Today’s Blog – Friday 28th April 2017

Editorial

On Monday we expressed some doubts about the investment wisdom of buying stock in Aramco’s planned IPO, as a tiny stake in a company controlled by a medieval theocracy did not seem the acme of good corporate governance.  The addition of major Chinese investors taking up shares as part of strategic and/or geo-political move did not ameliorate those concerns – we don’t know if there is a Chinese phrase for “minority shareholders”.

However, we may see another oil and gas IPO coming to market soon whose dynamics may rival the unattractiveness of Aramco.  The Australian Financial Review (AFR) has just reported in its financial gossip column “Street Talk” that the private equity owners (Macquarie Bank and Brookfield Asset Management, etc) of WA offshore oil and gas company Quadrant Energy are preparing for an IPO.

Quadrant was bought from US IOC Apache in 2015 for US$2.  The hoped for IPO valuation is A$4B.  What has changed in the last 2 years?  Oil and gas prices have got no better.  We very much doubt that Quadrant has added any new reserves whilst obviously depleting existing assets each year.  Maintenance spend is not normally top of the list for PE.  Those Saudi oil-fields are starting to look better.

The AFR did not mention anything about Macquarie’s assets in the Northern Territory – 50% of Mereenie and a path to takeover Central Petroleum (CTP) in the next couple of months. Our view has been that these would augment a Quadrant IPO – as East Coast gas is more understandable by East Coast fund managers and bankers than that strange place in the West.

Commodity prices

Oil prices slipped a fraction in overnight trading, with Brent down ~0.1% to US$51.44 and WTI falling harder (~1.3%) to US$48.97.  That old chestnut, a strengthening US dollar, was seen as the major trading catalyst for the day.

In the longer term, the IEA continues to warn of potential material oil supply shortages by 2020 – due to the US$1T investment strike since 2014.

The market has just dodged an “event” – the Saudis preventing a terrorist attack on a 400,000 bbl/day facility in the South of the country.  If that had been even partially successful, oil prices could have spiralled as the home of 10 mmbbs/day would have been seen to be vulnerable.

A less impactful “event” also just occurred on Russia’s Sakhalin Island.  This was the prevention of a supposedly ISIS led attack there (not directly on the Island’s rich oil and gas infrastructure – but presumably making a point about same).

Henry Hub closed down ~0.6% to US$51.44.

LNG and international gas

Speaking of Sakhalin, Russian news agency Interfax reported earlier this week that the Exxon/Rosneft JV on the island had nearly finished a feasibility study into their own LNG project.  The gas for this is a a matter of fierce inter-Russian NOC jostling – with Gazprom (with Shell) as the owner of the existing LNG infrastructure on the Island saying this gas should be used by it in a brownfields expansion).

Maybe that was not an ISIS attack after all.

Governments

Origin Energy (ORG) followed STO yesterday in issuing a response to the Federal Government’s proposed Domestic Gas Security Mechanism.  Its position is clear – APLNG supplies a lot of net gas to domestic markets.

STO’s lawyerly statement yesterday about supplying more gas into the “Australian” domestic market is being interpreted by some as saying “look – we supply lots of gas to WA”.  That is true – but not exactly helpful to politicians focused on East Coast woes.

Governments, fracking, etc

The NT Government’s taskforce reviewing fracking issued a report yesterday which contained an interesting snippet that may show where its thinking is going.  They called for a tender for an economic analysis of the consequences of: banning fracking, allowing fracking, or – only allowing fracking in the Beetaloo Basin.

There would be zero technical reason that we can think of to support only the latter (but would be seen as some sort of compromise). It would delight the licence owners in that region such as ORG and its partners (SASOL and AIM listed Falcon Oil and Gas) – but really annoy everyone else.

There could be potential negative blow-back for CTP as well – it has made the case that its existing production assets in the Amadeus do not “need” to be fracked.  But they would benefit a lot from having the ability to do so.

Quote of the day

We take a break from the recent interesting quotes from Martin Houston and revert to Friday favourite Rodney Dangerfield:

“The way my luck is running, if I was a politician I would be honest.”

“My wife wants sex in the back of the car and she wants me to drive.”

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