Friday, July 9, 2010
Monday, April 20, 2009
A disturbing fact pattern...
A disturbing fact pattern is starting to emerge. I honestly can’t tell if it’s cluelessness or evil genius.
US to put conditions on Tarp repayment The money quote, from an unnamed Obama Administration official is “…the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”. “The wider economic interest…” But who decides what the “wider economic interest” is? Somehow I think it won’t be the executives who run the banks. Many banks didn’t want the funds initially, but were forced to take them so no one could identify the “weak sisters,” leading to another Bear Stearns run on the bank (for the record, probably a good policy).
The government urged the banks to accept 15 cents in cash for every dollar that was owed them. According to the WaPo article, the recovery value of these senior secured (ie, first mortgage) bank loans is estimated at 11-50 cents on the dollar (Higher estimate from the banks, lower estimates from Chrysler.) I tried but could not find where the bank loans are trading in the secondary market. Generally, the loans should trade at the product of “Probability of Default” times “Loss Given Default.” Converting the debt at below market value is unquestionably in Chrysler’s interest, but not in the interest of the banks nor their shareholders.
So what happens if the banks refuse to play ball with the Obama administration? U.S. May Convert Banks’ Bailouts to Equity Share. By converting warrants to common equity, the US Government would gain the right to place Directors on the board, vote on shareholder resolutions, etc.
So, here’s where it gets ugly, as I see it.
--Global banks are more or less a commodity business. The same American banker might work for American, German, Japanese, or Canadian banks at different points in his career. If C, JPM, or BAC investors are abused, they can get essentially the same investment vehicle by selling their shares and buying Calyon or SocGen, (French), Credit Suisse or BMO (Canadian) banks, among others. Is it a good idea to destroy a sector of the American economic system for short term gain?
--If banks are forced to operate in a suboptimal way, it means that deserving companies lose out to more politically-connected ones. Further, one of the ways investors are irrational is “Home Bias,” which is the tendency of investors to hold an inappropriate level of domestic equities in preference to international investments. In my personal dealings with domestic and foreign banks, there is a similarity in the lending process…when lending decisions go “back to Paris” instead of being resolved in New York, probability of success is reduced. Do we really want to restrict the amount of capital available to US firms?
--I’m reminded of a story I heard about one way the mob does business…they find a small businessman and “persuade” him to take a Made Man as a “minority partner.” The Mafiosi partner proceeds to withdraw funds from the bank account, buy (and steal) inventory on credit, and generally loot the business, eventually leaving the proprietor with a bankrupted business and destroyed personal credit and reputation. Having pushed the limit on legitimate borrowing, is the US Government now using guile to loot the private savings and investments of even non-US investors?
US to put conditions on Tarp repayment The money quote, from an unnamed Obama Administration official is “…the context of the wider economic interest. He said the government had three basic tests. It needed first to “make sure the system is stable”. Second, to not create “incentives for more deleveraging which would deepen the recession”. Third, to make sure the system had enough capital to “provide credit to support the recovery”. “The wider economic interest…” But who decides what the “wider economic interest” is? Somehow I think it won’t be the executives who run the banks. Many banks didn’t want the funds initially, but were forced to take them so no one could identify the “weak sisters,” leading to another Bear Stearns run on the bank (for the record, probably a good policy).
The government urged the banks to accept 15 cents in cash for every dollar that was owed them. According to the WaPo article, the recovery value of these senior secured (ie, first mortgage) bank loans is estimated at 11-50 cents on the dollar (Higher estimate from the banks, lower estimates from Chrysler.) I tried but could not find where the bank loans are trading in the secondary market. Generally, the loans should trade at the product of “Probability of Default” times “Loss Given Default.” Converting the debt at below market value is unquestionably in Chrysler’s interest, but not in the interest of the banks nor their shareholders.
So what happens if the banks refuse to play ball with the Obama administration? U.S. May Convert Banks’ Bailouts to Equity Share. By converting warrants to common equity, the US Government would gain the right to place Directors on the board, vote on shareholder resolutions, etc.
So, here’s where it gets ugly, as I see it.
