Today’s Blog – Thursday 11th February 2016

Please pass this blog onto others who may like to read it

This blog will be short and or intermittent this week due to travel commitments


In the last few days downstream energy business AGL Energy (AGL) has announced its half yearly results.  As it had previously flagged to the market (and as we reported on in recent weeks) it is exiting its upstream gas assets (and taking a big loss in doing so).

It has also flagged that it is seeking to establish a renewable energy investment fund with seed equity provided by it of $200M for a ~20% stake.  It hopes to attract the balance of capital for the fund from institutional investors (who currently love infrastructure type assets – especially with a green tinge).  The fund will assist AGL’s base energy business be capital-lite (and hence earnings heavy) by providing off balance sheet third capital for e.g. wind and solar developments.

The two moves are related – and not just in the strategic element of re-positioning for a climate constrained world that the media has focused on.

AGL has got out of the upstream for two reasons – firstly because the specific acquisitions it had made in recent years turned out to be duds.  Secondly because the nature of upstream investment is long term and volatile – and AGL is a business judged by the market on the conventional industrial metric of smoothly growing annual earnings.  Upstream investments are typically held in unincorporated joint ventures which produce volatility in their accounting.

Renewables investments are also long term – and subject to e.g. the whims of Governments on pricing.  By making a 20% investment in a fund, AGL can equity account for much of its renewable portfolio, hence reducing earnings volatility – whilst still leveraging its retail business.

AGL used to be an ugly duckling compared to peer Origin Energy (ORG) – its current share price of A$18.60 compares well to ORG’s A$3.60 (guess which one your blogster owns).

Commodity prices

Crude prices jumped around yesterday – with Brent pretty flat by the end of its trading day at US$30.84, whilst WTI closed down ~3% at US$27.45.

Good “numbers” from the EIA’s weekly report did not help. Crude inventories went against predictions earlier in the week by falling by 0.8 mmbbls (admittedly offset by a build in product numbers of 2.6 mmbbls).

Deeper into the numbers, very high figures at the WTI pricing node of Cushing encouraged a Goldman Sachs source to reiterate the vampire squid’s pronouncement of late last year that US$20/bbl could be seen as absolute on-shore storage limits were reached.

Reported increased OPEC production numbers also were seized upon by the bears.

Henry Hub was down ~2% at US$2.05.

LNG and international gas

Emboldened by its success in re-negotiating an LNG purchase deal from Qatar, India’s Petronet is now reported as seeking a price reduction from a potentially tougher supplier: Exxon.

Petronet has a purchase contract with Exxon from Australia’s massive Gorgon LNG project – with a reported price per mmbtu of ~14.5% of crude benchmarks – i.e. considerably higher than current spot and new contract pricing.

If even the mighty Exxon buckles, then predictions of wide-spread contract re-openings will be on globally.  The LNG market will be watching this carefully.

Company news – Cooper Energy (COE)

COE reported yesterday the outcome of the sale of two (exploration stage) PSCs located in Sumatra.  It achieved a sale price of US$8.25M, which seems like a pretty good outcome for it given the poor state of the upstream asset market – and its current enterprise value.

The purchaser is KKR backed private company Mandala Energy, who has been assembling a portfolio of assets in the region.

Company news – Santos (STO)

The Australian Financial Review (AFR) today reported that STO was seeking to change payment terms with its suppliers – extending these out from 30 to 60 days – which was said to be more in line with industry standards in these tough times.

The AFR failed to mention whether STO’s Directors and Management were contemporaneously extending the payment terms for their fees and wages……

Company news – Alinta Energy 

Alinta is owned by PE group TPG and owns a disparate collection of downstream (retail and generation assets).  TPG has appointed Lazard to sell it (hopefully collectively but possibly in parts) – and is seeking up to $5B.

Alinta is the largest retailer of gas in Western Australia and hence the outcome of this sale will of note for gas suppliers in that State – e.g. Perth Basin owners such as AWE and ORG.

We do not see any likely industrial buyers for this business.  ORG has too many issues elsewhere.  AGL has re-cast its strategy.  There are not many others.

So will we see private equity sell to private equity?  Who then is the barbarian and who the schmuck?  If they go down the IPO route – block calls from your broker.

Quote of the day

From US based oil commentator, Art Berman:

“Oil markets reflect a psychological conflict among investors between reality and hope. The reality is that the world is over-supplied with oil. The hope is that oil prices will increase without resolving that fundamental problem”.




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