David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

    Is the Deepwater Dead?

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:

    Marky Mark-ing to market cost and efficiency gains: More competitive than you think
    Contrary to popular belief, the US onshore isn’t the only sector seeing meaningful cost deflation and/or efficiency gains. While the ~60% reduction in DW rig rates has grabbed headlines, broad improvements, including drill-days (-30%-40%), steel costs (-30%), and various SURF/topsides costs (-10%-30%) have reduced total project costs by 30%-40%, in our view. And given the lag in response time, excess capacity and a moderate pick-up in activity, we expect cost and efficiency gains to be more durable than in the US onshore.

    But not all barrels are created equal. Only high quality resource can compete While all deepwater tends to get lumped together, the range of economics across projects is diverse (sub $30/bbl-$80+/bbl breakevens), with only high quality resource set to compete. We examine various drivers of project economics, many poorly understood, including fiscal terms, resource size, resource density, and proximity to infrastructure, and potential impact. We see high quality, pre-FID deepwater projects breaking even at roughly $40-$50/bbl.

    Meaningful challenges remain
    Though more competitive than the market believes, meaningful challenges will continue to drive an increasing share of discretionary capital to US shale, including: geologic risk, project execution risk, geopolitical risk, and capital inflexibility. Adjustments to development strategies and scope can mitigate some risk, and large, diverse IOC budgets will invest across the spectrum, but failure to revolve would demand a higher rate of return, with an increase to 15% required IRR (vs. 10%) increasing average breakevens by $7.5/bbl.

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    All eyes on the spending cap

    Thanks to a subscriber for this note from Deutsche Bank focusing on the Brazilian market. Here is a section:

    Speaking at the Senate Economic Committee on Tuesday, BCB President Ilan Goldfajn. Goldfajn repeated several statements that had already been published in the central bank’s Inflation Report last week, reaffirming the intention of making inflation converge to the 4.5% target in 2017. Goldfajn also repeated the remarks published in the Inflation Report about the three conditions for the authorities to initiate an easing cycle (namely limited persistence of food price shock, disinflation of IPCA components, and lower uncertainty about the fiscal adjustment implementation). The Goldfajn, however, added that the BCB “does not have a pre-established timetable for monetary easing,” as the COPOM decision will depend on several factors, including inflation expectations and forecasts. This comment suggests that the BCB has not yet made a final decision to cut rates, perhaps because market inflation expectations for 2017 have not converged to the 4.1% target yet. Despite Goldfajn’s cautious remarks, we still expect the COPOM to cut the SELIC rate by 25bps at the next meeting later this month.

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    Adobe Expertly Balances Growth and Profitability

    This article from MorningStar following Adobe’s results on September 20th may be of interest to subscribers. Here is a section:

    Third-quarter revenue rose 26% year over year to $1.46 billion, driven by 51% growth in the firm’s subscription revenue base. Creative Cloud continues to serve as the company’s key revenue driver, as both greenfield customers and cloud migrators are providing a consistent lift in the annual recurring revenue base. We believe ample growth opportunities remain across both Creative Cloud and Digital Marketing, particularly as consumer users migrate and enterprise customers consolidate digital content creation and marketing spend around suites of applications versus point solutions.

    The company is beginning to show the two main benefits of renewal billings in its subscriber base, which are higher prices and substantially lower customer acquisition costs. As a result, GAAP operating margin exceeded our forecast by more than 300 basis points at 25%, the firm’s best quarterly mark since the fourth quarter of fiscal 2012. While we suspect the firm will need to maintain aggressive investment in sales and marketing, particularly as competition for digital marketing wins remains intense, we think the increasing renewal mix of Creative Cloud billings will smooth this effect, yielding mid-30s operating margins in the long run.


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    Shale Oil Firms Hedge 2017 Prices in 'Droves' After OPEC

    This article by Alex Longley and Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

    Harry Tchilinguirian, head of commodity research at BNP Paribas SA in London, said on Friday that OPEC had thrown a “lifeline” to U.S. shale firms, prompting them to hedge “in droves.” The bank has “seen many queries coming through” from producers, he said.

    The West Texas Intermediate 2017 calendar strip -- an average of future prices next year that’s often used as a reference for hedging activity -- rose above $50 a barrel to its highest since August on Monday. “When calendar 2017 pricing rises into the low-to-mid $50s, as it is doing now, producer hedging rises materially,” Longson said.

