Today’s Blog – Tuesday 23rd February 2016

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Introduction

A reasonably widely held current view in the oil patch (by the likes of the IEA) is that the emergence of a possible “shale cap” will ensure crude prices do not bounce too highly once the inevitable consequences of the current retardation of future supplies comes into effect.

The “shale cap” is the possible re-emergence of lots of US tight oil supplies – at prices around US$60.  This pricing level fits with recent announcements from US companies operating in this space (note to the IEA: CEO announcements have the purpose of increasing share price, not providing objective assessments).

We are more cynical about this shale cap.  In our view capital markets are not efficient (other than in the long term) and the current and emerging very large losses being borne by equity and debt providers to US tight oil companies will be remembered for some years to come.  That is, when oil prices reach US$60 again (with established “sustainability” – however that will be measured) capital markets will not necessarily rush back to support the sector, even if it could be profitable at that level.

Furthermore, cost structures in the current sweet spots, using the best crews and oppressing service market suppliers to the point they are bleeding, are not necessarily representative of what would be incurred as and when US tight oil tried to expand again.

Commodity prices

Crude bounced up again yesterday, in the ongoing volatile market that is a trader’s delight, but which is not breaking out either up or down.  Brent closed up 5% at US$34.65 and WTI was up even more (6%) at US$31.48.

On the day the bulls took late succour from Friday’s BHI rig count reduction numbers, as well as from an IEA report estimating US tight oil production would reduce by 0.6 mmbopd in 2016.

On the rig count, we note a recent anecdote from Oil Pro – the current oil rig count across the entire on-shore US is now lower than it was in the Permian Basin alone at the time of the November 2014 OPEC meeting.

Henry Hub re-traced upwards slightly to close at US$1.82.

LNG and international gas

Cheniere Energy’s Sabine Pass liquefaction plant in Louisiana has now (belatedly) commencing loading its first cargo in what should be a fillip for Henry Hub later in the year.

What would not be a fillip for US gas prices was a recent report from consultancy group IHS, which estimated that an incredible 1,400 Tcf of US tight gas could be produced profitably at prices of ~US$4.

IHS are known as optimists in the industry and in our view the long term volatile history of the US gas market would suggest we could see a significant tightening of supply (and hence large price rises) in the next few years (but then over the last five years we have predicted five of the last zero US gas price rises).

Governments and fracking

The ongoing slow burn story of oil industry induced earthquakes in Oklahoma continues to trundle along, much of it receiving considerably less attention than issues elsewhere in less oil patchy locations (methane leak in California anyone?).

Environmental group the Sierra Club (amongst others) has recently initiated legal action over this.  The slow burn will likely continue for some time yet.

Company news – Oil Search Ltd (OSH)

Its OSH’s turn to issue its annual results today and as usual we leave the detailed analysis of the numbers therein to the banks.  The snippets which caught our eye:

  • Unlike nearly all its large ASX E&P peers, OSH does not need to have a dividend reinvestment plan (DRP) at present – which otherwise acts as a hidden diluting machine dripping away behind the scenes.
  • The planned FID date for Papua LNG is said to be 2018 – this project was noted as being either a single train development of 5 Mtpa or 2 smaller trains. This does not sound like a resoundingly economic configuration at current LNG prices.
  • Although OSH will try and encourage cooperation between PNG LNG and Papua LNG, its presentation contains the usual depressing picture of 2 plants being built side-by-side as egos and testosterone are expected to trump shareholder value, even in this market.

Company news – Senex Energy Ltd (SXY)

SXY issued its half year results today.  This production company’s current EV of ~A$80M compares to that of a number of un-funded pure exploration plays on the ASX – which must have the company asking what it can do to get similar market support.

At current share prices, SXY is a very cheap option on oil & gas prices rising and inducing new gas production from the Cooper and Surat Basins.

No doubt SXY will be closely examining the current sale by Origin Energy (ORG) of its Cooper Basin interests – however its presentation assures the market that it will not overpay for assets (shock horror!).

Quote of the day

Fatah Birol, head of the IEA, banging on the same drum as we do from time to time (i.e. every second day):

“It’s easy for consumers to be lulled into complacency by ample stocks and low prices today.  But they should heed the writing on the wall: the historic investment cuts we are seeing raise the odds of unpleasant oil-security surprises in the not-too-distant future,”

 

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