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Zhang Zuode

Author: zhangzuode   |   Latest post: Sun, 7 Nov 2021, 2:45 PM

 

Oil Price Dynamic

Author: zhangzuode   |  Publish date: Sun, 7 Nov 2021, 2:45 PM


Oil Price – dynamic

Further to my post – Hibiscus buy Hibiscus IV Oil price, here are some dynamic on oil price movement that have been observed recently.

US set oil price

US is the largest oil consumer. Plus, financialization of commodities, US thus set price of oil.

As such it is to the US, where data is in abundance, for a drill down on pricing dynamic. Primarily, the main source of data is from EIA – U.S. Energy Information Administration.

Here is a simplistic view of the dynamic of crude oil supplied to become products for consumers:

  • Crude oil is produced via shale patches, Gulf of Mexico and around USA and they finally flow into STORAGE, mainly commercial (Cushing is just one of many) and or the Strategic Petroleum Reserve (SPR).
  • There is also import and export of crude oil. Nonetheless, finally, balance of this export and import has to be either stored (BUILD) or deducted (DRAW) from STOCKS.
  • The main (can be said ONLY) user of crude oil is the refineries. In the data world it is known as INPUT to and PRODUCTION from the refineries. And the products are also STORED before being send to end users / consumers. Storing is required to act as a balance between production capability, weather interruption, seasonal use and distribution issues.

 

              

  • There is also import and export of products and this finally also show up in the STOCKS level of the products storage tanks.
  • Finally, to the consumers, the products are supplied (DEMAND).

Based on the foregoing, one only need to monitor:

  1. INPUT to refineries, as this indicates the strength of demand
  2. Products supplied and storage or STOCKS levels. This provide insight to demand
  3. Total storage levels of both crude oil (SPR + commercial) and products. This show how supply is meeting demand.

Let’s look at the refineries crude oil INPUT now:

The oil input is consistent and varies within a tight band over the years. In 2020 the input drop on lock-down. This year there was the Texas freeze and hurricane Ida. Similarly in 2017, hurricane Irma hit around same month causing similar drop in input as refineries where hurricanes “make” landfall had to be shut down and some incurred damage or flooding.

It is clear that oil input is seasonal. Between Week 18 to 36, refineries are working flat out to supply products to consumers that drives all over US – driving season. Around Week 36 to 44 (8 weeks/2 months), input drops. During this period, refineries carry out maintenance or refurbishment. And 2021 is no different. Do note that data reported lag by a week. In the coming weeks, input to refineries is going to increase.

Figure above shows the tight band of gasoline supplied over the previous years. 2020 (blue line) started within the band but then become an outlier once lock-down was declared. 2021 gasoline supplied (demand) is firmly back and within upper limit of the band too.

Diesel supplied did not suffer a drastic drop like that of gasoline in 2020, as it is mainly used for commercial transportation and certain manufacturing that are essential.

Jet fuel is no different to gasoline. Demand still lags but is edging towards the band. Only these three major products (gasoline, diesel & jet fuel) are considered. The other products share similar pattern.

Gasoline stocks (inventory) level is as shown below. It is clear that stocks draw a lot during driving season, despite refineries running flat-out.

From the refinery input, 2021 Texas freeze occurred about week 7 to 11, thus gasoline stocks level dropped correspondingly (near vertical, green line). And similarly, when Hurricane Ida hit around week 35. From both the supply and stocks level, demand for gasoline is back to normal (upper end) and stocks is at the lower end. Thus, demand is strong and supply is just keeping up. Gasoline stocks is now expected to rise to prepare for 2022 driving season.

Similar figures can be made from EIA data for diesel and jet fuel. They tell the same story.

Finally, the Total stocks level of crude oil plus products is as shown:

Total stocks level (green line)  has fallen from 1,980 mb to almost flat around 1,850 mb now. This is despite the build in crude oil. But products draw made the overall Total remaining flat for the past 8 weeks.

