Crude viewpoints from the Bay Area

The Oilholic finds himself in the San Francisco Bay Area yet again for the briefest of visits. By force of habit, one couldn't help doing a bit of tanker spotting from a vantage point some 21 floors above on a gloriously sunny day. More importantly, it's always a pleasure to discuss the stock market prices of companies behind what these metallic behemoths at sea are carrying.

The trading community appears to be in bullish mood close the midway point of 2014. Yours truly spoke to seven traders based here, most of whom had a buy recommendation on the big four services companies, which is not entirely unexpected. Five also had a buy recommendation on EOG Resources, a company the Oilholic admits has largely gone under his radar and Enterprise Products Partners, which hasn't.

 

The former, according IHS Energy data, saw a 40% rise in value to just under US$46 billion in 2013, making the company the largest market capitalisation gainer for upstream E&P companies last year. Now that is something. It is blatantly obvious that the liquids boom in North America is beginning to drive investment back into all segments of the oil & gas sector.

 

"Stock market is rewarding those with sensible exposure to unconventional plays. Hell if it goes on the way it has, I might even recommend Canadian E&P firms more frequently, Keystone XL or not," quips one trader. (Not to detract from the subject at hand, but most said even if Keystone XL doesn't get the go ahead from the Obama administration, future isn't so bleak for Canadian E&P; music to the ears of Chinese and Korean businessmen in town.)

Midstream companies are in many cases offering good returns akin to their friends in the services sector, given their connect to the shale plays. Okay now before you all get hot under the collar, we're merely talking returns and relative stock valuation here and not size. And for those of you who are firm believers of the 'size does matter' hypothesis, latest available IHS Energy data does confirm that the 16 largest IOCs it monitors posted a combined market capitalisation of $1.7 trillion at the end of 2013, a little over 10% above their value the year before.

Yet, oil majors continue to divest, especially on the refining & marketing (R&M) side of the business and occasionally conventional E&P assets where plays don't gel well with their wider objectives. Only last week, BP sold its interests in four oilfields on the Alaska North Slope for an undisclosed sum to Hilcorp.

The sale included BP's interests in the Endicott and Northstar oilfields and a 50% interest in each of the Liberty and the Milne Point fields. Ancillary pipeline infrastructure was also passed on. The fields accounted for around 19,700 barrels of oil equivalent per day (boepd). Putting things into context, that's less than 15% of the company's total net production on the North Slope alone and near negligible in a global context.

BP said the deal does not affect its position as operator and co-owner of Prudhoe Bay nor its other interests in Alaska. But for Hilcorp, which would become the operator of Endicott, Northstar and Milne Point and their associated pipelines and infrastructure pending regulatory approval, it is a sound strategic acquisition.

Going back to the core discussion, smart thinking could, as the Bay Area traders opine, see all sides (small, midcap and IOCs) benefit over what is likely to be seminal decade for the North American oil & gas business between now and 2024-25.

As Daniel Trapp, senior energy analyst at IHS and principal author of the analysis firm's Energy 50 report, noted earlier this year in a note to clients: "While economic and geopolitical uncertainty will certainly continue driving energy company values, it is clear that a thought out and well-executed strategy positively affects value.

"This was particularly true with companies that refocused on North America in 2013, notably Occidental, which saw its value expand 24%, and ConocoPhillips, which grew 23% in value."

There seem to be good vibes about the performance of North American refiners. As promised to the readers, yours truly wanted to know what people here felt. Ratings agency Moody's said earlier this month that North American refiners could retain their advantage over competitors elsewhere in the globe, with cheaper feedstock, natural gas prices, and lower costs contributing to 10% or higher EBITDA growth through mid to late 2015.

Those with investments and stock exposure in US refiners reckon the Moody's forecast is about right and could be beaten by a few of the players. A few said Phillips 66 would be the one to watch out for. Question is – what will these companies do with their investment dollars going forward in light higher profits, as the case for pumping in more capex into existing infrastructure is not clear cut, despite the need for Gulf Coast upgrades.

Additionally, most anecdotal evidence here in California suggests tightening emissions law in the state is price negative in particular for Tesoro and Valero, but Phillips 66 could take a hit too. In essence, not much has changed in terms of the legal parameters; only their impact assessment in 2014-15 is yet to reach investors' mailboxes.

