UK election result's impact on British Energy Inc

By all accounts, result of the UK General Election on May 7 was simply stunning. Pollsters got it horribly wrong, Prime Minister David Cameron’s Conservative Party returned with a majority against all expectations, Scottish National Party bagged 56 out of 59 parliamentary seats in the ‘oil hub’ of Scotland - all the ingredients to excite politically minded scribes and the general public alike. The Oilholic began his experience at Ellwood Atfield’s splendid election night bash in Westminster (photo above left) ushering in news of the first exit poll predicting the Conservatives were going to be the largest party with 316 members of parliament.

As events unfolded into early hours of the morning and late afternoon the next day, Cameron’s Conservatives returned with 331 MPs and a slim majority putting to bed all talk of a hung parliament. This blogger was up when Labour heavyweights Ed Balls, Douglas Alexander, Jim Murphy and Liberal Democrats ministers Vince Cable, Ed Davey, Lynne Featherstone and Danny Alexander all lost their seats.

Resignation of the hapless Labour leader Ed Miliband who managed to deliver his party’s worst election result since 1983 followed, along with that of Nick Clegg, now former deputy prime minister and Liberal Democrat leader. Cameron soon walked back into Downing Street after meeting the Queen and telling her he’d now form a majority Conservative government.

Having enjoyed the drama of election night well into sunrise the next day, it’s worth pondering what the result means for the UK’s energy industry in general and the oil and gas business in particular. Afterall, the Oilholic did fret about the direction of the market in his pre-election column for Forbes.

For starters, Ed Miliband’s barmy energy price freeze isn’t going to happen. A daft idea, daftly presented to maximum populist effect just didn’t work and is now in the dustbin of political history. This blogger expects ratings agencies to ease up both on UK-listed energy utilities Centrica, the owner of British Gas, and SSE, another service provider as well as the sector in general. 

Unsurprisingly, both stocks jumped as the entire London market welcomed the result on May 8 morning with the FTSE 100 momentarily returning back above 7,000 points. Nonetheless, Cameron’s government faces a very serious challenge of planning investment towards creaking energy infrastructure – from nuclear to renewables – ensuring the lights are kept on. By some estimates, the required capital expenditure could be as high as £330 billion by 2030.

Switching to the mainstream oil and gas business, both the Conservative victory in the UK and an SNP landslide in Scotland are broadly positive for various reasons. As this blogger has noted before, Chancellor George Osborne’s taxation policies turned positive for the industry towards the end of the last parliament, as the oil price decline began to bite North Sea players. 

Collective measures put into effect back in March imply that the UK’s total tax levy would fall from 60% to 50%, giving a much needed breather to those prospecting in the North Sea. Any further stimulus measures for the better are unlikely to be disrupted by the SNP, even if they do have a broader agenda of roughing up other government programmes both North and South of the Scottish border.

This is broadly good for the industry, as it goes through a challenging period and grapples with the restructuring in Aberdeen triggered by companies as large as BP and as small as independent operations services providers. 

Finally, turning attention to the new energy minister Amber Rudd, a Conservative MP for Hastings, who has been appointed as the successor to Ed Davey; the choice is a great one. Obviously, her credentials are solid or she wouldn’t be here. Gauging the response of the wider industry, most have welcomed the appointment.

Rudd is seen as conscientious and hard working minister. Even Greenpeace sent out a release welcoming her to the job, hoping that she’d bring the same energy to implementing the Climate Change Act, as she did to fight the corner of fisheries in her last government remit.

With a challenging portfolio, Rudd has her work cut out and we wish her well, especially as she sets about the arduous task of attracting investment to the sector. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Ellwood Atfield election night party, May 7, 2015 © Gaurav Sharma

Streamlining ‘crude’ corporations in tough times

In tougher times, operational efficiencies - often brought about by digital streamlining - do matter and the oil and gas business is most certainly going through a rough patch. Yet, despite living in an increasingly digital world, most in the business view IT through a prism of functionality rather than one of enablement and efficiencies. 

Afterall, when you think of the energy business in general and big oil in particular, it is all about physical assets, drilling and generating not servers and computers. Sometimes, a change of circumstances provides the necessary jolt and that circumstance has been the oil price decline. 

As every oil and gas and oilfield services company, large or small, listed or independent is scrambling around to save costs; suddenly many are meaningfully warming up to the premise of IT services management [or ITSM] - a concept that has been around for a while, but has not tickled the fancy of big oil to the same extent as big banking or big pharma.

With IT driven processes streamlining and merging functions ranging from human resource management to data management, organising emergency response to a centralised incident logging platform - the idea is has savings at its core. The Oilholic went exploring its potential at the recently concluded Knowledge 15 Convention in Las Vegas, Nevada; an event put together by ServiceNow (NYSE:NOW), one of the market leaders in the sphere. 

