Today’s Blog – Thursday 5th May 2016

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Introduction

As noted in yesterday’s blog, we recently snuck into Santos’ (STO) Annual General Meeting.  As is often the way with these events, some community protest groups mistook the event for a media rather than a shareholder one – in STO’s case this was manifested by various opposition groups protesting about its New South Wales CBM business.

A caucus of farmers, councillors, greens and aboriginal groups raised various issues (rather than questions) about this business, as they have done for a number of years now (we unkindly question as to whether these fossil fuel opponents walked the 1,000 miles to the AGM or used petroleum fuelled vehicles supplied from someone else’s backyard)

This ongoing issue must be painful for the Board and the company generally – particularly when the asset has been written down to nothing and even in an opposition free world would not likely generate material cashflows for a decade.

There is a possible stark contrast between the position of a new CEO and an old Board about this issue.  The former would probably give it away.  The latter paid $Bs for it – and we are informed – a Board conflict over the matter led to the so-called abrupt “retirement” of the company’s previous Chairman last year.  Watch this space to see how this potential conflict plays out.

Commodity prices

Crude prices ended up fairly flat in overnight trading, with Brent down slightly to US$44.94 and WTI up a bit at US$44.05.

The EIA’s weekly report was negative on the “numbers” side of the market, with a crude build greater than analyst consensus of 2.8 mmbbls, an unexpected rise in gasoline of 0.5 mmbbls and drop in distillate of 1.3 mmbbls.

The “events” side of the ledger helped to balance these negatives out, with for instance large wild-fires in Alberta Canada shutting in some production in that province.

Henry Hub closed up 3% at US2.14.

LNG and international gas

The last week has seen a couple of news items from what we characterise as one of the hidden giants of the long list of potential global LNG projects – Alaska’s AKLNG project to take the North Slope’s very well known gas resources South by pipeline and then West by boat.

On the negative side, the project has recently delayed a crucial Federal regulatory process – lodging a FERC application.

On the positive side, the Exxon operated Point Thomson project on the North Slope has started producing condensate of up to 10,000 bbls/day – with a massive amount of gas recyling.  This is a multi-billion dollar project that is wildly uneconomic as a condensate only operation.  Exxon therefore has a lot of sunk costs motive to push AKLNG ahead of other LNG projects.

Because AKLNG is owned only by Super-majors Exxon, BP and Conoco, it does not need to promote the project to investors as does just about every other LNG project in the world – which is why we characterise it as “hidden”.  But those parties have a lot of reasons to push it along with their own tortoise like determination.

Company news – STO

As promised yesterday, some other snippets from STO’s AGM:

  • The company’s strategic 12% (and growing) shareholder, Chinese gas group ENN, was not mentioned once (the Chinese fund who flipped its stake to ENN, Hony Group, came up in questions).  The Chairman professed not to know if any reps from his Chinese investor were at the meeting.  However, the CEO did mention the word “China” in his speech – the first time the Middle Kingdom has featured in STO’s Asian strategy.
  • Constant focus was made on being “free cash flow neutral” at particular oil prices.  This sounds like a precise term that can be neutrally measured.  However, it is only meaningful in a capital intensive business over a reasonable period of time – and there is substantial scope for disagreements over when that period should start, how long it should be, etc.
  • The oil price was constantly mentioned (“please sir, the oil price ate my homework!”)  However STO is a gas company with oil playing only a small part in its reserves base.  It would argue that LNG sales contracts mean that is a quasi oil company – but in our view that could be challenged, as LNG prices should increasingly diverge from traditional oil linked ones, even under long term contracts.

Company news – AWE

AWE announced today that it has sold its interest in an offshore Javanese PSC for up to A$27.5M (the proceeds include fairly long dated performance payments).

The buyer is a new Singapore company called HyOil Pte Ltd, which is presumably private equity backed.  Some settlement risk would exist.

Company news – Quadrant Energy

Quadrant (the PE backed Western Australian focused company who has a large asset base in the region acquired from Apache Corporation) continues to show an appetite for growth which its listed peers must envy.  It has just increased its equity in various oil prospective blocks off the North of WA – with the consideration focused on royalties and performance payments rather than cash upfront.

One of the vendors is private company Finder Exploratoin, which all South Australians know used to employ Don Pkye, the Coach of the Adelaide Crows.  Hopefully he has got a slice of the action here.

Quote of the day

Last year our amusement about the initial candidacy of The Donald for the US Presidency has gone the way of our other predictions.

His now almost certain nomination was no doubt secured by his recent insights into the involvement of Cruz’s father in the Kennedy assassination:

“His father was with Lee Harvey Oswald prior to Oswald’s being — you know, shot. I mean, the whole thing is ridiculous. I mean, what was he doing — what was he doing with Lee Harvey Oswald shortly before the death? Before the shooting?”

 

 

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