Today’s Blog – Thursday 14th May 2015

Introduction

The following story doesn’t really fit into any of this blog’s normal headings, but I thought it worthy of note in any event – as a demonstration of the ability of humans to hold contradictory views and not see an issue.

This was news from a couple of days ago of a union led protest in Perth against Chevron’s planned exploration activities in New Zealand.  This is the same Chevron that is the operator of the WA’s vast Gorgon LNG project, which has gone $10Bs over budget in recent years.  A goodly proportion of those $10Bs have of course gone into the pockets of very well paid union members……

Commodity prices

Crude prices were steady overnight, with Brent at US$66.81 and WTI at US$60.50.  The USD depreciated and again there was a drop in US inventories (this week by 2.2mmbbls), which normally would have supported a price rise.  However, EIA data on US production (which many observers do not trust – but that is what the market gets) was robust, some OPEC members are producing more than expected (informal “quota-busting”, led by the KSA this time?), etc.

Henry Hub is now sniffing at US$3, with last night’s close being US$2.94.  As usual, weather forecasts played a part, with the East Coast air conditioning load expected to be up.  The EIA noted that it forecast gas to match coal as an electricity generation fuel source in the US this year – both with ~1/3 shares of the market.

LNG

A couple of contrasting LNG stories from North America yesterday:

  • As noted a couple of days ago, the leading British Columbian LNG project (the Petronas operated Pacific NorthWest LNG) has hit a potentially major stumbling block, with an indigenous group now firmly rejecting a $1B offer from the project proponents to grant access to certain required land, etc, positions – and instead raising culturally significant concerns about salmon fisheries.
  • Cheniere’s Corpus Christi LNG project in Texas reached FID.

Not surprisingly, it is somewhat easier to conduct an oil and gas business of any stripe in Texas than in BC – or just about anywhere else in the world.

Company news – Woodside Petroleum Ltd (ASX: WPL)

WPL is a gas buyer from Corpus Christi LNG and announced today that its purchase contract was now uncondiional.  It will buy 0.85 mtpa for 20 years, at Henry Hub plus fifteen percent, plus a $3.50 liquefaction charge.

WPL is clearly evolving its LNG business from a producer only position to one where it is now moving down the value chain and positioning itself to start trading. BG Group is the exemplar of the value of this approach – which although requiring scale, is not the unique province of the super-majors like BP.

To date, the other three Australian LNG players, Santos, Origin Energy and OilSearch have not made any similar such steps.  It would be logical to expect moves by them in this direction in due course (and if they don’t, potential predators will see unlocked option value in this area).

Company news – Macquarie Group Ltd (ASX: MQG)

The AFR reported today that MQG is looking to flip its ~$1B interest in the recently acquired Apache Corporation assets in Western Australia.  Apparently Macquarie wants to sell its shares in the SPV purchase vehicle rather than working interests in the assets themselves, so it is hard to see that any industry interest would be garnered in buying illiquid shares in a PE vehicle.

Apache grew its WA business over the years primarily through the drill bit – and long time industry participants will recall the exhortation of Apache’s previous boss when faced with a decision: “drill it!“.

However, the private equity buyers of this asset are likely to have less appetite to take exploration risks.  Even though their investment timeline may be longer than Macquarie’s “a few weeks” – it is still likely to be only a few years.

Accordingly, in my view, the PE group may well be scouring various farm-in agreements, etc, that it has inherited to see if it can get out of various drilling commitments.  This could affect ASX listed companies such as Karoon Gas Ltd (ASX: KAR) and Carnarvon Petroleum Ltd (ASX: CVN) who were owed wells by Apache.

Quote of the day

Inspired by Macquarie’s flipping, I turned to the classic investment bible “Where Are the Customers’ Yachts” (a question that could no doubt be asked of MQG……):

“At the close of the day’s business they (professional investors) take all the money and through it into the air.  Everything that sticks to the ceiling belongs to the clients”.

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