Today’s Blog – Tuesday 12th May 2015


Quite a bit of recent industry and media chatter has followed the US investment conference last week at which a number of respected (i.e. rich) fund managers made some pretty bearish presentations on the oil and gas industry (e.g. see yesterday’s quote in this blog on the medium term future for LNG).  Most commented upon has been a presentation from David Einhorn, which provided a witty, sharp and numerically devastating attack on the economics of tight oil play companies such as Pioneer Natural Resources.

This type of attack is hardly new, as followers of internet bloggers of the likes of Arthur Berman and Dave Hughes would know.  However, an assault from a witty billionaire (based on accounting numbers) carries much more weight than negative analysis from maverick geologists (who deal with more complex issues for the layman, such as decline rates – but which ultimately go to accounting).

Commodity prices

Oil pulled back overnight, with Brent at US$64.91 and WTI at $59.31.  Although various issues have been canvassed by commentators on the causes of this, such as economic weakness in China and a stronger US dollar, overall this feels more like a generic market retreat from a frothy high.

Henry Hub also fell – to US$2.82.  Again this seems like a retreat from a day or so of over-bullishness, as gas storage numbers in the US are not signalling a current supply shortage.


Today’s Federal budget has been widely flagged as likely to include new measures to try to ensure multinational companies pay more tax in Australia (what – do you mean our existing 10,000s of pages of tax law don’t allow that?).

The Sydney Morning Herald (SMH) recently ran a story on Chevron Corporation, which provides a good example of the sort of false premise on which this type of attack flourishes.  Chevron is the largest oil and gas investor in Australia, which one would think would be welcomed, but the fact that it actually claims an interest deduction against its Australian sourced revenues, is claimed as being somehow unfair by the SMH.  The concept of “project financing” for massive LNG projects dosen’t seem to have crossed the SMH’s mind.  The reality for Chevron shareholders is that its Australian projects have gone massively over-budget on the cost side and they would have been far better off if they had not invested here at all.  Low profits mean low taxes unfortunately.


The leading British Columbian LNG project, operated by Petronas, has hit a squall recently, with its proposal to pay $1B to a native group (over the life of the project) in exchange for certain access rights being rebuffed.  This type of issue is not exactly a a surprise and all of the BC projects have far more work to do on multiple fronts to get anywhere near FID.

Meanwhile, over in Tanzania, another example of a project being retarded before it even starts emerged recently.  This was a claim from the Tanzanian Government that somehow tax should be paid (by who?) on Shell’s planned purchase of BG Group (given the latter has assets in the country).   This claim is unlikely to raise any money, but will reduce investors appetite to spend money in the country.  Still, it no doubt plays well in local politics for a week or so.

Argo Global Listed Infrastructure Ltd (ASX: ALI)

There is not much happening this morning on the ASX listed E&P company front, so I thought I would pull out a couple of thoughts from the imminent IPO of the above (the company – a listed investment company – with an obvious mandate in its name).  The IPO is seeking up to $600M and I think it will get strong support given its brand name and a desire for all things that provide yield.

This capital market appetite contrasts strongly with that for E&P companies.  Large companies like STO would be smashed if they raised equity.  Juniors can hardly raise money at any price.

The AFR recently pointed published a story noting that no less than Berkshire Hathaway was currently spending around 1/3 of its mighty cash-flows on infrastructure investments (largely on its own energy utility businesses and US rail) – as given the high pricing of alternatives such as stocks and bonds, this once boring investment class was a home with at least some fairly certain returns.

Quote of the day

From Arthur Berman last month, a quote which resonates strongly with Einhorn’s analysis:

“Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible”.

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