David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Falling oil prices and the implications for asset quality

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section:

    Our country bank analysts have studied the financing of the local energy production chain in 12 Asian markets and in this report evaluate the risks arising from sharply falling global oil prices. For the oil production countries, namely Australia, Malaysia and China, bank lending is primarily extended to the state-owned or globally established MNCs engaging in E&P (Exploration and Production), with some of them engaging in diversified energy businesses; for example, gas, that can help offset part of the losses from falling oil prices. In Australia, banks have set aside economic overlays (3-6% of the exposure) to buffer against potential risks from the worsening asset quality of the mining and energy sectors.

    Impact for banks financing refinery businesses and overseas projects
    While the refinery businesses of the major oil importing countries (India and Thailand) should benefit from falling global oil prices, the banks have less than 1% of loans pledged to the related industries, implying limited positive earnings impact. For Asian banks, such as Japanese banks, that have financed overseas projects, the borrowers are primarily strong companies with limited default risks.

    Indian, Indonesian and Chinese banks historically the best performers
    Since 2006, we identified four periods of global oil prices falling by an average of 46% within six months and we observed that global equity indices have been negatively affected, with MSCI Asia-ex JP financial index underperforming the S&P Index by 2%, but outperforming the global MSCI EM index by 4.7%. The best performers were India (+19%), Indonesia (+8%) and China (+4%), while HSBC (-14.5%), Standard Chartered (-21%) and Korean banks (-16%) were the worst. This order of performance is consistent with our preference among Asian financials based on our fundamental analysis.

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    Saudi Arabia Says Hard for OPEC to Give Up Oil-Market Share

    This article by Anthony DiPaola for Bloomberg may be of interest to subscribers. Here is a section:

     

    Global oil markets are experiencing “temporary” instability caused mainly by a slowdown in the world economy, Oil Minister Ali Al-Naimi said, according to comments published today by the Saudi Press Agency. He reiterated the country’s intention to maintain output amid plunging prices.

    “In a situation like this, it is difficult, if not impossible, that the kingdom or OPEC would carry out any action that may result in a reduction of its share in market and an increase of others’ shares,” Naimi said, according to the state-run news agency. Saudi Arabia, the largest producer in OPEC, will stick to its oil policies, he said.

    The Organization of Petroleum Exporting Countries decided Nov. 27 to keep its production target unchanged at 30 million barrels a day, ignoring calls from members including Venezuela to curb output to tackle a supply glut. Crude prices, which had already fallen 30 percent for the year by the November meeting, plunged after the decision, extending the drop to 43 percent.

    Steady global economic expansion will resume, spurring oil demand, Naimi said, leading him to be “optimistic about the future.” Oil extended gains after the comments.

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    Oil Market Report

    Thanks to a subscriber for this report from DNB which may be of interest. Here is a section: 

    Things have changed to the worse after the OPEC meeting

    We had assumed a small OPEC quota cut and some deliverance from Saudi/UAE/Kuwait, but the market would still be over supplied

    After the OPEC meeting it looks as the market will be left to itself until the next OPEC meeting scheduled for June

    Prices will have to be low in order to achieve a new equilibrium between supply and demand but the price effect on fundamentals will be somewhat lagged

    How far down prices need to decrease is impossible to calculate as the market could easily overshoot to the downside during the adjustment process

    Our base case is that we are close to the bottom of this price cycle now but since the effects of lower prices is lagged the market could overshoot to the downside

    We could see the 50’s short term before the market turns

     

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    Bloated with Gas

    Thanks to a subscriber for this contemplative report from Deutsche Bank examining the LNG sector and its potential for growth. Here is a section:

    There is a positive: capex likely much reduced, trading volumes enhanced
    Today c15-20% of major IOC capex is on LNG developments. We think much will be deferred in 2015/beyond, potentially a material $10bn plus curb on near term IOC capex. For those with trading businesses (BP & BG) greater access to US volumes gives an attractive, low capital, source of annuity cash flow. 

    Other industries?
    For Europe, by 2022 70bcm (15% of supply) could come from the US, potentially cutting Russian dominance of Europe markets (to 22% from 33% now) unless significant ground is ceded on price. For European Oil & Gas E&C companies the shift in build to the US represents another nail in their coffin. Euro utility? Falling spot gas helps affordability but curbs UK power margin. 

    Why bother writing this report?
    LNG matters to the IOCs: long-lived, low maintenance it grows towards 20% of operating cash flows by 2020. With the downstream pressured, this shift has been central to the rebuild of cash cycles at Shell, Total, Chevron and Exxon. Relative winner? BP. A price disrupter and less dependent on Asia, BP is long US gas and short European, a positive given the likely trade flows. 

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    Copper Falls to 8-Month Low on Concern Oil Slump Will Cut Costs

    This article by Agnieszka de Sousa for Bloomberg may be of interest to subscribers. Here is a section: 

    Mining is an energy-intensive industry and lower oil costs have a deflationary impact on producers, according to Macquarie Group Ltd. Copper also declined as a strike was set to end at Peru’s Antamina mine, the world’s sixth-largest copper mine.

