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Energy Blast – Nov 26, 2009

Robert Amsterdam — Thu, 26 Nov 2009 10:27:19 +0000

Ahead of the UN Conference in Copenhagen next month, the US has announced its target for cutting greenhouse gas emissions - which 'will be widely regarded as far from satisfactory in its detail', says The Independent. Are disputes over 'waste...

Weak Dollar Boosts Commodities – So What’s Next?

Chris Vermeulen — Thu, 26 Nov 2009 04:30:56 +0000

Another fantastic week for precious metals as the US dollar continues its slide lower. Energy commodities like oil and natural gas are having some difficulty finding buyers. When commodities start to trend they become very profitable for those riding them up or down. But when a short term trend starts to virtually go straight up (parabolic) [...]

Did the SARB make the right call?

Prieur du Plessis — Wed, 25 Nov 2009 09:42:10 +0000

By Cees Bruggemans, Chief Economist FNB. Did the SARB make the right call last week? It decided to keep interest rates unchanged, on the premise of inflation being projected inside the target zone over most of the next two years, with a sense of ‘balanced’ risk to the forecast. To the extent that one believes the SARB should [...]

The New Crude Oil Benchmark That Could Change the Oil Market’s Price Dynamics

Investment U — Tue, 24 Nov 2009 19:46:09 +0000

The New Crude Oil Benchmark That Could Change the Oil Market’s Price Dynamics by Sheena Martin, Contributing Editor Tuesday, November 24, 2009 Earlier this month, the world’s largest oil producer set the table for a move away from traditional light, sweet crude oil. Saudi Aramco, the state-owned company of Saudi Arabia has decided to drop [...]

Some Options as the US Dollar Continues its Slide

QualityStocks — Tue, 24 Nov 2009 18:56:56 +0000

Buying the dips has been a “buzz” word of late. As the stock market goes about its ups and downs, there is money to be made for those that care to pay attention and act. Acting is the operative word in this instance. The issue is, however, we as investors have been taught to buy [...]

St. Mary Grows With Shale Plays – Analyst Blog

Zacks Market Commentaries — Tue, 24 Nov 2009 18:06:02 +0000

St. Mary Land & Exploration Co. (SM) reported third-quarter earnings of 23 cents per share, beating the Zacks Consensus Estimate of 19 cents but down from the year-earlier earnings of $1.20. Non-cash charges and impairments result in a reported net loss of 7 cents per diluted share.

The results were driven by the company’s production performance and reduced costs. Revenues for the quarter were $185.8 million, down nearly 43% from the year-earlier level.

St. Mary reported quarterly production of 26.4 billion cubic feet equivalent (Bcfe), down 5% year over year. However, volumes were within the company’s guidance range of 25.5 to 27.0 Bcfe. Production would have been down 2% year over year without accounting for the last year’s asset sale. Production was also sequentially down as a result of lower levels of capital investment.

Of the total production, gas was 65% and the rest was oil. Natural gas for the quarter was 17.2 billion cubic feet (Bcf), down 5% year over year. Oil production during the quarter was 1.5 million barrels (MMbbl), down 3% from the year-earlier quarter.

Average equivalent price per Mcfe (including the effect of hedging) was $6.86, down 38% from the year-ago realization. Average realized prices (inclusive of hedging activities) were $4.95 per Mcf of natural gas and $62.65 per barrel of oil, a decrease of 48% and 25%, respectively, from the same period a year ago.

On the costs front, unit lease operating expense (LOE) was down 17% year over year to $1.30 per Mcfe. Transportation expenses and G&A expenses were also down 17% and 9% from the year-earlier level to 20 cents and 79 cents per Mcfe, respectively.

Discretionary cash flow was $99.9 million during the quarter, down approximately 49% year over year. Net cash from operating activities was $111.3 million, down nearly 56% from the year-earlier level. The main reason behind these falls was the significant decrease in oil and natural gas prices.

At the end of the quarter, the company had cash balance of $20.5 million and long-term debt of $499.8 million, representing debt-to-capitalization ratio of 33.4%.

St. Mary expects to invest $450 million for the 2009 capex program, including $117 million for the Eagle Ford, Haynesville and Marcellus shale developments. For the fourth quarter, the company anticipates production to be in the range of 24.75 – 26.25 Bcfe.

The company has been working over the past several years to build a significant position in emerging shale plays in order to transition it to more of a resource play focused company, with a deep inventory of repeatable drilling prospects with a high rate of return.

Given the company’s increasing activity in the oilier parts of its assets portfolio, specifically the Permian and Rocky Mountain regions, we believe that St. Mary will be able to maintain or even increase its oil-weighted activity through 2010. In turn, this will create the value for shareholders.
Read the full analyst report on "SM"
Zacks Investment Research

Repsol Remains Neutral – Analyst Blog

Zacks Market Commentaries — Tue, 24 Nov 2009 17:45:40 +0000

REPSOL YPF S.A. (REP) reported third-quarter earnings of 30 euro-cents per share (45 cents per ADR), compared to the Zacks Consensus Estimate of 43 cents and year-earlier earnings of 58 euro-cents (82 cents per ADR).

While earnings was down year over year due to the steep decline in oil and natural gas prices, a sequential increase in net income (€859 million vs. €647 million or $1.23 billion vs. $975 million) shows the signs of recovery in the macro backdrop.

Adjusted income from operations during the quarter totaled €859 million ($1.23 billion), down approximately 45% year over year, primarily reflecting the impact of lower oil prices and weak refining margins.

Adjusted upstream operating income during the quarter was €302 million ($432 million), down approximately 51% from the year-earlier level due to poor realizations, partially offset by lower exploration costs and a favorable euro–dollar exchange rate.

Repsol’s liquids price realizations averaged $62.9 per barrel versus $104.9 per barrel in the year-ago period. The average natural gas price realization during the quarter was $2.1 per Mcf, down more than 54% year over year.

Total production averaged 327 MBOE/d (43% liquids), down 1.2% from the year-ago level. After excluding the impact of contractual and regulatory changes and the OPEC quota reduction, volumes were 2.5% higher than in the third quarter of 2008. Investments in the Upstream business segment were €290 million ($414 million), down approximately 23% from the year-ago level. Exploration expenses were down 22.2% year-over-year to €70 million ($100 million).

Adjusted operating income from the Downstream segment was €206 million ($294 million), down 47.3% year over year, mainly due to the impact of lower refining margins. Repsol realized a refining margin of 30 cents per barrel, down nearly 96% year over year. The company invested €457 million ($653 million) in its Downstream segment during the quarter.

Adjusted operating income from YPF was €211 million ($302 million), down 53.2% from the year-ago quarter, reflecting lower liquid sales, partly offset by lower operating costs.

The company’s adjusted income from operations in Gas Natural SDG was up 63.8% year over year to €226 million ($323 million). Finally, Repsol’s LNG division earned €5 million ($7.1 million) during the quarter, down nearly 87% from the prior-year quarter.

Repsol’s net debt was about €10.58 billion ($15.12 billion) at the end of the quarter, reflecting a net debt-to-capitalization ratio of 29.6%.

We believe that the long list of challenges facing Repsol will continue to weigh on its valuation, limiting its upside from current levels. These include declining reserves, weak volumes, very low reserve lives and rising costs. Consequently, we maintain our Neutral rating for the stock.
Read the full analyst report on "REP"
Zacks Investment Research

Arena Resources Inc. – Momentum – Zacks Rank Buy

Michael Vodicka — Tue, 24 Nov 2009 05:00:00 +0000

Arena Resources Inc. (ARD) has posted big gains over the last 8 months on strong earnings and elevated energy prices.

Company Description

Arena Resources, Inc. engages in the exploration and production of oil and natural gas properties in the united States. The company was founded in 200 and has a market cap of $1.58 billion.

With crude trading at elevated prices, exploration companies have fallen back into favor. This dynamic and strong third-quarter results, reported on Nov 5, has helped push shares of ARD back to the 52-week high.

Third-Quarter Results

Earnings for the quarter came in at 31 cents per share, 5 cents ahead of the Zacks Consensus Estimate. The company has beat in each of the last four quarters by an average of 2 cents, or 10%.

In a bid to expand its enhance and expand its operations, the Board of Directors approved a $27 million increase in its capital budget for 2009 to $107 million.

Estimates Rising

Estimates have generally been on the rise for the last few months. The current-year estimate has added 13 cents to $1.12. The next-year estimate is bullish, pegged at $1.75, a 57% growth projection.

Valuation

After the recent run up, shares do look a bit pricey, trading at 36X projected current-year earnings. The bullish next-year estimate helps temper the valuation a bit though.

The Chart

Shares of ARD have posted big gains over the last 8 months after bottoming out around $20 in early March. The 52-weke high is close at hand at $44.40, take a look below.

Zacks Investment Research

Hold Reserves, Loan Money or Own Something

Richard Shaw — Tue, 24 Nov 2009 03:15:47 +0000

Cash, bonds and stocks are the three primary asset classes for securities investors. They point to the three basic things you can do with your money other than spend it or donate it . You can hold it in reserve (cash). You can loan it (basically bonds). Or, you can own something with it (stocks [...]

Marathon to Slash Spending – Analyst Blog

Zacks Market Commentaries — Mon, 23 Nov 2009 19:23:33 +0000

In its investor day meeting, integrated oil major Marathon Oil Corporation (MRO) offered a glimpse of its 2010 production and capital spending plans.

Capital Spending Trimmed

Marathon said that it will prune its capital expenditures by about $1 billion in 2010, as the company allocates a larger percentage of funds towards the Exploration & Production (E&P) segment as against the under-pressure refining business. The Houston-based firm has pegged its 2010 capital budget at about $5 billion, down nearly 7% from the $6 billion it expects to invest by the end of 2009. As per the plan, expenditure on the downstream business (refining, marketing and transportation), which constituted approximately 40% of this year’s budget, will fall to 23%, while the remaining portion will go to exploration and production projects.

Upstream Production Outlook

Marathon’s change in focus to the upstream business can be attributed to plummeting refining profits on the back of weak demand for gasoline, diesel and jet fuel. The company’s new area of emphasis will be deepwater exploration, unconventional resource plays in North America and development in Angola.

Marathon also guided towards 2009 E&P production growth of around 6% from the 2008 level. During the four-year period 2008–2011, the company expects upstream volumes to increase at a compound annual growth rate of approximately 4% (with contributions from new projects in the Gulf of Mexico, Canada's oil sands, Libya and Angola).

In 2010, Marathon plans to drill 3–4 significant wells in the Gulf of Mexico, 2 high-risk, high-potential wells in Indonesia, as well as commence activity in Norway, Libya, Angola and the domestic onshore resource plays.

Outlook

Marathon’s move to chop capital spending follows a similar decision by rival ConocoPhillips (COP), which earlier announced a 12% reduction in its 2010 budget. In contrast, super majors such as ExxonMobil (XOM) and Chevron (CVX) have maintained their capital spending even during the current downturn in an effort to lift production.

We like Marathon’s large and geographically diverse reserve base, competitive downstream operation, and solid project pipeline. However, the uncertain commodity-price environment and the company’s heavy downstream exposure will continue to weigh on Marathon’s revenue and profitability, at least in the near term. As such, we see the stock performing in line with the broader market and rate it as Neutral.
Read the full analyst report on "MRO"
Read the full analyst report on "COP"
Read the full analyst report on "XOM"
Read the full analyst report on "CVX"
Zacks Investment Research

Despite What the News Tells You, Crude Oil Prices Set to Fall

Investment U — Mon, 23 Nov 2009 18:57:31 +0000

Despite What the News Tells You, Crude Oil Prices Set to Fall by Sheena Martin, Contributing Editor Monday, November 23, 2009 Is the price of oil headed for $100 per barrel again? Many say it is. But to be frank, the “fair price” is much lower than the current range of $75-$83 per barrel. If you [...]

CBI Wins Refinery Project – Analyst Blog

Zacks Market Commentaries — Mon, 23 Nov 2009 17:21:05 +0000

Chicago Bridge & Iron Co. (CBI) has been awarded a project valued in excess of US$1.4 billion by Refinería de Cartagena S.A. (REFICAR) for the engineering, procurement services and construction of a new refinery, with processing capacity of 165,000 barrels per day, adjacent to REFICAR's refinery in Cartagena, Colombia. CB&I's scope also includes revamping the existing 80,000 barrel per day refinery. The overall project will relieve regional refining constraints and will enable REFICAR to produce clean, ultra-low sulfur gasoline and diesel from heavy crude.

REFICAR has chosen CB&I to be the single contractor to engineer, procure, and construct this important project, which is key to enhancing Ecopetrol's position as a leading producer for the entire region. Refinería de Cartagena S.A. is owned by Ecopetrol, Colombia's national oil company.

CB&I will provide project management and the engineering, procurement services, fabrication and construction for the new refinery, including the following major components: Crude and Vacuum Distillation, Fluid Catalytic Cracker Naphtha Hydrotreater, Diesel Hydrotreater, Hydrocracker, Hydrogen Plant, Sulfur Plant, Delayed Coker, HF Alkylation, C4 Isomerization, Power Generation and Offsites and Utilities.

In October, the company was awarded a contract in excess of US$100 million by UGI LNG, Inc. to engineer, procure and construct the expansion of the Temple LNG peak shaving facility near Reading, Pennsylvania. CB&I's work scope includes the addition of a new 50,000 cubic meter liquefied natural gas storage tank and related processing facilities designed to provide 150 million cubic feet of natural gas per day during peak demand periods. The Temple LNG expansion will connect directly into the Texas Eastern pipeline to provide gas supplies for the Mid-Atlantic and northeast markets.

Chicago Bridge & Iron Company N.V. provides engineering, procurement, and construction (EPC) solutions, as well as process technologies for the energy infrastructure projects. It primarily focuses on projects related to oil and gas companies. CB&I operates approximately 80 locations around the world. The company was founded in 1889 and is based in The Hague, the Netherlands . Its major competitor is Matrix Service Co. (MTRX).

Read the full analyst report on "CBI"
Read the full analyst report on "MTRX"
Zacks Investment Research

What Obama was really doing in China

Andrew Snyder — Mon, 23 Nov 2009 16:01:50 +0000

pBaltimore #8212; (a href="http://www.todaysfinancialnews.com" target="_blank"TFN/a): It looks like we found out what President Obama was actually doing in China last week. When he wasn’t bowing to foreign leaders or taking tours of historic China, our leader was giving the Chinese some financial advice./p pIsn’t that a scary thought?/p pJust a couple of days after Obama touched down in Washington, China makes a very American decree. It’s telling its banks it had better shore up their capital situations or face strong sanctions from the government./p pThey say imitation is the sincerest form of flattery. America did it first, now the communists are following./p pIn case you missed the news over the past year or so, China’s economy is flat-out soaring ahead. While no figure that disseminates from#8230;/p

The Best Energy Investments in the World

Contrarian Profits — Mon, 23 Nov 2009 15:00:37 +0000

Brian Hunt, editor in chief of Stansberry’s free online investment digest, a href="http://www.thedailycrux.com/"The Daily Crux/a, interviewed Marin [Katusa, Casey Research]to get his take on where oil prices are headed for the long-term... the regions where investors and traders should focus their dollars... and some of his favorite energy companies with massive upside.

Watching the dollar: No more Chicken Little

Andrew Snyder — Mon, 23 Nov 2009 14:08:25 +0000

Is the drop in the dollar worth watching? Just like the sun will eventually shine its last ray of light, the mighty dollar will someday buy its last barrel of oil or its final container of Chinese imports. We all know it is going to happen, so why bother discussing it. Right?

Oil May Look Placid on the Surface – But It’s Roiling Underneath

Taipan Publishing Group — Mon, 23 Nov 2009 12:00:00 +0000

On the surface, oil seems like it’s going nowhere… but the story is very different below the waterline. Keeping up with crude oil is a bit of a migraine these days. nbsp;It’s an essential task, of...div class="feedflare" a href="http://feeds.taipanpublishinggroup.com/~ff/taipan?a=6NiNcS-kFuA:OkuO7KLYUcM:yIl2AUoC8zA"img src="http://feeds.feedburner.com/~ff/taipan?d=yIl2AUoC8zA" border="0"/img/a a href="http://feeds.taipanpublishinggroup.com/~ff/taipan?a=6NiNcS-kFuA:OkuO7KLYUcM:V_sGLiPBpWU"img src="http://feeds.feedburner.com/~ff/taipan?i=6NiNcS-kFuA:OkuO7KLYUcM:V_sGLiPBpWU" border="0"/img/a a href="http://feeds.taipanpublishinggroup.com/~ff/taipan?a=6NiNcS-kFuA:OkuO7KLYUcM:F7zBnMyn0Lo"img src="http://feeds.feedburner.com/~ff/taipan?i=6NiNcS-kFuA:OkuO7KLYUcM:F7zBnMyn0Lo" border="0"/img/a a href="http://feeds.taipanpublishinggroup.com/~ff/taipan?a=6NiNcS-kFuA:OkuO7KLYUcM:wd9GD17jvC4"img src="http://feeds.feedburner.com/~ff/taipan?d=wd9GD17jvC4" border="0"/img/a a href="http://feeds.taipanpublishinggroup.com/~ff/taipan?a=6NiNcS-kFuA:OkuO7KLYUcM:l6gmwiTKsz0"img src="http://feeds.feedburner.com/~ff/taipan?d=l6gmwiTKsz0" border="0"/img/a /divimg src="http://feeds.feedburner.com/~r/taipan/~4/6NiNcS-kFuA" height="1" width="1"/

Energy Blast – Nov 23, 2009

Robert Amsterdam — Mon, 23 Nov 2009 11:41:42 +0000

Iran began five-day, large-scale air defense war games yesterday aimed at protecting its nuclear facilities from attack. Changes in the permafrost in western Siberia are costing Russian oil companies a reported $1.9 billion every year in damage repair for infrastructure...

On the Ground in Brazil

Frank Holmes — Mon, 23 Nov 2009 06:00:00 +0000

If seeing is believing, natural resources and infrastructure opportunities abound in Brazil. The above photo was snapped by our global strategist Jack Dzierwa at Satilde;o Paulorsquo;s Guarulhos International Airport as he spent hours trying to board a domestic flight to Rio de Janeiro. Not surprisingly, he didnrsquo;t make the flight. Jack has traveled extensively around the world, and he says hersquo;s never seen anything like the hectic scene at Guarulhos, which just canrsquo;t service the rapidly growing number of Brazilians who can now afford to travel by air. Scenes like this are important for investment managers to experience in order to grasp the significance of whatrsquo;s taking place in emerging countries like Brazil. You just canrsquo;t get the full flavor of the chaos at Guarulhos from an economic data spreadsheet or a research report. Jack traveled to Brazil to collect some insight on the countryrsquo;s infrastructure development and the best prospects for investment. His experience at the airport gives him tacit knowledge and a clear understanding that Brazil will have to expand on its domestic infrastructure. Brian Hicks, who co-manages our Global Resources Fund (PSPFX), has also spent the week in Brazil ndash; he has been doing research and meeting with natural resources companies. Brazil is a key driver for natural resources and infrastructure markets. It is home to 190 million people, many of them moving into the middle class, and itrsquo;s also one of the worldrsquo;s fastest-growing economies. Similar to China, this rise of the middle class will increase demand for oil and other commodities, and its expansion will put growing pressure on the countryrsquo;s inadequate infrastructure. Just a couple of weeks ago, a blackout left nearly 60 million people without electricity and another 7 million without water. Traffic in downtown Satilde;o Paulo is so bad that many businessmen use helicopters as taxis to get around the city. Brazil only has three main international airports, despite that it has 14 cities with at least 1 million residents. The U.S. Energy Information Administration estimates that Brazil has more than 12 billion barrels of proven oil reserves. That number is certain to grow as we learn more about the large discoveries recently made off its southeastern coast. In addition to vast reserves of oil, it is also a leading producer of iron ore, aluminum, platinum and other industrial metals. This natural wealth puts Brazil in an enviable position compared to some other large emerging economies. As the domestic demand for resources increases with infrastructure expansion, much of that demand can be met from internal sources. This benefits the economy on both ends and sets the stage for further economic growth. Please consider carefully a fundrsquo;s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. #09-818

