Mark Latham Commodity Equity Intelligence Service

Wednesday 1st April 2015
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Buharni defeats Goodluck Jonathan

With anger swelling over corruption, inequality and a devastating Islamist insurgency in the nation’s north, Nigerians chose a former general who once ruled with an iron hand to be their next president, according to election results on Tuesday.

The election was the most competitive presidential race ever in Nigeria, one of the largest democracies in the world. Now, if power is handed over peacefully, it will be a major shift for the nation — the first transfer of power between civilians of different parties in a country that has spent much of its post-colonial history roiled by military coups.

With all but one of Nigeria’s 36 states counted, the former military ruler, Muhammadu Buhari, held a lead of more than two million nearly votes over President Goodluck Jonathan.

The remaining state is in the north, where Mr. Buhari enjoys broad support and the government has been widely condemned for allowing the Boko Haram militant group to sweep through villages and towns, killing thousands of civilians.

Since the end of military rule in 1999, Nigeria has been governed by a single, dominant party — Mr. Jonathan’s Peoples Democratic Party.®ion=FixedTop&action=Click&contentCollection=BreakingNews&contentID=31840949&pgtype=Homepage&_r=1
MGL: Buhari is elected simply because Nigeria's voters want something done about corruption.  Can Buhari deliver? 

Iran talks extend beyond deadline, Iran Russia say deal close

Oil futures edged lower on Wednesday amid speculation that a last-minute deal over Iran's nuclear programme would be reached that could allow more Iranian crude into world markets.

Talks between Iran and six world powers to settle a dispute around Tehran's nuclear programme extended beyond a Tuesday deadline, as the parties edged towards a deal but failed to agree on crucial details such as the lifting of U.N. sanctions.

Efforts to reach a framework deal were scheduled to continue on Wednesday morning in the Swiss city of Lausanne.

Russian Foreign Minister Sergei Lavrov said a general agreement had been reached over all key aspects of a future deal, TASS news agency quoted him as saying. A diplomat, speaking on condition of anonymity, later denied that an agreement had been reached.

"Whether or not there is an Iranian nuclear deal, we do not expect a flood of oil into the market as a consequence," head of commodity markets strategy and oil strategy at BNP Paribas, Harry Tchilinguirian, told Reuters Global Oil Forum.

Iran currently produces around 2.8 million barrels per day (bpd), according to Tchilinguirian, although Western sanctions limit exports to around only around 1 million bpd. The country keeps around 30 million barrels of crude on its fleet of oil tankers.

"Which sanctions will be lifted and the uncertainty in the timing of lifting suggest that Iran will not be in position to significantly add to the current oversupply in the market," he said.
MGL: Another deadline extension. You read it here first.

Russian Miners With Billions of Dollars Weigh Dividend Increase

Russian metals exporters that are piling up cash after the ruble collapse are sharing the wealth with investors as the economy tilts into recession and global demand slows.

The weaker ruble has benefited Russia’s resource companies, which have costs in the national currency and revenues in dollars or euros. OAO Novolipetsk Steel, OAO GMK Norilsk Nickel and four other of Russia’s largest metals and mining companies together held $8.3 billion in cash and equivalents at the end of December, according to data compiled by Bloomberg. They had about $5.7 billion a year earlier.

Companies are using the windfall to reward shareholders, switching focus from debt repayments or investments. Prices for major materials have softened as China’s economic growth slowed last year to the weakest since 1990. Russia is sliding into its first recession in six years, as U.S. and European sanctions add to slowing consumer demand and a slump in oil prices.

“It makes no sense to start large investments now, and it’s better to pay excessive cash to the owners,” Kirill Chuyko, head of equity research at BCS Financial Group, said by phone on March 31. “The cost of capital for Russian companies increased, which also makes companies rethink their dividend policies.”

Steel and nickel prices fell more than 20 percent in the past 12 months, while copper has dropped about 9 percent. At the same time, Russian producers have turned into world leaders in terms of profit margins and cost cutting. The ruble plunged 46 percent last year before stabilizing in the first quarter, while the economy is forecast to contract 3 percent this year.

Novolipetsk Steel, known as NLMK, said this week it’s overhauling its dividend policy. The steelmaker, which cut its debt ratio to among the lowest in the industry last year, may double distributions and is adding free cash flow as a basis for its payouts.
MGL: Analysts are suggesting Norilsk could have a 11% dividend yield next year. First class deposit, dominant position in Palladium, and an unusual constellation of oligarchs with needs on the shareholder register, all combine to give Norilsk a 'shareholder friendly' attitude, add in the management changes which see them 'licking their wounds' after a decade of disastrous investments outside their core mines, and its almost compelling. 

China official PMI rises in March, HSBC improves

China's official gauge for manufacturing activity picked up in March, indicating the sector has managed to return to expansionary territory.

The official Purchasing Managers' Index (PMI) released by the National Bureau of Statistics (NBS) came in at 50.1 in March, up slightly from 49.9 in February.

However, the HSBC final manufacturing PMI for March fell to 49.6, compared to 50.7 in February, beating an earlier flash estimate of 49.2.

A figure above 50 signals expansion, while anything below indicates contraction.

Both indexes track activity in factories and workshops, but the HSBC index measure focusses on small and medium sized enterprises, while the official PMI is skewed towards state-owned enterprises.

