Interactive Investor

The Oil Man: Oil price, Tullow, Circle, Sound, Far

10th February 2016 13:38

Malcolm Graham-Wood from interactive investor

WTI $27.94 -$1.75, Brent $30.32 -$2.56, Diff $2.38 -74c, NG $2.10 -4c

As I mentioned on Monday, this week sees the publication of the short term outlook forecasts from all the major agencies. The International Energy Agency (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. It suggested that OPEC was "unlikely" to cut a deal with other producers and that prices were likely to fall as global supplies increase.

In its "Short Term Energy Outlook", the Energy Information Administration (EIA) said that demand in 2016 would be trimmed from an increase of 160/- barrels per day (b/d) to 110/- b/d, thus increasing stocks.

The EIA, for what it's worth, is forecasting Brent and WTI prices of $38 and $50 in 2016 and 2017 respectively. US production was 9.4 million b/d in 2015 and is expected to be 8.7 and 8.5 million 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, but rather the cutbacks in capital expenditure (capex) by the oil majors that have taken the sum of as much as $400 million (£275 million) 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 with. On this basis I would point out the comments by Eni, which has said that "global upstream capex has been reduced to dangerous levels" - and also an interesting suggestion from the IEA: it has said that, despite the global slowdown, oil demand grew by 20% in 2015 and forecast a rise of 15% in 2016. This indicates we are storing up a substantial problem for the future as demand will continue to grow and production will fall sharply…

Tullow Oil

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 operational expenditure), the outlook, even at this oil price, remains solid.

TEN will come onstream in third-quarter 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 $300 million 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 I would, therefore, at least for the time being, give it the benefit of the doubt.

Circle Oil

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 gas supply agreement 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 Egyptian General Petroleum Corporation payments are "uncertain".

Slightly more concerning are the comments about the finances; discussions with the International Finance Corporation 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.

Sound Energy

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 million standard cubic feet per day (mmscf/d) in the daytime and 0.7 mmscf/d in the night-time - if that makes any sense! The company expects 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.

Far Limited

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 468 million 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 joint venture is currently preparing for a drill stem test 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 couldn't rule out the possibility that, at $1 million a day, there may be an opportunity for an effectively "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 wouldn't 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$250 million (£122 million) - 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 its 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…

And finally…

Those fans who remember the FA Cup final, where the 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 year's 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.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.