News from the Energy Patch: Companies Looking for Alternate Ways to Grow Their Businesses (NHY, SSL)

Last week we took issue with the idea that higher absolute inventories of oil products in the US suggest oil prices should be lower, arguing that it was the number of days’ demand that the inventories could supply that was the more relevant number.

Jay Walker hit on the other major reason that US inventories should not have the predictive power they once might have: increased demand from India and China. He points to a New York Times article that makes the following points about China:

* Total miles of highway, now some 23,000, more than doubling what existed just six years ago.
* Year over year growth of car sales of 54%.
* Passenger cars on the road, now 20 million, compared to about 6 million in 2000.
* Government announced target of 56,000 miles of freeway by 2035 (the US has 46,000 miles of interstate highways).
* and by 2030 carbon dioxide emissions are projected to exceed those of the US.

Walker goes on to make his own point, with which we heartily agree:

Anyone who thinks that the demand for global fossil fuels will abate anytime soon, should also consider that the average American uses about 25 barrels of oil annually, versus 1.8 barrels in China and 0.8 in India. Those latter two figures are obviously going to move upwards at a rapid rate, considering those countries recent growth rates in the 7-10% range annually and the apparent embedding of the car culture in China particularly.

Which, of course, provides a long tailwind to investing in the fossil fuel industry.

And, of course, alternative energy sources. Last week we chuckled at calling coal an “alternative energy” but now we read that Watch List member Sasol (SSL), which has long converted coal into traditional liquid fuels, is going a step further and converting it into hydrogen for fuel cells.

In a global first, American fuel-cell development company Intelligent Energy has announced the development of a new hydrogen-generation system, which is the product of a collaborative effort between itself and local fuel giant Sasol.

The ‘Hestia’ system converts Sasol’s Fischer-Tropsch [FT] fuels into hydrogen. The high-purity hydrogen is then transformed into electricity and heat for practical applications, using Intelligent Energy’s fuel-cell systems.

Sasol is also taking its coal conversion skills to India in a big way.

This could turn out to be a boon to the country which imports 70% of its crude oil requirement. Also India is endowed with one of the largest coal reserves to the tune of 253 billion tons.

Sasol wants to invest in India initially perhaps with $1 billion investment. But for this “we have to give them identified coal blocks to get on to the job. This is a very exciting opportunity and investments are likely to run into $6 billion,” Chidambaram said after his two-hour long meeting with the Investment Commission, which also has HDFC Chairman Deepak Parekh and ICICI Onesource Chairman Ashok Ganguly as members.

TheStreet.com has also shown some love to energy stocks lately, noting their single-digit multiples and double-digit growth rates.

In the meantime, expect producers to look for ways to get more product out of the ground.

Venezuela hopes to nearly double its production of extra-heavy oil in the Orinoco tar belt within three years by increasing drilling efficiency, a director of state oil company PDVSA told Reuters on Saturday.

Venezuela, the world’s No. 5 oil exporter, is already producing 620,000 barrels per day of synthetic crude drawn from an estimated 235 billion barrels of extra heavy oil in the Orinoco Belt.

“It would be feasible within the next three years to double production to 1.1 million barrels per day in the existing areas,” PDVSA Director Eulogio Del Pino said in an interview.

In yet another story related to Sasol, the company is looking to shed some weight (and raise some cash) in other parts of its portfolio. Reuters reports that:

Bidding has started for the chemical unit of South African petrochemical group Sasol , with negotiations with short-listed bidders to be held in July and August, the group said on Tuesday. Sasol is selling most of its Olefins & Surfactants [O&S] chemical unit, although keeping the unit’s South African business. Early last month the group said 19 firms had received information to prepare their bids.

The sale will affect the overseas operations of the chemical unit it bought more than four years ago, most of which is concentrated in Germany, Italy and the United States. Last August, Merrill Lynch said the sale might fetch up to 900 million euros ($1.15 billion), and backed the sale, provided that oil prices do not crash below $15 per barrel. Sasol in 2001 bought the chemical business then known as Condea from Germany’s RWE Dea for 1.3 billion euros, and most of this business is held in Sasol O&S.Sasol says it wants to sell most of the O&S unit because it is not well-integrated in its plans, which include using its chemical division to provide feedstock for units such as the group’s gas-to-liquid [GTL] initiative.

Although the sale doesn’t look to fetch as much as Sasol paid, focusing on the energy business makes sense these days.

SSL 1-yr chart:

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Meanwhile, Watch List conglomerate Norsk Hydro (NHY) is cleaning up its portfolio. Hydro has decided to sell its 50 percent shareholding in the gasoline retail chain Hydro Texaco in Norway and Denmark to the Scandinavian retail company Reitan Servicehandel for approximately NOK 1 billion. It has also reached agreements to divest the industrial site in Stade Germany after the closure of its primary aluminum plant there by the end of 2006.

These deals make a small dent in the company’s $34.5 billion market cap, but can help it focus on more profitable enterprises.

NHY 1-yr chart:

Comments

[mslasky]

How many days of oil supply is in storage, does seem more valid than the absolute number, or it's trend. But if all storage for oil is utilized. then I'd expect a dramatic drop in prices, in a natural attempt to create more demand, since it would be costly to close pipelines, refineries, and production.

[WilliamTrent]

On the other hand, it's a lot easier to build storage tanks than develop new sources, pipelines or refineries. Then there would be no shortage of storage capacity.

And for most commodity goods, demand is inelastic to price - at least in the short run. You aren't going to commute to work more often if there is cheaper gas, and although the threat of a blackout enticed some conservation efforts recently they were pretty short-lived and had less to do with cost than the threat of having power shut off completely.