Russia’s Consumers Get “Carried” Onwards And Upwards

Edward Hugh — Sun, 22 Nov 2009 16:24:00 +0000

blockquote“Cutting rates by 50 basis points here and there is not going really diminish the appeal of the ruble,” said Manik Narain, an emerging markets strategist at Standard Chartered Bank Plc in London. “In terms of nominal interest rates Russia (at 9% as of 24 November) is still offering the highest yields in the emerging market space and in an environment where oil prices are remaining relatively well supported we think that the ruble will continue to be seen as an attractive way to position for global recovery,” /blockquotepbr /The world's central banks are having a hard time of it these days, having just gotten through the worst banking and financial crisis in living memory they now face a growing dilema between continuing to give support to the developed economies (which are yet to recover from those early hammer blows) and the danger of creating fresh global asset price bubbles in emerging economies, asset bubbles which could easily be being fuelled by low US interest rates and a weak dollar. The latest warning in this respect comes not from Nouriel Roubini (or even from me, a href="http://fistfulofeuros.net/afoe/economics-country-briefings/the-dollar-as-a-funding-currency/"but see this post/a, and a href="http://www.forexblog.org/2009/11/interview-with-edward-hugh-the-dollars-demise-is-vastly-overstated.html"this recent interview I gave on Forex Blog/a), rather it emmanates from Germany’s new finance minister, Wolfgang Schäuble. His comments - which were a href="http://www.ft.com/cms/s/0/4ec41a1a-d616-11de-b80f-00144feabdc0.html"cited in last Saturday's Financial Times/a - highlight official concern in Europe that the exceptional steps taken by central banks and governments to combat the crisis carry with them a series of undesireable side effects.br /br /Such openly expressed concerns only add further weight to a href="http://www.ft.com/cms/s/0/85f1fac2-d1dc-11de-a0f0-00144feabdc0.html"recent statements made in China/a, where only a week ago the banking regulator Liu Mingkao explicitly criticised the US Federal Reserve for indirectly fuelling the “dollar carry-trade” – a process whereby investors borrow dollars at ultra-low interest rates in the United States and the invest them in higher-yielding assets abroad.br /br /Wolfgang Schäuble went even further, saying it would be “naive” to assume the next asset price bubble would look just like the last one. “More likely today is a scenario in which excess liquidity globally creates a new [sort of] asset market bubble.” he said, and the fact “ that low interest rate currencies such as the US dollar increasingly being used as a basis for currency carry trades should give pause for thought. If there was a sudden reversal in this business, markets would be threatened with enormous turbulence, including in foreign exchange markets.”br /br /As I argued in my last post on the carry trade, the danger of a short term sudden reversal may be being overstated at this point, since exit from emergency life support will be at best slow and measured in the United States, while ample funding will continue to remain available in Japan, where the central bank a href="http://www.ft.com/cms/s/0/c3a3be3e-d608-11de-b80f-00144feabdc0.html"has now formally recognised that the economy is once more back in deflation/a (officially it exited in 2006, and did the Bank did manage to summon up half a percentage points worth of interest rate rise before falling back again, but in reality, if we strip out the oil price impact, the sad truth is that Japan never really left deflation).br /br /However, regardless of whether or not we are running the danger of having an overly rapid unwind effect, untold damage is in fact being done, with the structural distortions being produced by the massive “wall of liquidity” which is currently sweeping the planet being evident enough, showing up as it is in some unexpected places, like Russia for example.br /br /br /strongRuble Once More On The Rise/strongbr /br /On the face of it the idea that investors who were rushing for the Russian door following the Roki tunnel incursion back in August 2008 may now be rushing back in again may seem hard to believe, particularly given the serious economic recession which followed, and in reality it isn’t quite like this, but what is clear is that a steady and significant flow of funds is now most definitely heading in Russia’s direction - even if the immediate objective is not to increase Russia most definitely needs, namely capital investment. A brief glance at the ruble vs US dollar charts shows immediately what has been happening. After hitting a low of $31.39 on September 2 the ruble has been steadily rising, and was at $28.65 on November 11, since which time it has been hovering, as investors vacilate waiting to see where policy and the currency go from here./ppa href="http://1.bp.blogspot.com/_ngczZkrw340/Sw4pa3BFLiI/AAAAAAAAPow/4p8N8w7-NNQ/s1600/rouble+2.png" /ppimg style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408305743940365858" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sw4pa3BFLiI/AAAAAAAAPow/4p8N8w7-NNQ/s400/rouble+2.png" //a At the same time, if we look at movements in the ruble-USD over a longer period of time (2 years in the chart below) it is plain the the ruble hit bottom on 4 February 2009 at $36.22 after falling steadily from 17 July 2009 when it touched $23.25./pp /ppbr //ppa href="http://3.bp.blogspot.com/_ngczZkrw340/Sw4pXI2mHVI/AAAAAAAAPoo/UTsQ29_bkVA/s1600/rouble+one.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408305680008748370" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sw4pXI2mHVI/AAAAAAAAPoo/UTsQ29_bkVA/s400/rouble+one.png" //abr /br /br /br /br /In fact, as I say, while it is clear that Russia is on the receiving end of a steady inflow of funds, it is far from clear that these funds are of the kind she most needs at this point. Much of the money has been going into stocks, and Russian equity funds drew record amounts at the end of October, according to data provided by EPFR Global. And Bllomberg data show that the ruble has been the second-best performer among emerging market currencies after the Chilean peso over the past three months, gaining 8.7 percent in the period. And even foreign currency purchases from the central bank and lowering interest rates systematically to a record low (in Russian terms) has not worked. Indeed Russi'a foreign currency reserves have now risen to $441.7 billion (as of Nov. 13) compared with the low of $376.1 billion reached on March 13. Indeed the Micex Stock Index of Russia’s 30 most liquid stocks has gained 116 percent this year, making the Index the world’s best- performing benchmark equity measure since January (in local currency terms) according to Bloomberg data. br /br /In comparison Russia’s foreign direct investment plummeted an annual by 48.1 percent, the most on record, to just $10 billion in the first nine months of the year, while overall foreign investment, including credits and flows into securities markets, was $54.7 billion, down 27.8 percent when compared with the same period a year earlier,according to Federal Statistics Service data. Other foreign investments, including loans from foreign banks and Russian companies’ foreign divisions, were down 20.9 percent in the period to $43.7 billion. The consequence of all this is that the decline in investment activity has been - as can be seen in the GDP growth components chart below - perhaps the greatest single drag on the domestic Russian economy over the past twelve months.br /br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Swq58CA-BvI/AAAAAAAAPnI/A-avWTMjlnI/s1600/russia+growth+components.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 297px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407338743595927282" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Swq58CA-BvI/AAAAAAAAPnI/A-avWTMjlnI/s400/russia+growth+components.png" //abr /br /But this overall impression no longer gives us a precise up-to-date picture picture because, in a reversal of the previous pattern of capital flight Russia has, significant capital flows have, since mid-September, been making their way towards Russia, in the process enabling the central bank to once more rebuild up its badly shaken currency reserves. These have fluctuated from a high of $582 billion in August 2008 to a low of $384 billion in Feb – April 2009, and now stand at some $413 billion as of September. What is happening is that pressure to repay those outstanding debts which external lenders are unwilling to rollover means the aggregate capital flow data to some extent masque a change in the structure of Russian external debt. In the opinion of Guillaume Tresca, a Paris-based emerging market strategist with Credit Agricole’s Caylon Unit, the Russian authorities are now under severe pressure to accept the inevitability of short term ruble appreciation and even though they “will try to do what they can to smooth the process, it’s very hard for them to go against the flow” since current “capital inflows are massive.”br /br /Indeed a consensus seems to be now emerging that Russia’s central bank may find itself having to reluctantly accept a stronger ruble next year as rising commodity prices prove too powerful a force for policy makers to counter and as consumer demand plays a bigger role in the bank’s decisions. Representatives of the Russian administration have repeatedly asserted that they will cap the ruble’s advance with Vladimir Putin stating his government won’t allow excessive appreciation in a bid to give some support to struggling exporters. But the Canute like task of driving back the ocean is hardly an easy one, and the IMF recently warned that efforts to fight the ruble’s advance may prove “unproductive.”br /br /The problem is, in the short term at least, letting the rouble rise has its attractions for a Russian administration faced with simmering popular frustration with their inability to get the ongoing contraction fully under control. A rising ruble means slower inflation and more spending power for domestic consumers, who have yet to get over the record 10.9 percent economic contraction which hit them in the second quarter. Given that the eight interest rate cuts introduced by the central bank since April have manifestly failed to unlock the credit flow to consumers as banks hold back their lending on concern borrowers can’t repay their debt (see chart below) a rising exchange rate certainly seems to be worth a second look as a way forward, since while a higher exchange rate coupled with near double digit inflation may cripple manufacturing competitiveness, it does transfer incomes directly into people’s pockets, something hard pressed politicians might see as quite beneficial.br /br /a href="http://3.bp.blogspot.com/_ngczZkrw340/Swv02_RS5BI/AAAAAAAAPnQ/EGbBRnSLgsk/s1600/russia+credit+growth.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 327px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407685003122500626" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Swv02_RS5BI/AAAAAAAAPnQ/EGbBRnSLgsk/s400/russia+credit+growth.png" //a Lending is still - as can be seen in the above chart prepared by the World Bank for its latest report - a problem, and corporate (or non-financial corporation lending) fell by 0.7 percent in September from August continuing the ongoing decline. Lending to households dropped 1.1 percent making the eighth consecutive monthly decline, with year on year levels now in negative territory, while non performing retail loans rose, climbing to 6.4 percent from 6.2 percent.br /br /And the World Bank expect the many bank balance sheets will continue deteriorating as the share of non-performing loans increases. “In the environment of increasing credit risks, lending activities by the banks have remained limited despite improving liquidity conditions in the economy and continuing monetary loosening.” Bad debts in the banking industry may reach an average of 10 percent by the end of the year according to the Bank.br /br /br /And when we look at ruble realities, as the IMF point out, efforts to stem the ongoing rise with intervention are far from being able to give the desired result. Bank Rossii bought a net $15.2 billion and 485 million euros in October, their largest foreign currency purchases since May, and went on to buy $6 billion during the first 17 days of November according to press reports citing central bank chairman, Sergey Ignatiev. Yet last week the Russian the ruble ended 0.1 percent higher at 35.0632 against the central bank’s target currency basket, its strongest level since December 23 2008. The ruble appreciated 3.4 percent in October against the dollar (for its second consecutive monthly gain) and has risen more than 1 percent so far in November. Thus the central bank has now moved on to use monetary policy to try and stem the rise, and said on October 29 that it would also use interest rates in an attempt to reduce the “attractiveness of short-term investments in Russian assets and stop the accumulation of risk”.br /br /The recent rise follows ruble a 35 percent slump against the dollar between August last year and January, raising the cost of imports (which make up about 49 percent of the consumer goods sold in Russia) and, in theory, making Russia's domestic industry somewhat more competitive externally. However, without a sound institutional infrastructure, and a coherent monetary policy, short term devaluation gains can easily be turned into medium term inflation, thus defeating the purpose of corrective price devaluation.br //pp/pbr /br /br /pThe problem is not in fact of recent making, and is a product of a steady and systematic long term mismanagement of Russia's monetary policy which has now created a veritable Procrustean bed of problems for Russia's economy and society. Failure to address the underlying inflation problem between 2005 and 2008 meant that large structural distrortions were accumulated in the economy, including a massive problem of commodity export dependence, a problem which effectively turned the country into a veritable disaster waiting to happen if ever there should be a protracted lull in the secular rise in energy prices. That lull has most definitely now arrived, and while Russia's future depends in the short term - on energy prices, it is far from clear what the future holds for the energy prices themselves. /pbr /pa href="http://3.bp.blogspot.com/_ngczZkrw340/Swv5min3eZI/AAAAAAAAPnY/rqDWKGy7ABg/s1600/world+bank+oil.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 283px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407690218112776594" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Swv5min3eZI/AAAAAAAAPnY/rqDWKGy7ABg/s400/world+bank+oil.png" //abr /br /Weak global demand for oil has led to a sharp rise in excess capacity and OPEC's spare capacity has risen to levels not seen since 2002, when prices averaged USD25/barrel with OPEC’s pricing power staying very low. Up to now oil prices have remained in the USD70/barrel range, supported by OPEC output restraint and its stated desire to have prices reach what it calls "a comfortable level" - ie near USD75/barrel - as well as by expectations of rising demand. At its September 2009 meeting, OPEC left its production quotas unchanged but indicated it would take rapid action if prices dropped sharply. OPEC production, however, continues to edge higher, with compliance to its combined cuts of 4.2 million barrels per day falling to 66 percent in September from 71 percent in August. Thus there is evidence of OPEC strains and there is considerable uncertainty about real levels of 2010 demand, all of which makes for considerable uncertainty about prices. As can be seen in the above chart, World Bank oli price estimates (like the economic growth ones) have fluctuated from a 2010 price estimate of around $62.95 in March to the current (November) level of $75.29. While the earlier estimate may be considered to be too low, the current ones may well be too high, thus a level of $70 may not be an unrealistic forecast. It should be noted however that there are credible dissenters, and in a more or less reasoned analysis Capital Economics suggest that oil prices could well fall back again in 2010 to average somewhere around $50. If this forecast proves anywhere near correct, the Russian economy is going to be subject to major downside risks, due in particular to the difficulties posed by:br /br /i) financing the fiscal deficitbr /ii) rising unemploymentbr /iii) growing bad loans in the banking systembr /iv) refinancing external debtbr /v) the continuing high level of consumer price inflation and the difficulties this poses for monetary policy at the central bankbr /br /Added to all this, the economy will clearly not rebound as easily as many seem to foresee, adding to the risk element on all fronts.br /br /br /strongA Return To Growth In The Third Quarter/strongbr /br /Following the deep output drop sustained in the first half of the year (10.4% of GDP year on year), the slow recovery in global demand and rise in commodity prices has helped lift Russia’s economy up from its earlier lows. But the recovery has only been a modest one, since preliminary data indicate that the economy still registered a 9.4 percent year-on-year drop in the thrid quarter, indicating only a very small improvement (possibly a seasonally adjusted 0.6%) over the second quarter. More recent data also point towards a rather uneven progression, with the manufacturing sector falling back while rising real incomes means that consumer demand is producing stronger growth in the services sector.br /br /As in other countries, investment (both foreign and domestic) took a severe hit on the back of the credit crunch, and gross capital formation was indeedthe main demand side factor dragging GDP down in the first half of the year (by 14 percentage points), followed at some distance by consumption, which contributed 1.2 and 3.0 percentage points to aggregate output contraction rates respectively in the first and second quarters. Net exports, on the other hand, made a positive contribution (5.1 percentage points in the first quarter and 5.9 percentage points in the second) although strongas elsewhere/strong the strongdrop in imports/strong was the key factor. When imports are looked at in volume (price adjusted) terms we find that real ruble depreciation (the real effective exchange rate depreciated by 5.9 percent in the first nine months of 2009) meant that the import contraction was more severe than it seemed, especially in the second quarter of 2009 when the drop in imports meant that net exports increased by 66 percent.br /br /strongUnemployment Falls Back, But Problems Remainbr //strongbr /br /Six million Russians were added to the government’s official poverty count in the first quarter of this year alone, and by the end of 2009, 17.4 percent of the population or 24.6 million people will be living beneath the subsistence level of $185 per month, almost 5 percent more than before crisis, according to World Bank estimates. Unicredit analysts forecast that the number of Russians with disposable incomes of more than $1,000 per month will fall 48 percent this year to about 13.6 million, or roughly 9.6 percent of the population. Thus this recession is likely to have lasting and important results./pbr /pOn the hand, employment statistics from the Federal Statistics Service indicate that a sharp downward adjustment in the labour market took place up to February this year, before moderating and then reversing. Unemployment seems to have peaked in February at 9.5 percent following the sharp decline in output, and the severity of the blow was especially strong in the industrial sector. /pbr /pa href="http://1.bp.blogspot.com/_ngczZkrw340/Swv-srF1PgI/AAAAAAAAPng/ib8hHjWpxx8/s1600/russia+unemployment.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407695821023297026" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Swv-srF1PgI/AAAAAAAAPng/ib8hHjWpxx8/s400/russia+unemployment.png" //abr /br /br /Since the beginning of March 2009, however, with real level of economic activity bottoming out (see above chart), the labor market continued to show moderate improvement: by September the number of those in employment had increased by 2.6 million, and the rate of unemployment fell to 7.6 percent, down significantly but still much higher than in September 2008 (5.8 percent). According to the World Bank this steady improvement is rather misleading as it reflects significant seasonal gains in employment and a shift in labor adjustment towards labor hoarding in the manufacturing sector.br /br /As the World Bank also notes, the long term regional differences in Russian unemployment rates are striking ranging from a low of 1.6 percent in Moscow to a high of 52.1 percent in Ingushetia in August 2009. Traditionally unemployment is largely concentrated in the Southern, Far Eastern and Siberian federal districts. However, the crisis related unemployment shows a different pattern, with the largest increases in unemployment being found in the North Western District (from 4.8 to 7 percent) and the Urals (from 4.9 to 8.1 percent). Regression analysis carried out by the World Bank revealed that unemployment levels were higher in those regions with higher levels of manufacturing, and where industrial production accounted for a larger share of GDP.br /br /And while it is entirely possible that the economy will show a “modest” recovery in the second half of 2009, this is “unlikely to have significant impact on social indicators,” according to the World Bank. Unemployment will increase to 9 percent “as seasonal factors wane” from 7.6 percent in September and it may take three years before the number of Russians living in poverty falls to pre-crisis levels, the World Bank estimates. Indeed, in the short term real incomes are “likely to fall further". /pbr /pstrongMonetary Policy Mess /strongbr /br /The political threat posed by growing unemployment and rising poverty must most certainly be one of the reasons behind Russia’s central bank recent decision to lowered its key interest rates for the eighth time in six months, in a bid to both stimulate lending and to stem the inflow of funds and the rise in the value of the ruble which is making the work of restoring competitiveness to the manufactured sector all the more difficult. Earlier this month Bank Rossii cut the refinancing rate to 9 percent from 9.5 percent and reduced the repurchase rate charged on central bank loans to 8 percent from 8.5 percent. Despite the reductions Russia still has the fourth-highest benchmark interest rate in Europe after Ukraine, Iceland and Serbia.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sw24Z-mJeJI/AAAAAAAAPog/dK4SaanO7nc/s1600/russia+interest+rates.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408181483981076626" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sw24Z-mJeJI/AAAAAAAAPog/dK4SaanO7nc/s400/russia+interest+rates.png" //abr /br /The best thing that can be said about Russian monetary policy instruments is that they are hopelessly ineffictive. Even October consumer-price growth at 9.7% annually, while well down on June 2008s 15.1 percent peak, is still horribly unacceptable, and it is extremely hard to understand how economic mismanagement and incompetence can have reached such a level that an economy which has been contracting at the rate of nearly 10 per cent a year can still have this kind of price inflation. There is no other word for it, this is a mess.br /br /br /The bank is caught on the horns of a large dilema, since cutting rates further to stem inflows and the ruble rise may only risk fuelling more inflation, yet First Deputy Central Bank Chairman Alexei Ulyukayev stressed only last week that the central bank did not exclude the possibility of further cutting its rates in November and that its board could discuss a cut as early as Nov. 24. Indeed the bank stated explicitly at the end of October that it was ready and willing to use interest rate policy to stem speculative capital flows that "threaten to undermine currency stability". /pbr /pstrongInflation Woesbr //strongbr /One consolation at least in all this mess is that pressure on Russia’s producer prices have been easing, and prices have even been falling. According to the preliminary data from the State Statistics Service, the price of goods leaving factories and mines was in fact down an annual 10.8 percent in August following a record 12.3 percent drop in July. Evidently The with the 2008 spike in oil and energy prices the logic behind this is easy to see. What is not so easy to see is why domestic prices take so long in responding to general capacity utilisation signals and why the Economic Development Ministry still seems comfortable with the expectation that average inflation will range between 12 percent and 12.5 percent in 2009 only marginally down from last year’s 13.3 percent. Stunning!br /br //pbr /br /pa href="http://3.bp.blogspot.com/_ngczZkrw340/Sw0V_P4X0lI/AAAAAAAAPno/7WSwEAciAlg/s1600/russia+inflation.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408002903880749650" border="0" alt="" src="http://3.bp.blogspot.com/_ngczZkrw340/Sw0V_P4X0lI/AAAAAAAAPno/7WSwEAciAlg/s400/russia+inflation.png" //abr /br /And while consumer price inflation has been tame in recent months this good behaviour may not last long, since it could rise more than expected in November, according to Deputy Economic Minister Andrei Klepach, a development that could prompt the central bank to bring its rate-cutting policy to a halt. Consumer prices could rise "by about 0.3% to 0.4%" in November, Klepach said in comments recently. And Klepach’s prediction seems to be near the mark, since consumer prices rose 0.1% in the week to 9 November, bringing to an end a period of just over three months without inflation, according to the latest data from the Federal Statistics Service. Looking into the future price growth may be further spurred by an influx of budget spending in the fourth quarter, as well as by a planned 30% increase in pensions which is due to come into effect on 1 December.br /br /The rising ruble, driven by higher oil prices and speculative capital seeking to capitalize on Russia's comparatively high interest rates, has put the central bank in a quandry. While a strengthening currency hurts the country's exporters, further rate cuts risk driving up inflation, which Prime Minister Vladimir Putin predicted – probably optimistically - would be just over 8% by the end of the year, which amazingly would be a post-Soviet low.br /br /In fact, despite the fact that inflationary pressures have been easing in Russia in recent months, chiefly due to collapsing consumer demand and outlfows of capital following the crisis that hit the country a year ago, Russia's inflation in January 2010 is only expected to be "significantly below "the level of January 2009, according to the First Deputy Chairman at the central bank Alexei Ulyukayev recently. This kind of argument is hardly reasssuring, since inflation last January was at an annual rate of 13.4%, and the suggestion now is that consumer prices will increase by between 0.2% and 0.3% in November and by the same amount in December.br /br /strongWhy Not Devalue?/strongbr /br /Well, one way not to solve the problem would be a ruble devaluation according to European Bank for Reconstruction and Development Chief Economist Erik Berglof. Even while recognising that the country has a very difficult couple of years in front of it, Berglof argued recently “this (devaluation) is the wrong way to think about the recovery in Russia”.br /br /As he said, Russia’s failure to wean itself off its reliance on commodity exports has condemned the country struggling to find economic growth in the face of a large drop in demand for its key export products. “If you want to have a flexible exchange rate, you need to get out of this dependence on commodities,” Berglof said. “It’s a major concern that in the last 10 years Russia has become actually more dependent on commodities. Unfortunately, not much progress has been made.”br /br /Well, this is eaxctly the point, and is why I have been arguing over the last two year about how a href="http://russiatooat.blogspot.com/2007/12/inflation-in-russia-two-much-money.html"all those wage increases which the Russian administration seemed to rejoice in/a (since they bought short term popularity, and fuelled consumption) simply stoked-up the domestic inflation bonfire and in the process did untold damage to domestic competitiveness. However it is evident Russia's industries cannot now simply be transformed overnight, and this is where I find a weakness in Berglofs argument, since some remedy is needed to straighten out the distortions and get of commodity export dependence. But what? If it isn't devaluation, then surely we will need to see very substantial wage deflation in order to attract the now much needed inward foreign investment.br /br /Of course not everyone agrees with Berglof, and the Russian Association of Regional Banks, whose 450 members include the Russian units of Barclays and Citigroup, has called for a devaluation of as much as 30 percent. Billionaire Vladimir Potanin, realist and owner of 25 percent of OAO GMK Norilsk Nickel, said in recent interview with the Russian Newspaper Vedomosti that the “interests of the economy” will lead the currency to depreciate in the “mid term,” allowing exporters to cut costs and modernize production.br /br /Nonetheless energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states during the first seven months of this year, according to the Federal Customs Service, while metals were responsible for another 12%. So the commodities dependency is massive, and this situation can't be turned round easily.br /br /strongGetting Carried Away By Global Liquidity?/strongbr /br /Bank Rossi are also not 100% convinced by the merits of Berglof's reasoning, as witnessed by the fact that they facilitated a 35 percent depreciation in the ruble during the second half of last year (see chart below), and as the collapse in raw material prices and the dramatic change in local credit conditions first pushed Russia's economy into recession the ruble’s trading range was widened to between 26 and 41 against the dollar-euro basket.br //pbr /pHowever, as I keep stressing, the central bank is now locked on the horns of a massive dilemma, since as risk appetite returns, with it comes the enthusiasm for buying the so called "high yield" currencies - like the South African Rand, the Russian ruble and the Hungarian forint. Instruments denominated in all these currencies offer investors substantial returns at the present time thanks to offering some of the highest interest rates among globally traded currencies.br /br /Indeed buying Russian rubles was one of the key recommendations made by Angus Halkett, currency strategist at Deutsche Bank in London, in a research report published back in April, and the market seems to have followed his advice The so-called carry trade works by investors borrowing in currencies with low interest rates and good prospects of continuing depreciation (the USD at the moment, for example) in order to buy higher-yielding assets, in countries with high domestic interest rates and continuing prospects for ongoing appreciation.br /br /In general, engaging in one or other form of the thousand-and-one-varieties carry trade is pretty standard practice during times when returns for real economic activity are low, and central banks hold down rates and supply liquidity. Indeed we may include here the kind of carry practiced by banks in borrowing from the central banks only to then lend - for a small, but very low risk, interest rate commission - to their national government, who at this stage in the business cycle will normally be running a fiscal deficit. So more than funding recovery, the watchword at the moment is very much "carry on carrying".br /br /But for those on the receiving end, the consequences of so much carry are far from innocuous, since the process simply funds all sorts of economic distortions, and far from allowing normal market corrections to occur, it simply amplifies the problem. And this is exactly what is starting to happen now in Russia. The ruble had its biggest weekly advance in more than three months last week as risk sentiment rose, following industrial output data from China, which is now the world’s second-largest energy user, which simply showed output increased at a faster pace than forecast.br /br /As a result the ruble tends to rise as risk sentiment does, and in particular as economic data exceeds consensus expectations, and the currency has now been on an upward trend since mid-August (see chart below), gaining 0.7 percent to 30.6629 per dollar last Friday alone. This was the highest close since July 27. Over the week as a whole the ruble appreciated 3.1 percent, the most since the week ending May 22. So things are now becoming very detached from the so called "fundamentals" (whatever those might be in the topsy turvy world in which we now live), since it simply is not plausible that the currency should be rising in this way in a country with 12 percent consumer price inflation and which badly needs to move away from commodity export dependency. The only conclusion which could be drawn is that the Russian economy now needs massive structural reforms, and on any imaginable scenario in the world in which I live these are simply not going to be implemented.br /br /On the other hand Russia’s central bank may have to accept a stronger ruble next year as rising commodity prices prove too powerful a force for policy makers to counter and as consumer demand plays a bigger role in the bank’s decisions. The authorities “will try to do what they can to smooth the appreciation, but it’s very hard to go against the flow,” said Guillaume Tresca, Paris-based emerging market strategist for Calyon, the investment-banking unit of Credit Agricole. “Capital inflows are massive.”br /br /Policy makers have indicated they will cap the ruble’s gains and Prime Minister Vladimir Putin has said his government won’t allow an excessive appreciation as exporters struggle to tap into a global trade recovery. Even so, efforts to fight the ruble’s advance may prove “unproductive,” the International Monetary Fund warned on Nov. 12, adding that “underlying factors” justify its strength. There is a growing consensus that Russia’s central bank is now close to accepting the inevitable, and will allow the ruble to continue appreciating to help domestic demand and cap inflation. As Clemens Grafe, chief economist at UBS in Moscow puts it, “A higher exchange rate, because it transfers incomes into people’s pockets, could actually be more beneficial,”br /br /strongFiscal Resources Near To Running On Empty?/strongbr /br /br /According to preliminary estimates from the Ministry of Finance, the federal budget deficit totaled 4.0 percent between January and September, slightly below the expected level, in part due to the under execution of budgeted expenditures in the first three quarters of 2009. The federal non-oil deficit (which excludes drawing on oil revenues) amounted to 11.0 percent. This is managable, especially given the comparatively low level of Russian sovereign debt to GDP. However, as the World Bank point out under the likely scenario of a sluggish global recovery and modest growth, Russia will face a tightening budget constraint and need to reduce expenditures and the fiscal deficit over the medium term. Further, funding the planned increase in social expenditures, mainly related to increases in pensions, may well requires spending cuts in other expenditure categories. /pbr /br /pThe Ministry of Finance baseline federal budget estimates with conservative oil assumptions icorporate plans to reduce the federal budget deficit from 8.3 percent of GDP in 2009 to 3 percent in 2012, but the medium term fiscal outlook also indicates an extensive drawdown of Russia's Reserve Fund to finance the deficit. Given the size of the anticipated deficit, the Reserve Fund is likely to be depleted by the end of 2010 and borrowing will be required to offset the gap. Estimates of the Ministry of Finance indicate that the combined external and internal borrowing to cover the fiscal deficit will amount to 1.0 percent of GDP in 2009, 1.6 percent in 2010, 2.5 percent in 2011, and 1.5 percent in 2012. All of this is manageble, but the depletion of the Reserve Fund does mean that if downside risks materialise, and in particular if there are more writedowns in the banking sector needing government support that there is now little in the way of a cushion between managed adjustement and unstable dynamics.br /br /br /strongOutlook – A Hard Road To Travel/strongbr /br /br /If one thing is clear hear it is that attaining a recovery in Russia's economic fortunes at this point is going to be no easy feat, as a href="http://www.bloomberg.com/apps/news?pid=newsarchiveamp;sid=aC8Q3ycECRlw"Trust Investment Bank put it in their latest report/a, October data for the world’s largest energy exporter suggest “an almost complete absence of clear signs of recovery” since industrial output slumped and capital investment fell. October capital investment was still down 17.9 percent while industrial output dropped an annual 11.2 percent in October worse than the September reading. Even unemplyment was up again, at 7.7%, although as the World Bank pointed out, this is the result of the same seasonal factors which lead to the fall in unemployment over the summer. Dbr /br /On the other hand disposable incomes climbed a monthly 6 percent in October and rose 3.9 percent compared with the same period last year, the biggest annual jump since September 2008, according to provisional data from the Federal Statistics Service, while wage declines eased with wages falling an annual 4.5 percent, compared with a 4.9 percent annual decline in September. And retail sales, which had previously fallen for nine consecutive months, the longest period of declines on record, suddenly sprang back to life, with October retail sales rose 3.2 percent from September and declined by 8.5 percent on an annual basis as compared with a 9.9 percent drop the month before.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sw0ZKg7CYQI/AAAAAAAAPnw/bQRC4SINF3E/s1600/russia+retail+sales.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408006395968774402" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sw0ZKg7CYQI/AAAAAAAAPnw/bQRC4SINF3E/s400/russia+retail+sales.png" //abr /br /Other data also show this mixed picture. Monthly GDP Indicator data from VTB Capital, based on the PMI surveys for the Russian manufacturing and service sectors, continued to show economic contraction on an annual basis in October, butthe rate of decline eased for the fifth consecutive month. The Indicator showed a 0.6% annual contraction, the slowest rate seen suring the current eleven-month period of continuous decline.br /br /a href="http://4.bp.blogspot.com/_ngczZkrw340/Sw2smUlPK_I/AAAAAAAAPoA/Det1Qvhq7ls/s1600/GDP+indicator+2.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408168501901732850" border="0" alt="" src="http://4.bp.blogspot.com/_ngczZkrw340/Sw2smUlPK_I/AAAAAAAAPoA/Det1Qvhq7ls/s400/GDP+indicator+2.png" //abr /br /The seasonally adjusted Total Activity Index remained above the no-change mark of 50.0 for the third month running in October, indicating growth of private sector output. The Index improved fractionally over September, to 54.2, indicating reasonably robust growth (although it remained below its historic trend of 56.6). This was driven by a faster rise in services activity, while the rate of growth in manufacturing production slowed to a weaker pace. On a quarterly basis the indicator showed 0.4% q-o-q growth for the second month running.br /br /a href="http://2.bp.blogspot.com/_ngczZkrw340/Sw2qzRN1UlI/AAAAAAAAPn4/h6pCnqcA1nI/s1600/GDP+Indicator+One.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408166525313307218" border="0" alt="" src="http://2.bp.blogspot.com/_ngczZkrw340/Sw2qzRN1UlI/AAAAAAAAPn4/h6pCnqcA1nI/s400/GDP+Indicator+One.png" //abr /br /blockquoteCommenting on the survey, Aleksandra Evtifyeva, Senior Economist at VTB Capital, reported:br /br /““The GDP Indicator continued to point to an improvement in economic activity in October. The manufacturing sector’s performance deteriorated slightly while activity in the services sector is approaching pre-crisis levels. This might be one of the consequences of higher oil prices and a stronger rouble as low export orders were the main drag on manufacturing. Another encouraging development highlighted by the October surveys was the deceleration in the pace of job cuts: the employment sub-indices now stand at around 47, which is already higher than last autumn./blockquotebr /The GDP indicator reading was based on manufacturing sector survey findings which confirmed that overall Russian manufacturing business conditions deteriorated in October. Although output, new orders and input purchases all continued to grow, the rates of expansion slowed compared to September. Moreover, manufacturers shed jobs at a faster pace than in September.br /br /The headline seasonally adjusted Russian Manufacturing PMI fell from 52.0 in September to 49.6 in October, signalling an overall deterioration in the business climate at the start of the fourth quarter. It was the first month-on-month fall in the headline index since it plummeted to a record low (33.8) in December 2008, although the latest figure was indicative of only a marginal rate of decline. Of particular note, the new export orders index posted a strongish decline to 47.8, evidently reflecting the recent ruble appreciation. The input price index continued to point to strong rise in costs associated with metals, energy and oil-related items while output prices index pointed to a moderating growth in price charged.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sw2xWi1TESI/AAAAAAAAPoI/50mTeapNq4s/s1600/russia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408173728407425314" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sw2xWi1TESI/AAAAAAAAPoI/50mTeapNq4s/s400/russia.png" //abr /br /In contrast the rebound in Russian services activity rose continued in October, supported by a record fall in charges, and Russia's services sector, which accounts for about 40 percent of the economy, rose for the third consecutive month, reaching its highest level since September 2008, although the reading of 54.3 still remained significantly below the long-run series average.br /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sw2yMDZ9MQI/AAAAAAAAPoQ/ZbQ0hewWC1Y/s1600/russia.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408174647684182274" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sw2yMDZ9MQI/AAAAAAAAPoQ/ZbQ0hewWC1Y/s400/russia.png" //abr /br /br /strongSo Where Do We Go From Here?/strongbr /br /In contrast to the most recent PMI data and the opinions of analysts like Neil Shearing at Capital Economics and Trust Investment Bank , Russia's political leaders are markedly more optimistic. Russia’s economy may expand as much as 4 percent in the last quarter of 2009 following a timid return to growth in the third quarter, according to Deputy Economy Minister Andrei Klepach speaking at a conference in Moscow recently. The economy may show “quite strong growth” of between 3 percent and 4 percent in the fourth quarter over the previous three months, Klepach said. This is an interesting claim, and doubly so given that Klepach has been quite cautious so far this year in his claims. Evidently the rising price of oil and the return of some financial flows into Russia is firing up optimism, as are the numbers for retail sales, we will just have to hope they won't fire up the inflation process again, although with lending to households still stuck in gridlock, perhaps the dangers here should not be overstated. More worryingly, inflation may fail to fall significantly from its current high level, even as the central bank reduces interest rates in a bid to stem the ruble rise.br /br /Klepach's optimism is not shared, however, by the World Bank who in their latest report argue Russia’s economy will suffer a deeper contraction than they previously estimated this year even after a series of central bank interest rate cuts which have manifestly failed to ease the “prolonged” credit drought. The World Bank now expect the Russian economy to contract by 8.7 percent this year, compared with their June forecast for a 7.9 percent decline. The government is currently predicting the economy will shrink 8.5 percent this year and grow 1.6 percent next year.br /br /br /blockquote“We expect that the central bank will continue lowering its policy rate in thebr /near future to facilitate credit to the real sector,” the World Bank said. “Thebr /impact, however, appears to be limited. The policy rates are mostly indicative,br /while the cost of credit remains very high.”/blockquoteThe OECD, on the other hand, seems rather more positive, arguing that Russia’s economy will enjoy a stronger commodity-driven rebound than first estimated, although, they hasten to add, authorities should avoid a sudden removal of stimulus measures to ensure the domestic economy keeps up the pace of its advance. They now expect the Russian economy to expand by 4.9 percent in 2010, compared with a June forecast for 3.7 percent growth, although output is still expected to contract 8.7 percent this year (broadly in line with the World Bank), more than the 6.8 percent estimated in June. The 2010 figure seems very optimistic in the light of the problems here identified, and more than adding to our appreciation of the Russian situation such numbers may rather cast doubt on the methodology being applied, and raise questions about some of the numbers being seen for other countries.br /br /br /blockquote“Although recovery is in prospect, the large output gap and subdued inflation suggest that policy stimulus should not be removed too hastily,” the OECD said. “Fiscal policy should be managed to avoid dislocative demand effects from a surge of expenditures in late 2009 followed by a tightening in 2010.” /blockquotebr /According to the OECD, Russia’s economy will enjoy a stronger commodity-driven rebound than first estimated and “Fiscal and monetary stimulus and the recovery of global demand should result in a strong rebound of output towards the end of 2009". The basic OECD argument is that “A large part of the policy stimulus will be felt only late in the year, as fiscal expenditure is back-loaded and a series of interest rate cuts began only in the second quarter.”br /br /strongLong Term Impact On Russian Growth/strongbr /br /But let us not underestimate the difficulties. According to the World Bank Russia’s real GDP will likely return to pre-crisis levels only in late 2012. And, the Bank says, without a more productive, diversified, and competitive economic base, its long-term growth is likely to be slower than in the past decade and than the pre-crisis expectationbr /br /a href="http://1.bp.blogspot.com/_ngczZkrw340/Sw21w05Cq4I/AAAAAAAAPoY/BxotSEDWSOI/s1600/Russia+Trend+Growth.png"img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 213px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408178577978076034" border="0" alt="" src="http://1.bp.blogspot.com/_ngczZkrw340/Sw21w05Cq4I/AAAAAAAAPoY/BxotSEDWSOI/s400/Russia+Trend+Growth.png" //abr /br /Russia’s pre-crisis decade of prosperity was built on strong capital inflows, rising consumer and corporate credit, and significant capital investment. The post-crisis world will look very different: Russia will need to implement fiscal adjustment and diversify its economy in the context of sluggish global growth, low capital flows, and more limited access to foreign financing. So it is now time to look towards a new growth model based on increases in productivity and know-how and on more efficient allocation and use of investment, labor, and FDI. Next generation reforms should be geared to make Russia's monetary policy instruments much more effective, the Russian economy much more productive, diversified, and open—and more able to respond to future shocks. The success and duration of the transition from the current model of heavy dependence of natural resources to a more sustainable growth model depends, according to the World Bank on maintaining a competitive exchange rate, sustaining a prudent fiscal stance, improving the investment climate, more mobile capital and labor, making the financial sector deeper and more efficient, investing in infrastructure to eliminate key bottlenecks to growth, and strengthening governance and fighting corruption as part of the overall effort to improve the effectiveness of the public sector.br /br /The OECD more or less agrees: “Laying the foundations for sustained rapid growth will require unwinding some of the distortive consequences of the crisis". And, may I add, unwinding some of the distortive processes which lead the crisis to be such a severe one in the first place.div class="blogger-post-footer"img width='1' height='1' src='https://blogger.googleusercontent.com/tracker/7303901362201842397-2825345067395600868?l=russiatooat.blogspot.com' alt='' //div

Exponential Growth, Finite World – Analyst Blog

Dirk Van Dijk — Fri, 20 Nov 2009 21:27:04 +0000

I want to talk about the challenge of exponential growth in a finite world. This is a concept that while on its surface seems easy to get, most people don’t fully grasp it.

