Today’s Blog – Wednesday 12th April 2017

Editorial

Yesterday’s blog joined the wide-spread current media commentary on the recent move on BHP made by activist hedge fund Elliot Management.  Most of the Australian commentators share our view that the move does not seem to adequately take account of the significant political hurdles in Australia to the recommended re-structuring (which specifically includes a transfer of value from our BHP shares listed on the ASX to Elliot’s shares listed on the LSE – hang on!).

So BHP may not be particularly vulnerable to this approach.  But what about Australia’s other large E&P companies – our quick thoughts:

  • Woodside Petroleum (WPL) has had what could be called an “activist” shareholder for many decades: Shell.  However the latter has been seeking to exit for some time – which could give an aggressive hedge fund or other player a platform from which to agitate.  We think WPL (like all other LNG companies) would be better off not owning liquefaction facilities – these should be owned by lower cost of capital midstream entities.  But given the JVs it is in, can WPL effect much change itself?Otherwise, although WPL has characteristics of being a bit fat and lazy (exemplified by its recent cringeworthy change-out of its Chairman) it does not seem so obviously so as to induce a hedge fund attack.
  • Oilsearch (OSH) also owns liquefaction assets – but also does not exactly control how they might be disposed of (“please Mr Exxon, can we sell these?”).  Otherwise it does not appear to be particularly open to an activist hedge fund attack.
  • Santos (STO) already has its own activist investor – Chinese energy company ENN. The latter’s efforts to procure Board representation and influence strategy have been rebuffed by STO’s current Directors.  We don’t think this game is over.
  • Origin Energy (ORG) is currently fixing up its most obvious structural fault – disposing of most of its conventional oil and gas assets.  However,  it is still left with its large stake in APLNG.  Our view remains that this stake would benefit from being bundled up with STO’s GLNG asset – but the social and financial barriers to doing so have seemed too large.  We think they would also be too large for a disruptive investor to deliver but would love to see someone take on the challenge.
  • Beach Energy (BPT) also has a key shareholder – Seven Group – but one who is inside the fold.  At some point that party will either exit or deliver something that is designed to be for its benefit rather than that of other shareholders (“we have this lovely asset called Longtom…”).

Commodity prices

Oil prices continued their upwards run overnight, with Brent up ~0.5% to USS$56.26 and WTI up slightly more at US$53.40.  The bullish momentum was sustained by apparent Saudi support for the widely mooted extension of OPEC’s current production cut.

Henry Hub took a bit of a dive – closing down nearly 3% to US$3.15.

LNG and international gas

Yesterday we quoted Jera’s Chief Fuel Transactions Office, Hiroki Sato, speaking at last week’s Gastech LNG conference in Japan on Charif Souki’s offer to sell LNG on a fixed price basis.  We thought it worthwhile to quote him further as follows:

 “If you hear now that you can buy LNG for Japan at $8 in 2023, everybody would probably say it’s cheap. But … actions based on predictions rarely work out. That is how it works in the world.”

We thought this was very revealing.  Buying LNG on a fixed or floating (linked to oil) prices have exactly the same risks of being “wrong”.  However, what Sato alludes to is the career risk of acting differently from the herd.  No-one gets fired for buying LNG as it always has been done – but someone would risk being fired doing something new and then diverging from the herd.

Company news – ORG

One point we failed to mention yesterday about ORG’s developing plans to spin-out certain upstream assets under the name of Lattice Energy was the proposed location of the new company’s headquarters.  Melbourne is the lucky winner – ostensibly because it is close to certain key assets of Lattice in the Otway and Bass Basins.

Only a heartless cynic would suggest this choice had anything to do with the current living quarters of the CEO-designate of Lattice – one town called Melbourne, our sources say.

Quote of the day

The Australian Financial Review’s Matt Stevens on the sophistication of the political analysis made by the Elliot crew in New York:

“It seems risible to imagine that any Australian Treasurer might sign-off on an arrangement that would see BHP unified around a British entity that has a primary listing in London and would see the company’s majority Australian ownership transformed into CHESS depositary instruments.”

 

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