Today’s Blog – Tuesday 25th October 2016


Last Thursday we reported on news about an incredibly cheap Abu Dhabi large-scale solar farm – and concluded that its fiscal essence was the same as the issuance of a AA rated sovereign backed multi-decade bond – with a coupon of say 150 basis points higher than available in the the yield starved traditional bond market.

Another much larger and more traditional bond issue was made by another Arab nation last week.  This was Saudi Arabia’s successful sale of US$17.5B of bonds – the biggest ever by a “developing” nation – at a coupon of 3.6%.

The KSA’s balance sheet has been deteriorating over the last two years as it runs on a large cash-flow negative basis under the conditions of US$50 oil.  However, the bond market has clearly shown some faith in oil markets recovering.

As we have noted on a number of occasions, the “new normal” of very low cost money is distorting business and politics in various ways.  Solar developers are taking advantage of this given the predictability of cash-flows that their assets possess.

This should be another impetus for oil and gas companies to hive-off their assets with similar characteristics (such as liquefaction plants, pipelines, etc) – if they can overcome their considerable reluctance (in Australia anyway) to give up their traditional “control”.

Commodity prices

Last week’s crude trading was fairly flat – with a positive response to good inventory numbers out of the US balanced out by reactions to various OPEC parties posturing before the November meeting.

The BHI rig count numbers on Friday showed yet another increase – US$50 oil is working its magic over the Permian focused companies in particular.  Oil rigs were up 11 and gas rigs 3.

Monday’s trading was slightly negative, with Brent down ~0.7% to US$51.42 and WTI similarly down to US$50.47.  In addition to the BHI numbers, the bears responded to Iraq joining the ranks of OPEC nations saying “we won’t cut”.  Given this, the KSA and its immediate neighbours will have to bear the brunt of any OPEC cut.  Russia is unlikely to be a reliable partner in any such endeavour.

Henry Hub has had a bad few days in response to warm Autumn weather and higher than expected inventory numbers.  Last night it fell ~4% to close at US$2.86 (after a fall last week of nearly 10%).

LNG and international gas

The most prominently successful LNG buyer in securing contractual changes and price cuts in recent times has been India’s Petronet (who earlier this year for instance, procured a reduction in LNG prices from Qatar).

Petronet has now publicly turned its price-cutting gaze towards Australia – and has formally sought a 10% reduction on its Gorgon LNG contract.  How the likes of Exxon will respond to that will be interesting to observe.

The rapidly growing world of LNG imports being facilitated through more flexible FSRU plants continues.  Two recent developments concern projects for Turkey and the Phillipines, reflecting issues of competitive costs, diversity of supply, depleting traditional suppliers, etc – i.e. issues that are being replicated in many other potential locations.

Governments, fracking, etc

Today’s Australian Financial Review (AFR) contained a quote from Greenpeace on BP’s recent decision to pull out of a drilling program in the Great Australian Bight, saying that this was “a huge people powered win…people have begun to break the stranglehold of Big Oil.”

We agree that “people power” was behind this – but have rather a different group of people in mind than Greenpeace’s Australian activists.  This project did not go ahead for the simple reason that it is not viable under current low oil prices – and the “people” behind those low prices are arguably the array of independent oil-men in the US who used technology and enterprise to unleash the shale revolution.

Company news – Cooper Energy (COE) and Santos (STO)

COE and STO announced yesterday that the former had bought the latter’s suite of offshore Victorian assets for A$62M (plus a kicker of A$20M that would follow upon Sole being sold down or FID’ed).  COE will fund this through a well priced – and fully underwritten – rights issue.

This represents a great deal for COE in our view.  It now has 100% of Sole and presumably has a highly developed sell-down strategy for that asset.  It has acquired production and reserves very cheaply.  This deal could end up costing COE next to nothing, depending on the sell-down terms for Sole and/or whether it is pre-empted on the producing Casino asset.

Strategically COE is now moving rapidly up the ladder of ASX listed E&P companies.  As long as it continues to deliver on its clear and simple strategy, then more deals should be available to it – for cash or scrip.

Beach Energy (BPT) is one of COE’s largest shareholders.  It did not take up the previous rights issue offered by COE – at a cheaper price than the current raise.  It therefore faces an interesting quandary in what to do next.  Like COE, BPT has a strategy of focusing on East Australian gas – but to date COE has been more adept in following through on that strategy.  Your move Beach.

For Santos this deal represented selling an asset for  quite a bit less than its NPV and option value.  The company’s relatively new CEO presumably wanted to show that he meant it when he said he would rationalise STO’s portfolio – and COE were in the right spot to benefit from an opportunity that in a few year’s time could well look like a bottom of the market one.

Quote of the day

Another quote from a recent article by veteran industry commentator, Philip Verlerger, on the causes of the shale revolution:

“The United States is different. Its culture promotes entrepreneurism and experimentation. Its laws permit those who find technological breakthroughs for resource development to capture much or all of the rents.”



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