Keystone XL farce, Jon Stewart & an OFS merger

Despite much being afoot in the crude oil world, there’s only one place to start and that’s the ongoing farce over the Keystone XL pipeline extension project. A continuation of US President Barack Obama’s dithering over approval of the transnational pipeline extension (from Alberta, Canada to Texas) is not a major surprise. However, an unassailable truth flagged up by none other than comedian and political satirist Jon Stewart certainly is! 

It seems many controversial decisions, including Keystone XL’s approval, were delayed by the Obama administration until after the US mid-term elections undoubtedly to calm worried Democrats (who were in for, and eventually did get, an electoral pasting) so that they didn’t have to take a political stand on these issues one way or another. So when Obama delayed approval of Keystone XL (again!) in April this year, that helped the President’s mates both for and against the project. 

Especially, senators Mary Landreiu (D-Louisiana), Mark Begich (D-Alaska), Mark Pryor (D-Arkansas) and Kay Hagan (D-North Carolina) all in red states favouring the project, who then used the delay as a pretext to criticise and "distance themselves" from the president. 

Conversely, blue states Democrats thought they got points for criticising the pipeline extension project to pander to opposing sentiments of their respective electorates. It was supposed to be a win-win situation; except for one thing - they all LOST and Landreiu, who is facing a tough run-off is going to, chuckled Stewart on The Daily Show broadcast for November 6 evening.

This week, the "old" senate rejected approval of Keystone XL, one of its last acts before the new Republican controlled senate convenes. At which point, the "new" senate will approve it and then one assumes the President would veto it. Then Democrat presidential candidate(s), including one Hillary Clinton who is said to be in favour of the pipeline, will take their respective positions either denouncing or praising the decision and so it goes. 

According to the splendid Stewart, it’s a popular tactic known as the “Chickensh*t gambit”. (To view the clip in the US click here, for the UK, click here, for elsewhere not quite sure where!)

Both those for and against the project should despair over the state of affairs. However, on the bright side they’ll be plenty of material for Stewart to bring a bit of laughter into our lives. As for the Canadian side, they are a patient bunch and among their ranks are some who quietly (and somewhat correctly) believe their country's need for the pipeline is diminishing as China's footprint on the global crude oil market grows ever bigger than that of the US. 

Meanwhile, by sheer coincidence barely days after the Oilholic went on Tip TV to discuss the challenging climate for oilfield services (OFS) companies (including why the Kentz takeover in August by SNC-Lavalin would not have happened now at the price it did back then), came the mother of all moves – Halliburton’s for Baker Hughes.

In case you’ve been on another planet and haven’t heard, Halliburton has agreed to buy rival Baker Hughes in a cash and shares deal worth US$34.6 billion. The transaction has been approved by both companies' boards of directors and is expected to close in late 2015, pending regulatory approval. As the oil price has fallen by a third since the summer, demand for OFS has cooled and a coming together of the second and third placed services providers makes sense in a cyclical industry.

Nonetheless, the announcement and speed of agreement took many by surprise. Dave Lesar, CEO of Halliburton, told CNBC's Squawk on the Street program on Tuesday that Baker Hughes brings complimentary product lines to the merger which his company does not have.

“Production chemicals is one, artificial lift is another, so from that standpoint they [Baker Hughes] do have some technology that we do not have. Plus they have some fantastic people in their talented organisation. Combine that with out talent and I think we’re putting together the industry bellwether.”

“Both companies are growing. We’re going to hire 21,000 people just at Halliburton this year, not only blue collar but white collar and professionals. You add that to capability and the growth we’re seeing out at Baker…I think it expands career opportunities.”

Lesar also said he had a top notch team in place to address anti-trust concerns which might involve divestments of up to $7.5 billion. The Halliburton CEO added that the response from big ticket clients, including several National Oil Companies (NOCs), had been great. “Feedback from almost of our customers, including NOCs has been pretty positive, where a stronger, more developed organisation can help them in ways neither Baker nor Halliburton could have done standing on our own.”

“Furthermore, we would not have done this deal if I did not believe that we could get this through the regulatory bodies,” Lesar said. There you have it, and it’d cost $3.5 billion in payments to Baker if he is wrong and regulators block the deal.

The Halliburton CEO largely sidestepped commenting on the Keystone XL farce and the oil price tumble, except adding on the latter point that: “We’re not in the bunker yet!” As OPEC meets on November 27, the market is in a sort of “pause still” mode. Brent is lurking just below $80 level, while the WTI is around the $75 level (see right, click to enlarge).

