Today’s Blog – Friday 21st August 2015

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Introduction

The current oil price malaise is now picking up some serious scalps at the larger end of ASX listed company land.  As we noted a few days ago, the share price of Santos Ltd (STO) was smashed by nearly 10% last Friday.  That was eclipsed yesterday by a sell-down in Origin Energy Ltd (ORG) of an even larger 13%.

Today’s victim is the Managing Director of STO, David Knox, who has been relegated to an operating role whilst the company either finds a successor or is sold.  In the meantime, Chairman Peter Coates will be the Executive Chairman.  The company has announced a “full strategic review” whose end point could well be its loss of independence nearly 60 years after its foundation.

Low oil prices (and hence low LNG prices in the Pacific) mean that the LNG projects of STO and ORG in Queensland effectively make no money.

The ASX’s other two large LNG companies, Woodside Petroleum Ltd (WPL) and Oil Search Ltd (OSH) must be thanking their lucky stars that their own most recent LNG projects were effectively finished before the oil price smash hit them.

Commodity prices

Brent closed down slightly overnight at US$46.26, whilst WTI recovered somewhat from yesterday at US$41.14.  A slightly weaker US dollar helped the latter.  However, no bullish market commentators could be found who thought this was anything but a temporary respite.

Henry Hub closed up at US$2.75.

LNG

The Platts Pacific LNG price for September delivery (Japan/South Korea) is flat at US$8/mmbtu.  Not the sort of price that would make a positive return for the high cost Queensland projects.

Governments and fracking

The UK’s The Guardian newspaper has recently reported that green groups are girding their loins for “hundreds” of battles over potential shale gas exploration efforts in Britain, following recent licence awards.  It will be interesting to note how much exploration actually takes place, given the attitude of capital markets to oil and gas (Yuk!) right now.

Company news – STO

Things must have finally reached boiling point at STO, with the announcement of its so-called “succession plan” today.  As this blog has noted before, the abrupt “retirement” of the company’s Chairman earlier this year, and then an inchoate management re-organisation in more recent times, seemed to indicate dis-agreements at the top over various matters.  The largest of which was likely to be whether the company needed to do a large and dilutive equity raise or not.

That is still an option – but this blog presumes that by flinging the doors open to a full strategic review, the Board is responding to various proposals that have been put to them that extend far beyond a normal re-capitalisation.

We expect every investment bank in the land (and further afield) to be sharpening their spread-sheets and seeking clients and/or partners, etc.

Earlier in the week WPL flagged a plan to hold its powder dry until desperate seller opportunities opened up even wider.  STO’s wide set of assets don’t fit that well with WPL – but for instance its PNG LNG asset would be of serious interest to it.

Company news – ORG

As noted above, ORG’s share price was smashed yesterday – following its full year results announcements.  The market did not exactly like the disclosure of further costs and delays for its Queensland LNG project.

Internally ORG has now combined its E&P and LNG groups. I would expect further asset sales to be pursued – e.g. its remaining New Zealand assets (the Kupe gas field), etc.

Company news – Armour Energy Ltd (AJQ) and Empire Energy Group Ltd (EEG)

As noted yesterday, AJQ has recently entered into a non-binding LOI with Aubrey McClendon’s AEP over a possible farm-in to its Northern Territory acreage.   EEG has now announced it has done the same.

McClendon is an aggressive and smart US landman (one of the most successful ones in history), and I expect his tactics to be to play-off desperate ASX listed juniors against each other over turning LOIs into a binding agreement.

Quote of the day

Normally when an MD is replaced it is appropriate to say:

“Le Roi est mort, viva le Roi!”

But with STO we don’t yet have a new Roi.  Maybe in this instance its more apt to quote Louis XV:

“Apres moi, le deluge”.

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