Meanwhile, official data also showed activity in the country's services sector grew moderately in March with a PMI of 53.7, easing from 53.9 in February.
MGL: It is worth observing that China has left behind a decade of 'silly season' infrastructure investment, and seems embarked on a much more sensible path. Beijing has finally, and forcefully rammed through its 'anti-pollution' message, and succeeded in changing the thinking of most of the mega cap companies that we look at as investments. Is the word sustainable applicable to the 'low growth' path from here?  Surely there are still some nasties in the cupboard, but nothing the market has not now thought about. 

Oil and Gas

Apache reports strong results in Egypt

Apache Corporation today reported strong appraisal- and development-drilling results from Egypt following the previously announced discovery of two new oil fields in the Western Desert. The initial discoveries were announced with the fourth quarter 2014 results on Feb. 12, 2015. Development leases were approved by the Egyptian General Petroleum Corporation (EGPC) and Ministry of Petroleum in record time, taking only 13 days from submission of the development plan for Berenice, and only six days for Ptah.

The Berenice and Ptah fields are located in the Faghur Basin along the same fault trend in the Khalda Offset Concession. Exploration and drilling efforts are targeting rock from both the Mesozoic and deeper Paleozoic eras. These targets are a PRIMARY focus for Apache Egypt and have proven successful in this area with oil and gas discoveries made at the nearby Shu-1X, Apries-1X, Bat-1X and Geb-1X wells, although Ptah is the largest new field found in the play thus far.

Five wells, including the discovery wells, have been completed to date by Khalda Petroleum Company, Apache's joint-venture company with EGPC. All five wells are producing without the need for fracture stimulation at a combined rate of more than 13,600 barrels of oil per day (bbl/d) with first production starting in November 2014. The wells have produced approximately 1 million barrels of oil to date. Apache has invested $14 million to install production facilities and plans to invest another $35 million to handle the forecasted production increase.

Apache currently has three rigs operating in these two fields to drill development wells. All oil is being shipped via pipeline to nearby Khalda-operated processing facilities. Apache plans to continue increasing production from the two fields to 17,500 bbl/d by mid-year.
MGL: Image titleApache is one of the few big E&P's we follow thats trading under its PV10, EV is $35bn, PV10 is $43bn. We're not huge fans of Egypt, but the  political background has improved, subsidies are being reduced, and we must acknowledge the strength of activity in this geologically fecund country. Image title

India Cuts Domestic Gas Price by 8% as Global Energy Costs Fall

India cut the price of locally produced natural gas by 8 percent for six months beginning Wednesday as global energy costs slump.

Prices have been lowered to $4.66 per million British thermal units based on the gross heat value, according to the oil ministry’s Petroleum Planning and Analysis Cell. Rates were fixed at $5.05 per million Btu effective Nov. 1.

The reduction will squeeze the profit margins at explorers such as Reliance Industries Ltd. and Oil & Natural Gas Corp. and curb their appetite for investments needed to raise output. Prime Minister Narendra Modi aims to cut dependence on imported energy to 50 percent by 2030 from 77 percent now.

“If prices continue to fall for long, it will reflect on investments by producers,” said Dhaval Joshi of Emkay Global Financial Services in Mumbai. “This will pinch the producers, although it’s good for consumers.”
MGL: Thats the quickest turnaround from rumour to fact in India we've ever seen!

OPEC oil output hits highest since October on Iraq, Saudi

OPEC oil supply has jumped in March to its highest since October as Iraq's exports rebounded after bad weather and Saudi Arabia pumped at close to record rates, a Reuters survey found, a sign key members are sticking to their effort to regain market share.

The increase from the Organization of the Petroleum Exporting Countries adds to excess supply in the market, despite some signs that the halving of crude prices since June 2014 is encouraging higher oil demand.

OPEC supply has risen in March to 30.63 million barrels per day (bpd) from a revised 30.07 million bpd in February, according to the survey based on shipping data and information from sources at oil companies, OPEC and consultants.

"Demand might be a bit stronger than expected at the beginning of the year, but I don't think it is strong enough to absorb the entire oversupply," said Carsten Fritsch, an analyst at Commerzbank in Frankfurt. "There's still oversupply in the market, which is reflected in the inventory builds."

Besides Saudi Arabia, the main reasons for the rise are the resolution of involuntary outages - Iraq lifted exports due to improved weather and Libya managed to nudge production higher despite unrest.

If the total remains unrevised at 30.63 million bpd, March's supply would be OPEC's highest since 30.64 million bpd in October 2014, based on Reuters surveys.

Saudi Arabia was the driving force behind OPEC's refusal last year to prop up prices by cutting its output target of 30 million bpd, in a bid to discourage more costly rival supplies. The group holds its next meeting in June, and comments from OPEC officials suggest it will not alter the policy.

In March, the largest increase has come from Iraq, whose southern oil exports recovered following bad weather that delayed tanker loadings, according to shipping data and industry sources. Northern exports were slightly lower.

Based on this survey, Iraq's exports have come close to December's record high of 2.94 million bpd, depending on whether tankers at the southern ports on earlier on Tuesday actually depart in March. Iraq was hoping to reach 3 million bpd of exports this month.

Saudi Arabia has increased output to within a whisker of 10 million bpd on average in March, sources in the survey said, due to higher demand from export customers and an increased local requirement in new oil refineries.
MGL: Confirms our newsflow. Next chapter in the Oil bear: the storage cliff. When do run out of storage? At the moment the tealeaves suggest its a May event, but we're still not seeing the kind of VLCC storage activity we would associate with a collapse.

