Politics, Geopolitics & Conflict
This week, we saw a fairly big scare for the oil industry in the form of an intelligence-sharing event between the Saudis and the Americans warning of a potential Iranian attack on Middle East oil facilities–most notably, Aramco’s. As we noted in last week’s briefing, the September 2019 attack by Yemen’s Iran-backed Houthis on Aramco facilities caused chaos in the global oil markets. If it happens again, it will cause far more chaos. Iran has called the media reports surrounding such intelligence “baseless”, while various analyses pose the theory that a big attack on Saudi Arabia would be meant as a distraction at home, where Tehran is battling rising unrest that is backing it into a corner. There were no real details revealed concerning the so-called intelligence shared between Saudi Arabia and the U.S. Indeed, media reports made it seem as if the threat potential was directly from Iran, and not through a proxy such as Yemen’s Houthis. We find such a declaration of war on Saudi Arabia not to be in Iran’s interest at this moment, nor would it necessarily serve as a distraction for protesting Iranians across the country.
Another major concern for markets this week was Russia’s scratching of the deal that allowed Ukrainian grain to get to market - a deal brokered by the Turks. That deal saw 8 million tons of agro products leave Ukraine for global markets staving off a hunger…
Politics, Geopolitics & Conflict
This week, we saw a fairly big scare for the oil industry in the form of an intelligence-sharing event between the Saudis and the Americans warning of a potential Iranian attack on Middle East oil facilities–most notably, Aramco’s. As we noted in last week’s briefing, the September 2019 attack by Yemen’s Iran-backed Houthis on Aramco facilities caused chaos in the global oil markets. If it happens again, it will cause far more chaos. Iran has called the media reports surrounding such intelligence “baseless”, while various analyses pose the theory that a big attack on Saudi Arabia would be meant as a distraction at home, where Tehran is battling rising unrest that is backing it into a corner. There were no real details revealed concerning the so-called intelligence shared between Saudi Arabia and the U.S. Indeed, media reports made it seem as if the threat potential was directly from Iran, and not through a proxy such as Yemen’s Houthis. We find such a declaration of war on Saudi Arabia not to be in Iran’s interest at this moment, nor would it necessarily serve as a distraction for protesting Iranians across the country.
Another major concern for markets this week was Russia’s scratching of the deal that allowed Ukrainian grain to get to market - a deal brokered by the Turks. That deal saw 8 million tons of agro products leave Ukraine for global markets staving off a hunger crisis. The existing grain agreement was always tentative, set to expire on November 22nd. Moscow was determined to find fault with the grain deal and was always looking for an excuse to scupper it or aggravate it - as long as it could gain leverage from it. It found its reason on Oct 29, when a Ukrainian drone hit the Black Sea fleet - close to the heart of the grain export route. The justification for quashing the grain deal was that the fleet the Ukrainians hit are part of the security detail for getting Ukrainian grain to export. Once again, Turkey scored some more global mediation points because Moscow reinstated the grain deal on Nov 2 after talks between Erdogan and Putin, who backed down relatively easily on this because he’s losing leverage. At the same time, Erdogan has grown uncomfortably significant since Russia’s invasion of Ukraine and will, in the very near future, need to be dealt with himself.
Finally, with regard to market-moving developments, we saw unconfirmed and completely unsubstantiated social media rumors that Beijing was going to ease up on its zero-COVID policy resulting in an instant rally in Chinese stocks and a fair amount of bullishness for oil demand. It didn’t last long when the rumors proved to be unfounded entirely. Instead, we saw China’s NIO suspend production due to COVID measures, among other building consequences for Chinese industry.
The G7 and Australia have agreed to a fixed price when they move to finalize the price cap on Russian oil later this month. This will be instead of a discount to an index. The group opted for a fixed price cap to promote oil price stability and simplify compliance. A price has not yet been set but will be forthcoming next week.
Discovery & Development
QatarEnergy announced an oil discovery this week in its Sepia oilfield in Brazil. The oilfield is in the Santos Basin. This is from the working interest that QatarEnergy acquired last year during Brazil’s Transfer of Rights Surplus Bidding Round. The area is operated by Petrobras, which has an operating interest of 52%, along with QatarEnergy’s 14.4% stake, TotalEnergies' 19.2% stake, and Petronas Brasil at 14.4%. The Sepia shared reservoir is currently producing 170,000 bpd. The well penetrated a net oil column, which is one of the thickest in Brazil. Well tests are to follow.
U.S.-based Westinghouse will build Poland’s first nuclear power plan at a cost of $20 billion as the country looks to get away from coal. Nuclear power is a bone of contention in the EU, with some arguing that the potential for climate catastrophes is simply too great to use it as a climate-friendlier alternative to coal.
Canada said it would impose a 2% tax on stock buybacks as of January 1, 2024, to encourage more spending on domestic operations and workers. The measure appears to be indirectly targeting oil and gas producers, which saw a bumper year. The details of the tax will be made available later, but it is expected to put more than $2 billion into federal coffers over the initial five-year period.
