Today’s Blog – Tuesday 25th August 2015

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Introduction

Global stock markets were smashed again yesterday, with the ASX, and the resource companies listed thereon in particular, in the middle of the carnage.

From an oil and gas company perspective, this feels much worse than the GFC.  The latter induced a short sharp shock – but one that for ASX companies had a lot of prior good news momentum to push through to the other side with.  This was no better exemplified than by BG Group’s ultimately unsuccessful bid in 2008 for Origin Energy Ltd (ORG) at a hefty (but rebuffed) price of A$15.50 per share.   It is no comfort to this ORG shareholder to note that the share price recently went below half of this seven year old figure.

In mid 2008, Santos Ltd’s (STO’s) share price went above A$20 per share.  Now its share price has a “4” in front of it (a figure familiar from the 1980s) and he company will be lucky to remain an independent one by year end.

Ouch!

Commodity prices

Speaking of figures with an unpleasant number in front, overnight WTI closed down 6% at US$38.06 per barrel (whilst Brent fell even more – 7% – to US$42.48).  The fall was part of the world-wide collapse in asset prices, led by a large ~8% fall in the Shanghai stock exchange.

It is worth emphasising that oil markets cannot sustain these prices – the full cost of production of much of non-OPEC supply is somewhat-to-considerably higher than this and even low cost OPEC producers such as the KSA are burning their cash hoards very rapidly.  And – the nature of oil supplies – unlike say iron ore or coal – is that they deplete.

Henry Hub was a world of calm in comparison to crude markets, closing down a few cents at US$2.66.

LNG

Figures recently released from the PRC indicate that LNG has been substituting for pipeline gas imports, with the former over-taking the latter as the largest source of gas imports.  LNG prices, particularly in spot markets, have proved more flexible on the downside than stickier prices from the likes of Turkmenistan, whose sales volumes are presumably being pushed down to “take or pay” levels.

Mr Putin is due to visit Beijing in a few weeks’ time to admire the PRC’s shiny new weapons, and also possibly to do a few deals.  However, the Russian press has down-played any likely announcements over the Altai (also now called the Power of Siberia 2) pipeline from West Siberia to Western China.

Russian sources have however said that a deal on a sell-down of a ~10% equity stake in the troubled Yamal LNG project by Russian company Novatek to an un-named Chinese fund is close.  Any such deal will be political as well as economic and will likely have non-public elements that reflect the strength of China over Russia at the moment.

Over in the US we have just seen a rather more public development at Cheniere Energy – activist investor Carl Icahn has just taken two Board seats in the company.  I would not expect any major changes from this – possibly he is just riding a likely bull wave for the company in the lead up to its first GOM LNG exports by the end of this year.

Company news – Oil Search Ltd (OSH)

OSH announced its half year results this morning.  These were refreshingly anodyne – no write-offs, reasonable balance sheet flexibility, some credible growth projects, etc.

Company news – Senex Energy Ltd (SXY)

SXY released its full year results this morning.  The company has been one of the harder hit mid-size E&P companies recently on the ASX, notwithstanding it has no debt.  Its EV is now ~A$120M – around A$10/bbl of its 2P oil reserves, with no value being attributed to its gas assets.

Presumably the market has question marks over the future deployment of oil cash-flows into a Queensland CBM asset which has historically not been considered top tier.  Or possibly more likely, the market just does not like the oil and gas sector, period.

Company news – AWE Ltd (AWE)

AWE’s annual results were issued yesterday.  No particular surprises were included therein.  Unlike SXY, AWE has net debt – but also has in the Perth Basin a gas development asset which appears to be more mature than SXY’s CBM asset.  Otherwise the company’s asset portfolio is either un-focused or provides risk diversification, depending on your point of view.

Quote of the day

Continuing yesterday’s theme of what Edmund Blackadder might have said if he was ensconced in the STO Board room last week – this time as the company’s CFO:

“I’m as poor as a church mouse, that’s just had an enormous tax bill on the very day his wife ran off with another mouse, taking all the cheese.”

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