Today’s Blog – Thursday 19th May 2016

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Editorial

Interesting gossip overnight about a large potential takeover/merger in the oil patch – from the well known source Energy Egypt (relayed by Oilpro).  This concerned Occidental Petroleum (OXY) acquiring Apache Corporation (APA) for US$25B.

Although we have seen no other stories on this, it does have a ring of credibility about it.  One can see the generic strategic rationale about “bulking up” to become at the least a near member of the Super-Majors.  Possibly more importantly, a specific strategic purpose would be to combine the two parties’ interests in Texas’ Permian Basin to become the undisputed basin master thereof.

The Permian is arguably by far the largest oil “field” (very broadly defined) in the Western world and although maybe its tight oil economics are not as good as the best parts of the Eagle Ford, the running room to keep on growing, hitting new (and old) formations, and applying new techniques, is much bigger.

APA’s slimming down of non-core areas such as Australia a year or so ago increases the strategic rationale and likely support from the US investment community.

APA was the subject of a takeover rumour late last year – also from a large US independent – Anadarko – which came to nothing, as this latest rumour might also do as well.  And of course in any deal like this we have the issue that, shock horror, certain indispensable Chairmen, Directors and CEOs might lose their jobs, which they might not be happy about.

If the deal does proceed, it will then beg the question in every other Independent’s Boardroom – do we need to also bulk up, buy or be bought, etc.  That would include Australian companies Woodside Petroleum, Oil Search, Santos and Origin Energy.

Commodity prices

Crude fell overnight, with Brent down nearly 2% to US$48.54 and WTI down 0.25% to US$48.19.  The key driver came from the economic “numbers” side, with the US dollar rising on the back of smoke signals from the Fed that interest rates may go up in June.

On the industry “numbers” side of things, the weekly EIA report was a mixed bag.  Crude inventories built again – by 1.3 mmbbls (dashing hopes that last week’s fall may have been the start of a new trend).  On the other hand, product inventories fell sharply, with gasoline down 2.5 mmbbls and distillate down 3.2 mmbbls.

Henry Hub fell again – but just held up at the key barrier of US$2.00.

Governments, fracking, etc

The media (at least the likes of The Australian Financial Review – The Advertiser maybe less os) relayed quite a few reactions today to the item we reported yesterday – the Labor party’s plans to introduce a new body to review the national interest affects of new LNG projects.

The fear of a domestic reservation policy for the East Coast was a widespread theme.  At present we think this is fighting the previous war.  The arbitrage between domestic and international gas prices has reversed – intelligent producers should in fact be looking to divert supply from low priced LNG spot markets into high priced domestic markets.

LNG and international gas

Gas markets just to our north in Indonesia delivered a couple of interesting pieces of news recently:

  • Kogas has signed an MOU to build pipelines in Sumatra and Bali.
  • Mitsui has partnered with an Indonesian company over a FSRU project to bring LNG to Bali.

Few Australian companies appear to have much appetite to compete in these areas, notwithstanding the likes of A$10B market cap APA Group seems to be running out of growth opportunities domestically.  Sovereign risk is real in Indonesia – but is this any risker than e.g. Jemena deciding to build the NEGI pipeline with a large amount of uncontracted capacity that may not be filled?

Company news

Again this is thin on the ground today.  Come on E&P executives – do something more interesting than focusing on cost cutting!

Quote of the day

The recent abrupt bear-to-bull transformation of Goldman Sachs has led us to drag out the original Vampire Squid quote:

“The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” Matt Taibbi, Rolling Stone

 

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