The Oil slide. Chapter I: looking for shorts

On August 19 2013, OMV announced it had bought Statoil’s stakes in Gulfaks, Gudrun, and Rosebanks fields. The final consideration for the deal was $2.65 bn in cash. The biggest acquisition for OMV in its history.

WoodMac’s valuation of these fields is approximately 20% below. The disparity is driven mainly by Gulfaks and Rosebank: both have significant upside potential. Additionally, OMV hinted in the conference call that their underlying oil price assumption is $100/bl (while WoodMac assumes a price decline to real $85/bl within four years, staying constant at that level). Additionally, there are fiscal synergies when these assets are brought into a producing portfolio --compared to their value on a stand-alone basis.

In this insight, we aim to shed light on these three variables that drive the price disparity and our take on the transaction.

Sources familiar with the matter mention that it was a competitive sale, with many firms interested in the portfolio of assets on sale; which reflects the scarcity of high-quality assets in the market place. OMV rationale for over-bidding was a drive to diversify their above-ground risk mix towards geographies and fiscal regimes of stability/visibility/certainty.

Prior to the transaction, OMV had a portfolio of producing fields and E&A acreage that spans the MENA region 'and beyond'. This year the firm has over-performed all other European O&G firms.

In the last months we've seen investments retrenching from emerging markets and flying back to the US. As the US Treasuries come back to more palatable yield levels for investors (on the back of an earlier taper off of the Fed’s stimulus program), we've seen EM currencies depreciating against the greenback. Additionally, we have seen an uptick in the political uncertainty in the MENA region: Egypt, which had been among the most stable countries in the region for decades, saw a coup last month. This adds significant political and economic risk to the area.

Of course, nobody wants to see layers of financial leverage overposed to operational leverage; but if events in the MENA region continue to be so constructive, or if the oil price loses some ground, OMV has positioned itself ideally to enjoy the winner's curse in all its forms and shapes. "buena suerte amigos".

Sohn Investment Conference 2013

Read in FT's Alphaville:

3) Global figure most associated with negative views: the one and only Ben Bernanke.

My view: to compare their (Sohn's puppets) understanding of the trade-offs in today's monetary policy environment is like comparing Einhorn's tie knots with those of Bernanke ...

(Better don't do it).  Of course we would all like to live in an easier world: one with lower debt, higher expected returns; one where we all can be successful HF managers leaving office at 5 pm and running triathlons on weekends.

Alas, it turns out that the cocktail of low inflation and a reach for yield have sent risky asset prices soaring, depressing future expected returns. Now Wall Street blames Ben Bernanke for making their job a tad more difficult. They say it's distorting the economy and the financial markets.

Well, the truth of the matter is that the Fed's actions weren't that hard to anticipate. There are only two metrics in their dual mandate: full employment and price stability. Both have been lagging the targets for some time. Inflation has been incredibly subdued and there are no signals of any dramatic change. Wall Street's mandate was to position itself to benefit from the world that was coming. They, the asset owners, should have benefited the most from the new normal of lower nominal rates. They chose to be cautious and have lagged the indices since the market bottomed; that's fine, but it just doesn't feel right to hear these guys putting blame on Bernanke because they don't know what to buy now.

The decisive action taken by chairman Ben Bernanke and his FOMC colleagues has been fundamental to underpin this recovery. It only takes a peek outside the US to know that it feels good to be an asset owner in the US. Maybe our super-investors should invest in Europe instead, who could not but admire the rectitude and righteousness of the Bundesbank?   "buena suerte amigo"