Any growth rate that is positive will lead to a doubling in size eventually -- the higher the growth rate, the quicker the doubling. A quick "back of the envelope" method of figuring it out is known as the rule of 70. If you divide a growth rate into 70, it will roughly give you the time for something to double. Thus if something is growing at 2% a year, then it will double in about 35 years, at 5% only 14 years, etc. If you want to be more precise, you can always use your Y^x button on your calculator, but the rule of 70 will do for this discussion.

Clearly, exponential growth is what we are looking for when we invest -- better known as compound interest -- and it is vital to anyone’s financial health that they stay on the right side of it. People who get on the wrong side -- for example, by carrying a credit card balance -- are eventually headed towards financial oblivion. If that is you, then your best investment is probably not one of the stocks or ETFs that I recommend, it is paying down you damm Visa bill.

It is also why I try to watch the downside when I make investment decisions. It is far more important to avoid 50% losses than it is to have a 50% gain. After all, if you had a 50% gain in one year, but in the next year you suffered a 50% loss, at the end of two years that dollar would have turned into just $0.75 -- a 25% loss.

However, far more important to the world is the dark side of exponential growth. Let's start with the obvious one: population growth. The table below comes from Wikipedia, but is based on UN data. Note that from 1750 to 1800, the world population grew from 791 million to 978 million -- an increase of 187 million, or 0.4% per year. From 1850 to 1900, it grew from 1.262 billion to 1.650 billion -- an increase of 388 million or at 0.53% per year.

Thus, even very small growth rates can result in some very large increases extended long enough, and as the base grows, the absolute increase gets larger each year even if the rate of increase stays the same. Now look at what has happened more recently. From 1950 to 1999, world population increased by 3.457 billion, more than doubling from 2.521 billion, an increase of 1.78% per year. Lately we have seen a slowdown in the growth rate; from 1999 to 2008 it was just 1.29% per year, but that has meant an increase of 729 million in just nine years, or 92% of the entire world population in 1750.

Looking forward, the U.N does see a further reduction in the rate of growth, to just 0.68% per year, or almost back down to the growth rate in the very earliest days of the Industrial Revolution. But the base is so much larger, the absolute increase is 2.2 billion, or almost the world population of 1950. The effect is that a long-term graph of world population looks like a picture of a rocket launch. And unless you believe in the Mayan calendar or the equally silly "end times" nonsense, this is going to cause some very big problems (not that the end of the world in 2012 wouldn't be a very big problem on its own).

Now look at where the growth is coming from. The combined populations of North America (Mexico is included in the Latin American numbers, so basically the US and Canada) and Europe are actually expected to fall from the current 1.069 billion to 1.020 billion. All of the growth is coming from Asia, Africa and Latin America.

The only thing that can keep up with exponential growth is something that itself grows exponentially. Fortunately, the one thing that grows exponentially at a very fast rate is computing power, which in turn allows for technological advances. So far, technology has managed to hold off the worst of the problems that one might expect. After all, this analysis is not exactly original. It was first made by Thomas Malthus back before world population hit the 1 billion mark.

However, you can eat potato chips, not computer chips. One of the things that technology has done is level the playing field, so that people in Asia and eventually Africa will have the same shot at success as people in the U.S. and Europe. They can see how we live, and surprise, surprise -- they would prefer to live the way we do, and are increasingly able to do so. As they do, the economic growth opportunities will be huge.

That is why I like the emerging markets story so much. However, given the challenges of trying to research foreign firms who might be best positioned to take advantage of these trends, it probably makes sense to use ETFs such as the I-shares MSCI Emerging Market Fund (EEM) or more country-specific variants like the Claymore China Small Cap ETF (HAO) or the Wisdom Tree India Earnings ETF (EPI).

One of the things that has been absolutely key to our ability to have so much higher living standards today than back in, say, 1850 is that we use a lot more energy.

So let’s take a look at energy consumption per capita (the data I’m using comes from here if you want to investigate further). In 2005, people in North America used the equivalent of 8157.9 kilograms of oil per year (kgoe/y) per person, up from 7942.9 kgoe/y in 2000. Thus while our rate of increase in energy consumption was just 0.54% per year, it was on a high base so the absolute increase was 215 kgoe/y over that time.

Now look at Asia (excluding the Middle East). In 2000, they were using 865.2 kgoe/y, and by 2005 it was up to 1051.5 per year. That is an increase of 3.98% per year, or to go back to the rule of 70, it means that if it keeps up Asia’s energy consumption per capita will double by 2022. Combine that with a population that is expected to grow at 0.6% per year, and Houston, we have a problem.

However, note that the absolute increase in energy use per capita in Asia was just 186 kgoe/y, or just 86.5% of the increase in North America, despite the far higher growth rate. However, if the relative growth rates continue, that will not last. If we extrapolate out the growth rates of 2000 to 2005 then by 2015, Asia’s per capita consumption will grow to 1,553.0 kgoe/y, an increase of 501.5, while the absolute increase in North America will be "only" 451.4 kgoe/y.

Put another way, right now we use 7.76x as much energy per person as in Asia (keep in mind these figures include relatively rich countries like Japan and South Korea, as well as basket-cases like Burma and Bangladesh), and by 2015 that ratio will fall all the way down to 5.54x as much.

Now, the peak year for actual oil discovery in the world was in 1964, and as you pump oil out of the ground it is gone. Once you reach the point where you have pumped half the original oil in a field, it is basically impossible to increase the annual output from that field without causing serious damage that eventually results in that oil being trapped forever. Most of the currently producing fields are past their peak. As the International Energy Agency (IEA) found last year:

"Output from the world's oilfields is declining faster than previously thought, the IEA said in its annual report. Without extra investment to raise production, the natural annual global crude oil depletion rate is 9.1%. The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as in the North Sea, Russia and Alaska. The effort will become even more acute as prices fall and investment decisions are delayed. Even with investment, the annual rate of output decline is 6.4." (See here for full story.)

Now the situation is better for natural gas (NG) than it is for oil, but eventually that will run out as well. However, we have much more time thanks to the new shale plays here in the U.S. We need to shift to more usage of NG as a bridge towards the eventual goal of producing most of our energy from renewable sources like wind and solar. But given the tiny fraction of the world’s energy they now represent, we will need many years of very fast growth in them to make a substantial dent in world energy needs.

Natural gas also has the benefit of being located here in North America, rather than in rather unstable and hostile areas of the world, the way oil is.

The U.S. cannot continue to run massive trade deficits with the rest of the world. The trade deficit is the source of our external debt, not the fiscal deficit. Our external debt is now (as of 6/30/09) at $13.454 trillion -- up from just $7.744 trillion five years ago. That is a growth rate of 11.7% per year, and is clearly not sustainable (that might be overstating it since it is a gross number; we do hold some debts of other countries that offsets it in part). Still, even if the net growth rate is half that amount, it is clearly unsustainable, and is one of the reasons the dollar is going to be under long-term pressure.

Putting this all together it seems clear to me that the price of energy must continue to rise over the long term. Companies that are going to be able to increase their production of oil, such as Petrobras (PBR) are going to be exceptionally well positioned.

While natural gas should see a big growth in demand, it is not a perfect substitute for oil. Still, big gas producers like EnCana (ECA) have a very bright long-term future. I would also note that what I am saying about oil also holds true for other commodities. Energy and commodities are going to be the real stores of value and of wealth over the next few decades.
Read the full analyst report on "EEM"
Read the full analyst report on "HAO"
Read the full analyst report on "EPI"
Read the full analyst report on "PBR"
Read the full analyst report on "ECA"
Zacks Investment Research

Stone Energy Outdoes Estimates – Analyst Blog

Zacks Market Commentaries — Fri, 20 Nov 2009 19:14:28 +0000

Stone Energy Corporation (SGY) reported third-quarter 2009 earnings of $1.06 per share, beating the Zacks Consensus Estimate of 66 cents and the year-earlier earnings of $1.04. The robust results were driven by increased production volumes and reduced costs.

Production during the quarter averaged 239 million cubic feet of gas equivalent per day (MMcfe/d), compared to average daily production of 209 MMcfe/d in the prior quarter and 129 MMcfe/d in the year-ago quarter. This increase was primarily due to the company’s successful execution of its hydraulic rig work over program, reduced cycle time and optimization of individual well rates.

Stone expects net daily production to average 225-235 MMcfe in the fourth quarter and 210-220 MMcfe in 2009.

Discretionary cash flow was $157 million during the quarter, down approximately 4% year over year. Prices realized during the quarter averaged $77.39 per barrel of oil (down more than 27% year-over-year) and $5.90 per Mcf of natural gas (down nearly 45% year-over-year). Overall realization, on a per Mcfe basis, was down in excess of 34% year-over-year to $9.23 per Mcfe.

On the costs front, unit lease operating expenses (LOE) were down significantly to $1.28 per Mcfe. The significant reduction in LOE was due to lower maintenance projects operation. DD&A was down nearly 29% year-over-year to $3.06 per Mcfe and SG&A expenses were down 51% year-over-year to 43 cents per Mcfe.

Stone’s capex guidance for 2009 is $300 million, excluding acquisitions, capitalized interest and G&A. For 2010, the company is expecting $350 million of capex though it is yet to be approved by the Board. At the end of the quarter, the company had approximately $98 million in cash and $650 million in long-term debt. Current debt-to-capitalization ratio is 59.9%.

The Gulf of Mexico (GoM) shelf has helped the company to deliver a strong quarter underpinned by both production growth and decreased cost. Last year’s acquisition of Bois d’Arc Energy, a pure-play GoM player, has increased Stone’s footprint in this region. Given this acquisition, the company has now visibility into three years to five years of oil development drilling and more approved developed non-producing reserves.

However, Stone’s high cost and capital-intensive Gulf Coast-centric asset base as well as lack of meaningful exposure to the emerging shale plays are competitive disadvantages. Consequently, we recommend a Neutral rating for the stock.
Read the full analyst report on "SGY"
Zacks Investment Research

This Small Oil Producer is Ripe for a Takeover… Here’s How to Profit

Investment U — Fri, 20 Nov 2009 18:18:58 +0000

This Small Oil Producer is Ripe for a Takeover… Here’s How to Profit by Sheena Martin, Contributing Editor Friday, November 20, 2009 Takeovers are big news in the market at the moment. In fact, did you know that takeovers have the biggest one-day gain in stocks for any asset? As my colleague – and takeover expert [...]

Small Cap Voice Featured Company: Rival Technologies Inc. (RVTI.OB)

QualityStocks — Fri, 20 Nov 2009 17:00:36 +0000

Rival Technologies Inc. is an innovative energy related technology company focused on investing in emerging technologies that display extraordinary market potential. The company has filed several provisional patents and patent applications and is focused on licensing its technology for industry use. Rival Technologies. Inc. is the parent company of TRU Oiltech Inc. which researches alternative [...]

The Dollar, the Euro, and being Bullish on Gold

Contrarian Profits — Fri, 20 Nov 2009 13:22:14 +0000

The dollar nevertheless remains the world’s leading reserve currency, with the euro in second place. Investors are naturally anxious to protect themselves against markets, including currency markets, which have shown such a high degree of volatility. The Chinese, who have the greatest number of dollars in their currency reserves, have already suffered substantial losses. In what amounts to a crisis of the dollar, the euro is in second place as a reserve currency, but there are potential threats to the future of the euro, due to the weak productivity of the Mediterranean economies.

Zacks Analyst Blog Highlights: Toyota Motors, Petroleo Brasileiro S.A., ExxonMobil Corp., Chevron Corp., and Royal Dutch Shell PLC – Press Releases

Zacks Market Commentaries — Fri, 20 Nov 2009 12:26:57 +0000

For Immediate Release

Chicago, IL – November 20, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Toyota Motors (TM), Petroleo Brasileiro S.A. (PBR), ExxonMobil Corp. (XOM), Chevron Corp. (CVX) and Royal Dutch Shell PLC (RDS.A).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Thursday’s Analyst Blog:

Toyota’s 1st Sales Gain in 15 Months

Toyota Motors (TM) has posted its first year-over-year monthly sales gain across the globe in 15 months during October. The company’s sales rose 4% to more than 630,000 vehicles. In the U.S., the company’s sales fell 3.5%.

However, in the domestic market Toyota’s sales grew 15% helped by tax breaks for purchases of environment-friendly cars. In China, the company saw a staggering rise of 40% in sales. Toyota returned to profitability in the second quarter of fiscal 2010 ended Sep 30, 2009, after reporting losses since the third quarter of fiscal 2009.

The company posted a profit of ¥21.8 billion ($232 million) or ¥6.96 per share (7 cents) per share. This profit was attributed to government incentive programs across the world – such as the U.S. “Cash for Clunkers"– that helped the company recoup its market share. Consolidated revenue in the quarter dipped 24% to ¥4.54 trillion ($48 billion).

Automotive revenue fell 24% to ¥4.11 trillion ($44 billion) while Financial Services revenue shrank 17% to ¥307 billion ($4 billion). This was on the back of a decline in vehicle sales in each region as well as a negative impact from the appreciation of yen. Sales volume declined 16% to 1.64 million units due to a decrease in volume in all the regions except North America.

Petrobras Profit Exceeds Ests

Total oil and gas production during the third quarter of 2009 reached 2,534 million oil-equivalent barrels per day, from 2,524 million in the previous quarter and 2,437 million in the same period of 2008. Compared to the third quarter of 2008, Brazilian oil and natural gas liquids production increased 4.8%, while international production was up 24.6%. However, Brazilian natural gas volumes were down 3.3% from the year-ago period, while international output during the quarter was down 6.0% year over year.

During the third quarter of 2009, the average sales price of oil in Brazil decreased 36.4% from the year-earlier period to $64 per barrel. Average sales price of international oil was down 16.9% year-over-year, reaching $57.16 per barrel. Regarding natural gas, average international sales price decreased 21.5% from the third quarter of 2008, while domestic price was down 61.5%.

Refining costs per barrel in Brazil was down 2.6% to $3.37 and internationally, it fell 45.2% to $3.51. Lifting cost per barrel moved down 24.5% in Brazil to $22.86, while overseas costs rose 9.4% to $5.6. Petrobras exported an average of 724,000 barrels of oil per day, 10.2% higher compared to the same period last year.

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Will UNL Beat UNG?

IndexUniverse Staff — Thu, 19 Nov 2009 20:43:53 +0000

Can USCF's new fund tackle the natural gas contango?

United States Commodity Funds' new ETF, the U.S. 12-Month Natural Gas Fund (NYSEArca: UNL), began trading yesterday, offering investors another easy access point to the natural gas market. But let's hope it sees smoother sailing than its controversial cousin, the U.S. Natural Gas Fund (NYSEArca: UNG).

Not only have regulators vociferously blamed UNG for distorting the commodity markets earlier this year, the fund has also performed dismally to date, dropping a whopping 61.24 percent since the beginning of the year. And it's not because investors have lost their taste for the fund: Last month, UNG still saw brisk inflows of $308 million, even as its net assets dropped $263 million.

Record-low natural gas prices have played their part in slashing UNG's returns, of course, but the big anvil weighing the fund down is the market's nasty case of contango. For the better part of the year, the front-month NYMEX natural gas futures contract has stayed cheaper than those with later delivery dates. And since UNG buys only the front-month contract, selling it near its expiration date to purchase the next-nearest month's contract, the fund has been stuck in a wicked cycle of "sell low, buy high" for months now.

UNL, on the other hand, may be able to avoid some (but not all) of the same pricing sting. Instead of focusing solely on the front-month contract, UNL purchases an equally weighted basket of futures contracts with delivery dates in each of the next 12 months. Two weeks from rollover time, the fund sells the front-month contract and buys the one 12 months out, essentially pushing the basket forward in time.

Given that currently UNG must absorb losses across 100 percent of its contracts during rollover, while UNL only experiences losses in 1/12^th of its portfolio, this methodology should protect the latter somewhat from contango's vicious sting. But it can't make UNL entirely immune, considering the furthest-out contracts are still priced substantially above the front-month contract: Yesterday, the December 2009 contract closed at $4.254, while the December 2010 contract closed 45.7 percent higher, at $6.199.

Also consider that at 0.75 percent, UNL's expense ratio is a mite bigger than UNG's (0.60 percent), so when the contango lessens, any cost savings from choosing the former over the latter would naturally erode. And should the natural gas market flip to backwardation, UNL's staggered buying strategy would actually put it at a disadvantage to UNG.

But backwardation's not likely to happen in natural gas—at least, not anytime soon. To see inversion occur, we'd need to start seeing shortages in the physical commodity, yet natural gas stocks just hit an all-time high. In fact, the International Energy Agency recently predicted that even if demand rebounds, due to an extra-cold winter and economic recovery, we'll still see a natural gas surplus that will depress prices until 2015.

Will UNL ultimately outperform UNG until then? Obviously only time will tell, but we may be able to divine some clues from USCF's other 12-Month Oil Fund (NYSEArca: USL) and its UNG-analogous partner, the U.S. Oil Fund (NYSEArca: USO). Despite oil's price recovery, the commodity has also experienced heavy contango recently, and year-to-date, USL is up 38.84 percent, while USO is only up 22.87 percent.

Still, while I'm always happy to have more tools in the box, when it comes to natural gas, I'm not yet sure whether a flathead or a Phillips screwdriver would be better.

Petrobras Profit Exceeds Ests – Analyst Blog

Zacks Market Commentaries — Thu, 19 Nov 2009 17:55:57 +0000

Brazilian energy giant Petroleo Brasileiro S.A. (PBR), or Petrobras S.A. announced encouraging third quarter results, helped by strong performance from the Supply segment. Earnings per ADR came in at R$1.66 (96 cents), comfortably beating the Zacks Consensus Estimate of 80 cents. However, on a year-over-year basis, Petrobras’ earnings per ADR was down approximately 28.7%, hurt by lower prices of oil and natural gas. Still, they were better than the high double-digit earnings decline suffered by other majors such as ExxonMobil Corp. (XOM), Chevron Corp. (CVX), and Royal Dutch Shell PLC (RDS.A).

Upstream

Total oil and gas production during the third quarter of 2009 reached 2,534 million oil-equivalent barrels per day, from 2,524 million in the previous quarter and 2,437 million in the same period of 2008. Compared to the third quarter of 2008, Brazilian oil and natural gas liquids production increased 4.8%, while international production was up 24.6%. However, Brazilian natural gas volumes were down 3.3% from the year-ago period, while international output during the quarter was down 6.0% year over year.

During the third quarter of 2009, the average sales price of oil in Brazil decreased 36.4% from the year-earlier period to $64 per barrel. Average sales price of international oil was down 16.9% year-over-year, reaching $57.16 per barrel. Regarding natural gas, average international sales price decreased 21.5% from the third quarter of 2008, while domestic price was down 61.5%.

Downstream

Refining costs per barrel in Brazil was down 2.6% to $3.37 and internationally, it fell 45.2% to $3.51. Lifting cost per barrel moved down 24.5% in Brazil to $22.86, while overseas costs rose 9.4% to $5.6. Petrobras exported an average of 724,000 barrels of oil per day, 10.2% higher compared to the same period last year.

Capital Spending & Balance Sheet

Year to date, Petrobras’ capital investments have reached R$50.7 billion. At the end of the September quarter, the company had cash and cash equivalents of R$30.1 billion and long-term debt of R$79.6 billion.

Segment Performance (Year to date)

E&P

The E&P segment earned R$13.1 billion during the first nine months of 2009, down 59.4% year over year, reflecting lower oil prices and the increase in exploration costs due to higher geological and geophysical expenses. These were somewhat negated by the 6% increase in average daily oil and NGL production and the lower government takes.

Supply

Segment earnings came in at R$12.1 billion as against a loss of R$2 billion in the first three quarters of 2008. The improvement over the previous-year period can be attributed to lower oil acquisition/transfer costs and reduced imported oil product costs, partly offset by lower export prices and, in Brazil, to the reduced price of those oil products pegged to international prices.

Gas & Energy

During the first nine months of 2009, Gas & Energy segment’s income reached R$718 million, compared to a loss of R$291 million in the year-earlier period. The positive comparison was due to reduced energy purchase costs, the greater availability of energy for trading, increased fixed revenue from auctions, and a reduction in the natural gas import/transfer cost. Partly offsetting these factors were reduced thermal power output due to higher hydroelectric reservoir levels and lower gas sales volume.

Distribution

Earnings in the Jan – Sep 2009 period reached R$949 million, up slightly (by 1.7%) from the same period previous year. The upturn in the operational results reflect an 11% increase in sales volume, mainly on the back of the inclusion of the commercial activities of Alvo Distribuidora. This was partly cancelled by narrowing of sales margins due to lower average sales price.

International

Petrobras’ International segment lost R$41 million during the first three quarters of this year, as against a profit of R$354 million in the same period of 2008. The year-over-year reduction came because of lower international oil prices and lower equity income due to losses on investments in the U.S.
Read the full analyst report on "PBR"
Read the full analyst report on "XOM"
Read the full analyst report on "CVX"
Read the full analyst report on "RDS.A"
Zacks Investment Research

Zacks Industry Rank Analysis Highlights: B.P. Prudhoe Bay Trust, San Juan Basin, Exxon Mobil and Petrobras – Press Releases

Dirk Van Dijk — Thu, 19 Nov 2009 14:00:05 +0000

For Immediate Release

Chicago, IL – November 19, 2009 – Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis include B.P. Prudhoe Bay Trust (BPT), San Juan Basin (SJT), Exxon Mobil (XOM) and Petrobras (PBR).

Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist for Zacks.com.

This week: Some Improvements in Energy

A good example of an industry that is showing both a very good overall rank and substantial improvement is Oil Royalty Trusts, which with a industry rank of 2.00 is tied for 4th place with several other industries. What sets it apart is that it improved 21 spots in its ranking as the average ranking of its components, up from 2.43 last week. Every one of the seven firms in the industry has a Zacks Rank of 2.

These are great vehicles for income-oriented investors, as they simply represent big pools of oil or natural gas in the ground. As the oil is produced, the proceeds are paid out in the form of dividends. It also means that the dividends are very variable with the price of oil.

The problem with them is that eventually the oil in the ground will run out, so some of that dividend is really a return of capital, not a return on capital. Thus if you are thinking about investing in them, look at how long those reserves will last, as well as the current income you are getting from them.

On the plus side, the tax code recognizes this, so a portion of the dividend is sheltered from the IRS. Unlike a regular exploration and production oil firm, there is no risk of a dry hole, nor are they exposed to changes in the price of drilling. If you think that the price of oil is headed higher, they are very attractive investments, especially if you want current income. Two of the larger names in the area that are worth considering are B.P. Prudhoe Bay Trust (BPT) and San Juan Basin (SJT).

A good example of a big important industry that is still distinctly mediocre in terms of its absolute standing is the Integrated Oil Industry, the home of some of the world’s largest firms like Exxon Mobil (XOM) and Petrobras (PBR). It currently has an average rank of 2.95, which puts it in 102nd place out of 206 industries ranked. That, however, is a substantial improvement from the 3.16 average last week, and was enough to lift it by 49 spots.

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Zacks Investment Research

Zacks Analyst Blog Highlights: D.R. Horton, Pulte, Owens Corning, Masco and EnCana Corporation – Press Releases

Zacks Market Commentaries — Thu, 19 Nov 2009 13:13:36 +0000

For Immediate Release

Chicago, IL – November 19, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: D.R. Horton (DHI), Pulte (PHM), Owens Corning (OC), Masco (MAS) and EnCana Corporation (ECA).

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Here are highlights from Wednesday’s Analyst Blog:

Housing Starts, Permits Plunge

Housing prices are still under pressure, despite unprecedented steps by the Federal government and the Federal Reserve to prop up the price of that asset class. Artificial government support is not as durable a way to prop up prices as a better balance between supply and demand would be.

Well, if prices are going down, the last thing you want to see is more new supply on the market. Thus, in the long term, the decline in housing starts is a good thing. If we stop building houses for long enough, then population growth will start to bring the vacancy rate down. On the other hand, as Lord Keynes famously said, “In the long run we are all dead."

One thing is abundantly clear: this report was not good news for the homebuilders like D.R. Horton (DHI) and Pulte (PHM), nor was it encouraging to suppliers to the industry like Owens Corning (OC) or Masco (MAS). It is also bad news for millions of construction workers who are now unemployed.

It is also yet another reason for the Fed to keep interest rates down very low for a very long time. The only reason for the Fed to consider increasing the Fed funds rate would be if we were going to have a very sharp V shaped recovery. With Housing Starts and Permits falling again, that just simply is not going to happen.

EnCana Misses, Profit Tumbles

Revenues were down 64.2% year over year to $3.9 billion. During the quarter, total production was down 7.0% to 4,387 million cubic feet equivalent per day (MMcfe/d), of which 81% was natural gas. Natural gas production decreased roughly 9.3% year-over-year to 3,551 million cubic feet per day (MMcf/d), while oil and natural gas liquids (NGLs) production was up 3.7% to 139 thousand barrels per day (MBbls/d).

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Zacks Investment Research

SectorWatch.biz: Positive Trends in Oil Gas

Stuart T. Smith — Wed, 18 Nov 2009 14:57:42 +0000

IRVINE, Calif., Nov. 18, 2009 (GLOBE NEWSWIRE) — SectorWatch.biz announces the availability of a commentary of interest to investors in Lucas Energy, Inc. (NYSE Amex:LEI) and other oil & gas-related equities making news and driving markets today. Investors can view our free commentaries at: www.SectorWatch.biz — in association with FiSpace.net, a dynamic social networking site [...]

