Monday Morning And All Is Green

Busy week ahead.

  • The auto bailout is now seen as a fait accompli via the TARP after senate did what it does best last week by shifting potential blame away from itself knowing that some other entity will take care of coddling the car industry. Recall that a month ago Paulson was dead set against including the auto's in his master plan but he now has senioritus knowing full well he graduates back to the real world next month. 

  • Fed rate cut of 50 to 75 bips expected on Tuesday...yawn. Does it really matter if Fed Funds goes to 0.50 or even 0 at this point? I think not. Unless you are the U.S. dollar, then I think you have to get that sinking feeling. Previous rate cuts have not had the desired effect on rates or lending but it will draw more and I'd guess better comparisons between the U.S. now and Japan in the later part of the 20th Century. I don't think this gets nearly as much attention as the prior bullet or the next one.

  • OPEC plans to roll out "severe" production cuts this Wednesday. OPEC's head says the Cartel must act quickly to alleviate an oversupply of 100 million barrels building up in the stock piles of developed nations and on the high seas (storage at sea due to the steepening contango). Of late, traders and analysts have given such cut back claims little credence since the group is notorious for cheating, especially in a falling price environment. But this time, Saudi is on board with the cuts and has brought friends. Russia and three other as of yet un-named non-OPEC producers (almost gotta be Mexico and Norway) are coming to the table in Algeria and mother Russia has espoused a new willingness to play ball. Russia seems to be leaning towards a go along cut of 200 to 300,000 bopd. I expect a 2 mm bopd cut from the Cartel. This alone is not enough to send prices much higher but if Saudi accepts a greater than normal burden and other non-OPEC nations cooperate then we are in for a test of the mid $50s. A bigger move can be expected if Russia's Medeyev follows through on his threat last week to join the Cartel, something I really don't expect to happen.

In Today's Post:

  1. Holdings Watch
  2. Commodity Watch
  3. Price Deck Update - analyst forecasts are starting to get in line with the new realities of oil and gas.
  4. Stuff We Care About Today
  5. Odds & Ends

Holdings Watch. It's expiration week and I'll be taking profits and losses on December positions into rallies early this week. If you like charts they seem to be trending up from bottoms made in mid October so I'm taking my time, milking them as they grudgingly move higher. I do have one constraint this week in the form that I will be out of pocket Wednesday for the arrival of intern #2. 

Commodity Watch

Crude oil rose 13% last week as OPEC talked tough on this coming Wednesday's production cuts, closing at $46.28. This morning crude is trading up $2.00 plus. 

  • IEA Watch: Peak Oil in 2020, not 2030. The France based energy think tank now expects a much quick arrival of peak production capital spending on new projects collapses. Last month, and for the first time I might add, the group said they thought the peak would be around 2030. This is the same braintrust who called for increased production all summer only to say that increased production had resulted in an oil price that was too low to support sufficient investment in the oil patch to keep up with long term oil demand. Perhaps this is the kind of research you get when you have a 35 hour work week and 11 weeks of vacation per year...I wouldn't know. In my book, Peak Oil is misnomer as yes, there is a finite amount of oil on the planet so by definition we must peak at some point, but price and technology are far more critical to determining when that will be so it really should be call Peak at a price or some such. Anyway, not real useful from an investment standpoint but the bulls will stand up and say "look, an earlier peak!".
  • Dollar Watch: To me it looks to be weakening as the Fed finds new ways of flooding the markets with cash. Of course I've thought this for awhile now and have been surprised at its resilience at times. On a chart, the dollar appears to be rolling over now.

Natural gas fell 4% last week to close at $5.49 after a weak storage withdrawal. Temps fell again and I to say look out below if we get another pathetic withdrawal this Thursday. However, as I like to say, price takes care of price, oh, not quickly and not all at once to be sure, but in the end, it does and the rig count drop seen in the next chart, has not yet begin to impact the numbers. This morning gas is trading up a dime with oil and perhaps with the blizzards playing about the northern tier of the U.S.

Rig Count ... Timberrrr!!! Nearly everyone in the industry expected a 200 to 400 rig count dip back in September. Now the popular thinking is closer to a 600 to 800 point plunge off the peak of 1606. We're at 1379 rigs drilling for gas now. I expect this decline to accelerate in 2009 as the new year's constricted budgets really hit home. Note the second graph below, which shows the year over year change in rig count has now fallen to 98 rigs below last year's levels. This is important because the growth in U.S. gas production has been generated by rampant drilling in the shale plays. These wells are high decline rate by definition with flush production at the onset following completion and a sharp 80%-ish decline in the first year of production. Cut the number of wells completed and watch the YoY production surplus (now standing at about 5 Bcfgpd) fall as well.


Weather Watch:

  • Last week HDDs (which set up the withdrawal number this Thursday) rose to 200, the coldest reading of the season so far. This is about 5% colder than normal for the week and vs the year the ago number. The forecast for the week had been 194 so this is a little colder than expected.
  • This HDDs are forecast to warm back up to 185.

Price Deck Update: Forecasts continue to inch lower... The following charts depict the median price estimates for oil and natural gas vs the quarter to date performance for the commodities and vs the 2009 strips. As you can see, analysts still appear to be too high vs current and future prices but that is changing. The E&P stocks in particular have, in my opinion, already discounted much of the futures curve and at this point, analysts need to see the light, cut their numbers, but not necesariliy their ratings (like I said, the market has already taken care of that via equity pricing as it relates to reserves).

....Estimates Undercutting Expectations To Raise Numbers In 2009. In the last two weeks we've Merrill and Goldman slash their 2009 oil price projections to $25 and $30 respectively as part of this effort to undercut reality. Do they think prices really average that for 2009? Probably not. But as a former analyst I can tell you its better to be in a position of concentrating on company specific fundamentals and then incidentally being able to raise estimates throughout the year as opposed to doing all that work on the details and having the macro over ride your call as you are forced to lower numbers.

