Brent’s premium gets dents as oil price dips

It’s definitely a moment worth recording and the Oilholic was rather glad he was awake earlier today when it happened. For at one point in Asian trading, both Brent and WTI were in perfect sync at US$48.05 per barrel as the oil markets rout continues (see screen grab below, click to enlarge). What's more, for a precious few minutes, the WTI actually traded at a premium of a few cents to Brent marking only the third such occurrence since 2010.

Of course, Brent’s premium has been since been restored back to well over a dollar and rising. However, it is a far cry from 2012 when the premium was averaging around $20 per barrel above the WTI, and did touch $25 at one point if this blogger’s memory serves him well.

The near coming together of both global benchmarks shouldn’t come as a surprise as it was on the horizon. What transpired today was merely for the sake of a record which might not be all that unique over the coming weeks and months of volatility. That said, once the projected supply correction kicks in around midway point of this year, the Oilholic does see Brent’s single digit premium to the WTI climb up to around $5.

As of now, one's 2015 oil price forecast is for a Brent price in the range of $75 to $85 and WTI price range of $65 to $75. Weight on Brent should be to the upside, while weight on WTI should be to the downside of the aforementioned range.

Meanwhile, a Baron’s article is suggesting oil could fall to $20, while industry veteran T. Boone Pickens says he’s seen several slumps in his lifetime and reckons a return to a $100 level within the next “12 to 18 months” is inevitable.

Additionally, the Oilholic has called an end to the so-called “commodities supercycle” in his latest quip for Forbes. On a related note, Goldman Sachs has trimmed its six and 12 month 2015 estimates for Brent to $43 and $70, from $85 and $90, and to $39 and $65, from $75 and $80, for the WTI.

Finally, as talk of a Venezuelan default gains market traction, Moody’s has downgrades ratings of PDVSA and its wholly-owned US-based refining subsidiary Citgo Petroleum. PDVSA’s long term issuer rating and senior unsecured notes were downgraded by the agency to Caa3 from Caa1. Moody’s changed its outlook on the ratings to stable from negative. 

Citgo Petroleum's Corporate Family Rating was downgraded to B3 from B1; its Probability of Default rating to B3-PD from B1-PD; and its senior secured ratings on term loans, notes and industrial revenue bonds to B3 from B1.

Additionally, the rating on Citgo's senior secured revolving credit facility was downgraded to B2 from B1, reflecting a lower expected loss in case of default vis-à-vis other classes of debt in the company's capital structure. The rating outlook was also changed to stable from negative.

The rating actions follow Moody's downgrade of the Venezuelan government's bond ratings to Caa3 from Caa1 with a stable outlook, earlier this week. The principal driver of the decision to downgrade Venezuela's sovereign rating was "a marked increase in default risk owing to lower oil prices," the agency said. 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 2015. Photo: Bloomberg screen grab as Brent and WTI futures achieve parity on January 15, 2015 © Bloomberg

On Brent's direction, OPEC, China & more

Several conversations last week with contacts in the trading community, either side of the pond, seem to point to a market consensus that this summer’s rally in the price of Brent and other waterborne crudes was largely driven by geopolitical concerns. Tight North Sea supply scenarios in September owing to planned maintenance issues, the nagging question of Iran versus Israel and Syrian conflict continue to prop-up the so called ‘risk premium’; a sentiment always difficult to quantify but omnipresent in a volatile geopolitically sensitive climate.

 

However, prior to the announcement of the US Federal Reserve’s economic stimulus measures, contacts at BofAML, Lloyds, Sucden Financial, Société Générale and Barclays seemed to opine that the current Brent prices are nearing the top of their projected trading range. Then of course last Thursday, following the actual announcement of the Fed’s plan – to buy and keep buying US$40 billion in mortgage-backed securities every month until the US job market improves – Brent settled 0.7% higher or 78 cents more at US$116.66 per barrel.

 

Unsurprisingly, the move did briefly send the WTI forward month futures contract above the US$100 per barrel mark before settling around US$99 on the NYMEX; its highest close since May 4. But reverting back to Brent, as North Sea supply increases after September maintenance and refinery crude demand witnesses a seasonal drop, the benchmark is likely to slide back downwards. So for Q4 2012 and for 2013 as a whole, Société Générale forecasts prices at US$103. Compared to previous projections, the outlook has been revised up by US$6 for Q4 2012 and by US$3 for 2013 by the French investment back.

 

Since geopolitical concerns in the Middle East are not going to die down anytime soon, many traders regard the risk premium to be neutral through 2013. That seems fair, but what of OPEC production and what soundbites are we likely to get in Vienna in December? Following on from the Oilholic’s visit to the UAE, there is more than just anecdotal evidence that OPEC doves have begun to cut production (See chart above left, click to enlarge).

 

Société Générale analyst Mike Wittner believes OPEC production cuts will continue with the Saudis joining in as well. This would result in a more balanced market, especially for OECD inventories. “Furthermore, moderate demand growth, led – as usual – by emerging markets, should be roughly matched by non-OPEC supply growth, driven by the US and Canada,” Wittner added.