From the supplies and storage figures above, it can be said that DEMAND is strong and should remain within the band as per previous years. Average stocks for year 2011 to 2015 is provided, this was the stocks when oil price was last in the 100s. The Total stocks then, was 1,750 mb to 1,810 mb. Current level is ONLY 40 mb to 100 mb from the 11-15 average. Based on current refineries input, these 40mb to 100mb will be used up in no time.

Expectation is that Total stocks level should draw (reduce) towards the 11-15 average in the coming weeks. This could lead to higher oil price going forward, all things being equal.

Below is the average monthly oil price since 2020.

It is a shame that Hibiscus also benefits from the poor RM->US$ exchange (-9%). It makes sense to get US$ bond now. When the RM->US$ exchange normalize, less RM will be required to redeem the bond, that is, if it normalized.

General

News about Cushing low stocks level is just a red-herring, as ultimately, it is the Total stocks level that count.

Recent talk of US, Japan, India and others in a coordinated release of their SPRs crude oil to bring down the price of oil is also another delusion. Refer to the schematic above, and like Cushing, it is just moving crude from one tank to another. There is no net gain in the VOLUME of crude oil at all. FUNDAMENTALLY THERE IS NO CHANGE. If one just looks at commercial crude oil stocks, yes, there will be a build. So, any price dip is an opportunity to add.

It is November now, new rigs added will ONLY materially bring new supply sometime in March 2022. Please do not forget DEPLETION, so net gain in supply could be small.

Support for current to higher oil price

Oil majors 3rd quarter results were impressive. However, despite the large free cash-flow, none of the majors indicated higher CAPEX, rather all said, shares buy-back and or higher dividend.

Here is a brief on shale oil firms result: https://oilprice.com/Energy/Energy-General/US-Shale-Patch-Reports-Blowout-Earnings.html. Again, they are ONLY interested in reducing debts, share buy-back and pay dividends. One, Continental Resources (CLR) planned to buy a Permian field for US$ 3.25B. You would think investors will be happy as it will increase production by 50,000 barrels a day, but instead, its share price dropped 9%. Maybe price paid is too high or shareholders thought that further investment in oil (or gas) production should be stopped due to climate issues? CLR is not the first, there were others also.

Supply (fundamental / structural) going forward would remain constrained.

High gas prices, especially in Europe and Asia would force some consumers to switch from gas to oil. However, this is only temporary until gas prices normalize.

Risk to current high oil price

Cases of Covid 19 in Europe is spiking. Should governments in Europe adopt lock-down again, demand will be cringed.

SEEK TRUTH FROM FACTS

Conclusion

US, being the largest oil consumer at 19.7 mb/d, set oil prices through it more developed financial system.

Data is abundance in US and is primarily sourced from EIA.

The main (or ONLY) user of crude oil is the refineries. Oil input to refineries follows a seasonal pattern. The refineries are now coming out of their maintenance season and will increase input to build up products for next year driving season.

Products supplied to consumers and stocks level gives an insight to current demand. Demand for gasoline and diesel is back to pre-Covid level while jet fuel still lag.

Looking at Total stocks (level) of crude oil (SPR & commercial tanks) plus products stocks provide the best information on how supply is meeting demand. Today Total stocks is near 2011-2015 average stocks, the stocks level when oil price was last around 100s.

Given the above, oil price should trend higher towards end of the year and into first quarter of 2022.

The current spike in Covid 19 cases could temper demand, but switch from gas to oil might mitigate it.

 

Disclaimer:

I wrote this myself without pay. I and my families own Hibiscus shares. This is not an advice to buy / sell Hibiscus or any other equities / securities / assets.

  Jasonn likes this.
 
twynstar Very detailed analysis. Thanks a lot !!
07/11/2021 10:11 PM
zhangzuode Thank you for reading. Hope that it is useful.
10/11/2021 11:35 AM

Hibiscus buy Hibiscus IV - Oil price

Author: zhangzuode   |  Publish date: Sun, 24 Oct 2021, 1:21 PM


Hibiscus buy Hibiscus IV – oil price, UP / DOWN

SEEK TRUTH FROM FACTS

General

Since my article in June 2022, oil price has gone up by 15%. As profitability of Hibiscus depends on the price of oil, it is imperative to know what is the trend of oil price going forward.

