Finance is the wrong business for people committed to the idea of objective truth.
No asset is inherently worth anything, just some multiple of the income you think it will produce over time. Both the earnings forecast and the multiple can change at a moment’s notice — sometimes because the outlook for the future has genuinely changed, but often for other reasons. Read more
Kinder Morgan, the company which previously loved to distribute cash, is facing a bit of a dilemma. Read more
Simply amazing exploding crude inventory charts from BNP Paribas:
Back in November we meandered through the possible implications of there being no more petrodollars in the system (on account of US shale oil energy liberation).
Since then, we’ve also been thinking about the possible implications of there being no more sweatdollars in the system (on account of US re-shoring and digital manufacturing trends).
So what happens if key dollar recycling pathways were to be significantly closed off or contracted?
Privately, we’ve speculated the situation could over time lead to the rise of a new international funding currency front runner. (Though, certainly not because the US is losing influence. More because, shale oil and a labour surplus means it may not be in America’s interest to defend reserve-currency status at all.) Read more
FT Alphaville has written before about how the pronounced collapse in the price of oil appears very reminiscent of the disintegration in the value of a certain subprime financial asset; both have been swift, disorderly and self-reinforcing.
A new report from The Bank for International Settlements emphasises the latter dynamic by drawing a connection between the vast sums of money energy companies have borrowed from investors in recent years as well as the retreat of traditional dealers from certain commodities-related transactions. The new dynamic has imparted a swift and sudden forcefulness to the recent price action in the crude price that goes beyond the effects of a simple change in production and consumption of oil. Read more
This guest post is from the co-authors of UBS’s white paper for the WEF meeting 2015 in Davos, which started on Wednesday.
Note that one of the co-authors, UBS Investment Bank’s chief economist Larry Hatheway, will be fielding questions on the energy chapter on Friday at 11:30am during Markets Live. Read more
The parallels between the oil markets and bitcoin continue to astound.
Over in the bitcoin universe, for example, questions over the legitimacy of the $1,200 level achieved in November 2013 have begun to circle. The running theory is that the ridiculously high price was only achieved because Mt.Gox — Bitcoin’s premier exchange until it collapsed in February 2014 — was in league with manipulative HFT traders who, with the help of a proprietary algorithm nicknamed the “Willy Bot,” pumped the price as far as it could go, and then cashed out.
Over in the oil world, meanwhile, a similar dialogue is coming forth with regards to the record prices achieved in 2008. Read more
Fascinating what a few months of sub $90 per barrel oil prices can do to the dialogue about the respective merits of cheap energy.
So, whilst three months ago it was all about “trillions in stimulus from cheap oil!!“, today it’s “$50 oil changes everything!” and ARGHH “energy defaults may be the new subprime!”.
As FT Alphaville warned at the start of December:
If it is true that the commodity ecosystem is collapsing, then it is also true that all dependent industries are at risk. On that basis, those analysts who say that low prices will be a boon for many western economies that depend on oil imports, all miss that none of this necessarily guarantees increased demand.
Margins may be temporarily improved for intermediaries, manufacturers and retailers, but if we end up heading towards a price war on all fronts, all we get is a deflationary spiral that threatens contracts, salaries and debt.
Hedgeye’s Kevin Kaiser is an independent analyst on a lone crusade against the shoddy valuation of capital intensive corporations with limited earnings but with strong dividend payout track records. His question: where exactly is the money coming from?
His biggest beef is with Kinder Morgan, the pipeline operator which recently transformed itself from a Master Limited Partnership into a corporation. But, as Kaiser observes in a new research note, “Yieldco” syndrome could be much more common than that. Read more
Most technology users remain blissfully unaware of the internet’s carbon footprint because most “users” never have to come up close and personal with a data centre.
Yet, for all the energy efficiency that technology brings us, data centres remain the technology world’s dark little energy guzzling secret.