    U.S. shale producers used a similar rally to hedge their prices in May, when the WTI 2017 calendar strip also rose above $50 a barrel. The current activity comes after industry executives told investors in July and August they planned to use any window of higher prices to lock-in cash flows for next year.

    "We would like to be a little bit further hedged than we are today," Pioneer Natural Resources Co. Chief Executive Officer Tim Dove said back in July, noting his company has locked in prices for up to 55 percent of its 2017 exposure. “I’d like to see us get that number up as we go towards at the end of this year.”


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    Beyond Algiers

    Thanks to a subscriber for this report from Goldman Sachs which was issued on the 27th, ahead of the OPEC meeting. Here is a section: 

    Nonetheless, our 4Q16 oil supply-demand balance is weaker than previously expected given upside surprises to 3Q production and greater clarity on new project delivery into year-end. This leaves us expecting a global surplus of 400 kb/d in 4Q16 vs. a 300 kb/d draw previously. Importantly, this forecast only assumes a limited additional increase in Libya/Nigeria production of 90 kb/d vs. current estimated output. As a result, we are lowering our 4Q16 forecast to $43/bbl from $50/bbl previously. While a potential deal could support prices in the short term, we find that the potential for less disruptions and still relatively high net long speculative positioning leave risks skewed to the downside into year-end. Importantly, given the uncertainty on forward supply-demand balances, we reiterate our view that oil prices need to reflect near-term fundamentals – which are weaker – with a lower emphasis on the more uncertain longer-term fundamentals.

    Despite a weaker 4Q16, our 2017 outlook is unchanged with demand and supply projected to remain in balance. We expect demand growth to remain resilient while greater than previously expected production declines in US/Mexico/Venezuela/ Brazil/China are offset by greater visibility in the large 2017 new project ramp up in Canada/Russia/Kazakhstan/North Sea. While our price forecast remains unchanged at $52/bbl on average for next year with a 1H17 expected trading range of $45- $50/bbl, we continue to view low cost and disrupted supply as determining the path of an eventual price recovery with our forecasts conservative on both. As we wait for headlines from Algiers, it is worth pointing out that Iran, Iraq and Venezuela have each guided over the past month to a 250 kb/d rise in production next year.

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    Tesla Wins Massive Contract to Help Power the California Grid

    This article by Tom Randall for Bloomberg may be of interest to subscribers. Here is a section:

    Tesla Motors Inc. will supply 20 megawatts (80 megawatt-hours) of energy storage to Southern California Edison as part of a wider effort to prevent blackouts by replacing fossil-fuel electricity generation with lithium-ion batteries. Tesla's contribution is enough to power about 2,500 homes for a full day, the company said in a blog post on Thursday. But the real significance of the deal is the speed with which lithium-ion battery packs are being deployed. 

    "The storage is being procured in a record time frame," months instead of years, said Yayoi Sekine, a battery analyst at Bloomberg New Energy Finance. "It highlights the maturity of advanced technologies like energy storage to be contracted as a reliable resource in an emergency situation."


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    SunEdison's TerraForm Units Both Say They're Seeking Buyers

    This article by Tiffany Kary and Christopher Martin for Bloomberg may be of interest to subscribers. Here is a section:

    Multiple companies have expressed interest in TerraForm Power. Golden Concord Holdings Ltd., a Chinese clean-energy group, is planning to bid for SunEdison’s controlling stake in the company, people familiar with the plans said in August. That would challenge a joint offer from Canada’s biggest alternative- asset manager, Brookfield Asset Management Inc., and billionaire David Tepper’s Appaloosa Management LP hedge fund.

    TerraForm Power said in August that it was considering plans to set up an auction to sell itself, according to people familiar with the matter. SunEdison, which has been selling off assets in Chapter 11, said earlier this month that it had reached an agreement with the two non-bankrupt yieldcos over when and how they would bring claims as part of the bankruptcy.

    The process may not lead to a deal, according to Swami Venkataraman, an analyst at Moody’s Investors Service.

    If the bids “highly undervalue” TerraForm Power and its assets, “they may choose to operate as an independent company for some time,” Venkataraman said in an e-mail Monday.

