Today’s Blog – Tuesday 10th November 2015

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We noted yesterday that large enough organic growth options for the Super-majors like Exxon were limited – so instead they might more profitably pursue growth by “drilling on the stock-market floor”.

News from the US overnight made this statement timely.  This was the revelation that US$18B independent Apache Corporation had received an unsolicited takeover approach.  The predator was not named, but analyst speculation has focused on the likes of Exxon.  As one analyst said, once a takeover premium and debt were accounted for: “You need someone who can come in there with $30 billion. That thins out the list to begin with.”

Analysts also pointed out that there could be tax advantages from the acquirer being a European Super-major such as Statoil or Eni (readers may note the frequent phenomenon in other industry sectors such as pharmaceuticals of US companies escaping from the onerous US corporate tax regime by “inverting” – i.e. moving their tax jurisdiction through a merger).

Shell’s takeover of BG was thought by many to open the floodgates on other corporate activity up at the top end of the oil and gas food-chain.  After many months, maybe now we are starting to see this.

Commodity prices

Crude oil prices fell again over-night, with Brent closing at US$47.28 and WTI at US$44.00.  The key “numbers” item that drove the fall was a material month-on-month reduction in Chinese crude imports.  Monthly figures are volatile – but this could signal that the Chinese SPR is reaching its limits.

The Henry Hub natural gas price fell 2.5% overnight to close at US$2.31.  The end of last week saw total gas in storage in the US tieing with a record level of 3.9 Tcf – and with mild weather conditions, the record could be broken in the next few weeks.

LNG and international gas

Goldman Sachs has added its voice to the growing industry view that spot LNG prices have not yet found a bottom (we noted last week that Wood Mackenzie predicted a possible US$4/mmbtu gas price). Goldmans predict a <US$5 Asian spot price in 2018 and 2019.

This sort of price will challenge LNG projects on what is really the marginal cost of production and when it makes sense to curtail sales that might be making a cash loss.  On the buyer side, the availability of a depressed spot price will encourage them to reduce higher priced fixed contract purchases as much as possible – both within-in contract (e.g. to take-or-pay levels) – or ultimately to seek to re-open contract terms.

This trend was recently illustrated by a Bloomberg report on Toshiba’s take-or-pay position with respect to liquefaction capacity booked by the Japanese company at the Gulf of Mexico’s Freeport LNG plant.  Toshiba has effectively gone very long liquefaction – ~US$7B – and now is desperately trying to close its position out with the likes of on-sales.  When markets change, contracts can be broken, even by the most honourable and robust of parties.

From an East Australian point of view, a key question is: if Pacific LNG markets become as weak as forecast – what will this mean for the production levels expected from Gladstone?  For instance, what happens to East Coast gas markets if the Gladstone projects produce at only take-or-pay – or lesser – volumes?  Will for instance parties who are both producers and buyers (e.g. Kogas and Petronas) prefer to shut-in GLNG production and source spot gas instead?  How would they deal with their partners over such decisions, etc?

The simple meme that East Coast Australian gas is short – due to expected name-plate full capacity demand from 6 Gladstone liquefaction trains – may be challenged.

Company news – Santos (STO)

Much media analysis has followed STO’s various announcements yesterday about its placement, rights issue, asset sale and CEO appointment.

As we noted yesterday, much focus has been on the placement to Chinese PE group, Hony Capital.  The general consensus is that this has given rise to a blocking stake – and on cheap terms.  The company’s protestations to the contrary seem to be too loud.

A key giveaway as to what was driving the STO Board in its recent strategic review was the code name given to this process: Project Solo (as revealed in today’s Australian Financial Review).  This choice of name would seem to indicate that retaining independence was the main objective (what about Project Shareholder Value?).

This blog is reminded of some incidents when British Scientific Intelligence in World War Two (as set out by Professor R V Jones in Most Secret War) determined what the Germans were doing by their use of certain code words.  For instance, Wotan (the one-eyed God) let the British conclude that a key secret radar development was using one not two beams.

All-up the STO Board appears to have put together a deal that will likely see the company limp forward independently.  However, shareholders are likely to seek some Directorial changes in the next few months – and if that does not happen, then a “first strike” vote seems likely at next year’s AGM.

Company news – Central Petroleum (CTP)

CTP has just announced that it has made a A$10M placement (to be supplemented by a SPP). The funds will be used to prove up reserves which the company strongly believes can make their way to East Coast gas markets through the NEGI pipeline project.  As noted above, how short are those markets?

Company news – Strike Energy (STX)

Remarkably well supported STX issued an update on its deep CBM project in the Cooper Basin this morning – basically just saying that water pumping was occurring in line with plans.  The >A$100M market cap of this company, based on a single exploration play, must be the envy of its small-cap peers.

Quote of the day

Regular readers will be bored with repeatedly hearing this blog’s view that the current industry travails will almost inevitably lead to a medium term upwards price shock.  The issue was nicely summarised by the Saudis recently, as follows:

“also unsustainable, as it will induce large investment cuts and reduce the resilience of the oil industry, undermining the future security of supply and setting the scene for another sharp price rise,” Saudi Vice Minister of Petroleum & Mineral Resources Prince Abdulaziz bin Salman

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