On a related note, here is an interesting piece from Lior Cohen of the Motley Fool, examining the impact of the shrinking Brent-WTI spread on refiners. Valero and Marathon's first quarter performance could be negatively impacted as the spread narrows, the author reckons.

Overall, in the Oilholic's opinion what appears to be an abundance of low-cost feedstock from inexpensive domestic crude oil supply will continue to benefit US refiners. While North American refiners should be content with abundance, Europeans are getting pretty discontent about their reliance on Russian gas.

Despite obvious attempts by the European Union to belatedly wean itself off Russian gas, Fitch Ratings reckons the 28 member nations group would be pretty hard pressed to replace it. In fact, an importation ban on Russian gas to the EU would cause substantial disruption to Europe's economy and industry, according to the agency.

Painting a rather bleak picture, Fitch noted in a recent report that the immediate aftermath of such a move would see the region suffer from gas shortages and high prices due to its limited ability to reduce demand, source alternative supplies and transport gas to the most affected countries.

A surge in gas prices after a ban would probably also have knock-on effects on electricity, coal and oil prices. Industry would bear the brunt of supply shortages as household demand would be given priority. A lengthy ban on Russian gas – described as "a low-probability, but high-impact scenario" would see gas-intensive sectors such as steel and chemicals being heavily hit.

This would accelerate the closure or mothballing of capacity that is suffering from low profitability due to competition from low-cost energy jurisdictions such as the US or Middle East.

In 2013, Russia supplied 145 bcm of gas to Europe, and the latter would have great difficulty in sourcing alternative supplies. "Increased European gas production and North African piped gas could offset a small proportion of this. Tapping into the global LNG market would yield limited volumes as Europe's Russian gas demand equates to nearly half of the world's LNG production, which is already mostly tied to long-term supply contracts. Hence, gas and other energy prices could surge," the agency noted.

In theory, Europe has plenty of unused LNG regasification capacity, which could help replace some Russian supplies. But the majority of plants are located in Southern Europe and the UK, far away from the Central and Eastern European countries that are most reliant on Russian gas. So there you have it, and it should help dissect some of the political hot air. That's all for the moment from San Francisco folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo 1: San Francisco skyline from 4th Street with an oil tanker heading to Oakland in the background. Photo 2: Port of San Francisco, California, USA © Gaurav Sharma April, 2014.

On Oilfield services co’s & a Texan Goodbye

Last two days have been about chatter on oilfield services and drilling companies at a pan global level based on Houstonian feedback, an interesting editorial and an investment note – all of which suggest that things are stable, growth will occur but that 2012-2013 may not be as good as 2011.

The reason is tied-in to the Oilholic’s last few blog posts that natural gas price is low and crude oil price is relatively high. So gains are to be made on one side of the business and the other side – while not necessarily countering all gains – would still stunt growth to a degree according to those in the know. Furthermore, growing competition within the services and drilling industry also means the biggest companies will still grow over the next 12 months, but not by the 10%-or-higher range that would warrant a continued positive outlook according to Moody’s.

“We foresee lower operating margins and slower EBITDA growth in 2012-2013 for the three companies that offer the best barometer of industry conditions – Schlumberger, Halliburton and Baker Hughes,” says Stuart Miller, Vice President & Senior Analyst at the ratings agency.

“We would move our outlook to positive if we projected that sector’s EBITDA would grow by more than 10% (annualised) over the next 12-18 months, while a drop of more than 10% would translate to a negative outlook,” he concludes.

The US rig count is also expected stabilise in 2012-2013. Oil-directed drilling will continue to outperform, but natural gas drilling will remain depressed into the foreseeable future, leading to a slower upward curve according to the agency.

(Click on graph - above right - to enlarge; for the latest Baker Hughes Rig Count click here). Nonetheless, drilling and associated services in unconventional plays continues as an area of strength for the industry.

The technical difficulty of developing unconventional resources will support a robust demand for sophisticated (also read expensive) horizontal well services. Companies such as Superior Energy Services, Key Energy Services and Basic Energy Services all stand to gain from their increasing exposure to unconventional plays, says Moody’s.

This ties-in nicely to an editorial in the latest (Apr 13, 2012) issue of the Houston Business Journal by Deon Daugherty in which she notes that private equity funding is being pumped in to oilfield services firms as 2012 unfolds alongside the usual investment in other traditional E&P components of the business.

