charliezap

Oil Price Economics the 60 Minutes Way

This is a brilliant debunking of a silly piece by 60 Minutes. Anyone who buys commodities in the futures market has to eventually sell that contract or take delivery. Yes, Goldman may own a few tanks in Cushing, OK. They may even own a refinery or two. But the US government tracks inventories on a weekly basis and there is no evidence of excessive hoarding. Yes, Morgan Stanley may have a few large tankers slow-steaming out there on the high seas, but the volumes involved in tanker storage are simply not enough to account for $140 per barrel of oil. Besides, now they are playing a different game, trying to take advantage of the contango situation, delivering in the future at higher prices, now that spot prices are below $40 per barrel. This will be to the advantage of the consumer, as it will bring down future prices. Seems to me the market place is working just fine.

So why did oil go over $140. The obvious answer is supply and demand. No one can deny that China and India, growing at over 10% annually, added greatly to world demand. No on can deny that it takes years for the supply side to react to high prices, due to the enormous capital expenditures required to develop oil producing properties.

And why did oil go back to $40. Again, simple. 1) That new supply came to market, 2) high prices caused substitution and economization and reduced demand, and, 3) RECESSION!

In the short term, oil is a highly price inelastic commodity, which makes oil prices potentially highly volatile. Too bad Steve Kroft, and others, never did any Economics 101 before they ventured onto the networks to demonstrate their public ignorance.

Is There Enough Natural Gas?

Comments from the top of my head, which could be disproved by research or facts.

1. I don't think that Big Oil is much interested in looking for oil onshore the lower 48 any more. Their main interest within the US is potential fields offshore or in Alaska. Virtually all of the smaller E & P companies are already focused on gas.

2. There's lots of gas out there. The issue is cost. You have to go deeper, into deeper water, or use new technology fracturing to get it out of the shale formations.

3. Let the market decide, yes, but we do need tax incentives and/or disincentives to steer usage away from energy sources that pollute, contribute to global warming, or lack security of supply. A carbon tax (or cap and trade) would solve a lot of problems. A) It would encourage conservation in the use of transportation fuels, B) it would push more power plants toward natural gas, C) it would reduce carbon dioxide emissions, D) it would push demand toward domestic natural gas and other domestic sources (including wind and solar), and would reduce reliance on imported oil, including from countries such as Venezuela, Nigeria, and Saudi Arabia, E) it would improve the US trade balance, and, F) it would reduce the US federal budget deficit.

4. SemiFinal Comments: I don't think it is feasible to switch over to natural gas in the time frame proposed. It would take enormous amounts of capital for drilling and infra-structure. And there are so-called "environmentalists" who oppose everything that does not conform to their "ideal". Environmental opposition will slow down any solution.

Final Comment: I don't see any point if firing Chu. I think the Obama administration has as good a grasp of the situation as any administration could. In fact, they will push science as part of the solution, in contrast to the prior administration, who were anti-science.

AngloGold Ashanti: Losing Its Luster

This article is just silly. What do book value and price/sales ratio have to do with analyzing gold stocks? What matters most is earnings power relative to the stock price. In this regard, AU is the best buy among the major golds, having the lowest price/earnings ratio, based on Marketwatch consensus numbers.

Consensus is $2.72 for 2009 for a PE of 11.5 times at the current price. Some analysts, such as UBS, have estimated over $3 for 2009.

By comparison, the respective PE's for ABX, NEM and GG are 18, 22 and 44!

As for debt, the interest coverage ratio is a comfortable 6.2 times, not far short of Barrick's 7 times (12-month trailing basis). Yes, AU is more leveraged to the price of gold than other majors, and yes, the gold price is under pressure from potential IMF sales. On the other hand, the great reflation attempt underway now by the US and other major countries guarantees the debasement of their currencies. The gold price will hold up, and go up. Your short position will prove to be unwise, except possibly as a very short term trade.

Is There Enough Natural Gas?

experienced: you referenced Sasol, the South African CTL (coal-to-liquids) producer. Yes, the first step in the process is gasifying the coal. That's the easy part, and there are several companies besides Sasol, including General Electric, Shell and Lurgi that will sell you the technology. The second step, using the Fischer-Tropsch process to produce liquid fuels from the syngas produced in step one, is the one where Sasol's proprietary knowledge comes into play. Sasol currently has 2 or 3 CTL plants in South Africa, with a total capacity of over 150,000 BPD. They are doing feasibility studies for an 80,000 BPD plant in China, and India is also in talks with them.

