(Idea) Drama In Ecuador - Our Last Update On New Stratus Energy
Drama in Ecuador, there's no other way to put it. New Stratus Energy is like a fish stuck between two whales fighting (political election). Thankfully, NSE is hiding inside the belly of an even bigger whale (China), so the ramifications are not as meaningful as the market has you to believe.
Since our last update on NSE, we explained to readers the deal between Ecuador and the consortium (Sinopec 60%, NSE 40%). Please read the write-up for why we thought it was the ultimate oil beta to ride the incoming multi-year oil bull market.
For investors, there were already a lot of uncertainties surrounding the Sacha deal.
Ecuador's Presidential run-off election is on April 13.
The official deal close date is April 16.
NSE had to raise $120 million or C$172.8 million in financing. Shell, as the off-taker, is providing financing for the other $480 million.
But then President Noboa threw a grenade at the consortium last week Wednesday asking for the $1.5 billion payment to be made on March 11 at 9 PM. For practical and logistical reasons, this deadline was impossible to meet.
Note: Even if you want to buy a house with all cash, it takes 1-2 weeks. In comparison, that's how silly the 5-day deadline is.
As a result, NSE shares are now down to C$0.34 because the consortium failed to make the $1.5 billion on the President's truncated timeline, and the market thinks this deal is no longer on the table.
But that's all incorrect and I will explain why.
Drama in Ecuador
This whole Sacha deal saga has been a political nightmare from the start. Right after the deal's announcement, the opposition came in full force alleging corruption and theft. Many activists spoke out against the deal calling it a "steal" of Ecuador's natural resources.
Noboa likely panicked after he underestimated the level of backlash that came following the deal announcement. As a result, he orchestrated the truncated deadline knowing full well that the consortium could not make the payment in time.
But there is a lot of conflicting evidence post the deadline date that convinces me that the deal is not off the table.
One of the key Noboa policies is to increase energy investment in Ecuador by $45 billion. If Noboa were true to his words and canceled the deal, not only would the Chinese never invest in Ecuador again, but the debt financing that the Chinese are providing would become more punitive.
Right after the deadline passed, no one from the government confirmed that the deal was canceled. According to the agreement signed, COLH has to convene a meeting and issue the consortium an official letter stating that they are withdrawing from the Sacha deal. No letter has been sent and no letter is expected to be sent.
The Energy Minister spoke on public television today stating that the payment was not made on the President's deadline, so there's nothing more to discuss. The energy ministry is looking at other options for the Sacha deal. From what I know for certain, there are no other parties involved in this process. And if you just think about this whole situation logically for a second here, after the stunt that Noboa pulled, who would want to still be involved?
The end result is that New Stratus and Sinopec are in limbo until the April 13th Ecuador Presidential Election.
What do I mean by that?
The government will continue to state that they will not "sign" the deal and look for alternatives, all the while, the deal remains on the table because the official closing date is April 16th.