Eni’s Rating Downgrade & Other News

Moody's Investors Service lowered the long-term senior unsecured ratings of Eni S.p.A. (Eni) and its guaranteed subsidiaries to Aa3 from Aa2 and the senior unsecured rating of Eni USA Inc. to A1 from Aa3. In a note on Monday, it said the outlook for all ratings is stable.

Eni qualifies as a Government-Related Issuer (GRI) under Moody's methodology for such entities, given its 30.3% direct and indirect ownership by the Italian state. The downgrade reflects Moody's expectation that deleveraging process initiated by Eni management and recovery in the group's credit metrics will be gradual and unlikely to restore sufficient headroom to help underpin its business case analysis within the Aa range.

In other news, the U.S. EIA has cut its forecast for global oil demand in light of lower forecasts for global growth. EIA now expects global oil consumption to rise by 1.4 million barrels per day in 2011 against last month's projection of 1.5 million barrels. The consumption growth forecast for 2010 was unchanged at 1.6 million barrels per day.

On the pricing front, the EIA expects spot West Texas Intermediate crude prices to average US$77 a barrel in Q4 2010, down from its previous forecast of US$81. It added that crude prices are likely to climb to US$84 by the end of 2011.

Meanwhile, as you know, BP published its internal report into the Deepwater Horizon rig explosion in the Gulf of Mexico and the resultant oil spill last week. Given the ol’ day job of mine, I wanted to read it cover to cover – all 193 pages of it – before blogging about it. Having finally read it, goes without saying the oil giant is stressing on the fact that a "sequence" of failures caused the tragedy for which a "number of parties" were responsible. (To be read as Transocean and Halliburton)

In the report, conducted by BP's head of safety Mark Bly, the oil giant noted eight key failures that collectively led to the explosion. Most notably, BP said that both its staff as well and Transocean staff interpreted a safety test reading incorrectly "over a 40-minute period" which should have flagged up risks of a blowout and action could have been taken on the influx of hydrocarbons into the well.

BP was also critical of the cementing of the well - carried out by Halliburton - and the well’s blowout preventer. The report also notes that improved engineering rigour, cement testing and communication of risk by Halliburton could have identified flaws in cement design and testing, quality assurance and risk assessment.

It added that a Transocean rig crew and a team working for Halliburton Sperry Sun may have been distracted by "end-of-well activities" and important monitoring was not carried out for more than seven hours as a consequence.

Furthermore, BP said that there were "no indications" Transocean had tested intervention systems at the surface as was required by its company policy before they were deployed on the well. Crew may have had more time to respond before the explosion if they had diverted escaping fluids overboard, the report added.

BP’s outgoing Chief Executive Tony Hayward said, “To put it simply, there was a bad cement job and a failure of the shoe track barrier at the bottom of the well, which let hydrocarbons from the reservoir into the production casing. The negative pressure test was accepted when it should not have been, there were failures in well control procedures and in the blowout preventer; and the rig's fire and gas system did not prevent ignition.”

So there we have it – the oil giant is not absolving itself of the blame, but rather spreading it around. It came as no major surprise that both Halliburton and Transocean criticised and dismissed the report - though not necessarily in that order. The story is unlikely to go away as a national commission is expected to submit a report to President Barack Obama by mid-January 2011 followed by a Congressional investigation. The U.S. Justice department may yet step in as well if evidence of criminal wrongdoing of some sort emerges.

Away from the BP spill saga, French energy giant Total said last week that it could sell its 480 petrol stations in the UK as part of a strategic review of its British downstream operations as it refocuses on its core upstream strength and well something had to give.

© Gaurav Sharma 2010. Photo: US Oil rig © Rich Reid / National Geographic Society

From a Sobering August to Sept's Crude Forecast!

August has been a sobering month of sorts for the crude market. Overall, the average drop in WTI crude for the month was well above 8% and the premium between Brent crude and WTI crude futures contracts averaged about US$2. The market perhaps needed a tempering of expectations; poor economic data and fears of a double-dip recession did just that.

