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"

SRI - Social Responsible Investing

Topics of Interest:

- Nocera's artificial photosynthesis
... and how chemical fuels could not only substitute oil and gas (e.g. for transportation purposes), but go further and supply energy in scattered geographies like ElectroPS.it is doing in Asia and Africa.

- Fracking Could Work If Industry Would Come Clean
Companies like Baker Hughes and Schlumberger are developing technology to overcome many of the current problems mentioned.

It is quite certain that gas will be a game changer, and therefore substituting coal by gas seems like a good idea. But SWITCHING FROM COAL TO NATURAL GAS WOULD DO LITTLE FOR GLOBAL CLIMATE, STUDY INDICATES. Where they note that methane leakages have stronger greenhouse effects than CO2. Furthermore:

- Climate change may not be that related to CO2 emissions --but rather, to solar activity. Hence, carbon sequestration may not be a technology worth developing.

Published in the blogosphere: Omitted variable fraud: vast evidence for solar climate driver rates one oblique sentence in AR5

- Quantum physics could help minimize energy consumption by electronic devices. NYT reports that Physicists Create a Working Transistor From a Single Atom

- Examples of efficient buildings from p.70.
Which companies would benefit the most from the potential growth in this area? Schneider, GE, Sylvania?

More to come.
In the meantime, keep wired (to) Watts Up With That?
Boing Boing, Wired Science, Women in Planetary Science, David Robertson.

Meeting with Sven de Causmaecker

Meeting with Sven de Causmaecker in KL, Malaysia.
He is a graduate in Chemistry from Germany. We chatted about possible breakthrough technologies within the renewable energies world.

He talked about Daniel Nocera, a Massachusetts Institute of Technology professor whose recent research focuses on solar-powered fuels.

2 H2O >> 2H2 + O2

Hydrogen, used as a chemical fuel, has much higher storage capacity than the lithium batteries (there is not enough lithium for widespread transportation usage. H2 has also zero emissions; and the chemical reaction can be reversed with sun power at relatively high levels of efficiency.

There are several interesting videos of this technology in youtube. I would highlight his lecture in the Brookhaven Science Associates titled "Harnessing Energy from the Sun for Six Billion People -- One at a Time."

Oil is a very efficient form to store energy because its chemical union has little mass: Carbon - electron - Carbon, while for Lithium, the lightest metal, the density of energy that you can store is much lower. The nuclei are very light in atomic weight. But it is less common than 25 of the 32 chemical elements.

Uranium: 20 Terajoules/kg

Hidrogen condensed at 700 bar): 123 MJ/kg

Gasoline & Diesel: 47.2 & 45.4 MJ/kg

Fats / Carboydrates / Proteins: 37 / 17 / 16.8

Lithium air battery: 9

Lthium battery: 1.3

Lithium-ion battery: 720 kJ/kg.

Sven also mentioned cyano-biofuels, a small biotech firm based in Berlin, born from the university entrepreneurial lab of the German university of xxx, doing research on cyanobacteria and how to obtain cheap ethanol from algae and CO2.

We also talked about other technologies other than sun, which are clearly insufficient to meet the energy demands of the global population for the next decades.

[Current population: 7bn people. Energy consumption: 14TW.

Exp. population in 2050: 9bn people. Exp. energy demand in 2050: from 30 to 50TW]

Wind (farms) could yield up to 3TW of energy, which falls much short of demand growth. Onshore wind is the cheapest of the renewable energies. It is already pretty developed, with most of the best areas in many countries already exploited. Furthermore, aesthetic considerations will probably curb future development (as WT are growing bigger and taller, and therefore they can be seen from larger distances.

Fernan, working in SG for Gamesa pointed out that for strong winds it is better to have a high density net of smaller WT. While for milder winds it is better to have fewer but bigger WT.

Sven also said that offshore wind farms provoke vibrations that affect the bio-diversity of the area. Although few decision-makers will care about it.
Onshore WT also have collateral damage for the biologic fauna: they kill birds.

Offshore wind farms slightly lowers the load factor in the onshore wind farms. As you harvest the wind in the sea, the load factors inland will be reduced because the total quantity of wind energy generated by the sun is limited.

Peter Gleick is a PhD from UC Berkeley. His area of research is centered around freshwater.

All-Europe Equity Research Teams

Participants in the 2012 All-Europe Research Team were asked to rate, on a scale of 1 to 10, the importance they attach to a dozen sell-side equity research attributes. Industry knowledge receives the highest rating, followed by integrity/professionalism; accessibility/responsiveness and local market knowledge/country knowledge tie for third. Earnings estimates is deemed the least important of the attributes.

