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

    TerraForm Power Believes It Has Sufficient Liquidity to Operate

    This note by Will Daley for Bloomberg may be of interest to subscribers. 

    Even if some SUNE obligations are not fulfilled, TERP expects to continue operating

    Defaults may now exist under many of TERP’s non-recourse project-debt financing pacts (or such defaults may arise in the future) due to SUNE bankruptcy filing, delays in preparation of audited financial statements

    Defaults “are generally curable"; TERP will work with its project lenders to obtain waivers and/or forbearance agreements

    No assurances can be given that waivers, forbearance agreements will be obtained


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    Musings From the Oil Patch April 19th 2016

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

    In light of that view, a critical question is whether a real economic transformation can be performed. An earlier attempt was made in 2000 following the late 1990s oil price downturn and the expensive Saudi-financed war to oust Saddam Hussein’s troops from neighboring Kuwait. The financial pain of that experience was washed away by the rebound in oil prices that ended that transition effort. That experience leads Saudis to expect something to bail them out from having to make hard economic and social decisions.  

    Critical to this transition effort will be the mindset of the young Saudis who dominate the country’s population. By 2030, the youth group will add 4.5 million new Saudis to the labor force, nearly doubling its current size to 10 million workers. If the female labor force participation rate increases the number could be larger. This population demographic will force the economy to have to create three times the number of jobs for Saudis than it did during the oil boom of 2003-2013, which seems highly unlikely to occur. 

    There are a number of social impediments to making this transition occur, including Saudi reluctance to take blue-collar jobs that are thought to be menial. Saudi workers enjoy the slow pace and shorter working hours of government jobs. There is also a problem associated with tapping the young females in the country who are constrained by the social stigmas of not being able to drive and not earning enough to employ a car and driver. Here is where modern technology is helping as Uber helps liberate some of these females. More females are taking white-collar jobs in the private sector. Instead of becoming teachers, many are become lawyers and professionals. The challenge is that many of them are willing to trade down to government jobs with shorter hours when they have children. There are also social and employment issues involved with marriage when a woman’s father prefers that a prospective husband have the security of a government job. 

    Probably the greatest challenge for Saudi Arabia is that both the rulers and the ruled have been satisfied with the social compact that underlies the nation. The populace trades loyalty and obedience to the government in exchange for prosperity, which costs the government substantially. The new social compact will demand greater self-reliance from the people in exchange for their prosperity. Whether the populous understands how precarious their position is in continuing to depend on the government’s continuing largess because of the current and future market for oil. 

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    Exxon Says `$25 Billion Rule' Will Sink Deepwater Oil Drilling

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

    Environmental groups say the new rules don’t go far enough to safeguard marine life and the people who depend on it for their livelihoods. Friends of the Earth has called on the government to halt all auctions of offshore drilling leases.

    “There’s no such thing as safe offshore drilling,” said Marissa Knodel, a climate campaigner for the Washington-based group. “Tougher rules aren’t going to mitigate the human and environmental costs of allowing more drilling to occur.”

    Government Shortcomings
    In a closed-door meeting last month, BP, the largest driller in the U.S., said the government underestimated the time and complexity needed to implement the rules, ignored the reduced production and stranded reserves that would result, and added unneeded operations that could boost risks rather than decrease them. The comments came in slides Exxon presented at the meeting and were posted on a government website.

    The Deepwater Horizon disaster looms large over federal attempts to tighten requirements. The blowout at the $153 million well sank a $365 million drillship, paralyzed the Gulf region for months and cost BP more than $40 billion in penalties, compensation and restoration costs.

    Exxon, in the closed-door meeting with White House and Interior Department officials on March 7, outlined its assertion that the rules will cost $25 billion and argued they would increase the danger of a blowout by wresting decision-making from on-site engineers with decades of experience.


