Thursday, August 28, 2014

Brent’s flat feeling likely to linger

It’s been that sort of a month where the Brent futures contract seems to set record low after low in terms of recent trading prices. Earlier this week, we saw the price plummet to a 26-month low and lurk above US$102 per barrel level remaining largely flat. In the Oilholic’s opinion there is room for further connection yet.

The only reason the price has stayed in three figures is down to demand from refineries in India and China, met largely by West African crude. The jury is still out on whether a $100 price floor is forming, something which is not guaranteed. Macroeconomic climate remains a shade dicey and much might depend on how China’s fares.

With the Brent prices falling 5.6% in month over month terms, last week Bloomberg reported that Chinese refiners bought 40 cargoes of West African crude to load in September, equating to about 1.27 million barrels a day. As the Indians bought another 27 cargoes over the biggest monthly drop in prices since April 2013, the total volume purchased lent support to the price or the $100 floor would have almost certainly been breached. Geopolitics is not providing that much of a risk driven bearish impetus, even hedge funds have finally realised that by reducing bullish bets on Brent by 12.5% to just 63,079 contacts in the week beginning August 19, as wiser heads appear to be prevailing of late.

From price of the crude stuff to those trying to make money on it – as some in the UK oil & gas sector have suggested that London-listed exploration and production (E&P) firms might be down the dumps. Investec analyst Brian Gallagher clearly isn’t one of them. In a note to clients, he said the sector should not be feeling sorry for itself. 

“Brent has been above $100 per barrel all year and broadly above $100 per barrel for three years now. Performance of E&P companies generally has just not been up to the mark from an operational and exploration perspective. Unique events have also disrupted narratives. Valuations are however becoming tempting again and we maintain bullish views on Amerisur and Cairn.”

Aside from these two, market valuations are still pricing in exploration barrels, which Investec analysts don’t necessarily disagree with. “Nevertheless, if you want to trade discovered barrels, you’ll have to wait for lower levels in Amerisur, Genel, Ophir and Tullow, in our view,” Gallagher added.

Sticking with corporates, here’s the Oilholic’s latest interview for Forbes with Barbara Spurrier, Finance Director of London’s AIM-listed Frontier Resources on the subject of potential barrels in Oman’s Block 38. Yours truly also recently interviewed Alexis B├ędeneau, Head of IT at Primagaz France, a company owned by international conglomerate SHV Group on the crucial subject of cybersecurity and IT process streamlining within the oil & gas sector.

Finally, a Fitch Ratings report titled “European Union has Little Chance of Cutting Reliance on Russian Gas” rather gives away the concluding argument. The agency opines that Europe is unlikely to be able to reduce its reliance on Russian natural gas for at least the next decade and potentially much longer. 

“At best the EU may be able to avoid significantly increasing its gas purchases from Russia. Any attempt to improve energy security by reducing European reliance on Russia would require either a significant reduction in overall gas demand or a big increase in alternative sources of supply, but neither of these appears likely,” Fitch said.

European shale gas remains in its infancy and Fitch believes it will take “at least a decade” for production to reach meaningful volumes. By that point, of course it would probably only offset the decline in production from Europe's conventional gas wells and won’t be a US-style bonanza some are imagining. 

Piped gas imports to Europe from markets other than Russia are also likely to remain limited. Fitch opined that the Trans Anatolian Natural Gas Pipeline is the only viable non-Russian pipeline under consideration. This could provide 31 billion cubic metres of gas per annum by 2026, but that’s not enough to cover the incremental increase in gas demand the agency expects over the period, let alone replace any supplies from Russia!

Additionally LNG supplies will rise, but the market is unlikely to be large enough to gain market share against Russian gas. A candid and brutal assessment, just the sort this blogger likes, but maybe not the policymakers with camera facing soundbites in Brussels. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo: Oil tanker in Bosphorus, Istanbul, Turkey © Gaurav Sharma, March 2014.

Wednesday, August 13, 2014

Not that taut: Oil markets & geopolitical tension

The month of August has brought along a milestone for the Oilholics Synonymous Report, but let’s get going with crude matters for starters as oil markets continue to resist a risk premium driven spike.

The unfolding tragedy in Iraq, Libya’s troubles, Nigerian niggles and the fear of Ebola hitting exploration and production activity in West Africa, are more than enough to provide many paper traders with the pretext to go long and spook us all. Yet, the plentiful supply and stunted OECD demand scenario that’s carried over from last month has made geopolitical tension tolerable. As such its not percolating through to influence market sentiment in any appreciable fashion, bringing about a much needed price correction.

