ultimately feed into the Gorgon LNG plant on Barrow Island.  This horrendously expensive plant will no doubt have brownfield expansion opportunities, particularly in a much reduced cost environment.

Over in the US, the Freeport LNG plant in Texas has just signed off on a ~US$4B financing package, showing that investor and buyer appetite for these projects is still strong, despite the current small or even non-existent arbitrage between Henry Hub and oil-linked pricing in Pacific LNG markets.

Company news – Santos Ltd

As noted yesterday, your blogster attended STO’s AGM yesterday.  Some key items of interest:

  • A first strike on the company’s remuneration report was missed by a whisker (a 23.4% vote).  Although the legal reality of two strikes inducing a call for another General Meeting is not that oppressive (normal majority voting applies at such an EGM), such a vote is pretty embarrassing for a company of STO’s size.  Large CEO packages, even if backed up by detailed calculations of STIs/LTIs/etc apparently do not cut it with many investors who have seen 50% falls in the value of their investments.
  • No light was shed on the possible internal disputes which led to the recently announced and sudden “retirement” of Chairman Ken Borda.  Borda chaired the meeting in a professional manner and did not exactly come across as someone tottering off into his dotage.
  • Neither Borda nor MD David Knox mentioned the Company’s large and ill-fated investment in coal-bed methane (CBM) in NSW (although as expected some local farmers had an unscientific whinge about it in question time).  Some conjecture that the lack of internal accountability over losing at least $1B on this investment was a root cause for Borda’s recent “retirement”.
  • The Company’s internal oil price assumption forward curve appears fairly aggressive, with a return to US$90 oil expected in a few years.
  • When asked whether the GLNG project would be profitable at low oil prices, the MD must have mis-heard the question, as he replied that it would be cash-flow positive at US$40 oil.  Hardly the same thing for a very capital intensive project with low operating costs.
  • Although he is not exactly an orphan in CEO-world in doing this, it was somewhat grating to hear the MD mention on a number of occasions how the company’s LNG strategy “started” in 2008 (i.e. when he became CEO).  I seem to recall that, for instance, the key GLNG asset, the great Fairview CBM gas-field, was acquired in 2005……..
  • Returning Chairman Peter Coates said the company “had the right team in place” (echoes of fulsome support for a footy coach?), but cultural change was required to focus on the buzz-word du jour, “productivity”

Company news – Beach Energy Ltd (ASX: BPT)

Seven Holdings has increased its stake in BPT to 16.2%. I very much doubt that any takeover is planned.  Seven must have a lot of faith in the Cooper, notwithstanding the negatives that STO has recently given out over this Basin.

Quote of the day

Seeing the 10(!) Santos Directors lined up in a row on stage yesterday reminded me of the scene in Wall Street when Gordon Gekko took on a flabby company at its AGM.  STO is clearly a target for the likes of private equity predators at its current share price, who would no doubt be of a similar frame of mind to Gordon Gekko when talking with Bud Fox:

Bud Fox: “Why do you need to wreck this company?”

Gordon Gekko: “Because it’s WRECKABLE, all right!”

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