Today’s Blog – Monday 23rd May 2016

Please pass this blog on to those who might like to read it

This blog will be intermittent over the next week or so due to travel commitments

Editorial

As we noted on Friday, the word “serendipitous” instantly came to mind given the timing of Oil Search’s (OSH) announced friendly takeover of InterOil at the same time as spurned suitor Woodside Petroleum (WPL) held its rather lacklustre investor day briefing.  All media stories about the deal over the weekend managed to get the word in somewhere.

This reminded us of another well known serendipitous moment in the Australian oil and gas industry’s history which occurred ~8 years ago – Santos’ (STO) first sell-down of what became the Gladstone LNG project to Petronas – at the same time BG Group was seeking to takeover Origin Energy (ORG).  The metrics STO achieved on that deal apparently were the key determinant in ORG’s rebuffing of BG.

An interesting what-if question can now be asked: what if STO had struck that deal later, allowing BG to close a friendly takeover of ORG:

  • BG would then have been the undoubted king of Queensland CBM and should have been able to orchestrate a far more sensible outcome than the 3 competing, very expensive, and short-gas liquefaction plants we have on Curtis Island.
  • ORG shareholders would have been paid around 3 times their current share price.
  • STO’s GLNG project would not have gone ahead in its current form – it could have been a subordinate partner to BG in a better project – or left to sell Fairview gas into a good domestic gas market without having to spend capital on liquefaction.  In either scenario its share price should be much higher than at present.

So, for a “want of a nail” short delay in STO’s Petronas deal, the shareholders of it, ORG and BG were all worse off.  In future, what will WPL’s failed tilt at OSH look like with the benefit of hindsight?

Commodity prices

Crude finished flat at the end of last week (but up overall for the week) with Brent closing at US$48.72 and WTI at US$48.41.  US$50 was threatened, but the bulls could not push prices over that key line.  The key drivers in the market were acting against each other – US dollar strength pushing prices down and extensive production problems in Nigeria, Canada, etc, pushing them up.

The BHI rig count had zero oil rig movement and two gas rigs less, so had no affect on the market.

Henry Hub was up slightly at US$2.06.  It pushed, but did not break, the US$2.00 downside pricing point in the week.

LNG and international gas

Recent comments from Gazprom officials confirmed what we have suspected for some time – the massive Power of Siberia pipeline to China is delayed.  Apparently only 70 miles of pipe have been laid to date (leaving a mere 2,430 to go).

The announced 2018 start date clearly has no chance of being achieved – with positive consequences for competing spot LNG suppliers to China.

Also in Russia, a recent leader’s meeting in Sochi included talks between Russia and Indonesia about the latter importing the former’s crude – and LNG.

As we reported recently, Rosneft has joined Gazprom in trading in LNG (with Novatek’s Yamal to come on in due course).  It is most likely that this news will turn out to lead nowhere in terms of converting a MOU into a binding deal – but again it shows the changing shape of LNG physical flows – and markets.

Company news – Armour Energy (AJQ) and Empire Energy (EEG)

AJQ and EEG have in recent years struck farm-in deals in the Northern Territory with private equity company, American Equity Partners (AEP), led by industry legend Aubrey McClendon (who sadly passed a few months ago).

Both are awaiting closure of these deals in different ways. It appears they might have a very long if not eternal wait given recent media reporting that AEP is being wound up – and in any event the deals done in Australia were allegedly done by McClendon directly anyway and AEP had no liability in connection therewith.

Company news – Real Energy (RLE)

RLE issued a “brave” ASX announcement today – one that included the word “fracture” in its title – let’s hope that the lock-the-gate crowd (or indeed France’s Energy Minister) don’t notice.  RLE will shortly frack a well in the Cooper Basin to seek to enhance its flow characteristics.

Company news – STO

STO’s US based non-executive Director (NED), Scott Sheffield, will later this year change his job title at Pioneer Resources – a new CEO will come in at year end.  Sheffield will be Executive Chairman for another year – and then remain on the Board as a NED.

How Australian CEOs must wish they could “retire” in a similar manner (but maybe OSH’s Peter Botten might manage to do so).

Quote of the day

We are borrowing a quote from the Australian Financial Review today – from WPL’s investor day last Friday.  In hindsight one cringes just reading it, given on the day how OSH showed up WPL’s growth options for the lame efforts they appear to be:

“We’ll give it a good old crack today and see what we can come up with with”.  Peter Coleman, WPL’s CEO

 

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