Saturday, January 23, 2016

ExxonMobil: Investors Need to Know and Consider These Things

Being one of the largest companies in the world and operating in a politically incorrect industry has made Exxon Mobil (NYSE:XOM) a target of many special interest groups and ambitious politicians, hoping to raise money for their cause or secure the next term in office.

Add to that the challenge of an unprecedented low-price oil and gas environment, and it definitely testing the foundations of the company as it takes a number of hits from different sources, while at the same time attempting to keep the company moving forward.

The upstream business of the company has obvious headwinds from the low prices, but recent developments in the refining side of the business, which has offset some of the upstream weakness, is starting to show a few cracks of its own.

It was recently reaffirmed concerning its credit rating, but that could change in a couple of years because of one credit agency saying it could downgrade the company if things continue on as they are.

more on outlook for ExxonMobil 

Effect of Iran's Oil Exports on Price of Oil

Now that the price of oil has plummeted to under $31 per barrel as I write, it's worth taking a look at whether or not it's getting close to consider seriously investing in the commodity, or continue to wait on the sidelines; including whether to initiate a position or add to a position.

Most of the decision should be based on whether or not investors believe it's at least close to a bottom, or at minimum, a price range that reflects being near to a low.

Since I'm not a believer in timing the market, looking at a price range is the best way to analyze where the price of oil is at. The challenge is we're in uncharted territory. Not because we haven't seen significant price fluctuations in oil before, but because we have never seen it after the emergence of shale oil as a significant supplier.

For that reason we don't know how low the price of oil will go, but more importantly, how long it'll remain in the range it has been trading in recently. There are no signs anyone is willing to cut back on production levels outside of U.S. shale producers.

I'm looking for a sustainable price over $40 per barrel to be the trigger for some shale oil producers. Under these conditions and minus an unexpected geopolitical event, there is no catalyst I see that will cause oil to rebound to that level in 2016.

more on Iran and Oil Exports

Would Saudi Aramco IPO Make Sense?

A number of variables would determine its attraction to investors, including the stock exchange or exchanges it would be listed on. That this confirms about the oil market and the price of oil.

In a recent interview with 'The Economist,' Saudi Arabian deputy crown prince Muhammad bin Salman said one of the things he's taking into consideration as a way to relieve the financial burden on the government from an expected prolonged period of low oil prices, is to go the IPO route with state-owned oil giant Saudi Aramco.

Not only is it the most valuable oil or energy company in the world, it's probably the valuable company in the world too. We'll look at the implications of this to investors if it does go this route. Meanwhile, it's worth mentioning it confirms my thesis that Saudi Arabia knows the price of oil will remain subdued for a prolonged period. With the emergence of shale oil competitors, it will inevitably come to the place it will lose global market share.

One thing to keep in mind is the demand for oil, over time, should increase, which means the size of the market will grow with it. That will shrink the market share of Saudi Aramco on that basis, assuming it doesn't have a lot more supply it can release.

more on whether or not Saudi Aramco IPO would make sense

Wednesday, December 16, 2015

Can OPEC Break Shale Oil?

Summary

There is nothing Saudi Arabia or OPEC can do about shale oil over the long term.

At best they can only delay the inevitable.

Millions of barrels of shale oil will be introduced into the market over the next decade.

Companies with shale exposure, over time, will take market share away from OPEC.



From some of the headlines I've read recently, you would think the U.S. shale industry has been defeated by Saudi Arabia and OPEC, and everything in the oil sector going to return to where things were before shale producers entered the market.

Not only is this a fallacy, it is the exact opposite, which is why the strategy of oversupplying the market will remain in place for now in order to keep the price of oil low, which in turn makes it more difficult to invest in new exploration and development.

The idea of market share being the battleground being fought over is a misguided one because, that would suggest shale oil can be defeated around the world. It's not going to happen. It won't even happen in the U.S., let alone the world.

more on OPEC's war on shale oil

OPEC's War on OPEC

Summary

OPEC's greatest competitor is now OPEC. 

The real reason OPEC oil production levels will remain high. 

What the market is transitioning into. 

Is a real free market oil industry emerging? 


There are a lot of variables behind the reason the price of oil has plunged, as producers ramp up production in an attempt to maintain market share.

When Saudi Arabia and OPEC decided to boost production in response to the serious threat of U.S. shale oil, that was the primary impetus behind pushing prices down, in order to put extreme pressure on the quickly-growing shale competitors before they were too big to be dealt with.

As time as passed though, and U.S. producers have been forced to lower production levels and reduce exploration and development spending, a scenario has emerged that has gravitated to OPEC itself.

