Consol Energy is joining the shale gas party. And its $3.5 billion deal to buy assets from Dominion Resources looks like a bargain. But the investors who knocked Consol’s share price are rightly skeptical. By hedging its energy bets, the coal company risks confusing investors and sealing in a conglomerate discount.
Consol should at least feel happy with its negotiating prowess. True, it has paid slightly over the odds for proven gas reserves. When ExxonMobil bought XTO late last year it stumped up just $2.96 per thousand cubic feet. Consol is paying about 15 percent more. But Dominion’s territory on the Marcellus shale is largely virgin land. Consol should be able to triple production over the next five years.
A $5.6 billion IPO of a firm with no profit harkens back to the internet-bubble era. But OSX Brasil is a chance for investors to bet on Brazil’s burgeoning reserves and Eike Batista, the fastest riser on the Forbes rich list. The combination makes it sound more Amazon than Pets.com.
A first glance at the company’s financials gives reason for pause. It posted an operating loss of $19.6 million. But it hardly reflects the promise. Even if Brazil’s oil reserves fail to justify the hype, there is likely to be a need for OSX’s ships and drilling rigs to find out. Batista’s oil and gas company, OGX, has a $4 billion budget to sink into exploration and production.
Schlumberger’s shareholders have been freaking out since news leaked last week of the company’s bid for oil field services rival Smith International. Skeptical investors have now stripped almost $7 billion from the value of the industry leader — a powerful slap in the face to Schlumberger’s chief Andrew Gould. Such punishment appears excessive.
True, Gould hasn’t secured a steal. By Schlumberger’s own account, cost savings from Smith will be just $320 million a year by 2012. Taxed and capitalized, these would be worth around $2 billion to shareholders. So, by offering a $3 billion premium, at $45.84 a share, Schlumberger looks to be destroying around $1 billion of value.
With oil majors being given the cold shoulder in many developing countries, it is no mean feat that Exxon Mobil managed to replace 100 percent of production last year with new reserves. Even so, not all barrels of oil are born equal. By necessity, the stuff Exxon is using to fill its pipeline will be harder to extract or of lower value to investors.
That said, Exxon deserves applause for replenishing its supplies. The 100 percent figure arguably understates Exxon’s achievement, since it is based on restrictive Securities and Exchange Commission assumptions about oil prices. The oil giant’s own figures give a replacement ratio of 133 percent — beating its own 10-year average of 112 percent.
Only foolhardy parents would allow their children to reveal just the grades on their report cards they were happy with. Yet hedge funds are given this luxury in reporting their performance to compilers of sector-wide performance indices. The result is that while a single fund’s track record is clear enough, hedge fund index returns still flatter the average fund. Investors would be smart to call for a clean-up.
Taken at face value, historic index figures suggest that even a very average hedgie can easily beat the stock market while taking less risk. Since 1990, a weighted index of hedge funds has returned around 12 percent annually — about 4 percentage points more than the S&P 500 — with just half the volatility, according to Hedge Fund Research.
Climate change was initially billed in a leading role at the G20 meeting in Pittsburgh. Now it looks set to make the briefest of cameo appearances.Nonetheless, the gathering offers a crucial chance to recast the talks. The United Nations carbon process is in deep trouble and desperately needs help from the top. If the G20 heads of government want to avoid embarrassment at the Copenhagen Summit, they need to start to steer the talks in a new direction.The first step is to move away from the flawed Kyoto model on which the talks are based. Haggling over overall emissions caps is unproductive. Nations have an incentive to push for targets that are easy to hit — giving themselves plenty of headroom in the event of faster economic growth.Even then, it is hard to check up on compliance, since countries like China and India lack the ability to track their emissions.And not much happens to countries that blow through their targets. Canada will surpass its Kyoto limit by close to a third. Yet this failure has clearly not turned Canada into an international pariah.World leaders should set aside this failed framework. One way of doing so is to move toward energy efficiency goals — targeting emissions per unit of GDP. Recasting the debate in this way would reassure developing nations that climate talks would not infringe on their right to grow.Blunt overall targets punish nations with vibrant economies and growing populations while rewarding those with a dwindling workforce. Europe was able to breeze through the Kyoto test partly because of the collapse of the Eastern bloc in the 1990s.China has already moved toward targeting the carbon intensity of economic growth, a position outlined today by President Hu Jintao. The concept may have been tarnished when George W. Bush — the nemesis of environmentalists worldwide — used efficiency measures to throw a spanner in the works.But if set at far more ambitious levels than Bush envisaged, efficiency targets would make much more sense. Leaders should also reconsider shifting the base year for reductions from 1990 — an arbitrary date based around the setting up of the U.N. Framework Convention on Climate Change.Resetting the start date to 2005 would better reflect any efforts by China and India, whose emissions have rocketed since 1990.More important still, climate diplomacy needs to descend from the clouds. Nations are far more likely to agree to a series of detailed policies rather than inflexible and grandiose targets. It would also be much easier to monitor compliance and hold leaders responsible.Rich nations would be more willing