Today’s Blog – Tuesday 20th October 2015

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Towards the end of last week oil services behemoth Schlumberger (SLB) announced its quarterly results – which were below consensus, but at least still in the black.

The company’s CEO, Paal Kibsgaard made some sombre statements, including the following:

“In light of conservative customer budgets for next year, we are therefore entering another period during which we will continually adjust resources in line with activity, as the recovery now appears to be delayed.”

The shear breadth of sectoral exposure that SLB achieves, including in locations such as the Middle East where the Western oil companies are locked out, means that the company’s perspectives often provide insights not available to its E&P brethren.

On matters Middle Eastern, news emerged overnight that contractors in Saudi Arabia are experiencing delays in receiving payments, which would appear to support SLB’s gloom.

More fuel for the “U” shaped oil price recovery believers?

What could make the last part of the U more dramatic in its impact than some expect is the view that US tight oil production will not just bounce back in response to price signals – and SLB appears to support this thesis.  That is, capital markets do possess Mr Spock like logic and coolly respond to changed circumstances – rather, as Warren Buffett often quotes from Benjamin Graham’s the Intelligent Investor:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Therefore high prices may not see capital flood back to US tight oil as logic would suggest – leading to a supply crunch in oil markets in years to come, with little spare capacity left in OPEC and the newly expected spare capacity role of tight oil not eventuating.

Commodity prices

Crude price fell nearly 3% over-night, with Brent closing at US$48.83 and WTI at US$46.09.  The bad news on the day was a combination of poor (or un-trusted) Chinese GDP growth numbers; the pace building towards more Iranian oil hitting markets in the next few months; and, a stronger US dollar.

The Henry Hub natural gas price strengthened a couple of cents to close at US$2.45.  At or around this price natural gas is highly competitive with coal for electricity generation, which should assist the views of those who consider this price range to be a floor.

LNG and international gas

The commencement of LNG exports from the Gulf of Mexico seems likely to now be delayed by a few weeks or even months.  Cheniere Energy, the largest player in US liquefaction said late last week that first cargoes should now set sail in early 2016.  This will no doubt weigh heavy on the Henry Hub gas price for the next few months – particularly if combined with a El Nino induced mild winter.

The Australian Financial Review (AFR) today published a story on “Russia is running out of money“.  This economic foundation should be strongly borne in mind when reading other news stories about Russia supposedly building expensive new gas pipelines (to China, to Turkey, in Pakistan, etc).

With respect to the key Chinese pipelines, fiscal reality will drive further Chinese financing and involvement in Russia’s upstream – and if that is unpalatable to the Russians (which it likely will be) – then further delays will arise for these projects.

Putin does have some friends in the world – and a perhaps unlikely one is Israel’s PM Netanyahu.  News stories have recently emerged over Putin seeking a deal for Gazrprom over the large Leviathan gas discovery offshore Israel.  Readers may recall that Australia’s Woodside Petroleum (WPL) pulled out of a deal on Leviathan due to, inter alia, interminable Israeli regulatory delays.

Whether any deal happens on this seems unlikely – as always, does Russia really have the money; the other JV parties may not like Gazprom entry and could pre-empt it; etc.

Governments and fracking

The New South Wales Government has just purchased another petroleum exploration licence in the State – this time PEL 445 from Dart Energy (now owned by UK based Igas) for A$1M.

The Green Party in the State has called for the Government to arguably ignore the country’s Constitution, let alone natural justice, by saying the asset should have been appropriated (English translation: “stolen”) for zero compensation.

Company news – WPL

WPL’s CEO, Peter Coleman recently spoke at an LNG conference in Canada (where his company has a stake in the Kitimat LNG project operated by Chevron).  He said that the local cost structures needed to come down by 25% to 30% as Asian LNG buyers would pay no more than US$10-US$11/mmbtu.

Translating the economics of this to his base in Australia would seem to suggest that his Browse floating LNG project offshore Western Australia will struggle to make its fore-shadowed FID next year.

Company news – FAR

FAR has arguably the most high impact upcoming drilling campaign of any ASX listed E&P company.  FAR has a stake in what may have been the world largest oil discovery last year – offshore Senegal.  A 3-well delineation campaign is due to start soon, with a drill-ship on its way to location.

The Senegalese fiscal regime and its oil economics appear attractive (although the country would be no orphan if it changed its fiscal regime after a development had commenced) and the asset is of a type that should appeal to the Majors (Conoco is the Operator).  FAR is unlikely to go though full development itself.

Quote of the day

As alluded to by SLB’s CEO, US tight oil companies face a financing squeeze at present. Their situation was pithily summarised by one investor as:

“They are the walking dead. They can’t issue equity. They can’t issue debt. And they can’t sell assets.”  Ron Hulme – Parallel Resource Partners

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