 

Of course, the soundbite of last week on a supply and demand discussion came from none other than the inimitable T. Boone Pickens; albeit in an American context. The veteran oilman and founder of investment firm BP Capital told CNBC that the US has the natural resources to stop importing OPEC crude oil one fine day.

 

Pickens noted that there were 30 US states producing oil and gas; the highest country has ever had. In a Presidential election year, he also took a swipe at politicians saying neither Democrats nor Republicans had shown “leadership” on the issue of energy independence.

 

At the Democratic convention the week before, President Obama boasted that the US had already cut imported oil by one million barrels per day (bpd). However, Pickens said this had little to do with any specific Obama policy and the Oilholic concurs. As Pickens explained, “The economy is poorer and that will get you less imports. You can cut imports further if the economy gets worse.”

 

He also said the US should build the Keystone XL oil pipeline, currently blocked by the Obama administration, to help bring more oil in to the country from Canada. Meanwhile, US Defense Secretary Leon Panetta is in Japan and China to calm tempers on both sides following a face-off in the East China Sea. On Friday, six Chinese surveillance ships briefly entered waters around the Senkaku Islands claimed by Japan, China and Taiwan.

 

After a stand-off with the Japanese Coastguard, the Chinese vessels left but not before the tension level escalated a step or two. The Chinese reacted after Japan sealed a deal to buy three of the islands with resource-rich waters in proximity of the Chunxiao offshore gas field. Broadcaster NHK said the stand-off lasted 90 minutes, something which was confirmed over the weekend by Beijing.

 

With more than just fish at stake and China’s aggressive stance in other maritime disputes over resource-rich waters of the East and South China Sea(s), Panetta has called for “cooler heads to prevail.”

 

Meanwhile some cooler heads in Chinese boardrooms signalled their intent as proactive players in the M&A market by spending close to US$63.1 billion in transactions last year according a new report published by international law firm Squire Sanders. It notes that among the various target sectors for the Chinese, energy & resources with 30% of deal volume and 70% of deal value and chemicals & industrials sectors with 21% of deal volume and 11% of deal value dominated the 2011 data (See pie-chart - courtesy Squire Sanders - above, click to enlarge). In deal value terms, the law firm found that North America dominates as a target market (with a share of 35%) for the Chinese, with oil & gas companies the biggest attraction. However, in volume terms, Western Europe was the top target market with almost a third (29%) of all deals in 2011, and with industrials & chemicals companies being the biggest focus for number of deals (29%) but second to energy & resources in value (at 18% compared to 61%).

 

Big-ticket acquisitions by Chinese buyers were also overwhelmingly concentrated in the energy & resources industries where larger transactions tend to predominate. Sinopec, the country’s largest refiner, brokered a string of the largest transactions. These include the acquisition of a 30% stake in Petrogal Brasil for US$4.8 billion in November last year, a US$2.8 billion deal for Canada's Daylight Energy and the 33.3% stake in five oil & gas projects of Devon Energy for US$2.5 billion.

 

Squire Sanders notes that Sinopec, among other Chinese outbound buyers, often acquires minority stake purchases or assets, in a strategy that allows it to reduce risks and gain familiarity with a given market. This also reduces the likelihood of any political backlash which has been witnessed on some past deals such as CNOOC’s hostile bid for US-based oil & gas producer Unocal in 2005, which was subsequently withdrawn.

 

Since then, CNOOC has found many willing vendors elsewhere. For instance, in July this year, the company announced the US$17.7 billion acquisition of Canadian firm Nexen. To win the deal, which is still pending Ottawa’s approval, CNOOC courted Nexen, offering shareholders a 15.8% premium on the price shares had traded the previous month.

 

Squire Sanders’ Hong Kong-based partner Mao Tong believes clues about direction of Chinese investment may well be found in the Government’s 12th five-year plan (2011-2015).

 

“It lays emphasis on new energy resources, so the need for the technology and know-how to exploit China’s deep shale gas reserves will maintain the country’s interest in US and Canadian companies which are acknowledged leaders in this area,” Tong said at the launch of the report.

 

Away from Chinese moves, Petrobras announced last week that it had commenced production at the Chinook field in the Gulf of Mexico having drilled and completed a well nearly five miles deep. The Cascade-Chinook development is the first in the Gulf of Mexico to prospect for offshore oil using a floating, production, storage and offloading vessel instead of traditional oil platforms.

 

Finally, after the forced nationalisation of YPF in April, the Argentine government and Chevron inked a memorandum of understanding on Friday to explore unconventional energy opportunities. Local media reports also suggest that YPF has reached out to Russia's Gazprom as well since its nationalisation in a quest for new investors after having squeezed Spain’s Repsol out of its stake in YPF.

 

In response, the previous owner of YPF said it would take legal action against the move. A Repsol spokesperson said, “We do not plan to let third parties benefit from illegally confiscated assets. Our legal teams are already studying the agreement."