With Iran about to be released from sanctions, it has aggressively and publicly stated it will take steps to gain back market share it has lost, and will do what's best for the country, which was a reference to ignoring anything Saudi Arabia had to say about it.

more on OPEC battling OPEC

Oil Price Outlook for 2016 Looks Bad

* Outlook for the price of oil in 2016 looks weak.

* Why it'll take a lot for competitors to come to a production cut agreement.

* U.S. shale will remain resilient, but offshore and Canadian sands will struggle.

* There are no visible catalysts to provide support to the price of oil.


It's humorous to see headlines in the financial media bleating out the idea that the price of oil is crashing because of the decision by OPEC to do nothing to reduce production levels.

I've been on the record for a long time saying it's not going to happen, and there were a number of others, understanding what's really happening in the oil industry, coming to the same conclusion.

Maybe some were hoping it would happen, but the disruption caused from the emergence of the U.S. shale industry has forever changed the oil market landscape, and as Saudi Arabia is finding out, it doesn't matter how much supply is brought to market, it is here to stay.


more on 2016 oil price outlook

Wednesday, November 18, 2015

Russian Commodity, Economic Data and News

Demographics

Russians having 13 children per 1,000 people

Population shrinking since Soviet breakup - from 148 million then to 144 million today (146 million including Crimea)

Estimated for population to shrink by 14 percent over next 35 years - economic growth at risk

On pace to have largest population implosion in world history.

World Bank say Russian economic growth will decline by 1.3 percent annually over next 25 years because of declining workers.

World Bank: the number of working-age Russians will fall by more than seven million in the 2020s


Oil and Natural Gas

About 50 percent of Russian exports in terms of value are oil and natural gas.

Russia has third largest oil reserves in the world.

It is first in world for natural gas reserves.

Gazprom Pao is the leading natural gas supplier, with a mix of 85 percent natural gas and 10 percent oil

Next is Gazprom Neft, with a mix of 22 percent natural gas and 79 percent oil. It is a subsidiary of Gazprom Pao.

Lukoil has a mix of 13 percent natural gas and 85 percent oil.

Russia sends 70 percent of its oil to Europe
 

Russian opening door to foreign investment in natural resource companies.

 Oil and natural gas sales generated 68% of Russia’s total export revenues in 2013

 Russian natural gas exports to Europe to increase


Other Commodities

Uralkali is largest potash producer in the world


Russia domestically controls 30 percent of global platinum and palladium output.

Looking to boost global market share in platinum and palladium in Zimbabwe deal.

Ukraine

Russia imposing food embargo against Ukraine starting in 2016.

Ukraine stops importing Russian electricity.


Saudi Arabia

Saudi Arabia emerging competitor with Russia for European market.


China

Russia gaining ground in supplying China with oil.

Russia looking to China to explore Arctic together.

Uralkali’s shipments of potash to China totaled about 2.3 million tons in 2014


General Data

Oil and natural gas sales generated 68% of Russia’s total export revenues in 2013

Saudi Arabia's Airports to be Privatized to Lower Budget Pressures

* Privatization of Saudi Arabia airports will reduce budget requirements over the next several years

* Over the next decade it two it could make a difference because of economic diversification, but not in the near term

* Vulnerability of Saudi Arabia to low price of oil


The cost of engaging in a long-term battle for oil market share is starting to weigh more on Saudi Arabia, which has drawn down reserves and borrowed in order to maintain most of its budget requirements because of falling revenue. Consequently, it has also had its credit rating lowered
by Standard and Poor's.

That will likely continue to be detrimental to the country as it has plans to increase it debt by issuing of billions more in bonds, which will probably result in more credit rating cuts, resulting in higher costs of doing business.

Saudi Arabia, at best, has about 5 years of reserves left, standing today at about $647 billion. Its budget deficit is now at about $100 billion a year.

Among the steps taken to slow down the process is to drop proposed projects, eliminate non-essential one's, and find ways to lower dependence on government largesse, which is about 90 percent dependent on the energy sector to drive revenue. The low price of oil is of course the negative catalyst driving the challenge.

Recently it was announced Saudi Arabia is going to privatize its airports in order to allow it to be freed from having to prop them up.

Airport strategy

Most Saudi cities of any decent size of a domestic airport in them, but the bulk of the value of privatization will be at its three international airports located in Riyadh, Dammam and Jeddah. The goal is to have all airports in the country privatized by 2020.

The project is scheduled to be launched in the first quarter of 2016, starting with the key international airport located at Riyadh. Once that is completed, all remaining airports will go private.

All the privatized airports and associated services will be managed by the Saudi Civil Aviation Company Holding, according to Business Times.

