– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
Brazil’s government gouged oil giant Petrobras <PETR4.SA><PBR.N> in its $42 billion transfer of offshore reserves. But at least it seemed to lift some uncertainty. Think again: the contract may allow Brazil to raise the price, regulatory filings suggest. For those worried by state meddling, this is yet another troubling disclosure.
Petrobras is shaping up more like Gazprom than Exxon Mobil. By overpaying for 5 billion barrels of reserves, the Brazilian state-controlled oil group is transferring up to $17 billion of value to the government, whose stake will also rise. The company is looking more like an instrument of the state than a guardian of shareholder interests.
A year after the capitalization plan was first announced, Petrobras shareholders are finally getting some clarity. That earned a relief rally in the company’s beaten-down shares on Thursday. But the news overall isn’t good.
Half a billion dollars is normally sufficient to sway the minds of mortals. But in the case of Potash Corp’s potential sale to BHP Billiton, don’t expect such a big payday to decide the outcome of the deal. The fertilizer miner’s boss Bill Doyle has sat on larger sums before and held tight. With his golden parachute less than 6 percent of the payoff, he has no obvious incentive to shortchange shareholders with a quick flip of the company.
True, even if Potash shareholders go for the BHP deal on offer Doyle would become one of the top corporate earners of the past decade in North America. And it’s hard to imagine that so lucrative a package of stock options as Potash doled out to Doyle was entirely necessary to motivate him over the years.
U.S. coal miners dodged a bullet when Congress ditched cap-and-trade regulation. But they may still be vulnerable. Carbon tax or not, many geriatric coal generators are heading for retirement. And demand from China may not be the silver bullet investors expect.
There’s no denying that a price on carbon would have been grim news. For the first time in years, once-pricey natural gas had been giving cheap coal a run for its money, leading some electric producers to switch to gas. Even a small nudge from a cap-and-trade system could have accelerated the switch to the cleaner burning fuel. Small wonder then that the likes of Peabody and Walter Energy have outperformed the S&P 500 Index by close to 10 percent since lawmakers abandoned the cap-and-trade idea at the end of July.
Peak Oil has lost its leading prophet with the death of Houston banker Matt Simmons. Since many nations refuse to share detailed oil data it may be years before his warnings of ebbing production are vindicated — or discredited. But his crusade for more information on supplies is as urgent as ever.
The founder of Simmons & Co added plenty of gravitas to the “peak oil” movement — which contains more than its share of wing-nuts. His 2005 book “Twilight in the Desert” took on the biggest oil producer of all, Saudi Arabia. Drawing on 200 technical papers, he concluded that the kingdom’s largest oil field Ghawar would soon top out. As a result, oil’s friendly giant would soon start to struggle to keep pace with rising oil demand.
U.S. oil companies are becoming less liquid — but not in a financial sense. With natural gas so plentiful, Big Oil is fast becoming Big Gas. Shareholders may be underestimating the impact of the shift on future returns while an unexpected advantage is tipping to the oiliest majors.
America’s energy titans are finding it ever harder to ramp up oil output. Exxon Mobil is on track to pump 5 percent less this year than in 2005, according to Barclays Capital forecasts. Instead, the company has turned to gas for growth. A big project in Papua New Guinea and the XTO acquisition are accelerating the shift. Gas, which accounted for 38 percent of Exxon’s output in 2005, could account for up to 48 percent next year.
Disgruntled investors have wiped more than $40 billion off the value of Exxon Mobil since its splurge on U.S. gas giant XTO Energy — almost exactly the firm’s price tag. With Congress ditching carbon emissions rules, clean-burning gas looks like a bad bet. Yet to assume that XTO has zero value seems wrongheaded.
Even before lawmakers went cold on limiting greenhouse gases, investors were skeptical of the purchase. Between the announcement of the deal on December 14 and Thursday’s bumper second-quarter results, Exxon stock had slid 16 percent. Adjusting for an average 4 percent fall of peers Chevron and Royal Dutch Shell, investors have lopped slightly more than XTO’s entire $41 billion enterprise value off Exxon’s market capitalization.
ConocoPhillips is something of a prodigal son. Investors have taken the U.S. energy group back into the fold since it repented its wayward habits. It’s understandable that the valuation gap with peers would close. But it’s hard to see why Conoco is already rated almost in line with the best-in-class Exxon Mobil. It still has plenty to prove.
Admittedly Conoco’s second-quarter numbers, reported on Wednesday, will help. With far more exposure to U.S. refining than the likes of Exxon and Chevron, Conoco cashed in on a recovery in crack spreads — the profit made turning crude oil into fuels.
BP’s Gulf of Mexico oil disaster knocked Goldman Sachs off the front pages. It’s just the UK oil major’s luck that its best news in 86 days was overshadowed by Goldman’s settlement with the U.S. Securities and Exchange Commission. Few will praise BP’s speed, but its initial complete capping of the well is a big step forward. Restoring credibility and relations with Uncle Sam will, however, take years.
It could still go wrong again. But if the seemingly successful test on Thursday turns into part of a longer-term solution to the leak, it will mark the end of a period that has been torture for BP — but only the beginning of a healing process for the company and its bruised shareholders. For the first time since April, there won’t be live pictures of its oil gushing into U.S. waters. And the company’s bill will no longer be ticking higher by the barrel. All being well, BP will get a breather from bad publicity while it works on the permanent answer — its relief wells.
It’s potentially hazardous to swallow a meal a third your size. But it could make sense for Apache to grab $10 billion of BP’s Alaskan assets. The U.S. firm’s flair for squeezing oil from older wells makes it an ideal buyer — and BP is a keener seller than it was.
With a market capitalization just shy of $30 billion and only $2 billion in cash on hand, Apache might not find it easy to digest a big deal. Nor is it coming to the table with an empty stomach. Just days before BP’s Gulf of Mexico rig explosion in April, Apache snapped up Mariner Energy for $2.7 billion and bought $1 billion of assets from Devon Energy.