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

Cairn’s Indian Find Continues to Excite

Cairn Energy’s oilfields in the Indian state of Rajasthan continue to excite. In a trading statement last week, the company raised its estimate of reserves from 175,000 barrels of oil per day to a potential 240,000 barrels of oil. Cairn’s stock rose nearly 11.5% intraday as the markets greeted the news with much gusto as did the Indian media given the oily needs of the country’s burgeoning economy.

Cairn also hopes the opening of a new 590 km pipeline over the second quarter of 2010, which will connect the Mangala oilfield to Salaya port (in Gujarat state), would further fire-up production. Currently, oil from Mangala is transported by road haulage tankers.

In other trading data, Cairn posted an operating profit of $53 million in 2009, up from $11 million in 2008. Its Chief Executive Sir Bill Gammell also sounded optimistic about the company's prospects in Greenland. Cairn is to prospect for oil at four drilling sites in Baffin Bay and estimates these areas could contain over 4.0 billion barrels of oil.

Sir Bill says, "It’ll take stamina, skill and indeed luck to find hydrocarbons in the area." That was probably his philosophy when he bought his company’s Indian assets from Royal Dutch Shell; and it sure has yielded dividends.

In contrasting fortunes, it seems drilling for the crude stuff off the Falkland Islands coast may not be economically feasible after all the argy-bargy between UK and Argentina. The prospect of oil in the region renewed diplomatic spats with the Argentine Government complaining to the UN and launching fresh claims of sovereignty on the Falkland Islands, over which in went to war with the British and lost.

UK promptly rejected the recent claims on basis of the right of self-government of the people of the Islands "underpinned by the principle of self-determination as set out in the UN charter". The people are happy to be British subjects and have been for over a century. All the caterwauling now sounds foolish and premature.

In a corporate announcement in London on Monday, Desire Petroleum – one of the British companies prospecting for oil in the area – said initial results from its Liz 14/19-1 well, in the North Falkland basin prospection zone, showed quantities of oil may be small and of poor quality.

Shares in Desire, recently named among Deloitte’s upstream upstarts, ended Monday trading in London down nearly 50%. Rockhopper Exploration, another company drilling in the region with a 7.5% interest in the Liz well, saw its shares tumble 25.5%. Other regional players also took a hit across the board. Desire Petroleum will need to drill further and deeper than anticipated if it has the will to find better quantities of oil and gas. "It will not be possible to determine the significance of the hydrocarbons encountered and whether the well will need to be drilled deeper, suspended for testing or plugged and abandoned," the company said.

© Gaurav Sharma 2010. Photo Courtesy © Cairn Energy Plc

Deloitte’s Take on UK Upstream Independents

A report into activities of UK upstream independent companies published by consulting firm Deloitte this morning makes-up for quite interesting reading. Its ranking of 25 leading independents has the usual suspects – Tullow Oil and Cairn Energy atop, as first and second. However, movements elsewhere in the table narrate a story of their own.

Desire Petroleum Plc, Borders & Southern Petroleum Plc and Rockhopper Exploration Plc rose in market value rankings for London-listed independent production companies as they hold exploration rights near the Falkland Islands. According to the report, Desire, which started exploratory drilling in Falkland Island Waters for the first time since 1998, rose by 10 places to 14th place, Borders & Southern rose 17 places to break into the top 25 at 15th and Rockhopper Exploration Plc rose 23 places to 26 – just outside the top 25.

Desire’s Liz prospection field has estimated resources of between 40 million and 800 million barrels, according to published reports. Meanwhile, Falkland Oil and Gas Plc, another operator, has estimated resources of between 380 million and 2.9 billion barrels at its Tora prospection, according to its Q4 documents.

Argentina and UK went to war over the Falkland Islands in 1982 after the former invaded. UK forces wrested back control of the islands, held by it since 1833, after a week long war that killed 649 Argentine and 255 British service personnel. The Islands have always be a bone of contention between the two countries. The prospect of oil in the region has renewed diplomatic spats with the Argentines complaining to the UN and launching fresh claims of sovereignty.

UK has rejected the claims on the basis of the right of self-government of the people of the Islands "underpinned by the principle of self-determination as set out in the UN charter". Market commentators feel the fresh round of diplomatic salvos are as much about oil as they are about politics. A widely held belief that fresh conflict was highly unlikely could precipitate in independent operators in the region being taken over by oil majors.

Ian Sperling-Tyler, co-head of oil and gas corporate finance at Deloitte, raised some very important points while doing his press rounds. In separate interviews with Bloomberg and CNBC Europe, he opined that the wider market would have to wait and see what effect political risk will have on activity levels in the Falklands. However, he thinks it is highly plausible that operators in the Falklands were not big enough to monetise those assets on their own.

Hence, they could very well be acquired by a bigger company. And well the independents are growing bigger by the month too. The top two in the league table - Tullow Oil, which is developing reserves in Uganda, and Cairn Energy, which focuses on India, accounted for 60% of the market capitalisation of the top 25 companies for 2009, the report shows (click on image).

As for the diplomatic row between the two nations; it’s nothing more than a bit of argy-bargy with an oily dimension and is highly likely to stay there. Meanwhile, the BBC reports that Spanish oil giant Repsol might be about to join the exploration party from the Argentinean side.

© Gaurav Sharma 2010. Table Scan © Deloitte LLP UK