--Global banks are more or less a commodity business. The same American banker might work for American, German, Japanese, or Canadian banks at different points in his career. If C, JPM, or BAC investors are abused, they can get essentially the same investment vehicle by selling their shares and buying Calyon or SocGen, (French), Credit Suisse or BMO (Canadian) banks, among others. Is it a good idea to destroy a sector of the American economic system for short term gain?
--If banks are forced to operate in a suboptimal way, it means that deserving companies lose out to more politically-connected ones. Further, one of the ways investors are irrational is “Home Bias,” which is the tendency of investors to hold an inappropriate level of domestic equities in preference to international investments. In my personal dealings with domestic and foreign banks, there is a similarity in the lending process…when lending decisions go “back to Paris” instead of being resolved in New York, probability of success is reduced. Do we really want to restrict the amount of capital available to US firms?
--I’m reminded of a story I heard about one way the mob does business…they find a small businessman and “persuade” him to take a Made Man as a “minority partner.” The Mafiosi partner proceeds to withdraw funds from the bank account, buy (and steal) inventory on credit, and generally loot the business, eventually leaving the proprietor with a bankrupted business and destroyed personal credit and reputation. Having pushed the limit on legitimate borrowing, is the US Government now using guile to loot the private savings and investments of even non-US investors?
Tuesday, November 11, 2008
In Memoriam: Armistice Day
Normally, I don't touch anything that does not affect the price of oil and gas, but today is Armistice Day, when The Great War ended. Presented without comment is John McCrae's poem, "In Flanders Fields."
In Flanders Fields
In Flanders fields, the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below...
We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved, and were loved, and now we lie
In Flanders fields...
Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields...
Dedicated to my Grandfather, Robert M. Logan, and my Great-Grandfather, Howell B. Gwin.
The War ended before Dr. Logan could make it across the pond, but Dr. Gwin, like McCrea, served as a battlefield surgeon. I have two pictures of him, one taken in 1910 and one in 1928, and the horror of what he saw aged him 40 years in just 18. Unlike Dr. McCrea, he survived the war, bore children, and is buried in Mississippi.
Gentlemen, sleep well. Your service is remembered with humble gratitude. My sons carry your names.
In Flanders Fields
In Flanders fields, the poppies blow
Between the crosses, row on row,
That mark our place; and in the sky
The larks, still bravely singing, fly
Scarce heard amid the guns below...
We are the Dead. Short days ago
We lived, felt dawn, saw sunset glow,
Loved, and were loved, and now we lie
In Flanders fields...
Take up our quarrel with the foe:
To you from failing hands we throw
The torch; be yours to hold it high.
If ye break faith with us who die
We shall not sleep, though poppies grow
In Flanders fields...
Dedicated to my Grandfather, Robert M. Logan, and my Great-Grandfather, Howell B. Gwin.
The War ended before Dr. Logan could make it across the pond, but Dr. Gwin, like McCrea, served as a battlefield surgeon. I have two pictures of him, one taken in 1910 and one in 1928, and the horror of what he saw aged him 40 years in just 18. Unlike Dr. McCrea, he survived the war, bore children, and is buried in Mississippi.
Gentlemen, sleep well. Your service is remembered with humble gratitude. My sons carry your names.
Thursday, October 30, 2008
FT: World will struggle to meet oil demand
I'll comment on this more in depth when time permits, but this is an interesting article and speaks to one of the reasons I'm bullish long term on oil (and on career/investment prospects as an almost young-ish oil finance guy)
Short term (6 month) bearishness ($45-$50 Cal-09 crude) is due to an economic recession we probably have not seen the worst of and strengthening USD pushes down the trade deficit, lifting the dollar, and putting pressure on dollar-denominated CL.
Further reason for bearishness: As the price of oil drops, the incentive to cheat on the quote increeases...especially among countries like Iran and Venezuela, whose economies have been hurt by sanctions, bad policies, or both. As projects spurred by $100+ oil come online, and as Iraq continues to get more settled, supply will increase.
