Today’s Blog – Thursday 19th January 2017

Blogging will remain short and/or intermittent this week due to travel 

Editorial

The Australian newspaper today contains an article on plans by the Majors to sell Asia-Pacific assets in 2017 – with Wood Mackenzie estimating up to US$40B of assets will be on the sale blocks.

An interesting counter-point is a recent deal by Exxon to acquire ~250,000 leasehold acres in Texas’ Permian Basin (the hottest spot right now in World oil by a Texan mile) from a private company for US$5.6B in XOM stock (plus up to another USS1B in cash performance payments).

The Asian assets the Majors are selling are typically late life and increasingly immaterial to them – and importantly (outside Australia and New Zealand) located in countries with rather higher sovereign risks than Texas.

In the end of the day we think this the most important factor – if you are the likes of Exxon, then in Texas you can just get on and to petroleum work – whereas in many Asian countries you face incompetent regulators, uncertain laws, self-destructive nationalism manipulated by politicians, etc, etc.  And the painful disconnect between regulators & politicians who have followed local due process and paid fair and square to get their jobs and now surely deserve a decent return thereon – and pesky Western companies who in a most culturally inappropriate way refuse to pay them.

The question is begged as to who will buy the Majors’s non-core Asian assets in a World where the IOCs have also retreated back to North America, there is a lack of cash in the NOCs, etc.  The answer will be weighted towards – those who are more “flexible” in their business habits – e.g. the emerging 2nd tier Chinese companies.  We don’t anticipate much buying action from Australian companies.

Commodity prices

Crude prices fell overnight, with Brent down ~2.8% to US$53.92 and WTI down ~2.2% to US$51.39.  The EIA’s weekly inventory report is a day late this week due to Monday’s public holiday.  The drivers on the day appeared to be projections of growing US output in 2017 and a strong US dollar.

Henry Hub was also down – by ~3% – to US$3.30.

LNG and international gas

The Australian Financial Review (AFR) today contained a story on the recently very successful resource focused fund, Tribeca.  The fund’s managers noted one of their strongest conviction plays for 2017 was that Asian LNG prices would fall dramatically and they would seek to short that price movement.

They did not say what they thought the best way to do so could be.  Asian LNG futures would be a pretty thin market. Stocks with exposure might include the Australian LNG producers such as Santos and Woodside – at least in sentiment terms, as in practical terms most of their output in 2017 would be contract linked to crude prices.

Supporting this general thesis, Japan’s Institute of Economics has estimated that the country’s demand for LNG in 2017 will fall by 6.2%.

Disruption

China’s National Energy Administration has just announced it will cancel plans to construct more than 100 new coal fired power plants (to put that into context, the MW involved would be around 10 times the new renewable capacity planned for Saudi Arabia that we reported on yesterday).

The share of coal in the PRC’s energy mix is still very high – and gas’ share is low.  Compared to the similar sized US economy, China’s gas usage is small fraction of > 20 Tcf p.a. in the USA.

Market opening anyone?  Although maybe not this year according to Tribeca.

Company news – AGL

AGL announced today it has spun-off a wind project to the renewable fund it helped to establish last year – for A$36M.  The sale comes with an up to 10 year PPA with AGL – a lesser term than would have been required by financiers in the past.

Renewables – like infrastructure – is currently “where the money is“.

Company news – Woodside Petroleum (WPL)

WPL has just released its latest quarterly report.  One dog that was not barking therein was any news on the dispute with Senegal focused FAR Ltd over whether the latter has any pre-emptive rights over the purchase by WPL of a stake in FAR’s main asset.  WPL are playing a very straight bat that the deal has been completed and that is that.

But the game does not appear to be over yet.  In true Aussie style, we are cheering on the under-dog (and in true Aussie style we are not 100% objectively enjoying only the purity of the sport – but have a small wager in terms of some FAR shares).

Quote of the day

The old classic from US bank-robber Willie Sutton when asked why he robbed banks:

“Because that’s where the money is.”

 

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