 

Neither Chevron nor YPF have commented on possible legal action from Repsol. That’s all for the moment folks. Keep reading, keep it ‘crude’!

 

© Gaurav Sharma 2012. Graph: OPEC Production 2010-2012 © Société Générale CIB 2012. Chart: Chinese M&A activity per sector by deal valuation and volumes © Squire Sanders. 

Eurozone crisis vs. a US$100/barrel price floor

In the middle of a Eurozone crisis rapidly evolving into a farcical stalemate over Greece’s prospects, on May 13 Saudi Arabia’s oil minister Ali al-Naimi told a Reuters journalist at an event in Adelaide that he sees US$100 per barrel as a “great price” for crude oil. In wake of the comment, widely reported around the world, barely six days later came confirmation that Saudi production had risen from 9.853 million barrels  per day (bpd) in February to 9.923 bpd in March with the kingdom overtaking Russia as the world's largest oil producer for the first time in six years.

In context, International Energy Forum says Russia's output in March dropped to 9.920 million bpd from 9.943 million bpd in February. The Saudis exported 7.704 million bpd in March versus 7.485 million bpd in February but no official figure was forthcoming from the Russians. What al-Naimi says and how much the Saudis export matters in the best of circumstances but more so in the run-up to a July 1 ban by the European Union of imports of Iranian crude and market theories about how it could strain supplies.

Market sources suggest the Saudis have pumped around 10 million bpd for better parts of the year and claim to have 2.5 million bpd of spare capacity. In fact, in November 2011 production marginally capped the 10 million bpd figure at one coming in at 10.047 million bpd, according to official figures. The day al-Naimi said what price he was comfortable with ICE Brent crude was comfortably above US$110 per barrel. At 10:00 GMT today, Brent is resisting US$106 and WTI US$91. With good measure, OPEC’s basket price stood at US$103.49 last evening and Dubai OQD’s forward month (July) post settlement price for today is at US$103.65.

With exception of the NYMEX Light Sweet Crude Oil futures contract, the benchmark prices are just above the level described by al-Naimi as great and well above the breakeven price budgeted by Saudi Arabia for its fiscal balance and domestic expenditure as the Oilholic discussed in July.

Greece or no Greece, most in the City remain convinced that the only way is up. Société Générale CIB’s short term forecast (vs. forward prices) suggests Brent, Dubai and even WTI would remain comfortably above US$100 mark. The current problem, says Sucden Financial analyst Myrto Sokou, is one of nervousness down to mixed oil fundamentals, weak US economic data and of course the on-going uncertainty about the future of Eurozone with Greece remaining the main issue until the next election on June 17.

“WTI crude oil breached the US$90 per barrel level earlier this week and tested a low at US$89.28 per barrel but rebounded on Thursday, climbing above US$91 per barrel. Brent oil also retreated sharply to test a low at US$105 per barrel area but easily recovered and corrected higher toward US$107 per barrel. We continue to expect particularly high volatile conditions across the oil market, despite that oil prices still lingering in oversold territory,” she adds.

Not only the Oilholic, but this has left the inimitable T. Boone Pickens, founder of BP Capital Partners, scratching his head too. Speaking last week on CNBC’s US Squawk Box, the industry veteran said, “I see all the fundamentals which suggest that the price goes up. I am long (a little bit) on oil but not much…I do see a really tight market coming up. Now 91 million bpd is what the long term demand is globally and I don’t think it would be easy for the industry to fulfil that demand.”

Pickens believes supply is likely to be short over the long term and the only way to kill demand would be price. Away from pricing, there are a few noteworthy corporate stories on a closing note, starting with Cairn Energy whose board sustained a two-thirds vote against a report of the committee that sets salaries and bonuses for most of its senior staff at its AGM last week.

Earlier this year, shareholders were awarded a windfall dividend in the region of £2 billion following Cairn's hugely successful Indian venture and its subsequent sale. However, following shareholder revolt a plan to reward the chairman, Sir Bill Gammell, with a bonus of over £3 million has been withdrawn. The move does not affect awards for the past year. Wonder if the Greenland adventure, which has yielded little so far, caused them to be so miffed or is it part of a wider trend of shareholder activism?

Meanwhile the FT reports that UK defence contractor Qinetiq is to supply Royal Dutch Shell with fracking monitors. Rounding things up, BP announced a US$400 million spending plan on Wednesday to install pollution controls at its Whiting, Indiana refinery, to allow it to process heavy crude oil from Canada, in a deal with US authorities.

Finally, more than half (58%) of oil & gas sector respondents to a new survey of large global companies – Cross-border M&A: Perspectives on a changing world – conducted by the Economist Intelligent Unit on behalf of Clifford Chance, indicates that the focus of their M&A strategy is on emerging/high-growth economies as opposed to domestic (14%) and global developed markets (29%). The research surveyed nearly 400 companies with annual revenues in excess of US$1 billion from across a range of regions and industry sectors, including the oil & gas sector. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil worker in Oman © Royal Dutch Shell.

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.