Stuff We Care About Today

(CHK) maintained its dividend on its common and preferred shares this morning. Not really newsworthy but they did not cut the dividend which should be a positive sign in light of last week's reduced capital spending announcement.

For a very good primer on the oil sands biz written by our resident oil sands industry expert VTZ click here.


Odds & Ends

Analyst Watch: (CLB) raised by RBC to Outperform, (SWN), (RRC), (DVN) all cut to Hold at Deutsche, most likely due to a price deck adjustment. Lazard cuts a number of solar company price targets including (FSLR) from $210 to $140 while maintaining Buy ratings.



82 Responses to “Monday Morning And All Is Green”

  1. 1
    Sambone Says:

    By Lananh Nguyen

    LONDON (Dow Jones)–Crude oil futures traded more than $2 higher Monday in
    London, boosted by signals the Organization of Petroleum Exporting Countries
    will curb its oil output at its Wednesday meeting in Algeria.
    Comments by OPEC President Chakib Khelil and Secretary-general Abdalla Salem
    El-Badri further solidified expectations the group will decide to roll back
    crude production.
    “I will expect to see quite a few of these (comments) leading up to the
    meeting, and would expect a bullish reaction,” said a broker in London.
    At 1259 GMT, the front-month January Brent contract on London’s ICE futures
    exchange was up $2.17 at $48.58 a barrel.
    The front-month January contract on the New York Mercantile Exchange was
    trading $2.15 higher at $48.43 a barrel.
    The ICE’s gasoil contract for January delivery was up $38.75 at $496.75 a
    metric ton, while Nymex gasoline for January delivery was up 519 points at
    112.96 cents a gallon.
    Prices were bolstered by a stream of comments from OPEC officials reflecting
    the group’s desire to combat a supply glut in the global crude oil market.
    Khelil, who is also Algeria’s oil minister, said the market was oversupplied
    by around 400 million barrels a day, and said he is “very pessimistic about
    El-Badri also said Monday the oversupplied market required the group to take
    action at its summit. He called on non-OPEC oil producers to reduce output to
    help balance out the market.
    OPEC had largely set the stage for the group to trim production, but market
    participants were now assessing the size of a potential cut.
    Dresdner Kleinwort analyst Colin Smith said OPEC was “most likely” to curtail
    output by 1.5 million barrels a day, but said there was a distinct possibility
    for a 2 million barrel a day rollback.
    “Our view is based on a structural belief that OPEC is targeting a (circa) $80
    oil price and that it has sufficient firepower…to deliver that outcome in the
    face of any likely overall weakness in global oil demand,” Smith said.
    If OPEC and other oil producers like Russia successfully rein in production, a
    trough for crude oil prices could be formed in the coming weeks, said Tamer El
    Zayat, senior economist at Saudi Arabia’s National Commercial Bank.
    “If OPEC’s meeting on Dec. 17 reflected cohesion and determination in reducing
    production, a floor will be created for the crude oil prices,” El Zayat said.
    Stephen Schork, editor of the Pennsylvania-based Schork Report, said a hawkish
    announcement from OPEC could lift prices to the mid-$50 a barrel level.
    Oil market participants were also absorbing news from China which gave a
    “grim” outlook for the country’s demand, said Rob Laughlin, energy analyst at
    broker MF Global in London.
    China’s refinery throughput levels fell 2.3% on year, pressured by record
    inventories of oil products and weakening domestic demand, according to the
    National Bureau of Statistics.
    Meanwhile, the country’s gasoline exports November were at the highest level
    in 16 months, while its imports of crude oil and most refined products fell,
    reported the General Administration of Customs.

    -By Lananh Nguyen, Dow Jones Newswires (Spencer Swartz and Hassan Hafidh in Oran and David Winning in Beijing
    contributed to this report.)

    Dow Jones Newswires
    12-15-08 0809ET

  2. 2
    Sambone Says:

    Oil Prices Hinge On OPEC’s Next Output Move


    NEW YORK — OPEC’s president promises “significant” output cuts next week and Russia is signaling its interest too in halting the steep slide in prices.

    The trick for the edgy oil market is deciphering whether the signals from oil exporters indicate a where-there’s-smoke-there’s-fire reality or a smoke-and-mirrors illusion.

    The key when the Organization of Petroleum Exporting Countries meets Dec. 17 in Algeria is whether the 70% plunge in oil prices from its record in July will spur exporters into making real cuts in supply to offset tumbling demand and ballooning inventories.

    Since OPEC met Oct. 24 and agreed an output cut of 1.5 million barrels a day from Nov. 1, the ground has shifted beneath the market. Prices have dropped by 30%, to below $47 a barrel intraday Friday on the New York Mercantile Exchange. And some analysts warn of a further sustained fall to $30.

    Worse still for the group, the global economic meltdown has caused oil inventories in major industrialized nations to climb enough to cover nearly 57 days at the end of November, compared with OPEC’s desired level of 52 to 53 days of demand cover.

    That translates to an enormous overhang in the market of some 200 million to 225 million barrels that OPEC seeks to clear out of inventories. But with weak demand and recession fears keeping near-term prices weak, refiners have every incentive to put more oil into storage, compounding OPEC’s dilemma.

    OPEC Hasn’t Dented Inventories
    So far, OPEC cut output by around 750,000 barrels a day in November, but its response to crumbling demand has been to cut production of barrels that don’t have any buyers, rather than making deep enough cuts to dent bloated stockpiles.

    Meanwhile, U.S. crude oil futures prices are headed for a record sixth consecutive month of lower month-to-month prices and are on target to average this month at a four-year low under $45 a barrel.

    What’s more, many analysts don’t see the slide stopping soon. Goldman Sachs analysts now predict U.S. crude prices will average $30 in the first quarter 2009, a level last seen on a quarterly basis in the third quarter of 2003.

    The International Energy Agency on Thursday slashed its expectation of global oil demand for 2008 by 300,000 barrels a day and now joins a host of analysts in projecting the first decline in demand since 1983.

