Category Archives: Energy

Energy

Afren: One to look into weakness

Energy, On the cover, Sin categoría,
The way I see it the stock has short term downside to 80p on fund flows (some large hedge funds are sellers) and technicals… but enters FTSE 250 January or February, RDS are looking to sell them some really cheap assets, small 40-50mnbbls type assets currently too small for the big guys to work and which benefi from better fiscal terms under a Nigerian entity .. ie netbacks go from 2.50-5 per bbl .. so if you are RDS, why not give the assets to Afren, let them get $5 per barrel and take a royalty of around $2 ..less hassle, no political issues , everyone happy !. Ebok field could add 35p/sh unrisked and I am hearing solid things from RDS people. Obviously Addax must have strong views on it too.Expect 6 well exploration program next year targeting 685 bbls vs 129 bbls 2P today (easy 95p valuation then)
The stock, at 80p, will be at 8xPE and 3.4x EV/EBITDA 2010 at $70/bbl, so looks undemanding once we pass the 2009 cornerstone.

ENI and its alleged break-up value

Energy, English, On the cover, Sin categoría
Over recent weeks,Knight Vinke has suggested that splitting the company into utility gas and traditional oil businesses would unlock significant value.
They value ENI between €27.8 and €32.
My biggest discrepancy with them is a) that the issue is not the Gas & Power business but the E&P, and b) I find it hard to believe that both parts would trade at top-of-subsector multiples if separate.
First in the Snam and Gas & Power business… They take the assumption of Snam trading at a 20% premium to RAB, which is crazy compared to other utility stocks. They also use the rest of the gas & power division at a 30% premium to Enel, Edison, Hera, Acea (which all trade at 5.6-6x EBITDA 1yr fwd). They totally disregard the constant process of de-rating of the Italian utilities in the past six years and the impact on power prices of stalled demand and excessive capacity from gas oversupply.
The refining business is put at Neste multiples, which is OK to me
Chemicals are valued at much higher than anyone can imagine (7.5x EBITDA)
Corporate charges are drastically reduced (probably as part o the assumption that, as separate entities, cost savings and job cuts would happen). This is difficult to believe in Italy, but can be acceptable as a thesis.
Then Knight Vinke value the E&P business at the multiples of a BG, which is too radical given the poor growth, high capex and returns.
In essence they use consensus Sum of the Parts, reduce the traditional Megacap oil discount (21% to 15%) to zero by cutting corporate charges and others, pumping up the valuation of the Italian G&P to multiples of non-Italian (and therefore more attractive) utilities and applying a premium to the Snam RAB that it has never enjoyed in the past (Snam is a mature asset and growth RAB is very limited versus maintenance RAB, something that KV seem to value in the same way).
The key, as some analysts (e.g Nomura) point out is that where Eni trades (a 40% discount to its invested capital) is no different to that of other large-cap oils (BP, RDS, FP and STL). I think the value argument can be applied equally to all these companies, but unlocking it is not about addressing a small part (Gas & Power is only 15% of Eni’s invested capital base) but about turning around the core E&P businesses where returns have fallen a staggering 400-500 basis points in four years (while oil prices rose).
That is why, even if separated, it is an illusion to believe that oil investors would see ENI as a high multiple E&P and see it trade at the same multiples as Tullow, Dana, etc… First, because it would still be a State owned entity and its resource base would still be heavily impacted by resource nationalism, low returns and OPEC quotas.
In the meantime, the bet on the stock from here is a full break up not only of the utility assets (which as Scaroni has said, would be regulaywise impossible) but also the disposal (at current market price, no discount) of the Saipem stake.

Short Term Commodity Dynamics

Energy, On the cover, Sin categoría

Oil markets have seen several points on the supply side. Nothing major but Russian output edging up to 10mmbpd, while OPEC sailings are expected to remain very low at c22.59 mbpd, leaving them 1.77 mbpd (7.3%) below last year’s level. Oil should continue in its $65-75/bbl range, but I still believe that the break-out from this range will be on the upside as the steady recovery seen outside China lifts distillate demand and as non-OPEC supplies disappoint as the year progresses. These data points will obviously become apparent closer to the 4th quarter, so short term dynamics will likely be driven by inventories, which can continue to build as refinery utilization reaches 83% from current 84.5%.

