Mark Latham Commodity Equity Intelligence Service

Wednesday 27th July 2016
Background Stories on www.commodityintelligence.com

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    Macro

    China AQI's: stimulus ongoing, but it has moved.

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    Caterpillar just put the global economy on watch — again


    Caterpillar has again put the global economy on watch.

    The world's largest maker of massive industrial equipment lowered its 2016 earnings forecast on Tuesday, saying it did not expect economic conditions or its key industries to improve.

    "World economic growth remains subdued and is not sufficient to drive improvement in most of the industries and markets we serve," the company said in its statement.

    Because of the global scale of Caterpillar's operations and its involvement in long-term capital projects, the company's outlook is used as an informal bellwether of future economic conditions.

    "Global uncertainty continues, and the recent Brexit outcome and the turmoil in Turkey add to risks, especially in Europe," the company added.

    Caterpillar now sees adjusted earnings per share of $3.55 excluding costs, down from $3.70 yet higher than analysts' estimate for $3.52, according to Bloomberg. Its shares fell by 1.5% in premarket trading after this downgrade.

    Sales and profit for the second quarter beat analysts' estimates. Sales fell 16% year-on-year to $10.3 billion, while earnings per share came in at $1.09.

    "Despite a solid second quarter, we're cautious as we enter the second half of the year," CEO Doug Oberhelman said. "We're not expecting an upturn in important industries like mining, oil and gas, and rail to happen this year."

    Caterpillar expects to lay off more workers in the second half of the year, and it raised its estimate for restructuring charges to $700 million from $550 million.

    "Amidst these very challenging market conditions, our balance sheet remains strong and our employees are delivering better performance on everything from safety, quality, and cost management to machine market position," Oberhelman said.

    http://uk.businessinsider.com/caterpillar-cuts-earnings-forecast-and-warns-about-global-economy-2016-7?r=US&IR=T
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    Miner Freeport-McMoRan's revenue misses estimates


    U.S. miner and oil producer Freeport-McMoRan Inc's (FCX.N) quarterly revenue fell far short of Wall Street estimates, mainly due to lower copper prices.

    The company's shares were down 6.7 percent at $11.50 in premarket trading on Tuesday.

    The world's biggest listed copper producer said average realized price per pound of copper fell about 20 percent to $2.18 in the second quarter ended June 30.

    Copper prices have been languishing at near seven-year lows due to a supply glut.

    Three-month copper on the London Metal Exchange CMCU3 was down about 22 percent on average in the three months to June 30, compared with the same period a year earlier.

    Freeport has been working to reduce its heavy debt pile, which its chief executive has called "a killer", mostly through asset sales.

    The Phoenix, Arizona-based company's consolidated debt fell to $19.32 billion at the end of June from $20.78 billion on March 31.

    The company has said it wants to slash its debt by up to $10 billion but hasn't given a time frame.

    Freeport has entered into agreements to sell more than $4 billion worth of assets this year, including its 56 percent stake in the Tenke Fungurume copper and cobalt mine in the Democratic Republic of Congo.

    The company said on Tuesday it intends to offer up to $1.5 billion of its common stock as part of efforts to cut debt.

    Freeport's net loss attributable to common stock narrowed to $479 million, or 38 cents per share, in the three months to June 30 from $1.85 billion, or $1.78 per share, a year earlier.

    Excluding items, the company lost 2 cents per share, above the average analyst estimate of a 1 cent loss, according to Thomson Reuters I/B/E/S.

    Revenue fell 15.3 percent to $3.33 billion, coming in lower than estimate of $3.70 billion.

    http://www.reuters.com/article/us-freeport-mcmoran-results-idUSKCN1061FZ
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    Oil and Gas

    Brazil Said to Study Scrapping Nationalist Deep-Water Oil Rules


    For international oil companies that saw access to Brazil’s gargantuan offshore reserves curtailed back in 2010, the tide is turning.

    Brazil’s interim government is studying the benefits of scrapping nationalistic oil legislation that was championed by now suspended President Dilma Rousseff and her leftist Workers’ Party, said three people involved in the discussions who asked not to be to be named because the plans aren’t public. The government is considering going as far as returning to a concession model that companies prefer and consider more profitable, the people said.

    The studies are expected to be presented in September to Acting President Michel Temer, who has yet to take a side in the debate, one of the people said. The plans under study go beyond a bill currently in Congress that, if passed, would remove the obligation that state-controlled oil company Petrobras operate all pre-salt fields even if it doesn’t find them attractive.

    The discussion has just begun and any changes to the oil legislation would require a broad debate in Congress, which could take a couple of years, the people said. Rousseff’s predecessor, Luiz Inacio Lula da Silva, put Petrobras in charge of the country’s most prolific oil fields during the commodities boom. The Workers’ Party also pursued interventionist policies in the electricity industry, discouraging foreign investment.

    Temer’s press office didn’t respond to an emailed request for comment on studies to change the auction model for the pre-salt oil fields.

    Ideological Issue

    Under the current production-sharing model for Brazil’s most promising offshore region known as the pre-salt, Petrobras and its partners share a portion of production with the federal government through a consortium member known as PPSA, which represents the government’s interests. The first and only time this model was put to the test at the Libra field auction in 2013, only one consortium participated and paid the minimum signing bonus, underscoring the reluctance by foreign oil companies.

    The rules governing access to the country’s oil reserves are a deeply ideological issue for many Brazilian, especially members of Rousseff’s Workers’ Party who accuse Temer of trying to hand Brazil’s geologic riches to foreign oil companies. But now Brazil’s oil industry, dominated by Petrobras, has been slammed by widespread corruption, government interference and low oil prices, and those who support changing the legislation say new rules are necessary to attract investment and create jobs.