to stump up cash to promote efficiency if they had a clearer idea where the money would be used.”India’s plan, for example, might include efforts to harness its IT know-how to build a smart-grid and use electricity more efficiently,” notes Michael Levi, a climate expert at the Council on Foreign Relations.In Brazil, where most emissions come from deforestation, there need to be concrete plans to discourage clearance, by promoting greater productivity among ranchers, providing secure titles to land and offering alternative economic opportunities.China could be given greater help achieving its bold efficiency targets. Assistance from the United States in ensuring access to uranium could increase China’s willingness to ramp up nuclear output, some experts argue.This more granular approach offers the best hope of rescuing the climate change talks, which are starting to bear an alarming resemblance to the interminable global trade round.A more detailed agreement might be harder to market as a triumph to voters than a grand accord. But to come out of Copenhagen empty-handed risks creating the impression that the process is a lost cause.
In 1873, Walter Bagehot wrote that “the business of banking ought to be simple; if it is hard it is wrong.” He would have struggled to recognize today’s banking system.It is not just ever more ornate derivatives that bend the mind. Financial firms themselves have become fabulously complicated. Citigroup lists 2,061 subsidiaries and affiliates while the institutional chart of JPMorgan Chase is 267 pages long.Complexity — as Bagehot predicted — has become a curse. If nobody can understand financial firms, they will become ever more accident prone.The crisis that exploded a year ago offered a salutary lesson in the dangers of complexity. Many shareholders and creditors simply did not fully comprehend their investments. Instead they were forced to trust managers and the rating agencies.Regulators too could be forgiven for scratching their heads.”Supervisors are at a decided disadvantage in understanding risk-taking and compliance for firms that might involve dozens of jurisdictions, hundreds of legal entities and thousands of contractual relationships,” former Fed official Vincent Reinhart has written.Indeed Basel II — the international capital code — was an admission of defeat by regulators. The message from the banking accord was that institutions had become so convoluted that only they were able to understand the risks they were taking.Yet many intelligent executives of these same institutions failed spectacularly. It is no mean feat keeping tabs on an army of specialized financial engineers, lawyers and accountants.As Robert Rubin, the former Treasury Secretary and Citigroup executive, acknowledged last year on the Charlie Rose show: “Unless you are either running the trading operations or running the independent risk management, you are not going to know the risk well enough to have a real sense of where those risks are.”Making financial firms simpler will be far from simple.One approach is coercive. Regulators can make it very uncomfortable to be big. Capital requirements that ratchet up with size would encourage firms to split themselves up into their component parts, giving managers and regulators a better shot at following what is going on. On the whole, smaller firms tend to be more straightforward.Failing this, Reinhart has proposed a Lego model, in which financial firms would be composed of “well-defined modules.” A company made of units that can be easily disconnected from the whole would be easier to manage, with individually simple parts. Regulators can foster this model by insisting on a “living will,” complete with plans for how companies would salvage their firm in the event a single unit implodes.Regulators need to make it much easier to understand financial statements. First, they should impose a strict consolidation of bank balance sheets, forcing them to incorporate all special purpose vehicles.In addition, more information should be made available about banks’ risk-taking. Firms should be compelled to publish monthly indicators drawn up by regulators, including a measure of the relationship between short-term borrowing and long-term lending.This would enable creditors to exercise proper discipline over the banks by pushing up their borrowing costs if they become too reckless. The notion that only banks themselves can understand their own risk-taking needs to be jettisoned.Lastly, the government should also reduce the incentives for complexity. Financial institutions mirror the Byzantine structure of regulation, tax and accounting rules. They become complicated in order to shop for the most lenient regulator, lightest capital requirements and most tax efficient structure.Paring down these rules and structures should be an underlying goal of any regulatory overhaul.The first step to reducing the magnitude of future mishaps is to ensure that we can make sense of our financial institutions. The respect and awe often accorded to “black box” financial institutions is misplaced and dangerous. Instead we need to embrace simplicity.The Year Since Lehman — related columns:“Living wills” are easier said than doneA year on, it’s still a housing story
On healthcare, the White House is struggling with a political riptide that threatens to drag it into deep water.Americans, as they contemplate change, have suffered a weakness of nerve. The main reason is that nearly two thirds of Americans are apparently happy with their healthcare coverage, for all its deficiencies. Repeated reassurances from President Obama that those who like the existing set-up will not be forced to change, have had little effect.A change of tactics may be in order. The administration must do a better job of underlining the glaring defects of the existing system. The genius of the U.S. healthcare is in providing the illusion of value and security. For their own sake, Americans must be encouraged to set aside jingoistic claims about having the best care system in the world and look more honestly at its short-comings.
