Five Forces to Affect Wagers on the Re-opening of the West Sea Oil Exploration Projects

 

Speculating, more than anything else, is capitalizing on politically caused distortions in the market—Doug Casey 

Five Forces to Affect Wagers on the Re-opening of the West Sea Oil Exploration Projects 

 

From the Inquirer(October 16): President Rodrigo Duterte’s go-signal to resume oil and gas exploration in West Philippine Sea has perked up investor appetite on mining/oil stocks with stake in service contracts disrupted by the territorial dispute between the Philippines and China in the last six years. The biggest beneficiaries of the renewed oil exploration play were PXP Energy Corp. (PXP) and Atok Big Wedge, whose shares surged by nearly 50 percent on Friday. Apex Mining gained 34.84 percent and was the day’s most actively traded company. Shares of PXP’s parent firm, Philex Mining, also rose by 20.76 percent. As other mining/oil stocks also mostly gained, the mining/oil counter advanced by 10.79 percent…Energy Secretary Alfonso Cusi has given the “resume to work” notice to contractors doing petroleum exploration in the service contracts (SC) 59, 72 and 75. Atok Big Wedge’s subsidiary Tidemark Holdings Ltd. has a 20 percent in UK-based Forum Energy Ltd., which in turn has 70 percent economic interest in SC72, which is situated offshore west of Palawan Island and is host to the Sampaguita offshore gas discovery. Drilling in the area had been placed on hold by the Philippine government in 2014, under the term of then President Benigno Aquino, pending the resolution of territorial sovereign disputes. PXP, for its part, holds a 79.13 percent in Forum Energy. Apex Mining’s subsidiary, Monte Oro Resources & Energy, has 30 percent participating interest in SC72. 

 

Returns (weekly, year-to-date): PXP (+45.39%, -10.65%), APX (+31.45%, +111.11%), PX (+21.28%, 101.41%), FPI (+27.43%,+9.9%), AB (+49.87%, +5.3%), APO (+9.09%,-13.04%), OPM (+13.1%, -13.64%), OV (+13.75%, -17.27%), PERC (+12.9%, -14.63%) and ACEX (+11.57%,-7.8%). [as of October 16] 

 

Nota Bene: Past performance does not guarantee future results. 

 

Five forces are likely to affect speculations on the West Philippine Sea oil and gas projects. 

 

Here they are. 

 

1.Politics. 

 

Politics determine the existence and the operating parameters of domestic local oil and gas exploration projects. Yet, what the government gives or permits, it can take away again.  

 

In an attempt to downplay the immediate euphoria… 

 

From the CNN (October 16): Insisting that the lifting of the suspension of oil exploration activities in the West Philippine Sea was a unilateral move, Energy Secretary Alfonso Cusi now expects China to ask for an explanation. “I’m sure that they will not just take it without raising a word. I’m sure they are going to write us and we will address that as it comes – na bakit natin nilift (on why did we lift it), and we will be answering that,” Cusi said in an online media briefing on Friday. 

 

However, later… 

 

From the ABS-CBN (October 16): China hopes it can work together with the Philippines in jointly developing energy projects in the South China Sea, foreign ministry spokesman Zhao Lijian told a daily briefing on Friday. Philippines President Rodrigo Duterte has lifted a moratorium on petroleum exploration in the South China Sea, paving the way for three projects to resume, including a possible joint venture with China. 

 

For instance, the real estate boom, we’ve been told, would find its elixir in POGOs. What happened to them? 

 

2.Prices of oil and gas determine the viability of these projects.  

 

Falling prices of oil and gas will diminish margins, thereby reducing the incentives for these firms to pursue engagements in the project/s. On the other hand, rising oil prices, ergo, increasing margins, encourage investment commitments. 

 

Ever since its zenith two years ago, international oil prices have been southbound. However, the pandemic accelerated its cascade; oil prices crashed from March to April, but, in response to the collective actions of global central banks, subsequently rebounded. 

 

Nevertheless, global oil rig counts, which resonated oil prices, plummeted to multi-year lows and continues to fathom at the same levels as of September. That is, while oil drilling activities collapsed along with oil prices, the latter’s bounce has barely induced operators to increase exploration. 

 

Needless to say, a decreed re-opening of oil and gas exploration projects won’t necessarily translate to its reactivation (unless these are state-owned projects). 

 

3.Price trends of the underlying issues, before the news announcements, matter.  

 

 

Sure, the news spurred price spikes on shares of many project related issues, such as AB, FPI, OPM, OV, APO, and ACEX. But even before the announcements, inertia has governed the undercurrent of their respective trends. Friday’s speculative orgy, a possible sign of climaxing euphoria, will exhaust itself. 

 

On the other hand, the news only accelerated, confirmed, and reinforced the uptrends for several issues such as APX and PX, as well as PERC. Though these issues have reached overbought conditions and may see substantial retracements, the underlying trends have been more resilient and likely sustainable over a longer time frame. 

 

The outperformance of gold prices relative to oil underpins the strength of the price trends of gold miners (with oil exploration exposures). 

 

4.Volatile properties of exploration shall influence share prices too. 

