Today’s Blog – Friday 23rd December 2016

Your correspondent will be taking a few week’s off from the blogging keyboard – bring on 2017! 

Editorial

A couple of days ago we reported on the sale of a 50% stake in the Northern Territory’s Mereenie oil and gas field by Santos (STO) to Macquarie Bank (MBL).

Also earlier this week, the Australian Financial Review (AFR) reported that Western Australia focused and PE-owned E&P company Quadrant Energy could be IPO’ed on the ASX next year.  MBL is one of the key backers of Quadrant (who acquired its portfolio of assets from US IOC Apache Corporation a couple of years ago for A$2.5B).

We think the two stories are linked:

  • Quadrant’s successful IPO will require East Coast fund managers to be interested in it.
  • Those financiers understand the simple story of rising East Coast gas prices much better than they do the distant Western Australian gas market.
  • MBL should be able to link Mereenie to East Coast gas markets.  We think MBL will end up with 100% of Mereenie post a takeover of Central Petroleum (CTP) and be able to effectively negotiate haulage and sales contracts.
  • MBL could then vend its Mereenie (and broader Amadeus position obtained from CTP) into Quadrant – which would then be easier to sell to East Coast fundies.
  • And who better than the ebullient Richard Cottee from CTP to act as a peerless salesman bar none to spruik Quadrant to the market.  Better for him than running the impecunious CTP.

With Origin Energy (ORG) flagging the IPO of its own “Crapco” next year, 2017 could be an interesting year for E&P companies on the ASX.  Come on OPEC, lend us a hand and don’t cheat too much!

Commodity prices

Oil prices have continued to trade weakly in the run-up to Xmas.  Overnight London closed at US$54.90 and New York at US$52.65.

The key weekly “numbers” from the EIA’s inventory report were mixed.  Crude stocks unexpectedly built by 2.3 mmbbls.  However, this was offset by product declines of 1.3 mmbbls of gasoline and 2.4 mmbbls of distillate.  These numbers at this time of year are affected by end of year tax planning in the US as much as market fundamentals.

Henry Hub was flat overnight – closing at US$3.54.

LNG and international gas

China’s LNG imports in November were up a massive 47% on the prior year’s comparison month – to 2.66 million tonnes.  Cold weather played a big part in the rise.  However, of longer term greater relevance is the massive current pollution crisis being experienced in many Chinese cities – this provides a politically very important driver for the sustained growth of gas demand in the PRC.

Qatar’s Energy Minister al-Sada recently asked what is the key Goldilocks question for LNG markets – what is the pricing point that does not diminish consumption but is still high enough to encourage producers to invest for the future?”

We think there is no such single price – what US liquefaction developers need is quite different from what would be needed for a major green-fields project in e.g. East Africa or the Browse.

Disruption

A chilling recent quote (if you are in the E&P game) from Engie’s innovation chief, Thierry Lepercq:

“Even if oil demand continues to climb until 2025, its price could drop to $10 if markets anticipate a significant fall in demand.”

Ten dollars is a striking number that makes for good press – but the point is still relevant for any long term price much below US$50 – an approximate breakeven price for the Super-Majors – and arguably a social disruption price for many if not most OPEC countries.

Company news – STO

STO today formally launched its recently flagged Share Purchase Plan (SPP).  Take-up levels will be interesting – the promised discount of 2% is small compared to share price volatility driven by commodity markets, etc.

Quote of the day

In the last quote for the year, we try to end on an optimistic note (with an oil-patch connection), with the following from Warren Buffett, writing in this year’s Berkshire Hathaway annual report:

“All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth.”

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s