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January 28, 2014

Mobilizing Finance for #Energy Development in #Africa | Oil Council

Excellent study on energy investments in Africa.

Mobilizing Finance for Energy Development in Africa | Oil Council

Terry Newendorp, Chairman & CEO, and Shannon Thomas, Analyst, Taylor-DeJongh
Many economies on the African continent are undergoing a transformative expansion. Recent oil and gas discoveries, along with improvements in transparency and governance, have prompted the opening of new markets to foreign investment in all segments of the oil and gas value chain. International investors are also proving increasingly willing to take on emerging market risks as they seek to employ capital in a depressed global market. These trends have resulted in the highest levels of African investment since the 2008 global financial crisis. Though infrastructure requirements remain high, existing gaps in financing are increasingly being filled through a balanced approach that combines support from development agencies and export credit agencies, private equity investment, intracontinental investment, and the use of asset-backed debt facilities such as Sukuk and reserve-based loans.

Africa is already a proven oil and gas giant, accounting for 16% of total global production in 2012. The top four African producers—Nigeria, Algeria, Angola, and Libya—are all OPEC members with established oil industries. Yet most of the continent remains unexplored. A recent flood of notable discoveries in non-OPEC Africa indicates great potential for the approximately 45% of identified exploration blocks that remain open, and for the future of the African continent as a global oil and gas heavyweight for decades to come.  

Figure 1: Recent oil & gas discoveries (Q1 2012 - Q3 2013) Source: Company press releases and reports

Historically, it was easy-to-export oil that motivated the bulk of foreign investment in Africa’s hydrocarbons sector. But with rapidly increasing domestic demand for energy, many African countries can also support the monetization of natural gas developments. Evidence for this is clear: the past five years have seen an increase in midstream and downstream oil and gas infrastructure projects that is expected to continue in the years to come.  This is creating pronounced change in opportunities for the production of infrastructure-intensive natural gas. Previously unvalued and newly discovered gas deposits on both the eastern and western African coasts are gearing up for production, positioning Africa to greatly expand its already significant role in the globalizing gas trade. Over 15 years ago, South African industrial conglomerate Sasol invested in the Mozambican Pande and Temane gas fields with the intention of supplying Sasol’s local fuel retailers in Maputo. Now, the offshore gas discoveries in Mozambique exceed 65 Tcf, in a massive resource that will support not only domestic economic development, but also large LNG projects to supply global demand. Natural gas reserves and downstream infrastructure are also developing apace in other countries, including East African hot spots Tanzania and Kenya.  And in Mauritania, the Banda offshore gas field is being developed as part of an integrated plan that will provide the first electricity to residents in over 60 towns in the Senegal River Basin.

Still, there is much progress to be made. Based on moderate projected growth in domestic and global demand, the African continent will require USD 1.6 trillion in cumulative investment in oil infrastructure and USD 721 billion in gas infrastructure over the next 22 years,with an average required total upstream spend estimated at USD 92 billion per year. This amount could be even higher due to the complex technical requirements of many planned offshore and LNG developments.  Fortunately, maturing economies and novel risk mitigation strategies are creating new avenues for meeting the financing gap.

In recent years, debt financing in Africa has largely been government sponsored. The World Bank estimates that 70% of current external lending to Africa originates from foreign governments, and of the remaining 30%, around half the loans were based on sovereign guarantees. A significant source of debt has been development finance institutions (DFIs )such as the World Bank, and export credit agencies (ECAs), which have seen in today’s illiquid markets an opportunity to advance their own organizational goals (economic development and export promotion, respectively) by offering debt facilities and credit enhancements. Poor or no sovereign credit ratings limit many African governments’ access to international debt markets, on top of which many countries face restrictions on non-concessional debt and sovereign guarantees imposed by the IMF and World Bank.As both a direct and indirect result of these restrictions, in the past three years oil and gas firms used their own cash flows as the largest funding source for new business in Africa. Nevertheless, the availability of both debt and equity financing has steadily increased.
 Figure 2: Sources of African Debt in 2011. Source: World Bank International Debt Statistics

