Today’s Blog – Tuesday 21st June 2016

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

We are again on the road this week, so blogs may be shorter than normal

Editorial

Personal anecdotes are filtering through to this blog on a fairly regular basis about the never-ending cycle of redundancies at Santos (STO) – and no doubt this is fairly representative of the industry as a whole.

There are common factors in the names that are departing – they are highly experienced – and therefore no doubt command high salaries.

A recent re-read of a fairly well-known quote from Berkshire Hathaway’s Charlie Munger chimed with this news:

“I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.”

What is the connection you ask?  In our simple view, STO’s CEO is simply responding to the blunt incentives set him by his Board – he gets a bonus based on reducing the “free cash-flow breakeven point” (whatever that means – if that is not open to manipulation by a smart executive, then we would be surprised) at the end of a measurement period.

So by sacking – and paying out expensively – experienced people, the CEO increases the chances of getting his bonus.  But – negative NPV this year or long term shareholder value  destruction afterwards – who cares about that – not what he is incentivised about.

This also plays into one of our other continual themes – the industry – and the world – is storing up a whole lot of “interesting” times for itself when the massive current capex (and clearly people) cuts hit the brick walls of depletion and increasing demand in the “medium” term.

Commodity prices

Happy days are here again in Brent-land (unless you are a pessimist subscribing to the US$50 is the anti-goldilocks oil price theory) – it broke through this pricing barrier again last night to close at US$50.37.  WTI also went up by a similar amount (~3%) to close at US$49.37.

Opinion polls (and possibly more accurate betting markets) have recently been reducing the odds on a Brexit vote in the UK this week and asset markets generally have responded very positively to this.  The hyperbole behind the following quote from US market commentators Thinkforex shows why:

“This [Brexit] is a scenario which could potentially be fivefold worse than Lehman Brothers. Therefore, any relief on this front is uplifting the sentiment among trades.” 

Henry Hub continues on its white hot streak, racing up 5% to close at US$2.75 last night.  A very hot summer period is forecast to hit the US shortly, driving gas-fired electricity for air conditioning.

LNG and international gas

Last week we noted Shell was hoping to work with current partner Gazprom to expand their Sakhalin Island LNG plant.  The only problem they have is that the best source of gas for this expansion off Sakhalin is owned by Rosneft and Exxon.  Result – even less chance of cooperation than seen on the LNG island in the Southern hemisphere called Curtis Island.

Russia’s Energy Minister said on Friday (as the ink was drying on Shell’s MOU with Tsar Putin over Baltic LNG – and hopefully Sakhalin LNG in Shell’s mind) that the country might allow Rosneft/Exxon to take Sakhalin gas through Gazprom owned pipe to Vladivostok – presumably with a view to then on-shipping it to China.

From an Australian perspective – how “delicious” (thanks, Bruce!) to see others completely stuffing up on the LNG cooperation front – even when a strong Government should be in a position to arbitrate a sensible outcome.

Governments, fracking, etc

A somewhat disturbing media story yesterday in the otherwise most sensible oil and gas jurisdiction in the land (and ranking highly in the World) – South Australia.  This was an opinion poll that showed large opposition to fracking (which has supplied the citizens of that State with gas for many decades) – and of course calls for the usual “moratorium” to review the science, etc.

Quote of the day

In light of the fracking story above (and also when tough decisions might be deferred to referendums) – lets hope the politicians remember their job as defined by 18th Century British politician, Edmund Burke:

“Your representative owes you, not his industry only, but his judgment; and he betrays instead of serving you if he sacrifices it to your opinion.”

 

 

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