Today’s Blog – Friday 31st March 2017

Blogging services will be intermittent for a few weeks due to travel commitments


Our cynicism about the planned IPO for Aramco is being chipped away at (but not enough to have us lining up for a share subscription quite yet).  The latest move from Saudi Arabia is official news of a reduction in the tax rates that Aramco currently pays – a 20% royalty (which would presumably be a long time legacy from the old US investee concession days) and income tax of 85% – which will now be reduced to 50%.

With this new tax rate, back of the envelope calculations from various sources put a value on Aramco (unadjusted for sovereign risk……) of a bit more than US$1 trillion.  That’s still a fair bit less than the Saudi target of US$2T.  The Saudis are said to have been in discussions with Sinopec about it taking a “strategic” stake in Aramco – and with such stakes premiums could be paid.

In our view it would be far better for the Saudis and potential investors alike to create a structured finance instrument in place of the proposed partial IPO of Aramco.  Such an instrument could be as follows: investors to purchase a bond that will give ~20 years of cashflows derived from a fixed percentage of the revenues from the sale 0.5 mmbbls of oil per year over that period.   The advantages of this would be:

  • This should give investors similar cash-flows to 5% of Aramco.
  • Lesser reserves risks for investors.
  • A bond like structure should carry less sovereign risk, attract a lower discount rate and hence deliver more cash up-front.
  • Underwriting fees should be less (boo! say the banks).
  • The Saudis would need to disclose very little about reserves.
  • Control would still be absolute in the Kingdom.

The politics of selling off raw cashflows in such a naked form rather than an IPO might however trump these points of economic logic.

Commodity prices

Crude continued yesterday’s positive run – with WTI now breaking through the US$50 barrier. It closed at US$50.35 (up ~1.7%) whilst Brent went up slightly less (~1%) to US$52.96.  The drivers of the day were the foundation set the previous day by the good inventory numbers followed on by positive news from Kuwait about its support for an extension of the current OPEC cuts.

Henry Hub retraced ~1.2% to close at US$3.19.

LNG and international gas

A recently released annual review of the LNG industry by Platts noted that spot LNG in 2016 comprised 18% of total sales volumes – a 15% increase year-on-year.  A nearly one in five share of the market not under-pinned by long term contracts was thought unimaginable a few years ago.

The UAE is one of those countries that both exports and imports LNG – as Australia may well become.  Current renewables focused plans in the Emirates should just enforce – albeit in changing ways – the key roles of FSRUs.  Given excellent solar resources and strong credit ratings, solar power is now cheaper than gas-fired power in this country – and accordingly in the medium term the absolute demand for gas volumes should drop.  However, in our view the local FSRUs will then become more valuable through their strong gas deliverability capabilities – they will supply gas when the sun is not shining with great responsiveness.

Governments, fracking, etc

The US State of Maryland has just joined New York State in banning fracking.  This removes another part of the potential of the Marcellus to supply US gas markets – but in our view this will likely more affect local New England gas prices than Henry Hub itself.  The latter will otherwise have downward pressure from a wall of growing associated gas from Permian tight oil developments.

Company news – FAR Ltd

FAR has been very busy this week.  We reported a few days ago upon its latest exploration success and since then the company has announced what appears to be a very good value farm-in deal to some acreage neighbouring its successful Senegal asset.  Today FAR has announced a West African alliance with Chinese NOC, CNOOC.

This news should be reverberating inside Woodside Petroleum’s (WPL) HQ in Perth.  CNOOC could readily provide the firepower, operating skills and political connections to facilitate FAR taking action over pre-empting the sale of by Conoco to WPL of its stake in FAR’s Senegal asset.

Game on!   Your move, Mr Bond, er, Mr Coleman.

Quote of the day

Its Friday! So another batch from Mr Rodney Dangerfield:

“My wife made me join her bridge club … I jump next Tuesday.”

“Last week I saw my psychiatrist. I told him, “Doc, I keep thinking I’m a dog.” He told me to get off his couch”.


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