Today’s Blog – Monday 9th November 2015

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Introduction

Exxon – almost inarguably the world’s premier oil company – has to date ridden the rough ride of the last 12 month’s oil price slump better than its peers.  For instance, it has not engaged in the wholesale sackings that have otherwise been pretty much de rigour.

However, a recent Bloomberg report pointed out some salient facts which show that even the mighty “Empire” faces significant challenges in the years ahead.  The report focused on the almost 10 year reign of Exxon’s current CEO, Rex Tillerson – noting that he was expected to retire in 2016.  Over that 10 year period, Exxon’s daily production has declined by almost 10% – and to even maintain that level, its cash balance has been depleted from US$29B to US$4B.  Somewhat less measurably, the company’s “bank” of exploration prospects has also arguably been largely drilled out.

Like its peers, the company is currently making excellent profits from its downstream operations, but from an upstream perspective, it has a much harder road ahead..  Production growth in the US tight oil and gas plays should be feasible – if prices recover – but otherwise material growth may have to be found by drilling on the floor of the stock-market.

Exxon therefore captures the current conundrum facing the industry – it is increasingly harder to find oil and gas – but prices are currently too low to incentivise further searches.  Likely result – in the medium term prices will have to rise, and arguably materially.  Or – in the longer term, oil will be increasingly replaced in the energy mix, particularly by electric, fuel-cell and gas fired vehicles.

Commodity prices

At the end of last week, oil prices fell again, with Brent closing down ~1.3% at US$47.42 and WTI down ~2.4% at US$44.29. Overall the week saw a ~5% decline.

The BHI rig count on Friday was relatively bullish for oil prices – with a 6 oil rig fall (and a 2 gas rig rise).  This was the 10th week in a row of declines.

However, that news was swamped by a very positive US employment gain number.  The market considered that number will mean that a US interest rate rise is now more likely than not by year end (in the view of Bill Gross, that likelihood is now “100%”).  The US dollar was accordingly boosted and commodities across the board took a hit.

The Henry Hub natural gas price was flat, closing at US$2.37.

LNG and international gas

The pipeline which has consumed more column inches than any other, the Keystone XL pipeline, which is designed to move more Canadian oil from Alberta to the Gulf of Mexico, received a blow on Friday – perhaps a fatal one – as the White House finally issued a decision not to approve its construction.

Keystone XL had become a badge of political identity in the US – with the left opposing it due to the alleged contribution it might make to global warming (as Canadian tar-sands are a more carbon intensive form of oil extraction than conventional oil).

However, in the view of this blog, this pipeline project was not a particularly significant one – certainly not in global terms.  Whether it goes ahead or not would make no difference to oil demand, very little impact on oil supplies, with next to no affect on prices and a negligible impact on global warming.

Given Shell’s recent cancellation of a Canadian tar sands project (and what that decision says more widely about the economics of tar-sand production at current prices), the interesting question is begged – would supply growth in Alberta be sufficient to feed this pipeline anyway?

Governments

As we noted last week, the infamous shake-down merchants in the form of New York prosecutors have turned their avaricious gaze on the deep pockets of Exxon – focusing on the latter’s history with respect to global warming science and politics.

The next CEO of Exxon will have another major item on his/her agenda.

Recent media reports have signalled that the net is being widened to include investigating the other Super-Majors.

Company news – Santos (STO)

A big day for STO news (and what’s more, news delivered by formal ASX announcements rather than off-the-record backgrounding):

  • A deeply discounted A$2.5B rights issue – fully underwritten – as part of a plan to raise A$3.5B to pay down debt
  • An asset sale – STO’s interest in the offshore Victorian gas-field Kipper, to Japan’s Mitsui, for A$500M.  No other asset sales are planned at present.
  • A new CEO – ex Woodside Petroleum (WPL) executive Kevin Gallagher.  An engineer by background, his remit appears to be to focus on delivery of exiting projects and cost cutting, rather than growth.
  • Most puzzlingly – a A$500M placement to a Chinese private equity group Hony Capital.  The placement has been made at a premium, and Hony has made various undertakings about neither selling down nor increasing its ~8% stake over the next year.  However – why do this rather than just increase the size of the rights issue?  From Hony’s perspective – its mandate appears to previously focus on in-bound Chinese investment – so why the change and what does it hope to achieve?  If this stake diminishes the ability of STO to be taken over by others – which it arguably does – then the fiscal benefit of the above market placement price would seem to be swamped by the loss of a potential takeover premium.

Company news – Origin Energy (ORG)

ORG has been (unofficially) reported as commencing the sale of its Cooper Basin and Perth Basin assets in the next few months.  Beach Energy (BPT) and Quadrant Energy have been speculated on as the likely buyer of each asset respectively, however we expect keen interest in both, albeit for different reasons, given their degrees of maturity and partners.

Quote of the day

As noted above, there is growing momentum in prosecutors looking at oil companies through a lens of “are they the next tobacco companies covering up global warming”:

“ Exxon Mobil is not alone,” said Stephen Zamora, a professor at the University of Houston Law Center. “This is not likely to be an isolated matter.”

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