The $40-50 range, CAPP on Capex & Afren's woes

The first month of oil trading in 2015 is coming to a much calmer end compared to how it began. The year did begin with a bang with Brent shedding over 11% in the first week of full trading alone. Since then, the only momentary drama took place when both Brent and WTI levelled at US$48.05 per barrel at one point on January 16. Overall, both benchmarks have largely stayed in the $44 to $49 range with an average Brent premium of $3+ for better parts of January.

There is a growing realisation in City circles that short sellers may have gotten ahead of themselves a bit just as those going long did last summer. Agreed, oil is not down to sub-$40 levels seen during the global financial crisis. However, if the price level seen then is adjusted for the strength of the dollar now, then the levels being seen at the moment are actually below those seen six years ago.

The big question right now is not where the oil price is, but rather that should we get used to the $40 to $50 range? The answer is yes for now because between them the US, Russia and Saudi Arabia are pumping well over 30 million barrels per day (bpd) and everyone from troubled Libya to calm Canada is prodding along despite the pain of lower oil prices as producing nations.

The latter actually provides a case in point, for earlier in January the Western Canadian Select did actually fall below $40 and is just about managing to stay above $31. However, the Oilholic has negligible anecdotal evidence of production being lowered in meaningful volumes.

For what it’s worth, it seems the Canadians are mastering the art of spending less yet producing more relative to last year, according to the Canadian Association of Petroleum Producers (CAPP). The lobby group said last week that production in Western Canada, bulk of which is accounted for by Alberta, would grow by 150,000 bpd to reach 3.6 million bpd in 2015. 

That’s despite the cumulative capex tally of major oil and gas companies seeing an expected decline of 33% on an annualised basis. The headline production figure is actually a downward revision from CAPP’s forecast of 3.7 million bpd, with an earlier expectation of 9,555 wells being drilled also lowered by 30% to 7,350 wells. Yet, the overall production projection is comfortably above 2014 levels and the revision is nowhere near enough (yet) to have a meaningful impact on Canada’s contribution to the total global supply pool. 

Coupled with the said global supply glut, Chinese demand has shown no signs of a pick-up. Unless either the supply side alters fundamentally or the demand side perks up, the Oilholic thinks the current price range for Brent and WTI is about right on the money. 

But change it will, as the current levels of production simply cannot be sustained. Someone has to blink, as yours truly said on Tip TV – it’s likely to be the Russians and US independent upstarts. The new Saudi head of state - King Salman is unlikely to change the course set out by his late predecessor King Abdullah. In fact, among the new King’s first acts was to retain the inimitable Ali Al-Naimi as oil minister. 

Greece too is a non-event from an oil market standpoint in a direct sense. The country does not register meaningfully on the list of either major oil importers or exporters. However, its economic malaise and political upheavals might have an indirect bearing via troubles in the Eurozone. The Oilholic sees $1= €1 around the corner as the dollar strengthens against a basket of currencies. A stronger dollar, of course, will reflect in the price of both benchmarks.

In other news, troubles at London-listed Afren continue and the Oilholic has knocked his target price of 120p for the company down to 20p. First, there was bolt out of the blue last August that the company was investigating “receipt of unauthorised payments potentially for the benefit of the CEO and COO.” 

Following that red flag, just recently Afren revised production estimates at its Barda Rash oilfield in the Kurdistan region of Iraq by 190 million barrels of oil equivalent. The movement in reserves was down to the 2014 reprocessing of 3D seismic shot in 2012 and processed in 2013, as well as results from its drilling campaign, Afren said. 

It is presently thinking about utilising a 30-day grace period under its 2016 bonds with respect to $15 million of interest due on 1 February. That’s after the company confirmed a deferral of a $50 million amortisation payment due at the end of January 2015 was being sought. Yesterday, Fitch Ratings downgraded Afren's Long-term Issuer Default Rating (IDR), as well as its senior secured ratings, to 'C' from 'B-'. It reflects the agency’s view that default was imminent.

Meanwhile, S&P has downgraded Russia’s sovereign rating to junk status. The agency now rates Russia down a notch at BB+. “Russia’s monetary-policy flexibility has become more limited and its economic growth prospects have weakened. We also see a heightened risk that external and fiscal buffers will deteriorate due to rising external pressures and increased government support to the economy,” S&P noted.

Away from ratings agencies notes, here is the Oilholic’s take on what the oil price drop means for airlines and passengers in one’s latest Forbes piece. Plus, here’s another Forbes post touching on the North Sea’s response to a possible oil price drop to $40, incorporating BP’s pessimistic view that oil price is likely to lurk around $50 for the next three years.

