VULTURES are not the prettiest birds in the animal kingdom but they do a good job cleaning up a mess, which is what Slugcatcher has been observing recently as vulture-like clean-up crews swoop onto the leftovers and unloved assets of the oil industry.
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Image courtesy of Shell UK.
The arrival of the vultures is as predictable as the turn of the seasons, and as welcome, because without them picking the bones of failed or troubled businesses it’s difficult for the industry to move forward. Last week there were two examples of investors unveiling plans to buy oil assets while two other developments pointed in the same upward direction. When those events are combined it becomes easier to see why the oil industry could look very different next year as the worst effects of the price crash are replaced by optimism about the future with some financial experts even starting to talk about oil at $US100 a barrel, and more. More about price tips later. First, the vultures, starting with a world-class “spotter” of undervalued assets, Wilbur Ross, an American with a fabulous pedigree of acquiring control of distressed assets and emerging as a king maker. Earlier adventures of the 81-year-old Ross include the successful consolidation of the US steel industry, a deal which the Wall Street Journal newspaper netted him more than 12 times what he paid when he eventually sold to Indian billionaire, Lakshmi Mittal for $US4.5 billion. Ross did it again with coal when he made 2.5-times on his costs after snapping up coal assets in 2004 before selling his coal interests at the peak of the energy market in 2011 for $3.4 billion. Today, sensing the same conditions of distress and good assets going for cheap prices, Ross is buying the debt of troubled oil industry firms, setting himself up for a high-priced exit when the recovery takes hold. In Australia, something similar could be seen in a much smaller deal when the fleet-footed mining and engineering company, Mineral Resources, bought a 19.3% stake in Empire Oil & Gas at a low point in the cycle as part of a plan to supply gas to its mining interests. Ross and Chris Ellison, the man who controls Mineral Resources, can sense the same changing conditions which signal that now is almost certainly the low point in the oil and gas cycle and there’s no better time to buy energy assets than when they’re cheap. The other two developments which add to the belief that the worst is over and recovery is around the corner came in the growing interest in next month’s meeting of big oil exporting countries in Algeria. While not a formal meeting of the Organisation of Petroleum Exporting Countries, it will be seen as that because of likelihood that every member will be represented, including traditional enemies, Saudi Arabia and Iran. Between now and the September 26 kick off date for three days of oil talks there will be a lot of point scoring and name-calling, and perhaps nothing will come out of the meeting itself given the animosity between OPEC members, but that’s not the point. The point is that made by Saudi Arabia’s Oil minister, Khalid al Falih, who repeated his view of the oil market last week when he said: “The market is moving in the right direction. Demand is picking up nicely around the world”. The final point, and perhaps the most important because it very much a financial/oil market-related development, is the entry of vulture investment funds hunting for bargains. In London, the managers of a new oil-investment fund claimed they have been outperforming the broader energy market through astute investment decisions. The Westbeck Energy Opportunity Fund told clients that it had enjoyed a 7.07% increase in value since being form a few months ago, a solid result given that the wider market for energy equities had fallen by 1.75% over the same time, and the oil price had fallen by 12.77%. The promotional hype from the well-connected managers of the fund say: “Westbeck is a long-bias, equities vehicle designed to capitalise on two exceptional opportunities that are converging at the start of a new energy bull cycle.” The two opportunities seen by Westbeck are a strong recovery in the oil price, and the re-emergence of the US shale oil sector. The London-based investors reckon that oil will be driven by the “missing” $400 billion in capital investment that has not been made over the past two years, triggering a shortage of new oilfield developments. “An oil price regime of $70-to-$80 a barrel will be required to stimulate enough US production growth and re-ignite conventional capex,” Westbeck wrote, adding that: “Risks of a (price) spike above $100/bbl towards the end of the decade are high, with unprecedented geopolitical risks to supply”. Or, as Slugcatcher is inclined to say: “Houston, we’re ready to launch.”[/table]
Image courtesy of Shell UK.
