Today’s Blog – Thursday 9th June 2016

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Continuing our recent theme on the relative current popularity of various mechanisms through which energy can be stored, we note the current hype on the ASX over minerals exploration companies who are targetting lithium (and to a slightly less popular extent, graphite).

Lithium and graphite are the main requirements for the rapidly growing batteries markets – in cars, households, businesses and utilities.  The well known plans for Tesla to construct a giga-factory in Nevada to meet demand for batteries for its electric cars are expected by some (or many?) to be replicated elsewhere in the world, particularly China.

In last week’s Australian Financial Review, veteran journalist Trevor Sykes (also known as Pierpont) likened the market’s current appetite for any stock with any hint of lithium in it to the more than 40 year old but still memorably wild Poseidon Nickel boom – which naturally did not end well.

He noted there are an incredible 63 listed lithium companies on the ASX at present.  In addition there are nearly as many graphite companies.  Of these 110-120 companies, it would not be unrealistic to conjecture that only 2-3 will become successful producers.

The total number of oil and gas companies currently listed on the ASX is around 100 – i.e. less than the total lithium and graphite explorers.  And the availability of capital to other than the larger petroleum producers and developers is negligible.

Efficient-market thesis, Mr Fama?

Commodity markets

The oil bulls are still running, with Brent and WTI both up more than 2% over-night.  The former closed at US$52.72 and the latter at US$51.53.

This was despite somewhat negative figures from the weekly EIA inventory report, which although it included an expected crude draw of 3.2 mmbbls, had a product build of 1 mmbbls of gasoline and 1.8 mmbbls of distillate.

The drop in the recently released US production figures for May were the highest since the falls began last year – at 150,000 bopd – and this clearly assisted the bulls.

Henry Hub had a slight breather overnight, closing down ~1% at US$2.46.

LNG and international gas

The confusing and non-commercial world of international pipelines encountered a new twist recently – President Putin indicated that Russian Black Sea pipline project South Stream and even Turk Stream could be back on.

As always, the question to ask when such are things reported is “show me the money?!”.

Governments, fracking, etc

The Government of Victoria has recently taken the expected “Yes Minister” route of extending its “moratorium” on exploring for on-shore gas (which, shock horror, might use the ancient practice of hydraulic fracturing).

More studies are apparently required.  I suggest the authors of the 10,000 previous studies change the dates and send out an invoice yet again – a far more profitable and less risky business than oil and gas it seems.

Company news – Oil Search (OSH)

Yesterday saw riots and the deaths of student protestors in OSH’s PNG backyard.  OSH has sought to assure the market that this will not affect its operations and longer term business there.

Meanwhile OSH is also dealing with another rioter – the ex CEO of its target InterOil, Phil Mulacek.  Mr Mulacek believes the OSH bid for his alma mater is light on – driven by his view that InterOil’s contingent resources is higher than anyone else thinks is the case.

OSH is effectively dealing with this challenge by welcoming anyone who wants to bid (presumably including Mr Mulacek) on the basis of any such higher numbers.  Again the “show me the money? ” question is almost invariably a good one to put out there.

Company news – Santos (STO)

A personal anecdote rather than some more widely spread news – but an interesting one in illustrating how CEOs respond to their Board designed incentives, which may not always increase shareholder value.

As we have noted before, STO’s relatively new CEO is incentivised to reduce per barrel costs.  That does not necessarily lead to increased shareholder value, but we can hardly blame him for following his incentives.

Our little anecdote was the recent redundancy of what we think was STO’s longest serving employee – which naturally involved a large payout (at nearly seven figures – almost as much as bloggers make).  Any NPV analysis of such a redundancy payment would be clearly negative against the counter-factual of retaining a talented person until he retired.

But costs per barrel are now down.

Quote of the day

Thoughts of CEOs turns us again to the ancient wisdom of Sun Zhu on leadership:

“The general who advances without coveting fame and retreats without fearing disgrace, whose only thought is to protect his country and do good service for his sovereign, is the jewel of the kingdom.”




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