Many people would argue that those expensive projects will not, in fact, get built in this price environment; I'd argue 1). much of the production has already been hedged; and 2). even though sunk costs are irrelevant, Management is usually loath to abandon a project halfway through..both because of mob-demob costs and because it's embarrassing...you'd shoot credibility with the analysts and BOD, hampering both your future access to the capital markets and your likelihood of keeping your job, respectively.
I've spent 10 years in capital-intensive commodity businesses, and price almost always gets driven down to marginal cost. When I look at other capital-intensive commodity businesses (airlines), I see the same thing happening.
http://www.ft.com/cms/s/0/e5e78778-a53f-11dd-b4f5-000077b07658.html?nclick_check=1
World will struggle to meet oil demand
By Carola Hoyos and Javier Blas in London
Published: October 28 2008 23:32 Last updated: October 28 2008 23:32
Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.
Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.
The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term demand. The effort will become even more acute as prices fall and investment decisions are delayed.
The IEA, the oil watchdog, forecasts that China, India and other developing countries’ demand will require investments of $360bn each year until 2030.
The agency says even with investment, the annual rate of output decline is 6.4 per cent.
The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.
“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.
The watchdog warned that the world needed to make a “significant increase in future investments just to maintain the current level of production”.
The battle to replace mature oilfields’ output could even offset the decline in demand growth, which has given the industry – already struggling to find enough supply to meet needs, especially from China – a reprieve in the past few months.
The IEA predicted in its draft report, due to be published next month, that demand would be damped, “reflecting the impact of much higher oil prices and slightly slower economic growth”.
It expects oil consumption in 2030 to reach 106.4m barrels a day, down from last year’s forecast of 116.3m b/d.
The projections could yet be revised lower because the draft report was written a month ago, before the global financial crisis deepened after the collapse of Lehman Brothers.
All the increase in oil demand until 2030 comes from emerging countries, while consumption in developed countries declines.
As a result, the share of rich countries in global demand will drop from last year’s 59 per cent to less than half of the total in 2030.
This is the clearest indication yet that the focus of the industry on the demand – not just the supply – side is moving away from the US, Europe and Japan, towards emerging nations.
Short term (6 month) bearishness ($45-$50 Cal-09 crude) is due to an economic recession we probably have not seen the worst of and strengthening USD pushes down the trade deficit, lifting the dollar, and putting pressure on dollar-denominated CL.
Further reason for bearishness: As the price of oil drops, the incentive to cheat on the quote increeases...especially among countries like Iran and Venezuela, whose economies have been hurt by sanctions, bad policies, or both. As projects spurred by $100+ oil come online, and as Iraq continues to get more settled, supply will increase.
Many people would argue that those expensive projects will not, in fact, get built in this price environment; I'd argue 1). much of the production has already been hedged; and 2). even though sunk costs are irrelevant, Management is usually loath to abandon a project halfway through..both because of mob-demob costs and because it's embarrassing...you'd shoot credibility with the analysts and BOD, hampering both your future access to the capital markets and your likelihood of keeping your job, respectively.
I've spent 10 years in capital-intensive commodity businesses, and price almost always gets driven down to marginal cost. When I look at other capital-intensive commodity businesses (airlines), I see the same thing happening.
http://www.ft.com/cms/s/0/e5e78778-a53f-11dd-b4f5-000077b07658.html?nclick_check=1
World will struggle to meet oil demand
By Carola Hoyos and Javier Blas in London
Published: October 28 2008 23:32 Last updated: October 28 2008 23:32
Output from the world’s oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.
Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.
The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term demand. The effort will become even more acute as prices fall and investment decisions are delayed.
The IEA, the oil watchdog, forecasts that China, India and other developing countries’ demand will require investments of $360bn each year until 2030.
The agency says even with investment, the annual rate of output decline is 6.4 per cent.
The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.
“The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand,” the IEA says.
The watchdog warned that the world needed to make a “significant increase in future investments just to maintain the current level of production”.
The battle to replace mature oilfields’ output could even offset the decline in demand growth, which has given the industry – already struggling to find enough supply to meet needs, especially from China – a reprieve in the past few months.
The IEA predicted in its draft report, due to be published next month, that demand would be damped, “reflecting the impact of much higher oil prices and slightly slower economic growth”.
