Headlines
• Oil Market Comment: 2016 will be a transitional year for the industry, not least because there likely to be casualties, but we believe that it will also be the year that sees the start of what we have previously stated that “this leg will be seen as a relatively short lived down leg in the context of an upward saw tooth growth pattern,” but the one thing you can always guarantee with oil price estimates, that they will be wrong – its more about the direction.
• Jersey Oil and Gas (LON:JOG) – Farmout Good News – We Think: We believe that this is the start of what will end up being an increasingly active year, not just for the Company, but the wider industry.
Oil Market Commentary
The oil price continues to be an issue for the industry (if not the wider economy), with market fundamentals seemingly providing headwinds to a higher price. Against this back drop there is increased tension in the Middle East, heightened by Saudi Arabia's execution of the cleric Sheikh Nimr al-Nimr.
While we believe that it would be a brave Iran that would attack shipping in the Arabian Gulf, the Straights of Hormuz are an obvious strategic strength for Iran, and the county's more fanatical wings have always threatened scuppering shipping to block the shipping lanes. Consequently, the question for Iran is whether the desire to inflict economic havoc on Saudi Arabia is greater than the isolation that it will endure if it acts against the rest of the world in such a way.
In this respect, the UAE is a key strategic partner. While the "Arabian Gulf" pipeline to Fujairah is not sufficient to carry ~10mm bpd of crude, nor is the port able to cope with such a volume, the engineering required to build such an undertaking is well known and understood, to such an extent that it can realistically be deemed a "cookie cutter" operation. The key question is time. But here too there is optimism, as there is a lull in demand for engineering services and spare capacity, and spending on this scale would be (in our estimate) 25 – 30% lower than otherwise would have been the case.
We believe that the current price is unsustainable for a number of reasons, not least the fact that it will need to be higher to enable the cost of the social programmes in the Middle East to be met. We are in the process of finalising our oil price outlook and expectations. However, we are certain that the oil price will rise from these levels, it is inevitable given the wasting nature of production and the lack of investment over the next 2 years, the question is one of when and from what level.
Unfortunately, whether the oil price recovers isn't now the issue, the question now is timing, and the havoc it wrecks in the meantime. Over the last year we have commented that the unwinding of futures contracts and the persistence of the low oil price environment will conspire to undermine the outlook for the sector:
…forward supply attrition [created by natural decline and lack of investment] will increasingly weigh on the psyche of the oil market and push oil price towards $100/bbl mark, and beyond…
…but what is in question is when, not if.
In this respect, cash is more king than ever, and with a number of investors (peers and equity players) having waited the unwinding of the futures contracts, the impact of the debt follow through should start to see increased opportunity for M&A in the market.
2016 will be a transitional year for the industry, not least because there likely to be casualties, but we believe that it will also be the year that sees the start of what we have previously stated that “this leg will be seen as a relatively short lived down leg in the context of an upward saw tooth growth pattern,” but the one thing you can always guarantee with oil price estimates, that they will be wrong – its more about the direction.
News Items
Jersey Oil and Gas (LON:JOG) – Farmout Good News – We Think
The Company has today announced that it has completed the farmout of Blocks 14/11, 12 & 16 to Azinor Catalyst, with Azinor taking its 50%. However, outside of the cash consideration, we are uncertain as to how the Company retains ongoing interest in the Blocks’ upside; we assume there are further milestone payments or some form of participation in the revenues.
We believe that this is the start of what will end up being an increasingly active year, not just for the Company, but the wider industry.
We may provide a further update on one, or all, of the stories above later today. However, if there is anything that you would like to discuss, please feel free to contact us