There are two factors why Hibiscus is so attractive: -

  1. Oil price remains on the upward trend
  2. Production of Hibiscus should (not could) increase by 3 times once Repsol assets are incorporated upon completion of the deal expected at the end of this year

Based on 1) above, IF, a big IF, the Repsol deal did not go through, then, just on the strength of increasing oil price alone, Hibiscus FY22 EPS is estimated to be 12.1 sen. This is better than FY19’s 11.4 sen.

But of course, once Repsol assets are included (possibly in Q3 & Q4 FY22), EPS double to 24.1 sen.

So, from an investment viewpoint, there is a high margin of safety.

The above assume average oil price for FY22 to be 75.62 ONLY. Do not forget that Q1 FY22 is over and average oil price for the quarter, US$ 73.47 is baked in already. And so far, October average oil price is US$ 82. Yes, there are reports of oil price going to 100 or even 200, but, as an investor, it is always prudent to err on the conservative.

Supply / Demand

Below is the Global supply and demand balances for 2021.

The value is an average of the estimates provided by OPEC Monthly Report Oct 21 and EIA STEO Oct 21.

As a result, the shortfall in 2021 supply & balance pushes the stock levels down as shown below:

OPEC October 2021 monthly report: Preliminary August data sees total OECD commercial oil stocks down by 19.5 mb m-o-m. At 2,855 mb, they were 363 mb lower than the same time one year ago and 183 mb lower than the latest five-year average.

The OPEC report on OECD stock level lagged by two months. From the Supply Demand balance tabulation, the closing stock level at end 2021 is estimated to be 2,680 mb.

The price of oil correlate to OECD stock level as shown below. The stock level is projected to end the year at around 2,700 mb. Therefore, between now and end of the year, oil price may vary between 80 and 100, as per the red oval.

This price (range) projected are all theoretical and should be taken with great precaution.

Update on Repsol deal

Last week, Hibiscus made several announcements and posted details of Repsol assets audited accounts (Report) for financial year ending 31 December 2020. Here is a brief update:

  1. Hibiscus (financial health) is rated STABLE-(P)B1 by Moody, and STABLE-B+ by Standard & Poor.
  2. Merrill Lynch, JP Morgan and Seaport Global are Joint Global Coordinators and Joint Bookrunners to arrange a series of fixed income investor calls for potential US$ denominated 5-year senior fixed rate notes (BOND – layman take).
  3. Quantum of the Bond maybe US$ 300m or US$ 110m (RM 450.3m) and the fixed rate might be 7.18%. These values are derived from pages F-3, F-5 & F-12 of the Report. Of course, these are indicative and depends on cash-flow (internal generated fund). The final quantum could be less or more depending on market appetite and rate (less than 5%).
  4. Status of Approval required – pages 67-68 of Report.
    1. PETRONAS & PetroVietnam approval is expected by November 2021
    2. Fulfil all conditions precedent to the S&P Agreement – December 2021 and hence by extension completion of the Acquisition as well.
  5. A negative goodwill (NG) of at least RM 36m (Page 17, F-8 & F-13 of Report) to be accounted for. NG might be higher.

Summary

Supply and Demand balances point to OECD stock level might end 2021 at 2,700 mb.

Thus, oil price is expected to hover between US$ 80 to 100 towards end of 2021.

Hibiscus financial health has been rated as STABLE by both Moody and Standard & Poor.

A 5-year fixed rate US$ 110m to potentially 300m Bond are now being “run” by Merrill Lynch, JP Morgan and Seaport Global from Singapore. Fund from the Bond will primarily be used to settle the Repsol Assets acquisition together with internally generated fund. This confirmed management call that there will be no more CRPS.

Approval from PETRONAS and PetroVietnam is expected in November 2021 while completion of the deal is still earmarked for December 2021.

On completion of the Repsol acquisition, a negative goodwill of at least RM 36m will be “booked”.

Disclaimer:

I wrote this myself without pay. I and my families own Hibiscus shares. This is not an advice to buy / sell Hibiscus or any other equities / securities / assets.

