Today’s Blog – Thursday 15th December 2016


Over the last week news-flow from Santos (STO) has provided us with quite a bit of content to comment on.  STO gave us more yesterday – a quick and dirty capital raising launched post closure of ASX trading – the first and major component of which has been closed already.

The key details are that STO has just raised ~A$1B through a placement to sophisticated investors at a price of A$4.06 – an 8% discount to the previous trading price.  A further A$0.5B will also be raised through a share purchase plan to be put to existing shareholders.

To us one of the most interesting aspects of the raise has not been mentioned by STO or any media comment that we have read to date.  This was whether strategic shareholder – and recent agitator for Board representation – Chinese downstream gas company ENN – was offered a pro-rata share of the placement.  That should become clear in the next few days as it will have to lodge a revised significant shareholder statement, whether its position has changed in percentage or number of share terms.  We would have expected STO to offer ENN stock.  If it did not – that is a pretty direct casus belli.  Even if if did – and ENN was surprised and did not have liquidity on short notice – it will still be severely annoyed.

Its axiomatic when the Board of a junior exploration company says they are not cum another equity raising that they are lying.  However, the position of a larger company should be more nuanced.  Observers such as this blog would have concluded from STO’s recent strategy day presentation that free cash flow and asset sales (particularly of mid stream infrastructure) would have been sufficient to repair its balance sheet.

However, investment bankers are usually very persuasive when it comes to selling low risk deals that generate big fees and from the point of view of STO’s CEO he can still blame the ancien regime for any disappointments (that would not be the case for the NEDs – but their teflon skills seem to outclass their E&P ones).  Boutique banker J B North & Co was noted by STO as advising on the transaction.   Next time you need advice on a no-brainer like this one Kevin – this blog will do it cheaper than North – hence reducing cash-costs per barrel for you!

Commodity prices

Crude prices fell more than 3% overnight, with Brent closing at US$53.92 and WTI at US$51.05.  The “numbers” from the weekly EIA report were not on the face of it that bad – a fall in crude of 2.6 mmbbls, a build in gasoline of 0.5 mmbbls and a draw on distillate of 0.8 mmbbls.  However, the devil in the detail on this occasion was that the crude draw was largely in the isolated California area – whereas in the key Cushing hub, inventories still rose.

And scepticism about OPEC  rose a few notches.

Henry Hub had a better day – rising 2.6% to US$3.54.

LNG and international gas

A few reports have emerged from a current LNG conference in Barcelona (hmm – my invitation was lost in the post again) that support the thesis that vertical integration is one way to get LNG projects moving rather than wait for the traditional long term bankable contract from a friendly Japanese buyer.

For instance, the following quote from Total’s President of Gas, Laurent Vivier, captured the sentiment well:

“You need the players in the LNG upstream to start considering investment in the downstream supply chain, including import infrastructure. Total has invested a huge amount in the upstream and now we need to do our share, and other players need to do the same, to develop downstream demand.”

Unfortunately, other than a bit of toe-dipping from Woodside Petroleum (WPL), Australia’s LNG companies have been too small/poor/etc to look at such opportunities themselves.

Governments, fracking, etc

Yesterday Australia’s COAG group of Federal and State politicians released a policy paper on changing the regulatory environment for the country’s gas transmission system.

The policy to be adopted is an incremental rather than revolutionary one – compell the release of far more information on contracts, costs, etc by the pipeline owners to give potential shippers a more level negotiating playing field- with a back-drop of a mandatory arbitration process to resolve disputes about potential contract terms.

The obvious weakness of this is that it still gives a strong hand to the powerful pipeline companies in for instance funding the many millions of dollars that such arbitrations in the Australian energy context typically cost.

Quote of the day

The Australian economy recorded a rare quarter of negative GDP growth recently – which brought to mind the following quote from The Economist of a month or so ago (before a certain election……):

“The last time Australia was in recession, Mikhail Gorbachev led the USSR and Donald Trump had filed for Chapter 11 only once”.

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