Good afternoon
oil is falling into a seemingly bottomless hole! Worst day today since at least 1982…WTI is currently down by 7$/barrell to 11,30 US$!! But Brent is holding much better, down 1.70$ only. For the hedge funds, shorting oil has been a nearly riskless game: Overproduction into a very weak market, with storage at 100% - somewhere, the stuff has to go! So selling at any price for cash-strapped producers….
But in the longer term, this is a buying opportunity too good to be true! IF these levels should hold for a while- and nobody believes, that the will - all shale production will be wiped out, and no new project will spring to life! The only question is, what to buy - the physical, or some quality oil stocks? Being an equity man, the physical is not what I understand trading in - especially, as longer dated futures are trading at big premiums. With the lack of storage, this wonderful for hedge funds to buy the actualy and sell the future, has been made impossible as well. And unfortunately, quality equity names have been weak, but nowhere as exhibiting the current prices for oil. But still - I think there are some good oil investments around, or investments in the sector, which would still profit from longer term, rising energy prices. Two of them are Beach Petroleum and Strike Energy. Beach has no debt, and 40% of it´s earnings are from fixed natural gas contracts ( at least until June 2021, and some longer ) - but the share price has still halved. My little Strike does not profit directly from better oil prices, but would indirectly profit from better sentiment in the sector.
Gold is holding it´s ground today, while equities don´t like these oil prices…not good for oil producers, obviously, the economy in parts of the US, and definitely a big issue for corporate credit markets! As New York has been open for a few hours, markets are recovering some of the earlier losses ( NASDAQ just green! ), and gold is improving as well.
Base metals are mixed today - nickel strong + 2,7% , following strong market for stainless steel in China.
Vale has cut it´s production range for iron ore this year by 20 millt due to impact from corona. The Brazilian Prime Minister is still not accepting, that this is not just another flue, potentially risking much higher infection rates than the current in Brazil. This poses some further risk for the new guidance. Good for the large Australian producers, and the Australian current account balance!
Strike-excellent Quarterly, despite not having anything you can put into hard facts! As the MD reports, he has never been any busier than in the moment! Approvals and preparations/negotiations for drilling a well in August by latest, I believe ( officially in the 2.Half ), tender completed for thirs party midstream processing, appraisal plan for two more wells near West Erregully, engineering work for first production etc etc etc. Perhaps the most exciting of the Quarter has been, that more work has been done on South Erregulla, where the company sees a 50% chance of a Prospective Resource of 1,6 TCF, which would be absolutely outstanding and potentially worth even more than WestErrgulla, the find of last year. The company has 24.5 mill A$ in cash , no debt. The next well will cost 15-20 mill A$ of which Strike either has to pay 50% - or alternatively, and that would be fantastic - get a bigger part of the pie, in case the JV-partner, Warrego ( probably 6-7 mill A$ in cash ) could not pay for it´s 50% share. Strike is also in advanced disussion for project finance for the development of West Erregulla, and expects something there over the next few month. I know, that it´s boring to see the share price close at 13ct just about every day - but don´t get it wrong: This is a very active time for the company, and while it has nothing to do with fundamentals, I think the price will start to improve, once the market can see a fixed time frame for drilling of the next hole. Marketwise, this is a quiet time for them - but you should use this time to accumulate stock at current levels! Last , but not least, Woodside have delayed final investment decisions for two major offshore gas projects, which will make gas from Strike more sought after for domestic users! I guess to fix project finance, some kind of longer term gas sale agreements would be needed for Strike - hence, this is very positive!
Have a nice evening!
WS