Today’s Blog – Friday 4th March 2016

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Introduction

A recent SEC filing by Super-major Chevron (CVX) show just how central Australian LNG is to that company – the present value (PV10) of those projects (its share of Gorgon and Wheatstone) was said to be US$24B – a massive ~1/3 of the company’s total PV10 value.

These traditional LNG projects, with most of their capital sunk and with very low operating costs (including low and generally stable taxes in Australia) have very strong net present value characteristics at this stage of their life cycle.

Furthermore, using a 10% discount rate in the current environment of effectively zero interest rates, for projects in the low sovereign risk country of Australia, seems grossly excessive in terms of what returns equity markets are currently demanding.

CVX has a lower profile in Australia than the scale of its investment suggests – the other Super-Majors, with less capital employed here – tend to get more coverage.  That may be a function of the isolated nature of the two LNG projects, the exclusive Western Australian focus of the company or a deliberate policy of keeping its head down.

So whither now for CVX in Australia?  In the long term, we could expect brown-fields expansions at Gorgon and/or Wheatstone.  However, the weighting of investment towards Australia seems high and from a total portfolio perspective we would not expect a major doubling down through e.g. M&A.

Commodity prices

Crude traded unenthusiastically yesterday, with Brent closing essentially flat at US$37.01, as did WTI with its close being US$34.69.

On Friday in the US we will get the usual weekly rig count numbers from Baker Hughes. As we noted on Monday, last week’s figure was down to 500 operating rigs.  A recent Bloomberg story noted that the lowest figure since records began in 1948 was only a whisker below this, at 488 rigs.  The article went further to note that it is likely that one would have to go back to the immediate post Civil War 1860s to get lower numbers.

Henry Hub continued its bleeding, closing down yet again at US$1.63.

LNG and international gas

Gazprom announced yesterday that it had secured US$2B in debt funding from the Bank of China – in the context of ongoing post-Ukraine fiscal sanctions, the company does not have a glittering array of financing choices.  This is not a large sum, and combined with the current low gas prices the company is achieving on its sales, does not give rise to much of a war-chest in the context of all its desired projects.

We accordingly expect delays in “sanctioned” projects (the word means something different in Russia – politics as well as finances come into play) such as the Power of Siberia and delays in FIDing other expensive pipeline/LNG projects such as Altai, Sakhalin, etc.

Company news – Origin Energy (ORG)

The jungle drums notched up to a louder beat today on the possibility of ORG either de-merging or selling its upstream business, with a detailed article in the Australian Financial Review (AFR) on the topic.

ORG’s canny CEO, Grant King, sought to give his company (and himself) some room to maneouvre on the issue, by noting that naturally they were exploring all options that would add value for shareholders, but that any deal would optimally have to wait until next year, post the ironing out of any wrinkles in the APLNG project.

We continue to think that not only does this de-merging make strategic sense for ORG, but that also market jungle drumming can make things seem inevitable and everyone starts to sail along on increasingly become the currents of “fate”.

Company news – Santos (STO)

STO announced yesterday that the sale of its interest in the Kipper gas-field off Victoria had closed and it had received the full amount due (A$520M) from Mitsui.

Such good news was obviously material and required an ASX announcement.  Unlike the canny Malaysians with their deal over Stag, the staid Japanese did not have a price-reopener over the last few months to half the sale price of this asset.

The AFR story on ORG noted above canvassed the option of merging with STO.  However, STO’s CEO did not seem exactly keen on the idea.

The AFR noted in a separate article today a view from the analyst community that the company faces a stark choice if current low oil prices continue: accept a down-grade by the ratings agencies to junk status, issue more discounted equity or sell more assets.

The former and latter are closely linked in our view – selling infrastructure assets such as pipelines, gas storage, gas plants, etc, likely practically requires an ongoing investment grade credit rating.  If this view is correct, the company faces somewhat of a race – can it sell assets for sufficient sums to shore up its balance sheet prior to its credit rating coming under pressure?

Quote of the day

Much commentary has focused on the risks to the banking system of non-performing loans made to the oil and gas sector, particularly in the US.  Given this,  the recent views of “bond king” Bill Gross on this issue are of interest:

“The recent collapse in worldwide bank stock prices can be explained not so much by potential defaults in the energy/commodity complex, as by investor recognition that banks are now not only being more tightly regulated, but that future ROE’s will be much akin to a utility stock”.

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