Warburg pumping $500Mln into start-up oil producer

Private equity shop Warburg Pincus is putting $500 million behind a start-up Houston oil producer that’s aiming to buy oil and gas properties in the Mid-Continent and Rockies regions, the firms said Tuesday.

The transaction is only the latest foray of buyout firms into the U.S. oil industry, as Warburg, Blackstone and other firms have raised billions to take advantage of bargains in the oil patch amid low crude prices.

Warburg’s start up, Independence Resources Management, will look first to the Anadarko Basin in western Oklahoma and the Texas Panhandle. It’ll focus on regions with large quantities of oil but that are tougher to extract out of the ground.

There, the firm says, “advanced drilling and completion techniques can create compelling risk-adjusted returns.” Warburg hired Mike Van Horn, who was most recently a senior executive at Newfield Exploration, to be CEO of Independence.

“The investment will enable us to acquire a meaningful footprint in targeted plays and optimally delineate and develop that hydrocarbon resource over time,” Van Horn said in a written statement.

The line-of-equity investment of up to $500 million comes in part from Warburg’s first energy fund, for which the New York firm raised $4 billion last year to pour into U.S. oil explorers and other companies.

“The opportunity to grow a start up E&P company behind a great management team fits squarely within our investment thesis,” said James Levy, managing director at Warburg Pincus, in a written statement.
MGL: Image titleMore PE capital comes chasing into the Oil patch. Here's the most actives from Wall Street in q1, check out the  3x long crude ETN, which traded 3bn shares. Image titleHere's the shares outstanding, which leapt from 300% between December and March. Retail, and the blogs confirm this, thinks this Oil crash is totally temporary.  

New EIA monthly data tracks crude oil movements by rail

For the first time, EIA is providing monthly data on rail movements of crude oil, which have significantly increased over the past five years. The new data on crude-by-rail (CBR) movements are integrated with EIA's existing monthly petroleum supply statistics, which already include movements by pipeline, tanker, and barge. The new monthly time series of crude oil rail movements includes shipments to and from Canada and dramatically reduces the absolute level of unaccounted for volumes in EIA's monthly balances for each region.

EIA is initiating the new series with monthly data from January 2010 through the current reporting month, January 2015. CBR activity is tracked between pairs of Petroleum Administration for Defense District (PADD) regions (inter-PADD), within each region (intra-PADD), and across the U.S.-Canada border. EIA developed the new series using information provided by the U.S. Surface Transportation Board (STB) along with data from Canada's National Energy Board, and EIA survey data.

Total CBR movements in the United States and between the United States and Canada were more than 1 million barrels per day (bbl/d) in 2014, up from 55,000 bbl/d in 2010. The regional distribution of these movements has also changed over this period.
The maps below provide general flows of CBR movements annually from 2010 through 2014.

The Williston Basin in North Dakota (PADD 2) was the primary origin of 55,000 bbl/d of CBR shipments in 2010, with most shipments remaining in the Midwest region. Rail tank cars were used mainly to move Bakken crude oil to the Cushing, Oklahoma, storage and pipeline hub. The remaining volumes of Bakken CBR shipments went to Gulf Coast and East Coast refineries (PADDs 3 and 1, respectively).
MGL: So the dominant crude by rail shipments are Bakken to PADD1. With Bakken output faltering now, and Bakken crudes trading at $43.80 for spot, we have to think this activity moves into sharp contraction.  At the end of January 660 wells in the Bakken were awaiting completion, a number that has steadily risen since last June (@ 300 then.)  Harold Hamm's recent comments suggest non-completions reached 85% in March, which implies that the Bakken 'overhang' must now be around 750 wells,  at EIA average production per well, thats over 400kbpd waiting for either pipe or price.  The Dakota access pipeline, in construction now, will almost entirely replace this Bakken -> Padd1 activity as it links Bakken oil fields directly to major pipeline capacity interchanges in Illinois. Expected completion q4 2016, capacity 450kbpd.

US oil production on track to reach all time high

Rystad Energy estimates US annual oil production (crude oil plus lease condensate) to peak at 9.7 million barrels per day by September 2015, assuming WTI stays at 55 USD/bbl on average for the year. The average production for 2015 estimated at 9.65 million barrels per day could be an all-time high after its peak in 1970 with 9.64 million barrels per day as yearly average.

'The monthly peak is estimated at 9.7 million bbl/d by September 2015, assuming horizontal oil rig count for Bakken, Eagle Ford and Permian will stabilize at 400 rigs, which is 43% below peak,' says Per Magnus Nysveen, Senior Partner and Head of Analysis at Rystad Energy. 'Production could be even higher depending on assumptions like (1) lower drilling costs, thus more barrels per dollar spent, (2) narrowing price differentials in North Dakota, and (3) reduced backlog of completed wells.'

By accounting for 400 thousand bbl/d of plant condensates produced from natural gas processing plants, Rystad Energy estimates that US oil production reaches an absolute all-time high already during April 2015, and further growth could be expected throughout the year. For overall liquids production, including biofuels, NGL and processing gains, the all-time-high was already passed during 2013. In 2012 US total liquids production surpassed both Saudi Arabia and Russia.

Last week US domestic oil production reached 9.42 million barrels per day. Production in March was 0.124 million bbl/d higher than in February, and a staggering 1.2 million bbl/d higher than in March a year ago. The current growth rate for US oil production is thus the highest since October 2014, and on an increasing trend for the first three months of this year.