It expects oil consumption in 2030 to reach 106.4m barrels a day, down from last year’s forecast of 116.3m b/d.
The projections could yet be revised lower because the draft report was written a month ago, before the global financial crisis deepened after the collapse of Lehman Brothers.
All the increase in oil demand until 2030 comes from emerging countries, while consumption in developed countries declines.
As a result, the share of rich countries in global demand will drop from last year’s 59 per cent to less than half of the total in 2030.
This is the clearest indication yet that the focus of the industry on the demand – not just the supply – side is moving away from the US, Europe and Japan, towards emerging nations.
Wednesday, October 29, 2008
Slump Slows Carbon Efforts
Ken Silverstein at "Energybiz Insider" notes that "The economic downturn is pulling under the sweeping attempt in this country to cap carbon emissions. Until an uptick occurs, the focus will be altered and now concentrate on making gradual adjustments to limit greenhouse gas emissions. The global liquidity crisis is not just grabbing headlines. It's also causing a shift to the new paradigm. With credit tight, utilities and other industries are trying to preserve their cash and reduce their debt. It's now more about survival and less about cutting carbon emissions."
Read the whole thing.
http://www.energycentral.com/site/newsletters/ebi.cfm?id=587
Silverstein has always drunk more of the "Global Warming" Kool-Aid than I have. Though I disagree with his perception of the dangers posed by AGW, his analysis is thoughtful and he does illluminate the following thoughts:
--Environmentalism is a luxury good (people consume more as they prosper)
--Combatting AGW poses significant costs (1.1% of world GDP is the estimate provided by commentators who favor it..the true figure is certainly much higher) that cannot be borne in the current interest rate environment
--It is inherently a hard sell to require people to pay more for energy today for some undefined benefit in the future. People seem to understand instinctively that combatting AGW iwll reduce their standard of living.
Read the whole thing.
http://www.energycentral.com/site/newsletters/ebi.cfm?id=587
Silverstein has always drunk more of the "Global Warming" Kool-Aid than I have. Though I disagree with his perception of the dangers posed by AGW, his analysis is thoughtful and he does illluminate the following thoughts:
--Environmentalism is a luxury good (people consume more as they prosper)
--Combatting AGW poses significant costs (1.1% of world GDP is the estimate provided by commentators who favor it..the true figure is certainly much higher) that cannot be borne in the current interest rate environment
--It is inherently a hard sell to require people to pay more for energy today for some undefined benefit in the future. People seem to understand instinctively that combatting AGW iwll reduce their standard of living.
TD Securities expects a cold winter
"MDA EarthSat, a prominent weather forecaster concentrated on the energy industry, is forecasting that the 2008-09 winter will be the coldest in 5 years with average temperatures coming in 1.5 percent colder than last year and 0.3 percent warmer than the 30-year normal from 1971-2000. The prediction is based upon a weak La Niña that should be forming over the Tropical Pacific Ocean which has historically caused cooler winters across North America. "
I agree with this for the following reasons:
First Point: The JPL Laboratory reporst that 2008 has marked a shift in the Pacific Decadal Oscillation to a negative phase..resulting in a stronger than usual La Nina. http://www.jpl.nasa.gov/news/news.cfm?release=2008-066
Key Graf from the article: "The image also shows that this La Niña is occurring within the context of a larger climate event, the early stages of a cool phase of the basin-wide Pacific Decadal Oscillation. The Pacific Decadal Oscillation is a long-term fluctuation of the Pacific Ocean that waxes and wanes between cool and warm phases approximately every five to 20 years. In the cool phase, higher than normal sea-surface heights caused by warm water form a horseshoe pattern that connects the north, west and southern Pacific, with cool water in the middle. During most of the 1980s and 1990s, the Pacific was locked in the oscillation's warm phase, during which these warm and cool regions are reversed. For an explanation of the Pacific Decadal Oscillation and its present state, see: http://jisao.washington.edu/pdo/ and http://www.esr.org/pdo_index.html"
Second Point: Although the current sunspot cycle (Cycle 24) was expected to start in early 2008, the level of solar activity thus far has been minimal. http://www.dailytech.com/article.aspx?newsid=12823 "The sun has reached a milestone not seen for nearly 100 years: an entire month has passed without a single visible sunspot being noted. " As sunspot activity is correlated with solar output (See "Maunder Minimum" in Wiki), fewer sunspots would suggest a colder winter.