Trouble is the Sasol process produces a LOT of CO2, before even counting the CO2 produced when gasoline and diesel made by Sasol is used in cars and trucks. I've heard it said that Sasol is the largest single CO2 emitter in the Southern hemisphere. Sasol likely will have to consider CCS (carbon capture and sequestration) in the future, when and if it becomes feasible, and legally necessary.

www.sasol.com/

As to gasification, there are already such plants in the US, most notably the Great Plains plant owned by Dakota Gasification Company. Gas produced by this plant goes into the natural gas pipeline network for distribution and sale, while the CO2 is pipelined to Canada, where it is injected into the ground for the purpose of enhanced oil recovery (EOR).

www.dakotagas.com/Comp...




On Apr 27 02:12 PM experienced wrote:


> As to continued use of coal, there is at least one process (developed
> by SASOL) that converts coal to gas at sufficiently low prices to
> make such an alternative worthwhile. Sasol has several CTG plants
> outside the U.S. Whether these plants are low enough in CO2 emissions
> to please everyone is a question I can't answer, but CTG gets rid
> of most of the pollution problems associated with coal.
>
> One would think that with all this stimulus money being thrown at
> infrastructure projects, a compressed natural gas infrastructure
> could reasonably be added to the list of cost effective projects.

Commercial Real Estate Time Bomb Ticking for REITs

I should also add that the looming problem is a bigger one for the banks than for conservatively-financed, publicly-traded REIT's, especially as some of the commercial mortgages are non-recourse. And many of these non-recourse notes were packages into CMO's, so who knows where they ended up!


On Apr 21 11:40 AM charliezap wrote:

> This is a quite useless and misleading article.
>
> 1. Not one of the five numeric columns in the tabulation is of any
> use in assessing whether to buy sell or hold any of the listed REIT's.
> In real estate, EPS and PE are not useful, as they are based on earnings
> after the deduction of accounting (book accounting, not even tax
> accounting). The non-cash accounting depreciation number has absolutely
> no relation to market appreciation of the building (or market depreciation
> as we have now). FFO (Funds From Operations) and FFO/Price are far
> more meaningful, as FFO shows the cash flow available to cover debt
> payments and to pay dividends (REIT's are normally required to pay
> dividends of at least 90% of taxable income in order to maintain
> a REIT's non-tax-paying status). The tabulation would have been
> helpful it it had columns for FFO/Share, FFO/Price and Debt Coverage
> Ratio.
>
> 2. The commercial mortgage refinancing "problem" lies more with
> privately held real estate, including private equity firms and pension
> funds, than with publicly traded REIT's, such as the stocks listed
> in the table. It was mostly private real estate that paid excessively
> high prices for buildings during the past few years while taking
> on short-term (2-4 year maturities) debt with variable rate interest.
> A few REIT's, such as General Growth (seekingalpha.com/symbo...),
> made major new acquisitions this way, but they are the exception
> rather than the rule. The article would have been useful if it had
> examined the debt structure and maturity schedules of the REIT's
> in the table.
>
> 3. After the S&L debacle, of the early 1990's, many privately
> held real estate operators went public as REIT's in order to raise
> capital and pay down debt. Most of these REIT's adopted conservative
> debt policies, keeping debt to less than 50% of total market capitalization
> (debt + equity). A few may have strayed from these guidelines, but,
> again, they are the exception rather than the rule.
>
> 4. Most REIT's are now priced well below NAV (Net Asset Vaue, based
> on the reduced market values of the properties. Before the October-November
> 2008 bust, most were priced in excess of inflated NAV's. Simon Properties
> (SPG, largest mall operator), for example, declined from a high price
> over $120 at the beginning of 2008, to near $22 recently. It has
> subsequently rallied to near $43, after refinancing some of its debt
> by issuing new stock and bonds. Citigroup has a Buy on SPG and estimates
> FFO for 2009 at $6.02 and put 12/31/08 NAV at $73

Commercial Real Estate Time Bomb Ticking for REITs

This is a quite useless and misleading article.

1. Not one of the five numeric columns in the tabulation is of any use in assessing whether to buy sell or hold any of the listed REIT's. In real estate, EPS and PE are not useful, as they are based on earnings after the deduction of accounting (book accounting, not even tax accounting). The non-cash accounting depreciation number has absolutely no relation to market appreciation of the building (or market depreciation as we have now). FFO (Funds From Operations) and FFO/Price are far more meaningful, as FFO shows the cash flow available to cover debt payments and to pay dividends (REIT's are normally required to pay dividends of at least 90% of taxable income in order to maintain a REIT's non-tax-paying status). The tabulation would have been helpful it it had columns for FFO/Share, FFO/Price and Debt Coverage Ratio.

