WTI $102.71 -87c, Brent $109.41 -56c, Diff $6.70 +31c, NG $4.54 -2c
Its gone a bit quiet in oil markets after the inventory stats last week, it will be interesting to see how they settle down this week particularly in gasoline. As we enter June and the Northern hemisphere summer is not far away it is worth thinking about what factors may influence the oil price in the next few months. As you will know over recent years I have highlighted the fact that since the Arab spring Saudi Arabia has used much more oil for domestic consumption during these months and until it manages to bring on more gas for power generation its and by association OPEC’s exports fall. After that you can add anything you like to the equation but sometimes a heatwave in Japan will increase demand, sometimes it will be the hurricane season, occasionally North Sea maintenance overruns and this year it might be the Iran talks slowing down. Anyway, a few thoughts I might dwell on in coming weeks and I will of course pick up on the factors that might have a downward impact on prices.
Northern Petroleum -It’s all about Alberta
A few days ago I sat down with the executive management team at Northern, Keith Bush CEO, Nick Morgan FD and Graham Heard Technical and Exploration Director. To put the position into perspective these guys inherited a bit of a basket case of a portfolio and are doing their best to restore some shareholder value, not an easy task. Early evidence of change has included a restructuring of the board and the focusing on Canada with land purchases in Alberta in an effort to grow the company through production.
The portfolio does have other assets which I will mention briefly at the end but I ascribe no value to them at all at present, accordingly all Northern’s eggs are in one basket so it is encouraging that so far the plan appears to be working. The feedback from shareholders appears to have been to avoid E&P and to build on the production side of the story, combine that with rigorous capital discipline and a cut back in G&A costs and results should start to show. The Canadian production play has been initiated by the purchase of 26,454 acres in north west Alberta which include over 100 Keg River carbonate pinnacle reefs containing 101mmbbls of light oil originally-in-place calculated by the Alberta Energy regulator. These purchases have been made relatively cheaply through Crown land sales as some reefs were drilled many years ago and recovery is low, around 17%. There appear to be two ways of increasing production cash flow and value, one is drilling new wells into existing reefs the other is to increase secondary production capability through waterflood, this adds another 15-20% and takes recovery up to a more impressive 35-40%. Northern have drilled three wells this Spring all of which have been on production at differing rates and plan three more wells this summer, two into one reef and one water injection. Wells in this neck of the woods cost around $2m each so even with further land acquisitions, the cash at year end of £20.3m should keep them going.
As I have said, I ascribe no value to the rest of the portfolio, Italy may have some value but without even approval for seismic it’s a long way out, in French Guiana I don’t see action until 2016 and while the assets in Australia may be cheap to get to a saleable stage they don’t add to the pot at the moment.
Shareholders have been supportive of the new management so far and the stock is a bit above the lows of 22p, at 26.4p today the market cap at £25.2m is a bit above the cash level and capital discipline is evident. The worst appears to be behind them and they are being realistic about their prospects, it is going to be a long haul and evidence will be needed over, say a year, in Canada to prove the new strategy is working so watch this space.
A few bits and pieces I have picked up over the last few days…………..Another rise in the Baker Hughes rig count last week, +6 adds again. The Centrica story gets more exciting, firstly it would be a scandal if the company paid anything at all to buy Iain Conn out of his obscene BP pension fund so I hope that’s dead in the water, there are many around better than him. Secondly, the Sam going to BG story keeps surfacing, now although he sold Enterprise out to Shell that doesn’t make him a corporate axe man which is what BG needs right now….Over at Range Resources they have confirmed the Integrated Master Services Agreement as recently announced with Land Ocean and I will continue to BUY this stock, I genuinely think that whilst there is still risk, the new CEO Rory Scott Russell and his NED’s are doing all the right things and the leopard seems to have changed its spots. Faroe has spudded Butch South West to hopefully increase the area and the Bue well result is due very soon. Leyshon Energy Chairman John Manzoni, an industry great, has said that with new members of the team and the support of Halliburton, the testing goes on as does the search for acquisitions and investment opportunities in the area. Salamander picked up on Friday as rumours swept around that Cepsa were about to bid 160p for the company. I have had a number of discussions about the value of Salamander and whilst higher figures have been bandied around I still think that if there is an offer of anything north of 150 I would take a bidders hand off…My positive stance on Genel was picked up in the Sunday Times, once there have been a number of shipments of crude sold things will look much more positive and whilst it is a short term negative investors can think of it as creating a massive buying opportunity as my target for Genel is at least 1800p a share. When this happens it will seep through to other Kurdistan stocks and even GKP should benefit. Finally I have been hearing that Andy Inglis has arrived at Kosmos and it has been a night of the long knives like rarely seen before. My spies tell me that over 20% of the workforce has been ‘let go’ and it is all change round there, more when I hear it…
The Froch v Groves fight was the big event in town and whilst Froch justified his favouritism, no one, least of all little George saw that punch coming.
The furore over the Qatar bid for the 2022 World Cup increases as the Sunday Times finds what seems like meaningful evidence of n’eredowell activity around the bidding procedure…
Muzza took a long time to win but did better than Federer who got knocked out…
In the rugby it was a magnificent performance by the Northampton Saints to beat Saracens to win the Premiership title and over in France English Jonny won as well, he really will be deified before long!
The Grey Gatsby won the French Derby, good for Kevin Ryan and Ryan Moore and the team.
The Miami Heat will face the San Antonio Spurs in the NBA Finals this year. The Heat beat the Spurs to win the Championship last year. If they do the same this year, it will be their third Championship in three seasons.
And finally thanks again to John Martin and his great team at the Standard Chartered oil and gas team who I had the pleasure of joining at Lords on Saturday. It never looked like England would get up and of course they lost but we never thought it would be that close. Two things to say, firstly if we hadn’t bowled so many wides we would have won and secondly why are we thinking of going back to elderly county class wicketkeepers for the test team when we have Buttler on board, its not as if we don’t have enough keepers at the ECB……..