Headlines
- Oil Market Commentary: That said, as European energy demand starts to grow, there will be greater confidence in building in spare capacity to supply into the spot LNG market, hence the global gas market will grow, albeit slowly, which means as European sourcing patterns shift at quicker rates, that the spot LNG market will be increasingly squeezed.
- Caza Oil & Gas (LON:CAZA/TSE:CAZ) – Dilution Begins: We believe that the Yorkville facility is only the start of the refinancing process, and management need to make it clear to the Company's owners what the next stages will be. Regardless of the immediate next steps, it is certain that further dilution is inevitable.
- Falcon Oil & Gas (LON:FOG/CVE:FO) – So Far, So Good: We believe that this is good news for the Company and a step forwards on the road to commercialisation. However, with this is the fact that investors need to temper caution, due solely to the long lead times associated with the wholesale development of shale, which will be set against the headwind of it being in a market that is already awash with gas. Watch this space.
- Exillon Energy (LON:EXI) – As The Freeze Comes, Production Should Rise: This is a neutral update for the Company, but one we are taking the opportunity to say that we believe that as long as the management team pledge to act for the shareholders as a group, and the main shareholder maintains his commitment to the UK listing, that we believe that this company could be the next Imperial or Hurricane.
Oil Market Commentary
It does bear remembering that the oil price, on an adjusted basis, is trading at, or near, historic “real” lows, such that the recent $120/bbl highs are equivalent to $30/bbl in 1980s. Consequently, to see prices at ~$42/bbl is equivalent to sub $8/bbl in 1980s, and arguably providing significant impetus to the global economy in real terms. This needs to be set against a backdrop of a higher E&P cost environment, which cumulatively is starving the oil and gas business of revenues sufficient to continue to invest in the projects that make a significant difference to the global supply/demand balance.
We have said previously, but forward supply attrition will increasingly weigh on the psyche of the oil market and push oil price towards $100/bbl mark, and beyond; we continue to believe that the oil price will peak at ~$125/bbl, but what is in question is “when”, not “if”.
We have based this not on rational supply/demand metrics, but supply concerns which, when contrasted against the growing demand (oil demand is an inelastic demand driver), could well precipitate the kind of sharp increase in the oil price that we experienced on the downside, i.e. that it could be as swift as it is savage.
The fact that recent ordinarily price deflationary news has resulted in limited movement, to our mind underlines the fact that we are entering the transition phase between demand side control, to supply side control of the oil price. As this balance transfers from the demand side, we would expect to see increasing volatility in the oil price, especially as it approaches the “tipping point.” We do not believe that we are too far away from this point currently, as we have seen increasing swings in volatility.
What is clear is that the “stressors” in the oil markets are growing and, given that a lack of investment will only see supply decline, we do not see those stressors resulting in the low oil price environment that many speak of but, as history will judge, a hiatus in a return to the norm of the $80 – 100/bbl range.
The gas markets, however, are more difficult to call, as the market is not as deep, or liquid, and the investment cycles considerably longer. Here, however, is the growing realisation, in Europe at least, that Russia, which supplies 40% of European demand, is not averse to politicising its natural resources to achieve its aims with a concomitant need for the West to diversify supply sources.
Against that backdrop, as with the oil price, we see higher prices for gas ahead too, and while Henry Hub is a liquid pricing point for the US, like the WTI price, it is no longer the barometer of what is occurring globally due to the market domestic supply balance in the US.
In this respect, the European market is a good proxy for a balanced supply market, but the real barometer for pricing in the global gas market is the Japan Korea Marker (JKM) price, which is currently trading at ~$8.007/mcf and, although it is down 25% year on year, it is up >10% in the last 3 months alone.
Given the fact that LNG facilities have significant lead times require very large investment before first shipment of volumes, such that the majority of the resulting supply has to find a home at a preordained price and preferably identified before FID, which tends not to develop a deep and liquid spot market.
That said, as European energy demand starts to grow, there will be greater confidence in building in spare capacity to supply into the spot LNG market, hence the global gas market will grow, albeit slowly, which means as European sourcing patterns shift at quicker rates, that the spot LNG market will be increasingly squeezed.
News Items
Caza Oil & Gas – Dilution Begins
Today's news shouldn't come as a surprise as it have been well flagged by management previously. Whether this will ultimately be enough to secure the Company's future is ultimately up to the creditors, but rather paradoxically, the latest downward leg in the oil price could actually help in this respect. As long as the creditors believe that they will have a better deal by keeping the Company afloat and the asset within it, then the Company has a chance at having a future, and therefore the Company's owners having some value.
To do this, however, it will require a dedicated management that puts shareholder value at the centre of its operating philosophy from this point forwards. Consequently, this news should also be accompanied by a rationalisation of administration costs - management needs to start to share the pain of the equity holders.
We believe that the Yorkville facility is only the start of the refinancing process, and management need to make it clear to the Company's owners what the next stages will be. Regardless of the immediate next steps, it is certain that further dilution is inevitable.
Falcon Oil and Gas – So Far, So Good.
News that the prospective shale series has shown uniformity over such a small extent isn't necessarily such big news, especially as the B Shale series is pervasive over the basin, but it is reassuring to have the initial findings confirmed. What is key now, and essential to turn what is currently a well of scientific interest, into a well of commercial interest, is a successful fracking programme.
As has been evidenced by other countries that have touted their shale credentials, finding a shale with potential doesn't seem to be the hard part, but being able to access the hydrocarbons due to a mix of subsurface and topsides issues that need to be overcome is the largest hurdles. Still, that's the future and the Australian outback doesn't have the same issues that Europe has.
Also set against this, is the fact that Australia has a surfeit of gas from conventional resources which have remained undeveloped for 40 years, albeit the majority being offshore.
We believe that this is good news for the Company and a step forwards on the road to commercialisation. However, with this is the fact that investors need to temper caution, due solely to the long lead times associated with the wholesale development of shale, which will be set against the headwind of it being in a market that is already awash with gas. Watch this space.
Exillon Energy – As The Freeze Comes, Production Should Rise
Today's production report continues to detail a decline in produced volumes, but this shouldn't be a surprise as the Company is restricted to being able to only undertake minor interventions due to the need for ice roads, or all weather roads constructed during the winter, to move heavy plant in the summer.
We believe that the next stage for the Company is to outline the next stage of the Company's growth, and what plans it has for looking at leveraging off of the current operating environment to gain bulk ahead of what we believe will be an inevitable upswing in the oil price (see above).
Elsewhere for the Company, there is still the nagging doubt that the main shareholder will take the Company private, and return it to the Kusar Oil Company it started as, but we believe that there is more value for the Company's main shareholder to be had being a listed entity, especially as having liquid traded paper provides excellent currency for transactions, of which there are starting to be many in Russia, and of decent size too.
This is a neutral update for the Company, but one we are taking the opportunity to say that we believe that as long as the management team pledge to act for the shareholders as a group, and the main shareholder maintains his commitment to the UK listing, that we believe that this company could be the next Imperial or Hurricane.