    A return to a more traditional concession model for the pre-salt fields, which hasn’t yet been discussed publicly, could generate more competition at licensing rounds and accelerate the development of the region, bringing much-needed tax revenue to producing states and the federal government. The concession regime doesn’t have a mandatory participation by the state, and all oil production belongs to concession partners after paying royalties and taxes.

    Even if Temer decides to throw his administration’s support behind such changes, the legislation would probably not be sent to Congress until at least next year, two of the people said.

    The government is also preparing other changes that could be implemented faster to attract foreign investment to the industry. The government plans to start announcing new measures in August that include easing buy-in-Brazil requirements, extending a tax refund on imported equipment, and clarifying how to develop oil deposits that extend outside of the concession boundaries into unlicensed acreage, Oil and Gas Secretary Marcio Felix said in a Tuesday interview. The lack of clarity has delayed several large discoveries, including Petrobras’ Carcara field and Gato do Mato, operated by Royal Dutch Shell Plc, he said.

    http://www.bloomberg.com/news/articles/2016-07-26/brazil-said-to-study-scrapping-nationalist-deep-water-oil-rules
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    Statoil sinks to red in 2Q


    Norwegian oil giant Statoil on Wednesday posted a loss for the second quarter of 2016 due to low oil prices, compared to a profit in the same period last year, and decided to cut its capex guidance by $1 billion.

    The company’s net operating income in the second quarter 2016 dropped to $180 million, compared to $3.6 billion in the same period of 2015. The reduction was primarily due to the drop in prices for oil and gas and lower refinery margins. Cost reductions contributed positively to the results.

    Statoil reported a loss of $302 million for the quarter, compared to a profit of $866 million in the corresponding quarter of 2015.

    Further, the company’s revenues dropped 37 percent during the quarter to $10.895 billion, from $17.4 billion in the same period last year.

    The Norwegian company delivered equity production of 1,959 mboe per day in the second quarter. The underlying production growth in the quarter, after adjusting for divestments, was 6% compared to the second quarter of last year.

    Statoil said it is lowering its capex guidance for 2016 from $13 billion to $12 billion and its exploration guidance for 2016 from $2 billion to $1.8 billion. Production guidance remains unchanged, and expected annual organic production growth is 1% from 2014 to 2017.

    “We delivered solid operational performance with strong production growth and progress on project development and execution. Our financial results were affected by low oil and gas prices in the quarter,” says Eldar Sætre, President and CEO of Statoil ASA.

    http://www.offshoreenergytoday.com/statoil-sinks-to-red-in-2q/
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    BP pursues new projects despite profit miss


    BP will forge ahead with at least three more new projects this year, its CEO said, despite the British oil major reporting a 45 percent drop in second-quarter earnings that prompted a cut in its 2016 investment budget to below $17 billion.

    Tuesday's results missed expectations, with analysts surprised by higher corporate charges, including administrative costs relating to Gulf of Mexico oil spill liabilities, and a lower contribution from BP's stake in Russian oil producer Rosneft.

    Rivals Shell, Statoil, Total and Eni also report second-quarter numbers this week, sharpening the focus on Tuesday's drop in crude oil prices towards $44 a barrel, well short of the $60 previously cited as the level at which oil majors can break even.

    Though BP chief Bob Dudley acknowledged that the global oil glut's impact on refining margins and revenue continues to make for a challenging environment, he said that capital expenditure plans have been helped by a drop in associated costs.

    "We're going to choose our projects really carefully and the cost reductions and re-engineering of the projects has really brought them down to what I think is a very attractive (price range)," Dudley told Reuters.

    Dudley said that BP could make another three final investment decisions this year, having already signed off on the expansion of its Tangguh liquefied natural gas (LNG) plant in Indonesia and the Atoll offshore gas project in Egypt.

    PROJECTS EARMARKED

    A gas project in India, the second phase of the Mad Dog deepwater oil field in the Gulf of Mexico and a Trinidad project could all get the green light, he said.

    BP's projects pipeline is expected to add 500,000 barrels of oil equivalent a day by the end of 2017, with a further 300,000 bpd by the end of the decade.

    Shares in the company fell 2.5 percent to 429 pence by 1128 GMT, but RBC Capital Markets analyst Biraj Borkhataria said: "We think continued cost and capex deflation reads positively for the sector."

    Second-quarter underlying replacement cost profit, BP's most-watched profit measure, was $720 million, down from $1.3 billion in the same period last year and $120 million below an analyst consensus provided by the company.

    BP's refining margins hit a six-year low for the second quarter and the company said they would remain under significant pressure in the coming months.

    It continues to reduce costs and now expects full-year capital expenditure to come in below the previous target of $17 billion target, saying that its 2017 investments could drop to as low as $15 billion if crude prices remain weak.

    "I don't think BP should go below that because then you start to take away from important growth," Dudley said.

    Total costs for the 2010 Deepwater Horizon explosion and oil spill, which killed 11 workers, has reached $62 billion but the majority of claims have now been settled.

    BP maintained its quarterly dividend at 10 cents a share, reassuring investors in a sector valued for its consistent payouts.

    http://www.reuters.com/article/us-bp-results-idUSKCN1060J7

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    China Oil Giant’s Income Rises as Costs Cut Amid Shift to Gas


    China National Petroleum Corp., the country’s oil and gas behemoth, said first-half profit rose 11 percent and that spending cuts at the country’s largest field helped boost earnings.