2. The commercial mortgage refinancing "problem" lies more with privately held real estate, including private equity firms and pension funds, than with publicly traded REIT's, such as the stocks listed in the table. It was mostly private real estate that paid excessively high prices for buildings during the past few years while taking on short-term (2-4 year maturities) debt with variable rate interest. A few REIT's, such as General Growth (GGP), made major new acquisitions this way, but they are the exception rather than the rule. The article would have been useful if it had examined the debt structure and maturity schedules of the REIT's in the table.

3. After the S&L debacle, of the early 1990's, many privately held real estate operators went public as REIT's in order to raise capital and pay down debt. Most of these REIT's adopted conservative debt policies, keeping debt to less than 50% of total market capitalization (debt + equity). A few may have strayed from these guidelines, but, again, they are the exception rather than the rule.

4. Most REIT's are now priced well below NAV (Net Asset Vaue, based on the reduced market values of the properties. Before the October-November 2008 bust, most were priced in excess of inflated NAV's. Simon Properties (SPG, largest mall operator), for example, declined from a high price over $120 at the beginning of 2008, to near $22 recently. It has subsequently rallied to near $43, after refinancing some of its debt by issuing new stock and bonds. Citigroup has a Buy on SPG and estimates FFO for 2009 at $6.02 and put 12/31/08 NAV at $73

Why Eric Hovde Is Wrong About General Growth Properties

It looks like GGP has attracted a lot of analysts who know little or nothing about real estate, including the author of this article. No true real estate or REIT analyst pays any attention to book value (the depreciated value of the assets, less liabilities) for the simple reason that it has virtually no relation to market, or real value, especially if the properties have been on the balance sheet for any length of time. Someone mentioned, for instance, SPG, which has a book value of $15 and a stock price over 5 times that, $77. The Net Asset Value (NAV), according to a 12/17 report by Smith Barney is $67, so the stock is selling at about a 15% premium to NAV. (The NAV is based on a cap rate of 7.35.)

Why is book value so low relative to NAV and stock price. First, book value is based on the depreciated value of the assets. Second, there is high level of debt, and the loans are not based on the balance sheet (book value), but on how much debt can be serviced by the cash flow. A seasoned mall with a good operator in a strong market can often borrow much in excess of the original construction cost.

The author is this article criticizes GGP for excessive "capex". He apparently does not realize there is a difference between "maintenance capex" and "growth capex". The former refers to the amounts spent to keep the mall in first class shape and competitive with other shopping venues. If you drop the maintenance capex, the customers stop coming to your mall, and the value suffers a decline. When valuing REIT stocks, REIT analysts apply a multiplier to AFFO per share (Adjusted Funds from Operations), which is FFO less maintenance capex.

Finally, the Smith Barney report projects a 12.5% weighted average decline in AFFO among 6 large mall operators (not including GGP) for 2009 (vs 2008), and a further decline of 8% in 2010. The declines are presumably from higher vacancies and/or lower rents due to the consumer spending recession.

South Africa Still Shines Among Emerging Markets

On Apr 29 09:24 PM cameroni wrote:

> You are right Mr Killinger,
>
> The resource rich countries are holding up better and they always
> will. And we (North American's) are blessed with a tremendous store
> of resource wealth that is not being exploited all that aggressively.

I think it is arguable whether "The resource rich countries are holding up better and they always will." I think it is also arguable whether North America has the resources, or whether we are willing to exploit them.

When my daughter was in college, she showed me a paper by an Oxford based economist who studied emerging market economies. Specifically, this paper drew a distinction between resource rich countries and those where the people were better educated. It turned out that most of the resource rich countries were in Africa, while the better educated were in Southeast Asia. It also turned out that the better educated countries did much better than the resource rich by such measures as GDP growth and GDP per capita.

What explains this? Well, for one thing, the resource rich became afflicted by something that economist call the "Dutch disease." Say a country suddenly discovers oil. A lot of the resources in the country are turned to developing the oil resources, and other sectors, such as agriculture, are neglected. A few people at the top and a few suppliers benefit from the oil, but most of the people do not. Prices go up because of the new demand from the oil fields and from the beneficiaries. Unless the government is very enlightened (most are not), government spending does not benefit people on the lower end, e.g., through better education. The net result is that the majority of people, the ones at the lower end of the scale, are actually worse off in real terms, because of inflation.

On the other hand, the better educated countries, lacking resources, were able to organize manufacturing industries that were competitive because of lower prevailing wage rates than developing countries. Think of Nigeria, versus say, Taiwan.

The moral of the story -- study hard and work hard and you will be better off than if oil was discovered in your midst. For the US, it means the payoff is in better education for all of our people, to compete in high tech, health care, and other scientific enterprises that increase productivity.