Even healthy US jobs data released last week could not stem the decline; though prices did recover by about 2% towards the end of last week. On Friday, the crude contract for October delivery lost 0.6% or US$0.41 to $74.60 a barrel on NYMEX. This is by no means a full blown slump (yet!) given that last week’s US EIA report was bearish for crude. It suggests that stocks built-up by 3.4 million barrels, a figure which was above market consensus but less than that published by the API. This is reflected in the current level of crude oil prices.

Looking specifically at ICE Brent crude oil futures, technical analysts remain mildly bullish in general predicting a pause and then a recovery over the next three weeks. In an investment note discussing the ICE Brent crude oil contract for October delivery, Société Générale CIB commodities technical analyst Stephanie Aymés notes that at first the market should drift lower but US$74.40/73.90 will hold and the recovery will resume to 77.20 and 77.70/78.00 or even 78.80 (Click chart above).

On the NYMEX WTI forward month futures contract, Aymés also sees a recovery. “73.40 more importantly 72.60 will hold, a further recovery will develop to 75.55/90 and 76.45 or even 77.05/77.25,” she notes. By and large, technical charts from Société Générale or elsewhere are not terribly exciting at the moment with the price still generally trading pretty much within the US$70-80 range.

Elsewhere in the crude world, here is a brilliant article from BBC reporter Konstantin Rozhnov on how Russia’s recently announced privatisation drive is sparking fears of a return to the Yeltsin era sale of assets.

On a crudely related note, after a series of delays, Brazil’s Petrobras finally unveiled its plans to sell up to US$64.5 billion of new common and preference stock in one of the largest public share offerings in the world.

A company spokeswoman said on Friday that the price of new shares would be announced on September 23rd. The IPO could well be expanded from US$64.5 billion to US$74.7 billion subject to demand; though initially Petrobras would issue 2.17 billion common shares and 1.58 billion preferred shares. The share capital will finance development of offshore drilling in the country’s territorial waters.

Lastly, the US Navy and BP said late on Sunday that the Macondo well which spilled over 200 million gallons of oil into the Gulf of Mexico poses no further risk to the environment. Admiral Thad Allen, a US official leading the government’s efforts, made the announcement after engineers replaced a damaged valve on the sea bed.

Concurrently, The Sunday Times reported that BP had raised the target for its asset sales from US$30 billion to US$ 40 billion to cover the rising clean-up cost of the Gulf of Mexico oil spill. The paper, citing unnamed sources, also claimed that BP was revisiting the idea of selling a stake in its Alaskan assets.

© Gaurav Sharma 2010. Graphics © SGCIB / CQG Inc. Photo: Alaska, US © Kenneth Garrett / National Geographic Society

Oil Price, Petroaggressors & a Few Books I've Read

Since last week, the wider commodities market has continued to mirror equities. This trend intensified towards the end of last week and shows no sign of abating. Furthermore, it is worth noting that Brent crude is trading at a premium to its American cousin, a gap which widened over USD$2. On Tuesday (August 31) at 13:00 GMT, the Brent forward month futures contract was trading at US$76.10 a barrel (down 1.1%) versus WTI crude at US$73.83 (down 3.1%) in intraday trading.

This of course is ahead of the US energy department’s supplies update, due for publication on Wednesday. The report is widely tipped to show a rise in crude stockpiles and the US market is seen factoring that in. Overall, the average drop in WTI crude for the month of August is around 8.89% as the month draws to a close.

Having duly noted this, I believe that compared to other asset classes, the slant in oil still seems a more attractively priced hedge than say forex or equities. Nonetheless, with there being much talk of a double-dip recession, many commentators have revised their oil price targets for the second half of 2010.

Last month, the talk in the city of London was that crude might cap US$85 a barrel by the end of the year; maybe even US$90 according to Total’s CEO. Crude prices seen in August have tempered market sentiment. Analysts at BofA Merrill Lynch now believe the oil price should average US$78 per barrel over H2 2010 owing to lower global oil demand growth and higher-than-expected non-OPEC supply.

“Following robust increases in oil demand over the past 12 months on a stimulus-driven rebound, we now see some downside risk as slower growth sets in and OECD oil inventories remain high. Beyond 2011, oil markets should remain tight on solid EM fundamentals and potentially a looser monetary policy stance by EM central banks on the back of the recent crisis in Europe. Curves may flatten further as inventories return to normal levels and seasonal hedging activity picks up,” they wrote in an investment note.