It wasn’t the news of US air strikes on ISIS that drove Brent down to a nine month low this week, rather the cautious mood of paper traders that did it. Among that lot were hedge fund guys n’ gals who burnt their fingers recently on long bets (that backfired spectacularly in July), and resisted going long as soon as news of the latest Iraqi flare-up surfaced, quite unlike last time.

According to ICE data, hedge funds and other money managers reduced net bullish bets on Brent futures to 97,351 contracts in the week to August 5; the lowest on books since February 4. Once bitten, twice shy and you all know why. Brent price is now comfortably within the Oilholic’s predicted price range for 2014.

Away from pricing, the other big news of course is about the megamerger of Kinder Morgan Inc (KMI), Kinder Morgan Energy Partners (KMP) and El Paso Pipeline Partners Operating (EPBO), into one entity. The $71 billion plus complicated acquisition would create the largest oil and gas infrastructure company in the US by some distance and the country’s third-largest corporation in the sector after ExxonMobil and Chevron.

Moody’s, which has suspended its ratings on the companies for the moment, says generally the ratings for KMP and its subsidiaries will be reviewed for downgrade, and the ratings for KMI and EPBO and their subsidiaries will be reviewed for upgrade.

Stuart Miller, Moody's Vice President and Senior Credit Officer, notes: "KMI's large portfolio of high-quality assets generates a stable and predictable level of cash flow which could support a strong investment grade rating. However, because of the high leverage along with a high dividend payout ratio, we expect the new Kinder Morgan to be weakly positioned with an investment grade rating."

Sticking with Moody’s, following Argentina’s default on paper, the agency has unsurprisingly changed its outlook on the country’s major companies from stable to negative. Those affected in the sector include YPF. However, Petrobras Argentina and Pan American Energy Argentina were spared a negative outlook given their subsidiary status and disconnect from headline Argentine sovereign risk.

Switching tack from ratings notes to a Reuters report, a recent one from the newswire noted that the volume of US crude exports to Canada now exceeds the export level of OPEC lightweight Ecuador. While the Oilholic remains unconvinced about US crude joining the global crude supply pool anytime soon, there’s no harm in a bit of legally permitted neighbourly help. Inflows and outflows between the countries even things out; though Canadian oil exports going the other way are, and have always been, higher.

On the subject of reports, here’s the Oilholic’s latest quip on Forbes regarding the demise of commodities trading at investment banks and another one on the crucial subject of furthering gender diversity in the oil and gas business

Finally, going back to where one began, it is time to say a big THANK YOU to all you readers out there for your encouragement, criticism, feedback, compliments (as applicable) and the time you make to read this blogger’s thoughts. Though ever grateful, one feels like reiterating the gratitude today as Google Analytics has confirmed that US readers have overtaken the Oilholic's ‘home’ readers as of last month.

It matters as this humble blog has moved from 50 local clicks in December 2009 to 148k global clicks (and counting) this year and its been one great journey. The US, UK and Norway are currently the top three countries in terms of pageviews in that order (see right), followed by China, Germany, Russia, Canada, France, India and Turkey completing the top ten. Traffic also continues to climb from Australia, Brazil, Benelux, Hong Kong, Japan and Ukraine; so onwards and upwards to new frontiers with your continuing support. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Oil rig, USA © Shell. Graphics: Oilholics Synonymous Report, July 2014 clickstats © Google Analytics

Tuesday, August 05, 2014

Crude market, Russia & fretting over Afren

There's been an unsurprising calm in the oil market given the existing supply-side scenario, although the WTI's slip below three figures is more down to local factors above anything else.

Demand stateside is low while supplies are up. Additionally, the CVR Refinery in Coffeyville, Kansas which uses crude from Cushing, Oklahoma and churns 115,000 barrels per day (bpd) is offline and will remain so for another four weeks owing to a fire. It all means that Brent's premium to the WTI is now above US$7 per barrel. Despite (sigh) the latest Libyan flare-up, Brent itself has been lurking either side of $105 level, not as much down to oversupply but rather stunted demand. And the benchmark's current price level has triggered some rather interesting events.