    Counter to many analysts’ forecasts for a further decline, the IEA expects 2009 global oil demand to rise by 500,000 barrels a day, citing International Monetary Fund assumptions that the world economy will begin a gradual recovery in the second half of next year.

    Amid the weak demand picture, OPEC’s President Chakib Khelil, who as Algerian oil minister will host the Dec. 17 talks, promised an unspecified “significant” cut in output following earlier pledges to reduce supplies by 2 million barrels a day.

    Russia Attending OPEC Talks
    “The cartel needs to cut sufficiently to catch the market’s attention, but too-large a cut may be simply deemed unfeasible,” said Harry Tchilinguirian, analyst at BNP Paribas in London. “Achieving a price floor, rather than pushing for higher prices in the current economic climate seems a more realistic goal,” he said.

    The BNP Paribas analyst sees crude prices averaging $50 in the first quarter of 2009 and falling to $42 in the second quarter, and averaging $53 a barrel for the year.

    Saudi Arabia’s Oil Minister Ali Naimi said the kingdom produced near its output quota in November, according to Bloomberg News, despite industry estimates of higher flows.

    But analysts said it remains unclear whether oil prices have fallen enough to stir OPEC’s price hawks, such as Iran and Venezuela, to adhere to new, deeper cuts.

    Amid falling prices, “we think Saudi Arabia will be motivated to stand shoulder to shoulder with its more hawkish OPEC peers. It is hard to forecast investor credulity in this dizzying year,” analysts at FBR Capital Markets said in a report to clients. “But we think a 1.5 million barrels a day cut would be taken seriously by the market.”

    A wildcard at OPEC will be how invited guest Russia plays its hand. Russian officials have hinted at supply cuts to bolster OPEC’s moves and have made non-specific comments about possibly joining OPEC outright.

    An official at Lukoil, a Russian independent oil producer, was quoted as saying his country could cut supplies by 300,000 barrels a day. Russia promised, but didn’t deliver output cuts back in December 2001.

    Conjuring up pledges from non-OPEC producers could tip the balance for market-watchers into a smoke-and-mirrors skepticism, with Russia trying to make virtue of necessity. The IEA projects sliding Russian oil output already is on target to drop by 200,000 barrels a day in 2009, to 9.81 million barrels a day.

    (David Bird, senior energy correspondent for Dow Jones Newswires, has covered global oil markets for more than 20 years.)

  3. 3
    Sambone Says:

    OPEC Races To Get Ahead Of Declining Demand

    Of The Wall Street Journal

    ORAN, Algeria — The world’s big crude-oil exporters are caught in a downward race against falling demand as they scramble to keep prices from slipping still lower in the face of a weakening world economy.

    At a pivotal summit in Algeria this week, ministers from the Organization of Petroleum Exporting Countries could move to cut as much as two million barrels a day from production, having already agreed to slice a similar amount since prices began to drop in late July. OPEC furnishes about 40% of the world’s daily consumption of about 86 million barrels.

    OPEC’s moves to rein in production have been drowned out by a cascade of gloomy economic data from around the world. Oil stockpiles are building rapidly from China to the U.S. Gulf Coast as the global economic slowdown continues to eat away at demand, which just months ago still looked to be increasing at an unstoppable rate. The challenge now facing OPEC is whether the cartel — after weeks of muddled messages — can send a strong and credible-enough signal to arrest the steep drop in crude-oil prices, which have tumbled 68% since the record high in July.

    In November, OPEC members shaved their output by about 825,000 barrels a day, according to the International Energy Agency. Some analysts say members have cut much more since August.

    The price of U.S. benchmark crude, which closed at $46.28 a barrel Friday on the New York Mercantile Exchange, has dropped by nearly a quarter since OPEC met last month in Cairo to debate its next steps.

    The most ominous news for OPEC is China’s sudden slowdown, which was raised vividly last week with reports that China’s exports fell in November for the first time in seven years.

    The world’s second-biggest oil consumer after the U.S., China is facing its slowest economic growth rate in almost 20 years as financial problems in the U.S. and elsewhere diminish demand for Chinese exports and force manufacturers there to ax capacity and energy use.

    A lingering question is whether any non-OPEC nations such as Norway and Russia will help OPEC and cut their own output.

    Russian President Dmitry Medvedev said Thursday that his country, the world’s biggest oil producer outside OPEC, was considering whether to lower its oil output to support crude prices and to seek OPEC membership. Russian Deputy Prime Minister Igor Sechin and Energy Minister Sergey Shmatko are scheduled to attend the OPEC meeting.

    But how meaningful any announced cut by Russia would be is a question mark. Because its oil output is falling naturally because of underinvestment, Russia already is, in effect, helping OPEC without actually turning off any taps. Any reduction from Russia, depending on the size, could simply be repackaging naturally declining output as a “cut.”

    Some economists now compare OPEC’s plight to that of the early 1980s, when soaring crude prices helped spur a recession in the U.S. and Europe. Oil demand fell sharply, as did oil prices. It took nearly 15 years for U.S. consumption to return to 1980 levels.

    Many forecasters now predict that global oil demand next year will be the weakest in more than two decades, another sharp turnaround from expectations earlier in the year. In January, the U.S. Energy Department’s forecasting arm put global oil demand next year at just over 89 million barrels a day. It now estimates that demand in 2009 will be 3.7 million barrels a day less than that.

    Energy economist Philip Verleger has a much darker view, arguing in a recent report that oil demand next year could prove so weak that OPEC in the next year will need to trim at least five million barrels a day from production to avoid oversupply.

    The cartel has hinted it would announce substantial cuts this week, but ministers have offered few specifics. In Cairo last month, Saudi oil minister Ali Naimi said the “fair price” of oil should be around $75 a barrel — a target many analysts contend may be out of reach next year unless the economy turns around markedly.

    “We’re looking for OPEC to cut by at least another one million barrels a day early next year in order to have an impact on prices,” said Michael Wittner, senior oil analyst at Societe Generale in London. “And they could have to do more depending on what demand does.”

