Today’s Blog – Friday 15th May 2015

Introduction

Following on from yesterday’s example of cognitive dissonance quoted in my introduction, I came across what I think is another example of the genre.

This was a Reuters sourced quote from a senior manager in Shell Americas, who noted that the company would still consider acquisitions in the likes of the Permian and Utica Basins.  In my view the last thing the international investor community wants to see is more cash going from the pockets of the Super-Majors into US shale plays.  That’s why BG was a good deal for Shell – it was driven by LNG and Brazilian oil, not on-shore US assets.

Given the many hundreds of billions invested into tight oil and gas plays in recent years, it seems that some of those in the heart of the US industry are finding it hard to see that the new magic word for investors (as echoed recently by BHP’s MD) is “conventional”.

Commodity prices

Brent fell a tad overnight to US$66.59, whilst WTI slipped below US$60 to US$59.88.  The battle between Saudi Arabia and US tight oil is still being hard fought, with KSA production up and US production only just starting to decline (if you believe the US data – let alone the traditionally far cloudier OPEC self-reporting).

Henry Hub broke though the US$3 mark, settling at US$3.01.  The media has reported that the primary driver of this is news of less than expected inventory build numbers.  In my view the FID of Corpus Christi LNG which I noted yesterday should also be reinforcing to the market that, quite soon-ish, BCFs per day of gas will be leaving the US on boats.

LNG

The Jakarta Post has recently quoted the head of Pertamina as saying that he expected first cargoes to leave the Donggi Senoro LNG plant (located on Sulawesi) in July.

This seems optimistic.  A gambling man might like to put a small wager on first LNG coming from Cheniere’s business-friendly Louisiana located Sabine Pass liquefaction plant in front of Donggi Senoro.

Company news – AWE Ltd (ASX: AWE) and Origin Energy Ltd (ASX: ORG)

AWE announced today the spudding of an apprasial well (although appraisal in nature, it has an exploration well name, Waitsia-1) in the Perth Basin.  ORG is in a 50/50 JV with AWE in the relevant licence.  The well will be drilled to 4,050M and test secondary unconventional targets as well as appraise the conventional Waitsia sand.  If successful, the well will be flow tested and used as a production well.

In my view, AWE & ORG’s Perth Basin gas exploration and appraisal program is currently the most interesting in on-shore Australia.  The magic word “conventional” comes to mind.  As does “high prices”,  “no fracking”, “no CO2”, “existing infrastructure”, etc, etc.

Macquarie Bank recently noted that ORG could sell its Perth Basin assets in the short term – inter alia, to demonstrate discipline to the ratings agencies who recently down-graded its credit rating.

This would be an attractive asset to the likes of Santos Ltd (ASX: STO) – if it has the money – and the PE consortium who recently bought Apache Corproation’s WA assets (who do have money).  Dependent on ongoing results, I would expect ORG’s stake to be saleable for $200M++.

Quote of the day

As noted yesterday, Woodside Petroleum Ltd (ASX: WPL) has made a significant step in building up its LNG trading capabilities.  Given the economic inefficiencies of the LNG market (as illustrated by large pricing spreads between regions, customers, etc), there are clear arbitrage opportunities to be made – but also the potential for large losses.

I therefore turned to legendary trader (and founder of what is now Glencore) Marc Rich for some advice for WPL (quoted from The Economists obituary on Rich):

A new employee once asked Marc Rich for advice on trading. He expected, perhaps, “Buy low, sell high”, or “Think long-term”. Or perhaps, given Mr Rich’s habit of going to the office at daybreak, “Up with the lark”. Instead, Mr Rich picked up a knife and ran a finger across the edge. “As a trader you often walk on the blade,” he said softly. “Be careful and don’t step off.”

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