Tag Archives: Energy

A 2010 Warning Risk for Non-OPEC supply

Energy, On the cover, Sin categoría
russia
(Graph above shows Russian Crude Production). From an article I published in Cotizalia on Dec 3rd 2009.Today we saw Rosneft production figures reach a disappointing 2.119mbpd (only +1.5% y-o-y). This includes Vankor production at 160kpd in October (104kbpd in 3Q).

While Vankor crude output is expected to increase from 3.5MMt this year to 11.5-13.5MMt, production in the rest of the upstream portfolio (including the Priobskoye field) is expected to go down, leaving 2010 output “close to 2009 levels”. This is new and somewhat disappointing, taking into account that previously the company had expected crude output from the Priobskoye field to reach peak in 2012. This suggests that output growth at the Priobskoye field has been probably too high in 2005-09 and the field may stabilize lower than 2009 even after pick-up in drilling expected in the next two years. Investors will be concerned that Priobskoye might repeat the Sibneft fate when its fast production growth phase (2001-05) was followed by a steep decline in 2006-08. This is also new.

The market had continued to have a positive view of non-OPEC supply growth 2010-2012 despite the warning signs that we have highlighted for months. We already saw Lukoil back down from their strategic growth targets (from 4-7% production growth to flat), predominantly due to the fact that under the current tax system that eats 90% of revenues, Caspian and West Siberian oil fields are uneconomical. Furthermore, the other Russians are declining steeply: Surgut’s year-to-date production declined 3.2%, Tatneft declined 0.9% and Slavneft 3.7%.

Consensus on non-OPEC supply for 2009 versus 2008 calls for a 400,000 bpd increase, and the subsequent reduction of the call on OPEC, predicated on Russia growing to a level that offsets Norway-North Sea and Mexico declines.

I believe my bearish view on non-OPEC supply needs to be even more bearish for 2010, probably by 200kbpd given the capex, high tax and credit environment hitting Russia, Mexico and Norway.

So far YTD:

  • Norwegian volumes are at 2.24mbpd (below consensus estimates of 2.3-2.4mbpd)
  • Mexico volumes are at 2.65mbpd versus consensus at 2.96mbpd
  • Russian volumes are close to 10mbpd versus consensus at 10.3 mmbpd.
  • Total oil production by countries outside of OPEC averaged 50.1 million bbl/d during the first 3 quarters of 2009.

Dragon Oil… A cool 11.5% return to December

Energy, On the cover, Sin categoría

chartDragon Oil and its takeover bid (rejected by big shareholders) is set to deliver a minimum 11.5% return.

The critical step is the Court Meeting and EGM of Dragon shareholders which are scheduled for 10.00 and 10.15 on December 11th respectively, at the Grosvenor House Hotel in London.

ENOC needs to achieve 75% of the minority votes by weighting and 50% of the number of votes cast. While the decision to hold the meeting in London rather than in Ireland may appear to place an obstacle in the way of smaller Irish retail investors, voting may be done by proxy up to 48 hours before the Court Meeting. I believe that the vote will be tight, as already indicated by the statements of rejection issued by some of the major shareholders, and the failure of ENOC to respond by even a small increase in the bid strongly confirms that the 455p reflects what ENOC can afford to pay, not what the assets are worth.

The statement repeats that ENOC has undertaken not to sell its shares in Dragon until at least August 2009. If the offer lapses, ENOC could sell its stake at a higher price. So 11.5% is a minimum to make,

China, Exxon and the war for resources

Energy, On the cover, Sin categoría,

ep valuations

Graph above shows the valuation of independent E&Ps (EV/Core NAV) compared to Brent.

(Published in Cotizalia on November 19th 2009)

What an incredible week. Warren Buffett buys $60 million in Exxon shares, the independent E&P stocks (Dana, Dragon) rose to near-all-year highs on takeover speculation and we witness the evidence of what PetroChina said recently: the war for natural resources has only just begun. And the EU is losing.

While large European oil companies still fail to know what they will do to keep their businesses afloat if prices fall $1 or $2/bbl, the world is experiencing a revolution. So far in 2009, China has invested $16.5 billion to acquire oil assets. And what some disdained as excessive valuations has proven very reasonable, as PetroChina, Sinopec and CNOOC have demonstrated an exquisite discipline buying, but also by refusing opportunities.