Data centres, it could be said, represent the unglamorous side of the technology business. They’re the plumbing that holds the whole thing together. They’re the secret sauce that gives one player an advantage over another. As a consequence, there’s zero advantage — either from a security or cosmetic point of view — of bringing attention to where your data centre is located, how it is run or how much energy it consumes. Read more
BoAML follow in the footsteps of UBS with a whopper report on the smartening up of the world’s energy markets.
It’s a mighty 256 pager.
We’re still going through it in detail, but couldn’t resist flagging up the following factoid about “avoided energy” before revisiting some of the larger themes (among them, the reduction of power consumed by data centres).
What the analysts mean by “avoided energy” is how much energy we’ve avoided using thanks to improved efficiency and know-how. Read more
The FT’s Ed Crooks reported this week that fears over the long-term health of America’s shale industry could be put to rest thanks to news that independent oil and gas companies have now substantially improved their financial positions.
From the story:
Cash earned from operations by 25 leading North American exploration and production companies is expected in aggregate to exceed their capital spending next year for the first time since 2008, according to an analysis by Factset for the Financial Times.
As Crooks recounts, the longstanding fear was that the industry was shaping up to be a Ponzi scheme, relying on nothing more than excitement over shale to continuously attract new investment, with every likelihood that things would cave in on themselves once the financing for more drilling ran out.
Thanks to a shift to more profitable oil extraction over less profitable gas, however, it now looks like shale companies’ finances have improved enough to make the business sustainable. Read more
The $44bn self-acquisition of Kinder Morgan has been heralded by some as a great deal for shareholders.
But is it? Is it really? At least for the ordinary investors?
We’ve already wondered about the motivation for the deal.
Among our initial thoughts: Kinder Morgan MLP units trading under the KMP ticker had got expensive due to the heavy promotion of MLP structures as a safe-ish and yieldy investment at a time of low interest rates.
But we now think there may be more to it than that. Read more
Want to know why Modi is so focused on energy reform?
From Goldman’s Tushar Poddar and team: Read more
The extreme cold weather in the US is taking its toll on a whole host of energy products.
Most affected so far has been propane, which it turns out was understocked going into the season already:
As JBC Energy noted on Wednesday:
Moving to the light end of the barrel, US energy markets have experienced some unusual developments in recent weeks with severely cold weather leading to massive price fluctuations in propane, natural gas and ethane prices. Since the start of the cold weather in late December, overall propane stocks have declined by 10.6 million barrels to their lowest since June 2011, with a significant portion of these draws coming from the Midwest and as the Gulf Coast redirected flows northwards to supply weather affected areas.
Okay, a bunch of anecdotal data points and stories bundled together doesn’t necessarily make a trend, but…. lacking the power of Lisa Pollack-level data-analytics, that’s not going to stop us from trying to suggest as much now.
So, having already noted BP’s observation that energy is decoupling from economic growth, we present some more datapoints to build the case that something relatively remarkable is beginning to happen to energy consumption. Read more
According to BP’s Energy Outlook, which was released this week, global energy demand will continue to grow until 2013, but that growth is set to slow, driven by emerging economies — mainly China and India.
To wit, the following chart from the presentation booklet:
Home of oil sands, maple syrup, ice hockey, singing astronauts, William Shatner, the Bank of England’s governor-to-be and (rather poignantly) a lot of bears… Read more
If you submit to theoretical physicist Geoffrey West’s urban development theories, then you’ve probably aware of the idea that humanity is set to face a critical crunch point soon enough (if not already). And by crunch point, we mean — either humanity throws everything it’s got at speeding up technology to ensure its resource consumption-to-population footprint becomes manageable, or we wither away.