The Oilholic’s gut instinct, as one told Tip TV, is that OPEC has left it too late to act and should have made a call one way or another via an extraordinary meeting when the Brent fell below $85. So if they cut now, will it have the desired impact?

Meanwhile, Producers for American Crude Oil Exports (PACE), says repealing the ban on US crude oil exports will not only create hundreds of thousands of jobs and grow the economy, it will benefit consumers by “lowering gasoline prices” contrary to opinion expressed in certain quarters. That conclusion, it says, is supported by no less than seven independent economic studies. These include the Brookings Institution, IHS Energy, Dallas Federal Reserve Bank, and the US Government Accountability Office, among others. 

Finally, Fitch Ratings says the 25% drop in the oil price since July is likely to lift economic growth prospects, improve terms of trade, and have a potentially positive credit impact for a number of Asian economies if the lower prices are sustained below $90 level through 2015.

Most major Asian economies - including China, Japan, Korea and Thailand - would see an effective overall income boost from sustained lower oil prices, the agency said. In addition, countries with large oil import needs facing external adjustment pressures such as Indonesia and India are among the best positioned to see a positive impact on sovereign credit profiles, although the broader policy response will matter too, it added. That’s all for the moment folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To follow The Oilholic on Forbes click here.
To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma, October, 2014. Photo 1: Keystone XL pipeline © CAPP / Fox News as featured on the Daily Show. Photo 2: The Democrat hopefuls and John Stewart on the Daily Show. Photo 3: John Stewart’s “Obama & the Pussycrats”, The Daily Show, November 6, 2014 © Comedy Central / Daily Show November, 2014. © Graph: Oil benchmark prices 5-day assessment October/November 2014 © Gaurav Sharma 2014.

Crude price, some results & the odd downgrade

We are well into the quarterly results season with oil and gas companies counting costs of the recent oil price slump on their profit margins among other things. The price itself is a good starting point. 

The Oilholic’s latest 5-day price assessment saw Brent nearly flat above US$86 per barrel at the conclusion of the weekly cycle using each Friday this month as a cut-off point (see left, click on graph to enlarge). 

Concurrently, the WTI stayed above $81 per barrel. It is worth observing the level of both futures benchmarks in tandem with how the OPEC basket of crude oils fared over the period. Discounting kicked-off by OPEC heavyweight Saudi Arabia earlier in the month, saw Iran and Kuwait follow suit. Subsequently, the OPEC basket shed over $6 between October 10 and October 24. If Saudi motives for acting as they are at the moment pique your interest, then here is one’s take in a Forbes article. Simply put, it’s an instinct called self-preservation! 

Recent trading sessions seem to indicate that the price is stabilising where it is rather than climbing back to previous levels. As the Western Hemisphere winter approaches, the December ICE Brent contract is likely to finish higher, and first contract for 2015 will take the cue from it. This year's average price might well be above or just around $100, but betting on a return to three figures early on into next year seems unwise for the moment.

Reverting back to corporate performance, the majors have started admitting the impact of lower oil prices. However, some are facing quite a unique set of circumstances to exasperate negative effects of oil price fluctuations.

For instance, Total tragically and unexpectedly lost its CEO Christophe de Margerie in plane crash last week. BP now has Russian operational woes to add to the ongoing legal and financial fallout of the Gulf of Mexico oil spill. Meanwhile, BG Group has faced persistent operational problems in Egypt but is counting on the appointment of Statoil’s boss as its CEO to turn things around.

On a related note, oilfield services (OFS) companies are putting on a bullish face. The three majors – Baker Hughes, Halliburton and Schlumberger – have all issued upbeat forecasts for 2015, predicated on continued investment by clients including National Oil Companies (NOCs).

In a way it makes sense as drilling projects are about the long-term not the here and now. The only caveat is, falling oil prices postpone (if not terminate) the embarkation of exploration forays into unconventional plays. So while the order books of the trio maybe sound, smaller OFS firms have a lot of strategic thinking to do.

Nonetheless, we ought to pay heed to what the big three are saying, notes Neill Morton, analyst at Investec. “They have unparalleled global operations and unrivalled technological prowess. If nothing else, they dwarf their European peers in terms of market value. As a result, they have crucial insight into industry activity levels. They are the ‘canaries in the coal mine’ for the entire industry. And what they say is worth noting.”

