Today’s Blog – Monday 17th August 2015

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Introduction

One of the more marked changes in last week’s oil price data was a considerable widening in the spread between Brent and WTI – of ~US$2.  This widening coincided with a development in Washington, which all things being equal, should aid the compression of the spread.  This was a move by the Commerce Department to allow US crude exports to Mexico in the form of swaps (basically heavy Mexican crude for light sweet US crude).

The archaic 1970s US ban on the export of crude (other than to Canada or from Alaska) is the matter of some very slow discussions in Congress – with the speed of any legislative change likely being retarded by fear of any possible gasoline price rise being blamed on the change.  The new swaps with Mexico should provide some ability to raise WTI prices towards Brent levels (which paradoxically may sustain US production numbers and hence suppress global prices).

Commodity prices

Crude prices closed pretty flat at the end of last week, with Brent falling a couple of cents to US$49.19 and WTI climbing a bit more to US$42.23.

The BHI rig count numbers on Friday showed a slowing of the recent rig additions, with only 2 oil rigs being added to the count (with a reduction of 2 gas rigs for a net change of zero).

Towards the end of last week a concrete and material sign of financial stress in the US oil sector emerged – the bankruptcy of private equity backed Samson Resources.  The media noted that PE “Barbarians” KKR would lose ~US$4B on their 4 year old investment in Samson.  The broader question for oil prices is whether the likes of Samson’s assets will continue to be operated as “normal” under some new ownership structure or whether new drilling will cease and existing high-depletion rate wells will just be left to produce out.

The Henry Hub natural gas price was static at US$2.80.

LNG

Today’s Australian Financial Review (AFR) has a detailed story about the complex tax structuring that the Super-Major partners in the massive Gorgon LNG project have in place.  The primary intent of the structure (US company Chevron’s is different from European company Shell’s – and not surprisingly Exxon Mobil has “refused to comment”) appears to be to transfer income that would otherwise be taxable in Australia to other jurisdictions.  What the article does not say is that the US is also highly likely to be a jurisdiction that the partners would not want profits to arise in (given the very high US corporate tax rate).

The AFR quotes Chevron’s view on the return on equity at Gorgon as being ~13%.  This seems high given the massive cost over-runs at Gorgon – although the largest determinant of this figure will be long term (40 year) assumptions about oil prices.  However, the tax structure adopted could be providing some considerable assistance to the achievement of this figure.

Although frustrating for the Australian Taxation Office, the broader picture is that the likes of Chevron will not invest unless this sort of rate of return can be achieved – so the grim political choice can become do we want a lightly taxed mega project or none at all.

Governments and fracking

The British Government announced late last week that it would intervene in local planning decisions if Councils were tardy in processing onshore tight gas drilling permits, etc.

However, it remains to be seen how this would operate in practice if and when strong local groups (likely to emerge pretty much everywhere in the densely populated British Isles) oppose specific projects – particularly ones in Conservative seats.

Company news – Santos Ltd (STO)

Friday saw a highly unusual trading pattern in STO shares – ~4 times normal volumes and over the course of the day a nearly 10% fall in the share price.  There was no (public anyway) news to cause this fall.

The extent of this fall is marked for a company of STO’s size and could well have led to a “please explain” notice from the ASX. STO appears to have pre-empted that with a pre-market announcement today saying that the company has no need or intention to raise equity.

The current leadership of STO has really nailed its colours to the mast on this issue of “no equity raising” – possibly to the extent that desirable corporate flexibility has been reduced.

STO is due to release its half year results at the end of this week and the market will closely scan these for signs that new equity is or is not required.

Company news – APA Group Ltd (APA)

The ACCC has sought industry submissions in connection with APA’s potential acquisition of Energy Australia’s gas storage asset at Iona, Victoria.  As noted in this blog previously, APA is well placed, from a strategic, synergistic and funding position, to acquire this asset (for a sum speculated to be well north of A$1B).

Company news – Cooper Energy Ltd (COE)

Today COE has issued its full year results.  The company’s strategy to focus on East Australian gas projects appears to be on track (and as we noted last week, appears to be more advanced than Beach Energy Ltd’s (BPT’s) own recently announced East Australian gas strategy).  BPT is of course COE’s largest shareholder, although it has no Board representation at COE.

COE has long been blessed with a healthy cash position (unlike the vast majority of its similarly sized peers).  However, the implementation of its strategy has necessarily resulted in the burn of this cash balance at rates that are ultimately not sustainable.  This will inevitably lead to the market having to chose between supporting a sensible strategy – or ducking for cover.

Quote of the day

The political back-drop to the US’s 1970s imposition of crude oil export bans is demonstrated by the following quote from the time:

“By 1975 and possibly earlier, we will have entered a permanent sellers’ market, with any one of several major suppliers being able to create a supply crisis by cutting off oil supplies”. James Atkins, State Dept

Forty years on, the oil industry currently wishes that it was a seller’s market!

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