Today’s Blog – Friday 29th July 2016

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Yesterday a transaction was announced over the purchase of an old oil-field located offshore Western Australia – Stag – owned 50/50 by Santos (STO) and PE outfit Quadrant.

The price paid was US$10M – which gave rise to some on-the-face-of-it fantastic acquisition metrics for the acquirer, TSX listed Asian focused company Mitra Energy.

These were per barrel numbers of US$1 for 1P reserves, US$0.70 for 2P reserves and US$2,667 for flowing barrels per day – the sort of numbers that would look cheap in Russia, let alone a tax/royalty/low sovereign risk country like Australia.  Additionally, Mitra has the bragging rights that come from acquiring an asset that was originally “sold” (under a conditional contract that was not met) to Malaysian company Mitra Energy for US$50M – then a renegotiated but still failed US$25M.

This deal in our view illustrates the following current trends:

  • The asset is clearly pregnant with very large abandonment liabilities – hence the great metrics.  Although one presumes the parties have unofficially cleared the deal with the relevant regulators – it is still possible it might fall over if the Government is concerned about the ability of Mitra to meet its obligations.
  • There are not a lot of buyers out there with cash, even for an asset located in Australia.
  • Larger companies often hold onto assets too long and when they get round to selling them it is often “too late” to achieve a good price.
  • Around 2 years after the oil price decline started, the larger companies seem to be getting round to the point where they will sell for whatever the market price is – embarrassing as it might be – rather than just hold onto “valuable” reserves and production.

Commodity prices

The poor run this week continues, with overnight falls of around 1.7%.  Brent closed at US$42.70 and WTI at US$41.14.

The vibe is negative and now the market is turning to the dark art of the “technicals” – where entrails are read, charts are scanned, candles are spotted – and predictions are made of resistance points and breakthroughs.  If the wall of US$40 is breached, then the pessimists are saying – next stop US$30.

Henry Hub provided some light in the gloom – closing up 7.5% to US$2.87.

LNG and international gas

Earlier this week Platts reported that Japan expected its LNG imports to fall in the current fiscal year by >6%, as nuclear plants came back on line.  It noted that Japanese authorities expected oil prices to rise through this year and next (they haven’t seen those candles!) – leading to higher contract prices.  Expectations for spot prices was still low – increasing the gap between the two – and hence pressure to close that gap.

Japanese utility Osaka Gas is responding to these types of market pressures by currently negotiating an on-sale contract to sell LNG (sourced from the US) to German utility E-On.

Here at this blog we love markets – and its great to see the once separate Pacific and Atlantic LNG markets being linked by a once staid Japanese utility selling once locked in US gas to what used to be Gazprom’s bitch in Europe.

Governments, fracking, etc

Not everyone loves markets – as is illustrated by a number of the proposals to “fix” Australia’s downstream energy sector.  Self-interest naturally reigns, with e.g. –

  • AGL (owner of large and profitable old coal stations but successful spruiker of its renewables business) promoting capacity payments for …..old coal-fired plants.
  • Owners of transmission networks promoting more transmission networks (on which they will earn a guaranteed rate of return greatly in excess of their current cost of capital given regulators don’t seem to have noticed that interest rates are close to zero and equity risk premiums have been smashed from historical norms – they should just look at our superannuation portfolio).

Company news – Beach Energy (BPT)

BPT issued its production guidance for FY2017 yesterday – basically the same as the previous year, with volumes from the acquisition of Drillsearch replacing field decline.

More interesting to us was the flagging by the company’s CEO of acquisition activity within the next 6 months or so.  The strategy adopted by his Board of focusing on Australia and “nearby” limits the targets available – but BPT unlike most does have some fiscal firepower.

BPT shareholders will be hoping new BPT Director and largest shareholder Ryan Stokes does not show up at a Board meeting with and says “I’ll leave the room just now, but why don’t you all very carefully consider the purchase from me of a lovely asset called Longtom…..”

Quote of the day

We noted a few weeks ago that the “coup” in Turkey could lead to Erdogan joining Putin in the Dictator’s Club – and so it is coming to pass.

Coincidentally the Turkish pilots who inconveniently shot down a Russian jet have just been found to be part of the “coup” plot – and the Moscow Times has just taken the final lines from Casablanca to describe the emerging relationship between the two hard-men:

“I think this is the beginning of a beautiful friendship.”


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