Author Topic: Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.  (Read 256613 times)

Cardboard

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"I worked on a T2 tanker out of Jebel Ali during Desert Storm but wouldn't want to do it now."

Back then people had a brain it seems.

The news over the last few weeks is unbeliveable. This is the second attack with last time being 4 tankers. There was also a drone attack with bombs over a Saudi pipeline facility by the Houthis. They also claimed to have hit an airport with a cruise missile yesterday.

Deadline by rebels in Nigeria has also passed or on May 31 and who knows what will happen over there? They have threatened to shutdown the entire production and they did a lot of damage in recent past.

Where is the risk premium? Who is insuring these tankers? Should be obvious by now that the 5th Fleet is unable to fully protect them.

The world seems to be taking a lot of comfort in these new barrels coming from West Texas. However, they are too light and cannot be processed into fuels without being mixed with heavier grades. You can look up the differentials and see for yourself that there is a surplus of this grade and a deficit of medium and heavier grades. Already companies must be having a deep look at expanding such production considering that such oil is no longer selling at a premium as it used to but, a severe discount.

Feels like sleep walking into a major crisis while stocks as such CrowdStrike skyrocket on IPO day while posting terrible results: tiny revenues vs market cap and major losses.

It is not just oil. It is copper, uranium, agricultural commodities, lumber, pulp. Feels like that the commodities market is now the bond vigilante pricing in the next 5 recessions while the party is still going for unprofitable, concept companies.

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drzola

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Oil Tanker Insurance is always overrated it appears maybe?

across the delivered value of a tanker transit at less than a couple of dollars per barrel of oil.

The following sections explain the dynamics of the tanker insurance market:
◾The Basics
◾War Risk Insurance
◾History in the Persian Gulf
◾Implications for the Strait of Hormuz

The Basics

Oil tankers, specifically Very Large Crude Carriers (VLCC), are some of the largest and most expensive ships in the world. As such, a variety of mechanisms are used to insure oil tankers: hull insurance, cargo insurance, liability coverage (protection and indemnity), and war risk insurance. Oil tanker insurance rates are based on tangible factors such as deadweight tonnage (dwt) and the overall value of the ship itself, as well as what sort of coverage a tanker on a particular voyage needs.

The tangible aspects of oil tanker insurance are relatively uniform across ships of equal size and tonnage. Other coverage, such as liability and war risk factors, are more variable and dynamic, as they change based on the geographical location/route of the ship.

Lloyd's of London provides a market where ship charters find underwriters who will provide them insurance for a fee. Alternatively, some groups of ship owners band together to self-insure through P&I (Protection and Indemnity) Clubs. P&I Clubs pool their insurance risks and avoid fees. Today, most tankers are insured through P&I Clubs. For example, 13 P&I clubs currently insure upwards of 95 percent of the world's ocean-going tankers, measured by tonnage.

War risks are generally excluded from hull and P&I policies and therefore must be purchased in addition to P&I (liability) coverage.[ii] As a result, if a tanker's hull or machinery were damaged in a designated "additional premium area" (areas designated for additional war risk rates), a war risk policy rather than the baseline P&I coverage would pay the claim.

War Risk Insurance

Very loosely defined, a "˜War Risk Premium' is meant to cover any intentional damage to hull, cargo or persons. For the most part, every policy includes some nominal war risk coverage, based on trading routes and patterns. When the risk profile of a vessel is extremely low, such as for tankers that trade explicitly in low-risk areas like the Western Hemisphere, the premium can be as low as 0.001 percent of the market value of the vessel.

War risk premiums become pricier when ships enter designated conflict areas. Each year, insurance underwriters (those granting the insurance) reassess global risk to identify what areas to consider high risk areas. For any given year, there might be 15-20 "additional premium" areas that will require tanker charter companies to pay additional fees for war risk coverage on top of the basic war risk premium paid at the beginning of the insurance year. These "additional premium" areas may be designated in any number of ways, specifying particular countries, ports or even regions.

Charter companies are required to notify insurance underwriters in advance of the ship movement into a conflict area. The underwriter then offers war risk insurance for an additional charge. The policy lasts for a finite period of time, usually between 48 hours and seven days. At the end of the 48 hour to seven day window, the charter must renew insurance coverage if still operating within the conflict area.