    The parent company of listed unit PetroChina Co. posted a profit of 27.58 billion yuan ($4.13 billion) in the six months ended June 30, according to a Beijing-based spokesman, who asked not to be identified, citing company policy. That compares with a profit 24.82 billion yuan a year ago, according to data compiled by Bloomberg. Sales were 853.4 billion yuan, according to the spokesman, versus 1.02 trillion yuan a year earlier.

    “CNPC is doing what it can to cut costs, but low oil prices still sets a floor for how much the company can really make,” Tian Miao, an analyst with policy researcher North Square Blue Oak Ltd., said by phone. “PetroChina owns the best-quality assets of CNPC, including upstream, pipeline and refining, so improved CNPC earnings are a good sign that PetroChina may also report improved performance.”

    CNPC saw “better than expected” results in the first half, Chairman Wang Yilin said earlier this month, without providing details. “Operational performance” improved every month in the first six months, though the company’s crude oil business still posted a loss, according to Wang. The state-owned explorer will give priority to natural gas exploration and production in the second half of the year, he said.

    China’s largest oil and gas producer said in a separate statement Tuesday that its Changqing field produced 26.5 million tons of oil equivalent in the six months through June and that the unit operating it posted a profit during that period, overcoming losses during January and February.

    Changqing produced 11.76 million tons of crude (about 473,600 barrels a day), less than half the field’s total, while gas production reached 18.52 billion cubic meters. CNPC improved single-well output at Changqing and controlled production costs by investing the “lowest possible” amount in exploring for new reserves, the company said.

    Brent crude, the global benchmark, averaged about $47 during the second quarter, up from about $35 during the first three months of the year. Prices during the first half of the year averaged about $41 a barrel, down roughly 30 percent from the same period in 2015.

    PetroChina may break even in the first half on one-off gains and higher oil prices in the second quarter, Citigroup Inc. analysts including Graham Cunningham wrote in a July 15 research note. The listed unit posted a 13.8 billion yuan loss in the January to March period, its first-ever quarterly loss since listing in 2000. The company closed 1.3 percent lower at HK$5.28 on Tuesday, compared with a 0.6 percent gain in the city’s benchmark Hang Seng Index.

    http://www.bloomberg.com/news/articles/2016-07-26/china-oil-giant-s-income-rises-as-costs-cut-amid-shift-to-gas
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    ExxonMobil offer ‘inadequate’, former InterOil CEO says


    Former InterOil CEO Phil Mulacek issued a comment on the recent ExxonMobil’s US$2.5 billion offer to acquire InterOil, claiming the shareholders will forego billions of dollars of value.

    He added that by accepting the ExxonMobil proposal, the InterOil shareholders would also miss on five cash payments Total agreed with InterOil in 2014.

    According to Mulacek, the contingent resource payment (CRP) is “vastly inadequate for InterOil shareholders” as well as potentially manipulative and structurally flawed.

    “The recent certification of the Elk and Antelope resource, which Oil Search, recently conducted in connection with its purchase of a minority interest in PRL15 in 2014, shows an average estimated 2C resource of only 6.43 tcfe,” Mulacek said.

    He added that this is materially below the 10 tcfe estimate Oil Search suggested claiming this supports the view that the CRP as proposed by ExxonMobil would have only a minimal value unless modified.

    Mulacek, representing the group called ‘Concerned InterOil Shareholders’ said the group’s main concern is that the ExxonMobil’s CRP proposal is based only on a single resource estimate performed after Antelope-7 and before any gas or LNG is produced, which will not fully reflect the true resource size.

    The group calls for ExxonMobil to provide for recertifying the resource after production is underway and for supplemental payments based on the recertification, in each case back-to-back with similar recertifications and payments under the existing Total agreement with InterOil, saying, “this is reasonable and fair to both parties.”

    Mulacek urged ExxonMobil to amend the CRP proposal and certification review process “to provide a fair outcome for InterOil shareholders as well as Exxon.”

    http://www.lngworldnews.com/exxonmobil-offer-inadequate-former-interoil-ceo-says/
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    BASF's second-quarter profit fall on weak oil, crop chemicals units


    Chemical company BASF's adjusted operating profit dropped 16 percent in the second quarter, hurt by a slump in oil and gas unit and by weak demand for its agricultural pesticides.

    The world's largest chemical company by sales reported earnings before interest and tax (EBIT), adjusted for one-off items, of 1.7 billion euros, compared with the average forecast for 1.71 billion in a Reuters poll of analysts.

    The group reaffirmed its forecast for a considerable decline in 2016 sales - due to the sale of its gas trading business and as it adjusts prices to lower energy and raw material costs - and for adjusted EBIT to be slightly below the year-earlier level.

    It repeated that the goal was ambitious and depended on oil prices.

    http://www.reuters.com/article/us-basf-se-results-idUSKCN1070FA
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    DuPont profit beats as lower costs boost margins


    DuPont reported a higher-than-expected rise in quarterly profit as lower costs boosted margins, and the chemicals and seeds producer said it expected a 50 percent jump in operating earnings per share in the current quarter from a year earlier.

    The company, which is in the process of merging with Dow Chemical Co, raised the low-end of its 2016 operating earnings forecast by 10 cents per share to $3.15. It maintained the upper end at $3.20.

    DuPont continues to expect to close the merger later this year as the companies are working closely with regulators in all relevant jurisdictions, Chief Executive Ed Breen said in a statement on Tuesday.

    European Union antitrust authorities are expected to rule on the merger by July 28.

