Today’s Blog – Tuesday 8th September 2015

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Swiss based (but London listed) commodity trading and mining giant Glencore has recently adopted a crash program of debt management that looks eerily familiar to Australian oil and gas investors in Santos Ltd (STO).

STO’s current Executive Chairman, Peter Coates, is a non-executive Director of Glencore (and was an Executive Director there in the recent past) and is no doubt drawing upon experience at both ends of the globe during the travails of the two organisations.

Glencore has just announced a program of:

  • Dividend suspensions – STO has effectively already done this, albeit through the smoke and mirrors of a fully underwritten dividend reinvestment plan (which has the same affect as a suspension, albeit with some minor dilution and some enrichment of bankers).
  • Equity issuance – STO has not yet pulled the trigger on this – and the ongoing fall in its share price signals that the shorts are having a field day over this possibility.  Glencore has bitten the bullet – albeit it does not need to issue as much stock percentage wise as STO arguably does.
  • Asset sales – today’s The Australian signals that STO might execute some asset sale deals as soon as this month, whilst Glencore are not as (visibly) as advanced in their sale process.  If STO did deliver material sales that quickly, the market would no doubt react positively, particularly if the shorts need to quickly close out their positions.
  • What Glencore has not said, but is highly likely to be the case, is that its proposed “merger of equals” with Rio Tinto is now dead (although Glendora’s MD, Ivan Glasenberg might say “its not dead, its merely resting“).  STO’s share price diminishment and over-stretched balance sheet also likely precludes it from aggressively acquiring assets and/or companies in the current low commodity price environment.

Commodity prices

The Labor Day holiday in the US meant that WTI did not trade yesterday.  On the other side of the pond in London, Brent closed down sharply over-night, falling 4% to US$47.63.  That left the spread over WTI at only US$1.58 – likely a sign of big falls due in WTI on Tuesday in the US (all other things being equal, which will likely not be the case).

The key driver for Brent appeared to be another fall in the Chinese stock market – aided by Reuters reports of higher than expected North Sea production.  With Middle Eastern “events” being quiet (relatively speaking), Chinese “numbers” are the key item that crude market participants are looking at side-by-side with US “numbers”.

Henry Hub also did not trade on Labor Day and the last price remains US2.66.


Russian plans to export more gas from its Eastern provinces have been going more slowly than the Kremlin would like, not least due to Chinese “recalcitrance” in doing anything than a good deal for itself in terms of financing and commodity pricing.

It is therefore no coincidence that Gazprom has opened up another option for itself – exporting gas from the West of Russia, through the Baltic LNG project, which is a 10-15 million tonnes per annum project located on the Gulf of Finland.  Exporting from here would cut out the Ukraine pipeline route and presumably utilise established gas resources from Western Siberia.

Customer procurement to underwrite the project would clearly be critical and this is one reason why Gazprom is in discussions with Shell over its participation in the project.  The merged Shell and BG Group would have unrivalled LNG marketing muscle to take output from this venture, as well as providing development expertise.

Shell’s participation in these discussions with Gazprom demonstrate the thickness of hide that the oil majors have to have, given their investments in “difficult” places around the world.  Readers will recall that as recently as 2007 Gazprom forced Shell to sell a majority stake in the Sakhalin 2 LNG project to it at a knock-down price, induced by spurious environmental “breaches”.

Company news – Woodside Petroleum Ltd (WPL) and Oil Search Ltd (OSH)

Previous industry gossip about WPL possibly making a move on OSH have come to fruition this morning. OSH has disclosed a confidential(!) and non-binding approach from WPL, which outlined a takeover offer (though a scheme of arrangement) on a 1 for 4 shares basis.

The conditionality that WPL sought seems highly unlikely to be acceptable, including as it did, exclusivity, due diligence and PNG Government support.

This appears to be only the opening move in this game.  WPL can increase the price and change the terms – but without PNG Government support it would seem highly unlikely that a deal would proceed.

The Santos share price has leapt this morning – possibly as a flow-on consequence of the WPL/OSH deal – particularly given the large short positions noted above.

Company news – Origin Energy Ltd (ORG)

ORG’s Chairman, Gordon Cairns, has recently taken on the Chairman-ship of troubled retail giant, Woolworths Ltd, with the key initial task of finding a new MD for the company.  In order to free up time and avoid conflicts, Cairns has resigned from an advisory role at McKinsey and has also reduced his other Board commitments.

However, there is no sign that he will relinquish the Chairman-ship of ORG, which like its peer STO has seen its share price absolutely smashed in recent times due to its over-geared Queensland based APLNG project.

This possibly signals that Cairn considers that he has an upcoming job at ORG of bringing in a new MD there too.

Quote of the day

Where next for WPL and OSH?  Guidance from 19th Century German Field Marshall Helmuth Karl Bernhard Graf von Moltke:

“Therefore no plan of operations extends with any certainty beyond the first contact with the main hostile force”.

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