WTI $105.57 +18c, Brent $108.62 +34c, B/WTI Diff – $3.05 +5c , Natural Gas $3.65 -5c
The oil price has fallen this morning as the news from China that the Ministry of Industry and Information Technology has ordered more than 1,400 companies in 19 industries to cut excess production, part of efforts to shift towards slower, more sustainable economic growth. Industries affected include steel, ferroalloys, electrolytic aluminium, copper smelting, cement and paper.
Confirmation of news from the EIA that US crude oil production reached a 22 year high, last week the country produced 7.56m b/d, the most since 1990.
Finally on the oil price the article in the FT today entitled “The world might be drifting into an oil price shock” is a most interesting read, by Paul Stevens, a fellow at Chatham House and is attached.
Second quarter results from BG today and it is fair to say that they have delivered on their milestones as per the presentation by new CEO Chris Finlayson to analysts recently. Earnings were down 3% to $986m but beat the consensus of $968m, production was down 2%, again as expected and the dividend was raised 10% to 13.07 cents per share. In their key areas they delivered in-line or better, in Brazil the third FPSO started commercial production on-time and on-budget and the fourth appraisal well has shown ‘significantly better than the Iara discovery well’ characteristics. In Australia they made substantial progress on the QCLNG project and are still on track for first LNG in 2014 and on budget at $20.4bn. LNG guidance for the year remains as forecast as does guidance in all other areas, in Egypt which remains a ‘primary concern’ offshore operations are unaffected but higher volumes of gas have been diverted to the domestic market slightly impacting LNG exports but offset by the agreement between Egypt and Qatar. Finally, Tanzania is going well with their eighth consecutive discovery and total gross recoverable resource estimates are now 13 TCF and the site selection for the LNG plant is progressing well.
Overall these figures and statements were in-line or better than expected and we remain positive on the group and believe Chris Finlayson is doing a very good job and our target is significantly higher than the current price.
NB Conference call at midday.
Is it a glimmer of good news for BP among the morass of bad news, ‘unlucky’ lawyers and endless claims from ‘unfortunate’ businessmen? Halliburton has admitted destroying Deepwater Horizon evidence regarding the cement job and may, just may, give BP a chance to shift the blame a bit more towards Halliburton.
We had Tony O’Reilly, CEO of Providence Resources in yesterday in a pre-arranged visit to do a Malcy’s blog CEO interview. That will appear in due course but I wanted to say that we had a full house of people and the meeting went very well indeed. Just skimming over Barryroe we agreed that our valuations and theirs were roughly similar, i.e. significantly higher than the current share price and as I have said, potentially above £20 per share. The company has 80% and the CPR points to huge value, in a low tax regime and no royalty.
With a farm-out being processed I expect them to get costs back, a cut of next year’s drilling programme (3 wells) and a carry through to production. When a buyer is found I am sure that this will be the next transformation for PR, they and Lansdowne will likely sell 50% between them and a huge part of the valuation will be validated.
There is much more which I will document in the interview but with Barryroe, Spanish Point and the Porcupine basin not written off other parts of the portfolio may well add further value in the longer term, in the meantime take a look at the majors who have joined the rush to offshore Ireland viz Exxon, Eni, Repsol, Woodside and Kosmos to name a few. The chart below shows that few people concur with me and indeed todays Investors Chronicle puts them out as a sell so I cant be far wrong and would aggressively buy the stock a long way higher than this.
New Guinea Energy – From today’s Daily Flow Test – DY & JS
The company has sold its 50% participating interest in PPL269 in PNG to a subsidiary of ExxonMobil for a cash consideration of US$40m subject to certain conditions.
PPL269 is NGE’s most prospective licence and the company had estimated that a well would cost US$40m. This licence has five drillable prospects and adjacent licences contain major wet gas discoveries including Hides (9.6 TCF GIIP), Juha (1.5 TCF GIIP) and Pnyang (1.2 TCF GIIP).
The cash will be used to repay the convertibles leaving cUS$20m once complete. A very important and transformational deal for NGE. The company will now focus on identifying oil resources in PNG which have a shorter commercialisation timescale. The stock closed up c22% in Australia.
Tullow Oil- Dougie Youngson and Joe Stokeld
We initiated on Tullow Oil yesterday with a HOLD recommendation, as usual if you would like a copy of the research and haven’t already received it please just drop me a line.
Which Way Now?
Flawed Analyst & Market Valuation Methodology
Tullow’s valuation has benefited from the market giving it a premium rating for its high level of prior exploration success, which averaged 58% during 2007-12 (77% for E&A drilling). Consequently, the majority of analyst recommendations have factored in exploration upside ahead of drilling: a poor methodology in our view. This approach has resulted in a substantial fall in the share price in recent weeks, following the company reporting eight dry or uncommercial wells so far this year.
Exploration and Appraisal Still Key Growth Driver
Tullow will drill c40 E&A wells in 2013, targeting 1bn boe of resources across the portfolio. Results from Kenya have been mixed so far from a variety of operators. We believe Kenya could yield several medium-sized discoveries, which in turn could lead to multiple infrastructure hubs in country. However, we feel that the country will take a number of years to mature, as was the case in Uganda.
Development Projects Taking Longer
Progress in developing Uganda has taken longer than expected since the farm-out, mainly due to government demands for a domestic refinery. The export pipeline is likely to pass through Tullow’s Kenyan acreage, to expedite planning approvals and potentially tie-in any commercial Kenyan fields. Neither timing for completion, nor cost, has yet been determined.
TEN has now gained government approval and Tullow has started a farm-down process, with the aim of gaining a free carry to production in order to manage its forward capex profile (US$1.5bn net to Tullow for this project). The process should be completed later this year.
Target Price and Recommendation
We initiate coverage with a HOLD and set a target price of 1050p, which reflects recent drilling results and uncertainty over the timing and structure of the TEN farm-down.
It’s the anniversary of the London Olympic games and this weekend sees fantastic competition in London. In town is Usain Bolt who comes up against Londoner James Dasaolu who has clocked 9.91 this year…………..
It’s the Hungarian Grand Prix this weekend with the Red Bulls looking smoking quick in first practice.
Word reaches me that Paul Spedding, legendary analyst in the oil sector is to retire to spend more time with his money……..Paul has always been a first class analyst and although his departures promotes me to nearer the grandfather of the sector he will be sorely missed.