    Both Dow and DuPont have said that any asset sales required would likely be minor, but pressure to scrutinize the impact of the rapid consolidation in agriculture on farmers and consumers is mounting.

    The chairman of the U.S. Senate Judiciary Committee last month urged federal antitrust officials to conduct a "careful analysis" of the merger between Dow and DuPont.

    DuPont and Dow are merging in an all-stock deal, a first step toward breaking up the combined company into three separate businesses focused on agriculture, material science and specialty products.

    DuPont, which gets about half of its revenue from outside the United States and Canada, said on Tuesday it now expected a strong dollar to hurt full-year profit by about 15 cents per share, less than the 20 cents it had estimated earlier.

    The company is also benefiting from its cost-cutting program, and is on track to reach $1 billion in cost savings on a run-rate basis by year-end.

    Net income attributable to the company rose to $1.02 billion, or $1.16 per share, in the second quarter ended June 30 from $940 million, or $1.03 per share, a year earlier.

    Excluding items, the company earned $1.24 per share, easily beating analysts' average estimate of $1.10, according to Thomson Reuters I/B/E/S.

    Net sales fell 0.8 percent to $7.06 billion, but beat analysts' expectation of $7.01 billion.

    http://www.reuters.com/article/dupont-results-idUSL4N1AC3ES

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    Low cost inventories in the lower 48


    Unconventional development in the US Lower 48 has been the most reactive to the oil price collapse, with operators nimbly halting drilling plans and scaling back activity to balance the books.

    US tight oil operators drilling with positive NPV today are generating interest for investors, but will they continue to be economic in the future? After looking at data for more than 120 operators across the Lower 48, we can see where the largest low-cost inventories reside.

    While most operators across the major tight oil plays high-graded to the core, focusing the majority of spend on the more prolific and economic areas, operators in the Bakken withdrew the most rigs and stopped development in hundreds of wells - so much so, that the Bakken is now home to more drilled but uncompleted wells (DUCs) than any other play in the US Lower 48.

    These DUC inventories are critical to forecasting production volumes and are responsible for a slower production and supply reponse relative to the rig count, as rigs are no longer fully indicative of how many wells will be brought online. These DUCs provide cash flow to these operators, enabling them to focus on completions at will once rig commitments expire.

    US Lower 48 DUC backlog and horizontal rig count
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    The Permian, after a decade in the shadows of the Bakken and the Eagle Ford, is showing more promise in the US tight oil space due to its substantial drilling inventory of stacked pay and low breakeven resource.

    Compared to our global view in 2014, we now expect 7 billion boe less will be produced from 2016 to 2020, with the US Lower 48 accounting for more than 70% of those volumes in the near-term, through 2017. The agility that brought costs and breakevens down will slowly resurrect them again, with dormant inventories coming online and getting back on track to profitability.

    http://www.woodmac.com/lp/highest-returns/Lower48_NPV/?utm_source=twitter&utm_medium=social&utm_campaign=sm-lower48-capex-buyside&utm_content=p

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    Refiner Valero's profit beats as crude costs stay low


    Valero Energy Corp reported a bigger-than-expected quarterly profit as the U.S. refiner continued to benefit from low crude costs.

    Crude oil prices have remained depressed for the past two years, lowering costs for refiners and weighing on prices for refined products, which has boosted consumer demand.

    "We are also encouraged by ample supplies of medium and heavy sour crude oils in the market, which should help to expand their discounts relative to Brent crude oil, and by a positive demand outlook," Chief Executive Joe Gorder said in a statement on Tuesday.

    However, crack spreads - the difference between the prices of crude oil and refined products - have narrowed sharply due to a spike in gasoline and distillate inventories in the United States.

    This has hurt refining margins. Valero's refining throughput margin fell to $8.93 per barrel in the second quarter ended June 30 from $13.71 per barrel, a year earlier.

    Net income attributable to shareholders fell to $814 million, or $1.73 per share, in the latest quarter, from $1.35 billion, or $2.66 per share, a year earlier.

    Operating revenue fell 22 percent to $19.58 billion, but total costs and expenses fell by a fifth.

    Excluding items, Valero reported earnings of $1.07 per share, beating analysts' average estimate of $1, according to Thomson Reuters I/B/E/S.

    http://www.reuters.com/article/valero-energy-results-idUSL4N1AC3S7

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    Valero says biofuels blending costs could double in 2016


    Valero Energy Corp, the largest U.S. refiner, expects to get hit with a half-billion-dollar bill in the second half of the year thanks to the rising cost of meeting government mandates to blend biofuels.

    For the full year, the company's cost to blend renewable fuels like ethanol will swell to between $750 million to $850 million, mainly to pay for the paper credits used to meet the U.S. biofuels program, the Renewable Fuel Standard (RFS), the San Antonio, Texas-based refiner said on Tuesday as it reported second-quarter results.

    The RFS program requires oil refiners and importers to blend more renewable fuel or buy paper credits in an opaque, sometimes volatile market. Compliance credits to meet the standards, known as Renewable Identification Numbers (RINs), were about 25 percent higher in the second quarter than a year earlier.

    It is another blow for the company, which is already dealing with weak refining margins.

    The price tag would be up from the $440 million Valero paid for biofuels compliance in 2015, the most it has paid to meet RFS requirements since at least 2009, according to U.S. Securities and Exchange Commission filings.

    Valero spent about $334 million in the first six months of 2016 on biofuels compliance, the company said.

    Elevated costs for RINs credits are one of the headwinds the company faces, said John Locke, Valero's vice president of investor relations, on a call with investors.