Brigham Exploration Company (BEXP) Completes Well In The Bakken Shale

QualityStocks — Wed, 18 Nov 2009 14:47:40 +0000

Brigham Exploration Company announced the completion of a well on its Bakken Shale acreage. Brigham Exploration Company has a 31% working interest in the well. The Lee 16-21 #1H had an initial production rate during its first 24 hours of production of approximately 1,544 barrels of oil equivalent (BOE), composed of 1,341 barrels of oil and [...]

EnCana Misses, Profit Tumbles – Analyst Blog

Zacks Market Commentaries — Wed, 18 Nov 2009 14:00:00 +0000

EnCana Corporation (ECA) – a major Canadian oil and gas exploration and production (E&P) company – reported weak third quarter results, hit by lower prices and volumes. Operating earnings per share, excluding hedging and foreign exchange effects, came in at $1.03. This fell short of the Zacks Consensus Estimate of $1.11 and way behind the year-ago profit of $1.92.

Revenues were down 64.2% year over year to $3.9 billion. During the quarter, total production was down 7.0% to 4,387 million cubic feet equivalent per day (MMcfe/d), of which 81% was natural gas. Natural gas production decreased roughly 9.3% year-over-year to 3,551 million cubic feet per day (MMcf/d), while oil and natural gas liquids (NGLs) production was up 3.7% to 139 thousand barrels per day (MBbls/d).

Key Resource Plays

Production of natural gas from key resource plays was down approximately 6.5% year-over-year to 3,410 MMcfe/d, primarily due to a 9.8% fall in natural gas production (from 3,244 MMcf/d in the third quarter of 2008 to 2,927 MMcf/d). Gas volumes suffered from the decision to shut in some wells, restrict productive capacity and delay some well completions or tie-ins to sales pipelines because of lower natural gas prices.

However, oil production increased 20.9% to 81 MBbls/d, driven by a significant gain (approximately 44.4%) in Foster Creek. EnCana continues to see improved operational performance and strong initial production rates from its Haynesville shale gas play and Horn River basin. Year-to-date, the company has drilled 37 and 47 wells, respectively, in these two plays.

Integrated Business

The company’s integrated oil business generated impressive operating cash flows of $266 million, as production at Foster Creek and Christina Lake was up 40.6% to 45 MBbls/d. Despite this, upstream operating cash flow was down 1.6% to $180 million on the back of lower commodity prices. Realized natural gas prices during the quarter were down approximately 7.9% year-over-year to $7.31 per Mcf, while realized liquids prices were down 36.9% from the year-ago level to $57.39 per barrel.

Cash Flows & Drilling Statistics

EnCana generated cash flows from operations of $2.1 billion or $2.77 per share. EnCana drilled 292 net wells during the quarter, compared to 730 wells in the prior-year period.

Capital Spending & Balance Sheet

The company’s capital investments during the quarter were $1.3 billion (excluding acquisitions and divestitures). At the end of the quarter, EnCana had cash on hand of $1.4 billion and long-term debt of $8.2 billion, representing a debt-to-capitalization ratio of 24.7%.

Guidance

The company said that it expects full-year 2009 production to be approximately 4,465 MMcfe/d, while capital spending is likely to be $5.8 billion.
Read the full analyst report on "ECA"
Zacks Investment Research

Some Improvements in Energy – Zacks Industry Rank Analysis

Dirk Van Dijk — Wed, 18 Nov 2009 05:00:00 +0000

Industry Rank Analysis 11-17-09

Normally, the focus of this article has been on the industries that have the best overall Zacks ranks, with an occasional mention of the industries that rank particularly badly and thus should be avoided. This week, however, I want to look at some of the industries that are showing sharp improvements in rank, even if they are still far from the top of the list.

Ideally, you would want to focus on the industries that are both near the top of the list and rising fast, but that rarely happens, especially for industries with a large number of participants. The Zacks Industry Rank is an un-weighted average of the Zacks ranks of the firms in the industry, so it is much easier for a small industry with only tow or three firms in it to rise quickly and have a very good-looking rank than it is for a large industry with 25 or 30 firms in it.

A good example of an industry that is showing both a very good overall rank and substantial improvement is Oil Royalty Trusts, which with a industry rank of 2.00 is tied for 4th place with several other industries. What sets it apart is that it improved 21 spots in its ranking as the average ranking of its components, up from 2.43 last week. Every one of the seven firms in the industry has a Zacks Rank of 2.

These are great vehicles for income-oriented investors, as they simply represent big pools of oil or natural gas in the ground. As the oil is produced, the proceeds are paid out in the form of dividends. It also means that the dividends are very variable with the price of oil.

The problem with them is that eventually the oil in the ground will run out, so some of that dividend is really a return of capital, not a return on capital. Thus if you are thinking about investing in them, look at how long those reserves will last, as well as the current income you are getting from them.

On the plus side, the tax code recognizes this, so a portion of the dividend is sheltered from the IRS. Unlike a regular exploration and production oil firm, there is no risk of a dry hole, nor are they exposed to changes in the price of drilling. If you think that the price of oil is headed higher, they are very attractive investments, especially if you want current income. Two of the larger names in the area that are worth considering are B.P. Prudhoe Bay Trust ([url=http://www.zacks.com/stock/quote/bpt]BPT[/url]) and San Juan Basin ([url=http://www.zacks.com/stock/quote/sjt]SJT[/url]).

A good example of a big important industry that is still distinctly mediocre in terms of its absolute standing is the Integrated Oil Industry, the home of some of the world’s largest firms like Exxon Mobil ([url=http://www.zacks.com/stock/quote/xom]XOM[/url]) and Petrobras ([url=http://www.zacks.com/stock/quote/pbr]PBR[/url]). It currently has an average rank of 2.95, which puts it in 102nd place out of 206 industries ranked. That, however, is a substantial improvement from the 3.16 average last week, and was enough to lift it by 49 spots.

A good example of an industry that scores poorly on both fronts, and thus should be avoided is the SBIC and Commercial lenders group. It is no secret that credit for small businesses has been under pressure for awhile now, but this suggests that things are still getting worse. The industry rank for the group is a very weak 3.43, which currently puts it in 192nd place, a deterioration of 31 spots from last week when its overall score was 3.21.

Sector	This Week's Zacks Rank	Last Week's Zacks Rank	FY09 Revisions Ratio	FY09 Estimates Revised Up	FY09 Estimates Revised Down
Auto-Tires-Trucks	2.73	2.72	2.65	135	51
Consumer Staples	2.75	2.76	3.40	476	140
Retail-Wholesale	2.77	2.78	2.90	940	324
Computer and Technology	2.85	2.78	2.48	2082	838
Construction	2.85	2.85	1.43	185	129
Conglomerates	2.88	2.88	3.72	93	25
Basic Materials	2.92	2.88	1.65	446	271
Business Services	2.95	2.95	2.15	279	130
Medical	2.98	3.00	1.81	1466	812
Industrial Products	2.98	3.01	1.75	466	266
Oils-Energy	2.99	3.01	1.34	913	681
Utilities	3.05	3.02	1.12	239	214
Consumer Discretionary	3.07	3.03	1.54	548	357
Finance	3.16	3.15	1.29	1646	1277
Transportation	3.22	3.23	0.89	286	323
Aerospace	3.28	3.28	1.99	143	72

Dirk Van Dijk, our Chief Equity Strategist, also manages the Zacks ETF Trader. This service uses Exchange Traded Funds to help investors ride a 4-to-1 performance advantage of stocks in the top half of the Zacks Industry Rank. It commands trends without the extra risk and fees of buying many different stocks.Zacks Investment Research

Producer Price Index Tame – Analyst Blog

Dirk Van Dijk — Tue, 17 Nov 2009 15:44:31 +0000

In September, the Producer Price Index rose by 0.3%. While this is an acceleration from the 0.6% decline in September, it is well below consensus expectations of a 0.5% increase.

All of the price pressures were coming from food and energy. If they are stripped out to get the Core Producer Price Index, prices fell by 0.6% for the month -- a much faster decline than the 0.1% decline last month, and even farther below the consensus expectations of a 0.1% increase for the month. Both food and energy rose by 1.6% at the finished level in September.

For energy, though, it was just a partial reversal of the 2.4% decline in September. In September, finished food prices fell only 0.1%. On a year-over-year basis, the total Producer Price Index is down 1.9%. However, last month the year-over-year decline was 4.8%. Thus on a year-over-year basis, the deflationary pressures are abating -- but just think about where we were a year ago!

The finished goods producer price index is the one that gets all the headlines. The core producer price index at the finished level also gets a fair amount of attention. However, the Bureau of Labor Statistics also provides data on what is happening further up the food chain, with data on intermediate and crude goods. To keep the three levels straight in your mind, think Wheat (crude), Flour (intermediate) and Bread (finished).

At those levels, there is some evidence of minor inflationary pressures, but again it is all driven by food and energy costs. At the intermediate level, prices rose 0.3% following a 0.2% increase in September. On a year-over-year basis, prices are down 7.5% at the intermediate level. The huge price declines of a year ago are rolling off.

In September, the year-over-year decline in the intermediate producer price index was 11.7%. Intermediate food prices were down 0.2%, following a 0.5% decline in September. Energy prices rose by 2.3% at the intermediate level -- more than reversing a 2.1% decline in September. Core prices at the intermediate level dropped by 0.2%, following a 0.9% increase in September. Keep in mind price swings tend to be more extreme at the intermediate level than they are at the finished goods level.

Far more extreme, though, are the swings in the crude level producer price index. After all, there is another name for crude goods -- commodities. Overall crude goods rose by 5.4% in October, more than making up for the 2.1% decline in September. Over the last year, prices for crude goods have dropped by 14.1%.

The bulk of that decline, however, came last year as the price of all commodities absolutely collapsed. In October of last year, the crude goods index plunged 16.1% and it was followed by a further 13.1% decline in November. Those will roll off soon, so the year-over-year numbers are going to show much smaller declines. Core crude prices rose by 0.5% in October, on top of a 0.5% rise in September. Crude energy prices rose by 8.3% -- more than offsetting a 5.4% decline in September. Similarly, crude food prices were up 5.2% for the month after having fallen by 1.9% in September.

This report shows that aside from food, and especially energy, there is no real inflation pressure in the economic system. Even looking far up the production chain, price pressures for core goods are very moderate. Thus the Fed should continue to hold down interest rates and be as accommodative as possible. After all, the Fed has two mandates -- price stability and full employment.

With core producer prices falling for two months in a row, and in four of the last six months, price stability would argue for MORE inflation, since we are facing deflation. Yes, the deflationary pressures are less than a year old, but year-over-year declines -- even throwing in food and energy prices of 1.9% -- are a far cry from Weimar Germany, or even the U.S. experience of the 1970’s.

The enemy right now is unemployment, not inflation. It also means that people should just shut the heck up about the decline of the dollar and stop treating it like it's some type of disaster. Yeah, it is sort of bad that a ski trip vacation to Davos, Switzerland will cost a lot more, but hey, maybe it will cause some folks to decide to ski Aspen, instead. Perhaps a few Europeans or Japanese will decide to come vacation in the U.S. since with the low dollar, vacations here are very cheap for them. That would actually create a few jobs in restaurants and hotels here.

More importantly, perhaps companies will decide to buy products made by General Electric (GE) instead of the competing products made by Siemens (SI). We might just start to shrink the yawning trade deficit that is an absolute cancer on the economy.

Talk of the Fed tightening is probably premature by at least a year. Yes, a weaker dollar will mean higher prices for internationally traded goods, most importantly for oil. That, however, would help stimulate more drilling activity, greatly helping the bottom lines for companies like Pride International (PDE) and making the existing reserves of companies like Anadarko (APC) much more valuable. It might just help keep demand for oil down, and accelerate the shift to alternative energy sources, such as wind and solar.

Don’t overlook natural gas as a potential alternative energy source, since we have vast supplies of it here in North America. That would be good news for firms like EnCana (ECA). Yeah, nobody really wants to pay more at the pump, but with other price pressures being kept well at bay, we can afford it -- especially if it leads to more jobs.

Look for the gap between headline and core producer prices to continue to widen, but overall, price pressures are very well contained. This gives the Fed free reign to keep interest rates at extraordinarily low levels for a very extended period of time. And not doing so would be extremely irresponsible.
Read the full analyst report on "GE"
Read the full analyst report on "SI"
Read the full analyst report on "PDE"
Read the full analyst report on "APC"
Read the full analyst report on "ECA"
Zacks Investment Research

Devon to Sell Assets – Analyst Blog

Zacks Market Commentaries — Tue, 17 Nov 2009 14:40:00 +0000

Devon Energy Corporation (DVN) has announced plans to divest all of its Gulf of Mexico and international assets for net proceeds of about $4.5-$7.5 billion, repositioning itself as a high-growth North American onshore company. The company believes that this repositioning will result in value optimization for its shareholders.

It believes that the value of these assets is not adequately reflected in the stock price. Furthermore, the divestitures would position the company to deliver high organic growth on a sustainable basis, funded entirely by internally generated funds. With the asset sales, we expect Devon to emerge with a stronger balance sheet and flaunt one of the lowest cost structures in its peer group.

Devon expects to begin the asset sale process by first half of 2010 and to complete them by the end of the year. The company plans to use the proceeds to develop its U.S. and Canadian onshore portfolio and to retire debt. Devon expects net debt to be $6.9 billion and $2.5 billion at the end of 2009 and 2010, respectively. It expects net debt to capitalization at year-end 2010 to be 13%.

In 2010, Devon expects its total exploration and production budget to be about $5.2 billion to $5.9 billion, with about $4.1 billion earmarked for its North American onshore business. The assets to be divested represent approximately 11% of our estimated 2009 production of 248 million barrels of oil equivalent (BOE). The company expects combined oil, gas and NGL production to total approximately 229 to 233 million BOE in 2010.

In addition, the company expects its balance between liquids and natural gas to change only slightly as a result of the divestiture. Devon's Gulf of Mexico and international properties represent about 7% of its company-wide proved reserves of 2.8 billion BOE for 2009.

Oil and natural gas liquids (NGLs) are expected to account for about 43% of Devon's estimated proved reserves by the end of 2009. Incorporating divestitures, 2009 proved reserves are estimated at 2.6 billion BOE, with oil and NGLs accounting for 41% of proved reserves.
Read the full analyst report on "DVN"
Zacks Investment Research

Energy Blast – Nov 17, 2009

Robert Amsterdam — Tue, 17 Nov 2009 09:08:16 +0000

Russia's Energy Minister and the EU Energy Commissioner have signed a memorandum establishing an early warning mechanism to anticipate potential gas cuts and allow time to find solutions to problems before deliveries are physically affected. But the memorandum may be...

Donald Coxe – Investment Recommendations (November 2009)

Prieur du Plessis — Tue, 17 Nov 2009 08:51:07 +0000

The November edition of the Coxe Basic Points research report (subtitled "The Power of Zero") by Donald Coxe has just been published. His investment recommendations are listed in this post, and a link to the full report is also provided.

Devon Energy Corp. (DVN) to Liquidate Undervalued Assets, Emphasize Onshore Infrastructure

QualityStocks — Mon, 16 Nov 2009 16:21:53 +0000

Devon Energy Corp. revealed details of its strategy to monetize all outstanding Gulf of Mexico and international assets today, Monday, Nov. 16. Following this divestiture, DVN – an Oklahoma based energy company engaged in oil and gas exploration, will channel the capital generated into its U.S. and Canada onshore infrastructure. DVN will elaborate further on [...]

The Strongest BRIC Country

Martin D. Weiss, Ph.D. — Mon, 16 Nov 2009 13:57:58 +0000

I have a trick question for you, especially if you're interested in emerging markets: Among the four BRIC countries — Brazil, Russia, India and China — which offers the best stock market performance for American investors? Be careful how you answer, because appearances can ...

Zacks Analyst Blog Highlights: JC Penney Company Inc., Toyota, Honda, EnCana and Chesapeake – Press Releases

Zacks Market Commentaries — Mon, 16 Nov 2009 12:45:50 +0000

For Immediate Release

Chicago, IL – November 16, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: JC Penney Company Inc. (JCP), Toyota (TM), Honda (HMC), EnCana (ECA) and Chesapeake (CHK).

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Here are highlights from Friday’s Analyst Blog:

JC Penney Beats on Low Earnings

JC Penney Company Inc. (JCP), a leading retailer of apparel and footwear, accessories, fashion jewelry, beauty products and home furnishings, recently reported third-quarter 2009 results.

The quarterly earnings of 11 cents a share tumbled 80% from 55 cents posted in the prior-year quarter, weighed down by qualified pension plan expense. Earnings missed the Zacks Consensus Estimate by a penny.

The retailer, however, mentioned that earnings outshined the company’s initial guidance range of a loss of 5 cents to profit of 5 cents a share on the heels of effective inventory management and lowered unprofitable discounting. Consequently, gross profit rose 1.9% year-on-year to $1,696 million.

On stronger-than-expected results, JC Penney raised its fiscal year 2009 earnings outlook. Management now expects earnings in the range of 93 cents to $1.08 per share, as against 75 cents to 90 cents previously anticipated. For the fourth-quarter 2009, earnings are expected between 70 cents and 85 cents a share.

Imports Surge in September

So what was driving the increase in the deficit? Part of it was that we imported more cars from the Toyotas (TM) and Hondas (HMC) of the world as dealers restocked after inventories were depleted due to Cash for Clunkers. However, for the month, the biggest increase in our imports was Industrial Supplies and Materials -- a category that includes oil. Oil is a big part of the reason why our trade deficit has been so intractable, and the decline in the price of oil from a year ago is a big part of the reason that we have seen an improvement in the deficit over the last year.

We started making progress on reducing our non-oil deficit towards the end of 2005, and until the last few months, have continued to make steady progress. However, as the price of oil rose, that progress was offset by an ever increasing oil bill.

The net result was that from mid-2005 through the summer of 2008, our trade deficit remained stable at a horrendous level of roughly $60 billion a month. As a percentage of GDP, it exceeded 5.0% in every quarter from the second quarter of 2004 through the second quarter of 2008, and was extremely close to that level through the third quarter of 2008. It was not until oil prices collapsed in the fall of 2008 (along with everything else) that we saw a dramatic improvement in the trade deficit. Now with oil prices on the rebound, the deficit is deteriorating rapidly again.

There are really only two solutions to solving the chronic deficit problem. The first is that the dollar falls, thus making imports more expensive to U.S. consumers and businesses, and our exports much cheaper to foreign consumers and businesses. Yes, a weak dollar would not be fun next time you decide to vacation in Paris. It also would have the potential to be inflationary. However, right now, there are big deflationary pressures elsewhere in the economy (for example, housing prices and rents), so a little bit of inflation pressure coming from higher import prices is not a huge worry.

Creating export-led jobs is much more important right now. That would help increase Investment’s share of the economy, and decrease the Consumer’s share. Over time it is vitally important that we do this.

One big problem, though, as far as the weak dollar is concerned in curing this cancer -- it is not weak against every other currency. Most importantly, it has been absolutely stable against the Yuan, and our deficit with China was $22.1 billion in September, up from $20.1 billion in August.

As a percentage of the total, then, it was 60.5% in September -- down from 65.6% in August, but still a huge part of the problem. It is also an issue that a weak dollar does not address (unless China stops pegging to the dollar and moves to say pegging it to a basket of major currencies, I doubt they will go to a full free-float of the Yuan).

The second solution is that we get serious about creating domestic sources of energy to offset the need for us to import so much oil. Since we have already extracted most of our original endowment of oil, "drill baby drill" is looking less and less like the right answer.

However, we have lots and lots of natural gas (NG), thanks to the new Shale plays. Our ability to switch from oil to gas immediately is limited. Butiven the cost differential on a BTU basis right now, there is every incentive in the world already for businesses to make the switch if they can. Strictly on the basis of the amount of energy in them, a barrel of oil should be worth 6x as much as an MCF of natural gas.

Right now, oil is going for $75.86 a barrel while NG is going for $4.42, so if a business has the ability, they could be buying the equivalent of a barrel of oil for just $26.52. That is a big incentive to switch. Over the medium-to-long term, it is easier to make that change. Only relatively minor modifications are needed to switch, say, vehicles to natural gas -- it's not like it is some sort of cutting-edge technology.

However, it is not free, and we do not have the nationwide refilling infrastructure to do so. If this differential persists, I would expect more and more fleet-type vehicles (i.e. city buses and delivery trucks) to switch over. This would obviously be a good thing for the big producers of natural gas like EnCana (ECA) and Chesapeake (CHK).

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ETF Commodity Trading Analysis Charts

Chris Vermeulen — Mon, 16 Nov 2009 03:03:19 +0000

November – 15th Commodities continue to perform well as the US dollar tests the October lows. If we step back and take a look at the weekly charts of the gold, silver, oil and natural gas ETFs we can get a better feel for what to expect in the coming week. Trading commodity ETFs can be [...]

Commodity inflation

James Hamilton — Sun, 15 Nov 2009 14:36:39 +0000

Why are the prices of so many commodities rising in an economy that seems to remain quite weak?

	% change
butter	35
coffee	21.8
cocoa	20.2
copper	89.1
corn	-8.3
cotton	38.6
gold	32.1
hogs	2.7
oats	13.4
oil	63.2
lead	81.9
palladium	75.9
platinum	61.7
silver	59.1
steel	-0.9
sugar	73.6
tin	22.5
wheat	-26.6
zinc	55.4
average	37.4
euro	12

The table at the right summarizes the percent change between January 6 and November 11 in the cash prices of 19 commodities reported in the Wall Street Journal (downloaded via Webstract). The average commodity in this list has appreciated 37% since the start of the year.

A recent paper by Ke Tang and Wei Xiong documents an increasing tendency for commodity prices to move together over the last few years. A decade ago, what happened to oil prices was largely unrelated to movements in most other commodity prices. The graphs below show how the correlations between oil prices and the prices of four representative commodities have increased significantly over time.

Correlation (using a rolling sample beginning one year before indicated date) between returns on oil and specified commodity. Source: Tang and Xiong (2009).

One explanation I often see in the popular press is that movements in commodity prices are driven by changes in the value of the dollar relative to other currencies. However, the magnitude of movements in commodity prices greatly exceeds the size of changes in the exchange rate. For example, the table above shows that since the start of this year oil prices have increased five times as much as the dollar price of a euro; see also Steve Gordon's graphs. While the depreciation of the dollar is part of the story, most of the explanation must be found elsewhere.

Another important factor is resurging real economic growth outside the United States, which produces pressures for both the dollar to depreciate and the real price of commodities to appreciate. According to this theory, the increasing correlations between commodity prices results from the fact that countries like China are so much more important for the world economy today than they were a decade ago.

A third explanation is that investors are making increasing use of commodities as an investment class. Although Treasury Inflation Protected Securities offer a hedge against an increase in the U.S. consumer price index, they don't offer protection for foreign investors against depreciation of the dollar. Insofar as increases in the prices of commodities like oil may depress real economic activity, holding commodities as an investment also offers useful diversification against risks to equities. Particularly when interest rates are low, there is an incentive to hoard physical commodities as an investment vehicle.

The paper by Tang and Xiong proposes that the increased use of commodities as a financial investment accounts for the increasing correlation among commodity price changes over time. In support of that claim, they note the growing popularity of investment strategies based on the Goldman Sachs Commodity Index or the Dow Jones Commodity Index. Tang and Xiong document that correlations among commodities included in the indexes have increased faster than those not included. For example, one of the regressions they estimate relates the return on commodity i to equity returns, bond yields, the value of the dollar, and oil prices, where the coefficients are allowed to grow with time at different rates before and after 2004, and with different trends on these coefficients estimated for commodities included in indexes as for those excluded. The figure below shows their estimated time path for the coefficient on oil prices comparing the indexed and non-indexed groups.

Coefficient relating return on average commodity to return on oil as a function of time for commodities included in the GS or DJ indexes (top curve) and those excluded (bottom curve). Source: Tang and Xiong (2009).

For any of the explanations in this third class, one of the important challenges is to reconcile the story of commodity speculation with supply and demand for the underlying physical commodity. If we propose that speculators have driven the price of the commodity up, the physical quantity demanded should decline as a result. In order to be sustained, a coherent speculation-based theory of commodity price appreciation requires increased physical storage of the commodity.

The solid black curve in the figure below plots the typical U.S. crude oil stocks (excluding those held in the Strategic Petroleum Reserve) for each week of the year, based on the average over 1990-2007. The red line gives the actual values for 2008, which were significantly below the historical average, particularly in the spring of 2008 when oil prices were rising so dramatically. Those below-normal inventories were one reason I focused on what was going on to the fundamentals of supply and demand in trying to understand the behavior of oil markets in the first half of 2008.

Weekly U.S. crude oil ending stocks, excluding SPR, in thousands of barrels, from EIA. Black line: average over 1990-2007. Red: 2008. Green: 2009.

On the other hand, inventories of crude oil this year, shown in green above, have been substantially above normal, meaning that in the absence of that oil going into storage, we would have expected to see lower oil prices than we currently have.

Moreover, much of the current stockpiling may be taking place outside the United States. For example, Yves Smith noted this story from Bloomberg last August:

Copper, nickel and other base metals stockpiled by speculative Chinese investors including pig farmers may be sold when "market sentiment turns," said Scotia Capital Inc.

A price surge and easy bank credit this year encouraged pig farmers, stock brokers and businessmen to buy copper and nickel for speculation, Liu Na, an analyst with Scotia Capital, wrote in a note dated Aug. 17, citing reports from the state-owned China Central Television....

"These stockpiles are in 'weak hands' as speculators have no real use for base metals," Liu wrote. "When the market sentiment turns, they are very likely to turn into quick sellers, especially when the bank's money is involved."

I also found this November 3 story from the Financial Times of interest:

Gold prices continued to rise on Wednesday extending the all-time highs which followed India's central bank bought 200 tonnes of the precious metal, swapping dollars for bullion as the country's finance minister warned the economies of the US and Europe had "collapsed".
India's decision to exchange $6.7bn for gold equivalent to 8 per cent of world annual mine production sent the strongest signal yet that Asian countries were moving away from the US currency.

Policy-makers in the Federal Reserve have traditionally thought of inflation as a broad movement in all wages and prices, which to some extent is under their control, and viewed changes in relative commodity prices as outside their control. I believe that this is not the correct understanding of the current situation. Concerns about inflation, particularly on the part of foreign dollar-holders, are likely to show up first in the relative prices of internationally traded commodities. Insofar as these relative price changes can be destabilizing in themselves, it cannot be wise for U.S. policy-makers to ignore them.

Ways to Invest in Oil and Gas

Terry Stanfield — Sat, 14 Nov 2009 08:42:26 +0000

If you are interested in oil and gas investing there are three primary ways you can go about starting your investment. These ways include investing in companies, mutual funds, and commodities. You can make a lot of money in this industry if you are smart about your investments.

If Stocks Tank, Shouldn’t Gold Soar?

Jim Musselwhite — Sat, 14 Nov 2009 03:07:36 +0000

November 13, 2009 The following article is provided courtesy of Elliott Wave International (EWI). For more insights that challenge conventional financial wisdom, download EWI’s free 118-page Independent Investor eBook. ————- Large banks and more recently pension funds have suddenly become infatuated with gold. They chant the mantras that gold bugs have [...]

OXY Inks Partnership in Bahrain – Analyst Blog

Zacks Market Commentaries — Fri, 13 Nov 2009 21:34:31 +0000

Recently, Occidental Petroleum Corp. (OXY) entered into a partnership to develop oil and natural gas fields in Bahrain. Occidental along with partners Mubadala Development Company (Mubadala) and the National Oil and Gas Authority of Bahrain (NOGA) formed a new joint operating company, Tatweer Petroleum-Bahrain Field Development Company, which will serve as the operator for the Bahrain field.

The company will operate under the Development and Production Sharing Agreement signed in April 2009 by all three partners, approved by the parliament of Bahrain in May 2009 and ratified by His Majesty King Hamad bin Isa Al Kalifa. Tatweer Petroleum will begin start operations in the Bahrain field immediately. The operating team would include individuals from the Bahrain Petroleum Company (Bapco), Occidental and Mubadala employees and few local employees.

Oil and natural gas production from the Bahrain field is expected to peak at 100,000 barrels per day and 2.5 billion cubic feet per day, respectively. As per the production agreement, Occidental holds a 48% stake, Mubadala holds 32% and NOGA holds the remaining.

