Today’s Blog – Tuesday 18th August 2015

Please pass on this blog to others you think may like to read it

Introduction

Reflecting on yesterday’s news story about the complex tax structuring undertaken by the Gorgon LNG partners (Chevron, Shell and Exxon), this blog notes a potential inter-play with the widespread phenomenon of “corporate inversion” being undertaken by US companies.  This basically involves taking over a company whose head office is in a jurisdiction where the corporate tax rate is less than in the US (which is pretty much everywhere) in order to escape from the shackles of the onerous US tax system.

Notwithstanding political efforts to make such inversions harder to do (other than taking the sensible – but politically difficult – step of updating US corporate tax law), companies in many industrial sectors are still very active in pursuing this strategy.  However, energy companies have not been active corporate inverters – but there is no inherent reason why that should be the case.

So here’s my thought: Chevron should take over Woodside and move its head office to Australia.  Chevron already has a very substantial asset base in this country with Gorgon and Wheatstone and an Australian location could better allow it to pursue a full-on LNG strategy like Shell/BG Group.

Unlikely I think – I can image the political implications in the US of one for the largest remaining off-shoots of Standard Oil moving to – Australia?  Where’s that?

However, perhaps our Government would be better placed trying to push such a deal rather than promoting e.g. a greenfields coal project in the Galilee Basin which appears to be grossly uneconomic.

Commodity prices

Crude oil prices fell again overnight, with Brent closing at US$48.74 and WTI falling harder to US$41.87 (that is not far away to a number starting with a “3”).  Poor economic news from Japan and a negative manufacturing data point from New York appeared to be the main drivers for the fall (together with ongoing Iranian promotion of their ability to bring a lot of oil onto market quite quickly).

The “driving season” in the US, during which gasoline consumption is supposed to go way up, officially ends in a few weeks time on Labor Day.  This year it appears that Chuck Griswold and family have not been doing their bit for oil bulls as much as expected.  Or have they?  My in-depth research indicates that the car used in the original Vacation movie was a 1979 Ford LTD Country Squire Station Wagon – with a V8 engine – and a fuel efficiency rating of <19 miles per gallon.  The remake of this movie this year features the Albanian mini-van, the Tartan Prancer (don’t look for this in the shops) – which has a fuel efficiency rating around double that of its predecessor.  So driving season is not what it was.

The Henry Hub natural gas price fell to US$2.73 on poor inventory numbers.

LNG

A few negative data points from LNG projects around the world:

  • The Mozambique Government has recently changed the head personnel of its national oil companies. The reasons for the change are not clear – were the incumbents corrupt or not corrupt enough?  However, such opaque changes do not encourage greenfields LNG developers.
  • Russian energy news service Interfax has reported that the chances of Petronas’s Pacific Northwest LNG project moving to FID any time soon are fading, as Petronas currently does not generate enough cash-flow to pay dividends to the Malaysian Govt and meet its existing capex requirements, let alone commit to a major new project.

Governments

The West Australian has today reported that environmental approval has been given for the Browse FLNG project.

Now to get some customers!  And JV backing.  And costs down.  Etc.

Company news – Transerv Energy Ltd (TSV)

TSV today announced the spud of the Warro-5 well in its Perth Basin acreage (TSV is carried by aluminium giant Alcoa on this well).  Warro-6 will immediately follow – and then both wells will be “stimulated”.  WA is WA, not NSW or Victoria, but there is still a possibility of anti-frackers opposing this (which would cause considerable annoyance to other Perth Basin players such as AWE Ltd).

Company news – Otto Energy Ltd (OEL)

OEL reported yesterday that its (fully carried) Hawkeye-1 well in the Philiippines had come up dry (or more accurately, hydrocarbons had been encountered, but not in economics quantities).  The old “technical success”.

Company news – Icon Energy Ltd (ICN)

ICN had an EGM yesterday to deal with a single issue – trying to obtain a shareholder vote to support a redundancy payment to its ex-Company Secretary at a level greater than the Corporations Act permits without such a vote.  Not surprisingly, the shareholders voted against the payment (the ex-employee had already received $340k and was seeking another $165k plus 1.4M free shares – they are generous types over there at ICN!).

Where this leaves the company is unclear – on the one hand it has a contract of employment to deal with, whilst on the other it needs to follow the Corporations Act.

Quote of the day

Your blogster bought a few Santos shares last week – before the massive share price fall on Friday. Doh!  My reason: they seemed cheap.

I should have turned to guidance from Jim Chanos – arguably the world’s most famous short investor:

“Some of the best short ideas can look cheap from a valuation standpoint. I try not to short on valuation but on businesses where something is going wrong”.

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