    Saudi Arabia, accounting for more than one-third of OPEC’s total production, will be forced to shoulder most of the cutting burden, as has usually been the case, Mr. Wittner said.

    But getting the cuts just right to account for falling demand will be tricky. The economic downturn is hurting capital expenditure and forcing the shelving of a slew of drilling operations, not just in the U.S. but also in some OPEC countries.

    Oppenheimer & Co. senior oil analyst Fadel Gheit estimates the world oil supply is likely to drop by three million to five million barrels a day in 2009, due to OPEC cuts and smaller companies slashing production, compared with a decline of just one million to two million barrels a day in global oil demand.

    This scenario of overtightening supply relative to demand would reduce global oil inventories a record 10% to 30%, pushing crude prices significantly higher later in 2009, Mr. Gheit said.

    While many analysts contend oil prices will remain low next year, and possibly through 2010, the market continues to anticipate higher prices, with contracts for oil to be delivered several years in the future selling for significantly higher prices than oil for delivery early next year.

  4. 4
    Sambone Says:

    IEA Sees Global Oil Output Peaking In 2020

    Dow Jones Newswires

    LONDON — The International Energy Agency’s chief economist believes global oil production will peak much earlier than expected due to a collapse in investment, The Guardian reports Monday.

    Fatih Birol told the newspaper conventional crude output could plateau in 2020.

    “In terms of non-OPEC we are expecting that in three, four years’ time the production of conventional oil will come to a plateau, and start to decline,” Birol said.

    “In terms of the global picture, assuming that OPEC will invest in a timely manner, global conventional oil can still continue, but we still expect that it will come around 2020 to a plateau as well.”

    Full story: http://www.guardian.co.uk/business/2008/dec/15/oil-peak-energy-iea

    —London bureau, Dow Jones Newswires

  5. 5
    Fiveanddimer Says:

    Here’s a good discussion of how the global recession has impacted the peak oil argument. It features Matt Simmons and Robert Hirsh. The supply distruction brought on by the current drop in energy prices has got Simmons more convinced than ever that the world will soon be facing severe energy shortages.

  6. 6
    zman Says:

    Thanks Five, always good to hear from Matt who often brings some pretty good specifics to the table.

  7. 7
    zman Says:

    Dollar getting hit for another 1.25% drop here, helping to boost crude as well.

    Nice moves by Majors, but outpaced by E&P and Service at the open.

  8. 8
    Sambone Says:

    By Hyun Young Lee

    OTTAWA (Dow Jones)–Crude oil futures surged higher Monday on growing
    expectations that OPEC will make major production cuts when it meets on
    Rising equity markets and the plummeting dollar were also helping to buoy oil
    Light, sweet crude for January delivery was up $2.78, or 5.9%, at $49.06 a
    barrel on the New York Mercantile Exchange, after trading as high at $50.05 a
    barrel. Brent crude on the ICE futures exchange was $2.61 higher at $49.02 a
    Market attention zeroed in on OPEC’s Wednesday meeting in Algeria, with
    expectations coalescing around a 2 million barrel a day cut. OPEC officials
    have said explicitly that the cartel will cut production, though they have
    refused to specify by how much.
    Earlier Monday, OPEC President Chakib Khelil noted that the group’s de facto
    leader Saudi Arabia is also backing another output cut.
    “Everybody is supporting a cut,” Khelil, who is also Algeria’s oil minister,
    said. “I don’t have any doubt about it. The Saudis have already taken a
    decision ahead of the meeting.”
    OPEC has already announced two supply cuts totaling about 2 million barrels a
    day since September, but crude prices have continued to slide under the weight
    of the growing recession in North America.
    “Personally I think they’re going to cut by 2.5 million barrels a day,” said
    Addison Armstrong, a broker at Tradition Energy, a brokerage in Stamford, Conn.
    “They really made a hash of what they tried to do with earlier cuts – a more
    dramatic move is what’s going to be needed this time.”
    A high-level Russian delegation will also be attending Wednesday’s meeting,
    including the head of Russia’s biggest independent oil firm OAO Lukoil
    (LKOH.RS). Chief Executive Vagit Alekperov said Monday that OPEC had asked
    Russia to cut its output by up to 300,0000 barrels a day, or around 3% of the
    country’s total production.
    The comments helped to lift oil prices, although Alekperov didn’t indicate if
    Russia would follow through. Even if it does, the size of the cut is “less than
    I thought (OPEC) would want from the world’s second largest producer,” said
    Phil Flynn, a broker at Alaron Trading Corp. in Chicago.
    Further support came from rising equity markets, which climbed on hopes that
    the Bush administration could tap funds from the Troubled Asset Relief Program
    to aid the U.S. auto industry after the Senate shot down a bailout bill last
    The Federal Reserve will also be meeting Monday and Tuesday, with expectations
    of a 50 basis point cut to bring interest rates down to 0.5%. The dollar was
    getting hammered in anticipation, which in turn offered a boost to oil prices.
    Front-month January reformulated gasoline blendstock, or RBOB, was up 7.35
    cents, or 6.8%, to $1.1512 a gallon. January heating oil was up 7.43 cents to
    $1.5677 a gallon.

    -By Hyun Young Lee, Dow Jones Newswires

    Dow Jones Newswires
    12-15-08 0944ET

  9. 9
    zman Says:

    Sleeting in the South today, supposedly the Rock will be all iced up by early afternoon, first time this season.

  10. 10
    Sambone Says:

    09:56 12/15 DJ OPEC Pres: Intl Oil Cos Also See $70-$80/Bbl As Fair Price

  11. 11
    zman Says:

    Interesting that the broad market is ebbing off like it wants to move lower and the group is holding onto 2 to 4% gains across the board, even as oil has backed off a little.

    NG up 25 cents seems to be reacting to the gas-directed rig count and the HDD rally.

  12. 12
    jy Says:

    #9 “the Rock”?? as in…Little Rock? Rock City? Stone Mountain? Chimney Rock?

