Today’s Blog – Tuesday 11th August 2015

Introduction

Last week’s Wall Street Journal used some simple arithmetic to demonstrate the starkness of the position the industry currently faces: revenues over the next three years will be US$4.4 trillion (that beings with a “T”, not a “B”) less than what was expected under previous price assumptions.  That sort of money cannot be found from cost savings, efficiencies, capital deferrals, etc.

The wider oil industry appears to be seeking new business models to respond to this massive loss of top-line revenues, as follows:

  • The two giants of the service sector, Schlumberger and Halliburton are adding banking to their core businesses – through the making of “frack now and pay later” offers to E&P companies.  This may end up being an involuntary path to asset ownership if creditors default.
  • Meanwhile, the Super-Majors are making out like utilities, with maintenance of dividends being prioritised over renewal of reserves and resources.  In that context I note Warren Buffett’s view on the sustainability of this dividend paying behaviour: “No matter how conservative its payout ratio, a company that consistently distributes restricted earnings is destined for oblivion unless equity capital is otherwise infused”.

Commodity prices

Oil prices rebounded overnight, with Brent closing up at US$50.12 and WTI at US$44.82.  The key drivers were on the US-led “numbers” side of the ledger, with the dollar falling and signs from the Federal Reserve that the long awaited rise in interest rates (and hence the lowering in value nearly all assets, including commodities) could be further away than the previous consensus view.

The Henry Hub natural gas price also rose, closing at US$2.84 – on hotter than normal weather in the South and Central US driving higher demand for gas-fired power.

LNG

Last week this blog promoted the potential for expansion of the Gazprom/Shell/Mitsui-Mitsubishi Sakhalin-2 LNG project.  That has now hit a potential brick wall, with US authorities expanding current anti-Russian sanctions to include a key gas-field that would supply the brown-fields project.  US based LNG projects will likely benefit from the reduction in competition.

Over on the US side of the Arctic, Shell has now commenced drilling off-shore Alaska’s North Slope – in what, all up, could be the World’s most expensive well.  If gas is found therein rather than oil, Shell could only access gas markets by going through facilities on the North Slope owned by rivals Exxon, BP and Conoco – happy negotiating time!

As flagged yesterday, Japan is re-starting the first plant in its nuclear fleet today at Sendai.

Governments and fracking

Potentially very serious news has emerged for Queensland’s coal bed methane (CBM) industry: the leaking of a report from the Queensland environmental authorities into the harmful effects of Linc Energy’s underground coal gasification (UCG) project in the State.

The public do not differentiate between the completely different CBM and UCG industries – and CBM will be tarred with Linc’s very toxic brush.  Calling CBM “coal seam gas” (CSG), as occurs in Queensland, arguably exacerbates this risk.  UCG produces syngas (hyrogen, carbon monoxide, etc), whilst CBM produces good old, and well accepted, methane.  Language is a weapon in these wars.

That is demonstrated by a new push by the lock-the-gate crowd to brand farming produce “certified gasfield free”.  Linc’s apparent poisoning of farm-land in Queensland will give this promotion a massive boost.

Cynics may question whether Linc’s move from the ASX to the Singapore Stock Exchange at the end of 2013 was at least a partial mitigation measure against the emergence of this issue.

Company news – Beach Energy Ltd (BPT)

BPT today announced the sale of its Egyptian assets to AIM-listed Rockhopper Exploration Ltd.  The consideration is US$22M, of which around half will be cash and the balance in Rockhopper stock.  London analysts have suggested the price is an attractive one for Rockhopper.  BPT will take a large write-down on this disposal.

On the other hand, BPT has also announced today the acquisition of an asset – this time in its Cooper Basin heartland.  It has bought a 40% operated interest in a large Queensland permit from AGL Ltd for A$1.1M. AGL itself acquired this through the acquisition of Mosaic Oil Ltd – who paid considerably more than this latest price.

The timing of these two deals no doubt plays into tomorrow’s presentation by the company’s new MD into the results of his strategic review (expect “less foreign stuff and more Cooper stuff”).

Company news – Karoon Gas Ltd (KAR)

KAR has come out of its trading halt – but the news is bad not good.  The Levitt-1 well offshore WA has come up with no hydrocarbon shows and water-wet reservoirs.

Company news – Pura Vida Energy Ltd (PVD)

PVD joins KAR in the dry-hole club, with its fully carried MZ-1 well offshore Morocco also having no oil shows.  KAR and its JV partner will defer the drilling of a second well in this area until next year (thereby obtaining cheaper rig rates).

Both of these wells were high risk (and reward) exploration wells – but the sector sorely needs some good results in order to attract capital back to it.

Quote of the day

The US$4.4 trillion hole noted above affects countries more than companies – and it is not only the latter that need to diversify.  From today’s The Economist Espresso:

“OPEC members such as Angola, Nigeria and (especially) Venezeula are in far worse shape. In theory they should diversify and modernize their economies. But oilmen will eat quiche before that happens”.

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