Today’s Blog – Wednesday 30th September 2015

Please pass on this blog to others you think may like to read it

Introduction

Yesterday saw a Glencore inspired rout for resources stocks of all stripes on the ASX, from BHP on down.  However, overnight Glencore re-bounded 17% following a confidence boosting announcement from the company (and talk of privatising it).

Swings of this magnitude for a large listed stock (although not nearly as large as it used to be) demonstrate a few things.  Firstly, the leverage power of debt, for good and bad.  Second, the lack of consensus over where commodity prices are going.  Third, that the perceived integration benefits of Glendora’s mining/trading model are not universally admired.

As noted yesterday, Santos (STO) shares some connections with Glencore, not least its Executive Chairman, Peter Coates.  Like Glencore, STO’s high gearing level has been a significant factor in its large share price fall.

Commodity prices

Crude oil benchmarks rebounded overnight, with Brent closing at US$47.96 and WTI at US45.23.  Prices were boosted by strong business confidence numbers in the US, together with analyst consensus that this week will see further falls in US crude inventories.

Yesterday’s news about Shell pulling out of its Arctic exploration program could also have some good news for long term oil markets.  The USGS had previously estimated that the Arctic contained ~90 billion barrels of recoverable oil – with a goodly part of this being in the US sector.  Some recent media reports had quoted this number as being “reserves”, whereas they are in fact highly speculative prospective resources.

Given the very very few drilling based data points that this number was based on, Shell’s failed Burger J well is likely to significantly downgrade this number – possibly by a number as large as tens of billions of barrels.

Henry Hub gas prices fell yesterday to US$2.59.  Expected mild Autumnal weather in the US was the key driver.

LNG

Platts has recently reported that Asian spot LNG prices (for delivery in October) are expected to fall again.  Mild weather on this side of the Pacific, combined with currently high inventory numbers, is the main causal factor behind the fall.  A strong El Nino later this year will only reinforce this.

The interaction of these low Pacific prices with the expected wave of US LNG due to start by the end of this year is unclear.  Existing contracted gas purchases will trump spot price economics and the likes of Cheniere should be protected by take or pay contracts for their liquefaction capacity – but the actual volumetric output from the plants (and hence the effect on Henry Hub gas prices) may be less than previously expected.

Governments and fracking

ASX micro-cap New South Wales explorer Metgasco Ltd (MEL) continues to be a focal point for the State’s apparent legion of anti-frackers.  MEL announced yesterday a small seismic program to assist in further delineating its conventional (albeit likely tight) gas prospect in Northern NSW.

Naturally the lock-the-gate brigade reacted strongly (they don’t appear to have day-jobs…).  Notwithstanding their own use of fossil fuels, they declared that the local community should be a “gas-field free” one – presumably meaning that other communities, e.g. in Queensland, should be further “gas-field intensive” ones in order to supply their needs.

MEL’s strategy of announcing the seismic program could well be one whereby it is seeking to put pressure on the NSW Government to agree a reasonable compensation price for surrendering its licence.

Company news – Origin Energy (ORG)

ORG went into a trading halt as it announced a large (A$2.5B) fully under-written rights issue – at a discount of ~34% to its prior share price.  This was only part of a comprehensive program to shore up its balance sheet, which also included further cost cutting, dividend cuts and further asset sales.

On the latter, international assets were flagged for sale, of which New Zealand’s Kupe would be the most material.  Additionally, and for the first time publicly, ORG indicated it could sell its non-operated interests in the Cooper Basin and Perth Basin.  The former in particular should be attractive to the private equity groups who have been looking for distressed assets coming to market.

STO’s share price has fallen this morning, arguably due to the market concluding that it may at some point follow ORG in undertaking a deep discounted rights issue.

Company news – STO

A recent story in the New York Times, picked up by Melbourne’s The Age, re-opened STO’s bete noire from a few years ago – the “Lusi” mud volcano in Indonesia (also known as Banjar-Panji).  The story reported on a recent study that had concluded that drilling operations (in which STO participated as a non-operating party) had been the cause of this disaster (which was worse than Macondo from some perspectives).

The Age however failed to pick-up on STO’s involvement.  Although likely coincidence, a conspiracy theorist could see the benefits to the large shorts in STO’s stock of this story being re-opened at this time.

Company news – American Patriot Oil and Gas (AOW)

An ASX announcement from micro-cap AOW yesterday included one of your blogster’s favourite names from the oil patch – Edward Mike Davis – also known as “Tiger” Mike – and the famous author of the seminal 1970s Human Resources memos on how to manage an oil company.

I didn’t realise that the Tiger was still on the prowl – but apparently he has offered AOW US$20M for its assets – which has been rejected, at least for just now.

Quote of the day

How could I not go back to the archive of Tiger Mike’s memos for today’s quote.  Here’s another classic:

“There is one thing that differentiates me from my employees. I am a known son-of-a-bitch, and I care to remain that way. I have the privilege of swearing publicly, in front of anyone, or doing anything I want to because I pay the bills. When you work for me, you don’t have that privilege”.

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