From Credit Suisse:
■ The Sinopec issue is clearly polarising people: The reaction of investors to yesterday’s note is interesting. It evoked strong, and polar, views. Some see it as churlish to question any risks, given APLNG’s total protection under 100% Take or Pay. Others point to iron ore and see a high probability of default. We probably agree with neither school. There’s a grey area in between, with varying degrees of pain to Origin, to test. Whilst it may come at no financial pain to them (aside from any un-contracted volumes spot), we believe that lifting destination restriction would be the first step into the grey.
■ Origin has already waived binding APLNG terms: We continue to believe commercial logic may need a compromise to be reached. Let’s not forgot that in February 2011 Origin agreed to ‘defer’ (triggers unlikely to be met) the 2x $500m FID payments from Conoco to Origin. The rationale was ‘to better align economic interests’. It may have been needed, but it was a clear deviation from a binding legal agreement. Sound remotely familiar?
Exactly right. Firms will bury the truth in volumes of Orwellian legalese but the bottom line will be that under pressure from a collapsing spot market these contracts will break just as they did in the iron ore market.
Only this time we’ll be on the receiving end.