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    Jamie Dimon's Rate-Spike Nightmare

    This article by Lisa Abramowicz and Rani Molla for Bloomberg may be of interest to subscribers. Here is a section: 

    3) Investors are piling into medium and longer-term U.S. bonds with increasing conviction that borrowing costs will stay low forever. The biggest exchange-traded funds that focus on such notes have experienced a surge of new money this year, with the volume of short interest on the ETFs' shares falling. This has helped fuel a 4.9 percent surge in Treasuries maturing in seven to 10 years so far this year, according to Bank of America Merrill Lynch index data.
    4) The demand hasn't only come from ETFs and mutual funds. Big institutions and hedge funds have also bought more U.S. government bonds, particularly those maturing in the next decade, as they seek safe spots to park cash in the face of global economic uncertainty. 

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    Musings from the Oil Patch April 5th 2016

    Thanks to a subscriber for this edition of Allen Brooks’ report for PPHB. Here is a section:

    There is another aspect of U.S. production that is troubling given the rapid increase in oil prices during March. While we believe much of that increase was driven by speculators who had bet on oil prices falling and were rapidly covering those short positions as optimism about rising demand and falling output supporting higher oil prices grew. As oil prices rallied on the reports of steps being taken to reign in production growth and optimistic estimates for rising demand took hold, industry focus shifted to the question of at what oil price would producers resume drilling? Often overlooked in this process was how higher oil prices would encourage producers to begin completing previously drilled but uncompleted wells, or DUCs as they are referred to. DUCs will enable oil production to recover without an increase in the drilling rig count. It is this phenomenon that had us wondering whether we could see a repeat of what has happened in the natural gas market – steadily rising production despite fewer rigs drilling.

    When we plot the price of natural gas and crude oil to the number of drilling rigs searching for each of these commodities, we find very close relationships. Those relationships are shown in the following exhibits.

    What is equally interesting is the pattern between natural gas and crude oil production versus the number of active drilling rigs seeking the respective commodities. The chart in Exhibit 5 (next page), while busy, is instructive for its relationship between natural gas output and gas drilling rigs. One goes up relentlessly while the other steadily declines. In contrast, crude oil output, which had risen unchecked is now in decline, but only months later than the drop in drilling rigs began. The decline is now being hastened as a result of how few oil drilling rigs are working. What makes the volume-to-drilling-rigs relationship for natural gas different from that of crude oil? Most likely it is the impact of associated natural gas volumes. In 1993, associated natural gas from crude oil wells accounted for 26% to 28% of gross natural gas produced. The ratio declined steadily until 2013 when it was in the 15% to 18% range, but by the end of 2013 was up sharply to 20%.

    In the case of natural gas drilling, the fewer rigs working are targeting the most productive areas of the formations. On the other hand, during 2014 and early 2015, oil drilling continued at a high rate adding, we suspect, additional associated natural gas. This probably explains why gas volumes have continued to climb. With crude oil output now falling and both oil and natural gas drilling off sharply, one has to believe that the associated natural gas component of supply will shrink, possibly finally stopping the climb in natural gas volumes. If that happens, look for natural gas prices to begin rising, even with the huge volumes of gas in storage. Should we get a warm summer and economic activity continue to grow, we could see a more positive response by natural gas prices heading into the fall of 2016. That might become the surprise of 2016. 

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    The bin-Salman Interview What Does It Mean?

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

    The announcement of this meeting has been very supportive for the oil price as it led to a large short covering by financial players, since a deal to freeze production should limit the potential downside in oil prices. Now with the statements by MBS in the Bloomberg interview last week, the outcome of this freeze deal is much more uncertain. In the interview MBS said that Saudi Arabia will only freeze output if Iran and other major producers do so. If all countries agree to freeze production, we’re ready," MBS said . "If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.” This stands in contrast to prior statements from the Saudi Oil Ministry and from Russia which had suggested that a freeze deal could happen without any commitment from Iran. The market took this statement very negatively for the oil market because Iran has made no indications that they will join the freeze deal and even if they did, most analysts would probably doubt that production from Iran would be frozen anyway.

