Seeking Alpha

Andy Obermueller's  Instablog

Andy Obermueller
Send Message
Andy Obermueller is an expert on leveraging government action for investment gains. He spent ten years as a financial journalist, working for some of the nation's largest newspapers. At the business desk of The Star-Ledger, his market acumen helped guide the financial news read by more than a... More
My company:
View Andy Obermueller's Instablogs on:
  • How Obama Instantly Created $2.2 Billion in Investor Wealth
    With a stroke of his pen -- and after a hellacious fight with the Congress -- President Obama brought massive change to the health-care industry.

    He's doing the same with another industry today. The industry is different and he doesn't need Congressional approval. And the plan has already created $2.2 billion in wealth for investors.

    So what's going on?

    Would you be surprised if I told you it was politics?

    Presidential power, some would argue, is cumulative. It builds. Winning presidents tend to keep on winning; losing presidents tend to keep on losing. After more than a year in office, the verdict on whether Mr. Obama will turn out to be a perpetual winner like FDR or a chronic loser like Jimmy Carter has yet to be determined.

    Making such predictions is dinner-table sport inside the Beltway. Everyone has an opinion these days, but even the cagiest political operators should be loathe to make too bold a forecast. Today's supercharged political climate is full of surprises.

    The fact is no one knows how the Obama administration ultimately will be judged.

    But I can tell you what's coming next.
    As you know, health care was a cornerstone of the president's agenda. With the bill signed, Mr. Obama is wasting no time. He took a quick victory lap to Afghanistan to change the focus, came back and met with the French president for the same reason, and now he's ready for a new storyline.

    He's got it. If you saw the news yesterday you know what it is.

    Mr. Obama is clearly moving on to another key element of vision: The environment.

    We've all heard stories about how smart Mr. Obama is. And though the president is undoubtedly very intelligent -- and calmly disciplined -- both of those labels undersell him. In addition to his brain power and temperament, Mr. Obama is also very shrewd.

    You see, though I would suspect he would agree that presidential power is cumulative, I think he also knows he can't just ram through another bill without any support from the other side of the aisle. That's not a purely political calculation, it's bowing to the unavoidable reality that Senate rules don't allow for another reconciliation process this year.

    But with the midterm elections coming up, it's unlikely that the White House would railroad through more legislation even if the option were available. Mr. Obama and his advisers know that if you engage your enemy in the same way too long, he will adapt to your tactics. So the president is switching gears. That's why he's been talking about bipartisanship again, going so far as to quote the old Ronald Reagan line about "disagreeing agreeably." It's also why he's been supporting the construction of new nuclear power plants, a key Republican energy priority. The fact is Mr. Obama is priming the political pump.

    And what's going to come through the pump next?


    The President is flip-flopping on a longstanding policy and opening up nearly 300 million acres -- or about 480,000 square miles -- for offshore oil exploration, some of it for the first time.

    The action added at least $1.5 billion in market value to the offshore drilling industry's major players. President George W. Bush might have been an oilman -- and, to be fair, he did try to open up some areas for drilling -- but it's Barack Obama who today snapped his fingers and added nearly $1 billion in market cap to Transocean (NYSE: RIG), the leading offshore drilling company.

    The president didn't stop with offshore drilling. To placate supporters who are bound to be aghast at the drilling, he threw environmentalists a bone and announced he will also increase the military's use of biofuels and add hybrid vehicles to the government's fleet. He made his announcement in front of a fighter jet that will run on biofuel -- not because that was the most important part of the announcement (it wasn't) but because he wanted a better visual on the news than offshore oil platforms, which would incense Greens.

    Investors who own offshore drillers should hang on to them. And all growth-oriented investors should consider them: Offshore drillers are trading at very low valuations -- Noble Corp. (NYSE: NE) sells for 6.5 times earnings; Transocean for 7.3. Diamond Offshore (NYSE: DO) for 9.0. Part of that is uncertainty: No one knew what the Administration was going to do, especially after Mr. Obama said in his State of the Union address that some hard choices about drilling were going to have to be made. Now that those decisions have been made, all three of those industry-leading companies are steals. That's not just because of their long-term prospects but also because of their recent performance.

    Transocean, for example, which operates 138 mobile offshore drilling rigs, grew its earnings from $0.22 a share in 2003 to an astonishing $12.48 last year, a gain of +5,572.7%. That's reflected in its historical earnings multiple, which is more than 40 times earnings for the past five years. That kind of earnings growth is possible again. The shares are up nearly +47% in the past year. Diamond Offshore has had similarly strong earnings growth, with an average price-to-earnings ratio (P/E) of more than 30 during the past five years.