Brent's premium to Dubai crude hit its lowest level in four years this week. According to Reuters, at one point the spread was as low as $1.20 following Monday's settlement. The newswire also reported that Oman crude actually went above Brent following settlement on July 31, albeit down to thin trading volumes.

Away from pricing, the Oilholic has been busy reading agency reports on the impact of the latest round of sanctions on Russia. The most interesting one came from Maxim Edelson of Fitch Ratings, who opined that sanctions could accelerate the decline of Siberian oilfields.

Enhanced recovery techniques used in these fields are similar to those used for shale oil extraction, one of the target areas for the sanctions. As the curbs begin to hit home and technology sales to the Russian oil & gas sector dry up, it will become increasingly harder to maintain rate of production from depleting West Siberia brownfields.

As brownfields are mature, major Russian oil companies are moving into more difficult parts of the existing formations. For example, GazpromNeft, an oil subsidiary of Gazprom, is increasingly relying on wells with horizontal drilling, which accounted for 42% of all wells drilled in 2013 compared to 4% in 2011, and multi-stage fracking, which was used in 57% of high-tech wells completed in 2013, up from 3% in 2011.

"In the medium term, [EU and US] measures are also likely to delay some of Russia's more ambitious projects, particularly those on the Arctic shelf. If the sanctions remain for a very long time they could even undermine the feasibility of these projects, unless Russia can find alternative sources of technology or develop its own," Edelson wrote further.

Russian companies have limited experience in working with non-traditional deposits that require specialised equipment and "know-how" and are increasingly reliant on joint ventures (JVs) with western companies to provide technology and equipment. All such JVs could be hit by sanctions, with oil majors such as ExxonMobil, Shell and BP, oil service companies Schlumberger, Halliburton and Baker Hughes, and Russia's Rosneft, GazpromNeft and to a lesser extent LUKOIL, Novatek and Tatneft, all in the crude mix.

More importantly, whether or not Russia's oil & gas sector takes a knock, what's going on at the moment coupled with the potential for further US and EU sanctions on the horizon, is likely to reduce western companies' appetite for involvement in new projects, Edelson adds.

Of course, one notes that in tune with the EU's selfish need for Russian gas, its sanctions don't clobber the development of gas fields for the moment. On a related note, Fitch currently rates Gazprom's long-term foreign currency Issuer Default Rating (IDR) at 'BBB', with a 'Negative' outlook, influenced to a great extent by Russia's sovereign outlook.

Continuing with Russia, here is The Oilholic's Forbes article on why BP can withstand sanctions on Russia despite its 19.75% stake in Rosneft. Elsewhere, yours truly also discussed why North Sea exploration & production (E&P) isn't dead yet in another Forbes post.

Finally, news that the CEO and COO of Afren had been temporarily suspended pending investigation of alleged unauthorised payments, came as a bolt out of the blue. At one point, share price of the Africa and Iraqi Kurdistan-focussed E&P company dipped by 29%, as the suspension of CEO Osman Shahenshah and COO Shahid Ullah was revealed to the London Stock Exchange.

While the wider market set about shorting Afren, the company said its board had no reason to believe this will negatively affect its stated financial and operational position.

"In the course of an independent review on the board's behalf by Willkie Farr & Gallagher (UK) LLP of the potential need for disclosure of certain previous transactions to the market, evidence has been identified of the receipt of unauthorised payments potentially for the benefit of the CEO and COO. These payments were not made by Afren. The investigation has not found any evidence that any other Board members were involved," it added.

No conclusive findings have yet been reached and the investigation is ongoing. In the Oilholic's humble opinion the market has overreacted and a bit of perspective is required. The company itself remains in a healthy position with a solid income stream and steadily rising operating profits. Simply put, the underlying fundamentals remain sound.

As of March 31 this year, Afren had no short-term debt and cash reserves of $361 million. In 2013, the company improved its debt maturity profile by issuing a $360 million secured bond due 2020 and partially repaying its $500 million bond due 2016 (with $253 million currently outstanding) and $300 million bond due 2019 (with $250 million currently outstanding).

So despite the sell-off given the unusual development, many brokers have maintained a 'buy' rating on the stock pending more information, and rightly so. Some, like Investec, cautiously downgraded it to 'hold' from 'buy', while JPMorgan held its 'overweight' recommendation on the stock. There's a need to keep calm, and carry on the Afren front. That's all for the moment folks. Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: Russian Oilfields © Lukoil

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