Today’s Blog – Monday 7th November 2016

Editorial

We start as well as end today’s blog with a quote – as we think the following is particularly striking:

“We’ve long been of the opinion that oil demand will peak before supply. And that peak may be somewhere between five and fifteen years hence, and it will driven by efficiency and substitution, more than offsetting the new demand for transport.” – Simon Henry, chief financial officer of Royal Dutch Shell

That is “normally” the sort of thing that is more likely to be read on Bloomberg New Energy Finance than from the lips of a leader of a Super-Major – but qualitatively at least the acceleration in recent times of sources of potential disruption to the >150 year old oil and gas industry has been very strong.

This view – at least in terms of how short a timeframe is estimated to the point of peak demand – is not (yet) widespread in the industry.  However, if it becomes so it will have major ramifications in areas such as:

  • OPEC countries trying to produce as much as they can whilst they can (if that is not what they are already doing….).
  • Large reserves write-downs – as are already being flagged at Exxon, particularly over its high cost/long term Canadian tar sands assets.
  • Companies like Shell continuing to allocate capital to gas over oil – and increasingly invest in renewables, batteries, etc, as Total in particular has done this year.
  • Those companies – including a few in Australia we can think of – who are busy cutting costs to just survive – face increasing risks of strategic stranding as they do not have the band width (and balance sheet) to adjust to the changing environment.

Last week BHP struck a note in a similar vein – stating that the expected large growth in electric vehicles could provide a material uplift in long term demand for copper.  It that is true it suggests considerable hedging merit in BHP’s unusual corporate mix of both metals and petroleum assets.

Commodity prices

Crude prices fell again on Friday – with Brent closing at US$45.38 and WTI at US$44.07.  The fall over the course of the week was around 10% – driven by a toxic mix of very bad “numbers” from the EIA’s weekly inventory report (and bad rig numbers on Friday – see below); OPEC squabbling over potential cuts (with rumours that late last week the KSA was threatening to raise production if Iran refused to cut); and fears of The Donald getting his hands on the levers (and button – gulp) of power.

The BHI numbers on Friday capped off a dismal week – with a rise in oil rigs of 9 and gas rigs of 3.

Henry Hub also had a very poor week – down by ~11% to close at US$2.77.

LNG and international gas

One part of the US which is not seeing the cheap Henry Hub prices noted above is New England – where prices are above US$20 (i.e. quite a bit more than oil parity).  This price disparity is caused by pipeline bottlenecks and a generally prosperous community that can afford to be NIMBYs.

One massive winner of this is the LNG import facilities owned near Boston – including Excelerate Energy’s North East Gateway FSRU asset.  The maths are simple – buy Atlantic spot LNG cargoes at US$6-7 and sell them at US$20-25. With a margin of say US$15 per unit and FSRU vessel capacity of ~3 Bcf – thats a handy US$45M per cargo.

You don’t need to be Marc Rich to see the trading opportunity there.

Governments

The New South Wales Government flagged last week the introduction of possible measures to increase the penetration of EVs in the State.  The history of State Government support for roof-top solar panels would suggest that other States are likely to copy any such “virtue signal” – and over-pay the first movers.

Company news – Cooper Energy (COE)

COE’s largest shareholder, Beach Energy (BPT), advised the market late last week that it had diluted its stake in COE following the latter’s recent capital raising,  from 14.5% to 11.6%.

This dilution was presumably due to either BPT not liking COE’s recent deal with Santos; COE out-manoeuvring BPT over a quick raise; or a cock-up (e.g. BPT could not act quick enough).  The parties will each put their spin on this.

Company news – Central Petroleum (CPT)

CPT put out a short announcement late last week in response to some media comment about a Court Case in Texas under which a party which allegedly introduced a deal to CTP a few years ago was due a finders fee – of around one third of CTP’s market capitalisation.

Not a bad deal if you can get it……and one that will hang over CTP like a ominous cloud.

In the meantime, APA Group – CTP’s somewhat larger rival in the current public jostling over increased regulation of monopoly pipelines – must be rubbing its hands with glee.

Quote of the day

Following on from the “disruption” front noted above, a few week’s ago the ratings agency Fitch made the following strong call on threats to the oil and gas industry:

[Batteries have the potential to] “tip the oil market from growth to contraction earlier than anticipated.  The narrative of oil’s decline is well rehearsed — and if it starts to play out there is a risk that capital will act long before” [and in the worst case result in an] “investor death spiral.”

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