In yesterday’s editorial we lamented the break-down in the usual healthy oil and gas eco-system of increasingly bigger fish munching up smaller prey – with the recent developments at Santos (STO) and Origin Energy (ORG) exacerbating this.
Other factors are also working against this organic conveyor belt of discovery to delineation to development to production to late life operations to abandonment. These include:
- The shortage over the last few years (Central Petroleum’s CEO Richard Cottee has said a period of ~30 months) of risk capital prepared to support public E&P companies – particularly with respect to exploration expenditure.
- Very few new IPOs.
- ASX rules that make back-door listings much tougher to do.
- More and more acreage being locked up in long term retention licences in e.g. South Australia.
- Rising sovereign risk in many parts of Australia that deter capital markets and hence activity.
- The few cashed up companies keeping their powder dry – but arguably waiting for opportunities (“buy high quality assets for less than they are worth – there we’ve set the strategy, you just execute, Dilbert”) that will not arise.
- Higher cost structures that make it hard for juniors to undertake much exploration expenditure with the limited funds they have.
- Very few success stories for ASX companies operating outside Australia – unlike on London’s aim, where success in e.g. Africa has beget more funds for the sector as a whole.
In our view this is not good for the industry – or the security of supply for gas in the country – but there are no clean fixes other than the passage of time, the growth of animal spirits and the emergence of new predators.
Crude prices performed reasonably strongly overnight again, with Brent up ~1.7% to US$55.23 and WTI up slightly less (1.5%) to US$52.29. Apparent good news from non-OPEC countries agreeing to cut (translation in many cases – “cut” = “natural decline”) – along with statements from the Saudis indicating a willingness to cut even more than promised – were the main drivers.
Henry Hub took a bit of a hit yesterday and closed down nearly 6% to US$3.51.
LNG and international gas
Qatar is said to be considering merging its two massive LNG companies – QatarGas and RasGas – to save costs, etc (tip for a cash-strapped Qatari Government – sell beer to World Cup attendees in a few years time).
Another driver which is perhaps more strategically interesting is that in the past each company focused East or West. Now Atlantic and Pacific markets are increasingly converging and taking advantage of arbitrage opportunities between the two will be easier inside one company.
Company news – DUET
As noted last week, energy infrastructure company DUET was recently the subject of an informal takeover approach from Hong Kong’s massive conglomerate CKI. DUET advised the market yesterday that it had permitted CKI to undertaken non-exclusive due diligence.
Oil patch readers will contrast and compare this action with that of STO’s Board in 2015 – when it received an indicate, non-binding but generous bid from Sceptre Partners, its response was to quickly re-buff it rather than create optionality for shareholders through providing sought-for due diligence. (“Shareholders – who they?”)
Company news – AWE
AWE announced this morning the sale of its operated interest in the late life Tui oil-field offshore New Zealand. The sum involved is a modest US$1.5M – but this in fact represents a pretty good deal as it gets AWE out of the major abandonment liabilities associated with the asset.
The purchaser is PE funded Asian company Tamarind, who presumably sees some value in squeezing this particular lemon a bit harder. One addition to the eco-system noted above.
Company news – Cooper Energy (COE)
COE announced today the P&Aing of an oil development well – Butlers-9 – in the Cooper Basin’s Western Flank. This has been a highly productive and profitable area for the likes of COE and Beach Energy (BPT) – but are the limits of the relatively small oil pools there being reached? If the answer to that is “yes” – then COE has plenty of gas orientated alternatives. BPT’s apparent options are fewer.
Quote of the day
The UK’s favourite mid-market compere and more recently mid-morning DJ, Alan Partridge, provides the sort of bed-rock support that the oil industry needs in the face of predictions about wishy-washy EVs taking over:
“Kids like to go to the zoo but the beasts I like to look at are made of zinc galvanised steel – they’re cars.”