Today’s Blog – Monday 25th June 2015

Introduction

With the next OPEC meeting scheduled for the end of next week, plenty is happening in and around global oil exporter No. 1, the Kingdom of Saudi Arabia (KSA).  With last week’s major terrorist attack inside the Kingdom itself (against the Shia minority – who however are clustered around the major Eastern oil-fields), chaos next door in Yemen and a Iran running geo-politically rampant, the times are “interesting” indeed for the country’s new leadership.

My view is that OPEC will not make any policy changes next week, notwithstanding the desperation emanating from the skint side of OPEC, such as the Venezuelans.  Still, the market will no doubt watch every metaphorical papal chimney for smoke emissions in the lead-up to the meeting.

Commodity prices

Crude closed last week down, with Brent at US$65.37 and WTI at US$59.93.  There was some element of profit-taking in the close, possibly exacerbated by a holiday weekend in the US (three days of open positions apparently makes traders uncomfortable).

The BHI rig count on Friday continued its bottoming out process, with a decline of only 3 rigs.  If current prices hold up, and we can believe what public US shale companies say, then some rigs could come back on again soon.  That might be self-defeating for the companies (if they quickly cannot lock in hedges) as the crude market would likely act negatively to any build up of rig numbers.

Henry Hub gas traders also took some profits on Friday, with the closing price being down 10c at US$2.87.  The gas price seems to be in a zone at present which whereby it competes for coal on the power generation front – but any material rise would start to price it out of the market – hence being somewhat self-correcting.

LNG

Last week the Indian company GAIL entered into an agreement with Shell to on-sell part of the LNG supplies it has contracted for out of the US (including from Cheniere’s Sabine Pass plant, which is due to commence operations before year end).

This could signal weaker than expected end-user demand in the short term – and the ongoing attractiveness of LNG trading opportunities for the likes of Shell/BG.

Government

The NSW Government is now digging itself out of the mess it created before the last election with the actions it took to block the drilling activities of Metgasco Ltd (MEL).

The NSW Courts recently determined that this blocking was illegal and now the Government has decided it will not appeal this determination.  Metgasco has indicated in an ASX announcement today that it will seek an out-of-court settlement for the damages it has suffered.  The media has speculated this could be up to $100M.  The Government will be careful about the flow on effect of any settlement on the other parties who have invested considerably more than MEL in the State, particularly Santos and AGL.

Company news – Origin Energy Ltd (ORG)

An interesting confluence of events has benefited ORG today.  Following the recent down-grade of ORG’s credit rating, its 53% owned subsidiary, the New Zealand listed Contact Energy, has decided to pay an extra-ordinary dividend of NZ$367M in June, hence injecting some handy cash onto ORG’s balance sheet.

Contact advised the market a few months ago that it was looking to deploy funds in seeking out international growth options.  However, today it advised that after looking it had determined that “there were no material investment opportunities at this time“.

How nice for Origin and no doubt Contact’s CEO, Dennis Barnes (seconded from Origin) is owed a favour.

Company news – Cooper Energy Ltd (COE) and Santos Ltd (STO)

COE advised today that it had completed the purchase of a 50% interest in STO’s offshore Gippsland gas-field, Sole.  COE will now fund 100% of a FEED study (estimated to cost $27M) to potentially develop this asset and the JV will look to make a FID by Q3 2016.

It will be interesting to see if project financing is available for this development and if not how the parties might take it forward given their differing balance sheet weaknesses.

Quote of the day

The Game of Thrones that this blog called the changing rules of Saudi succession was alluded to in a special report on the KSA in The Economist this week:

“Muhahmad bin Salman must be well aware that the precedent his father set in getting rid of a crown prince could be followed to his disadvantage.”

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