Today’s Blog – Monday 24th August 2015

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Introduction

Friday’s abrupt changes at the top of Santos Ltd (STO) – and the effective putting of the company on the auction block – have dominated Australian oil and gas media coverage over the weekend and will be of close interest in the months to come.

It could now be the case that a take-over offer and/or battle for STO may emerge prior to the long-awaited Cooper Basin consolidation at the next level down.

Woodside Petroleum Ltd (WPL) has apparently already told the media that it is “not interested” in the company as a whole (although as we noted last week, it would likely be interested in STO’s PNG LNG asset – the latter’s crown jewel).

The media has also swiftly canvassed some other names as potential suitors (albeit with varying degrees of thought put into the analysis process):

  • France’s Total is said to have some potential fit with STO’s Gladstone and PNG assets – but would also have to take on a swag of non-core assets.
  • Japan’s Inpex has some nexus with STO’s assets off Northern Australia – but would likely move in a prudent Japanese fashion rather than pursue an aggressive takeover.
  • Origin Energy Ltd (ORG) has similar problems to STO that probably preclude a deal – basically it has too much debt.
  • In my view, private equity players are the most likely predators.

Commodity prices

Oil prices fell again at the end of last week, with Brent closing at US$45.46 and WTI at US$40.45.  Last week’s fall meant that oil markets saw the longest period of falling weekly prices for nearly 30 years.

The BHI rig count continued to show additions to the oil rig count, with 2 rigs being added.  This was the fifth week of additions, notwithstanding the huge fall in oil prices in the same period.

Henry Hub closed down at US$2.68, as the US natural gas market starts to eye the cooler Autumn period in which gas demand falls.

LNG

Late last week saw the transfer by Shell of its 50% operated interest in the Malaysian LNG project in Sarawak to Malaysia’s NOC, Petronas.  The fiscal terms of any deal were opaque.

On things Shell, the company has now received permission from the US Government to drill ahead its massively expensive well in the Alaskan Arctic ocean.  The target – known as Burger – previously yielded wet gas in a prior drilling campaign.

If that is repeated, there is only one market for the gas – LNG via the on-shore Alaskan AKLNG project.  Difficult as Alaska might be in terms of local politics, at least there is no realistic possibility of a NOC taking over operatorship (although Alaska’s Governor might seem to occasionally have other ideas….).

Governments and fracking

Last week we noted that the UK government had released on-shore acreage to shale gas explorers.  That release was limited to ground in England – as the Scottish Government (and potentially the Welsh Government) are part of the international ranks of those who have imposed a “fracking moratorium”.  The hypocrisy of the Scottish Government in doing so is note-worthy (but not surprising), given that its governing party, the Scottish National Party, is promoting an independent socialist worker’s paradise to be funded by “Scotland’s oil”.

Company news – Beach Energy Ltd (BPT)

BPT announced its annual results today and took the opportunity to have a massive clean-out of its balance sheet.  It has written off A$789M of oil and gas assets – around 40% of last year’s carrying value.

This level of write-off is so material that it arguably goes beyond the normal “kitchen-sinking” of a new MD – arguably it reflects the multi-decade term of the previous CEO was too long and allowed significant balance sheet detritus to build up.

BPT’s acting CEO is to be commended for reporting both pre and post tax numbers for the write-off – normal ASX disclosure practices tend to focus on the latter, smaller, number.  However, he did follow the iron rule of reporting that all write-offs are to be emphasised as being “non-cash” (which is only true depending on what time period one is looking at – real shareholder funds were burned over time).

Company news – Senex Energy Ltd (SXY)

SXY announced on Friday that it is slashing its capex for FY 2016, from ~A$80M last year to ~A$40M this year – with the majority of that to be spent on its shallow CBM acreage in Queensland’s Surat Basin.

In recent years SXY entered into a deal with the South Australian Government under which it converted Cooper Basin exploration licences into long term retention licences in return for a guaranteed broad-acre expenditure program.  It is opaque as to what this reduction in capex for the Cooper by SXY means in terms of this Government deal – e.g. are they merely deferring capex into the next few years?

Quote of the day

What Edmund Blackadder might have said if he has been in the STO Board room last week as the Chairman announced his “full strategic review”:

“Am I jumping the gun, Baldrick, or are the words ‘I have a cunning plan’ marching with ill-deserved confidence in the direction of this conversation?”

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