Fair enough, as the three and Schlumberger, in particular, view the supply and demand situation as “relatively well balanced”. The Oilholic couldn’t agree more, hence the current correction in oil prices! The ratings agencies have been busy too over the corporate results season, largely rating and berating companies from sanctions hit Russia.

On October 21, Moody's issued negative outlooks and selected ratings downgrade for several Russian oil, gas and utility infrastructure companies. These include Transneft and Atomenergoprom, who were downgraded to Baa2 from Baa1 and to Baa3 from Baa2 respectively. The agency also downgraded the senior unsecured rating of the outstanding $1.05 billion loan participation notes issued by TransCapitalInvest Limited, Transneft's special purpose vehicle, to Baa2 from Baa1. All were given a negative outlook.

Additionally, Moody's changed the outlooks to negative from stable and affirmed the corporate family ratings and probability of default ratings of RusHydro and Inter RAO Rosseti at Ba1 CFR and Ba1-PD PDR, and RusHydro's senior unsecured rating of its Rouble 20 billion ($500 million) loan participation notes at Ba1. Outlook for Lukoil was also changed to negative from stable.

On October 22, Moody's outlooks for Tatneft and Svyazinvestneftekhim (SINEK) were changed to negative. The actions followed weakening of Russia's credit profile, as reflected by Moody's downgrade of the country’s government bond rating to Baa2 from Baa1 a few days earlier on October 17.

Meanwhile, Fitch Ratings said the liquidity and cash flow of Gazprom (which it rates at BBB/Negative) remains strong. The company’s liquidity at end-June 2014 was a record RUB969 billion, including RUB26 billion in short-term investments. Gazprom also reported strong positive free cash flows over this period.

“We view the record cash pile as a response to the US and EU sanctions announced in March 2014, which have effectively kept Gazprom, a key Russian corporate borrower, away from the international debt capital markets since the spring. We also note that Gazprom currently has arguably the best access to available sources of funding among Russian corporate,” Fitch said in a note to subscribers.

By mid-2015, Gazprom needs to repay or refinance RUB295 billion and then another RUB264 billion by mid-2016. Its subsidiary Gazprom Neft (rated BBB/Negative by Fitch) is prohibited from raising new equity or debt in the West owing to US and EU sanctions, in addition to obtaining any services or equipment that relate to exploration and production from the Arctic shelf or shale oil deposits.

On the other hand, a recent long term deal with the Chinese should keep it going. That’s all for the moment folks! Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To follow The Oilholic on Forbes click here.
To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma, October, 2014. Graph: Brent, WTI and OPEC Basket prices for October 2014 © Gaurav Sharma, October, 2014.

Bright lights, energy finance & PE in Hong Kong

It is jolly good to be back in Hong Kong after nearly a decade and half. The city is home to some 7 million souls who live, work and sleep mostly in high-rise buildings given it is one of the world’s most densely populated places and space is at a premium.

Having soaked in the dazzling lights, magnificent views from the Victoria Peak (see left) and the ubiquitous Star Ferry ride from Central pier on Hong Kong Island to Tsim Sha Tsui in Kowloon, the Oilholic decided to probe what’s afoot in terms of energy sector finance, and the market in general, in this part of the world. 

The timing couldn’t be better as the Hang Seng Index recently soared to a six-year high and that can only bode well for the 48 companies on there who account for 60% of market capitalisation of the Hong Kong Stock Exchange. While Alibaba.com might have opted to list in New York, rather than here, CGN Power Co, mainland China’s largest nuclear power producer by operational capacity, has decided to file for a US$2 billion initial public offering in Hong Kong.

For regional energy companies, Asia’s self-styled capital of finance has always been a key destination for equity finance, even though real estate and services stocks understandably dominate the market. In CGN Power’s case, the move is part of its strategic goal to turn-on more nuclear reactors and turn-off coal-fired power plants. The listing will see it in the company of China Resources, CLP Holdings, Hong Kong and China Gas Company, Hong Kong Electric Holdings (Towngas), Kunlun Energy (formerly CNPC Hong Kong) and of course trader SS United Group Oil & Gas Company to name a few prominent players. 

Away from public listings, the search for liquidity and capital raising exercises bring many mainland, regional and (of late) Western energy firms to the doors of Hong Kong’s Private Equity (PE) players, a trend that’s now firmly entrenched here and continues to rise. According to a local contact, there are currently just under 400 major PE companies operating in Hong Kong. The Chinese special administrative region (SAR) and former British colony is Asia’s second largest PE centre, second only to mainland China.

