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The Pay Zone

Malcolm Graham-Wood (Malcy) is the Oil and Gas advisor who started his City career as a trainee analyst at Wood Mackenzie and then cut a swathe through a number of broking houses, all the time building up his knowledge and love of the upstream oil and gas industry including the service sector. Although he is a big fan of the sector, Malcy is not one to hold back a negative opinion if he believes it is warranted. He makes for an interesting lunch companion and is a regular confidante of Chief Executives and institutional investors. Here you’ll find Malcy’s reaction to oil sector news as it arises. Subscribe to Malcy’s Daily and Flash Blogs delivered – free of charge please click here

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The Pay Zone Oil Price: Total, Kurdistan, Shell, BG, Afren, New Guinea Energy, And finally.....

October 31 2013, 12:56pm
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WTI $96.69 -1.51 ; Brent $110.19 +1.12 ; B/WTI Diff - $13.50 +2.19 ; Natural Gas $3.63 +14c

FOMC came in with no surprises, actually it would have been more than a surprise if something had of happened, much made of ‘lack of statistics to work on’ as the Fed tweaked the politicians.

Oil Price 

As predicted, WTI and Brent are at odds with each other especially after the EIA stats confirmed the previous night’s API numbers. Inventory of crude oil built by 4.1m barrels compared with the combined intelligence of Wall Street predicting 2m barrels, again they are probably whooping with joy only being 50% light. WTI fell again as internal oil production continued to rise and refinery demand remained weak although that will change as winter onsets and refinery runs increase.

The continued shortage of Libyan and Nigerian crude is holding Brent up but even that doesn’t look so clever and for choice if the differential closes it will be due to selling of Brent.

Total (NYSE:TOT)

Not a bad set of figures from Total as a number of major projects started up and made it possible for the company to reduce near term capex, something that is dear to the markets heart at the moment. Although upstream was good, the company was unable to avoid the rigours of the downstream environment and reported a poor quarter.

Total/Marathon/KRG +Possibly other Kurdistan players……………..

Perhaps more interestingly is the discovery announced by Total this morning on the Harir Block in Kurdistan. The Mirawa-1 well has been announced as a discovery by the consortium ( Total 35%, Marathon 45% Operator, KRG 20%) AS ‘significant oil and gas columns have been encountered with gross intervals of 300 metres of oil and 800 metres of gas shows in the Jurassic and Triassic respectively. The oil was 39-45⁰ API and flowed at 3,200-3,900 b/d whilst the gas flowed 20-30m mcf/d with 1.700 b/d of condensate into the bargain.

The key thing here is that this consortium has said that ‘this discovery is very encouraging and demonstrates that our strategy to grow in this very prospective region is on the right track’ according to Total. It has long been my view that the region will only truly become a significant oil province when some of the majors make discoveries that are meaningful and make them want to stay, this could be it that discovery.

What is interesting is that none of the other, smaller and earlier players in the region, who took the initiative and the risk at the beginnings of Kurdistan exploration have reacted favourably to this news, it will surely lead to rationalisation in the region, you have been warned!

Shell (LON:RDSA)

3Q figs from Shell appeared a bit light but like most of its peers, lower realisations had a negative impact upstream and likewise downstream was pretty grim where weak margins persisted in the sector. Unlike most of its competitors, Nigeria had an adverse effect at the operating  level and the group describes this as ‘challenging’ and I suspect the operating environment isn’t changing for the time being.

At the moment the market like oil companies that cut back on expenditure and pay out big dividends and although the Shell pay-out is hardly parsimonious others are preferred. This is fine if you want a shrinking vehicle that doesn’t participate in excellent investment opportunities, Shell is managing to combine substantial dividends, share buy-backs and  investing in major oil and gas projects around the world that will give more certainty to cash flow, certainty that is missing in a particular peer.

The only thing that worries me short term is the chart, which I have mentioned a number of times recently and you don’t have to be a chart wizard to see the continued lower tops and bottoms, next resistance appears to be 2072p…

BG (LON:BG.)

At last the market were expecting a fall in production and didn’t panic about today’s fall, just think how much bother could have been saved if the old investor relations bloke had still been in place last year!

The negatives were well telegraphed, Egypt of course and in the US, upstream volumes are down as BG reduces drilling commitments and North Sea maintenance was in full swing.

On the good side, Brazil continues to exceed expectations and the first three FPSO’s produced around 160/- b/d in the quarter and the development is going better than planned. In Australia everything too is going according to plan and entering the commissioning phase with gas already flowing into the collection header system. 

LNG volumes were mixed with Nigeria and Egypt down but the Far East more than added to the process and is expected to continue longer term.

I have maintained a very positive view on BG this year and I continue to believe that the market not only got it wrong last year but has yet to appreciate the true value of BG, if I see one newspaper tomorrow valuing BG on a P/E basis tomorrow I shall scream……….

Afren (LON:AFR) From Daily Flow Test – Dougie Youngson 

IMS this morning has shown strong financials driven by guidance beating production which has come in at 48,573boe/d and an increased contribution from FHN.

There were two positive drilling updates. Firstly, Simrit-3 has flowed at a cumulative rate of 6,293bbl/d which backs up the previously announced Simrit-2 cumulative flow rate of 19,641bbl/d. And secondly the sidetrack of the Ogo-1 well in Nigeria is now entering the testing phase. The Lekoil announcement hints that the structure could be larger than previously thought.

Drilling continues at Maqlub-1 in Kurdistan and El Kuran-3 in East Africa. We would expect results in the short term from these two wells.

Our key concern continues to be the absence of any 2014 production guidance which we expected an update on today. Production from Ebok will go down next year and with only limited production coming from Kurdistan we expect production to be significantly less next year.

Shares will react positively this morning, but investors need to be cautious regarding Afren’s prospects for 2014.

New Guinea Energy – From DFT – Joe Stokeld

New Guinea (NGE) has released its quarterly report to the end of September. Within this the company announces that its 50% JV, Western Drilling, has signed a contract for the use of the SL 7 Heli Rig and camp within Papua New Guinea. Terms have been agreed for a single well which would see the Rig deployed for c150 days from Q4, with an option to extend for another 150 days if a second well is pursued.

Elsewhere, the company continues seismic planning at the PPL 267 licence and is progressing farm out negotiations for some of its 100% owned licences. NGE has also re-engaged other parties in connection with the possible acquisition of its interest in PPL 269, after Esso choose not to proceed with its proposed US$40m acquisition.  

Overall this is a positive update. The value of the Western Drilling contract and any dividends NGE could receive is not stated, however this revenue will likely make a welcome addition to the company’s current cash position of cA$5.8m.

And finally.....….Firstly a big get well soon to Ted Williams who I am told is in The London Bridge Hospital, I may come round and present on the sector mate!

In Australia, England’s cricketers started badly against a local team and the bowling was atrocious, pie-chucking indeed as oppo was 369-4 at the death. Talking of Australia, yet again they set India a huge one day total  which they ran down easily!

In the World Series the Boston Red Sox set Fortress Fenway alight after their first win there in 95 years in the finals, 4-2 up with one to play, that game will be a celebration!

Its Halloween in case you hadn’t noticed………………… I got so sick of the trick or treaters at Halloween that I turned the lights out and pretended I wasn't in.

Forget the ships. My lighthouse, my rules.