Today’s Blog – Thursday 3rd March 2016

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The oil patch has been stunned this morning by the death of shale gas pioneer Aubrey McClendon in a car smash.  Mr McClendon was recently indicted on a conspiracy charge over oil & gas lease bids and rumours have emerged that the death may have been a suicide.

McClendon was the founder of once-mighty Chesapeake Energy (now almost bankrupt – but still in the top 5 US gas producers) and in the halcyon pre-GFC days was named by Forbes as “the closest thing you’re going to find to a Bill Gates story in the energy industry”.

A balls-to-the-wall entrepreneur of the type that the oil patch has greatly benefited from over its 150 year history, McClendon’s career had massive highs and lows.  Without guys like him, US shale oil and gas would probably still be sitting in the ground as the Majors kept focusing on ever deeper and more expensive offshore/Arctic/tar-sands/etc projects.

His deal-making skills extended to success in negotiating his own employee contract at Chesapeake – which contained a clause which your blogster did not manage to obtain the last time he worked for a large oil company – namely an option to take a working interest in every well drilled by the company – with generous debt funding thrown in.

In recent times, McClendon has shown up in the unlikely destination of the Northern Territory, where the geological prospectivity is interesting, but the time from discovery to cash-flow is somewhat longer than in his native Oklahoma.

ASX listed junior Armour Energy is currently in a legal dispute with a McClendon PE venture and the implications of it from his passing are unclear at this stage.

Commodity prices

Crude prices rose again last night – against the grain of a very bad inventory report from the EIA, which indicated that US crude stockpiles had gone up the large amount of 10.4 mmbbls (and that product inventories had also gone up by 1.4 mmbbls).  Brent closed up <1% at US$37.06 and WTI did a little better at US$34.74.

The Australian Financial Review (AFR) today quoted hedge fund manager Andy Hall’s case for the bulls:

“There are good reasons to believe the bottom is now in.  Later this year prices will need to rise further to create supply.”

It is interesting to note that, in the last month or so, crude prices have already rallied by 1/3 from their bottom.  The market knows the long term story of an inevitable price reaction to the current investment strike and does not want to miss out on the early gains – however, brimming tanks at Cushing and elsewhere could easily derail this story in the coming weeks.

Henry Hub continued its funk, closing down ~4% at US$1.67.

LNG and international gas

Another step has been taken on the path of monetising Mozambique’s massive gas resources – but the development has been a Cooperation Agreement struck over a pipeline project rather than for the country’s LNG projects.

On the LNG front, no binding sales agreements have been struck as yet by any party (as far as we can tell anyway) which indicates FID on the various projects in the region seem unlikely to follow this year at least.

The pipeline project is one being promoted by Mozambique, South Africa (the US$6B pipeline’s destination) – and crucially, the PRC (which answers the perennial question – “where will the money come from?”).

There are still plenty of hurdles ahead on this one – but South Africa is energy short, Mozambique is gas long and China continues to bundle business and geopolitics in Africa The pipeline route is less challenging technically than say the Power of Siberia’s or politically challenging than anything going through the likes of Afghanistan or Pakistan.

Company news – Santos (STO)

Late last year STO (and its JV partner PE owned Quadrant Energy) struck a deal to sell the Stag oil-field off Western Australia to Malaysia’s Sona Petroleum for US$50M.  Sona has recently reported that the sale price has been halved to US$25M, following an expert’s report that concluded the original price was “unfair”.

The now apparent fact that the original deal had such a price-reopening mechanism – after only a few months – demonstrates the difficulties currently facing the sector in selling all but the best assets.

STO has made no disclosure about this – the common ASX disclosure rule that “good news is always material, bad news is rarely material” must presumably have applied.

Company news – Sino Gas and Energy (SEH)

SEH is an ASX junior gas producer in China.  It’s share price received a 30% fillip this morning following its disclosure that it was actually now being paid for the gas it was producing.

SEH is a partner in a couple of CBM and/or tight gas fields in the PRC and its share price in recent times has been severely punished as the market’s concerns about sovereign risk in the country have expanded.  Today’s development provides comfort on at least one key issue.

Quote of the day

Aubrey McClendon:

“American business would be run better today if there was more alignment between CEOs’ interest and the company. For example, would the financial crisis of 2008 have occurred if the CEO of Lehman and Morgan Stanley and Goldman and Citibank had to take a very small percentage of every mortgage-backed security… or every loan they made?”


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