Today’s Blog – Thursday 28th January 2016

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A few days ago The Australian Financial Review (AFR) reported on the views of Deutsche Bank about the ongoing very healthy appetite to invest in the infrastructure sector.

The key point was that Deutsche had estimated the cost of equity capital in this sector was now around 8% – which implies that the weighted average cost of capital (WACC) – given healthy gearing opportunities and low interest rates – would be very much less than this.  Result – there will be a strong ongoing support for high infrastructure prices.

What is the relevance of this for the Australian oil and gas sector?  In our view that at the top end of that sector, companies are very pregnant with infrastructure assets that have been held onto for “social”/”ego”/”testosterone” reasons – usually under the description of “strategic assets”.

This is very different from the US E&P sector – where oil and gas companies focus on holding only oil and gas assets – basically the sub-surface – and a large mid-stream sector owns on-surface facilities, pipelines, storage, etc.

However, this historical weakness in capital efficiency in Australia now provides opportunities to take advantage of demand from the infrastructure sector – and sell the likes of liquefaction plants, underground storage, pipelines, processing plants, etc.   The liberation of a lot of capital from this – from buyers with very low WACCs – could deliver a lot of unheralded upside to embattled companies like Santos, Origin and even Woodside.

But it will need a change of mindset from leaders, who must be prepared to “shrink their way to growth”.

Commodity prices

The topsy-turvy world of crude markets over the course of this week continued overnight, with yet another large change being based on not very much.  Brent closed up ~3% at US$32.80 and WTI was up ~2% at US$31.99.

This rise was notwithstanding a fairly hefty rise in stocks as announced in the weekly EIA report.  Crude inventories rose by 8.4 mmbbls and product (gasoline and distillate) fell by 600k mmbbls.

The bulls appeared to take further comfort from some very vague statements emerging from Russia about potential talks with OPEC about possible production cuts.

Henry Hub fell ~1% to close at US$2.15.

LNG and international gas

Russian owned news agency Interfax included a scary headline for anybody in the LNG game today: “Qatar to defend LNG market share“.  The oil patch knows what OPEC’s defence of market share has done for prices over the last 14 months……

However, it appears that this was a rather bold journalistic conclusion from Qatar’s recent willingness to renegotiate terms with India’s Petronet rather than a major change of Qatari policy.  Phew! says Australia.

Possibly better news for LNG sellers was Gazprom’s reporting earlier this week that it would spend US$1.2B on the massive Power of Siberia pipeline to China in 2016.  Such a puny sum should mean that the chances of this project delivering gas to the PRC by the flagged date of 2018 are slight.

Governments and fracking

We noted earlier this week that the “Knitting Nannas” had recently held a protest against Santos’ (STO’s) CBM operations in New South Wales.  Further reporting has identified two new protest groups – the “Climate Angels” (who presumably prefer NSW to be fuelled by coal rather than gas – that is the real choice) and the sister of the Federal Environment Minister (who is said to be a retired social worker – at the age of 51 – sounds like a better paying industry than oil and gas!).

We expect a couple of new protest groups to join these crowds soon: “STO Shareholders” and “STO’s new CEO”.

Company news – Shell and BG Group

Shell shareholders have overwhelmingly supported (with an 83% vote in favour) the acquisition of BG Group.  The latter’s shareholders are due to vote on this in ~2 weeks.   It would seem exceedingly unlikely that the deal will not go ahead now.

Company news – Beach Energy (BPT) and Drillsearch Energy (DLS)

The acquisition of DLS by BPT is now also done.  DLS shareholders voted in support of this yesterday (BPT shareholder support is not required).

One point of interest we noted from DLS’s presentation at the shareholder meeting – the strategic focus of the merged entity would be on Australia and “nearby”.

That would appear to provide Oil Search with a reason (“nearby” seems to include its PNG stomping ground) to hold its departing executive Matt Kay to the full extent of his notice period (until July this year) prior to his joining BPT as its new CEO.

Company news – Origin Energy (ORG)

The AFR today continued the jungle drums of support over the potential for ORG to demerge its upstream and downstream assets.  Consensus on these sorts of things can ultimately be hard for Boards to resist.

Company news – Carnarvon Petroleum (CVN)

CVN today announced it had farmed into a drill ready prospect off Western Australia with PE group Quadrant Energy.  No material promote arises under the farm-in deal – which shows the dismal state of the market for exploration assets.

Quote of the day

Italian Major ENI”s boss, Claude Descalzi, on what is driving oil markets at present:

“The lack of a regulator — the role played before by OPEC — which balanced oil prices and gave a long-term perspective, has resulted in the market being handed over to short-term positions.”

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