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Quarterly Production Reports: A Preview

Quarterly resource sector production & sales reporting seasons run for roughly two weeks and the June quarter 2017 season kicks off tomorrow with reports from Whitehaven Coal ((WHC)) and Northern Star Resources ((NST)), before the season heats up next week.

The Miners

The June quarter is traditionally positive for bulk mineral producers, UBS notes, as production ramps back up following wet season down-time in the March quarter. However, this year will bring a different story for coal producers given Cyclone Debbie hit in March.

Coal volumes are expected to be well down in the quarter — metallurgical (or coking) coal in particular. Statistics from Queensland ports show very weak shipments in April and only a partial recovery in May.

Total iron ore exports volumes from Port Hedland on the other side of the country have recently ticked up, Shaw & Partners notes, and are back to a long term uptrend. June exports ran at an average 1.44mt per day to an annualised run-rate of 524mt, which is an extraordinary amount when BHP ((BHP)) once suggested the port could only handle 180mt.

Iron ore cargoes directed to China represent 85% of Port Hedland throughput and looking at it the other way around, 40% of China’s iron ore imports leaves Port Hedland.

UBS nevertheless believes the numbers will be mixed among the individual miners. The broker expects Fortescue Metals’ ((FMG)) volumes to come in ahead of FY17 guidance but Rio Tinto ((RIO)) will struggle to match the run-rate of calendar 2017 guidance.

Fortescue will particularly be in focus with regard price realisation for its discount lower grade ore given March quarter realisation surprised to the downside, UBS notes. The broker expects 65% realisation, which is still weak but may prove a positive surprise.

Attention in the gold space will be on Newcrest Mining ((NCM)) and the impact of the seismic event and subsequent shutdown at Cadia. Production numbers are expected to be weak but UBS suggests other assets may have been worked harder to make up some of the gap. Costs will obviously look elevated given the cost of getting Cadia back on track. The market should, nevertheless, be able to look through these one-offs.

Evolution Mining ((EVN)) has now become the number two Australian gold miner – a position once held by Lihir until Newcrest bought Lihir to put daylight between it and other Australian players. The focus for Evolution will be on cash generation given a high level of debt on the balance sheet. UBS suspects the market may be a little bit optimistic.

UBS expects copper production to be largely flat on the March quarter. Attention will thus be centred on OZ Minerals’ ((OZL)) Carrapateena feasibility and whether it is on track, while an update on Sandfire Resources’ ((SFR)) rapidly expanding exploration program will be in focus.

Oil & Gas

It was a weak June quarter for oil prices, Macquarie notes, with an average US$50.80/bbl for Brent falling -3% short of the broker’s forecast. Prices trended lower later in the quarter as the extent of US shale production growth surprised and the lack of usual rebel attacks on ports/pipelines in Libya and Nigeria meant those two producers were able to pump at a rapid rate.

Both are exempted from reduced production quotas currently applied to other OPEC members for the very reason they have struggled so often to get their oil out there. As a result, net OPEC production has actually grown recently – not shrunk as the production cuts would suggest – all of which led to oil prices hitting the low forties in the month of June.

Macquarie expects oil prices to firm in the second half as destocking becomes more evident and increasing refinery runs add to demand. July is typically the largest month for US crude drawdowns as the famous US summer “driving season” kicks off in earnest following Independence Day.

Meanwhile, LNG prices remain suppressed going into the northern summer, Macquarie notes, despite political disputes in the Middle East and outages at North West Shelf (six owners, including Woodside Petroleum ((WPL)) and BHP) and Gorgon (Chevron/Exxon/Shell). With production about to commence at Wheatstone (Chevron and other foreigners) and other facilities, the broker sees soft prices continuing into the second half.

Macquarie does not buy into Qatar’s argument about “LNG price wars” and believes Japanese buyers will continue to diversify their supply and increase involvement in projects in Australia and PNG.

Elevated levels of Japanese LNG imports were once considered only temporary until the country’s nuclear industry got back on track following reactor shutdowns post-Fukushima. However it’s now been six years and only five of Japan’s prior 43 reactors, then supplying 30% of the country’s electricity, have been restarted. Japan will remain a gas buyer for a long time to come.

On an individual stock basis, Macquarie notes Australia’s once enviable LNG operational record has been tainted following poorly flagged maintenance and operational issues for both Woodside and Oil Search ((OSH)), which resulted in lower than expected production and sales. Santos ((STO)), on the other hand, looks set to report strong production.

The broker still prefers Oil Search, noting the shares pulled back on nervousness around the recent PNG election. PNG LNG is all about value growth from planned trains three and four.

Santos has been subject to concerns surrounding the Australian government’s announced intention to quarantine gas for domestic consumption, but Macquarie notes Gladstone LNG should be able to snap up a flood of gas hitting the market in October when Queensland Curtis LNG (BG, CNOOC) undergoes a two train shutdown.

Macquarie sees Woodside trading at fair value given upside potential is “trapped” behind the company’s alignment with joint venture partners at North West Shelf and Browse (Shell, BP and others).

In the small cap space Macquarie remains cautious. Beach Energy ((BPT)) has the strongest balance sheet and highest exposure to oil price volatility (the broker is positive on prices in the second half) but a general assumption Beach will look to M&A opportunities that may require a capital raising will suppress the share price.

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