Thursday, September 04, 2014

Bright lights, energy finance & PE in Hong Kong

It is jolly good to be back in Hong Kong after nearly a decade and half. The city is home to some 7 million souls who live, work and sleep mostly in high-rise buildings given it is one of the world’s most densely populated places and space is at a premium.

Having soaked in the dazzling lights, magnificent views from the Victoria Peak (see left) and the ubiquitous Star Ferry ride from Central pier on Hong Kong Island to Tsim Sha Tsui in Kowloon, the Oilholic decided to probe what’s afoot in terms of energy sector finance, and the market in general, in this part of the world. 

The timing couldn’t be better as the Hang Seng Index recently soared to a six-year high and that can only bode well for the 48 companies on there who account for 60% of market capitalisation of the Hong Kong Stock Exchange. While Alibaba.com might have opted to list in New York, rather than here, CGN Power Co, mainland China’s largest nuclear power producer by operational capacity, has decided to file for a US$2 billion initial public offering in Hong Kong.

For regional energy companies, Asia’s self-styled capital of finance has always been a key destination for equity finance, even though real estate and services stocks understandably dominate the market. In CGN Power’s case, the move is part of its strategic goal to turn-on more nuclear reactors and turn-off coal-fired power plants. The listing will see it in the company of China Resources, CLP Holdings, Hong Kong and China Gas Company, Hong Kong Electric Holdings (Towngas), Kunlun Energy (formerly CNPC Hong Kong) and of course trader SS United Group Oil & Gas Company to name a few prominent players. 

Away from public listings, the search for liquidity and capital raising exercises bring many mainland, regional and (of late) Western energy firms to the doors of Hong Kong’s Private Equity (PE) players, a trend that’s now firmly entrenched here and continues to rise. According to a local contact, there are currently just under 400 major PE companies operating in Hong Kong. The Chinese special administrative region (SAR) and former British colony is Asia’s second largest PE centre, second only to mainland China.

The energy sector (including oil & gas and cleantech), one is reliably informed, comes third in terms of PE finance after real estate and regional start-ups. A striking feature of PE funding flows originating in Hong Kong is the depth of international investment. The Oilholic noted oil & gas investments in Australia, India, Japan, South Korea and of course mainland China.

Furthermore, synergy and happy co-existence with PE groups based in mainland China is seeing funding stretch to jurisdictions previously untouched by them with the sizing up of international assets well beyond Australasia with oilfield services companies and independent E&P companies being the unsurprising targets (or shall we say beneficiaries).

For instance, Denise Lay, Chief Financial Officer of Tethys Petroleum, a London and Toronto-Listed oil and gas exploration firm, recently told yours truly in a Forbes interview about her company’s decision to sell 50% (plus one share) of its Kazakh assets to SinoHan, part of HanHong, a Beijing, China-based private equity fund.

Some notable PE players on everyone’s radar for oil & gas investments include Affinity Equity Partners, Baring PE Asia and Silver Grace AM. The funding pool, according to three local analysts is set to expand. One even complained of there being too much investment capital around and not enough deals, which is causing assets to go for inflated prices.

“But amid the synergy and seamless funding flows, there’s a bit of competition as well between SAR Hong Kong and China. For instance, the Hong Kong local administration is unashamedly pro-PE. Part of its overtures to attract more PE funds to be domiciled in Hong Kong includes amendment and extension of the current offshore fund exemption,” adds another.

Away from PE, most state-owned Chinese oil & gas firms have approached Hong Kong’s capital markets although the extent of their presence varies. While it’s a view that is not universally shared, for the Oilholic, the SAR with a convertible Hong Kong dollar (unlike the Yuan RMB which isn’t) serves as a good base for regional expansion and overseas forays for these guys.

On an unrelated note, one isn’t trying to establish any connect between gambling and the preferred currency, but the Hong Kong dollar is also the  legal tender of choice in the casinos of nearby Macau. 

The Oilholic discovered it the hard way this afternoon, having paid a visit to the Wynn Casino and trying to insert a Macau pataca note into the slot machine only to be told to use Hong Kong dollars. 

As of last year, gambling revenue in the former Portuguese colony and another Chinese SAR of US$45.2 billion, seven times the total of the Las Vegas strip, has made it the world’s largest gambling destination. Since photography is not permitted inside casinos, even with the presentation of an international press ID as the Oilholic did, here’s the exterior of the Wynn Casino with rival MGM in the background.

According to the World Bank, Macau’s GDP per capita came in at US$91,376 last year. That makes it the richest country globally after Luxembourg, Norway and Qatar. Mainland money flowing around Macau is pretty apparent, but not sure how much of it is filtering through to the masses.

