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Houston based energy industry bankers Tudor Pickering Holt (TPH) noted in their daily client email on Friday that, based on metrics in recent international deals, it is currently cheaper to buy contingent resources than it is to explore for them.
TPH used recent deal examples including an Anadarko purchase in the Gulf of Mexico, a Statoil deal off Brazil and our very own Woodside Petroleum’s (WPL’s) purchase of Conoco’s Senegalese assets – at prices ranging from US$1 to US$3 per barrel.
The recent Exxon take-over of InterOil – at a price of US$4.20 per BOE, was the richest in the market, especially when it is essentially for dry gas rather than crude.
The current difficulty in juniors raising funds for exploration – or the independents and majors investing internal cash-flows into the same – can be readily contextualised by investors effectively saying: “why should we fund to explore when you can buy cheaper for lower risk?”
The position is not sustainable in the “medium” term, as the inventory of contingent resources inevitably declines in the face of global depletion of production assets – but provides a fertile hunting ground for those with the funds and the fortitude to purchase assets a bit further along the risk spectrum from production assets.
Crude prices on Friday snapped their losing streak, finishing up ~2% at Brent (US$43.53) and ~1% at WTI (US$41.60). However, they were still down ~5% for the week, down 15% for the month of July and down ~20% from recent highs. Short covering appeared to drive the action on the day.
Additionally, a set of better than previous weeks’ drilling rig “numbers” from the weekly BHI report aided the bulls – an increase of oil rigs of only 3, and a decline of gas rigs of 2.
Bloomberg has recently reported on what we think is at least a partial response to the theory that US$50 is the “anti-goldilocks” oil price – i.e. one that is too hot to stop rigs coming back but too cold to provide profits.
This report focused on “US$60 being the new US$50”, with a range of companies reporting that the former rather than the latter was now the price that would be needed to incent new onshore US activity. For instance, Andarko’s CEO recently stated:
“The more we feel comfortable about that sustained $60 price environment, the more likely you will see us increase capital.”
Henry Hub was flat on Friday, closing at US$2.88 – up 4% for the week. US gas inventory numbers are positive – aided by hot summer conditions calling on gas-fired electricity for air conditioning – and should go into the normally higher priced winter period with a healthier balance than the previous year.
LNG and international gas
The mighty Gorgon LNG project continues to proceed very slowly to full production. Operator Chevron reported last week that the second and third trains would be on-line somewhat later than the market had previously expected.
This compares unfavourably with the ramp-up performance of the six liquefaction trains on Curtis Island, which have generally performed in line with predictions and are posting handy cargoes shipped performance metrics.
The reasons for this East beats West outcome are unclear, so we can only speculate that it reflects a better construction performance in Queensland, due to a less remote and challenging location.
Company news – WPL
In Shell’s results issued last week, the Australian media noted a change in accounting treatment for its holding in WPL – this was now not considered an asset whose reserves could be consolidated, due to a lessening of Shell influence over WPL as measured by factors such as diminished Board representation.
This reinforced to observers that Shell’s stake is for sale. In our view we see a strategic buyer for this as being less likely than a block trade to passive investors – in due course.
Company news – general
Australia’s E&P companies have now all released their quarterly reports. At all ends of the spectrum of companies involved the common themes of investment cut-backs and preserving cash are dominant.
At the junior end, exploration is almost dead at present – any hint of needing further capital would be punished much more than the possibility of actually making a discovery.
Quote of the day
We have noted before that we have predicted six of the last zero falls in US gas prices, as Henry Hub appeared to be far too low to support production costs. We were not alone in this view, as illustrated by the following illuminating recent Mea Culpa by well known US oil patch commentator, Art Berman:
“The thing I’ve been most wrong about was the longevity of shale gas company’s ability to keep getting money and therefore to continue running themselves into the ground on unprofitable ventures. I completely blew that. I just couldn’t imagine that could go on as long as it has. And I was wrong.”