Growth is also supported by year-over-year additions of 0.17 million bbl/d from new deep water fields in the Gulf of Mexico, including Tubular Bells, Jack, St Malo, Mars, Cardamom Deep, Cascade and others.
MGL: So this is confirmation of our primary thesis that capacity follows capex. Last year, at about this time, we did suggest US Oil production might be growing above 1.2mbpd as the new superfracs went into production. If you were to add the now substantial evidence of a 1mbpd fracklog building in the major basins, its entirely plausible that the growth would have been much higher. However, there's a growing disconnect appearing between the EIA data and local Texas RRC data, and if the RRC is correct, national data maybe overstating oil production by close to 1mbpd at this point in time. Image title
Make no mistake, if this Texas RRC data is correct, the 'fracklog' is the culprit.

Natural gas storage levels end heating season higher than last year

As winter makes its exit, and with it peak demand for heating, the nation’s natural gas storage inventories are higher than they were this time last year, despite 2015’s late start to spring temperatures.

And as the industry prepares to restock inventories during the so-called injection season between April and October, robust production will keep the natural gas market oversupplied and prices low, analysts said.

Natural gas in storage clocked in at 1.48 trillion cubic feet on March 20, according to the U.S. Energy Information Administration, representing “the first positive net injection this year.”

Storage levels are 63.6 percent above this time last year but 11.6 percent below the five-year average, according to the EIA.

Meanwhile, natural gas production, driven by fracking in shale plays, posted a year-to-date high of 73.2 billion cubic feet per day on March 22.

“This was largely because of record Northeast production, which hit an all-time high of 19.9 Bcf/d,” said the EIA, citing data from Colorado analytics firm Bentek Energy.

Production is expected to grow this year despite a falling rig count and plummeting oil and gas prices.

“We’re seeing an average 5.5 Bcf per day increase in production over last year,” said Erica Bowman, vice president of research and policy analysis for Washington, D.C.-based trade group America’s Natural Gas Alliance.
MGL: That was a shocker of a winter for gas bulls. We went into the season with low storage,  weather conditions seemed 'normal' for winter, if there is such an event, and here we are now at $2.6 for spot gas, worse yet LNG in Tokyo Bay at $7 odd is reflecting US gas prices. Image titleThis is the EIA data for the Marcellus field, its a supergiant, and now firmly in the top 10 globally of updated statistics. I've circled in yellow the technology 's' curve that has destroyed US Natural Gas pricing so profoundly.  Post the collapse in Natural Gas prices in 2010, the industry really beefed up its productivity, and production per well soared 5x in 5 years. Many analysts point at associated gas from Oil fields, and yes this was a contributor too, but the advent of the Marcellus is almost equal to associated gas in the national data, depending on your start point, each added over 10bcf per day to production.  

Our two questions: Is the natural gas bear now at exhaustion? We're going to lose the associated gas production growth, we're going to gain LNG exports. Second question: Is the Permian story an analog of the Marcellus story? We have multiple layers of oil bearing shale, we have an industry in its infancy on shale drilling in the Permian, and the Permian geology in size and scale is multiples of the Bakken and Eagle Ford. 


Canada Oil Output Limits GDP Declines in January

Crude oil gave Canada’s economy a surprise cushion in January, with gross domestic product shrinking less than economists forecast.

Output fell 0.1 percent, Statistics Canada said today in Ottawa, as rising oil production offset declines by wholesalers and retailers. The median forecast in a Bloomberg economist survey was for a 0.2 percent drop, with estimated declines ranging from 0.1 percent to 0.5 percent.

The report suggests that while Canada’s economy is being hurt by falling oil prices, the impact may not be as dire as some have worried. It also backs Bank of Canada Governor Stephen Poloz’s view that his surprise interest rate cut in January has bought policy makers time, said Bank of Montreal senior economist Robert Kavcic.

Crude oil and gas output rose 2.6 percent in January, after a 2.1 percent December fall, as oil sands producers completed maintenance work on some facilities, the statistics agency said.

Those gains were offset by a 2.6 percent drop in wholesaling and a 0.7 percent decline in manufacturing.
MGL: Image titleHere's Canada's Oil pipeline system. Since 2011, it has been struggling to keep up with Oil output from the oilsands, and WCS has traded at repeated, and large discounts throughout the period.Image title
Here's Enbridge's expansion activity. Since q3 last year Enbridge has been completing various pipelines running south and east from Alberta.
The big one was 600kbpd of crude from Chicago to Houston, completed in q4, and indeed as this capacity has come online WCS discounts have narrowed sharply, from peaks around $20, to current levels of $12. There's still a plethora of expansion activity to complete, out to late 2017.

Image title
As Enbridge points out, even on the low case, there a phalanx of large crude projects in the pipeline adding some 600kpd of Oil boe's by the end of 2017. Its only then that curtailed capex spend begins to impact Canadian crude production.

Somehow in all the noise about shale output south of the border, the market has been ignoring Canada's substantial Oil industry inertia as projects instigated at Oil prices above $100, and now contracted, in construction and completing over the next 2-3 years add a substantial amount to crude supply south of the border.  We strongly suspect the build in Cushing of inventory is directly associated with these added flows into the system.  The company and state data is indicating that the fracklog has replaced current oil production with potential oil production, and created not only a mammoth inventory build, but also a large overhang in the system.

Market implied expectations of some kind of V shaped recovery in Oil pricing late this year are sharply at odds with the facts as we find them.


Cost key variable in crude-price scenarios

With Saudi Arabia reluctant to cut production, crude oil prices over the next decade depend greatly on producers’ costs, says a veteran observer of oil markets and the Middle East.

