Today’s Blog – Wednesday 24th February 2016

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A recent Bloomberg article brings out a second order – but material – issue caused by the current low oil price – the rapid liquidation of many sovereign wealth funds (SWFs).  In this calendar year alone, analysts calculate that >US$400B of equities will be sold by SWFs in order to raise cash to prop up their weak parent Governments and economies.

Thats a lot of money to take out of equity capital markets in quite a short time and arguably adds to other secular bear issues for equities – aging populations, a retreat from historically high valuations, risks to equity profits’ share of GDP, etc.

The consequence for oil companies is that not only are they hit by declining commodity prices – those same price falls lead to a generic selling pressure in equity markets (including E&P stocks) induced by SWF sell-offs.

A nasty double whammy – or counter-cyclical opportunities to buy for those whose hands have not been cut to ribbons through attempting to catch falling knives over the last 18 months.  (You may notice blood on your screens from my cuts).

Commodity prices

Volatility continues!   Yesterday was the bears’ turn – with Brent closing down ~4% at US$33.27.  WTI rolled over into a new month’s contract and on a like-for-like basis was down a similar percentage, but compared to the prior month’s contract was up ~1% to US$31.82.

The driver on this day was a statement at the current CERA conference in Houston from Saudi Arabia’s Oil Minister Al-Naimi that were would be no production cuts.  That should have come as no surprise, but presumably there were still some who were taking some comfort from the previous week’s ill defined plans by the KSA and Russia (and hangers on) to promise not to increase production from their current record levels.

The Iranian Oil Minister made it crystal clear what his country thought of this proposal:

“Some countries that are producing above 10 million barrels per day (bpd) have called on Iran to freeze its production at one million bpd…This is more like a joke that they tell us they would freeze their production above 10 million bpd and that we should also in turn freeze our production at one million bpd.”

Henry Hub continued its slide – closing down again at US$1.77.

LNG and international gas

Russian oil and gas industry news service Interfax recently contained an interview with Australia’s Federal Resources Minister, Josh Frydenberg.  The latter spoke about how his Government was helping the Australian LNG industry prepare for another round of developments once the current cycle had turned.

Given the lack of levers at this disposal – and the poor track record of Australian Governments in a critical area – encouraging CEOs to concentrate on NPV not building their very own big fridges – this seems optimistic to us.

Company news – BHP

BHP’s interim results were released yesterday and have naturally garnered a lot of media and analyst attention as befits The Big Australian (although it is not as big as it used to be).

The company’s US shale write-down continues on its multi-year and multi-billion dollar way – and it has cost the job of another head of the company’s petroleum division (even though the relevant acquisitions were made prior to his ascension to the job).

One analyst questioned whether such assets were “tier one” and therefore not in line with the company’s strategy.

The answer to that is that of course they are not tier one oil assets.

Simplistically, only Governments own tier one oil assets.  Tier two assets can be owned by private companies – with sovereign risk – in e.g. Russia.  Low sovereign risk assets of scale are tier 3 and 4 – e.g. US shale.  (Gas assets are more catholic in their ownership spread – this is oil we are talking about).

Company news – Beach Energy (BPT)

BPT announced yesterday that its new CEO (ex Oil Search and Woodside executive Matt Kay) would start in early May.  This is a couple of months earlier than was feasible if Oil Search had held him to his full notice period.

No doubt this will be welcomed by long suffering BPT employees who will feel they have not had a full-time and engaged CEO for many years.

Company news – AWE

AWE issued its half year results this morning.  The company’s clear priority is on its Perth Basin assets.  Its partner there, Origin Energy, should give a clear look-through value to these assets in the next few months, given its current sale process.

Like many of its peers, AWE is arguably currently “cheap”, with a reasonably strong balance sheet and options for growth.   Typically for an Australian company, it is gas not oil exposed – with its gas assets exposed to more predictable AUD pricing rather than being oil price linked.

Quote of the day

A discussion yesterday about the merits of merging E&P companies in today’s tough conditions brought to mind the following aphorism from Berkshire Hathaway’s Charlie Munger:

“You can mix raisins and turds – but you will end up with just turds.”



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