Today’s Blog – Thursday 14th July 2016

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We have had occasional reason of late to lament the outcomes of democratic processes – in the Brexit vote in the UK and the Senate vote in Australia (and with the greater fear of The Donald to come).

However, the recent transition of leadership in the UK to new PM Theresa May has been quick, smooth and efficient. Even in Australia, although it took a bit longer than was desired, the return of PM Turnbull happened in only around a week.

This led us to compare these quick national leadership transitions with some woeful recent and current performances at what are the massively smaller and less complex entities of ASX listed E&P companies, as follows:

  • Beach Energy (BPT) arguably took around 3 years (if not longer) for its long serving CEO Reg Nelson to be replaced.   A long period (particularly in terms of oil patch turmoil) that was exacerbated by the very short (and somewhat mysterious tenure) of Rob Cole.  Even now BPT has a CEO who has not yet been accepted as a Director.
  • Santos (STO) were quicker than BPT – but it was still around a year between David Knox “leaving” and the new CEO Kevin Gallagher finding his feet – and we note that the latter has yet to advise the market of what the company’s new strategy is.
  • The Australian yesterday printed yet another article speculating that Grant King, the long time CEO of Origin Energy (ORG) would be replaced later this year.  After nearly 20 years at the top, moving on seems a very protracted process for him, his Board and the company.

Why the massive difference in leadership change-out times between democracies and companies?   A simple answer is hard to divine, but it seems that the “social” context of a Board room is one within which it is much harder to accept that change needs to happen, needs to happen quickly, no-one is indispensable, etc.

One strike for the efficiency of democracy over business!

Commodity prices

Crude prices fell over 3% overnight, with Brent closing at US$46.63 and WTI at US$45.11.

Poorer than expected “numbers” from the EIA’s weekly inventory report were the main driver.  Crude was down 2.5 mmbbls, whilst product was up 5.3 mmbbls (gasoline by 1.2 mmbbls and distillate by 4.1 mmbbls).

Additionally, a report from the OECD’s IEA noted that there were risks to pricing from the ongoing high inventory levels (notwithstanding its edging up of demand forecasts).

Over in Iran, the longer term supply side could be curtailed by an apparent recent political decision to only offer harsh terms to needed international investors.  If this plays out, hardliners will be pleased that foreign Satanic influences do not invest in the Islamic Republic, whilst the public of said Republic will face a tougher economic time than they could otherwise readily obtain.  And so it goes.

Henry Hub was flat at US$2.74.

LNG and international gas

Bloomberg recently published an article on the ongoing role that Boston’s long time LNG re-gasification plant serves, notwithstanding LNG liquefaction plants coming on line to its South in the US Gulf of Mexico.

This plant in particular serves a seasonal winter market – sunk re-gas capex is a cheaper way of doing that than would be a new pipeline.  Additionally, new pipelines face opposition from anti-fossil fuel activists, who are particularly strong in New England.

Balkanised markets find their own solutions, and money does not differentiate between gas delivery mechanisms.

Company news – Woodside Petroleum Ltd (WPL) and FAR Ltd (FAR)

WPL announced this morning that it had struck a deal with Conoco to buy the latter’s 35% interest in the offshore Senegal oil discoveries in which FAR is a 15% partner.  The price payable is US$430M.  The deal is subject to pre-emption – the other private sector JV party apart from FAR is UK listed Cairn Energy.

We have been cynical in the past about WPL’s M&A capabilities, but in our view this is a great deal for it – if it closes.  The asset is high quality, WPL has an option to take on operator-ship, fiscal terms are good, sovereign risk is OK, the deal metrics are fantastic, etc.

For FAR, this is not so good news.  The look through value of the deal is considerably less than its current market capitalisation.  FAR was forced to call a trading halt this morning after its stock price plunged.  Unless it pulls a rabbit out of its hat, the price seems to have further to fall.  FAR looks like it was blind-sided by the Conoco/WPL deal, which is a rare feat for a deal of this type in the small and leaky oil patch.

But on the plus side for FAR, this transaction presents it and Cairn with a short term opportunity to pre-empt the WPL deal at this very cheap price.  The challenge for them in doing so would be obtaining finance quickly – and persuading the market they could then on-sell down the track.  (The market might say – surely Conoco has scoured the world for buyers and this must be the best deal around – so why will you be able to do better?).

This one will be well worth watching – it has implications just beyond WPL and FAR – for instance what does it mean for the appetite of the Majors and NOCs to invest in deepwater, no matter the quality, etc? (And if they don’t – hello “moon shot” oil price?!).

Quote of the day

The recent view of Shell’s CEO, Ben van Beurden, on the oil price, maybe shows why the Super-Majors are cautious on deals such as the Senegal one:

“The fundamentals I think are pretty clear cut, that supply and demand are getting back into balance.  In my mind there is more upward pressure on the price than there will be downward pressure in the long run – but how we are going to get to a higher oil price level will be a bumpy ride, and at what level it will settle is very, very hard to predict.”



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