The partnership is a win-win for both companies. For Occidental, Tatweer Petroleum is a key element in its growth strategy in the Middle East. For Mubadala, such joint operations are progress on its ambition to include Enhanced Oil Recovery projects as one of the key pillars of its investment strategy in the region.
Read the full analyst report on "OXY"
Zacks Investment Research

McDermott Reports Profit Growth – Analyst Blog

Zacks Market Commentaries — Fri, 13 Nov 2009 19:02:18 +0000

Energy-focused engineering and construction company, McDermott International Inc. (MDR) reported better-than-expected third-quarter earnings, driven by robust performance from the Offshore Oil and Gas Construction segment. Earnings per share came in at 50 cents, 10 cents above the Zacks Consensus Estimate and 13 cents above the prior-year period. Revenues were up marginally (by 0.7%) to $1.7 billion.

Offshore Oil and Gas Construction

McDermott’s Offshore Oil and Gas Construction segment revenues were up 26% to a record $1 billion, as higher sales in the Middle East and Caspian regions more than offset reduced levels in other areas. Operating income for the quarter came in at $106.5 million (second highest quarterly income ever), compared to a loss of $19.7 million during the third quarter of 2008, reflecting strength in the Asia Pacific and Middle East regions. As of Sept 30, 2009, segment backlog was $3.9 billion, as against a backlog of $5 billion in the year-ago period.

Government Operations

Government Operations segment fetched revenues of $259.8 million, up from $222.4 million in the third quarter of 2008, primarily on the back of contribution from the Nuclear Fuel Services acquisition. Additional volume in the manufacture of nuclear components of certain U.S. Government programs and recovery work also helped the results. However, operating income for the quarter was down 42.7% to $19.8 million, attributable to project losses on down blending activities, together with additional depreciation and amortization expense. McDermott’s backlog, as at the end of the quarter, was $2.5 billion, up $900 million year over year.

Power Generation Systems

Revenues for McDermott’s Power Generation Systems segment decreased 38.3% to $389.6 million, adversely affected by reduced activity on customers’ major capital projects including new power plant construction and retrofits of existing power plants. Operating income was down approximately 59.5% to $34.2 million on the back of lower activity levels in the business. McDermott ended the quarter with a backlog of $2.1 billion, compared to backlog of $2.8 billion in the previous-year quarter.

Read the full analyst report on "MDR"
Zacks Investment Research

Imports Surge in September – Analyst Blog

Dirk Van Dijk — Fri, 13 Nov 2009 18:32:42 +0000

In September, the trade deficit expanded to $36.5 billion -- an increase of $5.7 billion or 18.5% over August. This was a much bigger increase than was expected, as consensus expectations were for a deficit of $31.8 billion. Since the trade deficit is a direct input into the GDP calculations, look for the next iteration of the third quarter GDP numbers to be revised down from the original read of 3.5% growth.

The reason for the growth in the trade deficit is also a bit of a silver lining. It happened because imports rose by $9.3 billion to $168.4 billion, while exports rose by $3.7 billion. The increase in both imports and exports indicates that world trade -- which is very important to global growth -- is on the mend.

A 5.8% monthly increase is unusual, but is probably a reflection of higher overall demand in the economy, which at this point is a good thing. A 2.6% monthly increase in exports is respectable, but is overshadowed by the big increase in imports.

The month-to-month numbers are in distinct contrast to the year-over-year figures. Relative to September 2008, imports are down 43.7 billion or 20.6%, while exports are down $20.0 billion of 13.2%. Thus on a year-over-year basis, the deficit is down $23.7 billion or 39.4%.

The decline in trade, as shown by the fall in both imports and exports, is both a reflection and a partial cause of the overall worldwide recession. On the other hand, without the decline in the trade deficit year over year, the decline in U.S. GDP would have been sharper than it was.

The first graph, (from http://www.calculatedriskblog.com/) shows the history of our imports and exports back to 1994. Note that both imports and exports declined in the last recession as well, but nowhere near as severely. Also note that the blue export line never crosses over the red import line, and that the two lines have been consistently diverging except during recessions. Now they are diverging once again.

This is not a good thing. It is the trade deficit that drives our external indebtedness, not the fiscal deficit. It is what gives China its huge political leverage over us by holding over $1.5 Trillion of our obligations. The chronic trade deficits are a cancer eating away at our economy.

So what was driving the increase in the deficit? Part of it was that we imported more cars from the Toyotas (TM) and Hondas (HMC) of the world as dealers restocked after inventories were depleted due to Cash for Clunkers. However, for the month, the biggest increase in our imports was Industrial Supplies and Materials -- a category that includes oil. Oil is a big part of the reason why our trade deficit has been so intractable, and the decline in the price of oil from a year ago is a big part of the reason that we have seen an improvement in the deficit over the last year.

The second graph (also from http://www.calculatedriskblog.com/) breaks out the deficit cause by our oil bill, and the deficit caused by everything else. We started making progress on reducing our non-oil deficit towards the end of 2005, and until the last few months, have continued to make steady progress. However, as the price of oil rose, that progress was offset by an ever increasing oil bill.

The net result was that from mid-2005 through the summer of 2008, our trade deficit remained stable at a horrendous level of roughly $60 billion a month. As a percentage of GDP, it exceeded 5.0% in every quarter from the second quarter of 2004 through the second quarter of 2008, and was extremely close to that level through the third quarter of 2008. It was not until oil prices collapsed in the fall of 2008 (along with everything else) that we saw a dramatic improvement in the trade deficit. Now with oil prices on the rebound, the deficit is deteriorating rapidly again.

There are really only two solutions to solving the chronic deficit problem. The first is that the dollar falls, thus making imports more expensive to U.S. consumers and businesses, and our exports much cheaper to foreign consumers and businesses. Yes, a weak dollar would not be fun next time you decide to vacation in Paris. It also would have the potential to be inflationary. However, right now, there are big deflationary pressures elsewhere in the economy (for example, housing prices and rents), so a little bit of inflation pressure coming from higher import prices is not a huge worry.

Creating export-led jobs is much more important right now. That would help increase Investment’s share of the economy, and decrease the Consumer’s share. Over time it is vitally important that we do this.

One big problem, though, as far as the weak dollar is concerned in curing this cancer -- it is not weak against every other currency. Most importantly, it has been absolutely stable against the Yuan, and our deficit with China was $22.1 billion in September, up from $20.1 billion in August.

As a percentage of the total, then, it was 60.5% in September -- down from 65.6% in August, but still a huge part of the problem. It is also an issue that a weak dollar does not address (unless China stops pegging to the dollar and moves to say pegging it to a basket of major currencies, I doubt they will go to a full free-float of the Yuan).

The second solution is that we get serious about creating domestic sources of energy to offset the need for us to import so much oil. Since we have already extracted most of our original endowment of oil, "drill baby drill" is looking less and less like the right answer.

However, we have lots and lots of natural gas (NG), thanks to the new Shale plays. Our ability to switch from oil to gas immediately is limited. Butiven the cost differential on a BTU basis right now, there is every incentive in the world already for businesses to make the switch if they can. Strictly on the basis of the amount of energy in them, a barrel of oil should be worth 6x as much as an MCF of natural gas.

Right now, oil is going for $75.86 a barrel while NG is going for $4.42, so if a business has the ability, they could be buying the equivalent of a barrel of oil for just $26.52. That is a big incentive to switch. Over the medium-to-long term, it is easier to make that change. Only relatively minor modifications are needed to switch, say, vehicles to natural gas -- it's not like it is some sort of cutting-edge technology.

However, it is not free, and we do not have the nationwide refilling infrastructure to do so. If this differential persists, I would expect more and more fleet-type vehicles (i.e. city buses and delivery trucks) to switch over. This would obviously be a good thing for the big producers of natural gas like EnCana (ECA) and Chesapeake (CHK).

It would also be a very big improvement environmentally. Natural gas is still a carbon-based fossil fuel, but it has much less of a carbon footprint than does oil or coal.

Increasing our use of renewable energy, such as wind and solar, and using the increased electrical output to power plug in hybrids would also be a big help in this regard. Natural gas is a great complement to them, since the output of renewable sources tends to be highly variable (it gets cloudy or the wind changes speeds). Gas-fired power plants can change their output levels much faster than can coal-fired plants.

We will need to significantly improve our overall power grid for that to happen though, since the best locations for alternative power are far from where the power is needed. New Mexico has lots of sun, and North Dakota has lots of wind, but neither consumes a large percentage of the country’s energy.

The Stimulus Bill made some tentative steps in the right direction, but not on the scale needed. I would argue that large investments in improving the power grid to enable large scale adoption of alternative energy would do more for our national security than increasing our military commitments in certain parts of the world. It would also do a lot more to bring down the unemployment rate, as well as being a big step in solving the chronic trade problem we have.
Read the full analyst report on "TM"
Read the full analyst report on "HMC"
Read the full analyst report on "ECA"
Read the full analyst report on "CHK"
Zacks Investment Research

Albert Edwards still uber bearish, calls for new lows in 2010

Prieur du Plessis — Fri, 13 Nov 2009 07:35:43 +0000

Albert Edwards has a large following among Investment Postcards readers. This post provides an update on the latest views of our favorite bear.

Economic prospects for 2010 and beyond

Prieur du Plessis — Fri, 13 Nov 2009 07:30:18 +0000

By Cees Bruggemans, Chief Economist FNB. After a great fall (2008), success in arresting the fall and stabilizing the economy on a low level of capacity utilization (2009), growth prospects tend to be very promising as slack resources as well as new inputs will be available to be put to work. Demand needs to grow in [...]

Suncor Misses View – Analyst Blog

Zacks Market Commentaries — Thu, 12 Nov 2009 19:15:44 +0000

Canada-based Suncor Energy (SU) reported weaker-than-expected third quarter results, hampered by lower commodity prices and higher operating expenses in its oil sands business, partly offset by increased production resulting from the Petro-Canada acquisition. Earnings per share, excluding certain items, came in at 23 Canadian cents (22 cents), below the Zacks Consensus Estimate of 31 cents. In the year-ago period, Suncor earned 87 Canadian cents (83 cents). Revenues were down marginally (by 0.8%) to C$8.4 billion.

Operating Statistics

The company reported operating earnings of C$288 million, down 64.4% year over year, while cash flow from operations dropped 49.9% from the prior-year period to C$574 million.

Production

Upstream production during August and September 2009 averaged 630,600 barrels of oil equivalent per day (BOE/d). Of this, 289,400 BOE/d came from the Petro-Canada acquisition. During the third quarter, volumes from Suncor’s legacy oil sands and natural gas operations averaged 339,900 BOE/d, as against 281,000 BOE/d in the year-ago period.

Excluding proportionate production share from the Syncrude joint venture, oil sands volumes rose 24.3% year over year to 305,300 barrels per day (Bbl/d), mainly reflecting improved operational reliability and lack of unplanned maintenance shutdowns.

Post acquisition, Suncor holds a 12% share in the Syncrude oil sands joint venture (located near Suncor's existing oil sands operations in Alberta). Syncrude operations contributed an average 37,400 Bbl/d of sweet crude production for the final two months of the third quarter of 2009.

During August and September 2009, Suncor’s natural gas business produced an average 772 million cubic feet equivalent per day (MMcfe/d), of which, 563 MMcfe/d came from the acquisition. Production from the company’s legacy natural gas operations averaged 208 MMcfe/d in the third quarter of 2009, as against to 213 MMcfe/d a year ago. This decrease was on account of production shut-ins and the sale of certain non-core assets in the second quarter of 2009.

East Coast Canada production contributed an average 49,600 Bbl/d during the two month period August-September 2009, while volumes from Suncor’s international segment contributed an average 108,600 Bbl/d – both lower than capacity as a result of planned and unplanned maintenance and the tie in of the North Amethyst extension at White Rose.

Guidance

Looking ahead to the fourth quarter, Suncor guided towards international production in the range of 130,000 – 140,000 BOE/d, while East Coast Canada production is expected to be 60,000 – 65,000 Bbl/d. Natural gas volumes are anticipated to be within 760 – 775 MMcfe/d. For full-year 2009, the company now expects oil sands production of 290,000 – 305,000 Bbl/d, compared to the previous guidance of 300,000 Bbl/d.

Plans asset sale to cut acquisition-related debt

In 2010, Suncor is targeting asset sale of up to C$4 billion, including a third of its natural gas holdings, as it looks to reduce debt following the Petro-Canada acquisition. Additionally, Suncor intends to offload smaller interests in the North Sea, all of its assets in Trinidad and Tobago as well as a corporate aircraft.
Read the full analyst report on "SU"
Zacks Investment Research

GeoGlobal Resources (GGR) Gets Approval for Offshore Oil

QualityStocks — Thu, 12 Nov 2009 17:33:54 +0000

GeoGlobal Resources, Inc., an oil and natural gas exploration and development company focusing on India, has announced another step forward in its bid for oil off the coast of eastern India, as part of a consortium led by GSPC (Gujarat State Petroleum Corporation). The company has announced that all signatures for the approval of the [...]

Commodity Companies Index (CCI) Up 214% YTD!

Lorimer Wilson — Thu, 12 Nov 2009 16:20:34 +0000

Up until now investors, analysts and newsletter writers have relied on the price performance of the commodities themselves (such as gold, silver, crude oil, etc.), the Reuters CRB Commodity Index or the HUI, XAU, GDM or CDNX indices to determine the health, performance and trends in commodities. Fortunately, for all [...]

Jacobs Wins Contract in Canada – Analyst Blog

Zacks Market Commentaries — Wed, 11 Nov 2009 21:14:10 +0000

Jacobs Engineering Group Inc. (JEC) has received a contract from Suncor Energy to provide project management, engineering and procurement services to complete the scoping study and Design Basis Memorandum (DBM) for tailings and water transfer projects. These projects are a portion of the Tailings Reduction Operations (TRO) implementation at Suncor's oil sands mining, extraction and upgrading facility located 30 kilometers north of Fort McMurray, Alberta, Canada. Officials have not disclosed the contract value.

TRO is Suncor's new initiative to implement a Mature Fine Tailings (MFT) drying process, which results in the dry material to be reclaimed in place or moved to another location for final reclamation. The process helps achieve a dryer landscape in a shorter period of time and allows for accelerated reclamation timelines, shrinking the environmental footprint of oil sands mining operations.

With annual revenues exceeding $12 billion, Jacobs is one of the world's largest and most diverse providers of technical, professional and construction services. Its major competitors are Foster Wheeler AG (FWLT) and Fluor Corp. (FLR).

The company’s diversification in terms of markets, geography and services will continue to facilitate future growth. Moreover, Jacobs’ cost focus puts it in a dominant position to expand margins under difficult economic circumstances.

At the end of the quarter, the company’s net cash position grew to $1 billion, up $254 million from the previous quarter and over $450 million from the beginning of 2009. This is a great story from an investment perspective. Jacobs has a strong balance sheet, which is expected to grow at a compound rate of 15% over the long term.

Jacobs is among those infrastructure stocks that may benefit from the coming construction boom. Looking forward, as banks get healthy and are willing to lend and the next round of stimulus begins, investors can expect infrastructure projects to increase.
Read the full analyst report on "JEC"
Read the full analyst report on "FWLT"
Read the full analyst report on "FLR"
Zacks Investment Research

Loews Upgraded – Analyst Blog

Zacks Market Commentaries — Wed, 11 Nov 2009 17:53:18 +0000

We are upgrading our recommendation on the shares of Loews Corp. (L) to Neutral. The company’s third-quarter earnings of $1.08 per share was well ahead of the Zacks Consensus Estimate of 87 cents a share. Loews reported a loss of 33 cents a share in the year-ago quarter.

The improved earnings were driven by increased investment income and a considerable reduction in investment losses at CNA Financial Corp. (CNA), besides strong results at Diamond Offshore Drilling Inc. (DO).

While the spin-off of Lorillard in 2008 eliminated the company’s overhang of tobacco litigation and the strong rebound in investment income is impressive, we think that the continuation of a stressed economic environment will have a restrictive effect on the top-line growth of the company.

The recent financial market appreciation bodes well for Loews. Both the holding company as well as the subsidiary, CNA, has experienced significant improvements in their investment income. Increase in the mark-to-market value of the investment portfolio has also resulted in considerable expansion of the company’s book value.

Diamond Offshore experienced a strong quarter with $170 million of earnings, up 17% year over year. Though it is currently experiencing a weak demand brought about by the fall in oil and natural gas prices, we think that Diamond's existing contract backlog should help mitigate the impact of the softening demand in the marketplace.

Also, in September, Diamond Offshore purchased a newly constructed, dynamically positioned drilling rig that is capable of operating in 7,500 feet of water. This rig has been named Ocean Valor This acquisition is consistent with Diamond's successful strategy of buying attractive assets at a time when pricing is favorable. Diamond was able to acquire the rig for approximately $490 million at an auction, well below the current cost to construct a similar new build rig.

While the management at CNA Financial has begun to focus on profitability instead of revenue generation, CNA’s operating income over the past few quarters has remained under pressure as a result of lower net investment income, economic slowdown and higher catastrophe losses. Though with the appreciation of the financial markets, the company is able to experience improved investment income, the premium volume still remains restricted as a result of the economic slowdown.

In June 2008, Loews had disposed of its entire ownership interest in Lorillard Inc. through the redemption of Carolina Group stock in exchange for Lorillard common stock and an exchange of its remaining Lorillard common stock for Loews common stock. In the recent years, Loews is looking to grow in areas such as natural gas exploration. So this spin-off decision was in line with the company’s strategy.

Loews, a holding company, is one of the largest diversified corporations in the United States. Its principal subsidiaries are CNA Financial Corp., a 90% owned subsidiary; Diamond Offshore Drilling Inc., a 50.4% owned subsidiary; HighMount Exploration & Production LLC, a wholly owned subsidiary; Boardwalk Pipeline Partners LP (BWP), a 72% owned subsidiary; and Loews Hotels, a wholly owned subsidiary.

Read the full analyst report on "L"
Read the full analyst report on "CNA"
Read the full analyst report on "DO"
Read the full analyst report on "BWP"
Zacks Investment Research

Oil Continues to Rise as the Dollar Falls

QualityStocks — Wed, 11 Nov 2009 16:25:02 +0000

Oil is a commodity that has steadily rose since December. Continuing its monumental climb, the commodity rose near $80 a barrel on Wednesday as the dollar continued to weaken, trumping a report pointing to a rise in U.S. oil inventories. While this trend may be confusing to the everyday investor, analysts have stated that the drastic [...]

Prieur’s readings (November 11, 2009)

Prieur du Plessis — Wed, 11 Nov 2009 06:45:15 +0000

This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy. Please also add the links to any other worthwhile articles you would like to share to the comments section.

Interview: Jim Rogers on gold, bubbles, commodites, equities, and Roubini

Prieur du Plessis — Wed, 11 Nov 2009 06:42:58 +0000

This post features an in-depth interview with Jim Rogers on a wide-ranging number of topical issues.

Mobius: Taking a closer look at Russian markets

Prieur du Plessis — Wed, 11 Nov 2009 06:20:08 +0000

Emerging markets guru Mark Mobius shares his (bullish) ideas on Russia in this post.

Will rising oil prices derail the recovery?

James Hamilton — Wed, 11 Nov 2009 03:43:06 +0000

Last April I described new research on the role of oil prices in the recent recession. Here's an update on what's happened since then.

In a paper presented at the Brookings Institution last spring, I examined the post-sample forecasting performance of an equation originally published in 2003, which relates real GDP to past values of GDP and oil prices. I noted in April that if you had known in October 2007 the values of GDP through 2007:Q3 and what was about to happen to oil prices through 2008:Q2, you could have used that historical relation to predict the value of U.S. real GDP for 2008:Q3 with an accuracy better than 99.5%.

Solid line: 100 times the natural log of real GDP. Dotted line: dynamic forecast (1- to 9-quarters ahead) based on coefficients of univariate AR(4) estimated 1949:Q2 to 2001:Q3 and applied to GDP data through 2007:Q3. Dashed line: dynamic conditional forecast (1- to 9-quarters ahead) based on coefficients reported in equation (3.8) in Hamilton (2003) (which was estimated over 1949:Q2 to 2001:Q3) applied to GDP data through 2007:Q3 and conditioning on the ex-post realizations of the net oil price increase measure.

In the figure above I extend the earlier-reported forecast an additional four quarters and compare the projection with what actually happened to GDP through 2009:Q3. The dotted green line is a forecast formed in October 2007 of what would happen to U.S. GDP if you used nothing more than the values of GDP observed through 2007:Q3. Basically that forecast simply extrapolates the recent prior trend. The dashed red line is the forecast that uses GDP values only through 2007:Q3 but also uses knowledge of what was going to happen to oil prices between 2007:Q4 and 2009:Q3. If you treated oil prices as the only thing that matters for the economy, you would have predicted the bottom would be reached in 2009:Q1, flat growth between 2009:Q1 and 2009:Q2, and normal growth resuming in 2009:Q3. That's exactly the trajectory that GDP has taken so far, although the bottom in 2009:Q2 was 2-1/2 percent lower than would be predicted on the basis of oil prices alone.

I have no doubt that the problems with financial markets were a bigger factor than oil prices in the striking collapse in output in 2008:Q4 and 2009:Q1. The other approaches to measuring the contribution of oil to the downturn surveyed in my Brookings paper would estimate a smaller contribution of oil to the downturn than suggested by the figure above. On the other hand, all of the approaches surveyed in that paper suggest that oil made a material contribution to the initial downturn, and it seems hard to deny that that the severity of the financial crisis was exacerbated by the fact that the U.S. had spent three quarters in recession prior to the failure of Lehman in September 2008.

What do these estimates imply looking forward, with oil prices now back up to $80 a barrel? The relation used to produce the figure above assumes that there is a threshold effect before the next oil price shock would begin to do its damage. According to that relation, oil has to get back above $130 before it would matter again for GDP growth. On the other hand, the original research on which that relation is based acknowledged that there's really not a very compelling basis in the data for choosing among various plausible nonlinear possibilities. The other approaches surveyed in my Brookings study assume a simple linear relation, according to which the recent resurgence in oil prices would already begin to exert a drag on spending.

Another magnitude that I think is important to watch is the share of the budget of an average U.S. consumer that is devoted to energy purchases. This had fallen considerably in the 1990s, making it easier for many consumers to largely ignore modest energy price fluctuations. When this share rises above 6%, it seems to become a more significant factor. The consumer energy expenditure share peaked last summer at 6.8%, but collapsing energy prices subsequently brought it back down to 4.7%. The resurgence in oil prices this summer had pushed that share back up to 5.4% in September.

Energy expenditures as a fraction of consumer spending. Calculated as 100 times nominal monthly consumption expenditures on energy goods and services divided by total personal consumption expenditures. Data source: BEA Table 2.3.5U, "Personal Consumption Expenditures by Major Type of Product and Expenditure," obtained from Econstats. Dashed line is drawn at 6.0%.

And the price of oil is up another 15% since September.

Dollar Decline in Perspective – Analyst Blog

Dirk Van Dijk — Tue, 10 Nov 2009 21:44:42 +0000

The dollar has clearly been under pressure this year. Most of the graphs of it that you have seen probably look like the first graph below, which shows what the dollar has done against two indexes since the start of the year. The blue line is how the greenback has fared against the major currencies like the Euro and the Yen, and the red line includes those, but also looks at how it has fared against a much broader collection of currencies.

Since March 9th, the day the market hit bottom -- and the dollar hit its high for the year -- it is down 14.4% against the major currencies and down 11.5% against the broad basket of currencies.

This has a number of implications. For starters, anyone from outside the country has seen nice gains if they invested in the U.S. market, but not nearly as eye-popping as the returns that domestic investors have seen. It also means that commodity prices have gone up much less for people based in Europe or Japan than they have for people in the U.S. Yes, the price of oil is up in Yen and Euros this year, but not by nearly as much as in the U.S.

There are those (many with very large soapboxes) who would have you believe that the decline in the dollar is a crisis. I, however, beg to differ.

While in the big picture over time it is not desirable to have the currency constantly devalued, at this point the decline is not likely to cause major problems. The major downside to a falling dollar is that it makes our imports more expensive, and thus can contribute to inflation. This is particularly true in the case of oil, which tends to rise as the dollar falls. After all, why should the price of oil for someone in France or Japan go down just because the dollar is weak?

However, right now such inflation is just offsetting deflation in other parts of the economy. The biggest weighting in the CPI is owner’s equivalent rent, or what it would cost you to rent a home identical to the one you own next door to your house. It makes up almost 24% of the overall CPI. Add in the rent that people pay to landlords if they don’t own a house and the figure gets close to 30%. It is part of core inflation, so if you strip out food and energy prices it is almost 40% of the core basket of goods.

Due to the weak housing market, and rapidly rising rental vacancy rates, rents are likely to be under substantial pressure for some time to come.

There is one currency, though, that the dollar has not declined against, and that is the Chinese Yuan, since the Chinese peg it to the dollar. Since we import a lot of goods from China, the decline in the dollar is not going to cause inflation in those prices.

The upside is that it means that our exports are much more competitive. This applies even in China, since we are often going head to head, not against local Chinese companies, but against European or Japanese firms. More exports mean more jobs, and a lower trade deficit.

Remember that net exports are a direct input into the GDP calculations. With an unemployment rate of 10.2% and rising, getting the economy moving again is a FAR higher priority than fighting inflation during a time of major deflationary pressures.

Since many U.S. companies have substantial operations abroad, or export goods, the decline in the dollar means a major tailwind to their earnings, since the euro they earned is worth more in dollars today than the euro they earned a few months ago was worth then. For the S&P 500 as a whole, more than 40% of the earnings come from abroad. For many companies like Coca Cola (KO) and Colgate Palmolive (CL), it is much higher than that.

One also has to take a longer-term look. The dollar has been slipping against both indexes since 2001, but there was a huge and sharp counter-trend rally a year ago as the world economy saw the wheels come off. The U.S. has always been a safe haven in times of distress, and around the world people flocked to pull their money out of Pounds and Rupees as they tried to find a safe place to hide in the turmoil.

The dollar still has not returned to the lows it saw early last year. Seeing the dollar decline as a crisis is sort of like seeing the decline in the TED spread as a crisis. It is not -- it is a sign that things are getting back to normal.

Also, the dollar has suffered far greater declines in the past with no major ill effects on the economy. To believe that a 14.4% decline in the dollar today is going to cause major havoc in the economy, then one must remember the last half of the 1980’s -- when the dollar fell by almost 40% against other major currencies -- as a period of economic disaster. Somehow that is not my recollection of the time.

Given the chronic trade deficits this country is running, and has been running for a long time, a weak dollar might not be good, but it is necessary. The last quarter we ran a trade surplus in was the 3Q of 1980. That’s right, when Jimmy Carter was in the White House.

While recently the trade deficit has come down, it was still 2.71% of GDP in the third quarter. That is still an awful number for our long-term economic health. However, it looks great when you consider that the trade deficit has averaged 4.575 of GDP so far this century and was over 5% of GDP for three straight years, from the second quarter of 2004 through the second quarter of 2007.

It is the trade deficit that determines how indebted we are to the rest of the world, not the fiscal deficit. We have run up big debts to the rest of the world, resulting in China for example owning over $1.5 Trillion in T-notes. In return, we got all the stuff that line the shelves of Wal-Mart (WMT). Now the credit card statement has come and we have to start paying. As the dollar falls it means we get to pay that debt back cheaper. We have to make and sell less stuff overseas compared to the stuff that was made abroad and sent here.

Now, other countries might not be all that happy about it, but what are they going to do? Sell their dollars so we can repay even cheaper? As long as the decline in the dollar is gradual and orderly, it will help boost the economy. The stock market realizes this. The fact that the market bottomed on the same day the dollar peaked out was no coincidence.
Read the full analyst report on "KO"
Read the full analyst report on "CL"
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Pasko: Dvorishchi ain’t no Cape Town

Robert Amsterdam — Tue, 10 Nov 2009 19:03:05 +0000

The last week of October was a tense time for the bureaucrats at Minprirody, Russia's Ministry for the Protection of the Environment and Natural Resources, and naturally for Minister Yuri Petrovich Trutnev. He went all the way to Cape Town,...

Talisman Net Slumps on Lower Prices – Analyst Blog

Zacks Market Commentaries — Tue, 10 Nov 2009 16:56:22 +0000

Canadian energy explorer Talisman Energy Inc. (TLM) reported marginally better-than-expected third quarter results, helped by in-line production volumes. Earnings per share from continuing operations, excluding one-time items came in at 15 Canadian cents (14 cents), a penny above the Zacks Consensus Estimate. However, on a year-over-year basis, Talisman’s adjusted earnings per share slumped approximately 77%, while revenues declined 42.3% to C$1.5 billion, hurt by lower prices of oil and natural gas.

Volume Analysis

Production during the quarter was down approximately 9.5% from the year-ago level to 401 thousand barrels of oil equivalent per day (MBOE/d), reflecting asset sales in Western Canada and maintenance downtime.