Deals, Mergers & Acquisitions
The U.S. DOE has sold off the final 15 million barrels of its planned 180 million barrel SPR release. A not-so-noteworthy development is that it was sold to Phillips 66, Marathon Petroleum Supply and Trading, Shell Trading, Valero Marketing and Supply, Macquarie Commodities Trading US, and Equinor Marketing and Trading. Deliveries won’t take place until sometime in December. The U.S. SPR has shed 237.981 million barrels since April 2021, 193.59 million barrels since the start of this year, and 164.788 million barrels since the 180 million barrel release was announced this year. Now below 400 million barrels, the SPR is at its lowest level since May 1984. The White House has toyed with the idea of releasing even more barrels from the SPR next year. Meanwhile, the WH said it would look to replenish the SPR when oil prices fall between $67 and $72 per barrel. The SPR has so far been propping up commercial crude inventories, which have been ravaged in large part by exports, with the wide gap between Brent and WTI making it an attractive offering. With some of the 180 million barrels in SPR sales now spread into December, it should continue to limit inventory losses in commercial crude inventories.
Marathon Oil Corp has reached a deal to purchase nat gas assets from Ensign Natural Resources for $3 billion in a move that will double the oil company’s holdings in the Eagle Ford. The deal is expected to increase its 2023 cash flow by 15%. The deal is expected to close by the end of the year. Marathon Oil Corp is expected to raise its base dividend by another 11% after the deal closes. See Q3 note below.
Tail-End of the Energy Earnings Beat
BP saw its Q3 profit more than double its Q3 profit last year, booking $8.15 billion. It increased share buybacks by $2.5 billion and boosted its dividend by 10% in Q2, after committing to using 60% of its excess cash flow for shareholder returns. BP’s tax bill on its British North Sea business alone is expected to be $2.5 billion, which includes the $800 million in new windfall taxes that the British government recently levied. BP’s total Q3 tax came in at $5 billion–or 37%. BP said it would increase the number of drilling rigs in the GoM and shale basins to increase production.
Devon Energy Corp beat analyst estimates with adjusted income for Q3 rising by 95% to $1.43 billion, or $2.18 per share. Devon acquired Eagle Ford operator Validus energy for $1.8 billion (less PP adjustments) in the quarter, saw its Q3 production total 614,000 boepd, with Q4 production expected to be between 640,000 boepd and 660,000 boepd. Devon announced a fixed-plus-variable quarterly dividend of $1.35 per share–lower than its Q2 dividend.
Chesapeake's Q3 adjusted income was $730 million, or $5.06 per share–more than double the $269 million it saw a year ago this quarter. Chesapeake cut its full-year EBITDA to $4.45 billion-$4.55 billion from $4.8-$5 billion previously. Chesapeake has been increasing its focus on Haynesville nat gas, and recorded 4.11 billion cubic feet equivalent per day in the quarter–90% of which was gas.
Refiner Marathon Petroleum beat analyst estimates, largely in line with its refining peers that have seen record levels from booming export demand. Q3 net income saw a more than six-fold increase to $4.48 billion, or $9.06 per share. This compares to $694 million from Q3 2021, and $1.09 per share. It raised its quarterly dividend by 29% to $0.75 per share. Adjusted EBITDA rose to $5.5 billion, up from $1.2 billion in Q3 2021. Utilization was 98%, while throughput was 3 million bpd. Refining operating costs were $5.63 per barrel, compared to $4.97 per barrel a year ago Q3. Marathon is anticipating throughput of 2.9 million bpd in Q4, at a cost of $5.30 per barrel.
Phillips 66 also easily beat analyst estimates, with Q3 earnings of $5.4 billion, or $11.16 per share, compared to last quarter earnings of $3.2 billion. Adjusted earnings were $3.1 billion, or $6.46 per share. Operating cash flow generated was $3.1 billion and returned $1.2 billion to shareholders with dividends and buybacks. Phillips 66 said it was processing 550,000 bpd of nat gas liquids at its new Sweeny Hub. Q3 pre-tax income was $3.6 billion, compared with $292 million last quarter.
Suncor beat analyst expectations also, sticking with the theme of the quarter, more than doubling its adjusted profit. Adjusted earnings came in at $1.87 billion from total upstream production for the quarter of 724,100 boepd. This compares with Q3 2021 throughput of 698,600 boepd. Suncor last week said it would purchase from Teck Resources its stake in the Fort Hills oilsands project in Alberta for C$1 billion, increasing its stake to 75.4%.
Marathon Oil Corp, like many of its peers, saw an increase in its quarterly profit this week, beating analyst estimates. Company earnings were $817 million, or $1.22 per share, compared with $184 million, or $0.23 per share, in Q3 2022. Adjusted earnings in Q3 was $832 million, or $1.24 per share. Revenue was 55% higher than in the same quarter last year, at $2.25 billion.
