Another good session for oil could be a harbinger of things to come as the Saudis edge closer to the biggest IPO the World has seen, the potential $2 trillion valuation of Aramco. With that float now perhaps just 12 months away, the Saudis face a race against the clock to pump up the oil price to a level that will maximise the price they can command, however the mere fact of the sale itself points to gathering storm clouds that threaten even FAR.
Why are the Saudis selling down? Logically, it can only be because they believe they can command a higher value for the asset now than they can by holding on to it themselves. In other words, it seems to me the Saudis believe the value of their oil asset will decline over time, rather than increase. You don't have to go back far to read the then orthodox view of oil's future. Peak oil would pass, supply would decline even as demand grew, and prices would escalate to $200 or more.
How 'yesterday' that now seems. European countries and Britain (soon to be ex-European) are rushing to ban future sales of fossil fuel-driven vehicles. Almost one-in-two sales in Norway are already electric cars. China has mandated electric for an increasing percentage of its growing fleet, meaning the oil demand surge expected from Asia might be subdued by the rush to green. Shell - Shell, for Heaven's sake - has seen the writing on the wall and is now working on 'lower forever' oil.
It is hardly the scenario we want as discoverer of a huge oilfield that will not come on line until 2021 at the earliest. For FAR, the demise of oil is a turd and we might polish it furiously with talk of a looming short-term price squeeze, but it will remain a turd. In short, prices are highly, highly unlikely to return to the dizzying heights that will reward us with a Hardman scenario.
Before you reach for the Stanley knife, though, I don't believe for a moment that all is lost. In my view, FAR stands to benefit from a 'mini' perfect storm of timing created by the Saudis' desperation.
Those storm clouds first emerged soon after the FAN-1 discovery, when the shale industry hit its stride and flooded the global market. As we know, oil prices plummeted from $100 to a nadir of $27, a disaster still bemoaned by many short-termers here but which in reality seeded those storm clouds with the ingredients of a beneficent mini super storm into which the good ship FAR now sails.
You know the story. Three trillion dollars was ripped from the industry. Exploration has crashed, even as in-ground reserves are increasingly depleted and World demand rises (at least in the short term). FAR has already benefitted from this. C Grade rigs - thanks Cajun - at $700k per day are now A Graders at 30% of the cost. Our JV has drilled wells ahead of time and budget, booking further savings even as our oil inventory grows.
Until just a couple of weeks ago, there had been little sign of that changing, with each mini price rally serving only to entice more shalers back to their rigs. But, perhaps optimistically, I believe a corner might have been turned.
The explosion in US rig numbers has slowed to a near stop, with just three added in the recent count. US oil stocks have seen drawdowns throughout the past month, with this week's 10 million barrels the largest. Admittedly 'driving season' is upon us, but this week's sharp OP rise suggests that at least the shorts are nervous enough to begin covering their positions. Oil has rallied from the mid-40s to 52 bucks in no time.
Now we've seen the Saudis turn the screws further, slashing exports from next week while stepping up pressure on cartel cheats to abide by agreed cuts. There are reports that US financiers have suddenly felt a tightening in their sphincters, meaning shalers will find investment more challenging.
Meanwhile, FAR and its 'partners' - a term used advisedly - continue apace to make hay while the low-cost sun shines. The current well was a surprise. Perhaps it is to mark time before heading back to the FANs, but track talk suggests not, with FFS-1 failing to live up to even the limited expectations held for it. Sirius is more likely a serious attempt to prove up a bigger SNE resource ahead of a Cairn - and perhaps FAR - auction of its contents.
We seem to keep saying this, but really the next six-to-12 months are critical for FAR. IMO, it will see the formation of that mini perfect storm that will determine the quantum of a long-expected SP rerate. Again, you know the story, with SNE-North, Cairn's upgrade, our own RISC review, and, further off, A2 and the behemoth that would be PE all candidates to inspire SP appreciation.
If they don't - gulp - then we might assume the market is of Shell's view about oil's future. That view might best be summed up by reference to the Orsen Wells' classic Touch of Evil. As Marlene Dietrich famously told Wells when his character asked her to read his tea leaves: "You haven't got any; your future's all used up."
Overly pessimistic? Perhaps. But whatever ensues, I believe the future carries a cut-price tag for oil investors.
OOO
FAR Price at posting:
7.5¢ Sentiment: Buy Disclosure: Held
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