The size of the additional premium depends on the level of risk perceived by the insurance underwriter. At times, these additional premiums can reach upwards of ten percent of the market value of the vessel. For example, the territorial waters of Somalia are one of the most expensive additional premium areas in 2008, with underwriters charging approximately two percent of market value of the vessel for a seven-day policy. For a $100 million vessel at port in Somalia for 20 days, a ship charter would be forced to pay six million dollars in additional war risk premiums.

History in the Persian Gulf

During the Tanker War, insurance companies quickly responded to the changing conditions in the Gulf.[iii] Many people speculated, especially in 1984, that the Strait of Hormuz would have to be closed because of rising insurance rates and losses. However, even at peak insurance rates, shipping traffic never ceased for an extended period of time.

At the brink of war in September 1980, underwriters overcautiously announced a 300 percent increase on cargo premiums for ships bound for Iran and Iraq, even though merchant vessels were not specifically targeted for attacks at that point. Both Iraq and Iran tried to spread fear and uncertainty in the market place by exaggerating the number and scale of attacks in the early 1980s. However, insurance rates tended to reflect the specific circumstances and targets in the region. For example, when Iraq began staging attacks on Iran's major oil terminal at Kharg island, eventually claiming the area as a maritime exclusion zone, insurance rates doubled for trips to that island. Insurers additionally bumped up rates following particularly successful attacks. After the attack on the Saudi tanker, Yanbu Pride, in May 1984, hull rates reached 7.5 percent for Kharg. Rates also increased for other risky areas.

When Iran and Iraq escalated attacks on shipping in 1981, the people in the energy industry were particularly concerned about the financial stability of the Lloyds of London marketplace, where insurance is traded between insurers and ship owners. Insurance companies had accrued an estimated $575 million dollars in losses by this time. Insurers struggled to develop a generalized risk profile for the region because attacks on shipping did not follow clear patterns.

Rates fluctuated substantially over the next several years, varying with the frequency and severity of attacks. For example, in January 1985 hull risk insurance rates were drastically reduced by half. Attacks were renewed later that year, causing hull rates to again double throughout May. On the whole, insurance claims reached a considerable two billion dollars by the end of the war, half of which fell on the Lloyd's market.

Strategic measures to reduce risk, such as re-flagging of tankers beginning in 1987, had a slow impact on insurance rates. The United States "re-flagged" a number of Kuwaiti tankers during the Tanker War, allowing the United States Navy to provide escorts within the Persian Gulf. Attacks on shipping declined throughout 1988, and insurance rates also began to fall and normalize.

The Gulf War provided a much-needed boost to insurance companies after the massive losses during the Tanker War. In August of 1990, insurers increased war risk rates to respond to the potential for another war in the Gulf. Rates rose to 0.025 percent for most Gulf ports, and rates quickly rose further in the Northern Arabian Gulf. As the risk of immediate war diminished in the last half of 1990, so too did cargo insurance rates, dropping from 0.5 to 0.0375 percent. Because the war never involved much damage to merchant shipping, these increased premiums turned into profits for insurance underwriters.

Immediately following the U.S. invasion of Iraq in 2003, rates for the area around Iraq peaked at 3.5 percent of the hull value, although subsequently they dropped steadily, back down to 0.25 percent by early 2004.[iv]

Implications for the Strait of Hormuz

There is little reason to believe that conflict in the Strait of Hormuz would result in prohibitively high insurance premiums that would significantly reduce traffic for any extended period of time. Although the cost of insurance for tankers certainly increased during the Tanker War, it never increased to the point where the price charged by underwriters for maximum war risk exposure translated to quantity of insurance purchased by charter equaling ZERO. In other words, from a microeconomic standpoint there have always existed people willing to accept and underwrite risk...for the right price.

In early 2008, only certain ports within the Persian Gulf are listed as "additional premium" areas. However, if conflict were to break out in the Strait, the entire Gulf would almost certainly require charters to purchase a war risk policy. Although the additional premium would be expensive, the contribution that incremental cost would make to the delivery price of oil would be quite small. For example, a relatively expensive war risk premium might be two percent of the market value of the vessel for seven days of coverage. Therefore, a $100 million VLCC might pay two million dollars in additional premium costs. When distributed over the two million barrels of oil a VLCC can carry, this amounts to a one dollar increase in the price per barrel.

Robert C. Seward, "The Role of Protection and Indemnity (P&I) Clubs," Tindall Riley (Britannia) Ltd. Online. Available: http://www.intertanko.com/pubupload/protection%20%20indemnity%20HK%202002.pdf. Accessed: March 5, 2008.

