WTI $81.12 -$1.08, Brent $86.24 -88c, Diff $5.12 +20c, NG $3.83 +4c
Oil prices came off yesterday after what has been a pretty steady week by recent standards. The US GDP figures were a touch better than expected and combined with the Fed’s chatter the day before produced a rise in the dollar which never helps oil. With the price of Brent being about the same as the beginning of the week traders have reported that the market has felt a little better this week but….
Early estimates of October Opec production are coming in and if they are to be believed it was another big month. I have so far had a number of 30.9m b/d which would be a 14 month high and up on September’s figure. With Saudi output down slightly it means that everyone else is doing what comes naturally to them, ie belting out as much as possible before the Opec meeting.
And the European Union, with much to play for have secured a deal for Russian gas through Ukraine for the winter, sanctions aren’t that important really…
Range is still in the top three of contributions to my inbox and apologies if I havent had time to reply to all messages personally yet. Today has seen the 3rd quarter update which generally makes good reading, progress is being made albeit slowly but that is to be expected and we need another 6-12 months before we see if the remedial work can succeed. Total production was 668 b/d of which 566 was from Trinidad up 7% but still adrift of the 1/- b/d target now hoped for in the 1st half of 2015. With the US loan completed it is being drawn down and work in Trinidad should be picking up with 3-5 development wells in the 4th quarter and planning work with LandOcean under way on a couple of projects. Rig-wise, 2 are drilling, 2 are operational awaiting permits, 1 is in short-term maintenance and 1 in long-term maintenance. Revenue was up 11% and there was a 50% reduction in admin costs, if you saw my interview with CEO Rory Scott Russell on TipTV lately you will know how appalled I was when I saw the G&A costs for last year so any improvement can only be welcomed. Overall, slow but steady improvements are happening at Range which the patient should see coming through in the share price in the medium term.
I started to look at Velocys some time ago, I had a conference call with CEO Roy Lipski which impressed me, following a bit more work I managed to get a personal interview with him to go through the concept and the detail of the business. Since then, and that was only in September much has happened and a stock I wanted to buy at 230p fell to 160p before recovering to today’s 187p.
When I first looked at it, like a lot of people I guess, I assumed I knew the business because I knew a bit about GTL, after all I have visited Shell’s Pearl plant in Qatar and seen how Sasol make it work too. The difference between what Velocys do and those others is significant and in a way makes me even more positive on the company. As I see it, the key is that the technology is now able to be commercial on a small-scale basis which to me opens up a massive potential market for the company. This also means that whereby the bigger GTL might use a 35,000 b/d minimum going up to 100,000 b/d small-scale GTL might use as little as 1,500 b/d. For if you have stranded gas, and I understand that as much as 30% of the worlds discovered supply is uneconomic, then this might make existing projects work, let alone ones that havent got off the ground for that reason. Also in this category, and thus finding their way onto the Velocys radar, would be where flaring or re-injection is prevalent or where emissions are controlled. Thus I see a huge market which is not negatively affected by lower commodity prices, (there is actually an argument which goes that working with small-scale GTL may actually be beneficial at lower prices) can be accessed by such a company with its market leading technology and solid patent protection. This has recently been endorsed by the High Court who ruled in favour of Velocys against CompactGTL and issued an injunction against the latter.
So, we have established that Velocys has the technology and the patents and we also know that it has significant support from its major commercial partners who have backed the company in a number of different ways. These companies range from WM, NRG and Ventech in the US to British Airways and a host of technology licensors and field services operators. But small-scale GTL doesn’t just work with gas, it is a perfect way to convert biomass and can use coal as well thus again significantly increasing the available market. The next thing the market wanted to see was the construction of the first commercial plant successfully using the technology and that is now underway at Waste Management’s East Oak landfill site in Oklahoma with NRG and Ventech. Success here will further de-risk the process and show that the technology for small-scale GTL works and I see many follow on operations in the coming years. The next success was the vicarious good news brought by the award of a $70m grant to customer Red Rock Biofuels to construct a biomass-to-liquids plant in Oregon.
