Today’s Blog – Wednesday 16th March 2016

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Introduction

Last week, J P Morgan (currently one of the biggest banks in the world) joined a growing bunch of largely US bankers who are voluntarily imposing restrictions on lending to certain sectors of the fossil fuel industry.  JPM will no longer provide finance for coal mines or coal-fired generators (in high-income countries anyway).

Given the current moribund state of the coal industry, large global coal miner Peabody pointed out how “brave” this action was – effectively kicking a man when he is down.

The relevance of this move to the oil and gas industry can be looked at from two perspectives.  Firstly, coal competes with gas so factors weakening a rival must be good for gas, right?

However – is this a step down a slippery slope that could next lead to similar limitations on the less-carbon intensive, but still CO2 emitting, oil and gas industry?   Green groups would certainly hope so.

A mitigation against this risk is the sheer size of the E&P sector compared to coal – the likes of JPM would be cutting themselves off from a very large market if they decided not to lend.  However, the risk cannot be dismissed too readily in our view – bankers in New York do not know or care how their Hampton homes are heated or Ferraris fuelled.

Commodity prices

Crude markets yesterday continued their current reality checking phase, with further declines of up to 2% in both London and New York.  Brent closed at US$38.94 and WTI at US$36.68.

“Numbers” emerging from the Middle East have started to show that Iranian production is on the way up – mitigated only by some views that part of this rise is due to the recognition of production that was previously happening anyway but was claimed as having come from Iraq.

Also on the Middle Eastern supply-side, the Ceyhan pipeline that exports Kurdistani oil is supposedly fixed and can quickly bring back on >0.5mmbopd (until it is blown up again).

An article in this week’s The Economist echoed one of our recent themes – that the volumes of tight oil that US companies can bring back on as prices rise will depend on the appetite of badly burnt capital markets to fund them in doing so:

“Those, then, who hope that nimble shale producers will be able to move the global oil price up and down just by turning the taps on and off may be disappointed.  Their financial backers will be the ones really calling the shots.”

Henry Hub continued to gradually claw its way back up from the depths, closing up ~2% to US$1.85.

LNG and international gas

International energy consultants Wood Mackenzie have recently said that up to half of the growing US liquefaction capacity may have to be shut in to balance global gas markets.

The key influencers on this will include: Gazprom’s choices over a market share or profit maximising strategy in Europe; the prices of competing coal in Europe and the US itself; and, the extent that liquefaction costs are effectively “sunk” through take-or-pay contracts.

Company news – BHP

Recent media stories on BHP Petroleum have flagged the company’s rare financial fire-power available to acquire producing and pre-development oil assets – particularly in the offshore areas where it currently works, such as the Gulf of Mexico.

Notwithstanding different balance sheet capabilities, we have not as yet come across any Boards of oil and gas companies that do not have the strategy of “please acquire cheap, low risk producing assets.  There, we have set the strategy, you just deliver“.

There do however seem to be less oil and gas Boards who are saying “go out and sell our best assets cheaply“.

We consider that good assets still attract funding from existing owners/financiers – and that the availability of high quality distressed assets is (still) low.

Company news – Cooper Energy (COE)

Judging by various ASX announcements this morning, there appear to be a few investor presentations on today from the likes of COE and those of its peers who still are well funded enough to attend conferences.

COE has re-emphasised its East Coast gas strategy and the good fit of its assets in this arguably supply short market.

As we noted yesterday, LNG re-gas facilities would currently make economic sense for East Coast Australia.  Imagine the endless fun in importing gas – and then selling it to a supply short party such as GLNG (who could then sell it to customers, who dump it in spot markets, where it comes back to Australia…..)

Quote of the day

With further developments expected later today to make likely The Donald’s nomination for the Republican candidate for the US Presidency, we, like all other commentators on this matter have turned from laughter to trepidation.

To quote Charlie Chaplin in The Great Dictator:

“….!”

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