[ii] Interview with individuals from Thomas Miller War Risks Services Limited, London, U.K., February 20, 2008.

[iii] Data on insurance rates during the Tanker War all taken from Martin S. Navias and E.R. Hooton, Tanker Wars: the Assault on Merchant Shipping During the Iran-Iraq Conflict, 1980-1988 (London, New York: IB Tauris, 1996).

sculpin

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Frontera (FEC - TSX) added to S&P TSX composite index

TORONTO, June 14, 2019 /CNW/ - As a result of the quarterly review, S&P Dow Jones Indices will make the following changes in the S&P/TSX Composite Index prior to the open of trading on Monday, June 24, 2019:

S&P/TSX COMPOSITE INDEX – June 24, 2019

ADDED

Frontera Energy Corporation (TSX:FEC)

Energy
Oil & Gas Exploration & Production

Cormark note on the potential impact...


Frontera Energy Corp. (FEC-TSX)
Potential TSX Index Inclusion, Active NCIB and
Colombian Macro Tailwinds Present Opportunity

Event:

We are highlighting Frontera as a potential TSX Index inclusion candidate.
Impact:Positive

Commentary:

With Venezuelan oil production at decade lows and Colombian crude differentials
remaining very competitive, we recently upgraded Frontera Energy to a Buy after
the company topped Q1/19 estimates on pricing strength and cost improvements.
We believe that continued strength in the name through May could drive inclusion
into the TSX Composite Index in June and material new buying demand.

Frontera was recently added to the MSCI Canada Small Cap Index, driving ~0.35
MM shares of demand for a stock that has traded ~0.1 MM daily over the 90 days.
Third-party estimates suggest that if Frontera’s share price holds ~C$13.90
(VWAP) through the last two weeks of May (or possibly the last three trading days),
Frontera could be added to the S&P/TSX Composite Index on June 21st. Index
inclusion would see ~2.5-3.5 MM shares of incremental demand by index funds as
well as follow-on “shadow” demand from “closet indexers”.

We also note that the company’s NCIB (July expiry) was increased from ~3.5 MM
shares to 5.0 MM shares with ~2.3 MM shares still to be repurchased over the next
two months. With material free cash flow and D/EBITDA below 1.0x we expect
Frontera to be aggressive in repurchasing the full 5.0 MM shares near term.
With 2.3 MM shares under the NCIB, potentially 3.5 MM shares of Index demand
(not including shadow indexing) and the company’s largest holder (Catalyst
Capital) restricted from selling during the NCIB, we estimate the potential for ~5.8
MM shares of structural demand through mid-June or ~9% of the company’s
outstanding float. Again, with daily liquidity of 0.1 MM shares (90-day ADV), this
demand would drive shares materially higher. Management is also considering a
Substantial Issuer Bid for later in the year (in which we would expect Catalyst to
participate) that could provide additional liquidity for shareholders.

A $0.125 quarterly dividend is expected for shareholders of record on July 3rd
(should Brent hold above $60.00/B) and a ~0.6 MM short interest should also
support the stock approaching a potential index inclusion.

Investment Conclusion:

While there is time before a potential index inclusion, we believe investors buying
early (through month-end) could be rewarded with material structural buying and
liquidity in mid-June. We reiterate our Buy rating and C$19.00 target (2.8x 2019
EV/EBITDA) on Frontera.

awindenberger

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I just spent some time catching up on this thread over the last 6 months. Its amazing to me the value we are seeing in O&G equities as a whole right now, and the solution is so obvious to everyone aside from the c-suites: Stop increasing production and use your ops CF to buyback shares!

sculpin

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I just spent some time catching up on this thread over the last 6 months. Its amazing to me the value we are seeing in O&G equities as a whole right now, and the solution is so obvious to everyone aside from the c-suites: Stop increasing production and use your ops CF to buyback shares!

+1 Definitely the way to go

Uccmal

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I just spent some time catching up on this thread over the last 6 months. Its amazing to me the value we are seeing in O&G equities as a whole right now, and the solution is so obvious to everyone aside from the c-suites: Stop increasing production and use your ops CF to buyback shares!

+1 Definitely the way to go

Some are:  Whitecap retired 1 M shares in May. 