2012's ranking:
DB 117, BAML 77, UBS 52, MS 49, JPM 54, Citi 30, CS 25, Barcap 17, Stanford C. Bernstein 32, Exane 15, Nomura 10, RBS 4, CA 10, SG 3, Kempen 4, GS 3, Redburn Partners 3, Goodbody 3, Handelsbanken CM 3, MainFirst Bank 3, Rabobank 4, Davy 4, Santander 4, SEB 4, Equita S.I.M. 3.

2011's ranking:
DB 74, UBS 77, BAML 56, CS 49, MS 47, JPM 58, Citi 17, CS 49, Barcap 20, Stanford C. Bernstein 37, Exane 11, Nomura 31, RBS 6, CA 6, SG 5, GS 4, Kempen 2.

Musing on 2012

12 month performance chart from the FT macromap:

Looking ahead to 2012 and 2013, I think that equities and equity-like products will benefit from a lower equity risk premium once the European debt crisis stabilizes. Damodaran calculates it on a monthly basis, and according to his calculations -for which I would give full credit- it finished the year at 6.04% (up from 5.2% at the beginning of the year, but down from a max of 7.64% during the market jitters of the summer).

The improvement in the (attractiviness of) valuations has been supported by a good year for corporate america. With earnings up 16% for the year, and cash flows to investors (dividends and buybacks) yielding 5.9% -significantly higher than the 10y UST yield at 1.87%, but also higher than the 10 year average at 4.72%.

Treasuries had indeed a very good year. With returns above 16% for 2011 there is not much more upside potential. Higher economic growth or higher inflation expectations would drag the prices lower, to yields that would be more aligned with historical measures (like those for the end of 2010, above 3%).

This analysis, in combination with the exploration of the supply and demand prospects in some specific markets that have called my attention recently translantes into some more specific trading ideas:

Longs of early cyclical companies. Including:

- Soft commodities -potash and phosphates. I am an avid reader of Jeremy Grantham's publications; and I think he is right in his call about the increasing scarcity of soil for feeding an ever increasing global population. The “finiteness of natural resources is simply ignored, and pricing is based entirely on short-term supply and demand.

Therefore I like potassium and phosphorus, which are necessary for all life and cannot be artificially manufactured or substituted by other products.

- Hard commodities, especially physical ownership of PGMs (rather than miners) via ETFs. i.e. Palladium and Platinum; and in a second order, Rhodium and Iridium.

- Energy-commodities like Uranium. Again, global energy demand is expected to double in the next two / three decades. Even after Fukushima's disaster, nuclear energy stands as one of the most reliable, cheaper and cleaner sources of energy in todays' world. Demand continues to be strong, outpacing global supply, and the depletion of the Russian nuclear reserves is coming to an end.

For uranium you may understand that the investor community is not interested in ownership of the physical asset -but rather, equity exposure through miners. After a very bad year in 2011 in which the sector was battered by investors, junior miners like Fission and Ur-Energy can yield better results (adjusted for risk, although it is the market who will determine that).

URA is the most popular ETF in the industry. Apparently it was the worse performer ETF in 2011; which was what initially called my attention ...

And lastly, digging a bit into the fundamentals of the companies; I like some metals and mining companies like BHP, automotive companies like Volkswagen, BMW and Hyundai motor; and Korean exporters like Samsung.

As said before, I would open shorts on AAA Sovereign bonds (US, UK, DE, JP). Yields are so low that they can only go high. And if they go lower ... what? At these levels there is not much room for higher bond prices and therefore losses are fairly limited. On the other hand, the downside potential (for the underlying prices, and therefore to make money) is much greater. Besides, since we are experiencing a collateral crunch, these assets are priced at a premium vs fundamentals. If I would have a bigger portfolio, not only I would not hold them, I would short them.

I am also quite bearish about the wind energy industry.

I think that there is still money to be made shorting Gamesa, Acciona, Vestas, EDPR (in this order).

Eq long/short spreads:

Long companies with no dividends, short companies with high dividends (since it seems that are priced at a premium up and above their supposed smaller risk exposure).

Long Hang Seng (from 2H2012), Strait Times, short Dow Jones

Long MXP, EUR, GBP, short JPY

I also like an assymetric bet in precious metals: short gold and silver and long palladium and platinum -physical rather than equities.

Commodities III - Chemicals

Natural gas prices are set to remain low due to the boom in shale gas extraction and the subdued economic growth (US Gov should start to tighten 1+% of GDP p.a. of its deficit after the elections. That could have an impact of up to 2% of GDP p.a.

Chemicals set to benefit from these low Natural Gas prices. US chem' firms have become the world's second cheapest producers Nitrogen fertilizers.

Ethanol demand will not decrease despite reduced subsidies. But if gasoline consumption would go down, ethanol would follow suite and corn with it (since it is the largest use of corn in the US.

Favorite picks:

Monsanto - MON at 70 usd

Mosaic - MOS at 50.4

Potash - POT at 41.3

Intrepid Potash - IPI at

CF Industries - CF

Agrium - AGU

Du Pont - DD