Today’s Blog – Monday 18th May 2015

Introduction

Today the annual APPEA conference kicks off in Melbourne.  Your blogster would normally be an attendee nursing a hangover at this point – whilst snorting up his sleeve as the Victorian Energy Minister makes a speech promoting his State as being business-friendly.

However, I am one of likely thousands of non-attendees following last November’s OPEC meeting and consequent psychological kick in the guts (at best) for the industry.  The duration of the current industry hangover remains highly uncertain, with bears pointing to the history of the 1980s and 1990s (and the more recent performance of US shale gas, particularly in the Marcellus, which has kept production up in the face of large rig declines and low prices).  Bulls can make a case for “this time its different“, uncomfortable as it is in making a case based on that premise, by noting that spare system capacity is much less than in previous decades and that accordingly markets will tighten quite quickly as demand rises and relatively small supply falls occur in the US.

Commodity prices

Crude prices closed last week flat, with Brent at US$66.81 and WTI at US$59.69.  The BHI rig count was only down 6 on the week.  This is still some 12 rigs higher than the trough of the 2009 GFC decline – and with the remaining rig fleet being a more productive one than 6 years ago.  The decline curve is well and truly flattening out and now the market will need to wait for actual production fall data (flawed as the methodologies for procuring such information are) rather than rig data.

Saudi Aramco’s Annual Report was released last week.  It noted that the KSA’s exploration efforts had discovered ~1 billion barrels of oil in 2014.  This is of course substantially less than the nearly 4 billion barrels of Saudi production, but the markets seem to have reconciled themselves to having no choice but to believe the reported reserves numbers (which magically replace production in full each year) rather than price in the unknown consequences of a “Twilight in the Desert” view.

Henry Hub closed at US$3.00.  Some profit taking seems to have capped the price for just now – given it has risen ~20% in less than a month.

LNG

Reuters reported that Anadarko has selected US company Chicago Bridge and Iron to be the lead contractor for its Mozambique LNG project – subject to FID which was still ostensibly pencilled in for the end of this year.  Readers will recall my cynicism about achieving such a timetable.  Sales contracts not construction contractors are key to FID.

Company news – Real Energy Ltd (ASX: RLE)

Cooper Basin minnow RLE has announced the entering into of a non-binding letter of intent to supply gas to industrial gas customer Incitec Pivot.  This “deal” (if a LOI can be called that) reflects a trend of industrial gas users trying to support junior oil and gas explorers (such as Strike Energy Ltd) with a view to getting a better deal on gas pricing.  The Australian domgas supply environment is currently one where the traditional sellers such as Santos and Origin Energy are likely to be reluctant to commit to sales contracts at other than high prices – or indeed at al,l given uncertainties over gas supplies for their own LNG projects.

Company news – Energy World Corporation Ltd (ASX: EWC)

EWC is somewhat invisible for a $650M market cap energy company. To my knowledge no large bank or broker covers it.  The company has some interesting assets in Indonesia and the Philippines (with some less material assets in Australia) – but is rife with conflicts of interest, overpromising/under-delivering, nepotism, etc, etc.

EWC announced today a $75M convertible notes rights issue – underwritten by its MD.  The funds will be used to progress its liquefaction project in Indonesia (on Sulawesi) and power plant project in the Philippines.  Further funds will be required for these, which the company will no doubt aim to procure from project financiers.  EWC, although possessing the characteristics noted above, somehow occasionally seems to get things done in these often difficult locations in ways that pleasantly surprise the market.

Quote of the day

There will be a theme in this week’s quotes of the day – drawing from the business wisdom of classic gangster movies.  Today’s quote, from Goodfellas’ Henry Hill, reflects the oil patch at US$115 oil (compared to today’s dismal scene):

“For us to live any other way was nuts. Uh, to us, those goody-good people who worked sh*tty jobs for bum paychecks and took the subway to work every day, and worried about their bills, were dead. I mean they were suckers. They had no balls. If we wanted something we just took it”. 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s