Weekly Overview: Engie, LNG – and Services Merger Off the Menu

This week saw the new CEO of Engie, Isabelle Kocher, present her plan for a new-look French state-run behemoth, ready to take on the challenges of a greener future. The former CFO, she stepped up from deputy to full CEO at the start of this month, replacing CEO Gerard Mestrallet and becoming the first female CEO of a top French firm.

Mestrallet had led Engie/GDF Suez since the 2008 merger between the state-owned utility and Suez, which he had led since 1995. She had been his successor-in-waiting for a year or more.

Given the plan’s references to consultations with staff representatives – and Kocher having already talked of disposals – there could be some big changes in the offing.

The company wants to boost its exposure to renewable energy sources and depend less on thermal energy and mature markets in Europe.

It has not yet gone as far as Germany’s E.ON, another company encumbered with the legacies of the past: hoovering up new production by signing long-term oil indexed gas purchase contracts, chiefly from Russia, left it ill-equipped to deal with the changing landscape.

This strategy had the effect of stifling competition; but it backfired when the eventual arrival of competitive gas supply coincided with collapsing industrial demand. This left Europe’s majors holding out-of-the-money contracts with companies such as Gazprom that they have been struggling to renegotiate for years. Both E.ON subsidiary Uniper and Engie are planning to join Gazprom in building Nord Stream 2. 

Commenting on the shake-up of his national champion, Societe Generale’s senior European gas and LNG analyst Thierry Bros told NGE that problems can arise when big, centralised companies go green and hatch plans to build solar electricity schemes in Mozambique or wind farms in Turkey, for example.

E.ON cut itself in two, because it recognised that the same company cannot do both centralised and decentralised electricity, he said. Uniper is the untrendy part of it, embodying the assets that Ruhrgas built up, and the contracts and infrastructure that society needs – for the present decade at least.

E.ON and Engie were among those companies that fiercely resisted unbundling but if they had been made to years ago they would not be here today – they would be like National Grid, Centrica and – until recently – BG, Bros said.

In the late 1990s the former monopoly British Gas voluntarily broke itself up, realising the three activities of upstream production, trade and supply and gas transportation did not belong under one roof. Shareholders were rewarded when it demerged as their combined dividend rose.

The shares in upstream arm, BG, traded at a premium while it was regarded as being best in class; but that did perception did not survive the profit warnings that followed the series of problems a few years ago: cost-overruns in Australia, delays in Brazil and the lack of gas to liquefy and of payment in Egypt. While these were not all its fault, they weakened it, and in the process Shell’s argument for owning it – which never led anywhere hitherto – began to gain credibility.

That $54bn deal, finalised in late February, met all the regulatory requirements and now a wave of asset disposals, including those in the UK North Sea, is in the offing.

BG made a contribution to Shell’s results, especially in the area of LNG, where it now has a larger portfolio of destination-free cargoes for sale than anyone else. LNG sales volumes of 12.29mn mt were up by a quarter year-on-year in Q1 2016, thanks to BG’s assets, while production was up 14%, to 7.04mn metric tons.

The destination-free volume is set to grow as well, with the commissioning phase of the first train of Sabine Pass now effectively over and contractual deliveries starting in earnest. Shell now is one of the buyers, and BG secured the lowest fees as it was Cheniere’s first customer.

Much has been made of the cargoes’ arrival in Europe, although so far six of the seven cargoes have gone elsewhere: Dubai, Brazil, Argentina and India.

The architect of BG’s merchant LNG business, Martin Houston, has since February been in partnership with the architect of Cheniere’s LNG business, Charif Souki, in Tellurian Energy. Until last year, Houston ran Parallax Energy, with funding to develop an LNG business and had been in talks with Cheniere. The two individuals are now seeking to compete with Cheniere in LNG.

Cheniere still has only an interim CEO, following CEO Souki's December 2015 dismissal at the hands of activist shareholder, Carl Icahn. A full-time CEO is expected to be appointed in the coming months, after which the company’s new direction should become clearer. So far, the view has been that it will be a lot more cautious than formerly.

Halliburton-Baker Hughes Deal Squashed

A merger that did not come off was the Halliburton/Baker Hughes tie-up: anti-trust regulators deemed the new company would be too big, and the proposed divestments inadequate to create real competition.

Their customers wrote to regulators to complain that the new company's prices might go up, although it was the fall in the oil price and the subsequent cancelling or reneging on upstream service contracts that has left this sector in such dire straits today.

Baker Hughes CEO Martin Craighead described the attempt as an “extremely complex, global transaction and, ultimately, a solution could not be found to satisfy the antitrust concerns of regulators, both in the US and abroad."

Ratings agency Moody’s might downgrade its ratings for both by early June. It said May 2 that it has reassessed the companies' standalone financial and operating performance in light of the terminated merger and in the context of the very weak oilfield services operating environment.

When the deal was announced Halliburton was the largest, and Baker Hughes the third largest, oil-field services companies.

This leaves Baker Hughes with a $3.5bn break fee, which it might need to shore up its balance sheet, or to help it buy other companies with complementary activities without posing a threat to the rest of the market, such as last year’s Schlumberger-Cameron takeover.

William Powell

Compelling case to go for LNG based power generation amid attractive prices, says Sri Lanka https://t.co/Inr5czFZZ2 pic.twitter.com/p74AD2zFLy

— Natural Gas World (@NatGasWorld) May 6, 2016