Today’s Blog – Thursday 14th April 2016

Please pass this blog onto others who might like to read it

Today’s blog is a short “flash” blog only.  There will be no blog tomorrow due to travel


Regular readers will know of this blog’s scepticism about the true extent of the “productivity” improvements that the oil and gas sector has claimed it has achieved since the late 2014 crude price fall.  In our view, the prime data source for evaluating the industry – announcements issued by publicly traded companies – should be treated with a degree of scepticism – their purpose after all is to increase stock prices rather than provide academically pure information.

Rather, we think (and Schlumberger’s CEO vigorously made this point recently) that many recent cost reductions have been cyclical not secular in nature – and will reverse when the commodity cycle inevitably turns.

This thesis was supported by a blunt news story from last week – mining giant Rio Tinto had unilaterally told its suppliers that it was extending payment terms from 45 to 90 days. “If you don’t like it – “stuff” you.”

No doubt in due course the benefits of this will be duly reported by Rio as part of its overall productivity gains.

Commodity prices

Crude prices re-traced some of the recent substantial gains overnight, with Brent closing down slightly at US$44.18 and WTI at US$41.76.

Poor crude inventory numbers from the weekly EIA report were the main cause.  Last week’s draw now appears to be somewhat of an anomaly – this week there was a build of 6.6 mmbbls.  This was partially offset by a gasoline draw of 4.2 mmbls (although distillate increased by 0.5 mmbbls).

In our view, the relatively small price decline in the face of quite a large draw reflects still substantial bullish sentiment going into the Doha meeting this weekend.

Henry Hub rose to US$2.04 overnight.

LNG and international gas

Woodside Petroleum (WPL) announced yesterday that it entered into a Heads of Agreement with Indonesia’s Pertamina to supply it with 0.5 – 1.0 mtpa of LNG over 15-20 years.  The HoA is to be converted into a binding agreement in due course (although for a company who found Israel to have unacceptably high sovereign risks, we wonder how WPL will find dealing with Pertamina…..).

This deal reflects a deepening of WPL’s relatively new strategy of increasing its LNG trading capabilities and pursuing the growth of a vertically integrated downstream LNG business.

Company news – Santos Ltd (STO)

Last week we noted rumours that WPL would shortly appoint Rio’s CEO, Sam Walsh, to its Board and speculated that STO would also appoint some new Directors soon.

STO announced two new directors yesterday, although (with due respect to them) they were hardly of Sam Walsh’s profile or reputation.

Indeed, although they had both had some mid-management level oil industry experience, a roguish acquaintance of mine said to me that said experience appeared to be when Colonel Drake was a boy.

Company news – FAR Ltd

FAR went into a trading halt yesterday to deal with a cap raise (as the market had feared following its latest good drilling results).  Shareholders will be closely watching the level of possible dilution and whether any placement terms are extended to all shareholders.

The difficulties of capital raising for the sector was recently illustrated by an announcement from Perth based micro-cap Wolf Petroleum. It has just secured a A$60k loan from an ex-Director – at an interest rate of >100%.

Quote of the day

A cold shower for those looking for a “goldilocks” oil price – a quote sourced from the LNG shindig in Perth – from Total’s CEO Patrick Pouyanne (I can’t quite render a suitable French accent in writing, but can imagine it):

“There is no new normal.  Oil is a commodity and in a commodity you have cycles.  I don’t believe at all in something stable.”


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