Today’s Blog – Monday 12th September 2016



Last week saw the anticipated retirement of Origin Energy’s (ORG’s) long time CEO, Grant King.  His nearly two decade reign delivered a very strong downstream energy business – but ultimately his company has suffered in recent years from the oil price fall coinciding with a lot of debt required to construct the APLNG facilities in Queensland.

Although maybe a bit harsh, in some ways we are reminded of the well known and acute observation from British politician Enoch Powell, which although directed at politicians, is in our view equally applicable to business leaders:

“All political lives, unless they are cut off in midstream at a happy juncture, end in failure, because that is the nature of politics and of human affairs.”

In hindsight, King would have been far better off accepting BG Group’s takeover offer for his company of around seven years ago – which was at a price around three times the current one – his reputation would have remained stellar.

King’s successor, Frank Calabria, has continued the recent tradition of energy company CEO’s of adopting a strategy that is as boring and uninspiring as possible. Noting that others have already appropriated the likes of “laser like focus on costs”, “reducing breakeven costs per barrel”, etc, he has chosen to “reduce debt”.

Meanwhile his Chairman – in response to some obvious media questions about splitting up the company’s downstream and upstream businesses, has said:

“That’s not on the table. It’s a non issue, a non question.”

As a small ORG shareholder ourselves, we consider the Board would be derelict in its duties if this matter was not put on the table for consideration and we hope that it will remain so.

We think that the Chairman’s response is typical from those leaders of companies who think they need to manage the media like they were politicians. In our view they don’t – politicians talk to millions of mostly unengaged people – companies talk to thousands of highly intelligent and engaged investors.

Commodity markets

Crude had a roller-coaster ride at the end of last week.  On Thursday we saw a large spike – as markets responded positively to the EIA’s official inventory numbers (a large rise in crude of 14.5 mmbbls – the highest since 1999 – accompanied by a draw on gasoline of 4.2 mmbbls and a distillate build of 3.4 mmbbls).

However, this spike was almost completely reversed on Friday, with Brent closing at US$487.01 and WTI at US$45.88.  The market presumably cogitated a bit more on the rationale for the large inventory build, which was arguably a temporary phenomenon caused by Hurricane Hermine reducing US imports rather than the long awaited start of a secular working off of large crude inventories.

Henry Hub was flat at US$2.80.

Governments, fracking, etc

The Australian Financial Review (AFR) has today reported on one of our perennial issues – the emergence in Oklahoma of causal links between increased seismic activity and the injection of produced water.

The AFR agrees with our thesis – anti-fossil fuel activists will grab this issue and blame it on “fracking” and to hell with the actual science.

Within a few months we expect Australia’s “lock-the-gate-I-want-to-get-off” crowd to point out some spurious link between Oklahoma earthquakes and CBM extraction risking the same in Queensland.

Company news – Santos (STO)

STO’s large Chinese strategic investor – downstream company ENN – came under some pressure last week from the Shanghai stock exchange over its decision making in effectively paying A$1B for a 12% stake in a company that has some “challenges” at present.

Conceivably this could lead ENN to consider short term actions such as selling out quickly, seeking to exert more influence (Board seats please), etc.  We will watch with interest.

Company news – Strike Energy (STX)

Last week saw another CEO change – at Cooper Basin explorer STX.  This was somewhat more abrupt and unexpected than the change at ORG and the tone of the relevant ASX announcement suggests some underlying disagreements at the top of STX.

If an announcement follows in the next few weeks about e.g. a material farm-down, a deeply discounted capital raising, a takeover offer, etc – then we will locate the dog that is not otherwise barking here.

Quote of the day

A challenge to a Eighteenth Century “blogger” of somewhat greater reputation than ourselves, author of the magisterial (i.e. lengthy) The History of Decline and Fall of the Roman Empire, Edward Gibbon:

“Another damned, thick, square, book! Always scribble, scribble, scribble! Eh! Mr. Gibbon?”  – William Henry, Duke of Gloucester, upon receiving the second volume from the author in 1781

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