Saudi Arabia Will Cap The Oil Price Rally

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The US said on Monday that it won’t extend the sanctions waivers for eight countries importing crude oil from Iran. The move could remove around 1.1 million barrels per day from the market.

Although Rystad Energy anticipated a further tightening of sanctions, the details in the announcement have led us to revise our forecast downward for Iranian crude production.

 

 

Rystad Energy forecasts that production will drop to 2.27 million bpd for the second half of 2019, reaching this level by July 2019, which equates to a drop of 0.43 million barrels per day (bpd) from current March 2019 levels.

The net effect for the oil market is bullish, as the market will lose more supply from Iran, mostly of medium-sour and heavy-sour quality.

“However, Saudi Arabia and several of its allies have more replacement barrels than what would be lost from Iranian exports in a worst case scenario. This should limit the positive impact on crude prices,” says Rystad Energy Head of Oil Market Research, Bjørnar Tonhaugen.

“Since October 2018, Saudi Arabia, Russia, the UAE, and Iraq have cut 1.3 million bpd, which is more than enough to compensate for the additional loss. However, realistic spare capacity will be cut significantly, reducing room for error in Libya, Nigeria, and Venezuela,” Tonhaugen added.

 

 

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Rystad Energy says that Iranian crude exports have dropped from around 2.5 million bpd in April 2018 to around 1.1 million bpd currently.

“In our new base case, we no longer expect India to buy Iranian oil after May 2019, and now only expect China and Turkey to continue purchasing Iranian cargoes. We lower our Iranian crude exports estimate from 900,000 bpd to 600,000 bpd from May 2019 onwards, allocating around 500,000 bpd of exports to China and the remainder to Turkey,” Tonhaugen remarked. Related: Solar Stocks Are Booming This Year

The density and sulfur content of the main crude grades exported by the “four cutters” –  Saudi Arabia, UAE, Iraq and Russia – are of similar quality to Iran’s main export grades, Iranian Heavy and Iranian Light.

“Saudi Arabia, Russia, the UAE, and Iraq will have no problem replacing Iran’s crude grades, such as Iranian Heavy, Iranian Light, and West Kharoon,” Tonhaugen said. “We believe that Saudi Arabia has ample capacity of Arab Light especially, which is a grade of similar quality to Iranian crudes, due to the current production cuts. Russian Urals and Iraq’s Basra Light is also comparable to Iranian crude quality, while UAE’s main export grades are somewhat lighter and sweeter than Iran’s.”

 

https://oilprice.com/Energy/Crude-Oil/Saudi-Arabia-Will-Cap-The-Oil-Price-Rally.html

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Oil Majors Eye New Acquisition Targets In The Permian

By Robert Rapier - Apr 25, 2019, 5:00 PM CDT

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Following the news that Chevron had agreed to pay a nearly 40 percent premium to acquire Anadarko Petroleum, investors quickly bid up the shares of other potential acquisition targets.

As I argued in the previous article, I believe the Permian was the key to the Anadarko acquisition, but there are plenty of other targets in the region. There are also several companies with the capability of making acquisitions.

 

 

In recent years, the few mergers and acquisitions in the oil and gas industry have been largely focused on the Permian Basin. The supermajor integrated oil and gas companies have been increasingly making forays into the Permian.

In addition to Chevron’s new acquisition, in 2017 ExxonMobil paid $6.6 billion to acquire Permian acreage from the Bass family of Fort Worth, Texas. ExxonMobil also spent $41 billion in 2009 to acquire XTO, which has a major presence in the Permian.

Permian Players

Today major acreage holders in the Permian Basin include the supermajors Chevron and ExxonMobil, as well as Occidental, Apache and Concho Resources. Occidental, in fact, reportedly attempted to acquire Anadarko prior to Chevron sealing the deal. But Occidental may now find itself in the crosshairs of a bigger player looking to shore up their Permian portfolio.

 

 

But there are many other major producers in the region, including ConocoPhillips, EOG Resources, Pioneer Natural Resources, Noble Energy, Devon Energy, and Diamondback Energy. Smaller producers in the region include WPX Energy, Parsley Energy, Cimarex Energy, Callon Petroleum, Centennial Resource Development, Jagged Peak Energy and Laredo Petroleum.

Let’s first take a look at the largest companies operating in the Permian according to enterprise value. This metric is preferred over market capitalization, because it includes a company’s debt. In the case of a potential acquisition, the acquiring company would be responsible for this debt in addition to the purchase price. Hence, it is a more comprehensive representation of a company’s market value. Related: Why Gasoline Prices Could Be About To Rocket

I have included the integrated supermajors that could have the ability to make major acquisitions, three of the larger exploration and production companies (which could make an acquisition or be a target themselves), and Anadarko for comparison. All data were retrieved from the S&P Capital IQ database.