Based on feedback from key local players, Daugherty writes that the technology and technical expertise needed to drill complex horizontal wells, hydraulic fracturing and expensive equipment is partly behind Houston private equity funds pouring investments in to oilfield services companies, alongside a high price of black gold driving investment into traditional E&P activity.

Speaking of editorials, there is another interesting and controversial one in The New Yorker (Apr 9, 2012) which makes a comment on ExxonMobil – the world’s largest “non-state-owned” corporation with annual revenues exceeding the GDP of Norway – and its ties with the US Republican Party.

While Democrats love to loathe the Irving, Texas headquartered IOC, columnist Steve Coll, splendidly notes that ExxonMobil CEO Rex Tillerson and President Obama "appear to share at least one understanding about energy policy and the 2012 (presidential) campaign: they are both aware that the partisan and media-amplified war over where to place the blame for rising (US) gasoline prices is largely a phony one."

The Oilholic couldn’t have put it better himself that being an E&P behemoth and that in itself being the area where its core interests are, "ExxonMobil can neither control prices at the pump nor make high profits there."

On a related R&M note, a Bloomberg report suggests that Delta Airlines is possibly in talks with ConocoPhillips about purchasing the Houston-based oil and gas major’s Trainer Refinery in Pennsylvania. Citing anonymous sources, the newswire says Delta would use the fuel from the Trainer refinery and other refineries in exchange for other products made there that it would not use.

While ConocoPhillips has said it would close the Trainer facility if it could not find a buyer by the end of May, its spokesman Rich Johnson told Bloomberg it is "still in the process of seeking a buyer for the refinery” and that the process was confidential. If it goes through, the move would be a remarkable one for a privately listed international airline.

Lastly on a crude pricing note, local media outlets suggest Enterprise Product Partners and Enbridge plan to reverse the flow of the Seaway oil pipeline two weeks ahead of schedule by mid-May pending US regulatory approval, thereby starting a much-needed reduction of excess crude from the US Midwest down and dispatch it to the Gulf Coast.

While the crude fetches a premium in the Gulf Coast, high inventory levels at the Cushing, Oklahoma – the delivery point for WTI oil futures contracts – have impacted WTI pricing relative to Brent. Reports suggest a mid-May (May 17) start date for the pipeline flow reversal will initially carry about 150,000 barrels per day of crude from the Midwest to the Gulf Coast. The news had an immediate impact as the arbitrage between transatlantic Brent and Gulf coast crudes on one hand and WTI on the other contracted sharply.

At 18:15 GMT, Light Louisiana Sweet (LLS) traded at US$19.40 a barrel premium over WTI, down US$1.65 from Friday's, Mars Sour (MRS) traded at US$12.25 a barrel over WTI down US$1.75, Poseidon (PSD) traded at US$11.55 over WTI down US$1.55.

Meanwhile, the ICE Brent futures contract for June traded at US$118.60 down US$2.61. Hitherto Brent crude and Gulf Coast crudes were moving up in tandem for the last 18 months, so this is certainly welcome news for those hoping for a return to more traditional levels stateside between WTI and Gulf Coast crudes.

Sadly, it is now time to bid another goodbye to Houston – a city which the Oilholic loves to visit more than any other. Yours truly leaves you with a view of the Minute Maid Park in downtown Houston. It is home to the local baseball team – the Houston Astros.

The stadium has a capacity of 40,963 spectators according to a spokesperson with an electronically retractable roof which was developed by Vahle, courtesy of which it can be fully air-conditioned when required – a wise decision given the city’s often hot and humid weather!

A local enthusiast tells the Oilholic that the field is unofficially and lightheartedly known as "The Field Formerly Known As Enron" by fans, locals, critics and scribes alike, acquiring the title in wake of the Enron scandal, as the failed energy company had bought naming rights to the stadium in 2000 before its spectacular and fraud-ridden collapse in November 2001.

Thankfully, on June 5, 2002, Houston-based Minute Maid, the fruit-juice subsidiary of Coca Cola Company, acquired the naming rights to the stadium for 28 years. Unlike Enron, it’s a healthier brand says the Oilholic. That’s all from Texas folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pump Jacks Perryton, Texas, USA © Joel Sartore/National Geographic. Photo 2: Minute Maid Park - home of the Houston Astros, Texas, USA © Gaurav Sharma 2012. Graph: Land & Offshore rig count and forecast © Baker Hughes/Moody's.