Oil price, BP, Sound, Echo, Eco, Wentworth

  • Apr 02, 2020
  • Oil Capital

The EIA have started to downgrade their US onshore production numbers, January fell by 100,000 b/d to 12.7m b/d so we have a base for the year. My initial estimate is that US production will fall by c.1m b/d by the end of the year, probably with or without interference from politicians.

We now know that President Trump spoke yesterday with MbS, all we know so far from that conversation is that MbS has also spoken to Putin (rumoured to be suffering from coronavirus) and that Trump is ‘ready to join the conversation at the appropriate time’. The other thing that has changed is that first having said that he would buy crude in the market to top up the SPR and then being disallowed under the stimulus bill he has now announced that the US will buy enough to top up the 77m barrels of oil needed.

Below is a link, to be fair it will mean a lot more to you if you speak German although as I don’t, the questions and answers are in English. Yesterday I spoke to Markus Koch, the leading German commentator on Wall Street who asked me to guest on his show ‘The Opening Bell on Wall Street’.

Interview with Markus Koch, The Opening Bell on Wall Street

BP’s response to the crisis is pretty much as expected although have deigned not to release colleagues for three months. 2020 capex has been reduced by 25% to $12bn pretty much as Chevron announced last week in terms of size and with some of that inevitably happening in US onshore hydrocarbon sales will fall. Cue an effective profit warning as the upstream will be down on 4Q 2019 and the downstream is seeing ‘ a significant and growing decline in demand’ although no COVID-19 effects will be seen in that quarter. As I mentioned in the interview above, this is the perfect storm for integrated oils as with the fall in price the usual benefits are absent, there is no one to drive around at sub $2 gasoline…

Sound has updated on the GSA with ONEE, the Moroccan state power company which was scheduled to be agreed by 31/3/20 but due to C-19 delays the parties are looking at extending to 30/6/20. The deal has been agreed in principle so there is no need to be concerned at this stage.

An update this morning from Echo who are in the middle of debt restructuring. The £1m loan has been amended and is now not required to make the quarterly payment due on 31/3/20 and has been restructured so no further payment is due until 31/3/2021. Also, support from the holders of the €5m convertible has indicated continued support for the company and negotiations for the deferral of 2020 interest payments continue and default rights have been waived.

Finally, the company are aware that deferral of the €20m notes payment will require approval at a meeting of note holders who are aware of the company’s request to defer interest payments also due on 31/3/20. ‘The Company confirms that it has not met the 31 March 2020 Notes interest payment and as a result the Company will be in default on the Notes until such time as Note Holder approval is received for a restructuring of Note interest payments. The Company will convene a meeting of the Note Holders as soon as is reasonably practicable’.

The company had flagged to its lenders and the market that it was hoping to renegotiate its debt so the technical default should not cause any disturbance in the market and the acquiescence so far of its financing partners is pretty good under the circumstances.

The company has ‘hunkered down’ so to speak although it is in a very strong financial position at present. It is cutting costs where possible, business travel etc and cut management pay by 40% to be reviewed monthly. Eco has met all its 2020 commitments and so there is very little to spend cash on, with the drilling programme suspended with $18.8m in cash and no debt it is strong and ready to go whenever that might be.

I spoke to Wentworth CEO earlier in the week, it is a favourite stock that is becoming more of an apple in the eye as time goes on. Wentworth doesn’t just have defensive qualities in this market, its attributes are positively abundant and they run a tight ship around there. The business is simple, transparent and recent management changes were fully supported by shareholders who are more than happy with the model.

The company ticks a lot of boxes right now, it has no commodity price volatility as its contract is to sell gas on long-term, fixed price contracts that provide for price escalation based on the US consumer price index. It has no debt and cash of $14.2m comfortably able to pay a dividend which yields over 7%. With magnificent simplicity the company states ‘as such, the company is not impacted by fluctuations in global commodity price’, touché as they say in the trade.

Unlike others they don’t need to cut capex, for the time being it’s not needed and spend is regular opex and development expenditure. They remain on track with existing forecasts and as can be seen are operationally resilient. At the moment they don’t even have a problem with COVID-19 although they have contingency plans with Maurel & Prom, the operator who can manage an outbreak by switching to a reserve crew they have on standby.

So what might be the downside? There is some country risk as ever given the market’s view on Tanzania in recent years but from what I’ve been hearing lately there is a good deal to be encouraged about in the area. As for being paid that has also been pretty much sorted, the company at last RNS said that they have been receiving consistent monthly payments for gas sales with receivables from TPDC of just one month.

I would suggest that Wentworth is in pretty good nick, indeed should something arise on the acquisition front I wouldnt rule out something, management is always on the lookout but the supportive shareholders are certainly not expecting it. The management is highly rated and the top team work together very well, the company has repaid its debt, is financially prudent and must be one of the strongest companies in the sector operationally and financially, as I said before, what’s not to like?