  2 people like this.
 
twynstar Nice article !! Very detailed analysis !!
24/10/2021 10:00 PM
zhangzuode Thank you for reading. Appreciate the feedback.
25/10/2021 8:13 AM
DragonG Quantum of the Bond maybe US$ 300m or US$ 110m (RM 450.3m) and the fixed rate might be 7.18% - May I know where you get this rate of 7.18%. Bank loan interest is definitely at least 1% -2% lower. Shouldn't it be wiser to get a bank loan instead of issue bond?
25/10/2021 2:12 PM
zhangzuode It is stated in the Report (Investor material Oct 21) posted on Hibiscus site - page F-12.

Yes, a bank loan might have lower interest, however, the terms might be too onerous. I think that the 7.18% indicated might be the top, maybe 5% would be fair since it is a US$ bond. Thus should interest be that low or lower, Hibiscus might then issue more to capture the low interest.

Also, a circular for the Bond was issued as per page F-3.

Thank you for reading.
25/10/2021 5:19 PM
DragonG Thank you for answer.
25/10/2021 5:49 PM

Hibiscus buy Hibiscus III - How much is Hibiscus Worth (Part b)

Author: zhangzuode   |  Publish date: Sun, 17 Oct 2021, 7:33 PM


VALUATION - How much is Hibiscus Worth

SOON, the 3rd child will be delivered. And what a productive child too – it would increase current production from 9,000 bpd to about 27,000 boepd. The 27,000 is barrel oil equivalent (boe) as the gas production is converted to oil equivalent.

In the previous write-up, there was still the possibility of more CRPS (and dilution) being issued, giving an estimated valuation between RM 1.16 to 1.29, now CRPS route is not required, the revised value would be RM 1.42.

Latest data from Hibiscus September 2021 presentation:

As my proposition is Hibiscus buy Hibiscus, the Net Assets would be

1,474 x 2 = RM 2,948 m

Shares issued (all CRPS converted) = 2,012.4 m gives RM 1.46 per share.

SEEK TRUTH FROM FACTS

These are few facts to take note:

1)      A company that to date, is debt free

2)      It has managed production cost well

3)      Healthy free cash flow, with higher average selling price (ASP) is more robust

4)      ASP of its product has increased and potentially will increase more, if not, at least maintain at current level

5)      Production will increase by 3 times within the next quarter or two. i.e., more product to sell in an increasing ASP!!!

Based on above FACTS, Hibiscus is a very valuable company. In Bursa, one cannot find another company with such huge (REAL) potential. If so, please share, thank you.

Presently, share price of Hibiscus has followed oil price movement. See figure below from presentation on Hibiscus’ website.  It has NOT considered the impending increase of production at all.

Hibiscus, like oil and gas companies all over the world has been valued at a discount of about 20% despite the increased oil price (https://oilprice.com/Energy/Energy-General/US-Oil-Stocks-Are-Seriously-Undervalued-Right-Now.html).

It is really amazing that Greenies (all over the world) forsake such opportunity for supposedly green investments that will not make money in the next 5 years or more.

Lately, some, like Norway has decided that they will continue to invest in fossil fuel projects. But they are the minority. Should more come around to invest in REAL (instead of illusion), then current prices would gain further.

Finally, what exactly is Hibiscus worth? Below is typical profit & loss table. Year 2020 was omitted as it is abnormal. Impairment, negative goodwill and such items are also omitted. Figures in blue are best, conservative, guesses.

Beauty is in the eye of the beholder, so, play / change the blue values to one’s heart delight. Use whatever PER one desire to get the value one is comfortable with.

Summary

Oil price has appreciated since June 2021 by about 14%.

Greenies are MAD, currently under an energy crunch, they double down to stop and remove fossil fuels. Good news for oil price going forward as supply will be cringed further while demand goes through the roof.

Like making babies require 9 months, shale oil, with current 543 rigs will not be able to increase production to flood the market like before in the next 6 to 12 months. An estimated 850 rigs are required to materially increase shale oil to overcome depletion.

Repsol deal is nearing completion with only two out of six conditions to be fulfilled – shareholders approval during an EGM and Petronas & PetroVietnam approval that should be forthcoming. Completion is expected to be end of this year.