 

The company has been notching up the concept with each passing year. From giving the corporate world its Platform as a Service (PaaS) offering to Software as a service (SaaS), to IT and infrastructure as service, ServiceNow simply defines what it brings to the solutions table these days as “Everything as a Service”.

Banners proudly proclaiming the strategy were all around the Mandalay Bay Convention Centre; venue of the event (see photo above). Everything is indeed in play - name a process optimisation slant, and a solution could be conjured up, as ServiceNow CEO Frank Slootman told this blogger in an exclusive Forbes interview.

And while the oil and gas sector remains behind the curve, attitudes are changing according to Slootman. Most in big oil are keenly observing how alternative energy and utilities companies are adopting ITSM to improve procedures and save costs, as the Oilholic noted in another Forbes article. 

Furthermore, KPMG’s IT advisory partner Phil Crozier opines that a wave of mergers and acquisitions within the sector could further the drive. “Hypothetically speaking, let’s look at Shell’s bid for BG Group. The person who is in-charge of IT operations in that sort of a setting does not get told how to bring two organisations together, merely a percentage of some sorts – say 20% – to take off the cost base.

“Now, the only way you can efficiently achieve those sorts of savings would be via process efficiencies and simplification in the approach taken by the two firms. That’s where digital process optimisation comes in.”

That drive is gathering momentum. The Oilholic found several energy sector executives around the convention floor eagerly exploring ITSM avenues. ServiceNow already counts the likes of Valero, Statoil, GDF Suez, GE Energy and several others among its growing client portfolio in the sector.

However, there is still a long way to go before ServiceNow or its bitter rival BMC can put the sector at par with ITSM adoption at big pharma, big finance or big tech. Anecdotal evidence suggests 2015-16 could see many big oil sceptics recognise the potential, even if under financial duress.

Of course, for the moment, you’ll just have to take the Oilholic’s word for it. One found it very difficult to get sector executives to talk about their potential plans on record. The topic is a sensitive one and outsourcing – which forms a component of all this – has been a political hot potato for better parts of a decade.

Here at Knowledge 15, some delegates even claimed to have reduced their headline back-office costs by as much as 50% over a period of 5 to 8 years. The potential for savings and efficiencies is almost, always accompanied by a reduction in headcount. As for the oil and gas sector, forget the back office - currently its shedding employees back, front and centre.

While it’s hard to be dispassionate about job losses, this is about something deeper. To quote one energy sector executive: “A dollar saved elsewhere in the organisation via effective ITSM solutions deployment for procedural matters, could be spent in upstream operations which is what every oil and gas exploration company is really about.”

IT driven streamlining seems to be finally bringing about that belated realisation for some. That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2015. Photo: ServiceNow’s ‘Everything as a service’ banner at Knowledge 15, Las Vegas, Nevada, USA © Gaurav Sharma, April 2015.

The ostentatious & those 'crude' percentages

The Oilholic finds himself gazing at the bright lights of Las Vegas, Nevada once again after a gap of five years. This gambling hub's uniqueness is often the ostentatious and loud way it goes about itself. The oil market had its own fair share of loud and exaggerated assumptions last week.

Sample these headlines – “Brent spikes to 2015 high”, “Oil markets rally as shale production drops”, “Brent up 10%.” There is some truth in all of this, and the last one is technically correct. Brent did close last Friday up 10.03% relative to the Friday before, while WTI rose 8.41% and OPEC's basket of crude oil(s) rose 10.02% over a comparable period (see graph blow right hand corner).

Bullish yes, bull run nope! This blogger believes market fundamentals haven't materially altered. There is still too much crude oil out there. So what's afoot? Well, given that one is in a leading gambling hub of world, once 'the leading one' by revenue until Macau recently pinched the accolade, it is best to take a cue from punters of a different variety – some of the lot who've been betting on oil markets for decades out of the comfort of Nevada, but never ever turn up at the end of a pipeline to collect black gold.

Their verdict – those betting long are clutching at the straws after enduring a torrid first quarter of the year. Now who can blame the wider trading community for booking a bit of profit? But what's mildly amusing here is how percentages are interpreted by the media 'Las Vegas size', and fanned by traders "clutching at the straws", to quote one of their lot, 'Las Vegas style'.

For the moment, the Oilholic is sticking one's 2015 forecast – i.e. a mid-year equilibrium Brent price of $60 per barrel, followed by a gradual climb upwards to $75 towards the end of the year, if we are lucky and media speculation about the Chinese government buying more crude are borne out in reality. The Oilholic remains sceptical about the latter.