Just after I met with Roy Lipski the company announced that it had raised £52m in a ‘significantly’ oversubscribed placing at a 225p, at the time a small premium to the market price. This demonstrates that the company has solid and supportive shareholders and new major institutions came in at that time as well. I have checked out the major holders and they are very blue-chip, comprising good quality institutions and top names from a wide range of international markets. The fact that this support was given to Velocys and at a price way north of here is very positive as the company has clearly got the right backing and now is strongly financed for the pending years of growth.
The financials are quite difficult as one might expect for a company such as Velocys with so much in the way of R&D and at this stage of its development. I am quite glad that I come to the company now as it is nothing like the act of faith it must have been two or three years ago. For what its worth I have put in further orders continuing in 2015, building strongly thereafter. This gets me modest revenue next year becoming more meaningful in 2016 and with it some operating profits that year. After that revenue, profits and earnings should pick up dramatically in 2017 and beyond which should make the wait worthwhile. The investors are clearly aware of this and all are of a long-term nature, some of them have held the stock for a long time and understand the process.
To sum up, Velocys is a high quality company with excellent management and a strong, experienced board. The market it is in is potentially huge and doesn’t depend on commodity prices being high or low, it is benefited by increased emissions legislation, including that of flaring gas and so is a net gainer here. It has proprietary, patent protected processes and JV’s with some of the worlds leading companies in a technology it controls, what’s not to like about it? It is well funded by supportive shareholders who have only recently cemented the near and medium term future for the company, I am convinced that it will be a rewarding albeit long-term investment from these levels.
As I write I notice that Exxon have just come in with earnings of $1.89 which cruises past the whisper of $1.71, will add more later if appropriate…
I notice in today’s press that Shell has been generally commended for appointing Chad Holliday as its new Chairman, a view I concur with. One of the drawbacks for Shell in the past has been that it has been too inclusive and not outgoing enough. The appointment of BvB and now Chad H has opened the company up and of course, while disappointed not to get the CEO job, Simon Henry is in my view a brilliant CFO.
As is often the case, any comment about Gulf Keystone normally infuriates readers and swells the inbox, yesterday was no exception, if anything more than ever, including irritating the company. I should try and make clear what I tried, obviously unsuccessfully yesterday, to say. Referring to the the potential sale of its 20% stake in Akri-Bijeel I said that I understood it that the asset was for sale but now the line was that ‘all options are being reviewed’ which was confusing. What I was trying to say was that as far as I am aware this asset has been up for sale for the best part of two years now and that saying it was ‘up for review’ now rather complicates things. That’s all, no inside knowledge, no insult intended and nobody died, its a blog…..
Its Halloween which I have never really got, after all we spend all year telling our kids not to take sweets from strange people then tonight they will all be sent out in the dark to knock on the doors of complete strangers and ask them for sweets….
Rugby this weekend is concentrated on the Aussies at Twickenham to play the Ba-Ba’s, apparently Quade Cooper and Will Genia are going to play as first choice half-backs. All the talk this week is about Sam Burgess now that he has switched codes and when fit might play for England in the World Cup, bring it on I say!
Some good football this weekend with the standout fixture being the Red Devils going to the Noisy Neighbours for Sunday lunch. The Happy Hammers go to see the Potters and a London Derby with the Super Hoops going to Stamford Bridge. The Tigers will want to keep up their run by getting something from the Saints and the Magpies who are playing a bit better might fancy their chances at Anfield. On that subject i notice that Stevie Gerrard has had to announce that he may have to leave the HubCap Stealers next year as their is no sign of a new contract from the American owners of the club, as good a way as any of tweaking them I would say…
Putting in the hours on the junior tour competitions has paid off for Muzza who is now guaranteed a place at the O2, his mum may not be able to come and hold his hand though as she is still in Strictly…
And with only three Grand Prix to go, although four lots of points Hamilton will be looking to increase his lead over Rosberg in Austin Texas this weekend, i hope that a number of my oily friends from Dallas and Houston will be attending…