Growing investor confidence is driving growth in equity investment with the help of alternative financing sources and risk mitigation measures, with benefits for Africans and international investors alike. A survey conducted by PwC showed that in the past three years, private and public equity were the fastest growing funding sources for oil and gas companies’ African operations, but still account for only 28% of total oil and gas financing. Also notable is the emergence of private equity funds as investors in energy and infrastructure developments. As of early 2013, Taylor-DeJongh identified 57 private equity funds that operate exclusively in Africa, and majors such as Carlyle, Och-Ziff, and Blackstone have started funds that specialize exclusively in African infrastructure. Growth in first-time funds and private investment companies specializing in specific regions within Africa is especially pronounced. Upstream oil and gas projects offer private investors value growth in the form of reserve increases, making them an attractive alternative to the more competitive buyout market. Energy demand from expanding local markets also helps to balance risk.African banks are an additional emerging resource.  South African banks such as Standard Bank and Nedbank have established themselves as lenders for energy infrastructure throughout the continent. The Nigerian banking sector is also especially active in home-country oil and gas sector lending. This trend is extending to other countries, often with the support of credit enhancements from DFIs and other external agencies. Across all sectors, the largest markets for local currency loan syndications are in Kenya, Zambia, Nigeria, Ghana, Angola, and South Africa. Loan tenors in Sub-Saharan Africa have extended to as long as 8 years, with hope that continued macroeconomic stability and regulation might support longer terms in the future. In the meantime, engaging local investors puts available capital to work, hedges currency risk, and has the potential to reinforce regulatory advances, helping to ensure long term reliable and stable returns.

The availability of resources as collateral is particularly advantageous because it allows companies to raise debt secured by claims on future production. Since 2007, banks have issued nearly USD 17.7 billion in reserve-based loans (RBLs) in Africa. RBLs base credit on the net present value of projected cash flows from resource sales.Banks have varying approaches to reserve-based lending, but the existence of fields in production or under development is necessary. The credit facility is reevaluated regularly, allowing credit growth if production or reserves increase. In the past two years, over USD 5 billion in RBLs have been issued based on assets in Ghana, Nigeria, Equatorial Guinea, and Egypt.

Growing competition for RBLs has also helped to hasten the expansion of Sukuk, an Islamic asset-backed debt instrument. Like conventional bonds, Sukuk provide a fixed amount of income to the borrower for a predetermined tenor.  Like RBLs, they are backed by physical collateral and associated cash flows. In lieu of interest, the lender is entitled to an agreed-upon portion of the income or dividends generated by the backing asset in exchange for taking partial ownership responsibility (similar to a moderated equity risk).  The global market for Sukuk has grown over 28% annually for the past five years, for a total market exceeding USD 130 billion in 2012 and expected to surpass USD 600 billion by 2015. While Egypt has been the target of most African Sukuk to date, issuances have also taken place in The Gambia, Senegal, and Sudan; plans for sovereign Sukuk are also being developed in Nigeria, Mauritania, Morocco, and South Africa.  

With each major project that successfully uses tailored financing solutions to accommodate a unique risk profile and expand local economic activity, more opportunities are likely to emerge for international and African investors. The risks of doing business in frontier markets are real, but institutional and infrastructure growth promise to reward those sponsors and investors who are willing to find constructive mitigation and risk-sharing structures. The mutual benefits to private and public stakeholders, both local and international, should encourage even more investment and help bring Africa into a new era of economic development, as global investors follow the lead of the capital providers to Africa’s oil and gas sector. 

Mobilizing Finance for Energy Development in Africa | Oil Council

January 24, 2014

#China Bank Regulator Said to Issue Alert on #Coal Mine #Loans @ Bloomberg

China's banking regulator ordered its regional offices to increase scrutiny of credit risks in the coal-mining industry, said two people with knowledge of the matter, signaling government concern about possible defaults.

