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The free-fall in spot crude prices in 2016 so far (of around 16%) has resulted in a much greater tightening in hedging product prices, for three basic reasons:
- The absolute fall in spot prices mean hedging at a certain price becomes more expensive, all things being equal, by the size of that fall.
- Higher volatility in recent weeks has led to higher options prices, given the typical Black-Scholes pricing methodologies used.
- Absolute demand for the finite amount of hedges available has increased their price.
Accordingly the ability of producers to go out today and hedge is much less than it was even a few weeks ago – just when they need it the most.
We noted in our blog of 24th December that the hedging then announced by Origin Energy (ORG), although perhaps “better late than never” in tone, should be followed up by others in similar positions such as Santos (STO). However, that window may have closed for STO at other than exorbitant hedging costs.
The helter-skelter down-ward spiral in crude markets continued overnight, with Brent closing down nearly 7% at US$31.32 and WTI down ~6% at US$31.20. The main driver appeared to be ongoing Chinese stock market turmoil and the signals this sends about PRC economic weakness.
Any “technicals” support at US$30 seems unlikely – the new market floor is now more likely to be US$20.
Morgan Stanley publicly joined the Goldman Sachs led US$20 crowd, with a report noting that currency movements alone (led by US dollar strength and also renminbi weakness) justified a fall to this sort of level.
A large disconnect between financial markets investors and the E&P industry was borne out at a recent Goldman Sachs hosted private confab where both groups were present. A client note from Goldmans after the meeting noted:
“Investors were looking for fear and trepidation from producers but got agility and below-expected clarity instead”.
Investors want producers to reduce production in recognition of where prices are actually are at not where they would like them to be. The refusal of producers to do so has led investors to sell down the commodity even more than they otherwise would. Result: producer optimism has in fact worsened their own position.
The Henry Hub natural gas price fell 10c overnight, closing at US$2.37.
LNG and international gas
Russian E&P news agency Interfax yesterday reported a story which we alluded to last week – the massive “joint” gas reservoir owned by both Qatar and Iran under the Gulf. Interfax noted that Iran’s plans for its side of this huge resource, which to date has served only limited domestic markets, included an LNG development option. French Super-Major Total was rumoured to be talking to the Iranian Government about this (which it denied, naturally, given the current – but soon to be terminated – sanctions position).
If Iran went ahead and developed this, Interfax speculated that could induce a ramp-up by Qatar from its own self-imposed moratorium on increasing LNG production. The results could therefore be two new sources of ultra-low cost LNG – and/or further Shia/Sunni conflict.
Company news – Shell and BG
Further to our various updates on the above, it emerged yesterday that one of Shell’s larger shareholders (with a 1.7% stake), UK funds management giant Standard Life, said it did not support the deal. It cited the political and other risks associated with BG’s interests in Brazil as being a key concern.
However, we still expect the deal to go ahead.
Company news – STO
The Business Spectator reported this morning on rumours that STO could be a target for Total (one of its GLNG JV partners). However, it also reported the views of various industry analysts (which we share) that STO, although cheap, would not be that appetising on an assets basis for the French giant.
We know it is not a case of either/or, but the serendipity of the timing lets us ask: what would Total prefer – developing part of the what is arguably the world’s best gas asset with Iran, or owning more of the currently loss-making GLNG?
Company news – Beach Energy (BPT)
BPT has just announced the appointment of a new CEO – Matt Kay. Mr Kay is currently a senior commercial executive at Oil Search and has previously held similar roles at Woodside Petroleum.
His commencement date is said to be before mid July next year, as no doubt he will have to sit out a period of gardening leave.
We note that BPT announced the retirement of long-serving CEO, Reg Nelson, in August 2013. For various reasons, BPT will therefore effectively had no driving leadership for a nearly three year period. We don’t expect Harvard Business School to write this up as best practice corporate governance.
Company news – ORG
The Australian Financial Review (AFR) contains yet another story today on ORG’s likely CEO succession plans, which are now widely expected to take place in 2016. ORG’s current long serving CEO, Grant King appears to be doing a very effective job in driving the timing and legacy-setting aspects of this process.
He has effectively established the date of his leaving as post first LNG cargoes from the 2nd APLNG train. We consider it feasible that later this year he extends this date to deal with the sell-off of ORG’s share of APLNG.
Quote of the day
A tweet from the Vatican following David Bowie’s death, quoting from his 1969 song “A Space Oddity”:
“Ground control to Major Tom
Commencing countdown engines on
Check ignition and may God’s love be with you.”