Iran improves terms for foreign investors, Pemex' credit rating cut by Moody's
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Iran Woos International Oil Companies

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Greetings from London.

We start this week's newsletter with the key figures for the oil and gas industry this week:


Iran is hosting a two-day conference on November 26 to attract international investment for its oil and gas sector. At the conference, Iran will
lay out 50 potential oil and gas projects to interested parties. Iran is looking to attract at least $100 billion in investment, capital that it says will help it achieve production gains of over 1 million barrels per day. The Iranian government is eagerly preparing for the removal of international sanctions, which is expected within a few months. Since reaching a historic agreement with the P5+1 nations in July, Iran has since overhauled its contract program with international oil companies, sweetening the deals in order to woo companies. Each individual project will have tailor-made contracts, rather than a standard contract for all projects. 

The details could indeed attract more investment than Iran has seen in the past. For example, companies will be allowed to sell production abroad. That will allow companies to earn more if they produce more, a situation that didn’t exist in the past under fixed-payment schemes. The contract terms could last as long as 20 years, whereas prior contracts only lasted 7 years. Foreign companies will still have to partner with a local Iranian entity. The bidding process could begin in March 2016 and the Iranian government has signaled its intent to sign contracts within two years. 

State-owned Mexican oil company Pemex saw its credit rating cut by Moody’s this week. The ratings agency
cited falling oil prices and declining production for the reasons it downgraded the Mexican company. The move comes after Pemex reported a third quarter loss of $10.2 billion. Pemex could also see its overall oil and gas production fall for an 11th straight year. “Moody’s believes that Pemex’s credit metrics will deteriorate further in the short to medium term,” Nymia Almeida, a credit analyst at Moody’s, said in the statement. “The company’s credit metrics, particularly its financial leverage, will deteriorate further as debt is used to fund capex and taxes remain high.”

The troubles at the state-owned firm largely motivated the historic opening of Mexico’s energy sector for private investment. The two auctions held thus far have not lived up to the hype, but a large part of the disappointment stems from low oil prices rather than a lack of interest on behalf of the industry in Mexican oil and gas fields generally. Mexico is planning another round of bidding for December, in which onshore fields will be auctioned off. 

Canadian oil producers are once again turning to the railways to export their product as the lack of pipeline capacity continues to dog the industry. Punctuated by the rejection of the Keystone XL pipeline by the U.S. government, Canada’s oil sector continues to face obstacles to shipping their production out of Alberta. With pipeline projects stalled, more oil is making its way to the rails. Oil-by-rail shipments
increased by 38 percent in the third quarter to 116,000 barrels per day. Genscape says that the rejection of Keystone XL will be a “short-term boon” for the rail sector. Of course, moving oil by rail costs more than pipeline, and as such, the discount of Western Canadian Select to WTI has increased to $14.98 in the third quarter, up from $9.72 in the second. 

The state of Alaska
bought a 25 percent stake in an LNG project from TransCanada (NYSE: TRP) in an effort to repair the state’s declining fiscal position. The Alaskan government agreed to pay TransCanada $64.6 million for a stake in a proposed project that would consist of a long distance natural gas pipeline, carrying gas from the North Slope to an LNG export terminal on Alaska’s southern coast. The LNG would be shipped to Asia. The state legislature passed a bill that allowed the state to take a direct position in the project. The state’s partners include ExxonMobil (NYSE: XOM), BP (NYSE: BP), and ConocoPhillips (NYSE: COP).

While Alaska’s objective is to bolster its finances as oil prices remain depressed and Alaskan oil production continues to fall, the move is a risky one. LNG spot prices in Asia have also plummeted over the past year and a half, and the market remains oversupplied and will continue to suffer from excess capacity for a few years. Moreover, the price tag is enormous: estimated at between $45 and $65 billion. The project has not received a final investment decision and would not begin exporting LNG before 2023. The proposed export terminal would have the capacity to ship 20 million tonnes of LNG per year. 

continues to see declining investment in its oil and gas fields, a worse outlook than just a few months ago. Oil companies will invest only around $20 billion in Norway next year, a decline of 25 percent from 2014. The decline in spending could send Norway into a recession. The country’s state-owned firm Statoil (NYSE: STO) has already announced 25,000 lost jobs, but there is no rebound in site.  

Finally, a new
report concludes that the major natural gas discovery by Eni (NYSE: ENI) in the Eastern Mediterranean earlier this year could spark accelerated natural gas development in the region. Eni’s Zohr discovery has been painted as a rival project to Noble Energy’s (NYSE: NBL) massive Leviathan discovery. Noble has struggled to make progress as it faced regulatory uncertainty in Israel, and Eni’s discovery raised the possibility of leaving Noble behind. However, a report from GlobalData says that the shared used of infrastructure and derisking the geology through development could help the region scale up and help all parties. 

In our Numbers Report, we take a look at some of the most important metrics and indicators in the world of energy from the past week. A worsening LNG market as demand fails to keep up with supply, speculative movements from oil traders point to persistent pessimism, and low oil prices continue to take a toll on the Russian economy. Find out about those indicators, and more, by clicking here. 

