Today’s Blog – Friday 15th July 2016

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We have noted over the last few months a few forays into the world of renewables (and batteries) by French Super-Major Total.  This has continued with a deal announced a few days ago whereby Total will take a stake in a Brooklyn based company called United Wind – that seeks to lease smaller scale wind-farms in the US.  The terms of the deal were not disclosed.

This company is not your typical large scale multi-MW wind-farm developer, but rather something that appears to be trying to be a bit “smarter” in terms of the growing down-sizing and getting nearer to customers of electricity generation (think roof-top solar) and the oft-hailed “smart” grid.

Total’s moves can be strongly contrasted with the recent views of Shell’s CEO, Ben van Beurden, who contrasted Shell’s annual $30bn investment – overwhelmingly in oil and gas – with what he says is the total $5bn annual investment of the top 10 solar companies:

“These top 10 solar companies don’t make any profit, have never paid any cent of dividend in their history. So I cannot invest $15-20bn in solar and wind, which is quite often what people somehow hope us to do, and also still at same time pay a dividend. We have to find ways to make these business models work.”

BvB appears to be talking about large scale capex projects.  Total seems to be thinking differently and more subtly (“trying to make these business models work”) – about how people generate, consume and store energy, the effects on the sector of massive new computer processing power and communications, etc.

Whether a Super-Major can bring the right culture to pull off what Total is trying to do will be fascinating to watch.  But at least they are trying – in a time of low oil prices – and creating what in the end of the day are a set of fairly low cost options.

Commodity prices

Crude prices bounced back somewhat overnight after the previous day’s big sell off.  Brent was up ~2% to US$47.37 and WTI was up slightly less (~1.2%) to US$45.68.

This appeared to be driven by a falling US dollar and a genuine bounce (hopefully not of the passed-away feline variety).

Henry Hub was flat again at US$2.73.

LNG and international gas

Chinese NOC CNPC recently issued a rare public forecast of the PRC’s future energy needs. It estimated that the pace of growth would slow dramatically from that seen over recent decades – and that demand would flatten out in ~20 years time.  However, it did estimate that natural gas demand in China would increase dramatically – tripling in the next 15 years to 18 Tcf per annum (which is still less than current US gas consumption).

Over in the US, the EIA has just published its view that the country will become a next exporter of natural gas within around a year – as pipeline exports to Mexico and LNG exports to many countries overtake the ongoing large imports from Canada.

One LNG destination that the US has not yet served – but could well do so – is Israel.  As we have previously noted, Israel has a FSRU facility which it is continuing to use (with another cargo just being delivered) – notwithstanding its own domestic gas coming on line.  This is because at present spot LNG cargoes can be sourced more cheaply than the contract price of its domestic gas.

Company news – Woodside Petroleum (WPL) and FAR

Some further developments following our commentary yesterday on WPL’s acquisition of Conoco’s stake in Senegalese licences in which junior FAR has a 15% stake:

  • FAR came out of its trading halt yesterday, and contrary to our expectations, managed to somewhat reverse its earlier share price fall.  It was still down 10% on the day, is flat so far today – but things could have been a lot worse if the market had priced it on a look-through basis.
  • The fact that the market did not reflects a few things: recognition that WPL got a very good deal; WPL’s presence substituting a willing developer for a somewhat reluctant one – and possibly, the option value of FAR’s pre-emptive rights.
  • The Australian Financial Review noted today that the other JV partner – LSE listed Cairn Energy – was rumoured to be mulling over its pre-emptive rights.  If FAR could find the short term finance to join in on any such move, it could well represent what will be seen in a few year’s time as superb deal-making (note – we still hold our FAR shares…..).
  • London based industry blogger, Malcy’s Blog, has been a long time supporter of this asset and FAR’s exposure thereto.  His view on the respective deal making skills here:

“Buying a class asset at $2.20/bbl is outstanding and COP have given away an asset in order to pay the dividend, such things happen in these markets and WPL will in due course be applauded for making a superb, counter cyclical move.”

Company news – Armour Energy (AJQ)

Readers may recall that junior AJQ has been in dispute with a JV partner (AEP) once led by the sadly departed Aubrey McClendon.  It has announced today that it has won a Court case concerning this dispute and AEP has been ordered to pay it US$13M, and subscribe for A$3.3M of AJQ shares.

We suspect that this is a hollow victory and AEP does not have the funds with which to comply.

Quote of the day

Following another shocking terrorist attack in France, a quote from General de Gaulle:

“France has lost the battle but she has not lost the war.”

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