Monthly Archives: May 2016

Dong Energy’s IPO shows why offshore wind is more than hot air

Like Saudi Aramco, Dong Energy is now in the midst of preparing for an initial public offering.

The Danish energy giant’s June listing is expected to value the firm at up to $16bn (£10.9bn), making it one of the biggest flotations of the year. It will of course be dwarfed by Saudi Arabia’s oil colossus, which has been valued (perhaps overenthusiastically) at up to $2trn, but it’s still not to be sniffed at.

I think the two energy companies make for an interesting comparison. On one hand, you have Saudi Aramco – a longtime oil Goliath that has provided the Gulf state with lucrative revenues, but has recently fallen into comparatively tougher times as a result of the oil price rout. Saudi Arabia has now had to stop using its oil revenues as a piggy bank, has tapped the debt market and will be tapping the equity market in order to get rid of its deficit (which came in at a national record of $98bn last year).

I’m sure its plans to raise money will succeed, as well as its new strategy to diversify its economy away from black gold. But what for oil itself? Where will it sit in a rapidly changing energy sector where it must compete with other sources such as shale, at a time when the West is pushing energy-efficiency and a move to renewable power, while China’s energy demand is slowing down as its economy slows?

This brings me on to Dong. The energy firm, which counts the Danish government as its biggest stakeholder, used to have a major focus on coal but has now transformed itself into the world’s largest offshore wind farm operator. It has tried – unsuccessfully – to sell its oil division, as it looks to shed its “dirtier” assets to become greener than green.

Its efforts have paid off. Since 2013, when it was still struggling post-financial crisis and Goldman Sachs bought a stake in the firm (amid a gigantic public furore into the influence of the US investment bank on a state utility), it has increased its profitability – thanks to its offshore wind division.

Renewables are expensive and controversial. While they make sense environmentally, they require hefty state subsidies in the transition period and transitioning too fast can be a costly burden. Certain types can also be less reliable, such as solar and wind, as they are dependent on certain weather conditions.

In the UK (where Dong makes large profits), energy secretary Amber Rudd has called for deep cost cuts to offshore wind farms if they wish to receive billions of pounds of new subsidies.

But – and excuse the pun here – they’re the way the wind is blowing. Political pressure to implement and raise renewables targets mean that they’re here to stay. They just make long-term sense, despite their short-term challenges.

Perhaps it is a little simplistic to say that oil is the past and renewables are the future, especially at a time when the former is relatively cheap and the latter still expensive. And oil is still one of the world’s major energy sources, while renewables are a mere pipsqueak. A pipsqueak still relying on handouts from mum and dad.

I’m sure bankers and investors will be able to profit from Aramco’s IPO more than Dong’s, despite the changing fundamentals.

But with a move to greener energy sources inevitable in the developed world and oil reserves (and revenues) depleting, I wouldn’t be surprised to see the balance changing – after all, the vampire squid must be smelling money…

Oil price: can $50 be conquered?

Can oil make it back up to $50 a barrel? And what does this mean for US rate rises? Mike van Dulken and Augustin Eden of Accendo Markets give their take on this pivotal day in the recent recovery…

A stronger US dollar is showing no signs of hampering the oil price rally towards $50, even after a trio of Fed speakers (non-voters we must highlight) spiced things up by jumping on a few bright spots of macro data to send the US dollar basket back to 3-week highs, suggesting a June US rate hike remains a possibility.

Wording is surely key here, with a rate hike technically possible at every meeting. Whether one is likely or not is a very different matter. Markets may now be pricing in a slightly higher likelihood, but they are by no means pricing in a hike. It’s generally accepted that the Fed prefers to avoid surprising markets – it’s not a good look for the central bank of the world’s reserve currency and number one economy. Better warm ‘em up and hint for a while before delivering the killer blow. And anyway, last night’s speakers (Lacker, Williams Kaplan) are all non-voters, which suggests this evening’s Fed Minutes will be more important in terms of deciphering the FOMC rate-setting committee’s most up to date views.

As it stands, we just don’t see June on the cards for a hike, even if some US data is surprising to the upside (did the trio miss May’s Empire State Manufacturing data cratering on Monday?). Certainly not with a UK referendum on EU membership set to take place less than a week after the Fed next meets. It’s assumed that a Leave vote would ‘pound’ sterling even more than jitters already have, which would only go to put unwelcome upward pressure on the dollar – in essence delivering a rate hike of sorts.