    The biofuels program was launched more than a decade ago to boost the use of renewables to cut greenhouse gas emissions and promote energy independence. This year's more ambitious requirements could hurt U.S. refiners, already facing what could be their worst year since the shale boom began.

    That puts expected second-half costs at as much as $516 million, nearly matching the $517 million it spent for all of 2013, when RIN prices surpassed a record of $1.40 apiece. The current price is around 96 cents.

    Prices of RINs have been rising since regulators set annual targets in May for the amount of biofuels including ethanol required to blend with gasoline and diesel and as worries have mounted of tightening inventories.

    "If I'm a refiner with a lot of gasoline and distillate production, why wouldn't I be concerned about rising RIN prices? The conditions are there for them to (rise)," said Timothy Cheung, vice president at ClearView Energy Partners in Washington. He estimated that RIN prices could rise another 25 percent by year-end.

    Valero and companies such as Delta Air Lines Inc (DAL.N), which owns a refinery, are stepping up their push to get regulators to tweak the program to shift onus to comply further downstream.

    http://www.reuters.com/article/us-valero-energy-results-biofuels-idUSKCN1062K4
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    Anadarko's loss smaller than expected as cost cuts help


    Oil and gas producer Anadarko Petroleum Corp (APC.N) reported a smaller-than-expected quarterly loss as it cut costs to counter a prolonged slump in crude prices.

    The company, which has cut this year's capital budget by half, said costs were lower by 11.8 percent in the quarter ended June 30.

    The company said early this year that it laid off about 1,000 workers and sold more than $1 billion in assets.

    Texas-based Anadarko raised the mid-point of its full-year sales volume forecast by 2 million barrels of oil equivalent (MMBOE) on increased sales from Gulf of Mexico, Delaware and DJ basins. The company estimated in March sales volumes of 282-286 MMBOE after adjusting for divestitures.

    Net loss attributable to Anadarko was $692 million, or $1.36 per share, in the second quarter, compared with a profit of $61 million, or 12 cents per share, a year earlier.

    Excluding items, the company lost 60 cents per share, compared with analysts' average estimate of 80 cents, according to Thomson Reuters I/B/E/S.

    Revenue fell 27 percent to about $1.92 billion, above analysts' estimate of about $1.89 billion.

    http://www.reuters.com/article/us-anadarko-petrol-results-idUSKCN1062J5
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    Tech Paper: Efficient Use of Data Analytics in Optimization of Hydraulic Fracturing in Unconventional Reservoirs


    Understanding reservoir parameters can help successfully optimize fracturing treatments per well

    Hydraulic fracturing operations affect reservoir flow dynamics and increase production in unconventional tight reservoirs. The control of fracture growth and geometry presents challenges in formations in which the boundary lithologies are not highly stressed in comparison to the pay zone, thus failing to prevent the upward migration of fractures. Several factors influence the growth and geometry of fractures, including reservoir, wellbore, and fluid/proppant parameters. Successful results require a thorough knowledge of reservoir parameters, including stress distribution and the appropriate use of corresponding wellbore components and fluid/proppant. The success of a hydraulic fracturing treatment is highly correlated with control of the created fracture geometry.

    This paper discusses a study in which a numerical fracture model is used to design the fractures in a tight oil reservoir. Fracture treatment designs include the selection of fracturing fluids, additives, proppant materials, injection rate, pumping schedule, and fracture dimensions. Using the fracture model, a statistically representative synthetic set of data is generated for each parameter to build data-driven models.

    Follow link to paper https://www.onepetro.org/conference-paper/SPE-177549-MS
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    Atlas Resource Partners Filing for Bankruptcy


    Just last week MDN predicted that Atlas Resource Partners (ARP), a publicly-traded exploration and production master limited partnership (“MLP”) with operations in basins across the United States including the Marcellus and Utica Shale plays, was heading for a bankruptcy.

    Yesterday ARP announced it has been working behind the scenes with the people it owes money (lenders and bondholders) on a deal to convert their debt into common units (in essence, shares of stock). The deal worked out will eliminate $900 million in debt ARP owes.

    The deal is like many others we’ve written about over the past six months or so–where a company waves the magic wand and turns debt into ownership.

    The problem with these plans, in our humble opinion, is that it punishes those who currently own equity in the company. The stockholders (in this case, since it’s a master limited partnership, called unitholders), find their shares are devalued to the point of being worth toilet paper.

    We live in a screwed up world where owning debt is better than owning equity. But we digress. Here’s ARP’s so-called pre-packaged bankruptcy plan to screw current owners, and turn debtholders into the new owners. ARP plans to file the paperwork in court tomorrow…

    http://marcellusdrilling.com/2016/07/atlas-resource-partners-filing-for-bankruptcy-tomorrow/
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    Agriculture

    Australia farmers defer wheat sales, hope for La Nina-led price rally


    Australian farmers are holding on to their wheat stocks and refraining from locking in deals for future sales, on hopes a La Nina weather event later this year will dent global output and lift prices from current 10-year lows.

    With the global market currently flush with wheat supplies, lower sales by the world's fourth-biggest exporter is unlikely to have much immediate impact on prices. However, a delay in sales could lead to Australia losing more of its share of the overseas market to rival Black Sea producers.

    "There is a heap of wheat in the world. We need a disaster somewhere to get prices above cost of production," said Dan Cooper, a farmer in Caragabal, 460 kilometers west of Sydney.

    "A lot of people are holding back forward sales in the hope there will be a weather event that will trigger a market rally," he added, referring to La Nina.