Their CFO bought 50000 sh.  a day or two ago which equals 10% of what he holds.  Thats $200,000, which isn’t chump change for a working man. 

He is the CFO so:
1) He thinks the numbers look really good, relative to the stock price.
2) Or he is an idiot.
In this case number 1) is more likely. 
GARP tending toward value

Joe689

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Iran takes out one of our drones in international waters.... 

Iran seems determined to taunt us into doing something.

I imagine Trump does not like to be taunted but election year is coming, and the politics of entering a conflict on the heels of him abandoning the treaty is not good.   Iran knows that. 

Problem is, they simply will not stop disrupting, and without intervention,  they will take oil price with them

Cardboard

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WCP is one of my largest positions.

A concern of the market is that they would continue acquiring assets or bargains but, in the last conference call it was made clear that they had enough assets to grow organically and would continue to pay down debt and return capital to shareholders in this environment. They recently raised the dividend and as you mentioned continue to buy back shares.

Insiders purchases has been among the most active and broad amongst Canadian energy firms. BNE, SGY and YGR are others were there has been a fair bit of buying over the last 6-12 months.

The world driven by algos and bots continues to sleep walk straight into an energy crisis. U.S. production has actually declined in recent weeks and also contrarily to popular belief price received is nowhere near WTI for most of Texas production. Only the Eagle Ford receives something close to WTI and is likely due to how close they are to seaborne oil or world pricing.

If you go to Oilprice.com (https://oilprice.com/oil-price-charts), you will find out that Texas production was getting from $38.01 to $51.66 (Eagle Ford) yesterday.

IMO, the reason for that is an over-abundance of ultra light oil or condensates and this has gotten worst as they have drilled more into the Western part of the Permian. Also look at the latest EIA report. Propane inventories are up 37.7% year over year and Other oils (lots of NGL's) up 11.9%. These two categories were up 3.9 million barrels in the last week alone. That is a clear indication of production turning to the gassy side.

It is true that they are facing shipping constraints in the Permian creating a discount but, it is clear also that what they produce is in oversupply. As a result the U.S. exports 3 million barrels/day to keep things stable while they still import over 7 million barrels daily. Why would you export anything if you are a net importer of over 4 million barrels/day?

The past has also showed us that sub $50 U.S. shale is unprofitable and contracts fast. That is where we are right now despite WTI now just above $55 on Iran shutting down a U.S. drone today. Just imagine what would happen if we were to lose 1 million barrels/day of the right oil or proper gravity and sulfur content. It could be Libya (in the midst of a civil war), Nigeria (where rebels have threatened to shut down oil production) and now pretty much anywhere around the Straight of Hormuz.

Where is the premium to attract production and keep things in line if anything goes offline? In the meantime the S&P and unprofitable ventures are at new highs... I recall $12 oil and the Internet bubble. The decade after was really different.

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Joe689

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WCP is one of my largest positions.

A concern of the market is that they would continue acquiring assets or bargains but, in the last conference call it was made clear that they had enough assets to grow organically and would continue to pay down debt and return capital to shareholders in this environment. They recently raised the dividend and as you mentioned continue to buy back shares.

What did you make of that huge volume day earlier in the week?  12M shares.  Only down a little and $4 held very strong.  Came off to me that they might be getting ready to purchase something.  They are very shareholder friendly, and think major shareholders have a real say at the table.  Therefore, if they were going to make a large purchase, it would be run by the largest shareholders.  Maybe one or two did not like it, and but others fully support, and lots of shares changed hands.  Just speculation.  Very high volume day on no news. 




Where is the premium to attract production and keep things in line if anything goes offline? In the meantime the S&P and unprofitable ventures are at new highs... I recall $12 oil and the Internet bubble. The decade after was really different.

Combine that with the mentality that we do not need oil anymore.   I agree that the next decade should be a good wake up call for these young generations.  Not sure what the wake up call will look like but it will have a lot to do with energy, growth, debt and interest rates.   Look at gold.... Faith in the fiat money is dropping with the fear of the printing presses coming back on.  Commodities are the true scarce supply.

bizaro86

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A concern of the market is that they would continue acquiring assets or bargains but, in the last conference call it was made clear that they had enough assets to grow organically and would continue to pay down debt and return capital to shareholders in this environment.

It seems to me that making acquisitions might be a better use of cash in the current environment. Nice assets have been selling at low prices, and the drilling inventory will still be there to drill next year.