Since one put the forecast out there, many, especially over the last few weeks wrote back wondering if this blogger was being too pessimistic. Far from it, some of the oldest hands in the business known to the Oilholic, including our trader friends here in Las Vegas, actually opine that yours truly is being too optimistic!

The reasons are simple enough – making assumptions about the decline of US shale, as some are doing at the moment is daft! Make no mistake, Bakken is suffering, but Eagle Ford, according to very reliable anecdotal evidence and data from Drillinginfo, is doing pretty well for itself. Furthermore, in the Oilholic’s 10+ years of monitoring the industry, US shale explorers have always proved doubters wrong.

Beyond US shores – both Saudi and Russian production is still marginally above 10 million bpd. Finally, who, alas who, will tell the exaggerators to tackle the real elephant in the room – the actual demand for black gold. While the latter has shifted somewhat based on evidence of improved take-up by refiners as the so called “US driving season” approaches, emerging markets are not importing as much as they did if a quarter-on-quarter annualised conversion is carried out.

Quite frankly, all eyes are now on OPEC. Its own production is at a record high; it believes that US oil production won’t be at the level it is at now by December and its own clout as a swing producer is diminished (though not as severely as some would claim).

Meanwhile, Russian president Vladimir Putin declared the country's financial crisis to be over last week, but it seems Russia’s GDP fell between 2% to 4% over the first quarter of this year. The news caused further rumbles for the rouble which fell by around 4.5% last time one checked. The Oilholic still reckons; Russian production cannot be sustained at its current levels.

That said, giving credit where it is due – Russians have defied broader expectations of a decline so far. To a certain extent, and in a very different setting, Canada too has defied expectations, going by separate research put out by BMO Capital and the Canadian Association of Petroleum Producers. Fewer rigs in Canada have – again inserting the words 'so far' – not resulted in a dramatic reduction in Canadian production.

Finally, here's an interesting report from the Weekend FT (subscription required). It seems BP's activist shareholders have won a victory by persuading most shareholders to back a resolution obliging the oil major to set out the potential cost of climate change to its business. As if that's going to make a difference - somebody tell these activists the oil majors no longer control bulk of the world's oil – most of which is in the hands of National Oil Companies unwilling to give an inch!

That's all for the moment folks from Las Vegas folks, as the Oilholic turns his attention to the technology side of the energy business, with some fascinating insight coming up over the next few days from here. In the interim, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Paris Casino on the Las Vegas Strip, Nevada, USA © Gaurav Sharma, April 2015. Graph: Oil benchmark prices - latest Friday close © Gaurav Sharma, April 17, 2015.

Perspectives on a changing energy landscape

That we're in the midst of a profound change in the energy markets in unquestionable. However, fossil fuels still remain the default medium of choice. Within those broader confines, the oil market is seeing a supply-driven correction of the sort that probably occurs once in a few decades.

Meanwhile, peak oil theorists are in retreat following in the footsteps of peak coal theorists last heard of during a bygone era. However, what does it all mean for the wider energy spectrum, where from here and what are the stakes?

Authors and industry experts Daniel Lacalle and Diego Parrilla have attempted to tackle the very questions in their latest work The Energy World is Flat: Opportunities from the end of peak oil (published by Wiley).

In a way, the questions aren’t new, but scenarios and backdrops evolve and of course have evolved to where we currently are. So do the answers, say Lacalle and Parrilla as they analyse the past, scrutinise the present and draw conclusions for future energy market pathways.

In this book of 300 pages, split by 14 interesting chapters, they opine that the energy world is flat principally down to "ten flatteners" along familiar tangents such as geopolitics, reserves and resources, overcapacity, demand displacement and destruction, and of course the economics of the day. 

Invariably, geopolitics forms the apt entry-point for the discussion at hand and the authors duly oblige. As the narrative subtly moves on, related discussions touch on which technologies are driving the current market changes, and how they affect investors. Along the way, there is a much needed discussion about past and current shifts in the energy sphere. You cannot profit in the present, unless you understand the past, being the well rounded message here.

“New frontiers” in the oil and gas business, today’s “unconventional” becoming tomorrow’s “conventional”, and resource projections are all there and duly discussed.

To quote the authors, the world has another 1.5 trillion barrels of proven plus probable reserves that are both technically and economically viable at current prices and available technology, and another 5 trillion-plus barrels that are not under current exploration parameters but might be in the future. Furthermore, what about the potential of methane hydrates?

Politics, of course, is never far from the crude stuff, as Lacalle and Parrilla note delving into OPEC shenanigans and the high stakes game between US shale, Russian and Saudi producers leading to the recent supply glut – a shift with the potential to completely alter economics of the business.

What struck the Oilholic was how in-depth analysis has been packaged by the authors in an engaging, dare one say easy reading style on what remains a complex and controversial discussion. For industry analysts, this blogger including, it’s a brilliant and realistic assessment of the state of affairs and what potential investors should or shouldn’t look at.

