Iraq has once again become a major oil producer, a development that could hurt the stocks of major oil companies. The New York Times reported that the war-torn country is now producing 2.5 million barrels of crude oil a day. That makes it one of OPEC's top producers; it could also make Iraq a huge threat to the values of major energy stocks.
The reason for that is obvious - all that additional oil on the market is sure to drive down oil prices and revenue at major energy companies. This is obviously good news for drivers at the gas pump, but bad news for stocks such as Exxon Mobil (XOM), Marathon Oil (MRO), ConocoPhillips (COP), and British Petroleum (BP). Particularly hard hit will be major producers that have invested heavily in exploration in far-off corners of the world.
Another problem is that most U.S. and European oil companies don't seem to be participating in the Iraqi oil bonanza. British Petroleum, the China National Petroleum Corporation, and Italy's ENI have some technical contracts in Iraq. The problem is that they don't have any deals to actually run or lease Iraqi oil fields. That could definitely drag down their stock value in the future because Iraq's oil potential is huge.
The country is producing three million barrels of crude oil a day, but some experts think it could produce a lot more. Hans Nijkamp, the head of operations in Iraq for Royal Dutch Shell (RDS.A), told the Times that he thinks Iraq could produce between six and ten million barrels of oil a day within ten years.
Iraq is taking steps to achieve this goal, including building new port and pipeline infrastructure. It will need to take some other steps, including streamlining regulations and dealing with electrical shortages. The country has also started planning on a project to filter and pump seawater into old oil fields in order to force more oil out. Iraq is also trying to develop new oil and gas fields close to the Persian Gulf and tanker ports, which should reduce transportation costs.
Iraq Deal Could Make Dragon Oil a Major Player
The new oil fields in Southern Iraq will be developed by Dragon Oil (DRAGF.PK). Dragon is a consortium of companies that include Kuwait Energy and Turkish National Petroleum. Dragon purchased six of twelve blocks of oil and gas fields that the Iraqi government auctioned off last week. The Iraq deal could make Dragon into a major player in the international energy business.
The gas fields could be particularly valuable because natural gas from them could be piped to Europe and markets in the Middle East. The Turkish National Petroleum company is in an excellent position to build a pipeline to carry Iraqi natural gas to Europe. Turkey is located just north of Iraq.
One potential customer is Saudi Arabia, which has no natural gas of its own. The Saudis currently burn crude oil to generate electricity, so there could be a market for Iraqi gas in Saudi Arabia in the future.
Expect Dragon's stock value to increase substantially if the predictions about Iraqi oil production come true. It could also be in an excellent position to become a major player in the gas business, particularly in the Middle East and Europe if it can develop Iraqi gas fields. In addition to the development in Iraq, Dragon Oil has oil fields in the Caspian Sea in the former Soviet Union.
Exxon in Northern Iraq
The only U.S. Company with a big presence in Iraq is Exxon Mobil, which has producing contracts for 850,000 acres in Kurdistan in Northern Iraq. Exxon's stock could be boosted by this news about Iraq. There is a downside to this story that could hurt Exxon's stock value.
Exxon has made its deal with the Kurdistan Regional Government, which wants to create a separate Kurdish state, not the Iraqi central government. That could seriously damage the company's relations with Iraq's government and harm its prospects of future business there. Although this move could help Exxon in the short run, it could damage the company in the long run by turning the Iraqi government against it.
The Iraqi government deliberately excluded Exxon from the auction of oil fields in Southern Iraq last week. The move may not be a smart one for Iraq because turnout at the auction was dismal, with none of the major U.S. or British oil companies showing up.
Apache Declares Cash Dividend
Apache (APA) has declared a cash dividend of 17 cents a share on its common stock. This should definitely boost Apache's stock value and enhance its reputation as a growth stock. The cash dividend will be paid to common shareholders on July 23. The company will also pay a cash dividend of 75 cents a share on depository shares.
Apache has taken one very risky move by getting into the commercial real estate business in Houston. The Houston Business Journal reported that the company had purchased 6.4 acres of land in the Blvd Place mixed-use development in Houston. The land is on the site of the Pavilion Shopping center, which is being demolished. The site is on in the center of one of Houston's prime shopping areas. It is also close to Apache's headquarters, according to the Houston Chronicle. Neither Journal nor the Chronicle reporters were able to deduce the sale price - it should be high.
Apache apparently plans to build a retail project, with a 48,500 square foot Whole Foods market and 150,000 feet of retail space there. This doesn't seem to be a very good move considering the poor state of the economy and commercial real estate. Such involvement in real estate could hurt Apache's profits and earnings per share. Future plans at the site call for a 1,000 unit high-rise apartment house.
Such bold moves could put future cash dividends from Apache in jeopardy by increasing its risks. Apache's stock could start falling if it starts taking losses on projects like this. The company is exposing itself to serious risks outside of its area of core expertise.
SandRidge Energy Sells Subsidiary
SandRidge (SD) has sold its SandRidge Tertiary LLC subsidiary to Trinity CO2 Investments LLC for $130 million in cash. Tertiary controls wells in the Permian Basin of West Texas that produce an estimated 1,100 barrels of oil a day. The additional cash should boost SandRidge's profits and bottom line.
There's no word on what SandRidge plans to do with all that extra cash. It might use it cover dividends - the company recently declared a cash dividend of $3.50 a share on its Convertible Perpetual Preferred Stock, according to a press release.
Strikes, Refinery Problems Limit Midwest Gasoline Production
Gasoline production in the Midwest has fallen slightly because of a strike at one refinery and equipment problems at another. Business Week reported that workers at the Husky Energy (HUSKF.PK) refinery in Lima walked out after contract negotiations with the union broke down. A spokesman for Husky claimed that the strike was not affecting operations at the refinery, which can reportedly process 160,000 barrels of crude oil a day.
Valero Energy (VLO) is operating its refinery at Memphis at below capacity because a piece of equipment called a fluid catalytic cracker is leaking, Business Week noted. The magazine didn't say how this would impact the refineries production.
The strike at Lima could have a negative impact on Husky's stock value if it continues and impacts production. A prolonged strike will definitely drive Husky's stock value down. The strike at Lima could drive up gas prices in the Midwest slightly if it continues through the summer driving season.
The equipment problems at Valero should not affect that company's stock value much if it can fix them quickly. If there are more problems at the Memphis refinery that affect gasoline deliveries, Valero's stock value could fall.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.