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. 

 

 

The Long-Term Price Trend and Investment Perspective of Gold

Instead of trying to interpret each move, it would seem prudent to see Gold prices from the prism of long-term trends. 

Gold prices etched a new milestone this week.  

After bottoming in January 2016, gold’s uptrend began to trek upwards in August 2018. This upside momentum picked up speed in the middle of 2019 when the issues on the US financial system’s repo holdings surfaced.  

The US government’s response to COVID-19 further accelerated this upside, which has turned almost vertical last week to break past September 2011 acme. 

While the eyes of the public have fixated on the USD quotes, the record run in gold prices has signified a global phenomenon.

Or, surging gold prices have reached milestone highs against ALL fiat currencies, including the Philippine Peso, for the FIRST time since the end of the gold exchange standards, otherwise known as the Bretton Woods standards through the Nixon shock on August 15, 1971.  

This unprecedented moment also suggests that while the actions of the US Federal Reserve and the Federal Government plays a significant role in the recent uptrend, global factors have likewise contributed materially.   

 

Like all assets, gold prices operate in long-term cycles.  

The last two gold bull-market had a 9- to 10-year cycle.  

Since August 1971, gold’s run-up from $35 to $760 occurred in about 9-years. Of course, nothing goes in a straight line; there were countercyclical moves within the general trend.  

After two decades of inertia, Gold prices bottomed in 2001-2002, which set the stage for the next ten-year uptrend, rising from about $260 to $1,794. 

If history rhymes, gold’s recent breakout in USD, peso and other currencies will translate to a multi-year upside. 

Or, if this uptrend of gold prices (in USD and peso) will at least resonate with the past, we should expect gold mining issues (here and abroad) to echo the ascent of its product.  

 

The gold indices of the US HUI (NYSE Gold Bugs), XAU (Philadelphia Gold and Silver), and Barron’s Gold Mining recently surged to reflect the breakout of gold prices.  

 

The chart of Philex shows how its prices behaved during the previous 10-year gold market. PX rose from about Php .15 per share to Php 26.55.  

And for the first time, in recent years, prices of domestic gold mines appear to have diverged or decoupled from the mainstream issues to the upside.   

So regardless of whether gold prices are about resurgent inflation or systemic credit deflation or escalating collateral issues of the offshore dollar system, a resumption of the gold’s uptrend will provide a safe-haven to your portfolio and or generate promising returns, without requiring substantial risk exposure.  

And political obstacles have also diminished.  Back in 2016, I predicted that the war on mines will end*. 

Once the bubble economy begins to corrode and where prices of metals soar, such industry bullying will come to an end. Ban on mining will transform to welcome back mining! 

Why the War on Mining Will Fail!  June 26, 2016 

From GMA (July 23, 2020): Allowing some mining companies earlier suspended or closed by the late former Environment Secretary Regina Lopez could help generate much-needed revenues for the government to respond to the COVID-19 crisis, a top official of the Department of Environment and Natural Resources (DENR) said….Environment Secretary Roy Cimatu, on Thursday, confirmed that some mining firms closed or suspended by Lopez in her controversial industry-wide environment audit would be allowed to resume operations after onsite inspections and reviews found that the miners have rectified their violations and complied with corrective measures.  

Gold prices are presently overbought. Since no trend goes in a straight line, then profit-taking should be expected.  

And this pause would present a timely window for entry points.  

Most Local Mines Fail to Benefit from Soaring Global Nickel Prices as a Result of Supply Constraints Mostly From Domestic Politics

Most Local Mines Fail to Benefit from Soaring Global Nickel Prices as a Result of Supply Constraints Mostly From Domestic Politics

Following a stunning 12.35% surge, the 6-company Philippine mining index was this week’s best performing sector.

