Wednesday, February 08, 2012

Corporate crude chatter: Xstrata, Glencore & more

There appears to be only one story in town these past few days - the valuation and implication of a Glencore and Xstrata merger. According to communiqués issued yesterday poured over the Oilholic and his peers, the Switzerland based commodities trader and the mining major aim to create a merged natural resources, mining and trading company with a combined equity market value of US$90 billion.

Xstrata’s operating businesses and Glencore’s marketing functions will continue to operate under their existing brands. It is proposed that the combined entity will be called Glencore Xstrata International plc, listed on the London and Hong Kong Stock Exchanges, with its headquarters in Switzerland and will continue as a company incorporated in Jersey. The deal was labelled by the two firms as a "merger of equals" but the Oilholic suspects Glencore would carry the upper hand.

While the new corporate entity will be the world's biggest exporter of coal for power plants and the largest producer of zinc, the ever secretive Glencore’s involvement gives the merger a ‘crude’ dimension. The latter’s Chief Executive Ivan Glasenberg has made a fortune for his company selling crude oil and oil products alongside other commodities. Controversy and Glencore go hand in hand as its Wikipedia page records.

Where from here remains to be seen as ratings agency Moody's has placed all the ratings of Glencore and Xstrata, as well as those of their guaranteed subsidiaries, on review for possible upgrade following the announced all-share merger. The initiation of this review reflects Moody's favourable assessment of the planned merger in terms of diversification and synergies, as well as the uncertainties surrounding the final details and execution of the proposed transaction.

Moving away from the Glencore-Xstrata story but sticking with Moody's, the agency also commented on the completion of Sunoco Inc.'s strategic review. It notes that the American petroleum company is better positioned to focus on midstream logistics and retail product marketing as its core operations, with greater clarity around its plans to re-deploy a sizeable portion of its cash liquidity.

Sunoco announced a number of steps last week to allow it to focus on its large investment in Sunoco Logistics Partners LP and on retail marketing as the drivers of its future growth and returns. It began shuttering the Marcus Hook refinery in December and is likely to do the same with its Philadelphia refinery by July 2012 unless it can conclude a suitable sale. These exposures and the limited sales prospects for the refineries have resulted in an additional pre-tax charge of US$612 million in Q4 2011, including non-cash book charges and provisions for severance and other cash expenses.

Continuing with corporate news, Petrobras announced another discovery of a new oil and natural gas accumulation – this time in the Solimões Basin (Block SOL-T-171), in the State of Amazonas. The discovery took place during drilling of Igarap é Chibata Leste well located in Coari, 25 km from the Urucu Oil Province. The well was drilled to a final depth of 3,295 meters and tests have indicated a production capacity of 1,400 barrels per day of good quality oil (41º API) and 45,000 m3 of natural gas. Obviously, Petrobras holds 100% of the exploration and production rights in the Concession.

The Brazilian major also closed the issuance of global notes in the international capital markets worth US$7 billion on Monday. The transaction was executed in one day, with a demand of approximately US$25 billion as a result of more than 1,600 orders coming from more than 700 investors. The final allocation was more concentrated in the United States (58.4%), Europe (28.1%) and Asia, mostly dedicated to the high grade market. The oversubscription is symptomatic of the huge interest in Brazilian offshore.

Finally, BP raised its dividend payout after quarterly earnings rose on rising crude prices. Replacement cost profit for the three months to December-end 2011 was US$7.6 billion up on US$4.6 billion for the corresponding period in 2010. For FY 2011, BP's profit was US$23.9 billion versus a US$4.9 billion loss in 2010. This meant allowing for a 14% rise in the dividend to 8c (5p) per share, a first increase since the 2010 Gulf of Mexico spill.

Away from corporate matters, the UK government launched its 27th offshore oil and gas licensing round last Wednesday making 2,800 blocks available to prospectors. The last British licensing round set an all-time high at 190 awards with high crude prices enticing exploration companies big and small. Lets see how it all shapes up this time around especially as the British government maintains that some 20 billion barrels of the crude stuff is still to be extracted. The Oilholic cannot possibly dispute the figure with authority, but what one can note with some conviction is that all the easy (to extract) oil has already been found. Extracting the remaining 20 billion would be neither easy nor cheap, especially in a tough macroclimate.

Meanwhile, as tensions mount over Iran, Saudi Arabia’s crown prince has said the Kingdom would not let the price of crude oil stay above US$100 using the WTI as a benchmark. Concurrently, and in order to allay Asian fears about crude oil supplies, the UAE government says it is looking to export more to Asia should there be a need to mitigate the supply gap caused by a ban on Iranian oil by Asian importers. That’s all for the moment folks. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Offshore oil rig in North Sea © Cairn Energy Plc.

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