The energy sector (including oil & gas and cleantech), one is reliably informed, comes third in terms of PE finance after real estate and regional start-ups. A striking feature of PE funding flows originating in Hong Kong is the depth of international investment. The Oilholic noted oil & gas investments in Australia, India, Japan, South Korea and of course mainland China.

Furthermore, synergy and happy co-existence with PE groups based in mainland China is seeing funding stretch to jurisdictions previously untouched by them with the sizing up of international assets well beyond Australasia with oilfield services companies and independent E&P companies being the unsurprising targets (or shall we say beneficiaries).

For instance, Denise Lay, Chief Financial Officer of Tethys Petroleum, a London and Toronto-Listed oil and gas exploration firm, recently told yours truly in a Forbes interview about her company’s decision to sell 50% (plus one share) of its Kazakh assets to SinoHan, part of HanHong, a Beijing, China-based private equity fund.

Some notable PE players on everyone’s radar for oil & gas investments include Affinity Equity Partners, Baring PE Asia and Silver Grace AM. The funding pool, according to three local analysts is set to expand. One even complained of there being too much investment capital around and not enough deals, which is causing assets to go for inflated prices.

“But amid the synergy and seamless funding flows, there’s a bit of competition as well between SAR Hong Kong and China. For instance, the Hong Kong local administration is unashamedly pro-PE. Part of its overtures to attract more PE funds to be domiciled in Hong Kong includes amendment and extension of the current offshore fund exemption,” adds another.

Away from PE, most state-owned Chinese oil & gas firms have approached Hong Kong’s capital markets although the extent of their presence varies. While it’s a view that is not universally shared, for the Oilholic, the SAR with a convertible Hong Kong dollar (unlike the Yuan RMB which isn’t) serves as a good base for regional expansion and overseas forays for these guys.

On an unrelated note, one isn’t trying to establish any connect between gambling and the preferred currency, but the Hong Kong dollar is also the  legal tender of choice in the casinos of nearby Macau. 

The Oilholic discovered it the hard way this afternoon, having paid a visit to the Wynn Casino and trying to insert a Macau pataca note into the slot machine only to be told to use Hong Kong dollars. 

As of last year, gambling revenue in the former Portuguese colony and another Chinese SAR of US$45.2 billion, seven times the total of the Las Vegas strip, has made it the world’s largest gambling destination. Since photography is not permitted inside casinos, even with the presentation of an international press ID as the Oilholic did, here’s the exterior of the Wynn Casino with rival MGM in the background.

According to the World Bank, Macau’s GDP per capita came in at US$91,376 last year. That makes it the richest country globally after Luxembourg, Norway and Qatar. Mainland money flowing around Macau is pretty apparent, but not sure how much of it is filtering through to the masses.

There have been repeated calls of late for a better wages by casino workers facing higher inflation. It is a soundtrack gamblers from many countries ought to be pretty familiar with - wages not keeping pace with inflation. That’s all from Hong Kong and Macau folks! It’s time to head off to Shanghai. Keep reading, keep it ‘crude’!

To follow The Oilholic on Twitter click here.
To follow The Oilholic on Google+ click here.
To follow The Oilholic on Forbes click here.
To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo 1: Hong Kong evening sky as seen from the Victoria Peak, Central, Hong Kong. Photo 2: Wynn Casino & Resort with MGM in the background, Macau © Gaurav Sharma, September 2014.

The subtle rise of the OFS innovators

Going back to the turn of 1990s, vertical drilling or forcing the drill bit down a carefully monitored well-shaft into a gentle arc was the best E&P companies could hope from contractors in their quest for black gold.

That’s until those innovators at Oilfield Services (OFS) firms - the guys who often escape notice despite having done much of heavy work involved in prospection and extraction - came up with commercially viable ways for directional drilling. The technique, which involves drilling several feet vertically before turning and continuing horizontally thus maximising the extraction potential of the find, transformed the industry. But more importantly, it transformed the fortunes of the innovators too.

The Oilholic has put some thought into how 21st century OFS firms ought to be classified, if a linear examination by market capitalisation and size is ignored for a moment. After acquiring gradual industry prominence from the 1970s onwards, OFS firms these days could be broadly grouped into three tiers.

