Today’s Blog – Friday 19th February 2016

Please pass this blog onto others who may be interested

The blog this week may be intermittent and/or short due to travel

Introduction

Continuing our theme from earlier this week of searching for various chinks of light in the otherwise dark tunnel of the current oil market, we do not share the optimistic views of day to day traders who make bullish bets based on cryptic words issued by various OPEC potentates.

However, one set of facts that is supportive of longer term oil supply limitations is news from China that production from that country (one of the top 5 in the world) has fallen over the last year.  That may be a bump – but it also could be the usually irreversible oil supply peak which many other countries have also experienced (e.g. the UK, Australia, Indonesia – and the USA).

Commodity price news

When we miss a day’s reporting and come back to look at oil price movements over a couple of days it becomes clearer how volatile and directionless crude markets are at present.

Wednesday’s trading experienced gains of 6-7% in both London and New York – largely hanging off various words from Iran about its potential support for highly conditional production “freezes” (at peak production levels) from Russia and the KSA, etc.

Yesterday saw some re-tracement from these in London (falling ~1% to US34.28) whilst WTI was flat at US$30.77.

This was despite some pretty poor “numbers” from the (day late) EIA weekly report which showed a crude inventory jump of 2.1 mmbbls and a product increase of 4.4 mmbbls.  Given that the previous day’s private sector estimate for inventories had actually predicted a decrease, it was somewhat surprising that the market did not take these figures rather more negatively.  It may do so today.

Henry Hub continued its recent slide, closing down yesterday at US$1.85.

LNG and international gas

Recent news from what are still the two most important LNG buying nations was poor, with Japan reducing its January imports by 14% (due to mild weather and the ongoing nuclear power station fleet start-up) and Korea reporting that its 2015 annual imports were down 13.5% on the prior year.

As we noted earlier this week, Indian Government delegations to Australia seeking cheap LNG might receive hospitable words from their Government hosts – but when dealing with the actual owners and sellers of LNG – private sector companies – pricing discussions take on a different hue. This was illustrated by India’s reaction post such discussions with Woodside Petroleum – they were reported as being disappointed at the “high cost of Australian LNG”.

Over in Canada’s LNG provinces, we note a recent report that some Russian “environmental scientists” have warned British Columbia that LNG may spoil salmon fishing habitats, etc.  Don’t accept any offers of a nice cup of tea from these guys.

Company news – Santos (STO)

STO issued its annual results for 2015 today.  As usual, we will leave detailed analysis of the numbers to the professional analysts (said numbers were as expected – very bad – with a write off of ~A$4B and 2P reserves being downgraded by ~25%).

A few snippets however:

  • The company reported back in August last year that it was introducing a succession plan and its CEO in due course would “stand aside”.  Apparently said CEO’s contract has a clause that pays him a $2.5M termination payment for “standing aside”.   This is typical of how spinelessly ASX listed Boards handle such issues – the preference is to be nice with a peer rather than look at legal options to terminate an employment contract “with cause” due to poor performance.
  • Reserves booked in New South Wales’ Gunnedah Basin have been converted into contingent resources.  Arguably they should always have been classified as such (and certainly would have been under SEC rules).  But that would not have supported an acquisition case when the company had an excess of animal spirits and wanted to do some deals.
  • STO’s total 2P oil reserves are a mere 40M barrels – i.e. it is a very gassy company.
  • No reserves write-downs have been made in respect of GLNG feed-stock, which may have surprised some in the market.

Company news – Origin Energy (ORG)

ORG reported its half year results a couple of days ago (unlike STO it has a June year end).

Again there were few surprises and market reaction has focused on cuts to dividends, etc.

Not many snippets were obviously of interest, other than such immaterial matters as disclosure that the company was writing off what seemed a pretty hefty A$157M spent on its geothermal activities.

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

The takeover of DLS by BPT took another step towards finalisation over the last few days, with the Federal Court approving the scheme of arrangement which effected the deal.  DLS has now left the boards of the ASX.

Quote of the day

Any investor in oil and gas companies at present has to have a view that oil prices will rise.  The inherent bet they are making is well illustrated by the following quote from OilPro:

“Thus the modern O&G industry’s know-how, technology, and project pipeline are just one big out of the money option.  It’s nice to have options, but not if they can’t be exercised. The only thing that will move many new O&G development projects back into the money is a significant and sustained oil price recovery, and that may lie beyond the expiration date for some”. Joseph Triepke, Oilpro Managing Director

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