Nickel Asia’s thundering 57.7% returns combined with Global Ferro Nickel’s sizzling 10.9% gain contributed most to the sector’s advance. On the other hand, other sector components had mixed results: Semirara up .65%, Apex Mining down .81%, Century Peak Metals increased .4%, Philex Mining 3.66% while PXP Energy plummeted 9.83%.

The Indonesian government’s declaration of a nickel ore export ban from January 1, 2020, stoked speculations that such actions would benefit local nickel mines.

This article from the PNA rationalizes by reasoning from price changes booming price shares of domestic nickel mines: “The Philippines’ decision to implement stricter environmental policies and regulations is projected to hamper the nickel mining sector’s growth, but Fitch Solutions Macro Research believes the sector can get a relief from Indonesia’s nickel ore export ban”.

To be clear, I am positive on the long term prospects of nickel mines, but current developments reveal the penchant of domestic markets to exaggerate pricing.

According to Investing.com, the Philippines is the second major world producer of nickel after Indonesia. New Caledonia (France), Russia, Australia, and Canada ranked third, fourth, fifth and sixth, respectively.

According to the Nickel Institute, the primary use of Nickel is as stainless steel 70%, as Non–Ferrous alloys 9%, as alloy steel and castings 9%, as plating 8%, batteries 3% and on other uses 1%.

Engineering has the largest 37% share of Nickel use per industry. Metal goods ranked second with 20% share, building and construction 15%, transport 14%, electronics 11%, and others 4%.

Global prices of Nickel (in USD) has been rocketing since it bottomed in 2016 on the back of plunging inventories (KITCO). As of last Friday (September 6th), USD prices of Nickel (KITCO) have raced to a 66.41% return for the year as Indonesia’s export ban should add to the reduction of global nickel supplies.

Supply of Nickel has been instrumental in shaping the industrial metal’s global market prices since the 1980s (ChartrUS).

There has been so much hype surrounding the Nickel’s role in the battery of Electric Vehicles (EV). Sad to say that even prices of lithium, a light metal widely used for the manufacture of batteries, have been in a waterfall since Q3 2018, almost in conjunction with the decline of the Global PMI. Notably, a slowing global economy has also been hampering the sales of global Plug-in Electric Vehicles. Not to mention that only 3% of nickel usage goes to battery manufacturing.

Even in the context of stainless steel, which accounts for Nickel’s largest usage, has barely been vibrant. Global prices of stainless steel have barely budged since it found a trough in 2017 (AGMETALMINER).

Rather than demand, supply constraints, mainly from domestic or even local policies, have played the primary role in contributing to the dwindling global supply of nickel, and consequently, the metal’s price dynamics. For instance, 2019's export ban marks the second imposed by the Indonesian government. In 2014, the same government imposed an export ban that it lifted in 2017.

How has the nickel price boom affected the performance of domestic mines?

USD prices of Nickel zoomed by 19.05% in the 1H of 2019. Since the peso was up 2.6% during the same peso, nickel’s net gain in peso was about 21.65%.

Nickel Asia’s sales grew 4.41% in the 2Q and contracted by .36% in the 1H of 2019. The profit margin for ore sales has been shrinking. It was 49.38% in the 1H of 2019, compared to 53.01% in 2018 and 58.81% in 2017. In short, surging global prices of Nickel barely distilled into the company’s sales and or margins.

If surging global prices of nickel failed to percolate into NIKL’s fundamentals that had not been true for Global Ferro Nickel (FNI).

FNI’s sales zoomed 19.63% in 2Q and 24.06% in the 1H.

FNI’s profit margins widened as well. In the 1H 2019, FNI’s margins expanded to 46.9% from 45.8% in 2018.

Yet, FNI’s share prices had been bid lower than of NIKL.

Perhaps, aside from the national level, the local political environment had influences on operations of Philippine Nickel mines, which are estimated to be in the 30s.

And unless the national government gives sufficient breathing regulatory and tax space to these mines, only a speck of soaring global nickel prices will filter into earnings and profits of listed mining firms.

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