    “Whatever positive connotations lower energy might have for global growth, the extent and pace of the decline in oil seems the more worrying factor for the moment,” RBC Capital Markets Ltd. said in a note.

     

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    Email of the day on the outlook for 2015

    Hi David & Eoin, I wanted to get FTM thoughts and opinion on where the best investment returns could be had over the next 12 months and what would be the key things to watch for? Thanks for an excellent service 

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    Musings From the Oil Patch November 18th 2014

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on LNG: 

    Temasek, Singapore’s state investment company, has joined with RRJ, a private equity firm founded by Richard Ong, a Malaysian dealmaker, to purchase $1 billion in convertible bonds to be issued by Cheniere Energy (LNG-NYSE) for financing the construction of its liquefied natural gas (LNG) export terminal. The bonds have a 6 ½ year maturity and carry an annual interest rate of 4.87% and will be convertible into Cheniere’s common stock in a year’s time. RRJ already had an equity investment in Cheniere. This move comes at the same time Asian buyers appear less interested in buying U.S. LNG. We don’t know why they are turning down what is supposed to be cheaper LNG, but we wonder whether they have less confidence that U.S. LNG supplies will be available in the volumes projected, and especially at the current low price that is projected to remain so for many years. It is also possible that Asian gas demand will not grow as much as projected due to slow growing economies, increased conservation and efficiency that trim demand growth, and  other alternative gas supplies being available with long-term, fixed price terms that prove cheaper than U.S. gas volumes. We continue wondering whether the U.S. LNG export terminals will become white elephants just as the LNG import terminals did.

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    Uranium Climbs to Highest Since January 2013 Amid Utility Demand

    This article by Ben Sharples for Bloomberg may be of interest to subscribers. Here is a section: 

    Demand from utilities is driving prices higher after uranium entered a bull market in September amid a labor strike at Cameco Corp.’s McArthur River operation in Canada, the world’s biggest mine for the fuel. Kyushu Electric Power Co. this month received local approval for reactors at its Sendai power station to resume operations, clearing the way for the first nuclear plants in Japan to restart as soon as early 2015.

    While uranium for immediate delivery is in demand through January, there’s also been a rise in buying interest for distribution of supplies later in 2015, Ux said. It has recorded 22 transactions for 3.8 million pounds this month.

    Uranium and nuclear energy is on a “more positive trajectory with a lot of upside to come,” John Borshoff, the chief executive officer of Paladin Energy Ltd., said on a conference call Nov. 13. Global production cuts of 6 million to 8 million pounds are starting to take effect, he said.

     

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    Halliburton Agrees to Buy Baker Hughes for $34.6 Billion

    This article by David Wethe and Tara Lachapelle for Bloomberg may be of interest to subscribers. Here is a section:

    Both companies are hired by oil and natural gas explorers to drill wells and provide services such as hydraulic fracturing, or fracking, which cracks rock to let petroleum flow more freely. Together, the companies will dominate the $25 billion U.S. market for onshore fracking.

    The merger also gives Halliburton access to Bakers Hughes technology to boost production in aging wells and its prized oil tools business.

    The two companies restarted talks yesterday after initial discussions fell apart late last week, a person familiar with the matter said yesterday. Baker Hughes confirmed the takeover talks on Nov. 13 after media reports of a potential deal.

    Talks collapsed a day later, and Baker Hughes released letters in which Craighead took Halliburton’s Lesar to task for refusing to raise his offer and pressuring for a hasty decision by threatening a proxy fight. 

     

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    Transocean Takes $2.76 Billion Charge Amid Glut in Drilling Rigs

    This article by Will Kennedy and David Wethe for Bloomberg may be of interest to subscribers. Here is a section: 

    Transocean Ltd., owner of the biggest fleet of deep-water drilling rigs, is feeling the effect of an oncoming glut in the expensive vessels just as crude prices tumble.

    The company will delay posting third-quarter results after saying earnings would be hit by $2.76 billion in charges from a decline in the value of its contracts drilling business and a drop in rig-use fees, the Vernier, Switzerland-based company said in a statement today. Transocean, which had been scheduled to report earnings today, fell 7.9 percent to $27.55 at 8:10 a.m. in New York before regular trading began.

    Oil’s decline to a four-year low in recent months has caused companies to consider spending cuts, reducing demand for rigs and the rates it can get for leasing them to explorers. Rig contractors had responded to rising demand during the past few years with the biggest batch of construction orders for rigs since the advent of deep-water drilling in the 1970s. Almost 100 floating vessels are on order for delivery by the end of 2017, according to a June estimate from IHS Energy Inc.

    “Ouch,” analysts from Tudor Pickering Holt & Co. wrote in a note to investors. The announcement “reflects the reality of this oversupplied floater rig market globally.”

     

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