Today’s Blog – Tuesday 22nd March 2016

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The UK’s Sunday Times reported a few days ago that ex-BP CEO Tony “I’d like my life back” Hayward was looking to set up a new venture, funded by Middle Eastern and Sovereign Wealth funds, to acquire distressed oil and gas assets.

To those of us in Australia, this seems a close echo of news from last year: the approach to distressed Santos (STO) by Middle Eastern and Sovereign Wealth funded Scepter Partners, also headed by an ex-CEO (STO’s John Ellice-Flint).

Another blog waggishly pointed out overnight that Mr Hayward might well look for cheap distressed assets in the form of the LSE oil and gas company of which he is Chairman, Kurdistan focused Genel Energy, who recently took a >US$1B write-down.

We reiterate one of our common themes – it is easier to find cheap, high quality and low risk assets in theory than it is in practice.

Commodity prices

Crude prices rose again over-night, with Brent up ~0.5% to US$41.39.  WTI rolled over to a new monthly contract, closing at US$41.62 – on a like for like basis, the rise was similar in magnitude to Brent’s.

The key “numbers” of the day were reports from industry intelligence body Genscape that inventories at the key global storage hub, Cushing Oklahoma, had declined by 600,000 bbls.

The theme of “missing barrels” – the difference between reported production, consumption and inventory changes, has received a bit of press recently and may well be influencing the bulls.  One aspect of this is the absence of profitable contango opportunities in floating crude storage – a potential price signal that the missing barrels in fact were never there.

Henry Hub fell ~5% yesterday, closing at US$1.81.

LNG and international gas

Chevron (CVX) has announced that Gorgon’s first LNG shipment has finally left Barrow Island – destined for Chubu Energy in Japan.

In Japan itself changes are afoot in wholesale gas markets which may provide opportunities and risks for LNG sellers.  The markets are to be liberalised, with third party access granted to facilities such as pipelines and re-gas facilities.   New pricing models (e.g. linking gas to coal rather than oil) will have greater scope to evolve – and then possibly be exported across Asia in the medium/longer terms.

The larger and better resourced LNG players such as Shell and BP will we well placed to move downstream into this evolving Japanese sector.  Smaller players relying on longer term contracts may be left behind if LNG becomes an even bigger boys’ game.

Company news – STO

The media today reports that STO’s new CEO, Kevin Gallagher, has started to swing his axe through the company’s senior executive ranks.  Although not worthy of an ASX announcement, the media has been advised by the company that two of its Vice Presidents, James Baulderstone (associated with the company’s expensive purchases of now nearly worthless New South Wales assets) and Trevor Brown (the unfortunate can carrier for a lack of reserves for GLNG) are the (initial) victims.

We expect more to come and within one year of Gallagher’s appointment an almost complete clear-out of executive ranks.  This may provide the NEDs with some welcome cover as investor’s appetite for revenge is assuaged with lower ranking victims rather than those arguably more accountable for the key bad decisions of 0ver-gearing,  not hedging and FIDing two LNG trains without enough gas.

Quote of the day

A slightly shorter blog, a beautiful day and the following quote from P G Wodehouse. Join the dots.

‘It was a morning when all nature shouted “Fore!”.   The breeze, as it blew gently up from the valley, seemed to bring a message of hope and cheer, whispering of chip-shots holed and brassies landing squarely on the meat.”

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