    Noble has had the most measured results, posting good steady growth, and should be able to regain its typical valuation of about 17 times earnings. Even before the president's landmark announcement today, Noble was worth $108 a share based on its current earnings. That's +157% upside even before new business juices earnings in the years to come.

    Investors should and must go into the oil patch with their eyes wide open. First, oil investors have to be comfortable with volatility -- there isn't a "safe" place to stand anywhere in the industry, which is subject to every kind of risk actuaries calculate, and then some. That's not to say there aren't great petroleum investments -- in fact, no sector has ever achieved a better return on equity than the oil business -- but understanding the risk is the first step toward understanding whether any investment is suitable for your portfolio.

    Second, even though the president reversed the moratorium instantaneously, the returns are going to take time. The intricate offshore survey work required to find suitable exploration sites will take months and years.

    For risk-tolerant investors looking to take advantage of Mr. Obama's bold new energy direction, the offshore drilling space is a great place to seek growth. The president has added billions to this sector in one day. It's likely just the beginning.

    Disclosure: No positions
    Apr 01 11:56 AM | Link | Comment!
  • Two Ethanol Producers Still on Track to Profit from Revised EPA Timetable
    The Environmental Protection Agency (EPA) recently cut the nation's biofuel output quota for 2010.

    It wasn't a token cut, either. It was a -94% reduction in cellulosic ethanol, to 6.5 million gallons, from 100 million gallons.

    (Cellulosic ethanol is a biofuel that can be made from any plant material. Traditional ethanol is made from corn.)

    The administration's cut is reason for investors to absolutely rejoice.

    Let me explain…

    Those of you who read my Government-Driven Investing newsletter know I shy away from partisan politics. This is not because I don't have passionate beliefs -- I assuredly do -- it's because partisan politics doesn't make anyone any money. And while I love wading into the political scrum, I do it purely as an avocation. My main interest and top priority is helping my readers make wise investment decisions.

    Sometimes, however, politics is unavoidable. This is one of those times.

    I've long held the opinion that President Obama would not sign a significant health-care bill and that environmental legislation was more likely. Now the president appears ready to split his "green" initiatives into two parts. One is the cap-and-trade system to limit carbon dioxide emissions, the other is the president's "green" jobs push. The cap-and-trade bill has attracted more ire from the same groups that opposed the president's health-care plan, and it is likely to suffer the same fate: a quiet death in a Capitol filing cabinet.

    With that background in mind, let's cut to brass tacks. This administration needs a win. Some had thought that would be financial reform, which Mr. Obama had also promised. But his opposition, emboldened by the election of Scott Brown in Massachusetts, which stripped the Democrats of their super-majority, has changed that and the Republicans appear ready to dig in their heels.

    With health care, cap and trade and now financial regulation off the table, the only other big issue left is green energy.

    Green energy is mostly non-offensive to the president's opposition. New, renewable energy technologies that reduce dependence on foreign oil appeal to both sides of the aisle. So does job creation. And policies that support green energy are mostly deficit neutral, as most of the investment comes from the private sector. Even the stimulus money that the Energy Department has given away has not been a giveaway, per se. Energy has required recipients to pony up matching funds in many cases to ensure that the technology being developed really was commercially viable.
    So what we're talking about here is an issue that came to prominence as part of the president's agenda, which has the capacity to win him industry support, create jobs and reduce dependence on foreign oil.

    The question, then, is this: How to ensure a win?

    Sitting around a burnished hardwood table in the Old Executive Office Building, what would be my advice to the President?

    Simple. Cut the output target.

    After all, no one's going to notice. Not really. It's inside baseball. Letterman isn't going to joke about it. "The View" is going to gab about something else at their gabfest. Morley Safer and "60 Minutes" have far bigger fish to fry.

    And later, when said output target has been exceeded, you've got a win to crow about.

    Here's the visual: The President in short sleeves and a hard hat, goes down to a construction site in Florida to break ground on a cellulosic ethanol plant. It could be one, say, that is supported by a federal loan guarantee. He can stand in the dirt with the dignitaries and say "this plant will help the United States meet and indeed surpass its ambitious goals for advanced biofuel output and usher in a new era of clean energy while creating thousands of green-collar jobs -- all at no cost to the taxpayer."

    This isn't a stretch. I didn't crib this from an episode of "The West Wing." That cellulosic ethanol plant in Florida? It's real. It's a joint venture between giant BP Plc (NYSE: BP) and tiny Verenium Corp. (Nasdaq: VRNM). It's just waiting to be approved. Other projects around the country are getting geared up. Projects involving all sorts of cutting-edge cellulosic technologies, from the latest and greatest enzymes from companies like Dyadic International, Inc. (OTC: DYAI.PK) to interesting new concepts like private ethanol-producer POET's corn-cob idea.

