What if they gave an oil auction in Brazil and nobody came?
Things aren’t quite that bad—yet—for the highly touted deep ocean oil discoveries off the coast of Brazil, but the October 21 auction for the Libra field—estimated to hold 8 billion to 12 billion barrels of oil—is shaping up as a near disaster. Only 11 companies registered for the auction last month—instead of the expected 40—and majors such as Chevron (CVX), ExxonMobil (XOM), and BP (BP) all failed to sign up.
This is quite a turnaround from the heady days of 2007 when discoveries deep under the South Atlantic were said to be about to turn Brazil into the Saudi Arabia of Latin America.
The auction news isn’t good for investors in Brazil’s Petrobras (PBR) but it could well be a boon for China and Chinese oil companies such as PetroChina (PTR) and CNOOC (CEO).
The reason for the lack of enthusiasm for the auction is a result of policies put in place by the Brazilian government after the 2007 discoveries. By law Petrobras has to be the sole operator of any field and gets a 30% stake in all of these deep sea finds. The government will retain ownership of the oil—unlike in the more common concession model where the bidding companies own the oil. In the current system companies make money by selling a share of the oil produced; in the concession model, the winning bidders own the oil and pay a royalty to the government.
There seem to be a couple of feature to this system that especially worry the big international producers. First, besides all the risk in bidding for a relatively unproven field, the government will charge a $6.8 billion signing bonus on the winning bidders. That seems high, the majors say, considering that only one exploratory well has been drilled at Libra. Second, the majors worry that Petrobras won’t have the capital or the engineering resources to support its role as sole operator. The company already has a capital budget of $237 billion for the five years that end in 2017—a huge burden for a company required by the Brazilian government to import fuel at international prices and then sell it for a loss on the domestic market.
Although international majors have shown limited interest in the auction, Chinese (and Indian, and Malaysian, and Colombian) state-owned oil companies have all entered bids. For these bidders, securing supply is the goal—and high prices and high risk matter relatively little.
A bad auction—low prices and few bidders—will put more stress on Petrobras and raise more questions about its capital spending budget.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any company mentioned in this post as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
Norway’s Statoil (STL.NO in Oslo and STO in New York) reported a brutal first quarter on May 2. Net income adjusted for one-time items fell to NKr 12 billion in the quarter from NKr 16.8 billion in the first quarter of 2012. Analysts had expected adjusted net income of NKr 13.7 billion for the quarter.
Lower oil and natural gas prices in the quarter were certainly part of the problem. So too were temporary production disruptions in Algeria, Norway, and Brazil. Production in the quarter fell to 1.998 million barrels of oil equivalent a day from 2.193 million barrels in the first quarter of last year. Statoil expects that production in 2013 as a whole will fall from 2012 levels because the company has sold some assets on the Norwegian outer continental shelf and because natural gas production from acquired U.S. shale assets has come on line more slowly than expected.
Which leaves investors trying to value a projected rebound in production in 2014 and later. Statoil has high volume projects scheduled to come into production in Brazil, the Gulf of Mexico, Tanzania, Mozambique, the Barents Sea, Indonesia, and eastern Canada beginning in late 2013 and stretching into 2020. The company projects that production growth will climb from a compound annual 2% to 3% from 2012 through 2016 to an annual 3% to 4% from 2016 through 2020. (Statoil is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )
The dangers are two-fold. Read more
Way back on March 12, I promised http://jubakpicks.com/2013/03/12/all-time-high-for-u-s-stocks-hooray-but-why-should-we-care/ that I was going to add a stock to my dividend income portfolio soon (on March 13, I said.) Well, I didn’t make the add then and I’ve been waiting for the predictable volatility of this market to give me a better entry price. I got that price today and I’m finally making my add to that portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/
I’m going to take advantage of today’s 1.6% drop to recommend buying shares of Italian oil company Eni (E in New York.) It’s not surprising that shares of Eni are down today—the Milan exchange FTSE MIB index closed down 2.5% today in reaction to the Cyprus “solution.”
But today’s drop brings the total decline since the January 17, 2013 high to 10.9% and it pushes the dividend yield close to my 5% dividend income buying target. (The yield is 4.95% on March 25 based on the paid September 2012 dividend and the declared May 20, 2013 dividend.)
And I think you might even get some growth out of this oil stock. Read more
Yesterday, March 20, shares of Anadarko Petroleum (APC) rose 3.7% on news that the company had made a major discovery in the deep waters of the Gulf of Mexico. The find at the Shenandoah-2 well could produce more than 500 million barrels of crude.
As important as the discovery is for Anadarko and its partners (ConocoPhillips (COP), Marathon Oil (MRO), and Cobalt International Energy (CIE)—analysts estimated it was worth $3 a share to Anadarko investors—the find has even bigger implications for oil production in the Gulf of Mexico as a whole. It’s large enough to turn the efforts to explore the entire Lower Tertiary trend into a gold rush. The Lower Tertiary trend, with sub-regions such as Walker Ridge and the Shenandoah formation, is a very deep water play that could hold up to 15 billion barrels of oil. By deep I mean deep and expensive. The Shendoah-2 well was drilled through almost six miles of rock in water 5,800 feet deep. Wells that deep cost big bucks—a deep-water well can cost $130 million and dry holes easily run to $10 million. That makes spending money on the best available seismic imaging technology a no brainer.
Anadarko’s discovery in the Shenandoah formation isn’t an isolated event. Since 2010 Exxon Mobil (XOM) has found the 700-million barrel Hadrian field, Royal Dutch Shell (RDS) has discovered the 500-million barrel Appomattox field, and Chevron has found the 200-million barrel Moccasin field, all in the Gulf of Mexico’s Lower Tertiary trend. BP (BP) estimates that its Mad Dog field could hold up to 4 billion oil-equivalent barrels.
Can investors already pick some winners from the Lower Tertiary trend discoveries?
Let me suggest a few. Read more
I added ConocoPhillips (COP) to my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ on January 11 because what was then a relatively pessimistic view of growth in global economy had hit oil prices and thus the stocks of oil companies. On January 11, ConocoPhillips shares paid a 4.51% dividend yield.
Since then sentiment on global economic growth has turned up and so have the prices of oil and oil stocks. Shares of ConocoPhillips are up 4.8% from the January 11 close to the close on January 25. That has reduced the yield to 4.32%.
I still like these shares as a dividend income play, however, even at this slightly higher price. Through a series of asset sales and the May spin off of its refining assets into a separate company, Phillips 66 (PSX), ConocoPhillips has turned itself into the biggest U.S.-based independent exploration and production company. With that comes big exposure to the U.S. onshore oil boom—ConocoPhillips has big holdings in the Permian Basin, in Eagle Ford and in the Williston Basin (which includes120 wells in the Bakken formation of North Dakota.) ConocoPhillips also has significant assets in Canada’s oil sands, the Gulf of Mexico, Africa, and Asia.
ConocoPhillips does not look like it will grow reserves or production as quickly as some of the smaller, more concentrated U.S. independents such as Pioneer Natural Resources (PXD) or Denbury Resources (DNR). Read more