South Africa Still Shines Among Emerging Markets

On Apr 24 02:53 PM Gedankonomist wrote:

> If South Africa were not controlled by the SA Communist Party aka.
> ANC, it would not be an "emerging economy," it would still be a "first
> world economy."
>
> It was a "first world" country until 20 years ago the "world community"
> led by Reagan and the US put sanctions on the country. Yes, apartheid
> was bad, but (a) that is their business and (b) many Africans migrating
> from other African countries into SA did not seem to mind it as much
> as staying at home and starving because of some US-foreign aid propped-up
> dictator.
>
> If Americans could only realize how much misery and desperation their
> tax money creates around the world.

Gedankonomist: Before you comment you should get your facts straight.

1. The SA Communist party supports the ANC, but does not "control" it. In fact, the SACP's major complaint is that they have been ignored by policy makers at the head of the ANC. Back in 1994, Mandela did threaten to nationalize "the mines, the big companies, and the banks" but after the IMF and other Washington groups pointed out that such actions would chase away the new capital the country desperately needed for growth, the ANC quickly reversed course and adopted free market economic policies. As a result, GDP growth was humming along at near 5% until the recent US induced recession, whereas it was only around 1 to 2% in the last years of the strictures of apartheid.

2. Under apartheid, South Africa was a "first world economy" for just a tenth of its people.

3. Apartheid was not just bad, it was EVIL.

4. There is more migration from other African countries now than there ever was under apartheid. And most of these migrants come from neighboring Zimbabwe. Are you saying that the US has been secretly propping up the Mugabe regime? Numbers of migrants have come from Nigeria and Somalia. Is oil-rich Nigeria propped up with US government aid? And Somalia? Did you ever see the movie "Black Hawk Down"? There is no love lost between the US and Somalia. In what other African countries is the US "propping up dictators"?

5. As for foreign aid money, the US contributes less to Africa (as a percentage of GDP) than most European countries.

PS: Your pictures are from over 15 years ago, and have no relevance to today's South Africa.

AngloGold Ashanti: Losing Its Luster

In concept Fly Boy is right. One should consider reserves and prospective reserves, as well as near term earnings. But earnings, or cash flow, are the mother's milk, for dividends in the dividend discount model, or for future expansion and extension of reserves, in the discounted cash flow model. My main point is that ratios like price/book and price/sales are meaningless for a gold mining operation, and anyone trading on the basis of such ideas will lose his shirt.

The article also marked AU down for having a relatively high cost per ounce. From an investor point of view, this can be both a disadvantage and an advantage. If you are a gold price bull, it is an advantage, because of the operating leverage -- you get more bang for the buck if the gold price rises (greater percentage increase in profit margin).

14 Stocks and 2 Strategies for High Yield Dividends

Frankly, high-yield high momentum seems like a pretty dumb strategy to me. It comes up with a lot of REIT's and utilities. These are really no-growth to slow-growth stocks. They tend to trade in ranges, with occasional up moves. The range for REIT's is defined by the underlying value of the real estate. Buy a REIT on the basis of "momentum" and you will be paying a premium over the real estate value. If you think the premium is going higher, you must subscribe to the greater fool theory.

If you buy REIT's and utilities when they have positive "momentum" what you get is a stock that is at or near the top of its current range. Better to screen for REIT's and utilities that are at or near the bottom of their range if you want to protect your principal.

Rentech: Homegrown Synthetic Fuel On the Near Horizon

Jack,

Yes, and Mobil contributed (to the ExxonMobil merger) the methanol-to-gasoline process that some other would-be synfuel producers want to license.

Rentech: Homegrown Synthetic Fuel On the Near Horizon

Rentech at this point is a speculative plaything. (Yes, I have a few shares in the mad money par,t of my portfolio.) They have mainly been a research outfit thus far and they have never made a profit. The fertilizer business is an accidental sideline. But I am banking on the upside that may be generated from a lot of hype and gullible investors (the greater fool theory). If it works, the percentage gain may be greater than on my Sasol (SSL) shares. If it doesn't, I lose a few $$$.

Other bigger companies, such as ExxonMobil, Shell, Sasol, and Conoco-Phillips have hundreds more patents in the F-T space. There is nothing new in Rentech's announcement of synthetic fuel in a pilot scale plant in the USA. Its been done before. Trouble is, given high natural gas prices, the process is uneconomical using this feedstock. SYNM is another smaller company in the synfuels space with high hopes.

The main problem in getting a commercial synfuels business going in the USA is opposition from environmentalists. Obtaining plant approvals will depend on the extent that the CO2 produced in the process can be "sequestrated".

Sasol has been producing synthetic fuels in South Africa from coal and natural gas for over 50 years. They have developed the process extensively. They also have a commercial scale plant in Qatar that produces ultra pure diesel from natural gas. Shell has bee operating a gas to liquid fuels plant in Indonesia for several years.

Rotsa Ruck!