    A U.S. government weather forecaster has said there is a 55-60 percent chance of a La Nina developing during August through October.

    The weather event is associated with lower rainfall in parts of the Americas, which would curb output in some of the largest global exporters, whereas in Australia the La Nina brings crop-friendly wetter-than-average conditions to the east coast.

    As of now, all-wheat plantings are running ahead of forecasts in No.1 exporter, the United States. In Australia, production is set to exceed official estimates of 25.4 million tonnes, analysts said.

    Output is so good in Australia that its top grains exporter Cooperative Bulk Handling is building emergency storage as all grain production could hit a record high of 16 million tonnes.

    While higher production would typically prompt farmers to forward sell to agribusinesses such as GrainCorp Ltd and Glencore, wheat prices near a 10-year trough of $4.05 per bushel have been a deterrent. [GRA/]

    The reluctance to sell has pushed Australian wheat prices to about A$30 dollars ($22.45) above Black Sea supplies, which could hurt its share in key export markets, traders said.

    Australia in June trimmed its forecast for sales to its largest wheat buyer, Indonesia.

    "Australia is going to have to get a lot more competitive to maintain its export volume ... we have lost market share predominately to Black Sea exporters and we are not priced to stop that flow," said a head of grain trading at one of Australia's largest exporters.

    http://www.reuters.com/article/us-australia-wheat-lanina-idUSKCN1060PH

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    Precious Metals

    Barrick Gold weighs sale of $1.9 billion Acacia stake - sources


    Barrick Gold Corp, the world's largest gold producer, is weighing a sale of its majority stake in African unit Acacia Mining Plc and has approached several South African miners, according to sources familiar with the situation.

    The potential sale would be part of Barrick's broader strategy of selling non-core assets to reduce its debt load. The Toronto-based company offloaded stakes in several mines last year.

    The talks are at an early stage and there is no assurance a deal will be done, the sources said.

    Barrick owns 64 percent of Acacia, a London-listed miner with three producing gold mines in Tanzania: Bulyanhulu, Buzwagi and North Mara. Much of the remainder of Acacia is widely held.

    Acacia also has exploration projects in the East African country and other parts of Africa.

    Acacia has a market capitalization of about 2.23 billion pounds ($2.93 billion), making Barrick's stake worth around $1.9 billion.

    Barrick has reached out to South African miners Harmony Gold Mining Co Ltd, Sibanye Gold Ltd, AngloGold Ashanti Ltd, Randgold & Exploration Co and Gold Fields Ltd, as well as some Australian and North American miners, said the sources, who declined to be identified as the matter is not public.

    Barrick spokesman Andy Lloyd declined to comment.

    The sources noted a recent sharp rise in Acacia's stock, partly due to a rebound in the bullion price, may discourage some potential buyers.

    Acacia's stock is up more than 200 percent since the start of the year, with strong results also providing a lift. Acacia reported better-than-expected earnings last week, breezing past market forecasts for earnings, production and costs.

    The stock rose after news of the potential sale, trading as high as 572.5 pence before paring gains. It was up 1.9 percent at 555 pence late on Tuesday.

    Barrick shares were up 2.6 percent at C$26.89 on Tuesday.

    While Barrick would prefer a sale, it is also evaluating a possible equity offering to reduce its stake, the sources said, adding this "plan B" would depend on investor appetite.

    A mid-sized, low-cost gold producer, Acacia is targeting 2016 production at or above 750,000 to 780,000 ounces.

    Barrick is aiming to reduce its debt by $2 billion this year, and as of end-April had extinguished $842 million. In the medium term, it plans to lower its debt to below $5 billion or by more than half of current levels.

    Barrick's fortunes have improved this year along with other gold miners, buoyed by a 24 percent jump in the bullion price and deep cost cuts. Its stock is up 164 percent since January.

    http://www.reuters.com/article/us-barrick-gold-acacia-mining-divestitur-idUSKCN1061Y0
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    Royal Gold: Bargain?

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    Steel, Iron Ore and Coal

    China enters into post-coal growth era: scholars


    China’s coal consumption might have peaked in recent years, suggesting the country has entered the era of post-coal growth, according to a commentary article published Monday in the journal Nature Geoscience.

    The commentary was co-authored by scholars from research institutes in China, Britain, and the United States.

    The timing of China’s peak coal consumption has been disputed, with the majority of projections now placing it between 2020 and 2040.

    Yet China’s coal use dropped to 4.12 billion tonnes, a decrease of 2.9 percent, in 2014, with another 3.6 percent decrease in 2015, all while gross domestic product (GDP) continued to grow by 7.3 percent and 6.9 percent respectively, the authors said.

    Coal use in China might have peaked in 2013 or 2014, depending on the way it is calculated, and if the volume figures take into account the fact that higher quality coal was burned, 2014 is more likely to be the year of peak coal consumption, according to the article.

    However, the authors pointed out: “it is not important whether the peak year was in 2013 or 2014, what matters is the reversal in the trend.”

    “We argue that China’s coal consumption has indeed reached an inflection point much sooner than expected, and will decline henceforth, even though coal will remain the primary source of energy for the coming decades,” said the authors.

    Two forces are driving this trend. First, is the ongoing economic slow-down, especially in the construction and manufacturing industries. The second force is strengthened policies regarding air pollution and clean energy, according to the commentary.