    The case is SunEdison Inc., 16-10992, U.S. Bankruptcy Court, Southern District of New York (Manhattan)  


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    Enbridge May Have Just Touched Off a 'Supermajor' Race for Pipes

    This article by Tim Loh for Bloomberg may be of interest to subscribers. Here is a section:

    With Enbridge Inc. planning a $28 billion takeover of Spectra Energy Corp., some investors say the industry’s in store for more deals as pressure mounts on the likes of Enterprise Products Partners LP and Kinder Morgan Inc. to follow suit. The biggest pipeline deal of the year foreshadows a feeding frenzy as those companies that survived the collapse in oil and natural gas prices step up the hunt for bargains. TransCanada Corp. got the ball rolling with the $10.2 billion purchase of Columbia Pipeline Group Inc. earlier in the year.

    “We’ve just come through a very tumultuous period,” said Libby Toudouze, a partner and portfolio manager at Cushing Asset Management in Dallas. “Being able to survive the trough in the energy cycle, especially one like this last one that was so long, means you have to be bigger, faster, stronger.”

    Enbridge’s deal would vault the Calgary-based company into North America’s largest energy pipeline and storage player. It could also mark the beginning of the "supermajor" era for the industry, according to Rebecca Followill, head of research at U.S. Capital Advisors, since it might “light a fire in the bellies” of the larger pipeline players, setting off a wave of consolidation that could accelerate through the end of 2016.

    “Enterprise Products Partners is the other big 800-pound gorilla out there,” Toudouze said. “This puts a little more pressure on them to try to do something in the space.”


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    Brent Oil Declines as Saudi-Russia Deal Falls Short of a Freeze

    This article by Mark Shenk for Bloomberg may be of interest to subscribers. Here is a section:

    "The failure of Russia and Saudi Arabia to take any steps to support the market is sending us lower," said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. "The Saudi oil minister actually talked the market lower, which is going to cost his country billions." 

    Brent rose the most in three weeks on Friday after President Vladimir Putin said he’d like OPEC and Russia to agree to an output freeze, speaking before he traveled to China to meet Saudi Deputy Crown Prince Mohammed bin Salman. Oil had rallied in August on speculation that members of the Organization of Petroleum Exporting Countries and other producers would agree to cap output when they meet informally in Algiers later this month. A similar proposal was derailed in April over Saudi Arabia’s insistence that Iran participate. 


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    Musings from the Oil Patch August 24th 2016

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB which may be of interest. Here is a section:

    The Obama administration’s Environmental Protection Agency (EPA) and the National Highway Traffic Safety Administration (NHTSA) released their Phase II fuel efficiency and greenhouse gas emissions regulations for heavy-duty trucks. This group includes the largest pickup trucks sold as well as the traditional 18-wheelers on the highways. The standards are to be phased in between the 2021 and 2027 model years. The existing standards, which were designed for the 2014 through 2018 model years, will remain in place until the new standards take effect.

    The heavy-duty truck standards come as the government has just begun negotiations with auto manufacturers over the final fuel efficiency ratings for light-duty vehicles where the industry is lagging behind the targets in the standards. Heavy-duty trucks are the second largest and fastest growing segment of the U.S. transportation system measured by their emissions and energy use. They currently account for about 20% of carbon emissions, yet only account for about 5% of the vehicle population. 

    Carbon emissions from transportation is now the largest contributor to overall greenhouse gas emissions. Three charts showing annualized sector shares of total emissions confirm this conclusion. It should be noted that the country’s total carbon emissions peaked in January 2008 and have declined steadily since. On an absolute basis, over the past 8 1/3 years there are 1,410.1 million metric tons of less carbon emissions, or a decline of 16.2%. The transportation sector contributed about 9.1% of that decline. The significance is that transportation’s emissions dropped 6.4% over that time span while overall emissions declined 16.2%. The overall figure reflects the sharp decline from coal’s use due to the shale revolution and low natural gas prices along with static electricity consumption. At the same time, the decline and then flat trend in vehicle miles driven coupled with more fuel-efficient autos also helped reduce the transportation sector’s emissions. One can see these trends at work by looking at the sector shares in 1973, 2008 and 2016.

    The United States has done well in reducing its carbon emissions by 16.2% since the start of 2008. The weak economy and energy revolution have been primarily responsible. Going forward, the energy policies targeting the transportation sector, coupled with technological improvements in overall energy use, will become more important in driving down carbon emissions. Thus, the reason for the heavy-duty truck standards. They have support from the industry and truck manufacturers who see economic opportunities from more efficient engines. The Independent Truck Owners Association estimates the new standards will add $12,000-$14,000 to the cost of new tractors, which often cost upwards of a quarter of a million dollars, but they hope to recover those higher costs through improved fuel efficiency.


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