No more CRPS to be issued for Repsol asset purchases. This indicated that rising oil price has aided cash flow so much that a 1 sen dividend was also declared.

Repsol asset, estimated at USD 415m in Jan 2020, was bought for USD 215m, an excellent deal.

Hibiscus is revaluated to be RM 1.42 to 1.46.

EPS for FY2022 could be 12 to 24 sen. For the later, Repsol asset production is included for Q3 & Q4 FY22. As PER is personal, none is given.

Happy investing, PEACE.

 

Disclaimer:

I wrote this myself without pay. I and my families own Hibiscus shares. This is not an advice to buy / sell Hibiscus or any other equities / securities / assets.

Labels: HIBISCS
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Hibiscus buy Hibiscus III - How much is Hibiscus Worth (Part a)

Author: zhangzuode   |  Publish date: Sun, 17 Oct 2021, 3:53 PM


Hibiscus buy Hibiscus III

So much has changed since I wrote my articles in June 2021.

Oil price went from US 74 to now US 84.86, a 14.7% increase.

There is now a gas & coal supply crunch in Europe, China and India. Much has been written about this and I will not go into this except to conclude that the greenies are MAD, insane, e.g.

  1. The UK oil and gas regulator did not approve Shell’s gas project recently in the UK side of the North Sea.
  2. IEA said, the gas shortage is not the fault of the green deal and asking double effort to put up more renewable projects
  3. Germany wants to bring forward the closing of their coal mines by eight years

 And many more…

Some of these greenies think that you just flip a switch on the wall and wala, electricity just come out, yeah right! And there is no need to know how the electricity got there.

Imagine should a government say that they will give a million bucks for any third child born, the greenie will think tomorrow they can come up with that third child!

The most optimist case, one that already have two children, there still is the persuasion whether the “factory” agrees or not? Then, not in the mood, tired, foreplay like wine and dine before the action and there could be some mis-firing due to lack of practise. These could take anything from weeks to months. Assuming agreement is obtained and action was done properly, there is still 9 months, no miscarriage etc etc…. At the quickest, with paper work after birth and bureaucracies, one may only see the money maybe after 10 to 12 months. More likely, 12 or more months.

Similarly, should shale players ramp up rigs etc, production would only be seen like at least 2 months down the road. Today looking at the rigs number, 543 for the just announced numbers, it is just enough to increase production to cover the depletion. YES DEPLETION! There must be at least 850+ rigs drilling today for production to increase in two months (December/January) later. There are currently manpower issues (apparently, they do not want to work), old rigs needing refurbishment, broken equipment to be replaced – supply chain issues to overcome and on and on …. Do not forget, there is also the ESG issues in America too – no more finance for dirty fossil fuels.

The fear that shale will flood the market once more is totally misplaced.

Supply & Demand

Demand is going up – most countries are talking about endemic now, travel between countries is being promoted, jet fuel, the last product that has not recovered could be returning with a vengeance.

The high gas prices now are forcing some electricity generators to convert to oil. Below is some information on Asia power sector.

It is estimated that 500,000 bpd could be added to current demand. This will totally negate OPEC+ 400,000 bpd increases.

UPDATE on Repsol purchase

The conditional sale and purchase agreement has 6 conditions:

(i) the approval from each of PETRONAS and PetroVietnam of the sale of the FIPC Shares to Peninsula Hibiscus for the relevant PSCs, to be obtained by Repsol;

(ii) the approval or waiver from each of PCSB and PVEP of the sale of the FIPC Shares to Peninsula Hibiscus according to relevant JOAs, to be obtained by Repsol;

(iii) the approval from the Barbados Exchange Control Authority of the sale of FIPC Shares to Peninsula Hibiscus, to be obtained by Repsol;

(iv) the clearance by Bursa Malaysia Securities Berhad (“Bursa Securities”) of the circular to shareholders of Hibiscus Petroleum in relation to the Proposed Acquisition;

(v) the approval of the shareholders of Hibiscus Petroleum at an extraordinary general meeting (“EGM”) to be convened; and

(vi) Bank Negara.

