Today’s Blog – Thursday 17th November 2016

Editorial

As we have reported on recently, the angst and disputes between Santos’ (STO) largest shareholder, Chinese downstream gas company ENN, and STO’s Board, has become increasingly public.

Yesterday the Australian Financial Review (AFR) contained extensive quotes from a letter to STO from ENN’s billionaire founder/controller, Wang Yusou, which we can only assume were leaked by the ENN camp to put some pressure on the STO Board.

The letter made some self-evidently sensible suggestions to STO:

  1. Define a strategy.
  2. Improve Board composition (hint! hint!)
  3. Fix up the balance sheet.
  4. And don’t forget about growth.

Some of the more interesting points that we read in the Chinese tea leaves were that the suggestion on strategy emphasised “developing value along the entire gas value chain”.  Additionally we think there was an implication that an on-side (and “on Board”) ENN could help out in strengthening STO’s balance sheet (no doubt at a reasonable price of course).

We think seeking out profit making opportunities in the rapidly liberalising international LNG (and gas generally) markets could be powerfully pursued by a strategy that combined STO’s upstream skills and ENN’s gas demand, PRC presence and PRC connections.

However, STO has rebuffed ENN and said it should wait until its annual strategy presentation due next month.  Or to paraphrase: “the world must stop while we have internal meetings!”

Like we said about the rather smaller Central Petroleum earlier in the week, this game ain’t over.

Commodity prices

Oil prices fell overnight, with Brent down ~1.2% to US$46.46 and WTI down ~0.8% to US$45.47.  We were surprised they did not fall more given some poor “numbers” from the weekly EIA inventory report, which showed crude stocks built by 5.3 mmbbls, gasoline increased by 0.7 mmbbls and distillate rose by 0.3 mmbbls.

The heavy lifting oil price-wise is very much now in OPEC’s court as the trend of declining inventories of a few weeks ago seems to have reversed.

LNG and international gas

Note to STO Board and Management:

  • Recent data has suggested China is materially increasing gas imports year on year.
  • Russian gas supplies to the PRC seem likely to be delayed by years.
  • China will still pursue policies of reducing pollution and could well welcome President Trump’s isolationist views in this area.

Opportunities to “develop value along the entire value chain” perhaps?

Disruption

Another small-ish story from Total which suggests it is leading the Super-Major pack in positioning for a world where oil and gas might suffer major disruptions from the rise of renewables/batteries/etc.

This was an announcement about a US$300M investment into 200 MW of solar PV (seems cheap) at its chain of petrol stations.  Qualitatively the economics of that appear to stack up well – and in addition there is likely a brand/stakeholder benefit as well as the acquisition of more knowledge of solar costs/technologies/etc.

Company news – New Zealand Oil and Gas (NZOG)

NZOG used to have a joint listing on the ASX as well as on its home New Zealand exchange but earlier this year reverted to just the latter.  Yesterday it announced the sale of its 15% stake in the Origin Energy (ORG) operated Kupe gas-field to Kiwi downstream energy company Horizon Energy for NZ$168M.

Again “value across the gas value chain” anyone?

If ORG could monetise its interest in Kupe for a similar metric then we think it would be compelling for it to do so given its current stretched balance sheet.

Company news – Oil Search (OSH) and STO

OSH and STO today announced the sell down by OSH and Exxon of a 20% stake in a PNG exploration licence to STO.  This seems like a sensible move to align equity in a potential gas discovery in this licence with the nearby PNG LNG JV owned gas-fields.

The price STO paid was not disclosed.  We can only conclude that Exxon successfully bullied OSH and STO into not stating this – but we would have hoped that the ASX would push harder for disclosure over such deals.  It should be up to the market to determine what is material.

Quote of the day

Another one from Sun Tzu, whose 2,500 year old wisdom seems to have some application to modern day corporate strategising:

“If on the other hand, in the midst of difficulties we are always ready to sieze an advantage, we may extricate ourselves from misfortune.”

 

 

 

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