Today’s Blog – Monday 2nd May 2016

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Introduction

We have begged the question upon a few occasions recently – do oil and gas companies risk “fighting the last war” if commodity prices continue their strong upwards trend?  Australia’s larger E&P enterprises appear to be currently focusing on costs rather than the medium term – “operating in a US$30 world”, etc.  However, we are currently nearer to a US$50 world (albeit with clear risks to the downside as well as upside momentum).

Houston based industry advisers noted in their daily email on Friday in the context of the Super-Majors:

“The market is still rewarding capex cuts despite the impact on medium-term growth: we would expect this to change if oil prices continue to improve and the market starts looking for growth.”

Markets are fickle – and generally much quicker to move than Management teams.  But we can conceive that in Australia they could quickly start to look for growth rather than cost reductions.

A nimble response to that – or even better working up options now – will be more highly rewarded than a slog of cost cutting (to the bone in many instances) that continues into an up-cycle.

Commodity prices

Crude traded pretty flat on Friday, with Brent closing at US$47.37 and WTI at US$45.92.  Over the week a gain of 5% was realised – and over the month of April the gain was ~20% – a 7 year record for Brent.

The rig count numbers were again bullish on Friday, with BHI reporting another fall in oil rigs of eleven (and a gas rig decline of one).

Various producing and exporting nations are developing significant stress, to the point that current and possible supply interruption risks are clearly growing.  For instance, in addition to the Venezuelan risks we noted late last week, Iraq’s grossly dysfunctional political system is getting worse (with an occupation of the Green Zone over the weekend by an extremist group) – to the point that even more dis-memberment of the country seems feasible.

The Henry Hub natural gas price closed up a few points to US$2.18 on Friday – and was also up 2% for the week.

LNG and international gas

The offshore East African gas discoveries made in recent years are amongst the highest quality conventional gas assets in the world.  However, their development in the form of LNG projects face not only the core problem of a currently long market and in the future much supply competition – but also increasing sovereign risk.

In recent days the UK has suspended aid to Mozambique following revelations of undisclosed loans and the direction of funds intended for fishing boats into military vessels (and ones bought from the French, I ask you!).

LNG rivals in more stable locations, even with considerably lower quality resources, such as Canada, Australia and the US, will no doubt be soberly (but secretly gleefully) pointing out the risks of East Africa to potential gas buyers.

Governments, fracking, etc

The CEO of Western Australian focused company Buru Energy, industry veteran Eric Streitburg, introduced a bit of theatre into the never-ending fracking “debate” at the company’s AGM last week.

Shareholders witnessed Eric demonstrating the non-toxicity of the frack water used by Buru – by drinking it.  Good on you Eric and we trust that other representatives of the industry such as APPEA will take note that the low road as well as the high road is an effective communications channel.

Eric showed more bravery than a British Conservative Minister about 25 years ago – who memorably appeared on TV feeding his young daughter a burger to prove that mad cow disease was not a threat to the public.

Company news – Origin Energy (ORG)

The Australian Financial Review (AFR) today continued the drum-beat of expectations that ORG will split up its upstream and downstream businesses in the next year or so.  The AFR noted that a number of major investors in ORG had been pressing the company to do so in recent times.

The comparative share price performance of rival utility AGL Energy provides vivid support for this – it used to be less than ORG’s and is now 3-4 times higher.

In our own limited experience, the drumbeat on this issue is also being manifested through the actions of ORG middle management – they can read the newspapers as well and are planning for their expected futures, notwithstanding a more cagey position from their leaders.

Quote of the day

Traditional demonic figure for US Democrats, oil industry billionaire, Charles Koch, when asked if Hillary Clinton may be the best available next US President:

“Its possible.”

And in his next move he may sell out of fossil fuels and invest all his money into wind-farms and lentils.

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