Today’s Blog – Thursday 20th August 2015

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Introduction

The oil market has been smashed again overnight (more below).   Current sentiments appear to be very bearish, with every piece of bad news being the signal for a sell-off.

A quote from Tudor Pickering Holt’s daily note to clients yesterday is set out below.  To my mind this provides a clue as to the source of much of this bear-ishness:

“The snapback in stocks / commodities coming out of the 2008/2009 financial crisis spoiled us…it’s usually not that easy exiting a down cycle.”

This to me says that the market is going through the “five phases” of grief after last year’s oil price crash – and we are now only at the second phase: anger that the re-bound has not yet come (and is not in sight).  If this cod-psychology is correct, then we have still three phases to go….

Commodity prices

Brent closed down more than 3% at US$47.00, whilst WTI was even harder hit, closing down 4.3% at US$40.55.  The twelve month forward price is now worse than it was during the 2008/09 GFC induced oil price fall.

The numbers du jour which induced this fall was data from the EIA’s weekly report, which indicated that US crude inventories increased by 2.6 mmbbls (although net product inventories – gasoline and distillate – fell by 2.1 mmbbls).  The market consensus figure earlier in the week had not anticipated the extent of the build.  The EIA also reported that US daily imports had increased by ~0.5 mmbopd – implying that the US is being used as the global storage site of last resort.

The Henry Hub natural gas price closed down 1c at US$2.71.

LNG

Regular followers will recall that this blog considers that the Alaska LNG project is the tortoise of the LNG world – well placed to beat some of the flashier hares.  However, Alaskan politics is currently bouncing a few rocks off the shell of this plodder.  Readers around the world will recall that Alaskan Governors can often be colourful characters – looking no further than one of the favoured running mates of The Donald, one Ms Sarah Palin.

Not wanting to be beaten by Ms Palin’s appetite for socialist oil industry taxes, the latest Governor (Bill Walker) has introduced a concept worthy of Hugo Chavez: taxing gas resources in the ground (a “reserves tax”) at the same time as he has signaled he would like the State to takeover 51% of the BP/Exxon/Conoco AKLNG project.

As this is the USA, I expect reason to prevail eventually – but this shows that LNG projects everywhere are subject to politicians mistaking fragile eggs for golden gooses.

Governments and fracking

Victoria’s Auditor General released a report yesterday concluding that the State was not as well placed as it should be to manage issues associated with on-shore oil & gas exploration.  This has led the Greens to issue a clarion call for the ban of fracking for the period of “forever” (rather than the usual mealy-mouthed five year moratorium).  The Farmer’s Federation wants more “science”.  Clearly more than a million safely fracked wells don’t provide a statistically valid sample size……

Company news – Armour Energy Ltd (AJQ)

Micro-cap AJQ has announced today that it has signed a non-binding deal with large US private equity firm, American Energy Partners (AEP) under which the latter may farm-into AJQ’s Northern Territory acreage.

AEP was founded a few years ago by the colourful ex-CEO of Chesapeake Energy (the second largest US gas producer), Aubrey McClendon.  This is the first deal that it (or Chesapeake, to my knowledge) has done outside the USA – the well costs, etc, will not be familiar!

If the deal is turned into a binding one, it will see AJQ be 25% free-carried through a US$100M program, and receive US$11M cash up-front as well.

AEP’s founding investor was another US private equity firm, Energy & Minerals Group (founded by ex-Exxon MD Lee Raymond’s son) – who themselves recently entered the Northern Territory through a farm-in with private Australian company, Pangaea Resources.

Company news – A J Lucas Ltd (AJL)

AJL has a 40% stake in the UK’s best known shale gas exploration company, Cuadrilla Resources, who were recently awarded further exploration licences in on-shore England.

Company news – Beach Energy Ltd (BPT)

BPT today announced that it had appointed an acting-CEO – Neil Gibbons – as MD Rob Cole was absent for family reasons.

Company news – Santos Ltd (STO)

Tomorrow STO will announce its half-yearly results.  Its full year results in February included a A$1.6B write-down – but using oil price assumptions that are significantly higher than the current forward strip – or indeed than the bearish sentiments on price that came from Woodside’s results briefing earlier this week.

STO will have to walk a narrow line between not being seen as being over-optimistic on oil prices versus not wanting to precipitate the equity raising which its leadership has nailed its credibility to not doing.

Quote of the day

Aubrey McClendon’s robust views on the fracking debate:

“We frack all the time. What’s the big deal? Where is the mushroom cloud? Where are the dogs with one leg?”

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