The Oilholic would be happy to recommend the book to individual investors, energy economists, academics in the field and of course, those simply curious about the general direction of the energy markets. Policymakers might also find it well worth their while to take notice of what the authors have put forward.

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© Gaurav Sharma 2015. © Photo: Front Cover – The Energy World is Flat: Opportunities from the end of peak oil © Wiley Publishers, Feb, 2015.

BG Group’s been ‘Shell-ed’

In case you have been away from this ‘crude' planet and haven’t heard, oil major Royal Dutch Shell has successfully bid for its smaller FTSE 100 rival BG Group in a cash and shares deal valuing the latter at around £47 billion (US$70 billion).

While it’s early days into the current calendar year, the deal, subject to approval by shareholders, could be one of the biggest of 2015 producing a company with a combined value of over £200 billion.

For the Anglo-Dutch oil major, BG Group's acquisition would also add 25% to its proven oil and gas reserves and 20% to production capacity, along with improved access to Australian and Brazilian prospects. BG Group shareholders will own around 19% of the combined group following the deal.

BG Group's new chief executive Helge Lund, who only took up the post last month, will remain with the company while the deal is being worked on. However, he is expected to leave once it is completed walking away with what many in the City reckon to be a £25 million golden goodbye. The Oilholic thinks that’s not too bad a deal for what would come to little over three months of service.

BG Group shareholders, who’ve had to contend with a lacklustre share price for the last 12 months given the company’s poor performance, can also expect a decent windfall should they choose to sell. The bid values BG at around 1,350p per share; a near 50% premium to its closing price of 910.4p on Tuesday. If they decide to hold on to their shares, they’d be likely to receive an improved "Shell of a dividend" from a company that has never failed to pay one since 1945.

Shell chief executive Ben van Beurden said, "Bold, strategic moves shape our industry. BG and Shell are a great fit. This transaction fits with our strategy and our read on the industry landscape around us."

The market gave the news a firm thumbs up. Investec analyst Neill Morton said BG’s long-suffering shareholders have finally received a compelling, NAV-based offer while Shell’s bid was arguably “20 years” in the making.

“We agree that BG’s asset base is better suited to a larger company, but the economics require something approaching Shell’s $90/bl assumption. Consequently, we do not expect a rival bid and are wary of this catalysing a flurry of copycat deals. But we are also mindful that investment bankers can be very persuasive! We suspect Shell aims to re-balance dividends versus buybacks over the long-term. This could imply lower dividend growth,” he added.

As for the ratings agencies, given that the deal completion is scheduled for H1 2016, and quite possibly earlier given limited regulatory hurdles, Fitch Ratings placed Shell's ratings on Rating Watch Negative (RWN) and BG Group's ratings on Rating Watch Positive (RWP).

The agency aims to resolve the Rating Watches on both companies pending the successful completion of the potential transaction and “once there is greater clarity with regard to Shell's post-acquisition strategy and potential synergy effects.” We’re all waiting to hear that, although of course, as Fitch notes – Shell's leverage will increase.

“Our current forecasts suggest that the company's funds from operations (FFO) adjusted net leverage will increase from 1.5x at end-2014 to around 2x in 2015-2017 based on conservative assumptions around the announced $30 billion divestment programme and execution of the announced share buybacks from 2017.”

Moody’s has also affirmed its Aa1 rating for Shell, but quite like its peers changed the company’s outlook to negative in the interim period pending the completion of the takeover. Meanwhile, some City commentators have speculated that Shell's move might trigger a wave of M&A activity in the oil and gas sector.

However, the Oilholic remains sceptical about such a rise in M&A. In fact, one is rather relieved that the Shell and BG Group saga would cool nonsensical chatter about a possible BP and Shell merger (oh well...there's always ExxonMobil).

They’d be the odd buyout or two of smaller AiM-quoted independents, but bulk of the activity is likely to remain limited to asset and acreage purchases. Of course, consolidation within the sector remains a possibility, but we are too early into a cyclical downturn in the oil market for there to be aggressive overtures or panic buying. However, 2016 could be a different matter if, as expected, the oil price stays low.

Moving away from the Shell and BG show, here is one’s take via a Forbes column on how oil markets should price in the Iran factor, following the conclusion of pre-Easter nuclear talks between the Iranians and five permanent members of UN Security Council plus Germany.

Additionally, here’s another one of the Oilholic’s Forbes posts on why a decline in US shale activity is not clear cut. As it transpires, many shale producers are just as adept at coping with a lower oil price as any in the conventional industry. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2015. Photo: Vintage Shell petrol pump, San Francisco, USA © Gaurav Sharma