    “I think even if China’s economic growth rebounds in the future, it is less likely that the consumption of coal will increase significantly again,” one of the authors of the article, Qi Ye, told Xinhua. He is the director of the Brookings-Tsinghua Center for Public Policy in Beijing.

    http://www.hellenicshippingnews.com/china-enters-into-post-coal-growth-era-scholars/
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    GE aiming to change coal narrative with high-efficiency power solutions


    Technology group GE is beginning to actively make the case for clean coal, having concluded that coal-fired generation will remain a major, albeit relatively smaller, part of the future electricity mix in many parts of the world.

    GE Power global sales and marketing leader for steam power systems, Michael Keroullé, admits that coal is a “hard sell”, particularly following the COP 21 climate agreement inParis last year. However, he tells Engineering News Onlinethat GE is ready to help “change the narrative” having recently launched its ‘Smarter. Cleaner. Steam Power’ initiative, which punts high-efficiency solutions, overlain with digital systems, to lower the environmental impact ofcoal-fired plants.

    Keroullé, who joined GE as part of the recent acquisition ofAlstom Power, says about 95% of the global demand will come from fast-growing economies, including some in Africa, where coal is often the most affordable and available primary-energy source. He views South Africa as a particularly high-potential market for clean coal, owing to its still significant resources and its deep experience in generating electricity from coal.

    However, it cannot be “business as usual”. For coal to receive political and financial backing, utilities and private developers will need to embrace higher-efficiency plants, which produce fewer greenhouse gases for every ton burnt and emit far lower levels of pollutants, such as sulphur oxides and nitrogen oxides.

    By way of example, Keroullé points to the 2 400 MW Hassyan clean-coal power project, to be built in Dubai, in the United Arab Emirates, by an independent power producer. The plant embraces ultra-supercritical technology, able to achieveefficiency levels of better than 47% – well ahead of the global average of 33%. Interestingly, the plant is expected to operate using coal sourced from South Africa and sell electricity at US5c/kWh.

    “If all existing coal plants achieved just 40% efficiency, the impact on CO2 emissions would already be considerable, at around 2 Gt annually,” he says, arguing that 50% efficiencyacross the coal power plant fleet would be a “game changer”.

    Besides marketing clean coal in South Africa, GE is focusing on supporting its existing boilers and turbines, which make up about 85% of the Eskom coal-fired fleet. It is working with the State-owned utility to help it recover its energyavailability to its stated target of 80% and is also in early-stage talks on possibly integrating digital solutions to improve plant operations and environmental performance.

    GE Power is also working with some potential bidders forSouth Africa’s possible new nuclear build programme.

    “We are aware of the controversy about the cost of thenuclear programme, but we still believe it is important to have an energy mix and nuclear can be an important component as a long-term, stable low-cost contributor to that mix. In addition, as the country renews the fleet of coalplants, it's a good idea to consider nuclear.”

    http://www.miningweekly.com/article/ge-aiming-to-change-coal-narrative-with-high-efficiency-power-solutions-2016-07-26

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    Chinese miners call for anti-dumping probe into iron ore imports


    Chinese iron ore miners have called for an anti-dumping investigation into imports of the steelmaking raw material from top suppliers Australia and Brazil.

    More than 20 Chinese miners in a statement on the Metallurgical Miners' Association of China website said "a huge volume of low-priced imported iron ore has had a severe impact on the domestic mining industry and even posed a big challenge for the security of steel production".

    "The capacity of major iron ore miners has continued to grow and requires a massive Chinese market to absorb their great excess," the statement posted on Tuesday said.

    Australia's BHP Billiton and Rio Tinto, along with Brazil's Vale, have embarked on massive expansion programs in recent years to supply the Chinese market.

    "Vale, Rio Tinto and BHP Billiton which have dominated global iron ore trade have defied the market and are still expanding despite prices being low since their strategy is to use low-priced dumping to crowd out higher-cost miners," the association said.

    Rio Tinto declined to comment, while officials from BHP and Vale could not immediately be reached for comment.

    Imports accounted for about 85 percent of China's total iron ore consumption, driving down capacity utilization at domestic iron ore miners and causing losses and shutdowns, the association said.

    China is the world's biggest steel producer and iron ore consumer, but growing supplies from Australia and Brazil and the low quality of ore mined locally has increased Beijing's reliance on imports.

    And a slide in iron ore prices in the past three years prompted more Chinese steel mills to opt for better quality imported ore and forced many to shut down last year.

    A total of 329 Chinese medium and large-sized mines closed last year and another 793 were shut in the first five months of the year with Jan-May output down 2.7 percent from a year ago to 471 million tonnes, the association said.

    China has seen a rising mountain of imported iron ore at its ports and imports are forecast to increase by 2.1 percent to 974 million tonnes in 2016 and by 0.7 percent to 981 million tonnes in 2017, according to Australia's Department of Industry and Science.

    Carsten Menke, an analyst at Julius Baer, noted that many of China's iron ore mines are vertically integrated into steel mills.

    "Hence, this looks like a tit-for-tat response from the steel mills who were feeling international pressure from steel anti-dumping investigations and tariffs," he said.

    China has faced its own anti-dumping measures over accusations of flooding markets with cheap steel. Beijing has denied that its prices are artificially subsidized, saying its production cost are much lower than Western countries.

    Simon Bennison, chief executive of the Association on Mining and Exploration Companies in Australia, said he found the anti-dumping probe proposal "surprising, given the iron ore price is set on China's Dalian Exchange."

    Iron ore prices have tumbled from a record near $200 a ton in 2011 to $37 last year. The price has since recovered, trading at $55.80 on Monday.

    http://www.reuters.com/article/us-china-ironore-antidumping-idUSKCN10617F
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    Fortescue cuts iron ore production cost target


    Australia's Fortescue Metals Group on Wednesday lowered its production cost target for fiscal 2017 to $12-$13 per wet metric ton, down from its fiscal 2016 average of $15.43 a metric ton and taking it closer to bigger rivals.