Elsewhere, Russia's largest privately held oil company - Lukoil - reported a 16% drop in quarterly profits with net profit coming at US$1.95 billion for the April-June period. Revenues rose 28% to US$25.9 billion on an annualised basis. In statement to the Moscow stock exchange, Lukoil said it is coping with the difficult macroeconomic situation and securing positive cash flow thanks to implementing measures aimed at higher efficiency which were developed at the beginning of the year.

The company largely blamed production costs for a dip in its profits which rose 24% for the first half of 2010. In July, US oil firm ConocoPhillips, which owns a 20% stake in Lukoil, said it would sell its holdings. However, the Russian oil major issued no comment on whether it would buy-out ConocoPhillips’ holdings.

Reading investment notes and following the fortunes of Lukoil aside, I recently stumbled upon a brilliantly coined term – “petroaggressors” – courtesy of author and journalist Robert Slater. After all, little else can be said of Iran, Venezuela, Russia and others who are seeking to alter the energy security hegemony from the developed world in favour of the Third world.

In his latest book – Seizing Power: the global grab for oil wealth – Slater notes that the ranks of petroaggressors are flanked by countries such as India and China who are desperate to secure the supply of crude oil with very few scruples to fuel their respective economic growth.

It is mighty hard to imagine life without oil; such has been the dominance of the internal combustion engine on life in the developed world over the last six decades. Now the developing world is catching-up fast with the burgeoning economies of China and India leading the pack. End result is every economy, regardless of its scale is suddenly worried about its energy security. Slater opines that a grab for this finite hydrocarbon may and in some cases already is turning ugly.

In fact he writes that the West, led by the US (currently the world's largest consumer of crude oil), largely ignored the initial signs regarding supply and demand permutations. As the star of the major oil companies declines, Slater writes that their market share and place is being taken not by something better - but rather by state-run, unproductive and politics-ridden behemoths dubbed as National Oil Companies (NOCs).

If the peak oil hypothesis, ethical concerns, price speculation and crude price volatility were not enough, geopolitics and NOCs run by despots could make this 'crude' world reach a tipping point. Continuing on the subject of books, journalist Katherine Burton's latest work - Hedge Hunters: How Hedge Fund Masters Survived is a thoroughly decent one.

In it, she examines the fortunes of key players in the much maligned, but still surviving hedge fund industry. In the spirit of a true oilholic, I jumped straight to Chapter 9 on the inimitable Boone Pickens, before immersing myself in the rest of her book.

© Gaurav Sharma 2010. Photo: Oil rig © Cairn Energy Plc

Cairn Energy "Smells" Black Gold in Greenland

Barely a week after announcing the proposed sale of a 51% stake in its Indian unit to Vedanta in order to concentrate on its Greenland operations, Cairn Energy claims to have discovered gas in the self-governing Danish protectorate. It is usually a sign that the crude stuff may follow. In a statement, the company said its personnel had observed "early indications of a working hydrocarbon system" off Greenland’s coast at its Baffin Bay T8-1 prospection well. Apart from the T8-1 site, the energy company said plans to drill at least two other wells over the course summer were also on track.

Cairn chief executive Sir Bill Gammell says he is looking forward to assessing results of the remainder of the 2010 drilling programme. So does rest of the market; except for Greenpeace who have promptly dispatched a protest ship to the region.

The company's planned drilling target depth is in the region of 4,000 metres (or above) and energy sector analysts are not yet jumping with joy. Perhaps a knee-jerk reaction to Cairn’s announcement has been tempered by the fact that Scandinavian, British and American teams have all attempted drilling off the coast of Greenland in the past, i.e. in 1970-75 and then again in 2000. Neither of the drives resulted in success.

Still the Greenland Bureau of Minerals and Petroleum, which has made developing oil activities one of its most important priorities aimed at creating enough revenues to replace the subsidy the protectorate receives from Denmark, would be hoping Cairn is lucky in striking black gold this time.

Meanwhile, the forward month crude oil futures contract dipped below US$72 a barrel in intraday trading across the pond as the wider commodities market mirrored equties trading; a trend noted over the last six trading sessions. I quite agree with Phil Flynn, analyst at PFG Best, who wrote in an investment note that: "Just when it seems oil is going to rally on strong economic optimism; it gets crushed with the realty of gluttonous supply."

