Today’s Blog – Wednesday 4th May 2016

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Introduction

Well over a year after it was first launched, Halliburton’s takeover of Baker Hughes (BHI) has collapsed in the face of opposition from competition regulatory authorities – primarily the US’s Department of Justice – but also including on the margin actors such as Australia’s ACCC.

The principal consequences of this failed deal are to weaken Halliburton (HAL) – and possibly make the leader in the oil service sector – the mighty Schlumberger (SLB) – even stronger.  That is, competition in the sector might be practically weakened by the theoretical economic model driven position of the regulators.

Not only has SLB benefited from the strategic distractions its two main rivals have faced over the last nearly 18 months, HAL also faces the tactical blow of having to pay BHI a very large break-fee of US$3.5B (and at at time when the service companies are not exactly awash with cash).

As we have noted in recent times, the service sector is absolutely bleeding at present -arguably more so than the E&P sector itself (which at least at Super-Major level is cushioned by well performing downstream refining businesses).

The ability of the E&P companies to achieve “productivity” gains by cutting (temporarily only in our view) payments to the service sector would not seem to indicate a strong degree of pricing power.

As oil markets inevitably recover in the “medium” term, we might see rapid inflation in service costs, as SLB dominates, HAL is weak, BHI is niche – as well as all of the secular issues such as a much smaller work-force that cannot pick up the slack.  If that is the case, margins will not expand as much as might be expected as higher prices come back.

Commodity prices

Crude had another weak day, as Brent closed down 1.5% to US$45.20 and WTI fell ~2% to US$43.88.  A US dollar rebound from last week – and the drip-feed of stories about expanding OPEC production – were the primary drivers.

Henry Hub was up 2% to close at US$2.08.

LNG and international gas

The head of Mozamique’s NOC has recently responded to concerns that the actions by the likes of the British Government to cut aid in the face of the uncovering of lies about debts and the misallocation of grants.

Not surprisingly, he said these would have no effect on the country’s mega LNG projects. Although a rather different person, why do I get a vision of Mandy Rice-Davies when reading this?

A sign of greater faith in the country would come from the confirmation of rumours that ENI will sell down its interest in the offshore gas resources to Exxon.

Although the flipside of that for Exxon itself would be the resultant claim of some that such a move demonstrated the lack of growth projects in the company’s own inventory.

Company news – Santos (STO)

STO held its AGM today (which we snuck into).  The key surprise outcome for us was that the company did not suffer a “first strike” negative vote on its remuneration report.

Although STO only narrowly avoided such a strike last year, this year only 14% of those who voted recorded a vote against.  Furthermore, other votes, upon the re-election of two Directors and the new CEO’s performance shares, were strongly supported, with > 90% votes for.

Accordingly, our prediction of a first strike ranks up there with our other predictions such as lower oil prices after the “debacle in Doha”, higher US gas prices as LNG cargoes commenced, etc.

All up, STO’s Directors will probably feel that they have gotten away fairly lightly (“it was the oil price wot done it, guv”) and can now move on.  That is probably a consequence of the stock being fairly “under-owned” by institutions (who mathematically cannot own that much anyway due to the Company’s 12% strategic Chinese shareholder at one end and a long-suffering extensive mums-and-dads owner base at the other).

Ultimately the instos have registered their concerns with STO by not owning it. rather than by hanging around and trying to effect change, vote at AGM, etc.

We will report some further nuggets from the AGM tomorrow.

Quote of the day

By far the most entertaining speaker at the STO AGM was a Texas-based shareholder, who had some tough questions to ask, and who noted that gthe previous CEO, David Knox had:

“Been given a golden handshake and sent back to Scotland (poor bastard!)”

 

 

 

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