    There are thousands of success stories in the cellulosic space. They're about a year or so behind the federal timetable in the 2007 bill. So instead of missing the timetable, the administration simply amended one year of it.

    Verenium took a hit on the day the EPA lowered its quotas. It should have shot up: The timetable didn't change because the feds don't want to support cellulosic ethanol, the timetable was changed because industry can't quite deliver the cellulosic ethanol, and amending the quota saves face for both parties. And my guess is that Verenium will shoot up, and dramatically, as soon as the company's flagship cellulosic ethanol plant is approved by Mr. Obama's Energy Department.

    Risk-tolerant energy investors can best cover cellulosic with Verenium and Dyadic. If you're unfamiliar with how critical Dyadic is to the industry, be sure to check out this recent article.

    Disclosure: No positions
    Feb 11 3:31 PM | Link | Comment!
  • Uganda Clears the Way for Billions in Profit
    Uganda, the East African nation sandwiched between the Congo and Kenya, is blessed with significant mineral resources. Its rich, fertile land is not prone to drought, and although agriculture has long encompassed a majority of the country's economy -- coffee is its most significant export crop -- the economic base is maturing: Services now account for 52% of the country's GDP.

    Overall, the country is making progress -- inflation, the bane of any unstable country, is in check while 2010 growth is forecast at an impressive +7% -- but three-fourths of the population subsists on less than $2 a day, the international poverty line.

    Uganda's economy, however, is about to change -- dramatically.

    The country, believe it or not, has never completed a national minerals survey -- not, one would think, an especially daunting task, as the entire country is smaller than the state of Oregon. While the state of its cache of copper and cobalt and gold can be estimated, the $64,000 question has long been petroleum.

    Is there oil? How much?

    That question was answered last year, when Heritage Oil PLC (London: HOIL) announced a large find. One tally pegged the Giraffe field -- anyone want to guess how they came up with that name? -- at some 400 million barrels. Heritage's CFO, however, suggested that the wider "Giraffe-Buffalo" field, which encompasses some 3,420 square miles, could contain several billion gallons of crude.

    The find is the largest in sub-Saharan Africa in at least the past 20 years. Previously, the largest onshore fields discovered in sub-Saharan Africa were at Rabi-Kounga in Gabon, where 900 million barrels were found in 1985, and at Kome in Chad, where 485 million barrels were found in 1977.

    Heritage's partner in the project was Tullow Oil (OTC: TUWOY). Late last week, the Ugandan government approved Tullow's purchase of Heritage's stake in the project. The government initially didn't want to have one company in total control of its oil. So Tullow chief Aidan Heavey and Ugandan President Yoweri Museveni sat down and Tullow suggested it could bring on a partner.

    So it came as no real surprise, after the Ugandan government blessed the sale of Heritage's stake to Tullow, when Chinese oil giant Cnooc Ltd (Hong Kong: 883) -- a unit of China National Offshore Oil that's listed on the Hong Kong exchange -- said it would buy a stake in the Tullow project for $2.5 billion. That not only satisfies Uganda's concerns but also brings Tullow capital it needs to pursue the massive project. Now, nothing in the oil business is over until it's over, but Heritage says the deal is "imminent."

    Big oil companies have the cash and the engineering expertise to find oil and bring it to the surface, but typically only governments can engage in deals of this size. It's a win-win, though. Tullow and Cnooc will reap a king's fortune -- a billion barrels of oil is worth $75 billion at today's prices -- and the find has the ability to remake the Ugandan economy and improve the standard of living in one of the world's poorest countries.

    This long-term growth is clearly not priced into Tullow, whose shares are primarily traded on the London exchange but are accessible to U.S. investors through ADRs, which represent half a share. These shares are at a 52-week low and represent a tremendous buying opportunity. Tullow and its Chinese partners have the rights to one of the largest fields in Africa, if not the largest, and Tullow's stock can be had at a steal.

    Note: Tullow's shares, at more than 70 times earnings, might seem expensive. But one has to remember how that metric is calculated: by dividing the stock price by previous 12 months' earnings. Tullow's trailing earnings are light -- $0.04, a fraction of the 25 to 30 pence a share the firm has proven it can earn. The firm achieved those earnings without the Ugandan wells it will be drilling in the next few years as this major new field continues to be developed.

    Oil isn't a game for the risk-averse or faint of heart. But for growth-oriented investors with a wildcat streak who can stay the course through the oil patch's persistent ups and downs, few companies in the industry have the potential Tullow has.

    Investors who buy this stock not for what the company has done but for what it will do -- in Uganda and elsewhere in Africa -- are likely to see a very rich reward, one that would have been impossible without the action of the Ugandan government.

    Disclosure: No positions
    Feb 09 11:12 AM | Link | Comment!
Full index of posts »
Latest Followers
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.