Today’s Blog – Thursday 7th May 2015


Following on from yesterday’s story about failed coal-baron Nathan Tinkler’s entry into the oil patch (with a plan to pick up cheap assets) the AFR reported a similar strategy from a party with rather larger scale – BHP (aside: I hate to still call it BHP Billiton – a reminder of how some smart South Africans managed to rip off Australian investors).

BHP’s MD Andrew MacKenzie was quoted by the AFR as potentially looking for conventional oil-field assets – but like Tinkler, only if they are cheap.  As noted yesterday, I don’t see the industry selling off high (or even medium) quality assets off at prices below fair value (other than exploration assets – which does not seem to be what parties are looking for).

A 20% dilutive equity raise is clearly better than selling off something for half its long term value.

McKenzie’s asset criteria appeared to preclude a corporate takeover and instead would more likely focus on pre-development assets in the Gulf of Mexico or East Africa, where BHP’s balance sheet can be used on a material basis.

Commodity prices

The recent upwards trend in crude prices continued overnight, with Brent settling at US$67.77 and WTI at US$60.93.  The US inventory number came in as a material draw of 3.9mmbbls – much higher than consensus.  However, one mitigating factor against this otherwise very bullish news was a possible temporary only reduction in imports for technical reasons.

Platts has reported that the IEA’s Fatah Birol had said that year to date investment in the oil sector was down by $100B year on year, the highest decline on record.  Birol concludes, not surprisingly, that this investment strike will naturally tighten supply and hence increase prices – even by the end of this year.

Henry Hub was flat at US$2.78.

LNG news

Bloomberg has reported that Shell’s CEO is currently visiting the PRC to obtain regulatory support for his company’s takeover of BG Group.  The combined entity will be the largest LNG player in the world, but in my view it is highly unlikely to be able to exert any market power over LNG supplies to China, which are diverse and a smaller part of the country’s gas supplies than pipeline gas, even before the one or two very large Russian pipelines start delivering gas next decade.

However, whether there could be some political quid pro quo for the PRC’s sign-off – e.g. ongoing Shell investment in marginal Chinese shale gas assets, remains to be seen (and would likely remain opaque in any event).

Company news – AWE Ltd (ASX: AWE)

AWE reported further results from its Irwin-1 gas exploration well in the Perth Basin.  These were somewhat disappointing, with the primary target being water-wet, but with some positives from the smaller – and tighter – secondary target.  Overall, marketable gas resources in the Perth Basin are increasing and there should be eminent scope for AWE to target decent gas sales agreements in the relatively high priced WA market.

Company news – Karoon Gas Ltd (ASX: KAR)

KAR continues to report positive news from its offshore Brazil exploration efforts.  It has flow tested the Echnida-1 well and achieved a rate of 4,650 bopd (of high API oil).

KAR’s partner in this area is the Canadian listed company Pacific Rubiales Ltd.  This company has just received a takeover offer from a partnership of Harbour Energy (a new-ish private equity backed entity) and an existing shareholder, Mexican company Alfa.

The growing pre-development project that KAR operates in Brazil looks like just the sort of asset that suits PE – i.e. it should allow the deployment of material capital at relatively low risk, has gearing options, decent returns, no exploration risk, etc.  KAR’s own exit path (partial or complete) could thus be foreshadowed by the Pacific Rubiales deal.

Quote of the day

When talking to a friend today about buying property in Sydney, even when the market is obviously hot, I was reminded of a apposite quote from Chuck Prince, the then CEO of Citigroup.  The quote was given in mid-2007 (i.e. as the GFC was just about to break), and which is a great exemplar of how most of us can walk into trouble with our eyes wide open, because career-risk and peer pressure require it:

“But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

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