For the record, this blogger does not think oil prices will average around $50 for the next three years. One suspects that neither does BP; rather it has more to do with prudent forward planning. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Oil pipeline with Alaska's Brooks Range in the background, USA © Michael S. Quinton / National Geographic

Crude reality: Time to short as bulls go lethargic?

Most of the Oilholic's contacts in City trading circles had been maintaining in recent months that a US$106 per barrel price would be the psychological floor to the year-end, barring bearish trends induced by a wider and unforeseen macroeconomic tsunami.

To be quite honest, the global economy is probably where it has been for a while – in a bit of a lull. So even though things are neither materially better nor all that worse, the level was still breached this Monday morning. Methinks there is going to be further selling and yet more shorting either side of the Atlantic.

Our old friends the hedge funds – held responsible by many for the assetization of black gold – certainly seem to think so. That's if you believe data published by ICE Futures Europe. It indicates speculative bets that the Brent price will rise (in futures and options combined), outnumbered short positions by 119,451 lots in the week ended October 29.

The London-based exchange says that's a reduction of 21% (or 30,710 contracts) from the previous week and the biggest drop since the week ended June 25. Concurrently, bearish positions on Brent outnumbered bullish wagers by 321,470; a 3.2% decrease in net-short positions from October 22. So there you have it!

On a related note, albeit for different reasons, the WTI also closed at its lowest since June 26. In fact the forward month futures contract for December shed as much as 55 cents to $94.06 at one point in intraday trading on Monday.

The Oilholic believes the prices aren’t plummeting; rather they are hitting a much more realistic level. Such a sentiment was echoed by two new supply-side contacts this blogger had the pleasure of running into at the UK business lobby group CBI's 2013 annual conference.

As 2014 is nearly upon us, Steven Wood, managing director (corporate finance) at Moody's, says oil prices should stay robust through next year. His and Moody's quantification of robustness for Brent, factoring in Chinese demand and tensions in the Middle East, stands at around $95 per barrel, and West Texas Intermediate "for slightly less, in the next one to two years."

"And with the worst behind the US natural gas industry, prices for benchmark Henry Hub will average about $3.75 per thousand cubic feet next year," he adds.

Additionally, the good folks at Moody's reckon the E&P sector's fortunes will continue to rise over the next year, with big capital spending budgets keeping fundamentals strong (also for the oilfield service and drilling sector).

One minor footnote though, even if it is still some way off – what if international sanctions on Iran get eased should relations between the Islamic Republic and the West improve? We could then see the Iran add over 750,000 barrels per day to the global oil output pool. Undoubtedly, this would be bearish for oil markets, especially so for Brent. The recent dialogue between both sides has made contemplating the possibility possible!

Away from price-related issues, if you needed any further proof of renewed vigour in North Sea E&P activity, then Norway's Statoil has announced it will go ahead with a decision to build a new platform at its Snorre field to extract another 300 million barrels of the crude stuff at an expense of £4.2 billion. This would, according to the Norwegian media, extend the project's lifetime to 2040.

Statoil will take a final decision on engineering aspects in the first quarter of 2015 with the platform scheduled to come onstream in the fourth quarter of 2021. The Norwegian firm owns 33.3% of the exploration project licence. Other shareholders include Petoro (30%), ExxonMobil (17.4%), Idemitsu Petroleum (9.6%), RWE (8.6%) and Core Energy (1.1%). That’s all for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

 

© Gaurav Sharma 2013. Photo: North Sea oil rig © Cairn Energy plc

BP fishes, ETP swoops & Chesapeake stumbles

Three corporate stories have caught the Oilholic’s eye over the past fortnight and all are worth talking about for very different reasons. With things improving Stateside and memories of a Russian misadventure fading, oil major BP announced on Tuesday that it had inked two production sharing agreements and aims to begin new deepwater exploration in Atlantic waters off the coast of Trinidad and Tobago. The company is already the Caribbean island nation’s largest oil & gas producer with average production for 2011 coming in the region of 408,000 barrels of oil equivalent per day.

Having been awarded blocks 23(a) and TTDAA14 in the 2010-2011 competitive bid rounds last summer, BP finds itself fishing for crude and gassy stuff in the two blocks which are 2,600 sq km and 1,000 sq km in area respectively. Local sources see the company as a ‘good corporate citizen’ and that ought to be comforting for BP in its march to rebuild trust under Bob Dudley.