Some believe this is aimed at economic diversification. I don't. I see it as budgetary diversification, meaning it's cutting budgetary costs to reduce pressure on its reserves over time.

Value of the action

Saudi Arabia without a doubt knows the days of oil above $100 per barrel are over. It may even be making decisions on it struggling to reach $80 per barrel over the next five years. There is no way it can continue to afford the types of perks and subsidies its people have gotten used to, so it must take steps to reduce costs.

This is important to understand because it could be viewed as a growth mechanism if it is believe it's a move to diversify the economy, rather than to lower the budget.

That doesn't mean there won't be added value once the privatization takes place. In doing research over the years concerning the difference in performance of state-owned companies versus privately-owned companies, the private companies have always outperformed the state-owned companies. A good example of that is the Mexican oil industry.

What this should do is reduce the budgetary requirements over the next several years, as the airports start to compete on their own. This very well could be a benefit for the economy, as the increased efficiencies and customer satisfaction could boost revenue and earnings, and result in more hiring.

In my opinion that's not the reason for the move though. It's driven by the numerous risks associated with declining oil revenue. 

Saudi vulnerability to oil and oil prices

With about 90 percent of revenue coming from oil, the risk to Saudi Arabia is obvious. The current price war shows how quickly even this energy giant, which has the largest oil reserves in the world, can be taken down.

It's not taken down yet, but we now know it only has at most about a five-year time period to solve its problems under a low-cost oil environment.

That five-year period is subject to understanding it must take action long before that. Five years is how long it has before running out of reserves. It can't wait that long to deal with it, and it isn't.

Saudi Arabia basically makes the decisions on behalf of OPEC, and controls the economic fate of the Middle East members. There is risk there because it refused to give up market share, which has been putting enormous pressure on about half of the OPEC members, several of which are located in the region.

Even though Saudi Arabia has some time to respond to the issues, the other countries in the Middle East don't. If the result is unrest, the Middle East could go up in flames; far worse than we're seeing now with the ongoing wars there.

This has historically turned in to a contagion spreading across the region, which could easily appear in Saudi Arabia. On top of this Saudi Arabia is underwriting some of the wars against ISIS in different countries.

There are more risks, but you get point, which is the low price of oil, which will remain subdued, will only magnify these challenges until a decision is made or agreed upon to slow down production in order to support the price of oil.

Conclusion

I don't believe investors should consider this an attempt at economic diversification. After all, a publicly run airport still sends a passenger out on a plane in the same way a privately run airport would.

There will be some savings and possible an increase in revenue and earnings from the private airports, but that will be only a small part of the revenue the country takes in, and will have little effect on the reserves.

This is a cost-cutting move to remove some of the pressures on the budget of Saudi Arabia, to work in conjunction with the stoppage of projects it had in its pipeline, and the removal of those services that aren't considered of major importance to its people.

A lot further down the road this could be very important and productive, but over the next several years the value will primarily in reducing costs so its revenue can target those services considered essential to maintaining order in the country.

Wednesday, September 2, 2015

Gazprom's Earnings Continue to Soar

 If weak gas and oil prices were supposed to devastate the industry, Gazprom (OGZPY) is one of the last companies to hear about it, as it has been producing great earnings. And with a P/E ratio of about 5, it is a great value play.

There have been two major catalysts behind Gazprom's great year. The most important has been the shrinking value of the ruble, and second, was the decision by Russia to lower export taxes earlier in 2015. That combination has driven nice results for the natural gas and oil giant.

In its latest quarter it generated $4.75 billion in net profit, a gain of 29 percent year-over-year. It also enjoyed an annual growth rate of 50 percent in the first half.

Investors need to understand that even in the midst of a low-price or depressed commodity market, there is more than one way for a company to make money. Those able to identify them, as in the case of Gazprom, will get in before prices are bid up.

The reason why Gazprom has been doing so well is its costs mostly are domestic, which means they're traded in rubles, while its sale are primarily in the U.S. dollar and euro. The difference in value between them is what is driving Gazprom's success.

Add to that its continual strong performance in Europe, which represents approximately 56 percent of its export business, and the deals with China which will be a serious revenue and earnings source for many years, and you can see why Gazprom should continue to surprise to the upside.

As for the ruble, it's under pressure from low gas prices, but when it moves up again, it will take the ruble with it. That means, unless the ruble really soars in response to a rise in gas prices, margin and earnings should continue to do very well.

In the meantime, it's good entry point for Gazprom, and if you believe there is more room for gas prices to drop, it'll get even better. But as it is, this is a great time to think seriously about taking a position in Gazprom, as risk/reward is aligned nicely.