Monday, December 06, 2010

Some Crude Chatter from Moody’s & Other Stuff

There’s been some interesting chatter from Moody’s these past seven days on all things crude. Some of these stood out for me. Early last week in a note to clients, the rating agency opined that CNOOC Ltd's Aa3 issuer and senior unsecured ratings would not be immediately affected by the Chinese company's additional equity investment of US$2.47 billion in its 50% joint-venture Bridas Corp.

The investment represents CNOOC's share of funding contributions for Bridas to purchase a remaining 60% interest in Pan American Energy, which is engaged in E&P ops in South America. Bridas plans to fund 70% of its purchase by equity and 30% by debt or additional contributions from shareholders.

CNOOC is funding its equity contribution to Bridas with internal resources on hand. The transaction would give it an additional 429 million BOE of proved reserves and 68,000 bpd daily production in South America, according to Moody’s. Completion of the transaction is expected to take place during H1 2011, that’s of course government and regulatory approvals pending.

However, the crude chatter of the week not just from Moody's, but from the entire market was the agency’s interesting analytical take on oil sands producers’ operating considerations. In a report titled – Analytical Considerations for Oil Sands Producers – the agency notes that while comparing oil sands development and production projects to conventional development and production projects, the former have much larger upfront development costs[1].

Such projects are more likely to incur construction cost overruns, and quite simply take much longer to reach breakeven cash flow. Other features include higher cash operating costs per barrel of oil equivalent, very long reserve life and low maintenance capital expenditures once in production, particularly of mining oil sands operations, the report said.

One might say that parts of the report are predictable but it must be noted that in analysing companies with relatively large oil sands exposure, Moody's balances the negative aspects of the difficult construction period against the anticipated long-term positive contributions from these assets. So well, on balance, I found the principal tenets to be very convincing.

Let us face it, whether peak oil will be here soon or not, “easy oil” (interchangeable with cheap oil) is most certainly gone. Cost overruns are unlikely to deter big oil. So far Shell has invested just under US$10 billion (River Oil Sands), Chevron US$9 billion (Athabasca), ExxonMobil US$5 billion (Kearl Oil sands investment) and BP is said to be catching up via its Sunrise oil sands investment.

Elsewhere, Desire Petroleum’s saga of will they find oil in the Falklands Is. or won't they or worse still when will they give up continues. Its share price saw wild swings and ended in a damp squib (haven’t we heard that before).

On the left, for the umpteenth time, here is Desire’s undesirable share chart (see the day's price nose-dive). To quote The Daily Mail’s inimitable Geoff Foster, “Many professional punters are gluttons for punishment. They continually get suckered into seat-of-your pants oil stocks and more often than not, live to regret it.”

I do not wish to tempt fate, but Desire Petroleum is no Cairn Energy. I do hope for Desire's sake that they do strike black gold in meaningful if not bountiful quantities. However, the market response to a whiff of positive news is nothing short of barmy.

[1] The report is available on Moody's web site.

© Gaurav Sharma 2010. Photo: Oil Sands, Canada © Shell, Graphic: Desire Petroleum Share Chart with stated time frame © Digital Look / BBC

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