Having averted a disaster, cartoon superheroes typically revert to their bland civilian identities. With the recession loosening its grip, Ben Bernanke is trying a similar trick.After a period of heroic boldness and creativity, the Fed is determined to be dull. Wednesday’s statement from the Federal Open Market Committee may well be calculated to bore.Yet Bernanke’s reversion to Clark Kent is premature given the dangers still posed by a fragile U.S. economy. The Fed’s more timorous approach in recent months seems due to an increasingly hostile political environment combined with an improving economic one.But until the United States is well on the road to recovery Bernanke should try to hold on to his swashbuckling spirit.The Fed has every reason to be politically intimidated. Relations between lawmakers and the Fed are close to an all-time low.Much congressional ire has been focused on the Fed’s role in bank bailouts. There has been nervousness over its expanded balance sheet, which more than doubled during the crisis to around 14 percent of GDP.For some Republican Senators such as Jim DeMint, the Fed’s purchase of U.S. Treasuries has been aiding and abetting “reckless” spending by Obama. DeMint is not alone in believing that credit easing is a covert means of devaluing the dollar. In the House an increasing number seem willing to listen to obsessively anti-Fed Congressman Ron Paul.It is a bad time for the Fed to have so many enemies. As lawmakers mull an overhaul of financial regulation, the stakes are high.Firstly, they could refuse to bestow responsibility for “systemic risk” supervision on the Federal Reserve — a role Ben Bernanke seems eager to secure. The central bank already looks likely to see its powers over consumer protection takenaway. (Both decisions may be good for America but they would be defeats for the Fed.)More worrying still, support has been building to give the investigative arm of Congress the right to audit Fed policy. A Ron Paul-inspired bill to do just this recently attracted 276 co-sponsors in the House.Allowing the Government Accountability Office to second-guess Fed monetary policy decisions would be more than just a territorial loss for the Fed; it would be bad for the nation too.”Headlines declaring that the investigative arm of Congress had cast doubt on the latest rate hike, for example, would certainly undermine the perception of an independent Fed,” says Vincent Reinhart, a former Fed official and now a scholar at the American Enterprise Institute.Lawmakers could also strip Fed regional bank presidents of a vote on monetary policy, leaving just the Congress-approved Fed governors in charge. This would be another erosion of Fed independence.With these swords hanging overhead, the Fed can be expected to take the safest path. All care will be given to restore the image of prudent, gray-suited central bankers.The Treasury purchase scheme — the most controversial of the credit easing policies — will most likely be allowed to expire, followed shortly afterward by the mortgage-backed security program.It is disappointing that the Fed is willing to tolerate the gloomy economic outcome it has been forecasting. A final burst of credit easing would not be without risks, economic as well as political.But it could help ensure that any economic recovery will be self-supporting. More creative action to support the commercial mortgage-backed security market would be especially welcome. Meanwhile, providing further details of the exit strategy would allay fears that the Fed is going too far.Hard as it may be, the Fed should try to block out the noises coming from Congress. Even if it means taking more political heat, Bernanke should not be willing to accept an anemic recovery and high unemployment.
Many optimists on US growth base their upbeat projections on hopes that inventories are reaching a low. Even a slow down in the rate of inventory drawdown can produce a rise in GDP.
This argument underpins a highly bullish forecast published by Brian Westbury and Robert Stein of the First Trust Advisors in Wheaton.