Today’s Blog – Thursday 25th February 2016

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Introduction

Following the takeover of BG Group by Shell, the industry is now dubbing the new and larger Shell, together with Exxon, as the “ultra-majors” of the industry – that (so far) have left BP, Conoco, Total and Eni as looking more like large independents rather then peers.

Some analysts have recently suggested that size is not necessarily good in the current low oil price environment, as the ultra-majors will have to add very large new projects year after year just to stand still.

We beg to differ.

For instance, the recent results of Conoco will show that (in hindsight naturally) separating from its downstream refining division has left it a poorer performer against its peers.

Secondly, a large driver of the Shell/BG transaction was about becoming the largest LNG player on the planet – thereby gaining the best position from which to make profits as this traditionally very economically inefficient industry liberalises.

We do not expect the other majors to fail to see these sorts of points.  A combination of e.g. BP and Total (against the back-drop of a potential Brexit!) would deliver a rival LNG giant, whilst Chevron and Conoco could marry up with no real political opposition (indeed with support from President Trump – as long as they pay their share of the Mexican wall costs that the Mexican Government may just be somewhat reluctant to pay for).

Commodity prices

Crude prices rose yesterday, with Brent up a healthy ~4% to US$34.51 whilst WTI was a bit of a laggard, rising ~1% to US$32.25.

The weekly EIA report supported the bears with its crude inventories – a rise of 3.5 mmbbls – but was bullish via its product inventories, which decreased by 3.9 mmbbls.  On the day, the latter provided more succour than the former gave rise to angst.

The mild weather in the US – so detrimental to natural gas prices – may be encouraging greater driving than normal for the time of year (hello Wally World!), as well as sustained low prices inducing more and more truck/4WD/etc purchases.

At the CERA conference in Houston, the KSA’s Al-Naimi said this week there would be no production cuts at the next OPEC meeting.  No surprise there then.

LNG and international gas

As we noted earlier in the week, the first Gulf of Mexico LNG cargo is currently being loaded at Sabine Pass.  The customer for this is BG (now Shell) – who is reported as having on-sold this to Brazil’s Petrobras.

This transaction is a good exemplar of the changing nature of LNG projects, which traditionally would be a producer owned vertically integrated operation selling direct to an end user.

The new world has:

  1. Multiple US producers selling into a deep and liquid market.
  2. An ultramajor buying gas from that market and paying a liquefaction capacity charge to:
  3. A specialist liquefaction developer and owner.
  4. A NOC buyer who will sell to;
  5. An end user.

Company news – Cooper Energy (COE)

It was COE’s turn today to issue its half year results, which included the usual litany of large write-offs and operating cost cuts.

The company states that it is on track with respect to its offshore gas development (Sole) – with further HOAs for gas sales expected by 30th June.  However, the current EV of the company is negligible, indicating some doubts from the market as to the achievability of the company’s present ambitions.

Company news – general

Nearly all of the larger ASX E&P stocks have now reported their full year or half year results.  Forward looking oil price assumptions – when stated – are not surprisingly much lower than at the same time last year.

However, such assumptions are generally still materially higher than the forward strip – particularly in the short and medium terms.

Regular readers will know this blog is strongly of the view that oil prices will rebound in the “medium” term (whatever that is).

But prior to that, things may stay pretty bad – and there is an awful lot of NPV in the early years of forward looking cash-flows.  Accordingly, the larger Australian companies’ balance sheet agonies may well not be over yet.

Accounting is one thing – but credit ratings are another.  Sustained low oil prices over this year will put pressure on these, which for companies like Santos could push them over the abyss into junk territory.

Quote of the day

From Al-Naimi in Houston:

“Let me say for the record again: we have not declared war on shale or on production from any given country or company, contrary to all the rumors that you hear and see.”

And we think he is right – it is the conventional operations of the majors which have arguably been smashed more than US shale oil.

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