On gas, two issues are paramount – how much gas the Russians will pipe into Europe just as Europe is supposed to be lined up for rising LNG supplies, and how sharply US domestic gas production will tail off. With Ukraine’s gas transport company taking further steps to shore up its balance sheet and with Russia saying it’ll start to buy Turkmen gas, the signs are that Gazprom is expecting its pipeline deliveries to be substantially boosted from low H1 levels. My analysis remains bearish – new LNG supplies will struggle to be absorbed without pushing prices down, with Q1 2010 prices below $5/mmbtu necessary to clear the market (15-20% down). This week should see the first significant reduction in the official data for monthly US gas production, but nevertheless it is hard to create a bull case in the face of rising LNG supplies destined for the US.

Non-OPEC supply growth… where?

Energy, On the cover, Sin categoría

Given that my view of non-OPEC supply goes radically against IEA and EIA estimates, here are a few highlights to track from recent reports (Simmons Institute and others):

Pemex June Production: Crude 2.52 million bbld (down 3.4% m/m from 2.61 mm bbld in May), Cantarell output was 604,498 bbld vs 641,350 bbld in May, down 5.7% m/m.

Norway: The Norwegian Petroleum Directorate (NPD) said that June liquids production was 2.083m b/d, -8.4%y/y. May was down 14% and 2Q overall down 6.8%. Gas production in June was up, 2Q was up 2% y/y.

Russia: Market expects Russia to deliver strong growth in 2009 and also in 2010. It is more likely to be flat at 10mboepd, and only because of natural gas liquids.

This means that even if we believe that Russia output will grow (and given capex cuts I find it difficult to believe, when Vankor is loss-making below $60/bbl even with the announced tax breaks), non-OPEC supply will not reach 50mbpd in 2009 versus IEA’s estimate of 50.8mbpd. 2010 non-OPEC supply may decline by 1 mmbd after peaking in 2007 (coinciding with the highest capex devoted to secondary and tertiary recovery ever senn in the industry).

2008 and 2009 were set to be key years for major project startups and production growth. However, it took a record level of startups and capex to keep non-OPEC supply just flat. Guidance for non-OPEC major project startups in 2010 and 2011 (combined) is 2 mmbd less than the 2008 + 2009 total.

Decline rates are estimated as high as 10% in non-OPEC and as from 2010 the decline in production is c3.5% pa.

Also, non-OPEC decline rates appear to have accelerated in recent years. Simmons calculate that 2008 decline rates were 1% to 2% faster than the proceeding 10-year average for 1998 to 2007.

Allow me to finish this diatribe with my favourite “underperforming versus hype” projects:

Vankor (Rosneft):Vankorskoye project (“Vankor”) was the big trumpeted start-up of 2008…. Now it’s “some time” in late 2009 (who wants to bet 2010?). The first stage of production has been quoted at 30 to 50 kbd, with Rosneft citing long-term peak production expectations of 400 kbd. Interesting to see the ramp-up curve on this one. We will likely see the figurtes quietly and surely brought down to a more realistic 250kbpd. Shell, whodiscovered it in 1988, believe it is uneconomical at $90/bbl ($60/bbl under new tax exemption if it happens) and deffinitely not as giant as Rosneft publicizes.

Atlantis (BP): First production was achieved at Atlantis in October 2007, with a near-term peak reached five months later in March 2008 at 102 kbd (almost half of BP’s trumpeted capacity for 200 kbd) despite 25 additional wells drilled by BP.

Azeri Chirag-Gunashli (BP): From 800kbpd target for 2009 to 700kbpd and falling, despite debottlenecking desperate efforts and “only” $4bn of added capex.

Thunder Horse (BP): According to a BP update in June 2009, seven production wells had been brought online thus far, with per-well production rates in excess of 40 kboed and overall production rates of approximately 300 kboed. However, liquids production target has been brought down to 150kbpd and ramp-up is now out of BP’s targets.

IEA have Russia up in 2009 vs 2008 (from 10mmbpd to 10.02) And FSU as well. They even increased estimates (IEA) in July. And they are still very close to 10mmbpd for Russia in 2010. OPEC overstates its own production (as they always do), particularly Saudi.

I find it impossible to reach IEA’s figures for those countries (US not in my list of worries). As per Halliburton’s figures the drilling is at 70% of planning capacity so it is virtually impossible to reach recovery rates. Especially in Siberia. In my view:

  1. Russia 9.8mmbpd (FSU 12.5mmbpd) versus IEA at 12.9fmmbpd
  2. Mexico 2.45mmbpd versus IEA (wait for this) 2.958!!!
  3. Norway 2mmbps (depends on corrosion) versus IEA’s 2.24mmbpd
  4. US 7.55mmbpd versus IEA’s 7.827mmbpd.

The three rules of oil investment are evident:

Don’t trust capacity estimates from ex-growth companies.

Don’t trust ramp-up figures from declining assets.

Don’t trust upgraded reserve estimates from new operators.