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Metrics for major oil companies operating in the Permian Basin.

• EV – Enterprise value at the close on April 12, 2019 in billions of U.S. dollars
• EBITDA – TTM earnings before interest, tax, depreciation, and amortization in billions of U.S. dollars
• TTM – Trailing 12 months
• FCF – Free cash flow in billions of U.S. dollars
• Debt – Net debt at the end of the previous fiscal quarter
• 2018 Res – Total proved oil and gas reserves in billion barrels of oil equivalent at year-end 2018
• EV/Res – The value of the company divided by its proved reserves

Potential Buyers

Based on their size and debt metrics, ExxonMobil and Chevron still appear to be the most capable of pulling off a major deal. Shell has been moving in the direction of becoming a natural gas company, and has already made major capital expenditures in this area in recent years. Further, in 2016 they made their own major acquisition — a $70 billion deal for BG Group.  Meanwhile, Total hasn’t shown much interest in the Permian.

BP may not have an appetite for an acquisition as it continues to be weighed down by its obligations from the 2010 Deepwater Horizon oil spill. As an aside, the continued fallout from that disaster has also resulted in BP having the cheapest reserves on the books by far of any company listed in the table. Also note that the EV/Res metric for integrated supermajors isn’t directly comparable to pure oil producers like Anadarko, as the former also have midstream and refining assets.

ConocoPhillips appears to be the most attractive target for an acquisition from a pure valuation perspective, but as the largest pure oil company it would be a large bite for even ExxonMobil. With respect to making an acquisition, ConocoPhillips CEO Ryan Lance stated earlier this year that the company isn’t feeling any pressure to do so. Related: Survey: Canada’s Government To Blame For Oil Crisis

Occidental also falls into the category of potentially making an acquisition or of being acquired. On a relative basis, they are more expensive than ConocoPhillips, but on an absolute basis the price would be more manageable.

What about smaller players like Parsley, WPX Energy, or Cimarex Energy? Based on the price movement following the announcement of the Chevron-Anadarko deal, investors are clearly betting that more deals will follow. Below are some of the metrics of potential acquisition targets (with Anadarko for comparison), including some of the large players listed in the previous table:

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Metrics for smaller oil companies operating in the Permian Basin.

• 1-Day Change – Change in share price on April 12, 2019, the day the Chevron-Anadarko deal was announced

Note that the double-digit gains of both Pioneer Natural Resources and Parley Energy imply that investors believe they could be next on the acquisition list. Parsley looks attractively priced according to its enterprise value and total reserves. Several other companies stand out, such as Devon Energy and Cimarex, although all of these companies outspent their cash flow in 2018. An acquisition by one of the larger players could give them the efficiencies and economies of scale to rectify that.

Another name on the list that stands out is Diamondback Energy, which has long been one of my favorite Permian Basin oil companies. Diamondback has been an outstanding performer in recent years, but now looks to be the most richly valued according to several metrics following its 2018 acquisition of Energen.

The biggest challenge with the smaller players is that they may not have enough reserves to really move the profit needle for the biggest players. Laredo Petroleum’s 200+ million barrels of oil and gas reserves might not be sufficiently appealing to ExxonMobil, which had 24 billion barrels of reserves at the end of 2018. But it could be appealing to a company like EOG Resources, which closed the year with 2.8 billion barrels of reserves.

Ultimately, price and valuation are only part of the equation. Anadarko wasn’t the cheapest acquisition target for Chevron, but Chevron liked the synergies of Anadarko’s locations. Thus, every major operator in the Permian is more likely to acquire companies whose properties are adjacent to their own. A deeper dive thus becomes an exercise in not only value, but in studying maps of the Permian producers — large and small.

 

 

https://oilprice.com/Energy/Energy-General/Oil-Majors-Eye-New-Acquisition-Targets-In-The-Permian.html

 

 

 

 

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The Index Investors Need To Watch In This Oil Rally

By Alex Kimani - Apr 25, 2019, 11:00 AM CDT

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For better or for worse, oil is the lifeblood of the global economy, with the commodity being the single most important energy source. And while the developed economies are its biggest consumers, emerging market assets can end up being the biggest beneficiaries.

Crude oil prices have enjoyed a fantastic rally so far this year, and received fresh impetus after the United States recently announced an end to sanction exemptions for Iran oil buyers by May for China, Japan, India, Turkey, South Korea, and others.

 

 

As that rally rages on, investors would do well to keep a close eye on the MSCI EM Currency Index.

This index has been a notable winner, producing double-digit returns during each of the three largest oil rallies over the past two decades.