An oil-price rise to $80-90/bbl in the next couple of years requires a production cut unlikely to be made by Saudi Arabia, says Fereidun Fesharaki, chairman of Facts Global Energy (FGE), London. Without a Saudi cut, Fesharaki writes in a March report, “prices can lag at $40-60/bbl for some time to come.”

Lower growth in oil production in the US, he adds, will not support prices on its own.

According to Fesharaki, Saudi Arabia “had no choice” when under pressure last year to cut production in defense of the crude price while supply was zooming in the US.

Before agreeing to cut output, he believes, the Saudis need to see growth in US oil production fall to no more than 200,000 b/d in 2016 and Iraq accept “real quotas.”

Both conditions are steep. US production growth last year was 1.5 million b/d and this year will be about 1 million b/d. And Iraq, which will be producing nearly 4 million b/d by yearend, remains “absolutely reluctant” to accept a quota.

“They [Iraqi officials] are unlikely to negotiate a quota before their production reaches 6-7 million b/d,” Fesharaki says.

What’s required

The market needs to shed 3-3.5 million b/d of current and future oil production to allow the crude price to exceed $80/bbl in the next year or two, he says.

This could occur if Saudi Arabia lowered production to 8 million b/d, if US production growth fell by 500,000-800,000 b/d, and if Iraq accepted a quota not exceeding 3.5-4 million b/d. Other OPEC members also would have to cut production, and Russia is likely to lose 300,000-500,000 b/d of production because of low oil prices and sanctions.

He expects US production growth to fall to 0-200,000 b/d by 2016, about FGE’s expectation for US demand growth this year.

This combination “can impact the market positively to the $50-60/bbl range, but it is not enough to raise prices to beyond $80/bbl,” Fesharaki says.

Iran, meanwhile, might increase production by 500,000 b/d in 3-6 months if freed of international sanctions and by 700,000 b/d a year beyond that. Iran will be reluctant to accept a lower production and remains committed to total liquids production of 4 million b/d.

Two scenarios

Fesharaki outlines one scenario in which crude prices fluctuate within a range of $50-80/bbl for the next 10 years. This assumes producers, especially in the US, don’t cut costs dramatically.

If costs do plummet, the price range for the next 10 years will drop to $40-60/bbl as US production continues to grow faster than 500,000 b/d/year in 2016 and 2017.

If US production doesn’t fall, Fesharaki adds, Saudi Arabia might have to raise production to perhaps 10.5 million b/d to depress the crude price to $30-40/bbl, despite protests from other members of OPEC.

“But we feel confident that oil prices in the range of $40-45/bbl will cut 80% of the US production growth,” Fesharaki says.

He doesn’t expect a demand rebound to rescue the market. Demand growth of slightly more than 1 million b/d is possible this year. Next year, growth of 1.5-2 million b/d is “unlikely, but not impossible.”

The analyst also doesn’t expect geopolitical upsets to cut production enough to balance the oil market, calling a major supply disruption from any of the vulnerable producers “highly unlikely.”

For the rest of this year, he expects prices of West Texas Intermediate and Brent crude to fall to $40/bbl in the second quarter, with WTI $2-3/bbl below the European marker, because of seasonal demand weakness, increasing storage costs, and postponement of refinery maintenance.
MGL: Image title
Canadian dollar depreciation has moved the marginal costs down 25% since the fall.
Image title
In Russia, marginal costs have fallen in half.Image title
In the US operators are sharply reducing capex costs per well. 

Here's a typical consensus Oil breakeven chart:

Image title
It's just history! ALL the above numbers are too high now. Between currency and technology we just shown you that 22m bpd (Russia, US, Canada) have seen cash breakevens drop between 25% and 50% in the last 4 months. 


Itochu to Post Loss on Samson U.S. Oil and Gas Investment

Itochu Corp. said it will post a loss of about 38 billion yen ($317 million) on a U.S. shale oil and gas investment amid a downturn in energy prices.

The loss resulting from Itochu’s 25 percent stake in Samson Investment Co. will be booked in the earnings for the fiscal year ended March 31, the Tokyo-based trader said. On a non-consolidated basis, the figure will rise to 43 billion yen. The full-year profit target of 300 billion yen hasn’t been affected, Itochu said.

Itochu joined the 2011 KKR & Co.-led purchase of most of Tulsa, Oklahoma-based Samson as part of the biggest leveraged buyout in the oil and gas production industry at the time, according to data compiled by Bloomberg. It was Itochu’s third-largest acquisition in raw materials, data show.

Itochu, Japan’s third-largest trading house, paid 78 billion yen, worth $1.04 billion at the time, for the equity in family-owned Samson. As a result of the loss, the balance of the investment will decline to 4 billion yen, Itochu said.

Samson Resources Corp., an oil and natural gas producer controlled by private equity giant KKR & Co., warned investors that bankruptcy may be its best option as collapsing crude prices erode its ability to repay debt.

Samson, which was acquired by KKR and a group of investors in a $7.2 billion buyout in 2011, hired restructuring advisers in February, including Kirkland & Ellis LLP and Blackstone Group LP, according to the company.
MGL: PV10 is $2.2bn, net debt $3.8bn, 2m acres of primarily gas acreage all over the map. This was one of the first big PE type investments post the gas crash, and had identical hallmarks to the infusion of capital we are now seeing in Oil in the US. 

Brazil engineering player files for bankruptcy

Brazilian engineering conglomerate Grupo OAS requested court protection from creditors for nine of its units on Tuesday as it grapples with the fallout from a scandal at state-controlled Petrobras, a major customer.