Oil & liquids production during the quarter was down 16.9% to 192.3 thousand barrels per day (MBbl/d), or 48% of total volumes. Volumes in North America, the U.K., Scandinavia , and other international regions were down 23.4%, 31.2%, 4.4%, and 30.5% to 31.4 MBbl/d, 71.3 MBbl/d, 30.1 MBbl/d, and 14.4 MBbl/d respectively. Oil & liquids production from Southeast Asia was, however, up 30.4% to 45.1 MBbl/d.

Talisman’s third quarter natural gas volumes were modestly down, approximately 1.2% to 1.3 billion cubic feet per day (Bcf/d). Production was down approximately 8.1% to 790 million cubic feet per day (MMcf/d) in North America and 62.2% in the U.K. to 14 MMcf/d. But volumes were up 111.1% in Scandinavia and 16.4% in Southeast Asia to 38 MMcf/d and 411 MMcf/d, respectively.

Realized Prices

During the quarter, the company’s realized commodity prices were down 42.9% from the year-ago quarter to C$50.29 per barrels of oil equivalent (BOE), reflecting significantly weaker oil and natural gas prices across the board.

Overall natural gas prices decreased approximately 50.3% year over year to C$5.01 per Mcf. In North America, unit realization declined 55.9% to C$4.05 per Mcf. Natural gas prices were down 67.8% in the U.K. and 44.1% in Southeast Asia to C$3.24 per Mcf and C$6.92 per Mcf, respectively, while Scandinavia experienced a 37.4% decline in realized prices to C4.83 per Mcf.

Oil & liquids realizations averaged C$72.24 per barrel, down 36.2% from the year-ago level. Prices realized in North America, U.K., Scandinavia, and Southeast Asian regions were C$60.17 per barrel (down 42.2% year over year), C$74.59 per barrel (down 35.2%), C$76.53 per barrel (down 31.9%) and C$74.30 per barrel (down approximately 36.8%), respectively.

Acreage Addition

Talisman added 90,000 acres of properties in Pennsylvania's Marcellus shale region, while boosting land holdings in the Montney region of British Columbia by 80,000 acres.

Cash Flows & Capital Expenditure

Cash flows from continuing operations during the quarter totaled C$828 million, down 46.6% from the year-earlier quarter, while the company spent C$871 million on exploration and development activities.

Balance Sheet

At the end of the quarter, Talisman had cash and cash equivalents of approximately C$2.0 billion and long-term debt of $3.9 billion, representing a debt-to-capitalization ratio of 33.5%.

Guidance

Management hiked its 2009 capital budget by 25% to C$4.5 billion, primarily to increase drilling on its shale properties and acquire new exploration lands. Talisman is targeting average production of 423,000 – 426,000 BOE/d for the year, slightly down from its previous 430,000 BOE/d forecast, as it expects to sell some non-core oil and gas assets. The company further informed that it plans to reorganize its North American operations into separate conventional and unconventional (focusing exclusively on shale gas) assets.
Read the full analyst report on "TLM"
Zacks Investment Research

Prieur’s readings (November 10, 2009)

Prieur du Plessis — Tue, 10 Nov 2009 07:35:48 +0000

November 9th CEOcast Weekly Newsletter

QualityStocks — Mon, 09 Nov 2009 20:58:57 +0000

Companies featured in this edition of the newsletter: ACTC, CHIP, CVM, DKAM, ENZ, IWEB, MBCI, MFGD, PHC Markets rebounded last week, on the strength of upbeat productivity and manufacturing reports that led to solid gains in all of the major indices. Despite news that the unemployment rate had hit its highest levels in 25 years, the [...]

Parker Hannifin Surpasses – Analyst Blog

Zacks Market Commentaries — Mon, 09 Nov 2009 19:38:12 +0000

Parker Hannifin Corporation (PH) reported fiscal 2010 first quarter net income, which declined 71% to $73.5 million from $250.2 million in the first quarter of fiscal 2009. Earnings per diluted share declined 70% to 45 cents. This was higher than the Zacks Consensus Estimate of 17 cents.

Sales were $2.2 billion in the quarter, a decline of 27% from $3.1 billion in the first quarter a year ago.

In the Industrial North America segment, sales declined 29.3% to $783.1 million and operating income declined 52.5% to $76.2 million, compared with the same period a year ago. In the Industrial International segment, sales declined 30.5% to $850.3 million, and operating income declined 69.5% to $61.8 million compared with the same period a year ago. In the Aerospace segment, sales decreased 12.9% to $416.9 million and operating income declined 22.0% to $53.1 million, compared with the same period a year ago. In the Climate & Industrial Controls segment, sales declined 27.0% to $187.0 million and segment operating income declined 32.3% to $10.5 million, compared with the same period a year ago.

Orders declined 27% in the Industrial North America segment, compared with the same quarter a year ago. Orders declined 25% in the Industrial International segment compared with the same quarter a year ago. Orders declined 23% in the Aerospace segment on a rolling 12 month average basis. Orders declined 17% in the Climate and Industrial Controls segment, compared with the same quarter a year ago.

Cash flow from operations for the first quarter of fiscal 2010 was $260.1 million, or 11.6% of sales, compared with $307.3 million, or 10.0% of sales in the prior year period.

Cash and cash equivalents stood at $189.8 million with long-term debt at $1.8 billion and shareowners’ equity at $4.5 billion at the end of the quarter.

For fiscal 2010, the company has increased its guidance for earnings from continuing operations to the range of $1.55 to $2.05 per diluted share. The current Zacks Consensus Estimate stands at $1.65 per share.

Parker Hannifin Corporation manufactures fluid power systems, electromechanical controls and related components. Its Industrial segment offers pneumatic and electromechanical components and systems; filters, systems and instruments to monitor and remove contaminants from fuel, air, oil, water and other liquids and gases; connectors which control, transmit and contain fluid; hydraulic components and systems for builders and users of industrial and mobile machinery and equipment; critical flow components for process instrumentation, health care and ultra-high-purity applications; besides static and dynamic sealing devices. This segment sells its products primarily to original equipment manufacturers (OEMs) and their replacement markets in various manufacturing and processing industries. The company’s Aerospace segment provides hydraulic, fuel and pneumatic systems and components used for commercial and military airframe and engine programs. Major competitors are Eaton Corporation (ETN) and Honeywell International Inc. (HON).
Read the full analyst report on "PH"
Read the full analyst report on "ETN"
Read the full analyst report on "HON"
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Tesoro Beats, Cuts Dividend in Half – Analyst Blog

Zacks Market Commentaries — Mon, 09 Nov 2009 17:55:52 +0000

Tesoro Corporation’s (TSO) third-quarter 2009 results came in significantly better than expected, helped by better demand balance in the company’s key West Coast region. Earnings per share came in at 24 cents, against Zacks Consensus Estimate of a penny loss.

Tesoro’s outperformance is in contrast to the steep losses posted by the other major refiners that have already reported -- Valero Energy Corp. (VLO) and Sunoco Inc. (SUN).

However, compared to the year-ago period, Tesoro’s earnings per share plunged 87.1%, while sales declined 45.4% to $4.7 billion -- severely hampered by depressed refining margins and lower throughput on the back of weak fuel demand and high inventories.

Refining Segment Results

Tesoro’s refining segment experienced a significant decline in operating income (operating income of $84 million vs. $476 million in the year-earlier quarter) due to struggling profit margins for the production of distillate fuels (like heating oil and diesel), as well as a narrowing of the sweet/sour crude spread.

Throughput

Total refining throughput averaged 564 thousand barrels per day (MBbl/d), compared to 622 MBbl/d in the year-ago quarter. Overall throughput volumes in the California region (consisting of the Golden Eagle and Los Angeles refineries) decreased 13.9% year-over-year to 235 MBbl/d. Throughput in the company’s Pacific Northwest refineries (Alaska and Washington) fell 4.3% year-over-year to 155 MBbl/d, while for the Mid-Pacific (Hawaii) refineries, it was down approximately 8.3% to 66 MBbl/d. In the Mid-Continent region, Tesoro’s refining throughput averaged 108 MBbl/d, 6.1% lower than the previous-year period.

Refining Margins

Gross refining margin decreased 42.5% year-over-year to $9.59 per barrel. In terms of different regions, refining margin was down approximately 36.7% in California to $11.54 per barrel, 34.0% in the Pacific Northwest to $9.08 per barrel, 91.4% in the Mid-Pacific to $1.05 per barrel, and roughly 42.8% in the Mid-Continent to $11.50 per barrel.

Realized Costs & Prices

Manufacturing costs before DD&A decreased 8.6% from the year-earlier level to $4.79 per barrel, primarily due to lower energy costs. Total refined product sales during the quarter averaged 611 MBbl/d, down 10.4% year-over-year. Average price realized on product sales decreased 36.2% year-over-year to $83.71 per barrel. Average cost per barrel was also down 35.1% from the third quarter of 2008 to $76.47 per barrel.

Capital Expenditure & Balance Sheet

Tesoro’s total capital spending (including turnaround expenditure) during the third quarter of 2009 was $109.0 million. As of September 30, 2009, Tesoro had cash on hand of $534 million and long-term debt of approximately $1.8 billion, representing a debt-to-capitalization ratio of 36.2%.

Dividend Cut

Tesoro announced a 50% reduction in its quarterly dividend to 5 cents per share (20 cents per share annualized). The new dividend is payable on December 15, to shareholders of record on December 1, 2009.

Guidance

The company informed that it expects capital spending for 2009 to be less than its stated budget of $600 million. For 2010, the company plans to spend $675 million.

Outlook

We believe that the overall environment for refining margins is likely to remain poor going into 2010. The sharply lower refinery utilization (just over 80% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.

The recent rally in crude prices have added to refiners’ miseries by increasing the cost of oil they buy to make gas, jet fuel and other refined products. Being one of the major U.S. independent oil refiners, Tesoro remains particularly exposed to this unfavorable macro backdrop.

We currently rate Tesoro shares as Neutral. Unless the outlook for refiners improves, we expect the stock to perform in line with the market.
Read the full analyst report on "TSO"
Read the full analyst report on "VLO"
Read the full analyst report on "SUN"
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No Inflation Problem – Analyst Blog

Dirk Van Dijk — Mon, 09 Nov 2009 17:43:37 +0000

Analytically, there are three components to an interest rate. The first is the risk that the money will not be paid back. This is a very big factor when dealing with corporate bonds, especially junk bonds. For the U.S. government's obligations, as the owner of a nice shiny printing press that can always be turned on to pay back any obligation denominated in dollars, that part is assumed to be zero.

The second part is expected inflation. After all, if you decide that you want to consume something later, rather than today, and thus decide to save and invest your money, you want to be sure the dollar you put away today buys at least as much in, say, ten years that it does today. If you expect that it will buy less bread, gasoline and clothing in ten years, then you would demand a higher interest rate to offset the diminution in purchasing power.

Finally, most people would rather enjoy themselves today rather than put off that enjoyment until some time in the future. As a result they demand a real interest rate, over and above the rate of inflation, to reward them for their delayed gratification, even if there is no risk that they will not be paid back.

Since 2003, the government has been selling bonds where the amount of the principal that gets paid back when the bond matures rises with the rate of inflation over the life of the bond, called TIPS. Aside from the fact that it is a much smaller and illiquid market than that of regular T-notes, TIPS make a great vehicle for tracking the real rate of interest that investors want in return for consuming later, rather than today.

Well, if repayment risk is assumed to be zero, and we know what the real rate is, then the difference between a regular T-note and the TIPS of the same maturity is what the market expects inflation to be over the life of the bonds. The yield on regular 10-year T-notes is shown in blue in the graph below, while the rate on 10-year TIPS is in pink, and the difference is shown in yellow.

Since TIPS were introduced, the average difference has been 2.17%. As of last week, the difference was 2.12%. In other words, the market does not expect inflation to be more of a problem over the next ten years than it has feared about inflation since 2003.

Aside from the price of oil and some other commodities, the last six or seven years have not been a particularly high inflation time (well, they have been for Health Care and Education, too, but overall inflation has been pretty well contained). Aside from the dislocations last year, which were arguably as much about the relative lack of liquidity in the TIPS market, this market-based measure of expected inflation has been remarkably stable -- much more stable than the yield on either regular T-notes or of TIPS.

While it is true that the implied inflation has been climbing since it almost hit zero last year, it is not at levels that suggest inflation is going to skyrocket.

This means that the Fed should be far more concerned about getting the economy moving again. Any move to tighten up monetary policy by raising interest rates would be a serious mistake. Historically, the Fed has not started to increase the Fed Funds rate until well after the unemployment rate has peaked -- more than a year, in the case of the last two cycles. Those unemployment peaks looked more like the Catskills versus the Andes sized peaks we have today, and unemployment is still rising.

Keep in mind that the unemployment rate will most likely continue to rise, even after the economy starts to, on balance, create new jobs. That is because there are probably a huge number of people who have become discouraged about their chances of getting a job and have stopped looking. Others have gone back to school or done other things that take them out of the formal labor force. As soon as it looks like companies are hiring again, they are likely to flood back into the labor market.

How, then, does one explain the recent move in the price of gold to over $1,100 an ounce? Historically, gold has been seen as the ultimate inflation hedge. Its rise over the past year to record nominal levels (it would have to roughly double to match its inflation-adjusted high’s set back in 1979) would seem to indicate that the market is afraid of inflation. How do we square this with data from the TIPS market, which indicates the market sees no real problem with inflation?

One reason might be the rise of India, although that would not explain the day-to-day moves. Historically and culturally, Indian’s have a far higher propensity to store their wealth in the form of gold, specifically in jewelry, not bullion, than the rest of the world does. That said, I don’t think that the 200 metric tons recently bought by the Reserve Bank of India is about to be turned into necklaces and earrings anytime soon.

Still, as millions and millions of Indians become more middle class, the demand for gold has gone up. To a lesser extent, this holds true for China as well. Even more Chinese are becoming wealthy or at least middle class than are Indians, although the cultural propensity to hold gold is not quite as strong.

Part of it might just be that we have not found that many new gold mines recently, and the ore grades in places like South Africa have been going down. That, combined with rising demand, is a classic recipe for rising prices -- even if people are not expecting a return of 1970’s-style inflation.

The second graph, from Goldnews.billionvault.com, shows that total world gold production has been falling over the last five years following steady growth in the over 20 years preceding that. That would mean good things for the gold miners who have large reserves of gold in the ground, especially if they are able to increase production when the rest of the world is seeing production decline. Freeport McMoRan (FCX) and Barrick Gold Corp. (ABX) are good examples of such companies.

Read the full analyst report on "FCX"
Read the full analyst report on "ABX"
Zacks Investment Research

Comstock Posts Loss, Falls Short – Analyst Blog

Zacks Market Commentaries — Mon, 09 Nov 2009 15:15:49 +0000

Oil and natural gas firm Comstock Resources Inc. (CRK) reported weaker-than-expected third quarter results as low commodity prices more than offset the rise in production volumes. Loss from continuing operations came in at 28 cents per share, 2 cents wider than the Zacks Consensus Estimate of 26 cents. In the year-ago period, the company earned $1.18 per share. Oil and gas sales were down 58.8% year-over-year to $67.4 million.

Volume Growth
The company’s operational performance during the quarter continued to reflect the success of its enhanced onshore drilling programs and property acquisitions, resulting in quarterly volume growth of 13.2% year-over-year to 17.0 billion cubic feet equivalent (Bcfe), of which 94% was natural gas. Production in the East Texas/North Louisiana operating region increased 33.7% to 10.7 Bcfe, while production from the South Texas properties came in at 5.0 Bcfe, an approximately 6.7% decrease from the year-earlier level.

Price Realizations Down
Average price realization per thousand cubic feet equivalent (Mcfe) was $3.98, down 63.6% from the year-ago quarter. Average oil price realization was $57.96 per barrel and average natural gas realization was $3.63 per Mcf, compared to $105.15 per barrel and $10.16 per Mcf, respectively, in the year-earlier quarter.

Costs & Expenses
Oil and gas operating costs were down 25.7% from the third quarter of 2008 to $16.0 million. However, overall operating expenses increased 1.9% year-over-year to $79.0 million.

Cash Flow & EBITDAX
Comstock generated operating cash flow from continuing operations of $70.0 million, a decrease of 47.4% from the year-earlier period. Quarterly EBITDAX (earnings before interest, taxes, depreciation, depletion, amortization, exploration expense, and other non-cash expenses) decreased 66.3% year-over-year to $46.8 million.

Capital Expenditure
During the third quarter of 2009, Comstock spent $79.0 million on its exploration and development activities. Management guided towards full-year 2009 drilling spending budget of $355 million. Of the 2009 spending budget, 90% is dedicated to the company’s East Texas/North Louisiana operating region. The 2009 drilling program consists of approximately 52 wells (38.4 net). Of these, 41 wells (30.6 net) are horizontal Haynesville shale wells.

Balance Sheet
At the end of the quarter, Comstock had approximately $3.1 million in cash and cash equivalents and $340 million in long-term debt. Debt-to-capitalization at the end of the quarter was 24.2%.
Read the full analyst report on "CRK"
Zacks Investment Research

Titanium Metals Down in the 3Q – Analyst Blog

Zacks Market Commentaries — Mon, 09 Nov 2009 10:00:00 +0000

Revenues and profits for Titanium Metals Corporation (TIE) plunged in the third quarter of 2009 due to lower shipments on the back of weak demand from commercial aircraft builders and lower selling prices. Earnings per share for the country's largest producer of titanium was $1.1 million, or $0.01 per share, compared to last year's $40.2 million, or $0.22 per share. Earnings also missed the Zacks Consensus Estimate of 3 cents.

Revenues of $181.4 million declined 39% year over year. Volumes in the melted product segment were down 39% to 675 million tons while prices weakened 20% to $23.9 per ton from $29.85 per ton last year. Shipments in the mill product business plummeted 31% to 3.8 billion tons and prices dropped 6% to $56 per ton from $59.4 per ton. Lower sales were followed by a significant 93% fall in operating income to $3.5 million. Cost of sales declined about 36% to $163.7 million on lower raw material costs. However, low utilization of production capacity more than offsets the favorable impact of declining raw material costs. Hence, gross margin as a percent of sales went down to 17.7% from 72.9% in the year-ago quarter.

Titanium Metals stated that the near-term demand outlook remains unclear. However, the company said that its major customer, the Chicago-based Boeing Company (BA), recently announced an expected first flight for the Boeing 787 prior to the end of 2009 and first commercial delivery during the fourth quarter of 2010. This is likely to drive production throughout the commercial aerospace supply chain and, thereby, create demand for Titanium products.

Titanium Metals Corporation is the second-largest producer of titanium worldwide and the largest producer in the US. Products include titanium sponge, melted products, mill products and industrial fabrications that are finding their growing adoption in commercial aerospace, defense, energy and several other industries.

We believe commercial and defense aerospace will be the key growth driver for Titanium Metals. The company is also seeing its adoption in geothermal energy extraction and oil & natural gas production. Chemical processing, consumer and sporting goods are some of the other areas of growth.

Read the full analyst report on "TIE"
Read the full analyst report on "BA"
Zacks Investment Research

Patterson Net Falls, but Beats View – Analyst Blog

Zacks Market Commentaries — Fri, 06 Nov 2009 21:24:43 +0000

Patterson-UTI Inc. (PTEN) reported a narrower-than-expected third-quarter loss of 12 cents per share, reflecting a recovery in rig demand as customers prepare for ramped up drilling activities in 2010. The Zacks Consensus Estimate was pegged at a loss of 16 cents per share.

In the year-ago period, the company earned 69 cents per share. Revenue was down 71.1% year over year to $176.2 million. The negative comparisons compared to the year-ago period reflect lower drilling activity. The number of rigs operating during the quarter averaged 73 (70 located in the U.S. and 3 in Canada), compared to 276 average rigs operating in the third quarter of 2008. However, it was up from 63 rigs operating in the June quarter.

Contract Drilling

Contract Drilling revenue totaled $112.3 million (64% of total revenue), down approximately 77.5% year-over-year. Average revenue per operating day was $16,800, down 5.5% sequentially, while average direct costs per operating day increased 6.7% to reach $10,630. The segment reported an operating loss of $19.9 million as against operating income of $157.2 million in the year-ago quarter. The weak results of this segment primarily reflect the significant decrease in the average number of rigs operating, compared to the year-ago period (73 as against 276) on the back of decreased demand largely caused by lower commodity prices for natural gas and oil.

Pressure Pumping

The company’s Pressure Pumping business recorded revenue of $41.7 million, a decrease of 31.2% year-over-year. In anticipation of increased activity associated with Marcellus Shale, the company has added equipment and workforce during recent years. However, delays in development of the shale have caused a slower ramp-up of customer activity, which in turn affected the profitability of this segment.

Additionally, the company’s customers have increased their focus on the development of unconventional reservoirs in the Appalachian Basin and the larger jobs related to it. As a result of this and declining commodity prices, Patterson-UTI experienced a decrease in the number of smaller traditional pressure pumping jobs, which led to an overall decrease in the number of total jobs. Consequently, the Pressure Pumping business’ operating profit was down significantly (by 90.6%) to $1.2 million.

Drilling & Completion Fluids

Revenue from Drilling & Completion Fluids fell 53.9% year over year to $16.5 million. The segment reported an operating loss of $2.3 million, $1.4 million more than that recorded during the third quarter of 2008. The weak results can be attributed to decreased sales volumes, both on land and offshore in the Gulf of Mexico.

Oil & Natural Gas

Revenue generated from the Oil & Natural Gas business was $5.7 million, down 58.4% from the year-ago quarter. This segment posted an operating income of $1.9 million, down significantly from the year-ago period, as it suffered from lower average sales prices of oil and natural gas.

Capital Expenditure & Balance Sheet

During the quarter, Patterson-UTI spent approximately $104.1 million on capital programs, of which approximately 90% went to the Contract Drilling segment. As of September 30, 2009, the company had $119.2 million in cash and no long-term debt.

Outlook

We remain concerned about the North American land drilling scene and its impact on Patterson-UTI, one of the largest onshore drillers. We believe that the current supply overhang in the natural gas market will continue to weigh on the company’s dayrates and margins during the next few quarters.

On the positive side, Patterson-UTI’s premium newbuild fleet and stellar financial health (free cash flow positive and a debt-free balance sheet) should help it weather the downturn better than its peers, such as Nabors Industries (NBR). Considering these factors, we believe that Patterson-UTI shares are fairly valued at current levels. As such, we see the stock performing in line with the broader market and rate it as Neutral.
Read the full analyst report on "PTEN"
Read the full analyst report on "NBR"
Zacks Investment Research

Disappointing Quarter for Sunoco – Analyst Blog

Zacks Market Commentaries — Fri, 06 Nov 2009 20:13:41 +0000

Oil refiner and marketer Sunoco Inc. (SUN) reported weaker-than-expected third quarter results as its refining and chemicals operations slipped in the red, pulled down by reduced margins and production. Loss per share, excluding special items, came in at 29 cents, significantly wider than the Zacks Consensus Estimate of 9 cents. In the year-ago period, the Pennsylvania-based company earned $4.78 per share. Revenues were down 42.6% year over year to $8.7 billion.

Refining & Supply

The Refining & Supply segment lost $118 million during the quarter, as against a profit of $398 million in the year-earlier period, mainly on account of lower realized margins and lower production volumes, partly canceled by lower expenses. Realized margin averaged $2.72 per barrel, down 81.7% from the third quarter of 2008, reflecting a very weak East Coast refining margin environment. Total production was down approximately 17.2% year over year to 669.2 thousand barrels per day (MBbl/d), as market-driven rate reductions lowered volumes throughout the refining system.

Retail Marketing

The Retail Marketing segment earned $49 million versus $72 million in the year-ago quarter, reflecting lower average retail gasoline margins, somewhat offset by lower expenses.

Chemicals

The Chemicals segment reported a loss of $1 million during the quarter compared to a profit of $19 million in the year-ago period. The year-over-year decline reflects lower margins and sales volumes, partially offset by lower expenses.

Logistics

The Logistics segment earned $19 million, down marginally from $20 million in the third quarter of 2008, as additional earnings from a refined products pipeline and terminal system acquired in November 2008 were offset by lower lease acquisition results.

Coke

Sunoco’s Coke segment achieved $35 million in profits during the quarter, up 20.7% from the previous year quarter. The higher income was on the back of increased price realizations from coke production.

Capital Expenditure & Balance Sheet

Capital expenditure incurred by Sunoco during the quarter was $286 million (42% spent on the refining business). Management expects capital expenditure to be just under $1 billion this year. At the end of the quarter, Sunoco had cash and cash equivalents of $178 million and long-term debt of approximately $2.1 billion. Debt-to-capitalization ratio stood at approximately 41.2%.

Outlook

We believe that the overall environment for refining margins is likely to remain poor going into 2010. The sharply lower refinery utilization (just over 80% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.

The recent rally in crude prices have added to refiners’ miseries by increasing the cost of oil they buy to make gas, jet fuel and other refined products. Being the second largest U.S. independent oil refiner by volume after Valero Energy Corp. (VLO), Sunoco remains particularly exposed to this unfavorable macro backdrop.

However, Sunoco has undertaken certain strategic actions to improve the company’s performance and competitiveness in a cost-effective manner, as it struggles to cope with the bearish refining margin environment. In this regard, Sunoco said last month that it would indefinitely idle a New Jersey refinery, furlough 400 workers and cut its dividend in half.

We currently rate Sunoco shares as Neutral. Unless the outlook for refiners improves, we expect the stock to perform in line with the market.
Read the full analyst report on "SUN"
Read the full analyst report on "VLO"
Zacks Investment Research

Statoil Slips, but Volumes up – Analyst Blog

Zacks Market Commentaries — Fri, 06 Nov 2009 16:17:48 +0000

Statoil ASA (STO) reported its third quarter results of 38 cents per share, compared to the Zacks Consensus Estimate of 40 cents and in line with the year-earlier quarter earnings. Revenue for the quarter was NOK 123.1 billion ($20.1 billion), down 29% year over year.

Though the company’s results were hurt by lower commodity prices, Statoil continues to maintain a high activity level both in Norway and internationally. Equity and entitlement productions were up 8% and 10% year over year, respectively, with the start-up of operations on several new oil and gas fields such as Tyrihans in the Norwegian Sea, Tune Sor in the North Sea and Thunder Hawk in the Gulf of Mexico.

Total oil and gas entitlement production during the quarter averaged 1.71 million barrels of oil equivalent per day (MMBOE/d), 62% of which was oil and 38% natural gas, compared to 1.55 MMBOE/d in the year-earlier period. Total oil and gas liftings in the quarter were 1.66 MMBOE/d, compared to 1.50 MMBOE/d in the year-earlier period. During the quarter, the company’s realized oil prices averaged NOK 400 ($65.5) per barrel, down approximately 39% year over year, while realized natural gas prices averaged NOK 1.61 (26 cents) per standard cubic meter, down approximately 32% from the year-ago level.

Net adjusted operating income during the quarter was NOK 31.2 billion ($5.1 billion), down by 41% from the year-earlier quarter. The decrease was primarily caused by the reduction in prices for both liquids and gas, partly compensated by increased sales volumes of liquids and gas.

During the quarter, total capital investment was NOK 25 billion ($4.1 billion) and operating cash flows were NOK 22.5 billion ($3.7 billion). Net debt-to-capitalization ratio stood at 27.1%.

Statoil expects its 2009 equity production to be 1.95 MMBOE/d. Capital expenditures for 2009 are expected to be around US$13.5 billion. Excluding purchases of fuel and gas for injection, unit production cost for equity volumes in 2009 to 2012 is expected to be in the range of NOK 33 to 36 per barrel. The company expects to complete around 70 exploration and appraisal wells in 2009.

Statoil is gaining momentum with the start-up of operations on several new oil and gas fields. A sharp rise in production is offsetting the fall in oil and gas prices, which helps the company to experience smaller profit declines than other large European oil companies such as Royal Dutch Shell (RDS.A) and BP plc (BP).
Read the full analyst report on "STO"
Read the full analyst report on "RDS.A"
Read the full analyst report on "BP"
Zacks Investment Research

Zacks Industry Rank Analysis Highlights: B.P. Prudhoe Bay, Sabine Royalty Trust, Archer Daniels Midland, Hershey and Del Monte – Press Releases

Dirk Van Dijk — Fri, 06 Nov 2009 13:00:44 +0000

For Immediate Release

Chicago, IL – November 6, 2009 – Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis include B.P. Prudhoe Bay (BPT), Sabine Royalty Trust (SBR), Archer Daniels Midland (ADM), Hershey (HSY) and Del Monte (DLM).

Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist for Zacks.com.

This week: Out-of-Step Industries

Sometimes the best investments come from a small group that seems to be bucking the trend of the much larger group that they are a part of. That appears to be the case for the Oil Royalty Trust group. There are eight names in this group, all of which sport Zacks #2 rankings. That puts them in a tie for 4th place among all industries tracked. Meanwhile, the Energy sector is well down the list overall sector rank list.

With royalty trusts, you get high dividends that will vary with the price of oil or natural gas. They don’t do a lot of reinvestment, just pump the oil or gas out of the ground, sell it and pass the proceeds along to the owners. Of course, eventually the wells run dry and with them, so does the stream of income. But they are a very direct play on the price of oil and gas, and you avoid the risk of dry holes.

They are among the best income-generating investments out there, though some of that income is really a return of principal as the wells run dry. Then again, the tax code recognizes that as well.

A few of the names in the group include B.P. Prudhoe Bay (BPT) and Sabine Royalty Trust (SBR), which might be good bets for people looking for high current income and who think that oil prices are likely to head higher as the dollar gets weaker.

At the other end of the spectrum, food stocks are generally very well regarded right now by the Zacks Rank, a big part of the reason that the Consumer Staples sector trails only the very small and analytically incoherent Conglomerates sector. However, there is one glaring exception to this otherwise tasty group, the Meat Processors. With an average rank of 3.67, the industry ranks 199 out of 206 industries tracked. Investors would be well served by looking elsewhere in the food industry right now. Some of the higher ranked alternatives in the food area would include Archer Daniels Midland (ADM), Hershey (HSY) and Del Monte (DLM).

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Zacks Investment Research

Oil & Gas Industry – Industry Outlook

Zacks Market Commentaries — Thu, 05 Nov 2009 21:16:48 +0000

OUTLOOK

The improving economic scene, both here in the U.S. as well as worldwide, is the main driver of the current oil rally that has seen the commodity settling around the $80 per barrel level. But high levels of product inventories (particularly gasoline), along with still higher supplies, will limit any sustained crude gains, in our view. But way too many factors weigh on oil prices, from OPEC decisions and geostrategic tensions to the value of the U.S. dollar and seasonal variables, to definitively size up each one of them for their respective impact on prices.

In its latest release, the Energy Information Administration (EIA) reported a less-than-anticipated increase in crude stockpiles, which rose by 800,000 barrels for the week ending October 23. However, current crude oil stocks, at 339.9 million barrels, still remain 9% above the year-earlier level as well as above the upper limit of the average for this time of the year. As such, crude oil’s near-term fundamentals remain dismal, to say the least.

At current projections, world crude demand for 2009 is expected to be below last year’s level, which itself was below the 2007 level -- the first time since the early 1980’s of two back-to-back negative growth years.

Last month, the Paris-based International Energy Agency (IEA) provided some positive news in this otherwise bleak supply-demand picture. The energy-monitoring body of 28 industrialized countries hiked its global oil demand forecast for both this year and 2010 by 200,000 barrels per day and 350,000 barrels per day, respectively, citing higher-than-expected consumption in Asia and the Americas.

Our view is that oil should be able to hold onto its recent gains and consolidate around current levels, provided this favorable economic view remains in place. But this does not mean that we will not see any short-term pullbacks. On the whole, we expect oil prices in 2010 to be higher than the 2009 levels, but remain significantly below the 2008 peak levels.

Natural Gas

The overall picture remains particularly weak for natural gas, whose inventories have recently hit a new record high of 3.76 trillion cubic feet (Tcf) and is threatening to test the maximum capacity of 3.89 Tcf. Continued strong domestic production (from a number of unconventional natural gas fields) and recessionary consumption (due to the economic downturn), particularly in the industrial sector, are at the core of the commodity's current woes.

Natural gas prices rallied earlier last year, reaching over $13 per million Btu (MMBtu) in July 2008, before trending down to seven-year low level of sub-$2 per MMBtu (we are referring to Henry Hub spot prices here) in September 2009. This, together with tighter access to credit, has prompted producers to scale back drilling operations over the past few quarters.

The supply picture is expected to reverse in the coming months as the lag effect of the sharp drop in domestic drilling activity takes hold. But we do not think this would be enough to offset the record high inventories (storage levels remaining 12% above their five-year average) and steep recession-related cuts in demand. This translates into limited upside for natural gas-weighted companies and related support plays.

OPPORTUNITIES

The strengthening oil price environment should benefit producers, particularly those international players having attractive growth opportunities in their home markets. Two such standout names are China’s CNOOC Ltd. (CEO) and China Petroleum and Chemical Corporation, or Sinopec (SNP), both of which remain well-placed to benefit from the country’s growing appetite for energy.

CNOOC enjoys a monopoly on exploration activities in China’s very prospective offshore region in addition to having a growing presence in the country’s natural gas and LNG infrastructure. On the other hand, Sinopec is the second largest crude oil and natural gas producer, and the largest refiner and marketer of refined petroleum products in China. Sinopec’s leverage to the lucrative Chinese market and the recent $7.5 billion Addax acquisition is expected to help sustain its growth momentum.

Within the oilfield services group, we prefer to own companies such as Cameron International (CAM) that derives about two-thirds of its revenue from outside North America, thereby playing an offsetting role to the relatively soft U.S. drilling scene. Cameron recently posted better-than-expected third quarter results and raised its 2009 forecast, as a revival in energy prices led to improved drilling activities.

WEAKNESSES

We continue to feel strongly that industry players in the servicing and drilling ends of the business with substantial natural gas-focused and North America-centric operations should be avoided. A major sub-sector that fits that description is the onshore drillers. While we currently don't have any Underperform rated stocks in this group, we remain skeptical of land drillers like Nabors (NBR) and Patterson-UTI (PTEN), given the extent of excess capacity in the sector that is expected to weigh on dayrates and margins well into next year.

As expected, natural-gas woes in North America have pulled down the oilfield services companies' third-quarter results. In particular, we remain wary of service providers like Smith International Inc. (SII), given its high North American exposure (from the W-H Energy acquisition) in the face of a collapse in the region’s drilling activities. We have Neutral recommendation on the company, whose third quarter results came in significantly below expectations.

Within the E&P group, we see little reason for investors to own shares of Stone Energy Corp. (SGY). We believe that Stone’s asset portfolio, centered on the Gulf Coast/Gulf of Mexico regions and lacking meaningful exposure to the emerging shale plays, is not suited for the current environment of low commodity prices and restricted access to capital.

We also maintain our cautious view on oil refiners, given the higher-than-average gasoline and distillate stocks -- a combination that will continue to hurt their profitability going into 2010. Additionally, the sharply lower refinery utilization (at around 82% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.

Being the largest independent refiner, Valero Energy Corp. (VLO) remains particularly exposed to this unfavorable macro backdrop. We have an Underperform recommendation on the company.
Zacks Investment Research

Pioneer Misses, but Volumes up – Analyst Blog

Zacks Market Commentaries — Thu, 05 Nov 2009 15:59:10 +0000

Pioneer Natural Resources Company (PXD) reported its third quarter results of 2 cents per share, well below than the Zacks Consensus Estimate of 6 cents and year-earlier quarter earnings of 91 cents. Before adjusting one-time items, loss per share was 6 cents.

Despite the increased production volumes and lower production expenses, earnings were down due primarily to weak realized prices. Revenue for the quarter was $410.1 million, down nearly 32% from the year-earlier level.

Total production for the quarter averaged approximately 113 thousand barrels oil equivalent per day (MBOE/d), up 2% year over year, reflecting the strong performance of Pioneer’s low-decline assets. Oil production averaged at 31.7 thousand barrels per day (MBbl/d), up approximately 7% year over year. Natural gas liquids production slightly decreased to 18.6 MBbl/d. Natural gas production also modestly increased to 374.2 MMcf/d.

On an oil equivalent basis, average realized price was $39.57 per barrel versus $59.04 per barrel in the year-ago quarter. Average realized price for oil in the quarter was $78.20, compared to $80.37 in the third quarter of 2008. Average natural gas price was to $3.64 per Mcf, significantly down from the year-earlier level of $7.98 per Mcf.

Year-to-date, all geographical production areas experienced growth. Production from the Spraberry field (in West Texas), South Texas area, Tunisia and South Africa increased 8%, 4%, 13% and 51%, respectively, from the same period in the last year.

At the end of the quarter, cash balance was nearly $56 million. Long-term debt balance stood at $2.87 billion, representing debt-to-capitalization ratio of 44.8%.

The company is guiding towards fourth quarter production ranging between 105 MBOE/d to 110 MBOE/d. Production costs are expected to average $11.50 to $13.50 per BOE and DD&A expense is expected to average $15.50 to $17.00 per BOE.

Based on the uptrend in oil prices and the solid hedging position, management is confident about the company’s operating cash flow generating capacity to the tune of $1 billion and $1.4 billion in 2010 and 2011, respectively. The company hinted that it will ramp up its production activity in the Spraberry field and will continue its successful oil development program in Alaska.

After having underperformed the peer group for last few years, the company is gaining investor attention with its attractive production growth and resource potential. Another potential catalyst for the company is its ongoing cost reduction initiatives. However, while we like Pioneer’s efforts of reducing debt level, there are other names in the group that have asset bases better positioned to deliver growth. We recommend a Neutral rating for the stock.
Read the full analyst report on "PXD"
Zacks Investment Research

Fuel Your Portfolio With BHP Billiton (NYSE: BHP): The Best-Run Commodities Company In The World

Investment U — Thu, 05 Nov 2009 14:37:22 +0000

Fuel Your Portfolio With BHP Billiton (NYSE: BHP): The Best-Run Commodities Company In The World by Tony Daltorio, Investment U Research Some companies just stand out – both in their own sectors and in the larger market. Australian firm BHP Billiton (NYSE: BHP) is one of them. As the largest and most diversified commodities producer in [...]

Devon Beats Estimates – Analyst Blog

Zacks Market Commentaries — Wed, 04 Nov 2009 21:15:25 +0000

Devon Energy Corporation (DVN) posted better-than-expected results for the third quarter of 2009 due to increased production volume and favorable service and supply costs across all major operating segments. Adjusted EPS of $1.12 surpassed the Zacks Consensus Estimate of 92 cents.

This, however, was significantly lower than $5.68 recorded during the same period last year, because of significantly lower product prices in the quarter. Reported net income was $499 million or $1.12 per share, compared to $2.6 billion or $5.88 per share a year ago.

The combined oil, natural gas and NGL production volume soared 6% to 61.9 million BOE (i.e. 673 thousand BOE per day), driven by production growth at each of Devon’s operating segments. Growth in oil and natural gas liquids production in the United States was greater than the decline in natural gas volumes. The continuing ramp up of volumes at the Jackfish oil sands project led Canadian oil production growth. Daily production volumes of oil, natural gas and NGL averaged 150.4 thousand barrels (up 14%), 2.6 billion cubic feet (up 2%) and 82.3 thousand barrels (up 14%), respectively.

Revenues dipped 65% to $2.1 billion as lower realized energy prices more than offset the production growth. Revenues from oil, natural gas and NGL were $845 million (down 35%), $691 million (down 67%) and $195 million (down 46%), respectively. Marketing and midstream revenues almost halved to $344 million. Realized price, including the impact of hedges, for oil, natural gas and NGL averaged $61.1 per barrel (down 43%), $3.4 per thousand cubic feet (down 57%) and $25.7 per barrel (down 53%), respectively.

Devon benefited from the continued downward pressure on service and supply costs due to weak activity levels across the industry. Costs in nearly every expense category were lower in the third quarter of 2009 compared with the same period in the previous year.

Devon maintains a healthy financial and liquidity position. It generated cash flows of $1.2 billion (before balance sheet changes) in the third quarter, which was sufficient to finance capex and dividend pay-outs for the quarter. Devon exited the third quarter with more than $900 million of cash on hand and $1.9 billion of unused credit facilities. It generated $168 million of free cash flow in the quarter. At quarter-end, Devon’s net debt to adjusted capitalization was 31%.
Read the full analyst report on "DVN"
Zacks Investment Research

Mines Management Inc. (MGN) Meets Exploration Targets for Montanore Project

QualityStocks — Wed, 04 Nov 2009 17:54:48 +0000

Recent quarters have played up the commodities markets. Oil and gold are the celebrities of the sector and moving higher and lower at the whims of the mutual funds and individual commodity bugs. When it comes right down to it, however, who can afford some of these commodities? After all, over $1,000.00 per/oz. for gold [...]

How To Play the Oil Conspiracy Theories

Investment U — Wed, 04 Nov 2009 14:48:09 +0000

How To Play the Oil Conspiracy Theories Tony Daltorio, Investment U Research Despite the world’s economic growth woes this year and consequent decreased energy demand in the U.S., the price of oil has held up pretty well this year ($77 as of November 3) when you’d actually think that it would be lower. What gives? Fundamentalists [...]

PetroChina Net Sags on Energy Slump – Analyst Blog

Zacks Market Commentaries — Wed, 04 Nov 2009 14:45:26 +0000

Chinese energy giant PetroChina Co. Ltd. (PTR) announced third quarter earnings of RMB 30.8 billion or RMB 0.17 per diluted share, compared to RMB 40.1 billion or RMB 0.22 per diluted share in the year-earlier quarter. The year-over-year negative comparison was primarily attributable to lower oil prices and weaker energy demand. PetroChina’s total revenue in the quarter reached RMB 267.7 billion, a decrease of 12.1% from the year-earlier period.

Upstream

The company’s upstream segment achieved steady growth in natural gas output during the nine months ended Sep 30, 2009, while oil volumes fell slightly. Crude oil output was 631.2 million barrels, down 3.7% from the same period in 2008. However, marketable natural gas output increased 11.4% year-over-year to 1,524.8 billion cubic feet (Bcf). The average realized crude oil price during the first nine months of 2009 was US$49.06 per barrel, representing a decline of 49.6% from $97.24 per barrel in the corresponding period of the previous year. The average realized natural gas price during the first nine months of 2009 was US$3.40 per thousand cubic feet (Mcf), marginally below the year ago level of US$3.44.

Refining, Chemicals & Marketing

PetroChina produced 3.062 million tons of synthetic resin in the first three quarters, up 1.0% from the corresponding period in 2008, besides manufacturing 2.049 million tons of ethylene, up 3.4% from the same period in 2008. The company also produced 53.91 million tons of gasoline, diesel and kerosene during the period, as against 55.6 million tons in the same period of last year. PetroChina’s refinery division processed 607.1 million barrels (MMBbl) during the first three quarters, down 5.5% from the corresponding period in 2008. In marketing operations, the group sold 73.17 million tons of gasoline, diesel and kerosene (an increase of 4.7% from the same period of last year) during January−September 2009.

Liquidity & Capital Expenditure

At the end of the first nine months of 2009, PetroChina’s cash balance stood at RMB 131.4 billion. Cash flow from operating activities was RMB 189.8 billion. Capital expenditure for the period reached RMB 152.4 billion, up 21.2% from the year-ago level.

Outlook

Going forward, leverage to the fast growing Chinese market and the turnaround in commodity prices are expected to be the main growth drivers for PetroChina. Being one of the two Chinese integrated oil companies, PetroChina is well-positioned to capitalize on these favorable trends. However, we are concerned about the company’s oil production growth prospects, considering its heavy exposure to significantly mature producing areas. Rising costs, downstream-centric assets portfolio, and special levies on domestic crude oil sales also remain an issue. As such, we maintain our Neutral recommendation on PetroChina ADRs.
Read the full analyst report on "PTR"
Zacks Investment Research

Chesapeake Up on Volume Growth – Analyst Blog

Zacks Market Commentaries — Tue, 03 Nov 2009 20:48:49 +0000

Chesapeake Energy Corporation (CHK) reported third quarter results of 70 cents per share, compared to the Zacks Consensus Estimate of 66 cents and year-earlier quarter earnings of 87 cents. Before adjusting one-time items, earnings per share were 30 cents. Despite the increased production volumes and lower production expenses, earnings were down due primarily to weak natural gas prices.

Chesapeake’s average daily production for the quarter increased 7% year-over-year and 1% sequentially to 2.48 billion cubic feet equivalent (Bcfe), of which natural gas was 92%. Taking into account the company’s production curtailments, Chesapeake’s year-over-year and sequential production growth rates were 14% and 2%, respectively. The company is guiding towards full-year production growth of approximately 5-6% in 2009, 8-10% in 2010 and 12-14% in 2011.

Average realizations for the quarter were $6.04 per thousand cubic feet (Mcf) for natural gas, compared to $5.56 per Mcf in the previous quarter and $8.02 per Mcf in the year-earlier quarter. Realizations came to $66.42 per barrel of oil, compared to $56.72 per barrel in the previous quarter and $75.74 per barrel in the year-ago quarter.

At the end of the quarter, Chesapeake had proved reserves of approximately 12.0 trillion cubic feet equivalent (Tcfe), a decrease of 4.2% from the end of the previous quarter. Total drilling and net acquisition costs for the first three quarters were 78 cents per Mcfe. Year to date, the company has replaced 665 Bcfe of production with an estimated 608 Bcfe of new proved reserves for a reserve replacement rate of 91%.

At quarter end, Chesapeake had a cash balance of $520 million and a debt-to-capitalization ratio of 48.5%, compared to 53.1% as of June 30, 2009. We believe that the fall in debt-to-capitalization ratio is a result of the company’s ongoing asset monetization initiatives.

While we believe that production growth will remain at or near the top of its large-cap peer group, particularly in the light of continued strong drilling results from its shale plays, Chesapeake’s natural gas weighted reserves and production remain our concern.
Read the full analyst report on "CHK"
Zacks Investment Research

Cameron Tops on Margin Strength – Analyst Blog

Zacks Market Commentaries — Tue, 03 Nov 2009 18:43:34 +0000

Cameron International Corp.’s (CAM) third quarter results were better than expected, as margins held up well during the period. Earnings per share, excluding severance-related costs, came in at 57 cents, surpassing the Zacks Consensus Estimate of 53 cents.

However, on a year-over-year basis, Cameron’s adjusted earnings per share fell 19.7%, reflecting slowdown in energy demand that hampered drilling activities. Gross profit during the period came at $403.8 million, down 11% year over year, as revenues fell 18.1% to $1.2 billion. However, gross profit margin rose approximately 261 basis points year-over-year to 32.8%, driven by cost reductions.

DPS Segment

Revenues for the DPS segment totaled $791.5 million, a decrease of 17.3% from the year-ago quarter, mainly due to the timing of certain subsea project deliveries. The DPS segment EBITDA fell 8.8% year-over-year to $171.8 million.

V&M Segment

Quarterly revenues in the Valves & Measurement (V&M) segment totaled $294.7 million, down 23.2% year-over-year, while the segment EBITDA witnessed a 29.1% year-over-year fall to $65.8 million. This was on account of a substantial drop in North American business activity levels.

CS Segment

Revenues in the Compression Systems (CS) segment totaled $145.6 million, a fall of 11.2% year over year. The segment’s EBITDA was $24.6 million, down 23.8% year over year. The negative comparison was due to reduced E&P activities by oil companies.

Backlog

During the quarter, Cameron received orders totaling $1.3 billion, down 48.6% year-over-year due to declines in every business segment on the back of overall market weakness and lack of large project awards. The composition of current order booking is: DPS – 72%, V&M – 19% and CS – 9%. At the end of the third quarter, total backlog stood at $5.1 billion, down 8.7% from the year-earlier level, again reflecting soft markets and the lack of sizable project awards.

Capital Expenditure & Balance Sheet

During the quarter, Cameron spent $56 million on capital expenditures, with the full-year budget expected to be approximately $240 million. As of Sept 30, cash and cash equivalents stood at $1.5 billion, while total long-term debt stood at $1.3 billion (debt-to-capitalization ratio of 31.0%).

Guidance

Management expects full-year earnings in the range of $2.26 – $2.30 per share, an increase from the earlier range of $2.15 – 2.25. The company further indicated that it expects the NATCO transaction to close during the fourth quarter.

We currently rate Cameron shares as Outperform.
Read the full analyst report on "CAM"
Zacks Investment Research

Are Higher Prices the ‘New Normal’ for Oil?

Frank Holmes — Mon, 02 Nov 2009 06:00:00 +0000

This analysis is from Evan Smith and Brian Hicks, co-managers of the Global Resources Fund (PSPFX). Oil prices have bounced more than 150 percent off of December 2008 lows but inventory levels remain at historically high levels despite a healing global economy. However, Goldman Sachs says robust 2010 oil demand growth will deplete these inventories over the next 12-to-18 months and diminishing production rates in key areas around the world will create a supply/demand imbalance. The above chart shows the decline in production from the worldrsquo;s top 230 projects. After peaking in 2009, production from these projects is set to fall for the next several years. Excluding OPEC countries (right chart), the decline rates quadruple from 2007 to 2012 (est). Over that time period, non-OPEC production is expected to fall by 2.5 million barrels per day. Only Brazil, Canada and the former countries of the Soviet Union are expected to see production growth. One of the largest contributing factors for this is chronic decline rates from some of the worldrsquo;s top mature fields. Mexicorsquo;s Cantarell field, one of the largest oil fields in the world, produced 30 percent less oil in 2008 than it did in 2007mdash;a trend thatrsquo;s expected to continue. Norway, the worldrsquo;s 11th largest oil producer in 2008, saw its oil production peak in 2001 and is down 27 percent since. Another big producer, Venezuelarsquo;s state-owned oil company PdVSA has seen annual decline rates of more than 25 percent in certain fields according to the Energy Information Administration (EIA). Adding to the dilemma, many countries without decline-rate issues have been holding out production increases until projects become more cost effective; this is why we recently saw Russia overtake Saudi Arabia as the worldrsquo;s largest oil producer. The Saudis have been content to sit on the sidelines while awaiting the return of higher prices. The same goes for other OPEC countries; PIRA, an oil-industry consultant, says the cost of oil will have to rise above $80 per barrel in order for the cartel to increase production. With oil prices currently hovering around that $80 level, OPEC officials have recently hinted that production increases arenrsquo;t off the table for the cartelrsquo;s upcoming December meeting. Even if we see a production increase out of OPEC, decline rates from maturing fields and high barriers of entry to bring new fields online should keep the supply/demand balance tight for years to come. Brian Hicks and Evan Smith will be co-hosting a free webcast event with U.S. Global Investors CEO Frank Holmes titled ldquo;Whatrsquo;s Driving Energy?rdquo; on Tuesday, November 3 at 12:00 PM ET. The presenters will be detailing the critical factors supporting long-term energy demand. Click Here to Register Please consider carefully a fundrsquo;s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. #09-762

Noble Energy Surpasses Ests – Analyst Blog

Zacks Market Commentaries — Fri, 30 Oct 2009 19:29:47 +0000

Noble Energy Inc. (NBL) posted adjusted earnings per share of $1.10 for the third quarter, which surpassed the Zacks Consensus Estimate of 81 cents. However, earnings was substantially lower than $2.08 recorded during the corresponding period of last year. The better-than-expected results in the quarter were driven by increased sales volumes and reduced costs compared to the second quarter and the year-ago period.

Consolidated sales volumes improved 3% to 20 million BOE, i.e., 217 thousand BOE per day, primarily driven by increased volumes in the United States and West Africa. Volumes rose in the U.S. supported by ongoing development activity at Wattenberg, the return to full production of Ticonderoga, and the impact of the Raton gas project in the deepwater Gulf of Mexico. Reduced facility maintenance downtime helped increase natural gas volumes in West Africa. However, volumes declined in North Sea due to the Dumbarton performance. Daily sales volumes of oil, natural gas and NGL averaged 67 thousand barrels (down 3%), 802 million cubic feet (up 6%) and 16 thousand barrels (up 7%), respectively.

Revenues dipped 43% to $621 million due to lower price realization. Revenues from oil, natural gas and NGL were $377 million (down 40%), $172 million (down 52%) and $24 million (down 52%), respectively. Realized prices for oil, natural gas and NGL averaged $63.4 per barrel (down 38%), $2.4 per thousand cubic feet (down 55%) and $25.4 per barrel (down 56%), respectively.

Noble has benefited from the continued downward pressure on service and supply costs due to weak activity levels across the industry. Cash costs, including lease operating expenses, production and ad valorem taxes, transportation, and SG&A were down 19% to $9.22 per BOE.

The company has maintained a healthy financial and liquidity position. Cash provided by operating activities was $488 million, covering the bulk of capex $224 million. Noble ended the quarter with $926 million of cash and debt to capital of 26%.
Read the full analyst report on "NBL"
Zacks Investment Research

Americas Energy Company and Trend Technology Corp. (TRET.OB) Announce the Sale of Initial Production from Oil Well

QualityStocks — Fri, 30 Oct 2009 18:37:07 +0000

Americas Energy Company, a consolidator of high-quality energy properties with projects in both Kentucky and Tennessee, recently announced that the company, along with Trend Technology Corporation, sold the initial production from its first oil well. This oil well is on a timed pumping program in order to extend its production life and is currently producing [...]

Too big to fail, is still heavy in the derivative market, and primed for a gigantic collapse.

Dr. Stock Pick — Fri, 30 Oct 2009 18:02:13 +0000

Dr Stock Pick HOT News & Alerts! _______________________________________ FREE Daily Stock Alerts From DrStockPick.com _______________________________________ Friday October 30, 2009 DrStockPick.com Article ************************************************************** Too big to fail, is still heavy in the derivative market, and primed for a gigantic collapse. Congress needs a chimney sweep to clean the soot from the smoke they’ve been blowing. Our do nothing congress; well we can’t really say do [...]

Zacks Analyst Blog Highlights: Moody’s, Microsoft, Fannie Mae, Freddie Mac and ExxonMobil Corporation – Press Releases

Zacks Market Commentaries — Fri, 30 Oct 2009 13:30:41 +0000

For Immediate Release

Chicago, IL – October 30, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Moody’s (MCO), Microsoft (MSFT), Fannie Mae (FNM), Freddie Mac (FRE) and ExxonMobil Corporation (XOM).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Thursday’s AnalystBlog:

GDP Notes – In Depth

With massive amounts of space sitting idle in offices and empty strip malls littering the landscape, look for new investment in commercial real estate to continue to decline in coming quarters. Moody’s (MCO) has estimated that the value of commercial real estate has plunged by 41% since the peak a little over a year ago, and that is hardly an inducement to build more. If a business needs the space, it's far cheaper to just buy some that already exists.

Spending on Equipment and Software (E&S), on the other hand, is starting to come back, if only feebly -- rising 1.1% after a 4.9% decline in the 2Q and a 36.4% plunge in the 1Q. Look for some stability in this line going forward as the new Microsoft (MSFT) operating system will probably generate a new PC cycle, but with capacity utilization still around 70% I would not expect a boom in orders for new factory equipment.

The real star of Fixed investment, though, came on the residential side, which rose 23.4%. This is the first increase in almost four years, and follows declines of 23.3% in the 2Q and 38.2% in the 1Q. The long string of declines had brought residential investment to a record low share of GDP. The extraordinary support of the housing sector by the government, including the first-time buyer tax credit -- the Fed buying up $1.25 Trillion of Fannie Mae (FNM) and Freddie Mac (FRE)-backed paper to artificially suppress mortgage rates, and the FHA acting like the old New Century Financial or Washington Mutual on their worst days -- have played a big role in the turnaround. I seriously question the sustainability of it after the support is removed, and I don’t think the support can continue indefinitely.

Exxon Misses, Production Up

ExxonMobil Corporation (XOM) reported third quarter 2009 earnings of 98 cents per share, below the Zacks Consensus Estimate of $1.04 and year-earlier earnings of $2.58.

Though the earnings came in below expectations, the company maintained its quarterly dividend of 42 cents per share and repurchased $4 billion worth of XOM common stock. With a sound cash position, solid credit profile and diversity of its asset base, both in terms of business mix as well as geographical footprint, Exxon remains better positioned than any of its peers.

The steep fall in oil prices and weak product margins caused a 65% drop in earnings from the year-earlier quarter to $4.7 billion. The production of oil and natural gas averaged 3.69 million oil-equivalent barrels per day, up approximately 3% year over year. When adjusted for the impact of entitlement volumes and OPEC quota restrictions, production was up about 5%. Its refinery throughput averaged at 5.35 million barrels per day, flat from the year-earlier level.

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Contributions to GDP Growth – Analyst Blog

Dirk Van Dijk — Thu, 29 Oct 2009 18:02:59 +0000

Not all components of GDP are created equal. Some are very big, and others relatively small. Some tend to be very stable over time, and some tend to swing violently from quarter to quarter. The bigger and more volatile they are, the more they will impact the overall growth rate of GDP.