Thanks for reading and we’ll see you next week.

Best Regards,

Evan Kelly


P.S. – In our Inside Investor report this week, financial analyst Michael McDonald gives a valuable insight in the financing of the energy markets and sees that most U.S companies have to make difficult decisions when it comes to financing their production. Michael points out which energy companies make the right financial decisions and shore up their balance sheets doing so. Find out which companies are on Michael’s radar by
clicking here.

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What's in Oil & Energy Premium this week:
Inside Investor
• Why The Right Financing Matters More Than Ever
Inside Opportunities:
• Hedging Your Energy Portfolio With Big Data
Executive Report:
• Inside the Numbers: Oil Markets Still Weak
Inside Markets:
• Natural Gas Still Has Space To Fall
Inside Intelligence:
• Politics, Geopolitics & Conflict – 27th November 2015
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Natural Gas Still Has Space To Fall

January Natural Gas

January Natural Gas futures declined to a multi-year low at $2.229 earlier in the week, but selling dried up, triggering a short-covering rally and enough upside momentum to put the market up for the week. If it can finish the week over $2.291 then a technical closing price reversal bottom will form. This will be the first sign that the buying is greater than the selling at current price levels.

This could prove to be difficult because the fundamentals remain bearish. Production remains strong and the commodity’s demand continues to fail to keep pace with the supply surge. Stockpiles held in underground storage in the lower 48 states reached 4 trillion cubic feet (Tcf) for the first time ever. The current storage level is up 11.2% from last year and is 5.5% above the five-year average, according to the latest data from the U.S. Energy Information Administration. 

At this time of the year, weather should have the biggest influence on prices. However, so far, winter has been slow to arrive. Sure, snow blanketed much of the Midwestern and Great Lakes states over the week-end, but this wasn’t followed up by a lingering cold spell which would’ve led to increased demand. 

Instead of the weather influencing the price action this week, the mechanics of the futures market seem to be exerting the biggest influence. With the December futures contract set to expire, short-sellers have been scrambling to cover their positions before expiration. This is creating an artificial bottom, but nonetheless, could prove to be an important technical formation especially since the market is technically oversold. 

According to current data from the Commodity Futures Trading Commission, the number of bearish traders outnumber bullish traders by about 2 to 1. So even though supply continues to build, there is the possibility of a short-term bottom simply because investors may not want to add to current positions at this week’s current low price levels. 

Technically, the main trend is down according to the weekly chart, however, a close over $2.291 on November 27 will create a potentially bullish closing price reversal bottom. Although this chart pattern may form this week, it will not mean much unless there is a follow-through rally next week. 

The trend is not likely to turn up even if the chart pattern is confirmed. However, it could lead to the start of a 2 to 3 week correction. Gains could be limited initially because the first upside target is only $2.415. The rally will gain traction over this level with potential targets at $2.600 and $2.665. Since the trend is down, sellers are likely to come in at these targets. 

This week’s price action is likely to be determined by personal preference. If you trust that supply is going to continue to grow then your choice is to sell weakness, hoping the pressure is strong enough to continue through last week’s low at $2.229, or wait for a relief rally into a retracement zone. 

Natural Gas Stocks

The sell-off in the natural gas futures market is being reflected in natural gas stocks including Range Resources Corp. (RRC), Southwestern Energy Co. (SWN), and Cabot Oil & Gas Corp. (COG). 

Range Resources Corp. (RRC)


Range Resources Corp. is in a downtrend on the monthly chart. However, there is a slight divergence developing between the stock and futures price action. Last month, the stock hit a low of $27.55. This low has held so far in November even with the futures contract reaching a new monthly low for the year. 

Value-seeking buyers may be coming in because prices are nearing multi-year bottoms at $23.77 from 2008, and $22.80 and $21.74 from 2006. 

Southwestern Energy Co. (SWN) 

Southwestern Energy Co. reached its lowest level since May 2005 this month, but it also took steps to shore up its financing while it rides out the severe drop in natural gas prices. Last week, the company announced that it entered into a $750 million three-year term loan agreement and used its proceeds to pay down balances under its existing credit facility and commercial paper program. The move is designed to create long-term value to its shareholders. 

This stock should be put on a watch list since there are no signs of a bottom yet on the weekly or monthly charts. 

Cabot Oil & Gas Corp. (COG)

Cabot Oil & Gas Corp. is a stock to watch this month for technical reasons. The main trend is down according to the monthly chart, but the market is currently testing a key retracement zone of its March 2009 bottom at $4.46 and its February 2014 top at $41.78. This zone is $23.12 to $18.72. 

Investor reaction to the price level at $18.72 will determine whether the stock will rebound back to $23.12, or continue to weaken into its April 2012 bottom at $14.42. 

Keep in mind that natural gas related stocks are likely to find support at value area, but they will need a catalyst to rally. The catalyst, of course, will be higher natural gas prices.
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