 

Oil and gas projects, like its mining contemporaries, shares a similar lifecycle: drilling, speculation, discovery, development, and production phases. 

 

And the exploratory phase tends to be most volatile in the context of price movements. 

 

5.Market liquidity and breadth. 

 

The current easy money regime has been enabling and facilitating wagers supported by several themes, including mining and oil issues. Market breadth has shown signs of improvement. 

 

Have cash-rich banks been using such surpluses to pump up select sectors in the PSE? 

 

While it may be true that liquidity in the PSE, expressed in peso trading volume, remains wanting, mines have led the marginal improvement in market breadth. 

 

Of course, there are other stories besides the mining sector, namely infrastructure (cement, project managers, and builders), alternative energy, and eCommerce (telcos, logistics, transports and real estate), as well as listed firms of a political favorite. 

 

As a side note, raging prices of alternative energy appear to be a gung-ho bet on the triumph of the “blue wave” in the nearing US elections. 

 

Again, politics, prices of oil, underlying price trends, the oil and gas lifecycle, as well as market liquidity and breadth, will likely influence the speculative appetite of the oil sector. 

 

Disclosure: The author has minor exposures to some of the aforementioned issues. 

 

 

Just a short note on equity markets…

``There is an even deeper reason to reject the long run as a guide to future investment policy. The long-run results we can discern in the data of stock market history are not a random set of numbers: each event was the result of a preceding event rather than an independent observation. This is a statement of the highest importance. Any starting conditions we select in the historical data cannot replicate the starting conditions at any other moment because the preceding events in the two cases are never identical. There is no predestined rate of return. There is only an expected return that may not be realised.”- Peter L. Bernstein Insight: The flight of the long run

At the start of the year, we propounded the scenario where 2009 could likely manifest some divergences in the global equity markets.

Despite the continuous decline in the major US equity bellwethers, we seem to be seeing some marginal proof of such transitioning.

Figure 7: stockcharts.com: Emerging Divergences Among Global Equities?

Although pressures from the worsening recession in the US continues to weigh on most Emerging Market bourses, the degree of decline hasn’t been as steep or as deep, based from December 23^rd of 2008, as shown in figure 7.

Probably this could be because most EM bourses fell steeply more than US benchmarks in 2008. As discussed in Black Swan Problem: Not All Markets Are Down in 2008!, In 2008, the US fell 38.49%, Chile lost 22.13%, Brazil 41.22%, Malaysia 39.33%, Thailand 47.56%, Indonesia 50.64% and the Philippines 48.29%.

In fact, the current losses of the US bellwethers seem to match, if not exceed, the losses attained by some of these bourses at their lows.

Nonetheless we seem to be seeing some outperformers: Chile lost only 22.13% during the dramatic meltdown in 2008 but is already slightly up on a year to date basis. We also see Venezuela (growing signs of dictatorships gaining acceptance?) and Colombia among the other Latin American honor roll.

Across the ocean, we have Morocco and last year’s member of the 3 amazing bourses which defied the tide, Tunisia as another hotshot. This, despite the global economic woes affecting their exports and tourism revenues, aside from a sharp slowdown in the national economic growth.

To quote Marion Mühlberger of Deutsche Bank, ``So it looks as though Tunisia cannot decouple completely from the global financial crisis but is unlikely to suffer any major economic or banking crisis”. Probably not in terms of traditional economic metrics but certainly has “decoupled” in terms of financial markets performance in 2008.

Not that we believe that this is anything about “economic recovery”, but from the monetary viewpoint, the potential response stems from the impact from we believe as the liquidity spillover or our “spillage effect” from the collective attempts by central banks and governments to inflate asset markets and the economies. Governments are essentially driving the public to speculate and turbocharge asset inflation.

As we noted above, the losses have vacuumed most of the liquidity generated by global authorities, although last week’s surge in select commodities as oil (+11.82%) and copper (+7.7%) seem to validate our supposition of a prospective spillover. Albeit Gold’s (6%) decline could be indicative of an emerging rotation, or possibly, rebalancing of the Gold-oil ratio which has surged to record levels in favor of gold.

Figure 8: PSE: Sectoral Performances

Finally we seem to see the same signs of divergences even in the Philippine Stock Exchange (figure 8).

Based on sectoral performance on a year to date basis we see commercial industrial (pink-up 15.27%) and the mining sector (green up 11.75%) outperforming the rest of the field- Property blue (-9.47%), banking black (-10.79%), holding red (-1.51%), all maroon (+1.17%) and service orange (+1.34%).

The surge in the commercial industrial has been powered by energy stocks.

The Phisix (-.03% year to date) continues to drift sideways which implies a likely bottoming cycle, despite the October like performance in the US. This seems largely due to the diminished scale of foreign selling activities which may have validated our assessment of the deleterious impact of forcible selling or delevaraging to the local equity market, regardless of fundamentals.

Nonetheless, if we see a continued rise by the present market leaders, then this “inflationary driven” run may start to spread over to the broader market. And people may start to read market prices as “justification” of an economic “recovery” and pile on them; even when this may be due to sublime responses to monetary policies.

However, we will need to be further convinced with technical improvements on some key local and select benchmarks, aside from key commodity prices and similarly progress in domestic market internal activities.