    If Saudi Arabia indeed see any chance that a freeze deal cannot be accomplished then it is relevant to ask the purpose of even arranging the meeting. If a meeting is held and Saudi does not accept a deal without Iran participating then we believe a deal will not happen and if a meeting is held without a successful deal, then the oil price may drop quite significantly on that kind of news. Would that be in Saudi Arabia’s interest. Would MBS like to see a lower price again to inflict even more pain on the other global oil producers and hence set the stage for higher prices later? It seems odd that MBS is not coordinated with the oil ministry in this issue, but could his statement have been meant for domestic politics? And is it not very strange if MBS in the last minute should undermine the Russian effort to achieve this now famous freeze deal? Is this a negotiating trick to achieve something in return from the Russians vs Iran in Syria or other places?

    The problem with this statement from MBS is that he outranks everyone else in Saudi when it comes to economic policy as he heads the newly formed Economic Council. This implies that if he actually means what he is saying here, there will be no production freeze deal in Doha, because we are confident that Iran will not take part in any production freeze deal. Before this statement by MBS we were 90% certain that there would be a production freeze deal coming out of the Doha meeting, because why hold this meeting if a freeze is not already agreed? It would, as described above, send the oil price in tailspin if a meeting was arranged and ended up with no agreement. After the MBS statements we see the chances for a freeze deal meaningfully reduced, maybe down to 50%.

    If the meeting to hold the freeze deal in Doha is cancelled or if it is held without a successful outcome we would reduce our short term (3-month) price target for Brent which is currently 45 $/b. We would however not do anything with out 6-month target of 55 $/b and our 12-month target for 65 $/b. Our 24-month target (currently 70 $/b) on the other hand may be adjusted slightly higher due to the extra damage that may be inflicted to the supply side of a potential revisit to 25-35 dollar oil prices.

    On Monday this week the Russian Energy Minister Alexander Novak however stated that “Russia can conduct extra talks with Saudi Arabia on oil output freeze before the meeting in Doha on April 17th”. Novak also stated that he is confident that an agreement will take place. This suggests that maybe the statements from MBS in the Bloomberg interview last week may have been meant for his domestic audience. Also the Kuwait OPEC governor Nawal Al-Fuzaia said on April 5 that there are indications that oil producing countries in both OPEC and non-OPEC are poised to agree on a production freeze to January levels. This statement seemed to give the market some restated confidence that there could still be a freeze deal in the Doha meeting on April 17th. But nonetheless the MBS interview last week has added a lot more uncertainty to the April 17th meeting than what the oil market would prefer. 

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    Email of day on the long-term outlook for energy resources

    Yer man, while I often feel like I am part of the new old economy. I am not concerned in the near term that electric vehicles will have mass adoption. I am puzzled how the electrical grid will power all these new super cars? Coal which is the worst emitter of GHG's is the primary source of electrical generation in North America and that is being phased out for natural gas as you know. The environmental movement is flawed with hypocrisy and makes no economic sense. In Canada the govt has chosen to demonize the oil and gas industry which funds the majority of our social services and yet we bail out Bombardier and the auto industry. I sound like a grumpy old man.

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    Musings from the Oil Patch March 22nd 2016

    Thanks to a subscriber for this edition of Allen Brooks’ ever interesting report for PPHB. Here is a section on savings:

    Mr. Burns, a long-time financial journalist and the creator of the “Couch Potato” investment portfolio, authored a column recently pointing out the dilemma faced by retirees who wished to finance their retirements without assuming any risk, or as he titled it, “How to cope with the great yield famine.”

    The column, published about two weeks ago, pointed out that the last time anyone earned 6% on a six-month certificate of deposit (CD) was December 2000. The lowest yield on a six-month CD immediately after the dotcom market crash was 1.01% in June 2003. The highest yield on a six-month CD since June 2003 was 5.22% in July 2006. Today, according to Bankrate.com, the highest yield on a six-month CD nationwide is 1.10%, but the vast majority of banks offer less than 0.15%.

