Today’s Blog – Monday 4th May 2015

Introduction

After my reporting on Friday of last week’s Santos Ltd (ASX: STO) AGM, Berkshire Hathaway held its somewhat larger ~40,000 attendee AGM in Omaha, Nebraska.  This was Warren Buffett’s (and his partner, Charlie Munger’s) 50th Berkshire AGM, a record at a large company that I will never see again in my lifetime.  A few interesting snippets:

  • Buffett considers that US stock prices will look high if interest rates go back to “normal” levels.
  • Buffett and Munger consider that in the energy industry there are large opportunities from the trend towards greater distributed generation sources (think rooftop solar, etc) and in particular in energy storage solutions (Elon Musk’s Tesla echoed this last week, with its promotion of the potential of batteries developed for cars to be used in household storage applications).
  • Railcars will continue to play a large role in delivering US crude.  The expected role of the US as the new “swing” crude producer should support this, as rail is clearly more flexible than pipelines.

Commodity prices

Crude prices fell by COB on Friday, with Brent at US$66.46 and WTI at US$59.15.

April 2015 actually experienced the largest rise in oil prices since the GFC bounce-back of 2009.

To continue one of my recent themes, if one rounds these numbers up, then we are already in a “US$70 per barrel” oil world (or “US$60 per barrel” if you are a US producer).  To my mind, that’s considerably higher than the “vibe” surrounding and in oil companies and in the media.  Prior to the GFC, these were good numbers – but there is still presumably a lot of pschological clinging to what many people (your blogster included) thought was a “new normal” of a permanent US$100/barrel.

Henry Hub closed slightly flat at US$2.75 on Friday.

LNG

The oldest LNG plant in the world, the Conoco owned Kenai plant in Southern Alaska, re-started operations last week.  First cargoes were delivered from Kenai to Japan in 1969 and now the plant operates on a largely seasonal basis.  It would be fair to assume that Conoco has recovered its original capital cost of this plant!   On a marginal cost basis it can make money, notwithstanding its age, and its customers in Japan (not untypically) value it from their long term partnership perspective.

Conoco is also one of 4 partners (the others being BP, Exxon and the State of Alaska) in the Alaska LNG project, based on gas resources from Alaska’s North.  This project has made considerable progress in recent years, but receives much less publicity than many of its Southern neighbours in Canada and the Lower 48.  Its partners do not need to sell their projects as much as other smaller LNG project proponents.

Company news – Super-Majors generally

The last couple of weeks have seen the Super-Majors report quarterly results.   One interesting theme is that the often queried “integration premium” (i.e. the purported benefits of being invested in both the upstream and downstream sectors of the oil industry) appears to have delivered.  Poor results from upstream sectors have been balanced out by good profits from refining operations – and also trading.  The recently separated Conoco illustrates this – with the remaining upstream business in Conoco doing worse than its integrated peers (whilst its now separate refining business did well).

The chances of the other Super-Majors following Conoco any time soon therefore appears to be much slimmer than many industry observers would have expected a few years ago.

Company news – Cooper Energy Ltd (ASX: COE)

COE reported more good news from its Sumatran Bunian-3 ST2 well.  After last week’s excellent flow data from the primary target of the well, a secondary target has also delivered a strong flow rate of 1,590 barrels per day.  However, COE has thrown no more light on its entitlement interest in this asset (its working interest – i.e. what it pays, is 55% – what it gets will likely be much less).

Company news – Drillsearch Energy Ltd (ASX: DLS)

DLS has today reported a gas discovery (it calls it a “wet” gas discovery, but has not supplied any data on liquids in the potential gas stream) from its Cooper Basin JV with STO.  The discovery has 26.3 metres of net pay, so appears OK rather than exciting.

Quote of the day

From famed investor of the 1970s and 1980s, Peter Lynch, and one to bear in mind if one has concerns about Buffett’s views on where US share prices might go if interest rates rose:

 “I’m always fully invested. It’s a great feeling to be caught with your pants up”.

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