Today’s Blog – Monday 3rd August 2015

Introduction

Last week’s news of further material rounds of job cuts in the E&P industry from the likes of Shell, Centrica, etc, was followed up by some very poor quarterly financial results from the two largest US Super-Majors, Exxon and Chevron, on Friday.  Their shares were marked down 5% in a session – pretty material for two of the world’s largest companies.

Exxon’s upstream results were its poorest for 13 years (i.e. a period that includes lower oil prices than prevail at present on a number of different occasions).

Clearly the carnage in the sector is far from over, and cost reductions and job reductions will likely continue to cut right to (and through) the bone.

Commodity prices

As foreshadowed last week, the month of July saw the largest fall in monthly oil prices since the darkest days of the GFC in 2008.  Brent closed down at US$52.21 and WTI at US$47.12.  The BHI rig count released on Friday was a catalyst for the fall on the day, with the oil rig count up 5 (the gas rig count was down 7, for a net reduction of 2).

Bloomberg reported late last week that OPEC production numbers in July averaged 32.1mm bopd – more than 2mm bopd above official quotas of 30mm bopd – and a number that is in excess of the total current surplus of production over demand.  If OPEC was the unified body that some imagine it to be, it could clearly close this gap and raise prices.

Henry Hub natural gas prices closed down at US$2.72.  Storage injections were in line with seasonal norms, but it appears the market was hoping for some more tangible signs of supply reductions.

LNG

Towards the end of last week Conoco Philips disclosed that it and its partner Origin Energy Ltd (ORG) had renegotiated some terms of the LNG sales contract from the Queensland based APLNG project with buyer Sinopec.  Concerns had been raised within the investment community in recent weeks that Sinopec would not physically be able to take LNG from APLNG due to delays in Chinese re-gas faciliity construction.

Conoco advised that the LNG contracts had been changed to allow Sinopec to redirect gas cargoes to outside the PRC.  There was no disclosure of any quid pro quo for the Producers under this deal.  One can therefore reasonably conclude that the fears over re-gas facilities were real.  This deal will put more gas into the (very long) spot gas markets later this year.

One blessing for these spot market (if not for Chevron and its partners – Exxon and Shell) was news of yet further delays in the Gorgon LNG project  Chevron flagged on Friday that first deliveries could now slip into 2016.

Company news – ORG

Some good news today for ORG and its ability to strengthen its stretched balance sheet. This was a development in its majority owned, New Zealand listed, investment in Contact Energy – namely confirmation that the Tiwai aluminium smelter would remain open for at least a few more years.  Tiwai is a material user of electricity in the overall Kiwi market and a possible closure thereof had been a big uncertainty-factor overhang affecting ORG’s plans to sell down or out of Contact.

The AFR today reports that various proposals for trade and market sales are being pitched to ORG.  The amount of smoke is such that it appears that a deal should be done in the next month or so.

Company news – Tap Oil Ltd (TAP)

TAP today provided an update on its ongoing disputes with its local Asian partner in its Thai oil-field joint venture.  Fair to say that the lawyers’ proverbial field day is still in full swing.

This issue is overhanging TAP’s management of its debts.  It appears to be facing a liquidity problem and has flagged it may have to sell its best asset (the Thai oil-field) to deal with this.  If that happened, its remnant assets in Australia would not be too exciting.  A classic case of the traps of debt in a declining commodity price environment.

Company news – Cooper Energy Ltd (COE)

COE today announced the entering into of a Heads of Agreement (HOA) with respect to the first potential sale of gas (1 PJ p.a. for ~8 years) from its Sole gas-field offshore Victoria.  The HOA appears to be a typical “confidence builder” setting a framework for key issues such as price and volume.

The customer is an industrial gas user – a US owned glass manufacturer.  The relatively small volumes indicate an ongoing liberalisation in gas markets whereby end-users and suppliers are cutting out the wholesale middlemen (such as ORG and AGL).

Quote of the day

A quote from this week’s The Economist, which summarises where the resource sector is at present:

“Commodity prices peaked in 2011 and have been heading remorselessly downwards ever since. Their decline of more than 40% so far is a huge bear market; had it happened in equities, the talk would be of calamity and collapse”.

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