Surely the Fed would be better holding off. If a Remain vote prevails, a relief rally in GBP could provide more room for manoeuvre via a corresponding drop in the dollar. Furthermore, as if that wasn’t enough, with each day that passes it looks increasingly possible (scarily so) that Donald trumps his democrat rival Hilary in the race for the a White House. Is that a geopolitical environment the Fed really wants to be hiking into? Of course not. The committee knows its choices have far-reaching implications. It was given a timely reminder in January via an aggressive market selloff in response to its December decision to go for it and deliver that first major post-crisis hike.

Which brings us to the non-currency drivers of the price of oil, the stuff we should really be concentrating on. THE FUN-DA-MENT-ALS. Supply disruptions have been a major issue of late, with Canada and Nigeria tagged as major reasons for prices continuing their 2016 reversal recovery. But these are likely short-term issues, in which case supply perceptions could be set to calm, thus hindering oil prices.

Extra help came from last week’s surprise drop in US weekly crude stocks (which suggests that consuming more = good) coupled with continued drops in US rig counts and stateside production as Opec-competing frackers call it a day. Opec mouthpiece Saudi Arabia remains stubborn within a divided cartel. All have helped usher prices ever higher and, as we write, there is the possibility (borrowing from Fed terminology) that another big drawdown in stockpiles is delivered this afternoon, sealing a test by oil prices of that key $50 level. Add to this improving, if patchy, US data and a better than expected rebound in Japanese GDP (big oil importer) and fundamentals are supportive of the near-term uptrend.

The question now is whether the current trend has legs? How close is US production to a turning point as shale and frackers return to bring production back on-line at more sustainable prices? They had been talking about $45-50 which is where we are. Those nasty 18-month term downtrends have been overcome to take us back to six-month highs. Can a major psychological level in $50 really be conquered too?

This commentary was provided exclusively by Accendo Markets for Hot Commodity: https://www.accendomarkets.com.

BHP investors: hold on to your seatbelts, you’re in for a bumpy ride

This week, Mike van Dulken and Augustin Eden from Accendo Markets warn that BHP Billiton investors should brace themselves for legal action of BP proportions…

BHP Billiton (BLT) is this week underperforming a similarly weak commodity sector, one which is already under the cosh from a US dollar rebound, an oil price turning over from its highs and persistent global growth concerns after the latest China data sapping investor sentiment. The reason Billiton’s faring worse than its peers stems from news of a $44bn civil legal challenge from Brazilian federal prosecutors related to last November’s Samarco dam failure. That in itself may appear to be a minor driver. It’ll be sorted out soon, won’t it?

Er, well, something similar happened to BP about six years ago and this has quite rightly spooked investors, who would now appear to be pricing in the prospect of long and protracted litigation akin to that which BP only put to bed in July last year – a whole five years and $53.8bn after its 2010 Deepwater Horizon Gulf of Mexico disaster!

The claim against BHP Billiton relates to clean-up costs for waterways and villages, community rebuilding and compensation for the deaths of 19 people and resulting homelessness inflicted on a further 700. Sound familiar?

While BP worked tirelessly to limit the impact (both environmental and financial) of its disaster, several attempts to close the affair failed, and now a fresh legal challenge for BHP Billiton sees its situation echoing that endured by BP. The March 2016 settlement between BHP Billiton, its domestic partner Vale and the Brazilian government was potentially just the beginning of a long road. While there remains the possibility that such an imposing precedent as BP’s Gulf of Mexico disaster is inflating the claim against BHP, one can’t help but see investors take flight at the prospect of added risk in an already risky sector.

Sure, the Brazilian government has form for demanding initially huge reparations for environmental disasters before conveniently reducing them, and a smaller settlement may well be agreed for BHP and its Samarco colleagues. But there is no guarantee of this. Then again, this is Brazil, where the president faces impeachment and replacement by any one of a number of equally dubious cronies.

BHP shares are still holding their uptrend from 2016 lows. Just. However, after giving up 50 per cent of their 2016 gains (now up just 40 per cent YTD vs highs of 80 per cent on 21 April), we have to wonder whether an already difficult situation could get even messier.

This commentary was provided exclusively for Hot Commodity by Accendo Markets: https://www.accendomarkets.com.