As I mentioned on Monday, this week sees the publication of the short term outlook forecasts from all the major agencies. The IEA thumped the market yesterday by pouring cold water on most bullish scenarios such as non-Opec cooperation, a weak dollar and lower than anticipated Iranian production. They suggested that Opec were ‘unlikely’ to cut a deal with other producers and that prices were likely to fall as global supplies increase. In its STEO, the EIA said that demand in 2016 would be trimmed from an increase of 160/- b/d to 110/- b/d thus increasing stocks. The EIA for what it’s worth are forecasting Brent and WTI prices of $38 and $50 in 2016 and 2017 respectively. US production was 9.4m b/d in 2015 and is expected to be 8.7 and 8.5m b/d for 2016 and 2017.
I have in recent months pointed out that the Opec policy of going for market share and driving out high cost production has resulted in an indiscriminate annihilation of some producers, not necessarily outwith Opec itself. Indeed the moves by countries such as Venezuela have rather proved this point. I have also suggested that it hasn’t been US shale that has blinked, rather the cutbacks in capex by the oil majors that has taken the sum of as much as $400m off projects scheduled for the next few years. IP week brings with it a number of opportunities for speakers to make slightly more longer term observations some of which I would certainly concur. On this basis I would point out the comments by Eni who have said that ‘global upstream capex has been reduced to dangerous levels’ and also an interesting suggestion from the IEA. They have said that despite the global slowdown, oil demand grew by 20% in 2015 and forecast a rise of 15% in 2016, indicating that we are storing up a substantial problem for the future as demand will continue to grow and production will fall sharply…
Tullow results this morning which shouldn’t really come as much of a surprise but the conference call seems interminable and is going on in my ear as I write. I have become more positive on Tullow recently as despite the significant debt burden I feel that the company was one of the first to get to grips with its business across the board. With production last year of 73,400 b/d and guidance of 73-80/- b/d which includes ups and downs for Jubilee and TEN and further cuts in Opex, the outlook, even at this oil price remains solid. TEN will come onstream in 3Q 2016 giving substantial flexibility on capex as well as booking more reserves and cash flow. Negotiations with the banks in March will be routine but an opportunity for the banks to look at the company’s debt capacity, given the profile of the price decks and upcoming production. The capex cuts are significant, after TEN the number which has been very high lately falls dramatically, guidance today by the company is that it may be as low as $300m next year.
Tullow has tidied up its assets and has reasonable headroom for the foreseeable future. Much less exploration and therefore less opportunity for development spend gives them flexibility but they have still got a reasonable portfolio if and when the market picks up. I am minded to believe that albeit from an almost impossible position the company has indeed made itself ‘fit for the future in a low price environment’ and would therefore, at least for the time being, give it the benefit of the doubt.
On Monday lunchtime Circle popped out an operational update of a rather mixed nature but it has at least for the time being reassured shareholders that all is not lost. A new GSA for Sebou in Morocco with Porcher at reasonable prices, has been signed and Porcher will pay for a pipeline extension. Less good news in Tunisia where the farm-out is still awaited and Egypt also has its problems, some infill drilling but EGPC payments are ‘uncertain’. Slightly more concerning are the comments about the finances, discussions with the IFC to ‘rightsize’ the balance sheet are ongoing but the company still say that the financial position and cash flow are under ‘significant pressure’. I get the impression that the financing process is slow rather than impossible so the market will watch with interest how it comes along.
More news yesterday from Sound who are able to announce some early production numbers from Nervesa now first gas is flowing. At present they are producing 1.0 mmscf/d in the daytime and 0.7 mmscf/d in the nighttime if that makes any sense! The company expect to ramp up to 1.8 mmscf/d in due course which will provide very agreeable cash flow. With so much news out recently and particularly in Morocco much is happening at Sound and the future is most exciting.
I had the opportunity yesterday to catch up with Cath Norman and Gordon Ramsay of Far Limited, appropriately after their recent announcement. That stated that they had increased 2C contingent resources in Senegal by 42% to 468m barrels and that is not including the current appraisal programme. The programme should almost certainly deliver more good news as SNE-2 had a successful flow test that was choked back and might have been more, indeed the thin sands above the reservoir may be crucial to confirming deliverability. The JV is currently preparing for a DST of SNE-3 which bodes well for the process and a good flow rate here would be further good news. Even better is that at present, the drilling programme is 28 days ahead of schedule and one couldnt rule out that at $1m a day there may be an opportunity for an effective ‘free’ 4th well. After that it remains to wait for the declaration of commerciality which can’t be far away.
Far is funded for all this and whilst one wouldnt want to jump the gun there is enough optimism in the already released figures to make a confident prediction that Senegal will deliver what IHS/CERA described as a ‘world class discovery’ and is likely the biggest oil find in recent years. Whilst some are playing Senegal through Cairn I have always been tempted to use Far as the vehicle, if you compare the existing finds and the estimated upside potential, it dwarfs the market cap of around A$250m, this is as close to a no-brainer as it is possible to get and is a lock away in my view even in current market conditions.
The price performance of Chesapeake on Monday, down 50% at one stage, was rather at odds with the company’s comment that it was not planning to go bankrupt. Given that it may not be in their gift it was probably a fair statement but some form of radical change at the company is inevitable. I am waiting for the ‘C’ word and in my mind that is capitulation but it may as well be Chesapeake…
Those fans who remember the FA Cup final where Lazarus like HubCap Stealers rose from the dead to snatch the trophy, will have had a modest amount of revenge as the Hammers dumped the Scousers out of this years cup last night in the last minute of extra time.
In the cricket, despite posting a record score, England were humbled as De Kock and Amla made batting look very easy. It is tempting to say that every game in modern one day cricket looks like a new record but England in the field looked very average.