 

Conditions ii), iii) & vi) have been obtained. Conditions iv) & v) rightly should be one condition and I believe no shareholder will vote against the purchase of Repsol asset.

PCSB and PVEP are 100% owned by Petronas and PetroVietnam respectively. Both PCSB and PVEP had given waiver. Do you not think that Petronas and PetroVietnam approval were required before PCSB & PVEP gave the waiver?

Management had on 30 Jul 2021, in an interview with Stockbit Malaysia (https://www.youtube.com/watch?v=CbNLG6HtjOY) said that no more CRPS will be issued for the Repsol purchase. Cash flow appears to be sufficient to fund the purchase.

There might be some loan though.

And Hibiscus is confident enough to declare 1 sen dividend.

Repsol assets were valued at usd 415 in Jan 2020 (https://connect.ihsmarkit.com/upstream-insight/article/heroldReports/136390/seam-alert-repsol-weighing-sale-of-malaysian-assets) Thank you to twynstar for this gem.

There remains the following:

  1. EGM to get shareholders approval of the purchase. A circular would be despatched soon after BURSA gives its approval (mere formality). The EGM would most likely be held after the upcoming AGM to be held normally in the first week of December 2021.
  2. Approval from PETRONAS and PetroVietnam (refer comment above on PCSB/PVEP)

 

Labels: HIBISCS
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Hibiscus buy Hibiscus II

Author: zhangzuode   |  Publish date: Thu, 17 Jun 2021, 8:43 PM


Hibiscus Buys Hibiscus

On 3 June 2021, Hibiscus announced the acquisition of Repsol’s assets in S.E. Asia.

Details of the assets being acquired, terms and conditions, etc., are clearly articulated in:

  1. the announcement (https://malaysiastock.biz/Company-Announcement.aspx?id=1324467) and,
  1. the Presentation pack (https://www.hibiscuspetroleum.com/wp-content/uploads/2021/06/HPB-Proposed-Acquisition-of-Repsol-Assets-Final.pdf)

 

The effect of the acquisition is sum up in the Presentation pack as:

This information is presented in another way as shown in the table below.

It can be seen that, all things being equal, the calculated total production at the end of economic life of both Hibiscus and FIPC is almost the same, a difference of 9% ONLY.

While the 2P reserve of FPIC is smaller than Hibiscus, BUT it is neutralized by the higher production. In fact, get the money first rather than later is a positive way to look at it.

Thus, in the greater scheme of life, this is considered the SAME.

So, Hibiscus is buying another “Hibiscus”.

Please remember this – Hibiscus buys Hibiscus.

At the end of May 2021,

  • 1,988,930,904 Hibiscus shares issued / outstanding.
  • @ 65 sen a share, to be conservative
  • market capitalization of Hibiscus equal RM 1.293 billion.
  • Exchange rate of 4.13 gives US 313 million

FPIC purchase price, US 212.5 million, a 32% discount to Hibiscus market cap of US 313 million.

At prevalent market condition (increasing oil price), a very good buy!

 

Funding

As per slide 13 of Hibiscus’ Presentation pack, the sources of fund would be from:

The most interesting source is from FPIC itself, BRILLIANT!!

The anxiety now is the fund that could be internally generated by both Hibiscus and FIPC.

The internally generated fund is conservatively estimated to be RM 450 m at the end of 2021. There remain a balance of about RM 390 m.

Two scenarios to pay the balance of the purchase price were considered – 100% using CRPS or part CRPS part loan. The results are:

 

Remember Hibiscus buys Hibiscus, the combined (Hibiscus + FPIC) value is arrived as 2 x Hibiscus. And Hibiscus value when oil price increases is:

The purchase is estimated to be completed at the end of 2021. So, the share price and oil price used to determine the conversion price of CRPS and value of Hibiscus are conservative.

It is assumed that CRPS would only be issued towards the fourth quarter when the amount of internally generated funds become clearer.

 

RISKS

There are many risks, and these are well explained in the announcement on 4 June 2021. Please refer to them for better handle of the risks involved.