Following are the Top-10 acquisitions by Chinese companies in the oil and gas sector so far in 2009. (Billions of US dollars)

RANK VALUE ACQUIRER TARGET

  1. 7.15 Sinopec Addax Petroleum Corp
  2. 3.30 China National PC OAO MangistauMunaiGaz
  3. 1.73 PetroChinaAthabasca Oil Sands
  4. 1.30 CNOOC, SinopecBlock 32 Offshore, Angola
  5. 0.93 China Investment CKazMunaiGas Expl & Prodn
  6. 0.87 Sinochem ResourcesEmerald Energy PLC
  7. 0.41 Petrochina South Oil E&D Co Ltd
  8. 0.31 CNOOC Talisman Energy Inc (gas)
  9. 0.27 XinjiangNew Energy
  10. 0.13 XinAo Gas Holdings Various oil reserves

You see, Europe’s efforts to invest in alternative energy and the electric car are very laudable and very necessary, but also very expensive, and even in the best case we should not lose sight of the importance of increasing access to natural resources . Especially when the International Energy Agency estimated that the use of electric vehicles in 2050 will not reach 35% of the worldwide fleet.

For me the problem is that the major oil companies are losing the best chance they ever had to buy relatively cheap assets and businesses in the OECD (see graph). For years we heard from Big Oil that E&P companies were too expensive, that they should wait for lower valuations to acquire assets. But that moment came in 2009, with the big oil companies full of cash and independents trading at historical lows … and they missed it.

However, China is demonstrating belief in the value of increasing its resources. But Exxon is now armed and ready. It has already placed a bid, rumoured at $ 4 billion for the assets of Kosmos in the Jubilee field in Ghana and continues to pursue attractive assets. As Rex Tillerson said, the company does not pursue crazy acquisitions, does not invest in political occurrences or areas that do not generate superior returns. And history shows it in their focus on the core business, a return on capital employed of 35%, share buyback of “only” $ 55 billion between 2008 and 2009 ($ 2 billion this fourth quarter!) And no debt, $2.9 billion net cash.

As Warren Buffett, Exxon knows that investing in cyclical assets with high debt clouds the ability to create long term value. And that’s what Warren Buffett has bought: a dirt-cheap stock, as he pays the total resources (72 billion barrels) at $4/bbl and pays zero for the chemical and refining businesses … but especially with the option to grow and buy without destroying the balance sheet.

In 2010 the figure of mergers and acquisitions, according to several companies and analysts, will reach $35 billion and may exceed $50 billion. Between PetroChina and Exxon they already have more reserves than all European listed companies together. The large integrated oil companies from France’s Total to Russia’s Rosneft, are unable to replace their reserves. 80% of global proven reserves are held by the producing countries. The little, very little that is left available, the independent companies with high exploration potential, will gradually fall inexorably. Those companies that lose this opportunity should not complain afterwards.

Happy Birthday, Oil

Energy, On the cover, Sin categoría
(published on August 28)
The modern oil industry began as a result of the search for inexpensive lighting. Until 1859, most people obtained artificial light by burning animal fats in the form of beeswax candles or whale oil.
In order to take advantage of the high prices of illumination, a group of investors hired a railroad conductor named Edwin Drake to head to a location close to where traces of crude oil had been observed on the surface. After a nervous few weeks in rural Pennsylvania, Drake struck oil on August 27, 1859. The 69 foot deep well on a salt dome rock formation yielded around 15 barrels a day.
The petroleum that flowed from this well in what became known as Oil Creek, near Titusville, Pennsylvania, started the modern oil industry we know today (oil had been produced in other parts of the world, but the Titusville well kicked off industry on a large scale).
The new industry was gradually consolidated and monopolized by the Standard Oil Company. In 1911, Standard Oil was split by anti-monopoly legislation into several competing firms. Esso (“S. O.” for Standard Oil), which later became Exxon and then ExxonMobil, remains the most well known of the Standard Oil children and the largest company in the S&P 500.
A few statistics:
Global oil production reached its highest figure in 2006.
Two companies, Exxon and Petrochina, control more oil and gas reserves than the entire rest of the quoted oil and utility companies.
OPEC and Russia control 77% of global oil reserves (including oil sands).
In 1991 global years of demand covered by proven reserves was 15 years. In 2009 it is roughly 12.
In 2009, c$198 billion will be invested in E&P to produce c81,820kbpd (oil). The highest figure (inflation adjusted) ever spent.
In 2008 global proven reserves fell 0.2% despite the addition of Tupi to proven status. Global reserve replacement ratio has been below 100% since 2004.
Global oil discoveries have declined steadily since the early 1960s despite periods of high prices and advances in exploration and production technology. The deficit has grown such that around the world we are now consuming roughly three times the amount of oil we are discovering each year.
The discovery deficit is now so large that the IEA estimates an equivalent of six additional Saudi Arabias need to be found and developed, requiring cumulative investments of US$26 trillion, to meet its expected 2030 global oil demand.