Today’s Blog – Thursday 4th February 2016

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The Super-Majors are currently releasing their financial results and as expected there is much red ink all round.

The mightiest private sector E&P company of them all, Exxon, yesterday took the opportunity to warn the sector that it is primed and ready to come after weaker prey, with the following statement:

“The scale and diversity of our cash flows, along with financial strength, provide us with the confidence to invest through the cycle.”

Some media commentators have recently pointed out that Facebook now has a similar market capitalisation to that of Exxon (just over US$300B).

This I think begs an interesting hypothetical: if you had the choice of owning all of Exxon or all of Facebook – but in a private scenario in which you could not sell shares for 10 years – what would you prefer?

I think the question is fairly easily answered when one considers that; Exxon has prospered for over 100 years: there is no credible future scenario in which its high quality hydrocarbon reserves will not be needed; its in-house capabilities have demonstrated prowess in creating new options and value; and – Facebook basically sells advertising in a highly competitive environment and could easily be replaced by as yet non-existent rivals within 10 years.

So why don’t public markets recognise this at present?  All we do is re-quote one of Warren Buffett’s favourite aphorisms:

“In the short term the market is a voting machine, in the long run it is a weighing machine.”

Commodity prices

Crude continues to operate in a very volatile market – yesterday saw large rises of 7-8%, with Brent closing at US$35.04 and WTI at US$32.29.

The market’s take on the causes for this jump were relatively weak – a lower US dollar and some good economic news from China’s service sector.

Indeed, the crude market seemed to fly in the face of bad “numbers” from the EIA’s weekly report, which showed a record non-SPR inventory figure of higher than 500 mmbbls (an increase of 7.8 mmbbls since last week). This was tempered however, by a draw of 6.7 mmbbls of gasoline and distillate.

Henry Hub was flat at US$2.04.

LNG and international gas

The EIA has recently reported that pipeline infrastructure developments in the Eastern USA are adding a lot of capacity to allow greater exports of Marcellus (and growing Utica) gas.

The Marcellus has been the engine room of US gas in recent years – adding nearly all the new capacity in the overall system.  The new pipelines will likely allow this engine room to be internationalised through the various Gulf of Mexico liquefaction plants that will steadily come on stream over the following months and years.

Governments and fracking

The flat-earthers of New South Wales achieved a significant victory today – the announcement by AGL that it was effectively walking away from its CBM activities in the State (see below for more).

This effectively leaves Santos (STO) as the last man standing in CBM in the State.  It will come under greater pressure from the flat-earthers, the Government – and its shareholders (and in our view its new CEO) to get out with what it can (a Government compensation payment of say A$50-100M – compared to an investment nearer $2B).

Company news – AGL

AGL has today announced it is taking another material write-down (A$795M pre-tax) on its upstream gas business, which it has (not surprisingly) declared as no longer being required under its new strategic direction.

In New South Wales its production assets at Camden will be run down – or sold (although the list of likely bidders does not seem large given the political situation in the State).  It will effectively just walk from its pre-development assets in the State.

In Queensland it has flagged that it will have to actually pay a material sum just to get out of the Moranbah joint venture (its partner there is Arrow – i.e. Shell and PetroChina).

Company news – STO

A confusing story from The Australian today on STO – Federal Labor MP Gary Gray has said that any party seeking to take-over STO would have to have an appropriate level of operational expertise.

That seeems to be stating the bleeding obvious and its unclear as to why anyone would place this story.   As a defence mechanism against the possible return of Scepter Partners it would seem very weak – clearly the team there is very well credentialled from a management (STO’s ex-MD, John Ellice Flint) and investor (sovereign funds largely derived from oil) perspectives.

Quote of the day

Our bet for the next US President – Marco Rubio – on Vladimir Putin:

“He will be treated for what he is – a gangster and a thug”.

One would like to be a fly on the wall at their first meeting (don’t drink the tea!) – some things are easier to say on the campaign trail than they would be to the fearsome face of Mr Putin.

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