 

SUMMARY

Hibiscus signed a Purchase agreement to buy Repsol’s South East Asia asset, FPIC (Fortuna International Petroleum Corporation). The Purchase price, US 212.5 m is 32% discount to Hibiscus market valued at US 313. A good buy.

FPIC estimated economic "life production" is only 9% more than Hibiscus’s life production. So, it is concluded that Hibiscus is buying another Hibiscus.

The purchase will be funded, as guided by management, by internally generated fund from both Hibiscus and FPIC, issuance of CRPS and maybe also bank loan.

Internally generated funds of both companies conservatively totalled RM 450m. The balance, RM 390m, may either be 100% funded by issuing CRPS or a combination of loan and CRPS. It is finally estimated the share value (post completion) maybe RM 1.16 or 1.29 for 100% CRPS or combine loan+CRPS respectively.

Peace Investors.

Disclaimer:

I wrote this myself without pay. I own Hibiscus shares. This is not as advice to buy / sell Hibiscus or any other equities / securities / assets. Always do you own due diligent before investing in anything.

 

Labels: HIBISCS
  2 people like this.
 
supersaiyan3 Well written.
17/06/2021 11:04 PM
DragonG Your TP is too conservative...might to write part 3?
08/10/2021 12:01 PM

Hibiscus buy Hibiscus

Author: zhangzuode   |  Publish date: Mon, 14 Jun 2021, 11:15 AM


Hibiscus Buys Hibiscus

Hibiscus announced the purchase of Repsol’s assets in South East Asia on 3 June 2021. Repsol announcement of the disposal was a day earlier.

Since the announcement, the response from the market has been muted.

One of the main concerns assumed is oil price direction.

Oil price, rising or falling?

As per all commodities, oil price changes / volatilities depended on:

a)      Supply – capital investment into exploration, production and so on to replace as well as add to current stock for continuous economic development and wellbeing

b)      Demand – current pandemic rising cases, EVs and use of renewable / alternatives instead of fossil fuels

c)      Geo-political issues – Iran potential return to supply and so on

Let’s go through the above in order of least importance:

1)      Geo-political issues – this has been around forever and can never be ideally solved. Solving one here often create another issue somewhere else, so, live with it.

2)      Demand

–        EVs, renewal / alternatives to fossil fuels, YES, in at least 20 or more years down the road. Ignore it for a 10 years’ time horizon.

–        Covid 19 cases: vaccines are being roll out and cases is coming down. US and Europe are removing restriction and air-travel is picking up. Going forward, demand will go up.

3)      Supply

–        since 2015, capital investment (CAPEX) has been reduced. While some investment came back, it was further reduced in 2020 and into 2021. Now, there is a new headwind – New Green Deal, more on this later.

–        Depletion, this very much ignored point is important and in this environment of reduced CAPEX, eats into the spare capacity.

Supply

Depletion

A direct way to see the effect of reduced CAPEX is the number of oil rigs operating worldwide. This data is obtained from Baker-Hughes. Supply or production data is from EIA – US Energy Information Administration.

Depletion rate is 5 to 7% as per Geological Survey of Finland (Report) “Oil from a Critical Raw Material Perspective” (http://tupa.gtk.fi/raportti/arkisto/70_2019.pdf). This is a robust report and have a good section on shale oil – section 7 (pages 138 to 155). PLEASE read it.

From the following three graphs, the rig productivity is estimated to be:

1988 to 2014 – 2.22 kb/d/rig/yr

2015 to 2019 – 2.76 kb/d/rig/yr

A 5% depletion rate was used to be conservative.

 

Graph 1: World average rigs per year and oil production

 

Graph 2: Estimated yearly new production required

Depleted amount is calculated from the previous year production, i.e., for year 2020, the 4.9 mb/d is 5% of 98 mb/d, 2019 production. Hence, new production required for the year would be the depleted amount plus the increase in year-to-year production.

Rig productivity is calculated from the new production required divided by the average of the current and previous year number of rigs to allow for the lag in production coming on-stream.