The filing comes after Grupo OAS struggled for months with the effects of a corruption investigation at Petrobras, as the state oil company is known, which undercut the builder's access to financing and contract payments.

An economic downturn, government austerity and a slumping currency have also taken a toll on the company in recent months.

OAS follows rivals Alumini Engenharia and Galvao Engenharia, two other engineering firms that have filed for bankruptcy protection since January as the Petrobras scandal escalated.

Prosecutors say the three firms were part of a cartel that paid bribes to Petrobras executives and politicians in exchange for contracts.

Sao Paulo-based OAS pledged to sell assets to repay debt and inject cash into its heavy construction unit.

Grupo OAS, founded in 1976 by contractor Cesar Mata Pires and his partners in the north-eastern city of Salvador, has about 8 billion reais ($2.48 billion) in debt.
MGL: Petrobras fallout must add to the stress from falling Oil on service and engineering providers, so far the pain here has been primarily in Brazil, but we note there's a vast gulf opened between the size of the Petrobras corruption ticket (~$30bn) and the companies who have owned up to paying the bribes. It surely has to impact everyone who supplied Petrobras's subsalt effort since 2005?

Sanchez PP buys some producing assets from Sanchez Energy

Sanchez PP buys some producing assets from Sanchez Energy

Sanchez Production Partners LP today announced that it has executed and closed an agreement with Sanchez Energy Corp. to acquire wellbore interests in certain producing oil and natural gas wells in the Eagle Ford Shale for aggregate consideration of $85.0 million, subject to normal and customary closing adjustments (the “Eagle Ford Acquisition”). The transaction has an effective date of January 1, 2015 and was financed by SPP with a combination of preferred equity raised in a private placement, common units, borrowings under an amended and restated credit facility, and available cash.

Producing assets: 59 wellbores in the Palmetto Field in Gonzales County, Texas.

Escalating working interest: Average working interest of 18.2% in 2015 increases to 26.1% on January 1, 2016; 33.5% on January 1, 2017; 40.6% on January 1, 2018; and 47.5% on January 1, 2019 for the remaining life of the wellbores.

Production: As a result of the escalating working interest transaction structure, average production of approximately 1,000 BOE/D net to SPP’s interest is expected from the wellbores over the period 2015 through 2019, with production following declines characteristic of MLP assets thereafter.
Reserves & Asset Mix: Based on estimates using the forward strip as of January 9, 2015, reserves total approximately 5.2 MMBOE, all of which are proved developed producing, with production expected to be approximately 84% oil and liquids and 16% natural gas.
MGL: Some will cry foul! Its hardly an arms length transaction. Nevertheless Sanchez family interests have deep pockets, and a desire to support the favourite son. 


EPA will require weed-resistance restrictions on glyphosate herbicide

U.S. regulators will put new restrictions on the world's most widely used herbicide to help address the rapid expansion of weeds resistant to the chemical, Reuters has learned.

The Environmental Protection Agency confirmed it will require a weed resistance management plan for glyphosate, the key ingredient in Monsanto's immensely popular Roundup weed-killer.

The agency has scheduled a conference call for next week with a committee of the Weed Science Society of America to discuss what the final plan for glyphosate should entail, said Larry Steckel, a Tennessee scientist who chairs the committee.

An EPA spokeswoman declined to give specifics of the plan, but told Reuters that its requirements will be similar to those placed on a new herbicide product developed by Dow AgroSciences, a unit of Dow Chemical Co..

Requirements for the Dow herbicide include weed monitoring, farmer education and remediation plans. The company is required to provide extensive reporting to the EPA about instances of weed resistance and to let "relevant stakeholders" know about the difficulties of controlling them via a company-established website.

Monsanto spokeswoman Charla Lord would not discuss whether the company was negotiating a plan with regulators, but said Monsanto "will continue to work with the EPA to ensure proper product stewardship as we move through the regulatory process."

At least 14 weed species and biotypes in the United States have developed glyphosate resistance, affecting more than 60 million acres of U.S. farmland, according to data gathered by the U.S. Department of Agriculture and U.S. weed scientists. The herbicide-resistant weeds hinder crop production and make farming more difficult and expensive.
MGL: There are 'fluffy' stories (ie WHO deciding glyphosate is carcinogenic) and real stories, ie this one. If you stress an ecosystem by using too much of a powerful medicine, it will respond, that's the nature of evolution in action. Now we did run some stories some years ago on this issue, but quietly dropped them in the face of the bear afflicting commodity equity, Monsanto looked too robust, and too defensive to throw darts at, and it was a mega cap you could own, and sleep easily at night. Now, well we're well into the bear, precious stocks already show signs of value, mining stocks ex iron ore in some cases could be buys, so suddenly this story matters to holders of Monsanto.  At 20x eps, 11x ev/ebitda and a sub 2% yield there's simply no room for bad news. Time to exit.

Steel, Iron Ore and Coal

BC Iron gets royalty break as iron ore hits new lows

Australia's BC Iron said on Wednesday it will be able to defer A$8-A$12 million ($6.11-$9.16 million) in royalty payments, as it struggles amid a dramatic fall in iron ore prices.

Facing the prospect of mines shutting down, Western Australia state in December notified miners producing less than 20 million tonnes annually they could be eligible for a 50 percent deferral on the royalties they pay. It also froze port fees and tariffs for miners using the state's Indian Ocean export terminals of Dampier and Port Hedland.

