Today’s Blog – Friday 11th March 2016

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Introduction

Recent figures from the EIA indicate that US oil production has finally, finally, rolled over on a year-by-year basis in December 2015 – considerably longer than consensus (us, OPEC, most E&P companies, etc) expected.

Reuters recently published an article which set out various technical reasons why this has been the case (in addition to such on-surface factors as momentum, oil-patch ingenuity, financiers keeping digging notwithstanding their hole-like location, etc).

The two issues the article picked up on were factors behind flatter than expected shapes in shale oil decline curves – with less initial production induced by choking and longer/flatter tail production aided by various forms of artificial lift.  Indeed service company Baker Hughes has pointed out that its artificial lift division has been a rare profit centre of late.

These do not only re-order the timelines of expected ultimately recoverable reserves – they add to them through greater recovery factor effects.  On the latter, EOG’s ex CEO, Mark Papa, has recently pointed to the massive boon that would be created for reserves (if not necessarily for the oil price) that would follow from inching up over time, the currently very poor recovery factors from tight shale rocks.

This seems just stating the arithmetically obvious, but it is an insight that reflects where by far most of the additions to oil reserves have come from over the last few decades – not from exploration success, but from recovery factor amplification.  In conventional reservoirs, some thought this could be reaching “natural” limits – but if Papa is correct, there is a whole bunch of additional oil reserves to come from discovered tight rocks.

Commodity prices

Crude prices fell ~1% overnight, with Brent closing at US$40.25 and WTI at US$38.03.

The key driver of the day was the growing realisation that the proposed OPEC/Russia meeting due for later this month may not happen – and even if it did it would be meaningless unless Iran was persuaded by best buddy Saudi Arabia to limit its production to current sanctions affected levels.

Henry Hub continued to inch its way upwards, closing up ~3% at US$1.81.

LNG and international gas

We have previously reported that India’s Petronet managed to re-open its LNG purchase contracts with Qatar to obtain better terms for itself, reflecting the current long LNG market.

Now China’s CNPC is seeking the same thing from Qatar, Bloomberg reported a couple of days ago.

In this environment, Australian LNG suppliers will point to the sanctity of contracts and say that what happens between NOCs is political and will not affect them.  However, we think this is too sanguine a view given the dollars involved (and the fact that oil and gas is political whether one is privately owned or not).  The Bloomberg piece quoted a Bernstein analyst as saying:

“While each contract is different, this will certainly create nervousness among LNG suppliers that have spent vast sums of money building LNG capacity.”

Company news – general

Typically for a Friday, there have not been many ASX announcements from the oil and gas fraternity this morning.  A stack of formal announcements about indice re-basing has been one gloomy indicator of a sector in strife.  The wave of demotions from various S&P league tables includes, for instance, Origin Energy (ORG) now out of the ASX 20 and AWE and Karoon Gas (KAR) out of the ASX 200.

Company news – 88E

88E is not only one of the most unusually named ASX listed E&P companies, it also seems to be one that trades in a parallel universe – where the price of oil is US$110/bbl and investors love exploration risk.

Over recent months it has traded up inexorably (including a big jump this morning on no news) to now have a market capitalisation in excess of A$200M.  To compare, this is slightly more than half that of FAR Ltd’s – a company with a 15% share in one of the world’s best crude oil discoveries in recent years, that has the subject of a recent successful delineation program.

88E on the other hand is farming into acreage on Alaska’s North Slope. It has drilled one well and discovered some unconventional oil and gas potential.  Err, and thats it.

Markets aren’t rational and excitement can boost share prices above fundamental valuation levels and far above peers.  Furthermore, strong support from the entrepreneurial Perth broking community (together with hordes of private investors following a rising price) can do the same.  We are sure this will all end well.

Quote of the day

Our recent comments on the bull market for infrastructure stocks allows us to pick one final quote for this week from Warren Buffett’s most recent letter to shareholders:

“That’s because utilities were usually the sole supplier of a needed product and were allowed to price at a level that gave them a prescribed return upon the capital they employed. The joke in the industry was that a utility was the only business that would automatically earn more money by redecorating the boss’s office. And some CEOs ran things accordingly.”

 

 

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