To read the entire article, go to

January 17, 2014

Citi goes bullish on miners for the first time in three years @MarketWatch

analysts seeing better bottom-up fundamentals, notably from big diversified miners. Citi’s top picks are $BHP $RIO $GLEN

Citi goes bullish on miners for the first time in three years - The Tell - MarketWatch

“We would rather be too early than too late in making this call.”
And with that, analysts at Citi moved their 12-month view on the mining sector to bullish for the first time in three years.
Sure, they’re concerned about the potential for long-term structural demand for commodities in China, and yes they’re aware there could be a seasonal slowdown in the first quarter of this year (as they pointed out in December), but analysts are seeing better bottom-up fundamentals, notably from big diversified miners. Citi’s top picks are BHP Billiton BHP +0.73% UK:BLT +1.16% , Rio Tinto RIO +0.94% UK:RIO +0.89% and Glencore-Xstrata UK:GLEN +3.42% .
“Investor sentiment has hit rock bottom. The mining sector has moved through five stages of grief, namely Denial, Anger, Bargaining, Depression, and now we think we are in Acceptance that the sector has moved into a new norm,” said lead analyst Heath Jansen, in a note out Thursday.
Amid a clutter of metals-price calls, Jansen foresees a flat commodity-price environment ahead and a reduction in volatility. An improvement in U.S. and European growth will help boost commodities, while weakening commodity currencies — the currencies of major exporters like Australia, New Zealand and South Africa — are boosting miners, he said. On top of all this, miners are cutting costs, improving balance sheets and aligning with shareholders’ interests. Because of this, earnings momentum has become positive.
But Citi’s advice to stay underweight on gold and base-metal stocks diverged from the opinions of other big investors. DoubleLine Capital founder Jeffrey Gundlach said earlier this week that not only is gold looking good technically — calling for $1,350 an ounce on gold “sooner rather than later” –  but he likes those miners as well. Most major gold companies lost at least half their value last year on the gold price plunge.
“Sentiment is as black as night on gold, so I’m actually long on some gold miners,” said Gundlach.
His gold call is more bullish than the average investment bank so far this year. Recent forecasts from six big banks (not including Citi) see the metal sinking to $1,209 an ounce this year, an average drop of 14.5% from the 2013 average. The gold-mining sector has a fan in hedge-fund manager John Paulson, who was reportedly telling clients last year that he won’t add more to his hard-hit gold fund, but still likes the miners.
For its part, Citi said its least-favored big-cap miner is Anglo American UK:AAL -0.43% . The investment bank parted company with UBS, whose analysts lifted the stock to buy from neutral, saying valuations are looking attractive after a recent underperformance (by more than 18% over the past three months compared to buy-rated Rio Tinto and BHP Billiton).
Writing for Benzinga on Wednesday, William Briat said now isn’t a bad time to go hunting gold mining stocks, which are nearing lows not seen since the fall of 2008. He advises looking for stocks that “are able to produce at an all-in sustaining cost that is below the current price of gold bullion, which means they remain profitable.”
While Citi’s note is focused on Europe’s mining stocks, Briat outpointed NYSE-listed Primero Mining  PPP +1.54% . “If a company still has strong assets, a solid balance sheet, and is able to create positive cash flow, this type of firm is of interest to me, especially when market sentiment is so negative,” he said.
Marc Faber extolled the virtues of mining stocks at the close of 2013. The author of the Gloom, Boom and Doom report said that given the extremely bearish views out there on gold, silver, platinum and palladium, mining companies are at “relatively good values.” Not a new call here for Faber, he’s been touting miners for a while.
– Barbara Kollmeyer covers markets for MarketWatch. Follow her @bkollmeyer. Follow The Tell @thetell.

Citi goes bullish on miners for the first time in three years - The Tell - MarketWatch