Just what the doctor ordered...and just in time. I hope that a series of colder winters will convince people that "Global Warming" is just another hoax, designed to convince the people to give more control over the economy to governments.
I agree with this for the following reasons:
First Point: The JPL Laboratory reporst that 2008 has marked a shift in the Pacific Decadal Oscillation to a negative phase..resulting in a stronger than usual La Nina. http://www.jpl.nasa.gov/news/news.cfm?release=2008-066
Key Graf from the article: "The image also shows that this La Niña is occurring within the context of a larger climate event, the early stages of a cool phase of the basin-wide Pacific Decadal Oscillation. The Pacific Decadal Oscillation is a long-term fluctuation of the Pacific Ocean that waxes and wanes between cool and warm phases approximately every five to 20 years. In the cool phase, higher than normal sea-surface heights caused by warm water form a horseshoe pattern that connects the north, west and southern Pacific, with cool water in the middle. During most of the 1980s and 1990s, the Pacific was locked in the oscillation's warm phase, during which these warm and cool regions are reversed. For an explanation of the Pacific Decadal Oscillation and its present state, see: http://jisao.washington.edu/pdo/ and http://www.esr.org/pdo_index.html"
Second Point: Although the current sunspot cycle (Cycle 24) was expected to start in early 2008, the level of solar activity thus far has been minimal. http://www.dailytech.com/article.aspx?newsid=12823 "The sun has reached a milestone not seen for nearly 100 years: an entire month has passed without a single visible sunspot being noted. " As sunspot activity is correlated with solar output (See "Maunder Minimum" in Wiki), fewer sunspots would suggest a colder winter.
Just what the doctor ordered...and just in time. I hope that a series of colder winters will convince people that "Global Warming" is just another hoax, designed to convince the people to give more control over the economy to governments.
Credit Crunch affects high yield M&A
The guys at Tudor Pickering Holt have this to say:
"E&P M&A stumbling block (S&P1500 E&P $366) – Just another factor we’re thinking about. Standard high yield 101% change of control provisions make takeouts/mergers-of-equals more difficult (not impossible) without credit market availability. If refinancing frozen/difficult, where does acquirer get the bucks to buy in aquiree's debt at 101%? Says M&A game may default to big companies buying small ones or debt holders may face tough negotiations."
I think this is on point. Traditionally, E&P companies tend to have lower credit ratings, all else being equal, than industrial companies. This is due to the double whammy of higher capex requirements for a wasting asset company and commodity price risk.
--Flight to quality - Basis has blown out...compare to small/midcap E&P's
--FAS 157 implications - no goodwill, destruction of Shareholder's Equity as debt is MTM. See Sept 08 "CFO" magazine.
--Deep discounts for debt
--arbitrage..have asset values dropped along with bond prices? What does this say about "Going Concern" value?
"E&P M&A stumbling block (S&P1500 E&P $366) – Just another factor we’re thinking about. Standard high yield 101% change of control provisions make takeouts/mergers-of-equals more difficult (not impossible) without credit market availability. If refinancing frozen/difficult, where does acquirer get the bucks to buy in aquiree's debt at 101%? Says M&A game may default to big companies buying small ones or debt holders may face tough negotiations."
I think this is on point. Traditionally, E&P companies tend to have lower credit ratings, all else being equal, than industrial companies. This is due to the double whammy of higher capex requirements for a wasting asset company and commodity price risk.
--Flight to quality - Basis has blown out...compare to small/midcap E&P's
--FAS 157 implications - no goodwill, destruction of Shareholder's Equity as debt is MTM. See Sept 08 "CFO" magazine.
--Deep discounts for debt
--arbitrage..have asset values dropped along with bond prices? What does this say about "Going Concern" value?
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