Posted by Malcolm Graham-Wood - Malcy's Blog
WTI $65.51 +$2.09, Brent $71.04 +$2.39, Diff -$5.53 +30c, NG $2.66 -4c
Oil prices are up over 5% in the last two days for a number of differing reasons. As I noted yesterday there appears to be some degree of conciliation in the tariff wars between the USA and China but don't hold your breath. Much more important is the jacking up of bad relations between international powers over Syria, importantly bad as no one appears quite what to do about it. It seems that whilst further attacks by the US would be counterproductive there is a feeling over there that something has to be done in the lesson teaching department so expect military reprisals sometime soon. In addition to this, the fact that Iran is on the other side presents the Donald with an easy target, if he wasn't going to abandon the nuclear deal before, it is now a certainty which brings with it sanctions and potentially reduced Iranian exports.
The EIA are first out of the blocks on the monthly front and the STEO which this month also contains the Summer Fuels Outlook is laden with genuinely interesting facts about the industry. In a mainly bullish piece the only real negative is the slight rise in forecast US production for 2019 to 11.44m b/d but to counteract that the 2017 guess is down a touch. Better news is yet another upwards tweak in global oil demand, now up by another 90/- b/d to 1.79m b/d. It also gives me the first chance of the year to mention the US driving season which you know how much I love…This year gasoline prices in the season ( I'm sure you know but from Memorial Day on 28th May to Labor Day on 3rd September) are expected to be up from $2.41 last year to $2.74. For the full year all grades average prices are forecast at $2.76 meaning that for the average American family spend of $190 fuel spend is going to be up 9%.
This combination of genuine demand increases and geopolitical tension probably means that those at least who thought that an imminent fall back to lower levels was likely will be proved wrong. Interestingly, and in WTI only, speculators have been taking a bit of money off the table in recent filings, that may be about to change…
Finally I can't finish this by saying something about the valuation of at least the UK oil and gas sector which has in no way kept up with any of the oil price moves in the last few months. With oil companies that I have spoken to recently confirming my views that since the 2014-16 price fall industry costs are down circa 70% or more, margins, revenues and profits for production companies are significantly higher and thus the value of most of these companies has increased substantially.
The DNO move for Faroe last week confirmed my long held view that it is at these times in the cycle that it can be cheaper to buy reserves in the Stock Market than go out drilling yourself, however cheap it is. This is not a complete list but the likes of Amerisur, EnQuest, Premier, Faroe, Genel, GKP, Ophir, Savannah, Serica, Tullow and of course those to whom these prices add materially to the P&L such as President, Range Resources and Trinity, not to mention those in the process of delivering major projects such as Hurricane or Rockhopper, done at low cost and high oil price economics. There has been little sign of institutional investment here for some time, those who have are the smart ones, there is much more to go for. And finally although I have picked out here companies with production, successful exploration is still going on with those cheap dollars and will also prove incredibly profitable.
Very good news from RRL this morning as they announce the final resolution of their historic situation in Colombia and they settle claims and disputes between ANH and the consortium of Optima Oil Corp and themselves. ANH confirms that there is no liability for payments or debts, all proposed penalties are lifted and the consortium waives any potential claims against ANH and terminates the three exploration licences. This is now subject to final court approval which is expected to take between 3 and 6 months. As I said, this is excellent news for Range as management successfully deal with another legacy issue from the grim and distant past.
Progress at Cabot continues with yet further production increases and whilst numbers remain relatively modest the economics are good and they are constantly beating their targets. Today's operational update gives April production so far of 950 b/d rising by 200 b/d through Q2, Q1 averaged 725 b/d which was down due to pipeline inspections and casing issues at a high rate well.
Cabot has a year end target of 1,600-2000 b/d with an average production of 1,000-1,200 b/d and the consistent build up of production shows that they are both technically and operationally doing very well. With this ‘strong platform' Cabot should be able to continue to develop its Canadian acreage very swiftly indeed.
Gulf Keystone Petroleum
Things are looking up for GKP and whilst catching up with management has not been possible for a long time there was at least a conference call this morning. If such a meeting does eventually take place, and I have again asked to see the impressive executive board I hope to add much more than today's brief note.
Today's figures show that a landmark first, since being in Kurdistan, post tax profit has been registered but also with the crude sales agreement a chance to start growing the company again. These plans have been in existence for many years but unable to be actioned until final discussions with the MNR have taken place, today's announcement suggests that such an agreement has completed and ‘moved the company closer' to such discussions.
So, a $14.1m net profit on production of 35,298 b/d against guidance of 32-38/- b/d is good but the guidance for this year is down sharply to 27-32/- b/d which I assume is just a conservative number as there is nothing in the new presentation that explains it. Operating costs per barrel are down from $3.5 to $2.8 which is impressive and the company has cash of $160m. It is worth looking at the chart in the presentation titled ‘development outlook' as this could be the long awaited unlocking of the real upside for GKP. On it the long awaited move to 40/- b/d and 55/- b/d is in the plan plus a potential 75/- and even 100/- in the longer term. Should even the first of these two plans become reality, and they seem closer than for a long time, my thoughts that GKP might return to a really proper valuation may actually be more than a dream…
Yesterday I noticed that Getech, a company I have recently started to look at had an AGM statement and 1Q update which reads very positively. Sales are in line but the 2018 pipeline seems larger and more diverse than before and the hope is that it will provide full year revenue above 2017 levels. The company has seen an increase in demand for data and information products for frontier areas, as well as in training and software, all appears to be looking up.
Below is my Monday Voxmarkets Podcast, you can see the companies I am talking about this week.
On a night of excitement at the Etihad the HubCap Stealers sealed a CL Semi Final place with a win over the Noisy Neighbours 1-2. What would have happened if a totally good goal had not been ruled off is anybody's guess and Pep spent the second half in the stands for his protests which were understandable given the shocking ref.
And to add to the good news for Scousers, Barca got knocked out by Roma after being 4-1 up from the first leg, tonight we will discover who else is in the semis….
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