The first tier would be the makers and sellers of equipment used in onshore or offshore drilling. Some examples include Cameron International, FMC Technologies and National Oilwell Varco with a market capitalisation in the range of US$10 billion to $30 billion. Then come the 'makers-plus' who also own and lease drill rigs – for example Seadrill, Noble and Transocean with a market cap in a similar sort of a range.

 

And finally there are the big three 'full service' OFS companies Baker Hughes, Halliburton and the world’s largest – Schlumberger. The latter has a market cap of $110 billion plus, last time the Oilholic checked. That’s more than double that of its nearest rival Halliburton. Quite literally, Schlumberger's market cap could give many big oil companies a run for their money. However, if someone told you back in the 1980s that this would be the case in August 2013 – you could be excused for thinking the claimant was on moonshine!

 

The reason for the rise of OFS firms is that their innovation has been accompanied by growing global resource nationalism and maturing wells. The path to prosperity for the services sector began with low margin drilling work in the 1980s and 1990s being outsourced to them by the IOCs. Decades on, the firms continue to benefit from historical partnerships with the oil majors (and minors) aimed at maximising production at mature wells alongside new projects.

 

However, with a rise in resource nationalism, while NOCs often prefer to keep IOCs at arm's length, the same does not apply to OFS firms. Instead, many NOCs choose to project manage exploration sites themselves with the technical know-how from OFS firms. In short, the innovators are currently enjoying, in their own understated way, the best of both worlds! Unconventional prospection from deepwater drilling to the Arctic is an added bonus.

 

If you excluded all of North America, drilling activity is at a three-decade high, according to the IEA and available rig data trends. The Baker Hughes rig count outside North America climbed to 1,333 in June, the highest level in 30 years. Presenting his company’s seventh straight quarterly profit last month, a beaming Paal Kibsgaard, chief executive of Schlumberger, named China, Australia, Saudi Arabia and Iraq among his key markets.

 

Of the four countries named by Kibsgaard, Australia is the only exception where an NOC doesn’t rule the roost, vindicating the Oilholic’s conjecture about the benefits of resource nationalism for OFS firms.

 

Rival Halliburton also flagged up its increased activity and sales in Malaysia, China and Angola and added that it is banking on a second half bounceback in Latin America this year. By contrast, Baker Hughes reported a [45%] fall in second quarter profit, mainly due to weak margins in North America, given the gas glut stateside.

 

Resource nationalism aside, OFS players still continue (and will continue) to maintain healthy partnerships with the IOCs. None of the big three have shown any inclination of owning oil & gas reserves and most of the big players say they never will.

 

Some have small equity stakes here and a performance based contract there. However, this is some way short of ownership. Besides, if there is one thing the OFS players don’t want – it's taking asset risk on their balance sheets in a way the likes of Shell and ExxonMobil do and are pretty good at.

 

Furthermore, the IOCs are major OFS clients. Why would you want to upset your oldest clients, a relationship that is working so well even as the wider industry is undergoing a hegemonic and technical metamorphosis?

 

Success though, does not come cheap especially as it's all about innovation. As a share of annual sales, Schlumberger spent as much on R&D as ExxonMobil, Shell and BP, did using 2010-11 exchange filings. And sometimes, unwittingly, taking the BP 2010 Gulf of Mexico oil spill as an example, the guys in background become an unwanted part of a negative story; Transocean and Halliburton could attest to that. None of this should detract observers from the huge strides made by OFS firms and the ingenuity of the pioneers of directional drilling. And there's more to come!

 

Moving on from the OFS subject, but on a related note, the Oilholic read an interesting Reuters report which suggests oil & gas shareholder activism is coming to the UK market. Many British companies, according to the agency, have ended up with significant assets, including cash, relative to their shrunken stock market value.

 

Some of these have lost favour with mainstream shareholders and are now attracting investors who want to push finance bosses and board members out, access corporate cash and force asset sales. An anonymous investment banker specialising the oil & gas business, told Reuters, rather candidly: "It's a very simple model. You don't have to take a view on the value of the actual assets or know anything about oil and gas. You just know the cash is there for the taking."

 

Finally, linked here is an interesting Bloomberg report on how much the Über-environmentally friendly Al Gore is worth and what he is up to these days. Some say he is 'Romney' rich! That's all for the moment folks! Keep reading, keep it 'crude'!

 

To follow The Oilholic on Twitter click here.

 

To email: gaurav.sharma@oilholicssynonymous.com
 

© Gaurav Sharma 2013. Photo: Rig in the North Sea © BP