Category Archives: Energy

Energy

Statoilhydro: Worth a punt

Energy, On the cover, Sin categoría
What is the only commodity that has not been played as a recovery theme? Gas. I am bullish UK Gas winter 2010 as LNG supply dries off and diverts into Asia, and on coal-to-gas switch (those CCGTs will burn gas to 60% utilization)
Statoil is the master hand managing pipeline gas volumes into the UK. Look at NBP pipeline volumes. Statoil is carefully managing up to 40mcm every day… The ONLY UK gas recovery play that trades at 10xPE (15% discount to peers).
I like Statoil ahead of expected bullish Q3 previews (out in 1 week) and Q3 report (out 4 Nov.) And because it’s the only UK gas exposed name that manages the volumes for profit, not cash.
Company specifics set to be great on the parameters that give higher multiples: Q3 production growth (gas) +10%, EPS growth ahead and Reserve Replacement improving for 2009 (to be published in the Q4 report in February).
With gas bottomed down at $4/Mcf and the oil price at $75 and a P/E of 10-11x, the Statoil share should be NOK170-173.

Afren: One to look into weakness

Energy, On the cover, Sin categoría,
The way I see it the stock has short term downside to 80p on fund flows (some large hedge funds are sellers) and technicals… but enters FTSE 250 January or February, RDS are looking to sell them some really cheap assets, small 40-50mnbbls type assets currently too small for the big guys to work and which benefi from better fiscal terms under a Nigerian entity .. ie netbacks go from 2.50-5 per bbl .. so if you are RDS, why not give the assets to Afren, let them get $5 per barrel and take a royalty of around $2 ..less hassle, no political issues , everyone happy !. Ebok field could add 35p/sh unrisked and I am hearing solid things from RDS people. Obviously Addax must have strong views on it too.Expect 6 well exploration program next year targeting 685 bbls vs 129 bbls 2P today (easy 95p valuation then)
The stock, at 80p, will be at 8xPE and 3.4x EV/EBITDA 2010 at $70/bbl, so looks undemanding once we pass the 2009 cornerstone.

ENI and its alleged break-up value

Energy, English, On the cover, Sin categoría
Over recent weeks,Knight Vinke has suggested that splitting the company into utility gas and traditional oil businesses would unlock significant value.
They value ENI between €27.8 and €32.
My biggest discrepancy with them is a) that the issue is not the Gas & Power business but the E&P, and b) I find it hard to believe that both parts would trade at top-of-subsector multiples if separate.
First in the Snam and Gas & Power business… They take the assumption of Snam trading at a 20% premium to RAB, which is crazy compared to other utility stocks. They also use the rest of the gas & power division at a 30% premium to Enel, Edison, Hera, Acea (which all trade at 5.6-6x EBITDA 1yr fwd). They totally disregard the constant process of de-rating of the Italian utilities in the past six years and the impact on power prices of stalled demand and excessive capacity from gas oversupply.
The refining business is put at Neste multiples, which is OK to me
Chemicals are valued at much higher than anyone can imagine (7.5x EBITDA)
Corporate charges are drastically reduced (probably as part o the assumption that, as separate entities, cost savings and job cuts would happen). This is difficult to believe in Italy, but can be acceptable as a thesis.
Then Knight Vinke value the E&P business at the multiples of a BG, which is too radical given the poor growth, high capex and returns.
In essence they use consensus Sum of the Parts, reduce the traditional Megacap oil discount (21% to 15%) to zero by cutting corporate charges and others, pumping up the valuation of the Italian G&P to multiples of non-Italian (and therefore more attractive) utilities and applying a premium to the Snam RAB that it has never enjoyed in the past (Snam is a mature asset and growth RAB is very limited versus maintenance RAB, something that KV seem to value in the same way).
The key, as some analysts (e.g Nomura) point out is that where Eni trades (a 40% discount to its invested capital) is no different to that of other large-cap oils (BP, RDS, FP and STL). I think the value argument can be applied equally to all these companies, but unlocking it is not about addressing a small part (Gas & Power is only 15% of Eni’s invested capital base) but about turning around the core E&P businesses where returns have fallen a staggering 400-500 basis points in four years (while oil prices rose).
That is why, even if separated, it is an illusion to believe that oil investors would see ENI as a high multiple E&P and see it trade at the same multiples as Tullow, Dana, etc… First, because it would still be a State owned entity and its resource base would still be heavily impacted by resource nationalism, low returns and OPEC quotas.
In the meantime, the bet on the stock from here is a full break up not only of the utility assets (which as Scaroni has said, would be regulaywise impossible) but also the disposal (at current market price, no discount) of the Saipem stake.

Short Term Commodity Dynamics

Energy, On the cover, Sin categoría

Oil markets have seen several points on the supply side. Nothing major but Russian output edging up to 10mmbpd, while OPEC sailings are expected to remain very low at c22.59 mbpd, leaving them 1.77 mbpd (7.3%) below last year’s level. Oil should continue in its $65-75/bbl range, but I still believe that the break-out from this range will be on the upside as the steady recovery seen outside China lifts distillate demand and as non-OPEC supplies disappoint as the year progresses. These data points will obviously become apparent closer to the 4th quarter, so short term dynamics will likely be driven by inventories, which can continue to build as refinery utilization reaches 83% from current 84.5%.

On gas, two issues are paramount – how much gas the Russians will pipe into Europe just as Europe is supposed to be lined up for rising LNG supplies, and how sharply US domestic gas production will tail off. With Ukraine’s gas transport company taking further steps to shore up its balance sheet and with Russia saying it’ll start to buy Turkmen gas, the signs are that Gazprom is expecting its pipeline deliveries to be substantially boosted from low H1 levels. My analysis remains bearish – new LNG supplies will struggle to be absorbed without pushing prices down, with Q1 2010 prices below $5/mmbtu necessary to clear the market (15-20% down). This week should see the first significant reduction in the official data for monthly US gas production, but nevertheless it is hard to create a bull case in the face of rising LNG supplies destined for the US.