(The Roman Empire, by the way, is perhaps the best example of a civilisation which failed to make the next great technologically leap to the carbon age and did actually wither.) Read more
An interesting chart from the American Enterprise Institute showing to what degree oil shipments by rail have risen in the last two years:
China’s energy consumption is legendary (okay, its everything consumption is legendary). More coal, oil, hydro, solar, and wind power than… than just about anyone. The coal numbers in particular are mind-boggling. By 2011 China was consuming almost as much coal (3.8bn tonnes) as the rest of the world combined (4.3bn tonnes).
The figures on oil consumption are almost as striking. They consume about 10m barrels a day; more than 10 per cent of world production. Read more
Awkward. One of the newish regulatory probes afflicting Barclays has brought us another batch of inter-trader communications they clearly never thought would see the light of day.
This particular investigation, which could see Barc landed with a record $470m fine over alleged US energy market manipulation, circles around four traders on the bank’s West Coast power desk who allegedly thought it wise to exchange messages explaining how they would “crap on” certain prices in one market to profit in another. Read more
Another way of looking at the myth of China’s inevitable growth…
[...]Warren Buffett’s net worth over the last couple of years has fallen… from $47 billion to $44 billion. That decrease stands in stark contrast to the performance over the same period of my dog. Quantifying the increase in Patches’ net worth over the last two years is difficult, but the sniff test suggests the improvement in his circumstances exceeds Warren’s by a wide margin (Exhibit 1).
The US overtook China to regain top position as the world’s leading investor in “clean” energy last year, according to Bloomberg New Energy Finance, the FT reports. It was the first year since 2008 that the US has been ahead of China as the world’s largest market for investment in renewable energy, biofuels and energy efficiency. However, it may drop back again this year after the end of two key subsidy programmes introduced as part of the 2009 economic stimulus package: grants for renewable energy projects and government loan guarantees to encourage private sector investment.
Banks are being discouraged from big project-finance deals by new global capital rules and the eurozone crisis, the FT says, citing market participants who say infrastructure schemes will increasingly be funded by investors. Standards ordered by the Basel committee of international regulators will make large long-term loans harder to hold on banks’ balance sheets, according to several senior bank executives in the US and Europe. Project finance loans to build power stations, wind turbines and bridges are particularly unattractive because of their size, tenor and illiquidity, the executives said. At the same time, troubled European banks, which have dominated the market, are pulling back – shrinking their balance sheets and shying away from new dollar-denominated loans.
Oil and gas supplies will struggle to keep up with world demand growth, making energy prices more expensive and more volatile in the long term, the head of Europe’s largest oil company told the FT. Peter Voser, the chief executive of Royal Dutch Shell, told the Financial Times: “We will have a lot of volatility ahead of us that we cannot avoid … for energy prices in general.” He added: “We most probably will see a tightening of the supply-demand balance and hence rising energy prices for the long term. I think we should just get used to that.”
Mergers and acquisitions by US energy utilities rose to their highest level for four years in the first half of this year, the FT says, emphasising how consolidation is being driven by low prices for natural gas, demand for heavy investment and more willingness by regulators to accept deals. PricewaterhouseCoopers, the professional services firm, says $52bn of deals for electricity and gas companies were announced in the first six months of this year – the strongest such period for M&A since 2007. The largest deals announced to date this year have been Duke Energy’s $26bn acquisition of Progress Energy, Exelon’s $11.5bn deal for Constellation Energy, and AES’s $4.7bn takeover of DPL. All the valuations include debt.
BHP Billiton has made another big bet on energy in the US with its agreement to buy Petrohawk, an independent oil and gas company, for $12.1bn in cash, the FT reports. The Anglo-Australian mining group said on Thursday it had agreed to pay $38.75 a share for Petrohawk, which operates in three leading areas of shale gas and oil production in the US. The deal values Petrohawk at $15.1bn including net debt. The offer represents a 65 per cent premium to Houston-based Petrohawk’s shares at the close on Thursday. It will be financed from BHP’s cash balances and a new credit facility. Should BHP succeed in the acquisition, it will have more than tripled its resource base to 11bn barrels of oil equivalent within a year.