WTI $100.83 -$2.10, Brent $106.66 -$2.01, Diff $5.83 +9c, NG $4.15 +3c
Its a good thing that there is some news on the oil price front as there is nothing doing on the company news front, officially the start of the silly season.
Both WTI and Brent are falling sharply for a number of reasons but primarily as explained here all last week, the physical market is well supplied and hedge funds and the like who took big positions when ISIS marched into Iraq are long and wrong and some are cutting and running. Both crudes have also taken out key support levels and now $100 and $106 for WTI and Brent respectively are next to be challenged but the 200 day moving averages also look dodgy. Supply wise it has been Libya surprising with last weeks production of 470/- b/d being a good 150/- b/d more than had been expected. Numbers should be treated with some caution as usual and with renewed fighting over the weekend the figure could easily drop.
A number of macro factors are also at work, we have 2Q China GDP on Wednesday and Janet Yellen is giving the semi-annual testimony on the economy and markets tomorrow and Wednesday. In Vienna there is still no sign of any agreement with Iran in the nuclear talks and with the deadline of 20th July imminent there are worries that after that we will all be back to square one, I suspect there will be some last minute diplomacy…
As expected the IEA oil review was not dissimilar to the others, they also see the 2H 2014 supply and demand situation being quite tight and go as far as saying that “supply risk from the Middle East and North Africa remain extraordinarily high”. Again, with the others, they see 2015 being a bit easier and with a further increase in non-Opec supply see the call on them down to 29.8m b/d next year.
An interesting development from HAL as they sign a JV with SPT Energy, a leading private Chinese oil services company. The JV intends to operate in the Xinjiang region and intend to enhance oil recovery using Halliburton’s expert fraccing techniques. Whilst in itself does not merit specific scrutiny, I have felt that for a long time the Chinese market for this type of expertise will grow exponentially which is one reason I am such a fan of Hunting.
I recently visited Sound Oil’s operations in Italy that confirmed my positive views on the company which is building up a strong portfolio of producing assets to pay for the cost of running the Italian end of the operation as well as moving ahead on the larger exploration prospects. We met with key management and operational staff and saw the producing gas asset at Rapagnano and shortly to be producing Casa Tiberi, on site these were either modernised or brand new and tie in to pipelines only a few metres away. Whilst relatively modest, these producing assets are important, as I have said they cover most of the costs of running the primary office in Milan by providing useful cash flow.
The Italian operation is run by Luca Madeddu who was formerly with ENI as was his technical manager Leonardo Spicci, and their exhaustive knowledge of the country both from a hydrocarbon point of view and a political one is invaluable. In terms of working the assets and maybe more importantly gaining the permits, having these experienced local experts is a real plus for Sound. Although the producing assets are important and pay the bills, the excitement and of course the potential upside comes from other assets such as Nervesa, Badile, Zibido, Laura and Santa Maria Goretti. Having ticked a number of boxes already this year by farming -out Nervesa, raising money from Continental Investment Partners and opening a data room for Badile Sound are well on track to deliver excellent returns to shareholders.
The drilling programme for the next eighteen months is exciting and even allowing for the inevitable delays I expect to see appraisal wells at Nervesa, Laura and Santa Maria Goretti and exploration wells at Badile and maybe Zibido. The latter two are in the same block and might therefore live or die together but if Badile was to come in, it would indeed be a company maker even if a likely farm-out was to happen later this year. I would expect some sort of farm-out of Badile and opportunities to finance any development would be possible via reserve based lending or via innovative debt, either way following the achievements earlier this year the company is in the strong position of being fully funded for the entire drilling programme.
So, the visit has reassured me that the asset base is strong and the drilling programme is fully funded. Costs are under control and in Italy all covered by existing or near term production and the upside is substantial particularly if Badile were to come in. Management is excellent at all levels throughout the company and I was most impressed with the team in Milan. With so much downside protection and potential for upside if results go their way Sound looks like a very decent prospect to me, the shares are actually below my low end valuation and significantly below my top end which would be huge if Badile were to come in, and that’s assuming they farm some of it out. It stays as a buy and although has rallied after all the good news I reckon the best is yet to come.
Gulf Keystone- Be careful what you wish for…
Its the AGM this week and after all the comings and goings at GKP shareholders could be forgiven for wanting root and branch changes in the company’s board. With the demise of most of the M&G four and the change in role for Todd Kozel it is easy to consider whether he adds value to the company any more and even whether the noises purported to come from the KRG oil Ministry are even genuine. GKP shareholders are right to feel that they might have been at best misled or at worst lied to but at this time I think they all, retail or institutional, should think carefully about the future. I have no side here at all but I do feel that GKP has come a long way and although the process has taken way longer than we all expected, me as guilty as anyone in this respect, there is still value there albeit somewhat opaque. The big question is whether this is enhanced by getting rid of Todd and his alleged close relationship with Dr Ashti. I am lucky enough to have spent time out there and seen the ministry at work and I happen to believe that the relationship is as genuine as it is fragile and accordingly shareholders might think twice about replacing him, it may create a value moment but as ever one should be very careful about what you wish for.
The World Cup finally finished last night with a deserved win for Germany who just about got over the line, I say just about because Argentina had enough clear cut chances to finish it off before extra time even came along. Much as I love him I’m not sure Lionel was the golden ball but it is a great compensation for him if any is possible. Today Scolari joins the bonfire of managers getting the bullet post the tournament which comes as no surprise.
So LeBron James is heading back to Cleveland where the odds have shortened massively following his signature, almost as much as Miami lengthened…
The cricket petered out into a draw on a shocking pitch prepared at Trent Bridge. With so many clubs now qualified to host tests and not enough to go round, to have produced two shockers in a row should incur a deduction of maybe one match which if it was an ashes game might concentrate the mind of the groundsman…
Justin Rose goes into The Open on a high having won the Scottish one at Aberdeen, Rory M was all over the place as ever and a bet on him for this week might be rewarding but not for punters of a nervous disposition.
Finally it is Bastille Day today so time to remember the revolution and plenty of blood in the streets, a bit like the AGM at Gulf Keystone I suppose…