Source: Philstar

 

 

 Let’s break it down by currency:

#1 Russian Ruble

YTD Change vs. Dollar: 7.8%

Source: X-Rates

As the world’s largest producer of natural gas, Russia’s economy is highly sensitive to O&G prices. It’s therefore hardly surprising that the Russian ruble is the biggest winner of the oil rally, with the currency having rallied 8.3 percent against the U.S. dollar so far this year.

The ruble has mostly recovered lost ground against the dollar after getting hammered last year due to the oil selloff and is now looking to replicate its world-beating gain of 21 percent from February 2016 to October 2018 during the last major oil rally. The leading EM currency has also been benefiting from record uptake of ruble-denominated debt and a robust current account surplus.

#2 Colombian Peso

YTD Change: 3.0%

Traders have been swooning over the Colombian Peso thanks to its qualities as a carry trade, higher oil prices, and a favorable political backdrop. Colombia’s relatively high interest rates make the currency a carry trade destination while a stable political and economic outlook are fueling enthusiasm for the country. Related: Saudi Oil Minister: We Won’t Ramp Up Oil Production Soon

After 50 years of conflict, the Colombian government finally struck a peace treaty with guerrilla group Revolutionary Armed Forces of Colombia, or FARC , and voted for a replacement for long-serving President Juan Manuel Santos.

 #3 Brazilian Real

 

YTD Change: -1.2%

The real is a tricky bet because of the country’s planned pension overhaul.

Brazilian stocks recently hit 3-month lows on signs of political infighting as well as fears that President Jair Bolsonaro might not be fully committed to consensus-building necessary to get lawmakers to pass the pension reform bill.

The biggest positive driver for the currency right now is the fact that it has become cheap.

#4 Turking Lira

YTD Change: -9.7%

Source: X-Rates

Turkey imports most of its crude oil from Iran and is one of the countries facing waiver exemptions by the United States. The nation has often lagged its EM peers whenever oil prices climb, which, coupled with the unstable political backdrop, make the lira a potential weak link.

 #5 Indian Rupee

YTD Change: 0.6%

Crude oil is India’s biggest import item, with nearly 15 percent of its GDP going to purchase the commodity. Indeed, India is the world’s third-largest oil importer and has posted trade deficits every month over the past five years. Consequently, the Indian rupee has been the most negatively correlated currency to crude prices over the past five years, essentially meaning that rising prices don’t bode well for the Indian economy.

Over the short-term, the trajectory of the ongoing elections is likely to drive investor sentiment.

#6 Philippine Peso

YTD Change:  1.6%

The peso was one of the worst performing EM currencies during the last oil rally. This time around, however, it seems to be holding up much better thanks to a more supportive domestic backdrop.

 

 

https://oilprice.com/Energy/Energy-General/The-Index-Investors-Need-To-Watch-In-This-Oil-Rally.html

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Iraq, Kurdistan To Discuss 50% Increase In Oil Production

- Apr 25, 2019, 2:00 PM CDT

The central Iraqi government will meet with its Kurdish counterparts soon to talk about oil exports from the now semi-autonomous region that tried to gain independence last year.

Reuters reported, citing Iraq’s oil minister, Thamer Ghadhban, that the two sides will also discuss the increase of oil production from the fields around the northern city of Kirkuk by as much as 50 percent.

The fields around Kirkuk, as well as the city itself, were until the fall of 2017 under the control of the Kurdish government, although the area was not officially part of the Kurdistan region. However, after the ill-fated independence referendum, which led to a strong reaction from Baghdad, the central Iraqi authorities regained control of the oil fields that account for a sizeable portion of Iraq’s oil total.

 

Around 300,000 bpd of crude oil previously pumped and exported in the Kirkuk province to the Turkish port of Ceyhan were shut in when the Iraqi federal government moved in October 2017 to take control over the oil fields in Kirkuk from Kurdish forces after the semi-autonomous region held a referendum that Baghdad didn’t recognize.

However, the only export outlet of the Kirkuk oil is the oil pipeline of the Kurdistan Regional Government (KRG). The Iraqi federal government and the KRG had been in talks for months to try to reach an agreement on resuming Iraqi exports from Kirkuk. Iraq only resumed oil exports from the Kirkuk province a year after it had stopped the oil flows.

In separate but related news, Thamer Ghadhban said the country had enough oil production capacity to boost output to as much as 6 million bpd if need be, although right now he did not see a pressing need for more OPEC production despite the removal of U.S. sanction waivers for Iranian oil importers.

“We have plenty of time to assess the markets’ reaction,” the official said as quoted by Reuters, echoing an earlier statement by his Saudi counterpart, Khalid al-Falih.

 

https://oilprice.com/Latest-Energy-News/World-News/Iraq-Kurdistan-To-Discuss-50-Increase-In-Oil-Production.html

 

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HE WHO CONTROLS THE OIL

CONTROLS THE WORLD!