There have been repeated calls of late for a better wages by casino workers facing higher inflation. It is a soundtrack gamblers from many countries ought to be pretty familiar with - wages not keeping pace with inflation. That’s all from Hong Kong and Macau folks! It’s time to head off to Shanghai. Keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Hong Kong evening sky as seen from the Victoria Peak, Central, Hong Kong. Photo 2: Wynn Casino & Resort with MGM in the background, Macau © Gaurav Sharma, September 2014.

Wednesday, September 03, 2014

Geopolitical loving: When Abe met Modi

The Oilholic finds himself roughly 6,000 miles east of London in Tokyo, Japan. While yours truly is here for cultural and ‘crude’ pursuits, another visitor was in town to firm up a crucial strategic tie-up. It was none other than India’s recently elected Prime Minister Narendra Modi, who popped in to see Japanese counterpart Shinzo Abe.

There’s been something of a political loving between these two heads of state. Abe hardly follows anyone on Twitter; Modi being one of the only four people he currently does follow! The Japanese PM was the first among international counterparts to congratulate Modi following his stunning mandate after elections in India. If you think that’s not a big deal, well US President Barack Obama got a welcoming handshake from Abe; NHK footage of Modi’s arrival in Japan shows one heck of a ‘best pal’ Abe-Modi bear hug. Protocol and formality not required between friends seems to be the message.

It is only Modi’s second and most prominent foreign visit since he assumed office this year; no offence to Nepal which was the first destination of his choice. Both leaders lean right, though the Indian PM’s right-wing credentials are stronger in a strictly domestic sense. The Japanese and Indian media went positively ballistic over the visit, atop giving it front-page stuff prominence. It’s extraordinary for all of this to be related to a bilateral meeting between two heads of state, with no priors, unless there was a collaborative attitude behind the scenes.

Any analyst worth his/her weight would note that at the heart of it is a move to counterbalance China, a country that has an uneasy relationship with both India and Japan. As if to underscore the point, Modi, visibly moved with the superb reception he received, criticised the “expansionist” maritime agenda of certain states. Wonder who he could possibly be referring to with the South China Sea so close-by?

Both countries are wary of China, have similar economic problems (cue inflationary concerns) and remain major importers of natural resources. As if for good measure, throw religion into the mix as Japan’s primary faith – Buddhism – was founded in the Indian subcontinent. So finding common ground or the pretext of a common ground is not hard for Abe and Modi.

Now is the Abe-Modi summit a big deal? In the Oilholic’s opinion, the answer is yes. We’ll come to natural resources and ‘crude’ matters shortly, but hear this out first – Japan is to invest US$34 billion spread over the next five years in terms of deal valuation. The trade between the two is insipid at the moment, either side of 1% of the total export pile in each case with the Japanese exporting marginally more than they’re importing from India. That makes the announcement a very positive development.

Japan, according to both men, could turn to India for its rare earth needs, a market led by China. While claims of India becoming a wholesale manufacturing base for Japanese electronics and engineering giants are a bit overblown, to quote the Indian PM: “We see a new era of cooperation in high-end defence technology and equipment.”

As for exchanging views on inflation - India’s, until recently was out of control and has only just been somewhat reigned in with the country's economy starting to gain momentum. Japan's on the other hand, “Abenomics” or not, has not managed to gain momentum (economy has shrunk in annualised terms last quarter by 6.8%). Inflation, thanks to a sales tax rise which came into effect in April, is not under control either with the country’s Consumer Prices Index (CPI) up 3.4% in July. That's well above the Bank of Japan’s target rate of 2%.

Given both countries are major importers of crude oil and natural gas, even a minor price rise has a major knock-on effect right from the point of importation to further down the consumer chain. At the moment, both are benefitting from a two-month decline in oil prices. Both PMs think they can work together towards the procurement of liquefied natural gas, according to an Indian source. The idea of two major importers strategising together sounds good, but concrete details are yet to be released.

If there was one hiccup, the two sides did not reach an agreement over the transfer of nuclear technology to India. Politics aside, Japan for its part is still grappling with the effects of Fukushima on all fronts - legal, natural and physical. Tepco, the company which operated the plant, is still in courts. The latest lawsuit - by workers demanding compensation - is a big one.

But not to digress, how did the men describe the summit themselves? For Modi, it was an “upgrade” in bilateral relations. For Abe, it was “a meeting of minds”. China would, and should, view it very differently. There is one not-so-mute point. Abe did not take any direct or indirect swipes at China, Modi (as mentioned above) was not so restrained. One wonders if in Modi’s quest for geopolitical rebalancing in Asia, would it serve in India well to improve relations with Japan and let them deteriorate with China?

That’s all the contemplation from Tokyo for the moment folks. The Oilholic is heading to Hong Kong, albeit briefly, after a gap of over a decade. Its a sunny day here at Narita Airport as one takes off. More soon, keep reading, keep it ‘crude’!

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© Gaurav Sharma 2014. Photo 1: Tokyo Bay Waterfront. Photo 2: Narita International Aiport, Japan © Gaurav Sharma, September 2014.

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 Bédeneau, 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