Thus looking at just the percentage changes in the components does not tell the full story. Of the 3.5% total growth, how many points were added or subtracted by each part of the economy?

The biggest part of the economy is the Consumer, or PCE -- overall it contributed 2.36 of the 3.50 points of total growth. In the second quarter it caused 0.62 of the 0.70 total decline in the 2Q. In the first quarter it actually offset 0.44 points of the 6.40 total decline. In other words, excluding the Consumer the economy would have contracted 6.84% rather than 6.40%.

Within Consumer spending, spending on Goods added 1.79 points after subtracting 0.71 points in the 2Q and adding 0.56 points in the 1Q. Spending on Durables was the main driver, adding 1.47 points after subtracting 0.41 points in the 2Q and adding 0.28 in the 1Q. Non-Durable goods added 0.31 points after subtracting 0.29 in the 2Q and adding 0.29 in the 1Q.

While spending on Services is much more stable than spending on Goods, it is also a much larger portion of the Consumer wallet. Service spending added 0.57 points to the overall GDP growth in the 2Q -- up from adding 0.09 points in the 2Q and subtracting 0.13 in the 1Q.

It is the volatility that gives Durable goods their importance to the economy, not the overall size. In the third quarter, total spending on Durable goods was at a $1.055 Trillion annual rate, just 15.4% of the $6.852 Trillion spent on Services, but Durable goods had an impact on economic growth that was 158% bigger.

Investment spending was a big swing factor in the 3Q. It added 1.22 points to overall growth. That is a HUGE improvement over the 3.10 point subtraction in the 2Q and the 8.98 point implosion in the 1Q. Unfortunately, 0.94 points of that contribution came from Inventories.

Inventory investment is the "worst" type of GDP growth, since large increases in one quarter are usually reversed in the next quarter -- or in this case, large declines being reversed upwards. In the 2Q, Inventory investment subtracted 1.42 points from overall growth and in the 1Q it subtracted 2.36 points. Even in the 4Q, it subtracted 0.64 points from growth. Three straight quarters of sharply lower inventories is highly unusual, and we were due for a bounce. Perhaps we have one more quarter of a solid contribution from Inventory investment, but I would not expect it to last much beyond that.

Overall Fixed investment added just 0.28 points to growth, but that sure was a nice improvement over the 1.68 point subtraction and the 6.62 point disaster that was the 1Q. However, it was not coming from the business side. Business investment subtracted 0.24 growth points in the 3Q, so it is still very soft, but at least it is not imploding like it was earlier in the year. In the 2Q it subtracted 1.01 points and in the 1Q it took away 5.29 growth points.

Within business investment it was spending on structures that caused the problem, with a deduction of 0.32 growth points while spending on E&S offset 0.08 points of that. In the 2Q, both sides of business investment were drags on the economy with investment in Commercial real estate subtracting 0.69 growth points, and spending on equipment deducting 0.32 points. The 2Q was in turn a major improvement over the 1Q disaster, where spending on structures subtracted 2.28 growth points and equipment spending subtracted 3.01 points.

Housing finally helped the economy in the 3Q, adding 0.53 points to growth -- after a string of 15 straight quarters where it was a drag on the economy. In the 2Q it was a 0.67-point drag and in the 1Q it was a 1.33-point drag.

The long decline has, however, made housing a much smaller share of the overall economy. In the 3Q, residential investment totaled only $360.9 billion, or 2.52% of the overall economy. At the peak of the housing bubble, it represented 6.34% of the overall economy. Thus the 23.4% increase in residential investment had far less of an overall impact than it did in the past.

While residential investment is still near a record low share of the overall economy, I have serious questions about the sustainability of the increase. The extension and expansion of the the tax credit by Congress might keep things going for the next few quarters, but after that things are likely to fall apart again. Just like we saw with the "Cash for Clunkers" (C4C) program, it is probably just encouraging those folks who might have bought later to buy now.

It is also tricking people into thinking that a house is more affordable that it really is -- just the way that teaser-rate ARM’s did, and we saw just how well that worked out. The FHA is handing out mortgages with only 3.5% down, and people can use the tax credit for that ridiculously small down payment. This has future disaster of biblical proportions written all over it. The next bailouts will not be of the banks like Bank of America (BAC) and Citigroup (C) but of the FDIC and the FHA.

Direct Government spending had a small but positive impact on overall growth in the 3Q, adding 0.48 points -- a fairly significant slowdown from the 1.33 contribution in the 2Q, but better than the 0.52 point drag in the 1Q. All the help came from Washington, not City Hall or the Statehouse.

The Federal government added 0.62 growth points, down from 0.85 points in the 2Q but up from a 0.33 point drag in the 1Q. The Pentagon was the main factor in all three quarters, with Defense spending adding 0.45 points in the 3Q following a 0.70 addition in the 2Q and a 0.27 point drag in the 1Q. Non-Defense spending was sort of a non-issue, adding just 0.17 points in the 3Q, not much difference from the 0.15-point contribution in the 2Q, and up a little bit from the slight 0.06 point drag in the 1Q.

State and Local governments are not allowed to run operating deficits, and so when faced with declining tax revenues they have to cut back, unless Uncle Sam helps them out. Well, Washington is helping, but it's not enough, and S&L spending was a 0.14 point drag in the 3Q. The Federal help was enough in the 2Q and so the contribution to growth in the 2Q was a positive 0.48 points. In the 1Q, before the stimulus package could get much traction, S&L spending was a 0.19 point drag.

Net exports had been just about the only bright spot in the first half of the year -- even though it came the wrong way, from both imports and exports plunging, only with imports falling more than exports did. That reversed in the 3Q, as both showed a nice expansion, but our appetite for foreign goods is outstripping the desire for U.S. goods and services abroad.

The increase in exports added 1.49 points to growth, but the increase in imports was a 2.01 point drag, for a net negative contribution from net exports of 0.52 points. In the 2Q, falling exports subtracted 0.45 points, but plunging imports added 2.09 points, for a net imports net help to the economy of 1.64 points.

In the first quarter, as world trade came to a near-standstill, net exports were just about the only positive you could find for the economy. Yes, plunging exports subtracted an awful 3.95 points of growth, but the fact that we were buying practically nothing from overseas added 6.58 growth points, for a net aid to the economy of 2.85 points. In other words, if the U.S. were a closed economy in the first quarter, growth would have fallen not at a 6.4% rate, but at a 9.25% rate.

Overall

Overall this is a very welcome report. It confirms that the recession is over and that we are on the right track. However, I am not thrilled about the overall composition of the growth. Over time we need to see the consumer become a much smaller part of the overall economy, and real business investment become a much bigger share.

Unfortunately, we seem to be headed in the wrong direction, with the growth in consumer spending nearly keeping up with the overall growth of the economy. This is especially true if you consider Residential Investment as primarily part of Consumption. We need net exports to play a bigger and more positive role in the economy, and ideally have that happen through exports growing faster than imports, not from a plunge in imports like we saw in the first half of the year.

Seeing net exports turn into a drag again is disappointing. A big part of that, however, is due to oil imports, and the increase in the price of oil. That is a long-term structural problem that needs to be addressed. Fortunately, the opening-up of the shale gas plays gives us a chance to finally do something about it, but I’m not sure how fast that will occur. That, along with more efficiency and alternative energy sources, can make a dent over time, but not overnight.

But it is a fertile place to see an increase in Investment spending, so it could have a double-barreled effect -- on both the investment line and on the net exports line. The contribution from inventories is not sustainable long-term, but given how much they fell prior to this rebound, we might see a bit more of it in the 4Q, though not much beyond that.

The increase in Consumption spending was largely due to the C4C program, which is now over, so don’t look for a big contribution from Durable goods spending in the fourth quarter.

All in all, a better-than-expected report, but don’t be deluded into thinking that we are out of the woods and the coast is clear. We still face major challenges, and getting complacent here would be a big mistake.
Read the full analyst report on "BAC"
Read the full analyst report on "C"
Zacks Investment Research

Exxon Misses, Production Up – Analyst Blog

Zacks Market Commentaries — Thu, 29 Oct 2009 15:21:25 +0000

ExxonMobil Corporation (XOM) reported third quarter 2009 earnings of 98 cents per share, below the Zacks Consensus Estimate of $1.04 and year-earlier earnings of $2.58.

Though the earnings came in below expectations, the company maintained its quarterly dividend of 42 cents per share and repurchased $4 billion worth of XOM common stock. With a sound cash position, solid credit profile and diversity of its asset base, both in terms of business mix as well as geographical footprint, Exxon remains better positioned than any of its peers.

The steep fall in oil prices and weak product margins caused a 65% drop in earnings from the year-earlier quarter to $4.7 billion. The production of oil and natural gas averaged 3.69 million oil-equivalent barrels per day, up approximately 3% year over year. When adjusted for the impact of entitlement volumes and OPEC quota restrictions, production was up about 5%. Its refinery throughput averaged at 5.35 million barrels per day, flat from the year-earlier level.

Total refined product sales of 6.3 million barrels per day were down 5.8% year over year, reflecting the depressed demand environment. Total product sales in the chemicals business increased almost 5% year over year.

Cash flow from operations and asset sales totaled $9.0 billion, down from $17.0 billion in the third quarter of 2008. Capital expenditures totaled $6.5 billion during the quarter, down 5% year-over-year. During the quarter, Exxon entered into a $600 million biofuel project with a leading biotech company.

Exxon remains better positioned − operationally as well as financially − than any other company to navigate the current choppy waters. Its capital discipline, cost controls and operating efficiencies are legendary, to say the least.

The company is well positioned for continued production growth with its prominent projects including QatarGas, RasGas and Gorgon LNG. Exxon’s solid financial strength has allowed it to continue to invest across the economic cycle focusing on world-class opportunities. And instead of investing in a whole host of projects, it has consistently returned the excess cash it generated to shareholders through dividends and share buybacks.

However, we believe that these positives have already been reflected in the current valuation, leaving limited room for above-market gains. We are keeping our Neutral rating unchanged for the stock.
Read the full analyst report on "XOM"
Zacks Investment Research

Futures As Predictors of Commodity Prices

Menzie Chinn — Thu, 29 Oct 2009 04:21:48 +0000

As commodity prices start rising again -- at least some -- the question of whether futures are useful indicators seems relevant. Figure 1 shows the IMF commodity price indices, as reported in the October World Economic Outlook:

Figure 1: Commodity price indices for energy (blue), food (red), agricultural raw materials (green), metals (black) and beverages (teal). NBER defined recession shaded gray, assuming recession ends in 2009M06. Source: IMF, World Economic Outlook (October 2009), data for Chart 1.16.

In a previous set of papers, Oli Coibion, Michael LeBlanc and I examined the predictive power of energy futures post and paper.

In a new paper, Oli Coibion and I update our results regarding energy futures, and metal and agricultural commodities as well, through the end of August 2008, just before the financial crisis broke out in full force. From the paper:

This paper examines the relationship between spot and futures prices for commodities, including those for energy (crude oil, gasoline, heating oil markets and natural gas), precious and base metals (gold, silver, aluminum, copper, lead, nickel and tin), and agricultural commodities (corn, soybean and wheat). In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. We find that while energy futures prices are generally unbiased predictors of future spot prices, there are certain notable exceptions. For both base and precious metals, the results are much less favorable to unbiasedness hypothesis. For precious metals and copper and lead, we strongly reject the null that β=1 at all three horizons. For the these other base metals, while we cannot reject that β=1, due to large standard errors. Finally, both corn and soybean futures have β close to 1, while wheat has β<1. Excepting oil and base metals, futures tend to outperform a random walk specification in out of sample forecasts.

The regression we run is:

s_t - s_t-k = β ₀ + β ₁ (f _t|t-k - s_t-k) + ε _t

Where s_t is the log spot price at time t, f_t|t-k is the log futures price at time t-k that matures at time t. The resulting β coefficients at the three month horizons are displayed in Figure 2.

Figure 2: β₁ coefficients, estimated via OLS. *** denotes significantly different from unity at the 1% level, using HAC robust standard errors. Source: Author's calculations.

Despite the bias in futures, along a RMSE dimension, futures outperform a random walk for most commodities, except for base metals (the out of sample period is 03M01 to 08M07). That being said, the outperformance relative to a random walk is seldom statistically significant.

Energy Blast – Oct 28, 2009

Robert Amsterdam — Wed, 28 Oct 2009 09:23:08 +0000

Rosneft has been fined $180 million by the Federal Anti-Monopoly Service for deliberately driving up wholesale prices for gasoline and other oil products in the first half of 2009, and Lukoil was warned that it could face a similar penalty...in...

Another Reason Oil is Headed Higher

QualityStocks — Tue, 27 Oct 2009 19:43:20 +0000

People have been scratching their heads wondering why the price of oil has held up relatively well this year in the face of a global slowdown and decreased energy demand in the United States. Fundamentalists will point to continued strong demand for oil from emerging markets like China and decreasing oil output from non-OPEC producing nations [...]

Valero Loss Bigger than Expected – Analyst Blog

Zacks Market Commentaries — Tue, 27 Oct 2009 17:07:52 +0000

Earlier today, Valero Energy Corp. (VLO) -- the largest independent refiner in the U.S. -- reported a weaker-than-expected third-quarter 2009 loss, reflecting depressed refining margins and lower throughput on the back of weak fuel demand and high inventories. This was partially offset by lower operating costs. The loss per share, excluding one-time items, came in at 39 cents, well below the Zacks Consensus Estimate of 26 cents.

In the year-ago period, the Texas-based marketer of petroleum products earned $1.91 per share. Revenue was down 45.8% year-over-year to $19.5 billion. Operating loss for the quarter was $579 million ($162 million excluding one-time items), compared to operating income of $1.8 billion ($1.6 billion excluding one-time items) in the year-earlier quarter. The main factors causing the operating loss were lower diesel and jet fuel margins, coupled with smaller discounts on sour crude oil and other feedstocks.

Throughput Volumes

Throughput volumes during the quarter were 2.38 million barrels per day, down more than 8% year over year, primarily reflecting reduction in sour crude volumes.

By feedstock composition, heavy sour crude, medium/light sour crude and sweet crude accounted for 19%, 23% and 29% of the total, respectively. The remaining volumes came from residuals, blend-stocks and other feedstocks.

The Gulf Coast accounted for approximately 52% of total volumes. The Mid-continent, the Northeast and the West Coast regions accounted for 16%, 20% and 12% of the total, respectively.

Throughput Margins

Company-wide throughput margins decreased nearly 63% year-over-year to $4.86 per barrel, as all regions witnessed substantially reduced margins. Average throughput margin realized in the Gulf Coast, Mid-Continent, Northeast and West Coast regions were $4.66 per barrel (down almost 65% year-over-year), $5.38 per barrel (down more than 59%), $2.86 per barrel (down nearly 79%) and $8.51 per barrel (down approximately 27%), respectively.

Costs

Cash operating cost per barrel was $3.94 during the quarter, down from $4.78 in the year-ago period. However, the unit depreciation and amortization expenses increased to $1.58 per barrel from $1.39 per barrel in the third quarter of 2008.

Capital Expenditure & Balance Sheet

Third-quarter capital spending totaled $521 million, of which $52 million was for turnarounds. At the end of the quarter, the company had cash and cash equivalents of approximately $1.6 billion and total debt of approximately $7.4 billion.

Company Initiatives

Given the weak refining margin environment, Valero has taken certain strategic actions to improve the company’s performance and competitiveness in a cost-effective manner. As part of this effort, during the most recent quarter, Valero extended the shutdown of its Aruba refinery and streamlined operations at the Delaware City refinery.

Further, this month the company has begun a concentrated effort to reduce costs at its Paulsboro refinery. Management informed that it has been taking advantage of the company’s refining flexibility by shifting feedstocks and operating rates to maximize profitability.

Outlook

We believe that the overall environment for refining margins is likely to remain poor going into 2010. The sharply lower refinery utilization (at just 81.1% of capacity) provides enough evidence that refineries are cutting back on production because the economy is still struggling on the demand side.

The recent rally in crude prices have added to refiners’ miseries by increasing the cost of oil they buy to make gas, jet fuel and other refined products. Being the largest independent refiner, Valero remains particularly exposed to this unfavorable macro backdrop. We see little reason for investors to own Valero and have an Underperform recommendation on the company.
Read the full analyst report on "VLO"
Zacks Investment Research

Prieur’s readings (October 27, 2009)

Prieur du Plessis — Tue, 27 Oct 2009 09:20:08 +0000

This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy. Please also let me know what you have been reading.

Terex Stays in the Red – Analyst Blog

Zacks Market Commentaries — Mon, 26 Oct 2009 20:55:16 +0000

Construction and mining equipment manufacturer Terex Corporation (TEX) announced its third quarter results recently. The company reported wider-than-expected net loss for the quarter. Terex posted a net loss of 77 cents per share, compared to the Zacks Consensus Estimate of a net loss of 33 cents.

Profits in the Cranes and Materials Processing & Mining segments were more than offset by losses in the Aerial Work Platforms and Construction segments. The company had posted net profit of 96 cents per share in the comparable quarter of 2008.

Net sales during the quarter declined 51.2% to $1,226.1 million from $2,514.6 million in the third quarter of 2008 due to weak sales at all of the company’s businesses, as well as an unfavorable foreign currency translation impact. Sales declined in all the four segments due to the impact of the global economic slowdown on target markets. Order backlog stood at $1,522.0 million at the end of the third quarter, down 58% from last year.

The Aerial Work Platforms division posted a 65.5% decline in sales on a year-over-year basis. Sales decline was due to lower volumes in North America and Europe, as customers continued to defer the purchase of new products.

The Construction segment reported a 55.9% decline in sales compared to the corresponding period of 2008 due to weak demand for both compact and heavy construction equipment as well as lack of financing availability for projects and capital equipment. Residential and commercial construction activity continued to remain low across the markets.

In the Cranes business, revenue declined 38.3% due to significantly lower sales of both rough terrain and tower cranes as a result of delay/cancellation of commercial construction projects and decline in oil related energy demand for rough terrain cranes.

In the Materials Processing & Mining segment, revenue decreased 48.8% compared to the third quarter of 2008, primarily due to a 60% decline in materials processing equipment sales. The company saw a drop in net sales of mining equipment also due to lower demand for hydraulic excavators and drills.

For the full year, the company continues to expect net sales to decline by approximately 50% compared to 2008. This forecast includes an unfavorable foreign currency translation impact of 5%. With no substantial recovery expected in any of the company’s end-markets in the near-term, we believe it is impossible for the company to post profits in the next couple of quarters.
Read the full analyst report on "TEX"
Zacks Investment Research

U.S. Airlines Industry – Industry Outlook

Zacks Market Commentaries — Mon, 26 Oct 2009 17:35:01 +0000

The U.S. Airlines industry has gone through several ups and downs in the past five years. Major negative influences on the industry included skyrocketing oil prices since 2005, economic recession in the U.S. since 2008, global economic downturn in 2009 and the "swine flu" outbreak.

The airlines industry is cyclical and sensitive to a number of key drivers, the most prominent of which is the world price of crude oil. Since the beginning of 2009, prices of crude oil have been half of what they had been the year before, creating some relief for airlines. However, some industry operators hedged their fuel contracts at higher rates and are still paying the price.

Many of the top airlines in the industry have responded by reducing services and aircraft fleet sizes, introducing new fees and higher fuel surcharges and reducing the number of people employed. Even with the price of fuel cut by half in 2009, these measures are expected to remain in place during the year. This is mainly due to a sharp decline in demand for travel, which can be as damaging for operators as high costs.

The airlines industry will be spending the next five years playing catch-up after suffering under the recession in 2009. Industry drivers all point to a slow recovery during 2010 and faster growth in the next four years. Additional fees and charges will continue to be the main method to offset oil price volatility. Hedging strategies are another profit protection tool and will be more extensively undertaken than in the past, despite the large drop in oil prices.

The volatility of oil has brought the benefits of successful risk management strategies such as hedging to the forefront of airline executives' minds. Air fares are expected to increase in 2010 with slightly higher passenger numbers. Confidence on both the consumer and business sides are expected to be up during the year, supporting demand for air travel. Fuel prices will remain subdued in 2010, giving the industry a breather after years of losses.

We also expect an increase in merger and acquisition activity in response to the challenges facing the industry. During 2009, operating conditions will remain tough and some companies will need rescuing from bad debts, large losses or similar items. Low-cost airlines are expected to weather the storm in 2009 with most tailwinds, as consumers will keep turning towards cheaper options. This will put them in a favorable position in 2010 and may make them purchase some smaller regional operators.

OPPORTUNITIES

Though almost all carriers are expected to post negative earnings in 2009, we favor Southwest Airlines (LUV), as it is the most successful low cost carrier in the U.S. Southwest has maintained continued profitability for the last 30 years -- even during periods of industry downturns -- mainly due to its strong fuel hedging strategies. Low-cost airlines are expected to get a higher share of revenue in the future, which will see structural changes in the industry and consolidation as a result of competitive pressures.

Another carrier, JetBlue Airways Corporation (JBLU), is projected to fare better than the average major player during the 2009 recession due to the competitive nature of the product and an increase in demand for low-cost services. The company has been able to increase its revenues ahead of the industry average for the past four years. Though JetBlue recorded losses in 2008, it is trying to sustain its profitability by downsizing its workforce and canceling routes.

WEAKNESSES

As a means of recovering lost revenues, some airlines have been increasingly using higher fees. Additional charges have focused on forcing passengers to pay more to check in additional baggage, which can cost up to $50 each way. This has led to a lack of pricing transparency in the industry. United Airlines (UAUA), Delta Airlines (DAL) and American Airlines (AMR) are some of the airlines whose reputation has suffered due to this. Moreover, volatility in oil prices in times of falling demand has taken a toll on these air carriers.

Zacks Investment Research

Magnum Hunter Resources Corp. (MHR) Secures $150M Revolving Credit Facility

QualityStocks — Mon, 26 Oct 2009 15:57:37 +0000

Magnum Hunter Resources Corp. announced today a three-year, senior secured, revolving credit facility with the Bank of Montreal (BMO). This new $150 million bank facility will be regulated via a semi-annual redetermination of its borrowing base, whose value will be allocated to MHR’s proved crude oil and natural gas reserves. MHR, and its subsidiaries, is [...]

Euro bests dollar by 79% in this millennium

Prieur du Plessis — Mon, 26 Oct 2009 08:35:30 +0000

"... the dollar will continue to weaken as interest rates in many countries and the eurozone are higher than the current rock-bottom US rates, providing currency traders carry-trade opportunities. This will encourage more selling of the dollar and buying up stocks, commodities and other currencies, which has been the general trend since spring," said Dian Chu in this guest contribution.

Gold, Silver, Oil, Natural Gas ETF Trading

Chris Vermeulen — Sun, 25 Oct 2009 17:19:59 +0000

The past week in gold, silver, oil, natural gas and the broad market wasn’t anything to write home about. We are seeing controlled profit taking which is making the market choppy. Many traders are getting very bearish on the market which is a good thing in my opinion. According to my market internals, sentiment and [...]

Defense Solutions Holding Inc. (DFSH.OB) Growing into Global Power

QualityStocks — Fri, 23 Oct 2009 14:18:03 +0000

Defense Solutions Holding Incorporated is a company that is on the rise. Founded in 2001 in Exton, Pennsylvania, Defense Solutions is known as being one of the few American companies that does business in the U.S. and Iraq. Today, the company announced that one American refinery and two Asian refinery groups have asked [...]

Stock Market News & Stocks to Watch from StraightStocks » Oil

Energy Blast – Nov 26, 2009

Weak Dollar Boosts Commodities – So What’s Next?

Did the SARB make the right call?

The New Crude Oil Benchmark That Could Change the Oil Market’s Price Dynamics

Some Options as the US Dollar Continues its Slide

St. Mary Grows With Shale Plays – Analyst Blog

Repsol Remains Neutral – Analyst Blog

Arena Resources Inc. – Momentum – Zacks Rank Buy

Hold Reserves, Loan Money or Own Something

Marathon to Slash Spending – Analyst Blog

Despite What the News Tells You, Crude Oil Prices Set to Fall

CBI Wins Refinery Project – Analyst Blog

What Obama was really doing in China

The Best Energy Investments in the World

Watching the dollar: No more Chicken Little

Oil May Look Placid on the Surface – But It’s Roiling Underneath

Energy Blast – Nov 23, 2009

On the Ground in Brazil

Russia’s Consumers Get “Carried” Onwards And Upwards

Exponential Growth, Finite World – Analyst Blog

Stone Energy Outdoes Estimates – Analyst Blog

This Small Oil Producer is Ripe for a Takeover… Here’s How to Profit

Small Cap Voice Featured Company: Rival Technologies Inc. (RVTI.OB)

The Dollar, the Euro, and being Bullish on Gold

Zacks Analyst Blog Highlights: Toyota Motors, Petroleo Brasileiro S.A., ExxonMobil Corp., Chevron Corp., and Royal Dutch Shell PLC – Press Releases

Will UNL Beat UNG?

Petrobras Profit Exceeds Ests – Analyst Blog

Zacks Industry Rank Analysis Highlights: B.P. Prudhoe Bay Trust, San Juan Basin, Exxon Mobil and Petrobras – Press Releases

Zacks Analyst Blog Highlights: D.R. Horton, Pulte, Owens Corning, Masco and EnCana Corporation – Press Releases

SectorWatch.biz: Positive Trends in Oil Gas

Brigham Exploration Company (BEXP) Completes Well In The Bakken Shale

EnCana Misses, Profit Tumbles – Analyst Blog

Some Improvements in Energy – Zacks Industry Rank Analysis

Producer Price Index Tame – Analyst Blog

Devon to Sell Assets – Analyst Blog

Energy Blast – Nov 17, 2009

Donald Coxe – Investment Recommendations (November 2009)

Devon Energy Corp. (DVN) to Liquidate Undervalued Assets, Emphasize Onshore Infrastructure

The Strongest BRIC Country

Zacks Analyst Blog Highlights: JC Penney Company Inc., Toyota, Honda, EnCana and Chesapeake – Press Releases

ETF Commodity Trading Analysis Charts

Commodity inflation

Correlation (using a rolling sample beginning one year before indicated date) between returns on oil and specified commodity. Source: Tang and Xiong (2009).

Coefficient relating return on average commodity to return on oil as a function of time for commodities included in the GS or DJ indexes (top curve) and those excluded (bottom curve). Source: Tang and Xiong (2009).

Weekly U.S. crude oil ending stocks, excluding SPR, in thousands of barrels, from EIA. Black line: average over 1990-2007. Red: 2008. Green: 2009.

Ways to Invest in Oil and Gas

If Stocks Tank, Shouldn’t Gold Soar?

OXY Inks Partnership in Bahrain – Analyst Blog

McDermott Reports Profit Growth – Analyst Blog

Imports Surge in September – Analyst Blog

Albert Edwards still uber bearish, calls for new lows in 2010

Economic prospects for 2010 and beyond

Suncor Misses View – Analyst Blog

GeoGlobal Resources (GGR) Gets Approval for Offshore Oil

Commodity Companies Index (CCI) Up 214% YTD!

Jacobs Wins Contract in Canada – Analyst Blog

Loews Upgraded – Analyst Blog

Oil Continues to Rise as the Dollar Falls

Prieur’s readings (November 11, 2009)

Interview: Jim Rogers on gold, bubbles, commodites, equities, and Roubini

Mobius: Taking a closer look at Russian markets

Will rising oil prices derail the recovery?

Dollar Decline in Perspective – Analyst Blog

Pasko: Dvorishchi ain’t no Cape Town

Talisman Net Slumps on Lower Prices – Analyst Blog

Prieur’s readings (November 10, 2009)

November 9th CEOcast Weekly Newsletter

Parker Hannifin Surpasses – Analyst Blog

Tesoro Beats, Cuts Dividend in Half – Analyst Blog

No Inflation Problem – Analyst Blog

Comstock Posts Loss, Falls Short – Analyst Blog

Titanium Metals Down in the 3Q – Analyst Blog

Patterson Net Falls, but Beats View – Analyst Blog

Disappointing Quarter for Sunoco – Analyst Blog

Statoil Slips, but Volumes up – Analyst Blog

Zacks Industry Rank Analysis Highlights: B.P. Prudhoe Bay, Sabine Royalty Trust, Archer Daniels Midland, Hershey and Del Monte – Press Releases

Oil & Gas Industry – Industry Outlook

Pioneer Misses, but Volumes up – Analyst Blog

Fuel Your Portfolio With BHP Billiton (NYSE: BHP): The Best-Run Commodities Company In The World