  13. 13
    zman Says:

    the Little one.

  14. 14
    BirdsofpreyRcool Says:

    Good morning. Nothing terribly bright and cheery about the credit markets today. The GM short-term bonds are pricing in the receipt of a near-term bridge loan, but then pricing in a bankrupcty within a year anyway.

    Credit pretty quiet. IG has barely traded… started flat to Friday, widened a bit, narrowed, now widened with the decline in the stock market.

    IG 269 bps now. about +2 to Friday’s close.

    There is a new bond deal to watch: Kansas City Southern, the 5th largest US railroad, plans to sell $175mm of senior, 5-yr notes. The proceeds will be used to pay down $200mm of 7.5% debt due in 2009. KCS is rated B1/B+, so at the lower part of the mid-range for junk. Should get done (as investors still like the rail sector). Will be interesting to see the price. Still no word on our energy services high-yield deal for IO.

  15. 15
    zman Says:

    Thanks for the color BOP. Interesting they like the rails still as much nasty stuff as there is around to read on coal.

  16. 16
    BirdsofpreyRcool Says:

    z – yeah. We might not be able to use coal here in the US… but, doesn’t mean other, less idealogically-restricted countries don’t want it. Takes rails to get it to the ports.

  17. 17
    zman Says:

    But the markets are worried about China going into recession…

    Oil gains cut in half, groups still higher but feeling the weight of market off 1.2% (Dow) to 2.6% (Nasdaq). Wasn’t the Nasdaq in vogue last week? Seems if the broads recover today/this week energy will be in fashion.

  18. 18
    zman Says:

    Connacher cuts oil sand production in half (9,000 goes to 5,000 bopd so its not a big hit in the scheme of things) due to weak prices. They are a small steam assisted gravity displacement player but its interesting to see them pull down production.

  19. 19
    BirdsofpreyRcool Says:

    China might be headed into a recession… but it doesn’t stop their long-term thinking. Rather sad article on bloomberg today:

    Bush Excluded by Latin Summit as China, Russia Loom (Update1)
    2008-12-15 15:40:06.791 GMT

    By Joshua Goodman
    Dec. 15 (Bloomberg) — Latin American and Caribbean leaders gathering in Brazil tomorrow will mark a historic occasion: a region-wide summit that excludes the United States.
    Almost two centuries after President James Monroe declared Latin America a U.S. sphere of influence, the region is breaking away. From socialist-leaning Venezuela to market-friendly Brazil, governments are expanding military, economic and diplomatic ties with potential U.S. adversaries such as China, Russia and Iran.
    “Monroe certainly would be rolling over in his grave,”
    says Julia Sweig, director of the Latin America program at the Council of Foreign Relations in Washington and author of the 2006 book “Friendly Fire: Losing Friends and Making Enemies in the Anti-American Century.”
    The U.S., she says, “is no longer the exclusive go-to power in the region, especially in South America, where U.S. economic ties are much less important.”
    Since November, Russian warships have engaged in joint naval exercises with Venezuela, the first in the Caribbean since the Cold War; Chinese President Hu Jintao signed a free-trade agreement with Peru; and Brazil invited Iranian President Mahmoud Ahmadinejad for a state visit.
    “While the U.S. remains aloof from a region it no longer sees as relevant to its strategic interests, other countries are making unprecedented, serious moves to fill the void,” says Luiz Felipe Lampreia, Brazil’s foreign minister from 1995 until 2001.
    “Countries in the region are more aware than ever that they live in a globalized, post-American world.”

    A Castro Triumph

    The two-day gathering, called by Brazil at a beach resort in Bahia state, is also a diplomatic triumph for Cuban President Raul Castro, making his first trip abroad since taking over from his brother Fidel two years ago. The communist island was suspended from the hemisphere-wide Organization of American States in 1962 over its ties with the former Soviet Union.
    “A lot of this is designed to stick it in the eye of the U.S.,” says Peter Romero, the U.S. assistant secretary of state for the Western Hemisphere from 1999 to 2001. “But underlying the bluster, there’s a genuine effort to exploit the gap left by a distant and distracted U.S.”
    The effort is most evident in the bloc of countries allied with the anti-American president of Venezuela, Hugo Chavez.
    Bolivian President Evo Morales last month expelled the Drug Enforcement Administration, alleging that DEA agents were conspiring to overthrow him; U.S. President George W. Bush dismissed the charges as absurd and suspended trade privileges for the Andean nation.

    Drug-War Defeat

    In Ecuador, meanwhile, President Rafael Correa has refused to renew the lease on the U.S.’s only military outpost in South America, a critical platform for the U.S. war on drugs.
    For Brazil, tomorrow’s summit caps a decade-long diplomatic drive to use its growing economic and political stability to play a bigger role in the world.
    While little concrete action is expected from the first-ever Latin American and Caribbean Summit on Integration and Development, the fact that the U.S. wasn’t invited has symbolic importance, says Lampreia.
    The summit reinforces such regional initiatives as the Union of South American Nations, which was formed in May by 12 countries to mediate conflicts such as political violence in Bolivia, bypassing the U.S.-dominated OAS.
    Thomas Shannon, the top U.S. diplomat for Latin America, says the nature of American influence is only changing, not declining, as the region matures.

    No Invitation Sought

    The U.S. “didn’t ask to be invited” to the summit, he says, although it had discussed with Brazil and Mexico ways the meeting’s agenda could be used during the U.S.-backed Summit of the Americas, in April in Trinidad and Tobago.
    “We don’t subscribe to the hydraulic theory of diplomacy that when one country is up, the other is down — that if China and Russia are in the area our influence has somehow waned,”
    Shannon said in a telephone interview.
    The fact that “there’s no warfare, weapons proliferation, suicide bombers or jihadists” in Latin America may make its issues “less urgent,” though no less important, Shannon said.
    The U.S. remains the region’s dominant investor and trading
    partner: Foreign aid to Colombia to fight drug traffickers and Marxist rebels totals $700 million a year, and remittances from Latin Americans living in the U.S. totaled $66.5 billion last year.

