Today’s Blog – Thursday 22nd October 2015

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Introduction

This week’s official visit by China’s President Xi Jinxing to the UK was marked yesterday by the signing of some “agreements” by Super-Major BP.

Earning themselves a triple-word score in that great desk-top game of bullsh*t bingo, BP “entered into a framework agreement for strategic cooperation” with giant Chinese NOC, CNPC.

That is, a non-binding MOU was signed in order to get some footage for the politicians on the evening news (however Kate’s appropriately red dress appeared to be of more interest there).

Under this MOU, BP will apparently expand its unconventional gas exploration efforts in China – which although clearly strategic is likely to be fiscally challenging.  The only issue of substance was the execution of an LNG sales agreement – for 1 mmtpa to be sourced from BP’s extensive LNG supply portfolio – which could have been signed at any time. BP no doubt banked some corporate defence credits with the UK Government.

Commodity prices

Crude prices fell by ~2% yesterday, with Brent closing at US$47.92 and WTI at US$45.72.  The key driver on the day was a worse than forecast inventory build number from the EIA.  US crude stocks increased by 8 mmbbls, off-set partially by a gasoline draw of 1.5 mmbbls and a distillate draw of 2.6 mmbbls.

Henry Hub fell 4% to close at US$2.40.  Milder than expected weather was the catalyst – demonstrating that there is not a lot of confidence in this market at present, given high gas storage numbers and an expected upcoming mild winter.

LNG and international gas

Origin Energy’s (ORG’s) AGM presentation yesterday indicated that its APLNG project would still break-even on a cash-basis at an oil price of US$23-25. That should roughly equate to an LNG price of US$5-6/mmbtu (ignoring confidential contractual complications such as s-curve pricing).

Given the fixed cost nature of almost all of the process of liquefaction (especially when powered by a project’s own gas), even that seems high to this blog.

Company news – STO

STO has this morning announced that it has received a highly conditional takeover proposal from Scepter Partners (hate the spelling!) of A$6.88 per share (a ~25% premium to its last price).  Scepter is an investment house that martials sovereign wealth, high net worth funds, etc and has a Middle Eastern flavour.

It is not known to this blog – but our knowledge in this space is not universal.  Whether it has the backing it claims or not is opaque.  It is clearly not an industry player – so presumably its strategy is focused solely on maximising returns from the existing STO asset base through a break-up or similar strategy – rather than seeing STO as a growth vehicle or one with synergies with its other assets.

STO’s Board has advised the market that it does not consider the proposal to be acceptable – given its conditionality (undisclosed) and its price.

The bell rings on round one of what could be an extended bout….

STO’s current strategic review process which was initiated a few months ago openly invited such offers.  The currently ongoing  negotiations for the sale of certain STO assets will play out against this – with heightened deal risk for potential buyers – both if they do and don’t act.

STO’s departing CEO, David Knox, has been widely quoted in the media this week following the GLNG first cargo ceremony of last Friday, basically saying that he chose to go at the right time (“blah, blah, blah”).  His timing in terms of trying to bolster his legacy appears to be unfortunate.

Company news – Quadrant Energy

Media reports today suggest that PE fund Quadrant (the acquirer of Apache Corporation’s Western Australian oil and gas assets and the mooted acquirer of STO’s assets in the same State) is already planning its exit/monetisation strategy.

A float is proposed – presumably timed to fit a rebound of oil prices in a few years’ time.

Company news – ORG

Following yesterday’s AGM, the media has been speculating on the future leadership of ORG – and as we noted yesterday, whether the company is potentially moving towards a de-merger.

Those with a long memory will recall that a significant development at STO – the first sell-down of its GLNG project to Petronas  for a higher than expected price – was a big influence on the successful defence against BG Group’s hostile takeover battle for ORG.

Will this latest STO development also have an influence on ORG’s future? For instance, if STO sells for a good price, will that encourage ORG’s shareholders to demand that the company sell-off its E&P business either by trade sale or demerger?

Company news – FAR

FAR went into a trading halt yesterday.  It is expected to come out shortly having made a placement to raise ~A$40M – as contingent funding for its upcoming Senegalese appraisal drilling campaign.

Quote of the day

David Knox’s natural (although perhaps currently foolish) attempt to protect his business record reminds this blog of a well known political quote from British MP Enoch Powell:

“All political lives, unless they are cut off in midstream at a happy juncture, end in failure, because that is the nature of politics and of human affairs.”

This is as true in business as in politics – very few CEOs ever craft the perfect exit.

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