London Brent crude was just about maintaining resistance above US$72 down 89 cents or 1.2% at US$72.55 around 14:45 BST. However, weaker economic data on either side of the Atlantic and fears of a double dip recession, most recently stoked by Bank of England’s MPC member Martin Weale have certainly not helped.

©Gaurav Sharma 2010. Photo: Oil tanker ©Michael S. Quinton/National Geographic Society

Cairn Energy: Choosing Greenland over India?

It seems Cairn Energy has shifted its attention from India to Greenland. What else can be said of the Edinburgh-based independent upstream upstart’s announcement of plans to sell a 51% stake in its Indian operations to mining group Vedanta for up to US$8.5 billion?

After a week of nudges and winks, Cairn confirmed rumours of the sale doing the rounds in the city of London. The company’s Indian operations have a market capitalisation of just over US$14 billion which makes Cairn India, the country’s fourth largest oil company.

Apart from seeking a "substantial return of cash" to shareholders, it is now clear that Cairn hopes to pursue its drilling ambitions in Greenland with some vigour. In a media statement, Cairn’s chief executive Sir Bill Gammell said, “I am delighted to announce the proposed disposal of a significant shareholding in Cairn India in line with our objective of adding and realising value for shareholders.”

To fathom what the announcement means for Cairn energy is easy. In fact, market analysts I have spoken to reckon the sale would generate more than adequate capital for Cairn's Greenland prospection in the medium term. This makes Cairn pretty cash rich and the market wonders what the inimitable Bill Gammell has up his sleeve. That it could bag another similarly scaled production asset akin to its fields in India’s Rajasthan state is doubtful.

Working out what the deal means for Vedanta is trickier. Its chief executive Anil Agarwal gave a rather simplistic explanation. In a statement he said, “The proposed acquisition significantly enhances Vedanta's position as a natural resources champion in India. Cairn India's Rajasthan asset is world class in terms of scale and cost, delivering strong and growing cash flow.”

Hence, simply put Vedanta has stated its intentions of venturing beyond metals and make a headline grabbing foray into the oil and gas sector. The market would be watching how the two aspects of the business gel under the Vedanta umbrella, but there are precedents of success – most notably at BHP Billiton.

In a related development, Cairn energy was featured in Deloitte’s half-yearly assessment of UK independent oil and gas companies. At the end of H1 2010, according to Deloitte the top five UK independent oil companies by market capitalisation were - Tullow Oil, Cairn Energy, Premier Oil, SOCO International and Heritage Oil in that order. The top three have maintained their respective positions from December 2009 while SOCO International entered the top five with a 31% increase in market capitalisation.

Overall, the first half of the year was broadly positive for the UK independents, with market capitalisation of the majority of companies in the league table increasing by 4.6% over the 6 month period to 30 June 2010. It stood at £26.482 billion as of end-June. (Click box on the left for the entire list)

On the oil price front, the crude stuff plummeted nearly 7% over the course of the week ended Fri 13th on either side of the pond. The price resistance is presently above US$75 a barrel and I expect it to remain there despite some pretty disappointing economic data doing the rounds these days. Looking further ahead, analysts at Société Générale’s Cross Asset Research team forecast NYMEX WTI to average US$80 in Q3 2010 (revised down by $10) and $85 in Q4 2010 (revised down by $5).

Looking further ahead, an investment note states that they expect NYMEX WTI of US$92.30 in 2011 (revised down by $8.70). NYMEX WTI is forecast at US$88.30/$87.50 in Q1 2011/Q2 2011, increasing to $95/$98.30 in Q3 2011/Q4 2011. On a monthly average basis, Société Générale expects NYMEX WTI of US$87.50 in December 2010 and $100 in December 2011.

In truth, fear of a double dip recession persists in wider market, especially in the US, EU and UK. However, many crude traders are quietly confident that in such an event, India and China’s crude oil consumption will help maintain the oil price at US$70 plus levels.

© Gaurav Sharma 2010. Photo courtesy © Cairn Energy Plc. Chart Courtesy © Deloitte LLP