Rio Tinto , which is not eligible for the rebate because of its size, expects some 85 million tonnes of iron ore capacity to be taken out of the world market in 2015 because the price slump has made it too costly to produce, on top of an estimated 125 million tonnes last year.

Chinese mines - among the least efficient globally - will absorb most of the losses. But analysts have warned small Australian miners, such as BC Iron and Atlas Iron, were operating close to the break-even point and will need to reduce overheads if prices continue to drop.

Both BCI and Atlas have posted losses for the half-year ended Dec 31 versus profits in the corresponding period, which included hefty writedowns relating to the value of their mines.

"The amount, A$8-A$12 million, is not a great sum, but given the climate we are operating in, every bit will help," BC Iron Chief Executive Morgan Ball told Reuters by telephone.

Iron ore .IO62-CNI=SI stood at $51 a tonne, data from The Steel Index showed - the lowest since late 2008.

Western Australia state, once the economic engine of Australia, in December recorded its first budget deficit in 15 years as revenues from iron ore plummeted.

In the boom years, multinationals Rio Tinto and BHP Billiton spent billions of dollars digging new mines.
MGL: Australia, which last year was bullish iron ore to a man, has rapidly moved from surprise and denial, into action. Everyone is on a cost cutting binge, and even the gov't is pitching in here. 

Iron ore prices are finally down to levels where we can conceive that they could be higher in a years time. Its not an easy bull case: Beijing wins the faction war; corrupt officials are in jail, and Beijing moves to stabilise the property sector. Steel production bounces some, and iron ore stops falling like a stone.  Its possible, but not plausible.

Our central case remains that iron ore remains around these levels for a decade.

There's still an outside chance that the Indian's finally move their substantial capacity back into the market this year. Thats a killer now. 

Iron ore price dives 3% on Tuesday

Iron ore levels had the sharpest single day drop in recent memory dipping to lowest level in decade. The price is all set to break the USD 50 per tonne floor within this week with miners on production rampage iron ore has dropped more than 25% this calendar year and has plum down by about 75% since its peak of about US190, reached in 2011. By most measures, iron ore producers should be curtailing output to boost prices at this point BUT the 3 biggest producers Vale, Rio Tinto and BHP Billiton are sticking to their guns to protect market share. Thus there is a very good chance that prices will continue to deteriorate and could fall closer to US$40

It was absolute quandary in iron ore market on the last day of March with price levels dipping by 3% suddenly. Even though iron ore market has been worst hit this year losing 28% within a span of 3 months the quantum of collapse this week has petrified traders in China. Iron ore with 62 percent content at Qingdao in China, sank by over 3% to level of USD 51.35 per DMT. That’s the lowest since 2004-2005
MGL: Price has now pretty much done its worst. The issue now is duration. Our central case today is that iron ore is in oversupply for at least a decade, we fear its going back to its early 1990's slumber as one of the most boring commodities to study. The big three: RTZ, BHP, and Vale once again dominate the market, and everyone else is in deep trouble. Vale has the worst balance sheet, and still has to complete its build out of capacity. Prices could well fall some more from here, but below $50, we are entering price levels which are not really sustainable on a 5-10 year view. We're not giving up our bearish tack, just cashing in some chips and noting that the argument must move from price to duration. 

Yanzhou Coal Mining announces 2014 annual results

Yanzhou Coal Mining announces 2014 annual results

In face of unprecedented difficulties and challenges in 2014, through adopting innovative thinking and implementing a series of operation management measures to adjust costs of sales to enhance profit, optimize marketing strategy and strengthen management capability to improve efficiency, Yanzhou Coal presented an excellent posture of stable and positive results with strong endogenous driving force and greater development potentials.

For the year ended 31 December 2014, sales income of the Group amounted to RMB60.37 billion, representing an increase of 7.0% YoY. Net income stayed flat at RMB 766 million. Earnings per share amounted to RMB 0.16, maintaining at same level as 2013. The Board of Directors proposes to declare a cash dividend of RMB 0.02 per share for the year ended 31st December 2014.

Under the prolonged market downturn and oversupply grim situation, the Group insisted on adopting innovative sales model, expanding sales channels and strengthening efforts on market expansion, thus successfully achieving sale volume growth.

The Group’s total sales volume of coal was 123 million tonnes, up 18.3% YoY. Of which, sales volume of the headquarters was 34.75 million tonnes, sales volume of Yancoal Australia was 15.74 million tonnes, sales volume of ShanXi Neng Hua was 1.50 million tonnes, sales volume of Heze Neng Hua amounted to 3.11 million tonnes, and Ordos Neng Hua contributed a sales volume of 5.79 million tonnes.

The Group continued to expand the business of the sales of externally purchased coal. Sales volume of externally purchased coal reached 57.02 million tonnes, up 44.7% YoY, setting the foundation for the implementation of domestic and international integrated marketing strategy.

In response to the increasing difficulties to generate revenue and profit margins were being squeezed in both domestic and overseas coal markets, the Group continued to flexibly adjust its product mix, optimize sales and marketing strategies, improve quality of the products and aftersales services, in order to achieve stable sales volume and profits.

During the Year, the average selling price of coal of the Company in the headquarters decreased by 17.7% to RMB 439.94 per tonne, that of Shanxi Neng Hua down by 25.4% to RMB 210.69 per tonne, that of Heze Neng Hua down by 13.6% to RMB 525.65 per tonne, that of Ordos Neng Hua down by 13.5% to RMB 163.02 per tonne, and that of Yancoal Australia dropped by 19.2% to RMB 463.77 per tonne.
MGL: Yanzhou fights price with volume, and it sort of works. But at the end of the day, debt is still rising inexorably, cash flow is negative, and its not until 2016 that we see some positive cashflow. Until then, its just another expensive coal stock: 26x eps, 14x ev/ebitda, <1% yield. Short the rallies.

