Today’s Blog – Thursday 30th June 2016

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Editorial

Is there sign of life in the IPO market for oil and gas stocks given this year’s price recovery and US$50 oil?  Australis Oil & Gas Ltd issued a prospectus yesterday seeking to raise A$30M.  It is backed by quality mid-tier broking firms Euroz and Bell Potter (Shh!  don’t mention the fact that investor bankers make for cr*p listed company executives…) – and the entire amount sought is said to be spoken for.

Australis’ asset base does not seem that exciting – 15,000 net acres in a tight oil play in Louisiana and a gas exploration play in Portugal – for a vend of a cool A$50M.  However, the key to obtaining finance here is the relatively recent stock-market success obtained by Australis’ Board when they ran Aurora Oil and Gas – an Eagle Ford player that was taken out at the top of the market prior to the oil price crash.

Backing the jockey is a tried and trusted investment technique.  But does it work in the oil patch?  The best recent data we have here in Australia is the second lives of the various executives who presided over the coal-bed-methane (CBM) boom a few years ago.

Unfortunately that data would seem to suggest that backing the jockey does not work – as companies ran by the ex-CEOs, etc, from the likes of QGC, Arrow Energy, Sunshine Gas, etc, have not delivered exactly delivered great returns for investors.

With companies focused on commodities like oil and gas, the market prices of those commodities – and critically, market sentiment – trumps brilliance in Management.

Commodity markets

The oil price continued its rebound overnight (US$50 again – hurrah! – unless you are of the anti-goldilocks persuasion…).  Brent was up 3% to close at US$50.10 and WTI was up ~4% to close at US$49.88.

The EIA’s weekly report turbo-charged the post-Brexit bounce, with a fall in crude inventories of 4.1 mmbbls and a net reduction in product inventories of 0.4 mmbbls (gasoline up by 1.4 mmbbls and distillate down by 1.8 mmbbls).

Potentially striking oil workers in Norway and the looming collapse of Venezuela also continued to help the bulls (the former are in a somewhat better part of the oil patch than the latter).

Henry Hub had a flat day, closing down a tad at US$2.86.

LNG and international gas

One of our favourite topics in the international gas market is the status of the Power of Siberia pipeline from Russia to China (its sheer size will affect the global market and in particular gas suppliers fighting for Chinese custom).

This is arguably the most challenging on-shore pipeline development ever considered, given the near virgin Arctic terrain and the vast distance it covers.

The pipeline is supposed to start deliveries in 2018.  We recently reported that only a tiny fraction of pipe had been laid to date.  Russian news service Interfax has just reported that Gazprom intends to spend ~US$3B on Power of Siberia in 2016 and US$4B in 2017.  We deduce from these numbers – which are small given the size and challenges of the pipeline – that deliveries commencing in 2018 are fanciful.

Start marketing, LNGers with spare gas.

Fracking, Governments, etc

Over the last couple of days we have reported on Germany’s banning of fracking.  We concluded that the oil and gas patch in the country was not exactly very large and this was just gesture politics (there must be a ten syllable German word for that?).

Likely coincidentally, Canadian company Vermillion Energy has just bought a small German production asset from French company Engie for US$50M.  The latter is far more sensitive to the politics of fracking, given it is largely a downstream energy utility.

Company news – Exxon

The recent somewhat badly handled news story about Exxon and BHP seeking buyers for their late-life Bass Strait abandonment liabilities, oops, we mean, oil production assets, got some support for its veracity recently.

This was news that Exxon is seeking to sell its Melbourne office building – for a rumoured A$100M (which is probably a higher figure than the net worth of the offshore oil assets at US$50 oil).

Company news – Woodside Petroleum (WPL)

The Australian Financial Review (AFR) reported today about what is effectively an infrastructure strategy from WPL – seeking the interest of owners of contingent resources in the Carnarvon Basin to process said gas through their liquefaction facilities in the region.

This is an identical strategy to a pipeline owner seeking throughput contracts.   That is fine, but it is not what an oil and gas exploration and production does, which WPL otherwise proclaims to be.

It is not alone in this strategic position – the GLNG JV in Queensland has publicly flagged that is has spare liquefaction capacity on Curtis Island and wants third party gas to be processed there.

Some day – when CEOs are not rewarded for sheer balance sheet size – the divestment by E&P companies of their currently beloved big fridges will gain traction.

Quote of the day

The editorial musings above reminded us of this old Warren Buffett classic:

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact”.

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