    The world no.4 iron ore miner also set shipment guidance for fiscal 2017 at 165 million to 170 million tonnes, little changed from the 169.4 million tonnes shipped in fiscal 2016..

    The company said it sold its iron ore on average at 88 percent of the benchmark price, or $45.36 a metric ton, over fiscal 2016. Iron ore stood at $57.40 a metric ton on Wednesday.

    The reduction in so-called C1 costs this year would better align Fortescue's cost structure with those of larger rivals Rio Tinto, BHP Billiton and Vale and provide a greater cushion amid volatile iron ore prices.

    Because Fortescue and other miners typically report production in terms of wet metric tonnes and the iron ore price is based on dry metric tonnes, an 8 percent reduction is applied to the wet tonnes to adjust for moisture content

    "Costs have been lowered for the tenth consecutive quarter and our continued focus on productivity and efficiency measures will drive C1 costs even lower in fiscal 2017," Chief Executive Nev Power said in a statement.

    Fortescue, which had borrowed heavily over the last decade to finance construction of its mines in order to export increasing amounts of iron ore to China, said its net debt had been cut to $5.2 billion.

    This week, Chinese iron ore miners called for an anti-dumping investigation into iron ore imports from Australia and Brazil.

    In a statement released on a trade association website, the Chinese miners accused Rio Tinto, BHP and Vale of low-price dumping to crowd out higher cost domestic miners.

    http://www.reuters.com/article/us-fortescue-output-idUSKCN107005
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    Atlas Iron ‘on sound footing’, hits FY16 shipping target


    Iron-ore miner Atlas Iron is on a sound footing for the future after having completed a debt restructuring plan and reporting an “excellent” performance in the June quarter, said outgoing MD David Flanagan on Wednesday.

    Atlas Iron shipped 3.7-million wet metric tonnes in the three months ended June, down 3% on the March quarter’s production, putting the company’s full-year shipments in the mid-range of its guidance at 14.5-million wet metric tonnes.

    Shipped tonnes were slightly lower than the prior quarter, owing to an  unplanned six-day port outload shut in June, when the Utah Point ship loader was damaged while loading another proponent’s vessels.

    C1 cash costs were maintained at A$33/wmt free-on-board (FOB) in the June quarter, while C1 cash costs came in slightly below its A$35/wmt to A$38/wmt guidance at A$34.49/wmt FOB.

    Atlas has reduced its term loan debt from $267-million to $135-million and extended the maturity date from December 2017 to April 2021. This reduced the company’s yearly cash interest expense by about 65%.

    The company had A$81-million cash at hand on June 30, compared with A$88-million at the end of March.

    “The business has achieved significant cost and debt reductions over a number of months and this is now leading to strong operating margins. We generated A$30-million from our operations over the quarter after interest payments and our contractor profit sharing obligations.

    “It’s now about consolidating that improved performance and delivering value for shareholders,” said Flanagan, who will finish as MD of the company on August 5.

    Atlas nonexecutive director Daniel Harris, who until recently as CEO and COO of Atlantic in Perth, has been appointed interim MD and CEO and will continue in this role until a permanent replacement is appointed. Thereafter, Harris will revert to being a nonexecutive director.

    http://www.miningweekly.com/article/atlas-iron-on-sound-footing-hits-fy16-shipping-target-2016-07-27
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    China offers more funds for 'difficult' steel cuts - state planner


    China is facing extreme difficulties in its bid reduce overcapacity in the steel industry and will provide more funds to help handle layoffs and debts, the country's state planner said in a statement on its website on Wednesday.

    China has pledged to cut steel capacity by around 45 million tonnes this year, and by 140 million tonnes by 2020, in a bid to tackle a price-sapping annual surplus estimated at around 300 million tonnes, nearly double the annual output of the European Union.

    But it reached less than 30 percent of its annual target in the first half of 2016 as local governments rushed to finalise their closure plans.

    The National Development and Reform Commission (NDRC) said in a notice published on its website (www.ndrc.gov.cn) that the next stage of capacity cuts would be "extremely difficult" as China tries to reach its targets.

    It planned to "increase financial support for the easing of steel overcapacity" and ensure that unemployment and debt were handled properly.

    The state planner, in an account of a government meeting held earlier this week, said China would also impose harsh penalties for the illegal construction and expansion of steel plants.

    The NDRC identified the closure of so-called "zombie firms" - non-viable firms that are still operating - as a priority, saying it would use tougher environmental, efficiency, quality and safety standards to drive them out of the market.

    Many in the industry have expressed concern that an improvement in steel prices, particularly in the second quarter of this year, has undermined China's efforts to cut capacity by allowing zombie steel firms to return to profit.

    But China's vice-industry minister Feng Fei said at a press briefing on Monday that while some capacity had come back on line, it did not include plants that had already been ordered to shut down.

    The state planner said the capacity cutting programme was only one part of China's efforts to rejuvenate the steel sector, with the country still committed to creating global industrial champions through the use of mergers and acquisitions.

    Two of China's biggest steel firms, Baosteel and the Wuhan Iron and Steel Group have already announced that they are planning to "restructure" together.

    "It is not simply a matter of easing steel overcapacity, but a need to focus on structural adjustment and upgrading our country's steel sector to transform from a large steel nation to a strong steel nation," the NDRC said.

    http://www.reuters.com/article/china-economy-overcapacity-idUSL4N1AD23J

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