While BP’s fishing, Energy Transfer Partners LP (ETP) is smiling having won plaudits around the crude world for its US$5.3 billion acquisition of Sunoco on April 30. A fortnight hence, market commentators are still raving on about the move especially as ETP’s swoop for Sunoco follows on from a clever buyout of Southern Union for US$5.7 billion. These acquisitions make ETP the USA’s second-biggest owner of pipeline assets behind Kinder Morgan whose merger with El Paso is imminent.

Most importantly, the Oilholic believes a swoop for Sunoco diversifies ETP’s pipeline portfolio adding around 9,700 km of oil and refined products pipelines to its existing network of 28,160 km of natural gas and natural gas liquids pipelines. With the move, oil revenues will account for over a quarter of its income. A Moody’s report prior to announcement of the deal suggested that together with Enterprise Production Partners, ONEOK Partners and Williams Partners, ETP was currently in a good place and among those best positioned for organic growth.

Growing production of oil, natural gas and natural gas liquids and higher margins are driving increased earnings and cash flow for midstream companies, especially those with existing gathering and processing or pipeline infrastructure near booming shale plays says the agency. While ETP’s smiling, the situation at Chesapeake Energy is anything but smiles. Under Aubrey McClendon, who co-founded the firm in 1989 in Oklahoma, it grew from strength to strength becoming the USA’s second largest natural gas producer and a company synonymous with the country’s shale gas bonanza. However, in a troubling economic climate with the price of natural gas plummeting to historic lows, Chesapeake has endured terrible headlines many of which were self-triggered.

Two weeks ago activist shareholders forced McClendon’s hand by making him relinquish the post of Chairman which he held along with that of Chief Executive over an arrangement which allows him to buy a 2.5% stake in all new wells drilled by Chesapeake. The arrangement itself will also be negotiated by 2014. The Oilholic finds the way McClendon has been treated to be daft for a number of reasons.

The arrangement has been in place since 1993 when the firm went public so neither the company’s Board nor its shareholders can claim they did not know. Two decades ago Chesapeake drilled around 20 wells per annum on average but by 2011 the average had risen to well above 1500 wells. That McClendon kept putting his money where his mouth is for so long is itself astonishing which is what the attention should focus on rather than on the man himself.

In later years this was largely achieved by borrowing at a personal level to the tune of US$850 million; Reuters reckons the figure is more in the region of US$1.1 billion. However, sections of the US media are currently busy sensationalising the Oklahoma man’s tussles within the company and as if this arrangement has emerged out of the blue.

Furthermore, the macroclimate and falling gas prices are now forcing the energy company’s hand with analysts at Fitch Ratings noting that it faces a funding shortfall of US$10 billion this year. In response, Chesapeake says it plans to sell US$9.0 billion to US$11.5 billion in assets this year. Word from Houston is that the sales of its Permian Basin property in West Texas and Mississippi Lime joint venture are a given by September. Some analysts believe asset sales may cap the figure of US$14 billion; though the view is not unanimous.

While this would help with liquidity issues, a sell-off of those assets currently producing oil & gas would most certainly reduce Chesapeake’s cash flow needed to meet requirements of its existing US$4 billion corporate credit facility secured earlier this week from Goldman Sachs and Jeffries Group. It matures in December 2017, with an interest rate of around 8.5% and can be repaid at any time over 2012 without penalty at par value.

As expected, Chesapeake has suffered a ratings downgrade; Standard & Poor's lowered its credit rating to "BB-" from "BB" citing corporate governance matters and a widening gap between capex and operating cash flow as the primary reasons. There is clear evidence of hedge funds short-selling Chesapeake’s shares.

Industry veteran and founder of BP Capital Partners – T. Boone Pickens – launched a strange albeit very vocal defence of McClendon on CNBC’s US Squawk Box on Wednesday which made yours truly smile. Pickens admitted that he had sold his position on Chesapeake – not because of what is going on but rather that he was very concerned about natural gas prices full stop.

“We got out of natural gas stocks and Chesapeake was one of them. We’re not long on Chesapeake now. Aubrey (McClendon) is a great Oklahoman and Chesapeake is a great company for Oklahoma City generating jobs and investment. Aubrey is a visionary…don’t bet against him…They’ll pull it off. You bet against Aubrey and you’ll scratch your loser’s ass,” said the industry veteran.

You have got to hand it to Pickens! If he's got something to say, there is no minding of the "Ps" and "Qs" – so what if its live television! As a former CNBC employee, the Oilholic wholeheartedly enjoyed Pickens’ soundbite and agrees that Chesapeake should make it out of this mess! However, bad headlines won’t go away anytime soon and its partly their own fault. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Pipeline warning sign, Fairfax, Virginia, USA © O. Louis Mazzatenta/National Geographic. Photo 2: Chesapeake well drilling site © Chesapeake Energy.