Large Chinese miners lower April thermal coal prices

Large Chinese miners lower April thermal coal prices

China’s top miner Shenhua Group lowered the April price of benchmark 5,500 Kcal/kg NAR thermal coal to 462 yuan/t with VAT, FOB Qinhuangdao, down from 520 yuan/t in March, sources said.

Shenhua will give a 2 yuan/t discount for buyers who purchase above 30,000 tonnes of coal in April, regardless of the coal grades, in a move to boost sales amid slackening demand.

That means the most favorable April price of Shenhua 5,500 Kcal/kg NAR coal would be 460 yuan/t, down 20 yuan/t from March.

The miner’s pricing has been falling for four consecutive months with a total drop of 60-70 yuan/t, but the April price is still some 20 yuan/t higher than average levels in the spot market.

China National coal group soon followed Shenhua to offer 5,500 Kcal/kg NAR coal at 460 yuan/t in April.

However, large coal groups may still face sales pressure this month due to bleak demand and high stocks, and spot prices may further slide, insiders said.

On March 31, the Fenwei/Platts CCI1 Index for domestic 5,500 Kcal/kg NAR coal traded at Qinhuangdao port was assessed at 439.0 yuan/t, inclusive of VAT, FOB basis, down 37 yuan/t from end-February and 55 yuan/t lower than the start of the year.

Buying interest from downstream power plants remains low, as their daily coal burn stays low due to a lack of strength in the demand for coal-fired electricity.

Coal stock at key power plants slid 32.3% from the beginning of 2015 to 64 million tonnes by March 31. It, however, was still enough for 20 days’ consumption, up from the 15-day normal level.
MGL: In order to stop coal demand from falling we need around 2-3% electricity demand growth in China. The pace of alternative energy implementation is red hot: hydro is largely done for now, but Nuclear, Wind and Solar are still accelerating. The last read we had for electricity was -6.3% year on year. 

Baosteel on track to start operations in September

Baosteel on track to start operations in September
With construction of the nine main parts of its steel complex proceeding smoothly, Baosteel Group's new project in Zhanjiang is well on track to start operating in September.

About half of the more than 40 billion yuan ($6.46 billion) investment has been utilized since construction of the project, located on Donghai Island, China's fifth-largest island, began in May 2013, said Zhanjiang Mayor Wang Zhongbing.

The complex is designed to have an annual capacity of 8.75 million metric tons of steel in its first phase.

A result of phasing out obsolete steelmaking capacity in Guangdong province, the project is set to become an efficient thin sheet and carbon steel production base.

It is expected to lift the equipment, automobile, home appliance and shipbuilding industries, as well as industries that support those, bringing revolutionary changes to the economic level and structure of the city.

The government will work to extend the industrial chain based on the project and plan other projects in nearby counties to promote their economies. The steel complex will create more jobs and entrepreneurial opportunities and help cultivate technological and managerial skills. More than 18,000 people are currently working on site for the project.

On the environmental side, Wang said, "I trust that Baosteel has the capital, technology and ability to make the environmental protection of the Zhanjiang steel project the best."

The investment in energy-saving and environmental protection makes up 16 percent of the total, with 116 well-established and reliable environmental technologies applied. Baosteel has planned the project to have the lowest emissions possible and the highest efficiency of resource utilization.
MGL: 16% of capex on environmental measures? Thats a new statistic for us to ponder. 

Again, we're still seeing inertia from the prior go-go growth regime, this project completes in September, which means it was likely started some 2 years ago? For all the talk from Beijing, we still haven't seen the top in steel, aluminium or cement capacity. All we're seeing right now is a rapid slowdown in the growth rate of additional supply. 

Evraz proposes tender offer to owners as core earnings rise

Russia's Evraz, one of the country's largest steelmakers, will return up to $375 million to its shareholders as part of a tender offer, it said on Wednesday, after its 2014 core earnings rose on a weaker rouble.

Margins at Evraz and other Russian steel exporters have been supported by a 40-percent decline in the rouble against the dollar since mid-2014 as their costs fell in dollar terms.

Evraz, partly controlled by Chelsea soccer club owner Roman Abramovich, said core earnings - earnings before interest, taxation, depreciation and amortisation (EBITDA) - rose 28 percent year-on-year to $2.3 billion.

However, the company's bottom line was hit by the rouble decline. Evraz made a netloss of $1.3 billion last year compared to a loss of $551 million in 2013 due to a foreign exchange loss of $1.0 billion and a $540-million assets impairment.

"In light of the strong financial performance in 2014, the directors would like to make a return of capital to shareholders of up to $375 million by way of a tender offer," Evraz said in a statement.

Its tender offer represents a maximum of 8 percent of issued share capital and a 10 percent premium to the closing price on March 31, Evraz said. Shareholders are expected to approve the offer on April 17 and to receive the proceeds by April 23.

Evraz added that its net debt to EBITDA ratio was at 2.5 at the end of 2014 and that the company could consider returning cash to shareholders should the ratio remain below 3.
MGL: Evraz turns shareholder friendly? Or does Abramovich just need a new yacht? Either way its good news for minorities, and this stock is in a bull market in dollars. 9x 5x ev/ebitda 3% dividend yield. 
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