 

Graph 3: Estimated average rig productivity over 2 time period

 

For year to year where there is reduced production, like 2019 and 2020, the reduction differences are not deducted from the depleted amount. Thus, for year 2020 and 2021, the calculated shortfall will eat into the spare capacity.

Estimated shortfall is about 1.54 mb/d for 2020 and 1.56 mb/d for 2021. That is cumulative 3.1 mb/d less spare capacity, worldwide.

Going forward, there will always be a ±5 mb/d depletion per year that need to be replaced. Using the rig productivity rates gives 2254 to 1813 i.e., average 2000 rigs per year is needed.

 

Shale Oil

In oil supply matrix (abstract of Report), shale oil since 2005, contributed 71.4% of new oil supply, and, accounted for 98% of global oil production growth in 2018.

 

March 2021 shale oil production is at 6.9 mb/d, indicated that shale oil has lost 1.9 mb/d from its peak at end of 2019. February 21 production was at 6 mb/d due to the freeze.

On page 153 of the Report, average well production decline is 86.8% while average field decline is 26.3% (with maintenance drilling).

Shale oil production and the average yearly oil rigs are as shown in the next graph.

 

It is estimated just to maintain the same shale production of 2019, at least 850 rigs are needed to be deployed. Currently there is only about 457 (28 May 21) on site.

 

There are two further issues that hamper the increasing of shale oil production: -

a)      “High-grading” of the area well drilled since 2016. Wells were drilled in areas with the best prospect (Tier 1) so as to increase production with the least number of wells. Going forward, the remaining prospective areas are of lower quality. This means more rigs are required.

b)      Low to almost junk rating of most of the shale oil (independent) companies, with some already bankrupt. Thus, they are not able to raise fresh fund to increase drilling. All free cash flow is used to reduce borrowings to improve rating.

 

New Green Deal

Oil majors (Shell, Exxon, Total etc.) face major hurdle to become carbon neutral. Some even face court cases while Exxon has three new directors that are “greenies”.

Board room meeting on new oil & gas CAPEX investment would be most interesting going forward. It is likely that CAPEX would be directed to renewables / alternatives to fossil fuel, this further exasperating the already much reduced CAPEX since 2015.

 

Summary

1)   Depletion rate is 5 to 7%

2)   CAPEX is reduced and this is reflected in the low number of rigs in operation currently

3)   Low rigs number caused cumulative replenishment shortfall of 3.1 mb/d in 2021, i.e., spare capacity will be less by 3.1 mb/d

4)   Shale oil depletion is much higher – 26 to 87%.

5)   Based on March 2021 production, shale oil has dropped about 1.9 mb/d from 2019 peak to about 6.9 mb/d (March 21). Current rig numbers are not able to replace depleted oil.

6)   Rigs number need to increase to 2000 rigs from current 1200 worldwide to maintain production.

7)   Rigs in US need to increase to 850 from current 457 (28 may 2021) to maintain production at around 7 mb/d. Actually more than 850 is required as new areas are of lower quality / tier.

8)   New Green Deals may cause further reduction in oil / gas CAPEX.

 

CONCLUSION

With geopolitical issues, need to live and accept the volatility that comes with it. As for demand, it is going up due to the roll out of vaccines while EVs etc. will not affect demand for the near future (next 5 years).

CAPEX has been reduced since 2015 and now with New Green Deal, it appears to remain relatively low in the years to come. The low CAPEX is reflected in the reduced number of rigs in operation. Rigs number need to be increased to 2000 worldwide to maintain production.

Unless rigs number goes up FAST, oil price is on an upward trend as spare capacity is being reduced.

Have a safe day and a good week ahead, stay at home.

Declaimer:

Nobody paid me to write this. I own Hibiscus shares. This article in no way promote buying or selling of Hibiscus or any other securites / equities / assets. Always do you own due diligent before investing in anything.

 

Labels: HIBISCS
  3 people like this.
 
supersaiyan3 Wow, so well research. Thanks.
14/06/2021 9:52 PM
zhangzuode supersaiyan3 - thank you for reading and the feedback.
08/07/2021 10:03 AM
DragonG Good job. You are right and should be reaping the reward now.
08/10/2021 11:54 AM


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