    He then went on to figure out the retiree’s needs and how much capital was required to meet those needs risk-free. The monthly premium for Medicare Part B is $121.80, or $1,461.60 a year. To earn that much money from a 0.15% CD you would need to keep $974,400 on deposit. For most Americans that is a large sum, but it is not a problem since Social Security deducts the payment from your monthly check.

    The official federal poverty level income for a family of two for 2016 is $15,930. To generate that income from a risk-free CD at 0.15% interest, you need to deposit $10,620,000. To finance a poverty-level retirement with a risk-free investment portfolio means you have to maintain $11,594,400 of your assets on deposit in those low-yielding CDs, which would place you among the top 1% of wealthy Americans. Think about that. If you don’t want to accept financial risk in your retirement, you must be in the top group of Americans in terms of wealth. The rich are poor! In order to keep our world spinning and boost its growth rate, there are no risk-free avenues available for ordinary Americans. Recognition of this condition, coupled with the stock market’s volatility, may be fuelling a portion of the anger we are seeing among the electorate today. This situation will also be an anchor on how fast our energy needs grow.


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    On perceived deficits in the lithium market

    This interview between Peter Epstein and Joe Lowry for Mineweb may be of interest to subscribers. Here is a section: 

    One point I find extremely interesting is that the countries that always were low price buyers, trying to secure the cheapest Chinese product, have now been shut out due the price run-up in China and the VAT penalty creating a disincentive for exports.

    I have been approached for help in securing product by companies in India and in similar markets, who in the past always sought the lowest price. These companies, faced with shutting down their plants, have offered US$28,000 – US$30,000/Mt, in advance, for lithium hydroxide.

    Unfortunately, since they have no relationships, supply for these companies is hard to come by. What we considered the bottom of the market appears to prove that demand destruction is not a major concern. On the other hand, the Japanese have contracts at low prices for much of their 2016 volumes and seem to be in denial that they will have to pay much higher prices in 2017.
    I see a return to a normalized global price range as a major theme for 2017. 

    Any thoughts on how Tesla’s (under construction) giga-factory fits into global battery markets?

    Yes, good question. The western press seems fixated on the Tesla giga-factory; however Tesla is really just one of many large battery projects worldwide. China has multiple projects, some of which, although smaller than Tesla’s planned operation, are already in production and will grow in phases.
    I think what Tesla is doing is great, but it’s only part of the global story. 

    Based on extensive meetings around the globe, are there critical events on the horizon that could shake things up?

    As long as China continues a reasonable level of support for battery related initiatives and there is not a major global recession, I think lithium ion battery demand for non-consumer applications has reached a tipping-point, ensuring robust lithium demand for the next several years.


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    Brazil Impeachment Picks Up Amid Protests and Legal Battles

    This article from Bloomberg may be of interest to subscribers. Here is a section: 

    A number of court injunctions have stopped Luiz Inacio Lula da Silva from taking a job in Rousseff’s cabinet, dashing hopes that the former president would use his political abilities to rebuild the government coalition and defuse the impeachment threat.

    The decision to block Lula’s appointment “will deprive Rousseff’s government of a crucial power broker capable of rallying her base,” Neil Shearing, chief emerging market economist with Capital Economics, wrote in a note to clients. “Her term in office looks increasingly likely to be curtailed.”

    The first injunction against Lula’s nomination was issued by a federal judge just one hour after his swearing-in ceremony on Thursday. It was later struck down by a higher-court judge but the legal battle is set to continue, with several others cases being considered all over the country, including in the Supreme Court.

    Rousseff said her government respects the courts but that the judicial system “can’t be politicized.” She lambasted federal judge Sergio Moro’s decision to release phone recordings that critics say show she appointed Lula to shield him from a corruption probe.

    According to Brazilian legislation, only the Supreme Court can probe, indict or imprison presidents and cabinet members.


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