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. 

 

 

Quote of the Day: The Texas Boom Bust Oil Economy

Writes analyst Wolf Richter at the Wolfstreet.com

This money was drilled into the ground. It was used to build office towers for the booming energy sector and everything that came along with it, such as law firms and engineering firms. It was used to build apartment towers. It drove technology forward and funded innovation. It bought equipment. It fed manufacturers that supplied the oil industry. It paid for the construction of hotels and temporary housing for oil workers even in small towns….

And along the way, the money paid for wages, salaries, bonuses, and royalties, and folks went out and spent this money.

The state government was ecstatic with this influx of cash. Retailers were even more ecstatic and opened new stores. Mall owners were happy. Banks bathed in bliss and extended huge loans to drive this miracle to the next level. Consumers were expressing their happiness by feeding retail profits and state coffers alike.

Retail sales recycled the money and contributed to the strong Texas economy. Everything went right – until the price of oil plunged.

Now oil and gas companies are going bankrupt. Manufacturers and service providers that supply the oil and gas industry are sinking into the mire. People are getting laid off, from retail workers to high-level engineers in the energy sector. And sagging retail sales indicate that these folks, and others around them, are closing their wallet or that they’ve maxed out their credit cards after losing their jobs.

Tax collections on motor vehicle sales and rentals had experienced an even greater boom. From the first half of 2010 to the first half of 2015, they’d soared 65%! Car dealers were on cloud nine! But that boom too is now imploding, with tax collections in January for December sales dropping 3.8% year over year!

And commercial real estate is getting hit. Debt is everything in the sector. So this is going to be a problem for banks. The entire math is based on high rental rates and low vacancy rates. But in Houston, rental rates are falling and vacancy rates are skyrocketing. Sublease space has spiked 69% and continues “to sit on the market,” even while new towers are being completed. “See-through buildings” are re-appearing — that infamous phenomenon of vacant and transparent buildings dotting Houston’s business district during the last oil bust. So watch the banks. 

Peak Oil: Where Art Thou?

Unrecognized by many, technology has significantly been improving on the way we do things. This includes finding new and adding to the existing resources that are deemed useful to society.

The chart found below is an example.

True, while oil prices are currently hovering at $80, technology is fast catching up on how unconventional oil is being found.
According to the Economist, (bold highlights mine)

``BP, A big British oil company, announced a round of efficiency measures and cost cuts on Tuesday March 2nd aimed at increasing annual profits by $3 billion over the next few of years. But BP and the world's other big oil companies face similar problems when it comes to boosting profits. Few big new oil fields that are easy to reach and cheap to exploit have been discovered in recent years. This has driven firms to seek oil ever deeper below the sea. In 1947, Kerr-McGee built the world’s first offshore oil well that was completely out of sight of land, drilling 4.6 metres into the seabed off the coast of Louisiana. This year Shell's 22,000-tonne Perdido rig is set to begin operation. Standing nearly as tall as the Eiffel Tower, it is chained to the seabed 2.4km metres below and is capable of extracting oil at a maximum depth of 2.9km."

I'd propose that the problem of high oil prices isn't due to the "perceived" scarcity of oil (or peak oil), but instead with over 90% of proven oil reserves held by governments, the problem is one of the access to these reserves as shown below.

Chart from the US EIA

In short, while government intervention adds to the inaccessibility factor in the supply side, government inflationism (too much printing money, subsidies, etc...) has been prompting for artificially increased demand, which compounds on the market distortions which results to high (and prospectively higher) oil prices.

To consider, technology has materially improved, in spite of the tremendous restrictions and contortions plaguing the oil marketplace.

Had free markets been allowed to function, we'd likely see the wonders of the price mechanism work by having more supplies sooner than later. In addition, markets are likely to discover feasible oil substitutes rather than government imposed options via subsidies.

As Professor Don Boudreaux explains, (bold highlights mine)

``Petroleum was no resource to our ancestors who had yet to grasp the fact that it can be refined and burned in ways that improve the quality of life. In fact, I suspect that whenever that gooey, noxious black stuff appeared in freshwater creeks in pre-Columbian Pennsylvania, natives of that region regarded it as a nuisance.

``So economically, the Earth's supply of nonrenewable energy resources was, back then, much smaller than it is today. Human creativity and effort turned a nuisance into a resource.

``Human creativity and effort also are at work finding not only substitutes for oil, but also new supplies of oil. Each success on this front increases the supply of oil. The reason is that oil deposits that remain unknown are economically nonexistent.

``The same is true of oil deposits that are known to exist but are currently too costly to tap. Oil in the Earth's crust that is out of reach with existing technology is no more of a resource today than is oil on Pluto. But if and when human creativity discovers cost-effective techniques for extracting that oil, it then -- and only then -- becomes a resource. In effect, more of the resource "oil" is created.

``Of course, as a matter of physics, there is indeed only a finite amount of oil in the Earth. But we have no idea how much. And our ignorance of this physical fact is economically relevant."

In short, access to resources is a function of how the market values them, which can only be determined by the price mechanism.