Today’s Blog – Wednesday 2nd November 2016

Editorial

One of the remarkable turn-around stories on the ASX so far in 2016 has been the investment performance of shares in coal miners.  Companies such as Whitehaven Coal have delivered to shareholders near 10-bagger returns and the market has scrambled to get back into the sector.

The main platform for this share price performance has been traded coal prices responding very strongly to regulatory changes in China that have shut in and otherwise retarded production in the country.  Moving beyond these fundamentals, share prices have also been driven strongly by the age-old factors of greed, fear and “not wanting to miss out” (otherwise known as the of king investment decision-making in institutional fund management: “career risk”).

Chief Investment Officer of Forager Funds Management, Steve Johnson, has described this situation as follows:

“The final lesson, then, is an old one. Wait and see is not an option.  Many investors wanted to see a recovery in the coal price before buying coal mining stocks.  By the time that had happened share prices had already tripled and more.”

We envisage scenarios where this could also happen for oil and gas stocks.  For instance, say OPEC does do some sort of half-hearted deal at the end of this month; US inventory numbers continue to be bullish; a geo-political “event” happens; Trump-risk is removed; etc.  Result – crude prices start to rise and then everyone will remember what happened to coal stocks – and oil and gas share prices could become turbo-charged.

We are of course known here at this blog for our over-optimism….but we have some shares to issue in a great gas exploration venture – very cheaply of course – don’t miss out on the Whitehaven Coal re-run.

Commodity prices

Crude prices have continued to trade downwards this week, with sharp falls on Monday and flat-to-negative moves on Tuesday.  Last night Brent closed at US$48.33 and WTI at US$46.79.  Over the course of October prices fell by 3%.

All eyes are on OPEC – and the bears are deducing that stories about cuts are not in fact lovely health drinks but the short lasting fix of OPEC heroin.

Henry Hub has also fallen sharply over the last couple of days and last night closed at US$2.87 – it must be positively balmy over there in the US just now.

LNG and international gas

Those crazy business development guys over in Japan are at it again – making moves in the changing world of LNG whilst the supposedly more gung-ho Australian energy companies are still busy slashing their navels.

A recent development has been from previously arch-conservative Tokyo Gas – who the Nikkei Asian Review has recently reported is, on the downstream side, signing LNG importing deals in Vietnam and Indonesia, whilst on the upstream end is developing its US footprint in gas production and liquefaction capacity – creating an international vertically integrated LNG business.

Governments

A few years ago the South Australian Government appeared to become bewitched about the possibilities of substantial growth in the State’s oil and gas industry (largely driven by the likes of the EIA reporting substantial shale gas potential in the Cooper Basin, etc).

Governments like to share the glory in such circumstances – and politicians love the concept of “hubs” – which apparently magically generate jobs, tax, etc, etc.  So the State Government sold a parcel of vacant land at a location near-ish to Adelaide harbour called Gilman, which was somehow going to become that very “hub”.

Yes, the likes of Schlumberger, etc, were going to pay excess economic rents to the new landowner in order to get access to that hub-juice (and they would not notice that there is rather a lot of other vacant land in South Australia on which e.g. their pipes and rigs could be laid down).

Not surprisingly, this concept formally fell over yesterday as the purchasers could not pay.  In our view it was dead anyway – even with US$100 oil, why would the hub concept have worked?

Company news – FAR, Woodside Petroleum (WPL), etc

Conoco has joined WPL in saying that the sale transaction between the parties over a Senegalese offshore asset in which FAR has an interest – and a claimed pre-emptive right – has now “closed”.  We take that to mean money has changed hands.  Once that has happened, the omelette becomes that much harder to un-scramble for FAR.

Its not game over yet according to FAR – but we think the Senegalese Government will want the parties just to get on with delineation and hopefully development.  FAR’s window to change that seems to be shrinking politically, notwithstanding what the legal niceties might be.

Quote of the day

US liquefaction pioneer Charif Souki on the liberalising world of LNG pricing – and why the US is currently king:

“You don’t have any justification to indexation to anything else anymore.  On that basis, it makes sense to be the low cost producer.” 

 

 

 

 

 

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