    Monroe’s Doctrine

    The Monroe Doctrine, which dates back to 1823, declared Latin America off-limits to European powers. Whether welcomed by the region or not, it has been invoked whenever real or imagined security threats to U.S. interests arise, says Gaddis Smith, a retired Yale University historian of American foreign policy.
    “Its essence is unilateralism; no Latin American country had any say in it,” says Smith, whose more than a dozen books on American foreign policy include “The Last Years of the Monroe Doctrine.”
    The real battle is for a larger share of the region’s abundant resources and expanding economies, and China has led the way.
    Two-way trade with the region shot up 12-fold since 1995 to $110 billion last year, according to the Inter-American Development Bank. China’s share of the region’s imports also jumped, to 24 percent from 9.8 percent in 1990, while the U.S.
    share shrunk to 34 percent from 43 percent. Two years after reaching a bilateral free-trade agreement, China’s demand for copper made it Chile’s biggest export market in 2007, replacing the U.S.

    Hu’s Trips

    Since making his first of three trips to Latin America in 2004, China’s President Hu Jintao has spent more time in the region than Bush — 22 days to 20 for the U.S. president. In October, as the global credit crunch dried up lending in the region, China joined the Inter-American Development Bank with a $350 million loan to finance small businesses. This month it pledged $10 billion in loans to state-controlled Petroleo Brasileiro SA so Brazil can develop the Western Hemisphere’s largest oil discovery since 1976.
    “The Chinese play up the development side of diplomacy so much better than the Americans,” says William Ratliff, a research fellow at Stanford University’s Hoover Institution who has a Ph.D. in Chinese and Latin American history. “Deals come with none or very few strings attached.”
    Even Colombia, which is spending $115,000 a month lobbying the U.S. Congress to approve a stalled free-trade pact, signed an investment treaty last month with China. During this year’s U.S.
    campaign, President-elect Barack Obama said he opposed the accord over concerns that Colombia isn’t doing enough to stamp out violence against labor organizers.
    Colombian President Alvaro Uribe today canceled his plans for the summit to monitor rescue efforts involving 200,000 people affected by flooding over the weekend.

    Arms Deals

    Changing relationships are also evident in arms deals.
    Chavez turned to Russia for at least $4.4 billion in weapons after the U.S. blocked sales of aircraft parts. Brazil, the region’s largest economy, is also shopping around: Defense Minister Nelson Jobim said in Washington this month that his government will only buy weapons from countries that agree to transfer technology for local production.
    Plans to purchase 36 new fighter jets, in which Boeing’s F-
    18 is competing for a contract against Stockholm-based Saab AB and France’s Dassault Systemes SA, “can only be justified politically if they contribute to national development,” Jobim said.
    Brazil may sign a deal with France for four nuclear submarines intended to help secure its oil basins in the Atlantic when French President Nicolas Sarkozy visits Brazilian President Luiz Inacio Lula da Silva this month.

    Reactivating a Fleet

    The U.S. plan to reassert its naval presence by reactivating the Fourth Fleet after 58 years to patrol the Caribbean has triggered negative reactions ranging from Chavez’s threat to sink the convoys to the more-diplomatic Lula’s demand for explanations from the Bush administration.
    Latin American leaders are looking to Obama to restore relations after the Bush presidency’s initial pledges of greater engagement gave way to a focus on the 9/11 terror attacks and wars in Iraq and Afghanistan. Yet the honeymoon with Obama may be short-lived, says Michael Shifter, vice president of the Inter- American Dialogue in Washington. He says that the issues that have dominated Latin American relations — including Cuba, immigration and U.S. trade barriers on agricultural products — may remain in dispute.
    “Latin America wants the U.S. to be engaged, but in very different terms that it has in the past,” says Shifter. “In any case, they’re not waiting around for the U.S. to change its mindset.”

  20. 20
    Dman Says:

    Z – do you expect the OPEC news be out before the market opens on Wednesday?

  21. 21
    BirdsofpreyRcool Says:

    GMAC bondholder committe just agreed to a debt swap. Don’t know the details, but this committe represents $10.5B of GMAC bonds. This should help equities.

  22. 22
    zman Says:

    Dman – I’d just be guessing but would say no. They tend to meet and greet for awhile and I think they’ll want to talk in front of the non-OPECs for a bit before they throw the number at us.

  23. 23
    BirdsofpreyRcool Says:

    “committee” (i can spell, usually)

  24. 24
    Sambone Says:

    ORAN (Dow Jones)–OPEC will have to decide if it cuts production over 3 or 12
    months to get rid of a stocks overhang as demand falls by 1.4 million barrels a
    day in the first half of 2009, the organization’s president said Monday.
    Speaking at a press briefing, Chakib Khelil said: “What will be discussed (at
    an Organization of Petroleum Exporting Countries meeting Wednesday in Oran) is
    if the cuts are made over three months or 12 months” to reduce an inventories
    overhang he estimated at 400 million barrels of crude oil.
    OPEC could meet again after Oran and before an ordinary meeting due in March
    in Vienna, he said. Khelil said the oil demand decline was now seen at 1.4
    million barrels a day in the first half of 2009. He said demand was now
    forecast to fall by 500,000 barrels a day in 2009, compared to a
    200,000-barrel-a-day decline in 2008.
    “In 2009, the recession will get worse,” Khelil said. However, he expected oil
    demand to bounce back in the third and fourth quarter of 2009.
    -By Benoit Faucon, Dow Jones Newswires
    Dow Jones Newswires
    12-15-08 1113ET

  25. 25
    BirdsofpreyRcool Says:

    IG 268

  26. 26
    Sambone Says:

    4207 DJ 12/15 11:24 *DJ EIA: 10:30 AM Release For Gas To Start Thu, Jan 8, 2009
    4206 DJ 12/15 11:24 *DJ EIA Reinstates 10:30 AM ET Release For Natural Gas Storage
    4205 DJ 12/15 11:20 *DJ EIA Had Moved Time After Inadvertently Releasing Data Early
    4204 DJ 12/15 11:15 *DJ EIA: 10:30 AM ET Release To Begin Wednesday, Jan 7, 2009
    4203 DJ 12/15 11:14 *DJ EIA Reinstates 10:30 AM Release Time For Weekly Petroleum Data

  27. 27
    Sambone Says:

    NEW YORK (Dow Jones)–The U.S. Energy Information Administration said Monday
    it is reinstating the 10:30 a.m. ET release time for its weekly petroleum and
    natural gas data reports in early January after resolving technical concerns.
    The widely watched Weekly Petroleum Status Report, which estimates oil
    supplies to the market, imports and inventories, will return to its 10:30 a.m.
    ET release time Jan. 7.
    The Weekly Natural Gas Storage Report will return to that release time Jan. 8.
    In early June, EIA began delaying the release of the data as part of a larger
    effort to assure the data remain physically inaccessible before the release
    EIA loads the reports behind an electronic gate that is removed, and
    interested parties can access the information.
    EIA said has “thoroughly tested” its electronic gate system of withholding
    access to the data until the designated release time “and eliminated all
    identified problems.” EIA said with changes to the system, it is “materially
    reducing the likelihood of an inadvertent early release of either weekly
    -By David Bird, Dow Jones Newswires
    Dow Jones Newswires
    12-15-08 1136ET

  28. 28
    zman Says:

    Thanks Sam, good to know.

  29. 29
    zman Says:

    BOP – over the weekend, I heard GM had something like $68 billion in debt from some talking head. My system shows debt at about $45 billion there. Are GMAC bonds on top of GM’s debt? Thanks.

    Oil up less than a dollar now and trading pretty technically, with dips coming quickly after it falls through rounds levels like the day’s gain at $3, $2, and $1 and at $50, $49 and so on. Other than last week, crude has not had a real up week in 5 months so I’m not sure that this week’s OPEC decision is met with as much selling (if at all) as has been the case with previous announcements. Just watching the headlines come out of various OPEC sources this morning, it seems they are gearing up to wow the world with their announcement. Almost feels like some of the louder mouth nations like Iran are trying to low ball the cut, saying it will be 1.5 to 2.0 mm bopd which would like not wow anyone as that’s the expectation.

  30. 30
    zman Says:

    ETSWD – let me know if you see this.

  31. 31
    ram Says:

    I see it.

  32. 32
    zman Says:

    Wachovia throwing in the towel on several E&P names. BBG, BRY, CHK, KWK and WLL. I used to work with the analyst there, pretty smart guy but this looks fishy. These end of the year cuts are designed to wipe the slate clean and get ready to bump numbers when able going forward.

  33. 33
    zman Says:

    Thanks Ram, he was having trouble logging in. How’s the weather?

  34. 34
    zman Says:

    Oil’s give back of today’s early morning $3+ gain probably only temporary. It should tell the powers that be at OPEC that the numbers need to be big and believable (in terms of where the cuts will come from).

  35. 35
    ram Says:


  36. 36
    zman Says:

    $5 swing on oil today.

  37. 37
    md Says:

    GMAC was bought by Cerberus.

    Z – SAM anyway to post occasional NG European prices to compare to Henry Hub for LNG competition.
    We got a blast of above normal temp up here over the weekend and next few days.

  38. 38
    zman Says:

    Thanks md – crude down $1.50 now. Pre-release profit taking may make OPEC strike harder than it would have.

  39. 39
    Sambone Says:

    12:38 (Dow Jones) The US dollar/oil reversal may be fast approaching, Bespoke
    Investment Group says. With the dollar getting close to breaking its upswing
    from July lows, blog says action throughout next few days should provide
    insight into how the currency will trade over next few months. “If it can hold
    support, it will remain in bull market mode, but if it breaks its uptrend line,
    look out below,” blog says. On the flip side, oil seems to have stabilized
    since its free-fall. “While it has a long, long way to go before putting a dent
    in its losses, its recent break above its short-term downtrend line is a
    start.” (SMR)

  40. 40
    md Says:

    I think I;m right on GMAC – Cerberus. Saw it on Bloomberg yesterday.

    OPEC Wed. 12/17 Press conference 16:00 HRS. EST 10:00 AM. I guess the EIA report will not get much attention.

    I’ll take a raincheck on PBR weekend report

  41. 41
    zman Says:

    md – ooops, slipped my brain.

  42. 42
    Sambone Says:

    Off subject

    Now who really wants to dress out to play Bama anymore?


  43. 43
    antrimshale74 Says:

    Cerberus owns 51% of GMAC and GM owns the rest. GM has been booking huge losses for their 49% stake, including GMAC’s horrid Residential Capital (Res Cap) division which wrote sub-prime and alt-A mortgages (as well as prime).

  44. 44
    zman Says:

    Industrial output down 0.6% for November:


  45. 45
    Sambone Says:

    By Spencer Swartz

    ORAN, Algeria (Dow Jones)–Top OPEC officials arriving here Monday ahead of
    the group’s most important meeting in years sent strong signals that the group
    and some non-OPEC producers will join forces to deliver a big production cut to
    end the rout in crude prices.
    With falling oil revenues threatening financial stability in a number of
    member countries, the Organization of Petroleum Exporting Countries is
    launching a full-scale effort to rein in bulging crude inventories caused by
    the stumbling global economy and pull prices higher. Most ministers have
    signalled a preferred price around $75 a barrel, around $26 higher than the
    current price.
    OPEC has stepped up lobbying efforts with non-OPEC nations like Russia, the
    world’s top producer, increasingly under financial strain, to slash output.
    After recent mixed signals, ministers are trying convince oil markets that all
    members are aboard for cutting output again.
    OPEC President Chakib Khelil, who is also Algeria’s oil minister, told
    journalists that Saudi Arabia wants a substantial cut; two weeks ago it was
    hesitant about cutting additional barrels until members fully abided by
    commitments made earlier this autumn to reduce output.
    “Everbody is supporting a cut. I don’t have any doubt about it,” Khelil said.
    “The Saudis have already taken a decision ahead of the meeting.”
    Saudi Oil Minister Ali Naimi, scheduled to arrive here Tuesday, has yet to tip
    his hand on what OPEC should do Wednesday here in Algeria’s second biggest
    Crude prices rose sharply in European trade Monday on expectations that OPEC
    would ax output further, but fell back into negative territory during U.S.
    trade on fears about the effectiveness of any cut. Prices have plunged roughly
    70% since hitting a record peak of $147 a barrel in July on whithering demand
    and economic activity.
    Despite announcing two production cuts totaling 2 million barrels a day since
    September, OPEC has failed to stem the tumble in crude prices as markets focus
    on shrinking demand. OPEC output accounts for about four out of 10 barrels
    consumed globally daily.
    Khelil decined to indicate how many barrels OPEC may agree to take off the
    market this week, but most analysts expect a minimum output cut of 1 million
    barrels a day to account for falling crude demand – expected to contract for
    the first time in 25 years this year – and rising oil stocks that are well
    above a five-year average level.
    Khelil said his view on the need for another large output reduction was based
    on his expectation world oil demand will drop by 200,000 barrels a day in the
    first quarter, during the dead of winter, and by 1.2 million barrels a day in
    the second quarter, when energy demand usually weakens as winter comes to an
    end in the northern hemisphere.
    Such weakness would further inflate crude stocks in big consuming nations like
    the U.S. World markets were oversupplied by 400 million barrels, Khelil said.
    An OPEC delegate said non-OPEC nations like Russia, the world’s top producer,
    may contribute a production cut totaling between 300,000 to 500,000 barrels a
    day to add to a much bigger OPEC output reduction.
    “There are a number of scenarios being talked about. This is based on
    indications we’re getting,” the delegate told Dow Jones Newswires.
    The delegate declined to say which non-OPEC countries were inclined to cut
    production and by what amount, but said Russia was set to account for the
    largest share of non-OPEC production cuts. Azerbaijan, Oman, and Syria are the
    other non-OPEC nations scheduled to attend OPEC’s meeting Wednesday.
    Russia, which pumps around 9.8 million barrels a day, is sending several top
    government and energy officials to the OPEC meeting, including Deputy Prime
    Pinister Igor Sechin, Energy Minister Sergey Shmtko and chief executives of
    some of Russia’s biggest oil companies.
    Non-OPEC nations last made a concerted effort to assist OPEC in cutting output
    to halt sliding oil prices in 2001, though the assistance was spotty as not all
    non-OPEC countries stuck to their commitments.
    -By Spencer Swartz, Dow Jones Newswires
    Dow Jones Newswires
    12-15-08 1319ET

  46. 46
    zman Says:

    Thinking about buying a little SU in front of the OPEC meeting.

    The Russia contribution of 300 to 500,000 bopd is higher than the 200-300 kicked about over the weekend. Traders are acting like these guys are going to disappoint (and or demand is going to get a lot worse). I don’t think OPEC & Co. will come with anything but a very large combined cut.

  47. 47
    VTZ Says:

    Z – What sort of combined cut would be a “holy-crap-I-can’t-believe-they-cut-that-much” cut? 4-5 million?

  48. 48
    zman Says:

    V – my guess is 2.75 mm bopd. 2 from OPEC with half of that coming from Saudi. The rest from Russia, Mexico, maybe Norway. Anything bigger than 3 and I think the initial reaction will be a pop and then very quickly to move to *cough*BS*cough*. So if they were to announce a 4 to 5 mm bopd cut no one would believe them.

    Did you get my email a minute ago?

  49. 49
    BirdsofpreyRcool Says:

    Thanks, Antrimshale… I stepped out for a bit.

    GMAC was GM’s captive financing branch, before they sold a majority stake to Cerberus. GMAC was formed to provide floor-plan financing for dealers and auto loans for consumers… before they jumped on the sub-prime gravy train through their ResCap division. GMAC (ignoring ResCap) basically acts as a bank for GM’s retail auto operations. No private bank wanted (or wants) that much exposure to the retail auto sector, so GMAC filled that requirement. Problem is, through it’s floor-plan financing for automotive dealerships, GM could basically create sales by stuffing auto dealership lots with product. No surprise there are “too many dealerships.” That’s not the fault of the dealerships, but it’s another example of how poorly GM runs it’s actual business. But, I digress.

    The US taxpayer is being asked to not only “save” GM (and Chrysler), but also to save the financing branch. GMAC is trying to become a “bank” so that it can access money through TARP, the Discount Window, and take FDIC insurance-backed deposits (which they would use to fund auto-loans). So far, GMAC’s request to be a bank has been denied.

    It is questionable if GM could survive without GMAC surviving. It is thought that if GMAC does not achieve bank status (or otherwise shore up it’s operationg), that GM can not survive. So, although GM is not obligated to, GM will use taxpayer money to keep GMAC alive.

    So, z, to answer your question, GMAC’s debt load is completely separate from GM’s. There is also ResCap debt…

  50. 50
    md Says:

    Is OPEC not concerned about optics of adding oil to recession as they are about propping prices. A measured but effective response of 2.0 M would likely meet the criteria

  51. 51
    VTZ Says:

    Just looking at it now Z.

  52. 52
    zman Says:

    Thanks BOP – so the total debt load here is somewhere north of $70 billion, wonder how the coverage ratio looks on that.

    MD – About 3 weeks ago, President Khelil said that the economy is what is, don’t blame us, blame mis-managed housing and lending sectors in the U.S. The higher price (around $75) won’t hurt the global economy and is beneficial in the longer term as it will inspire capex that will keep prices from reaching $300 per barrel some day.

  53. 53
    zman Says:

    V – what I should have added was names like Flour to that list as well.

  54. 54
    zman Says:

    Turn on CNBC now Epperson’s big questions about energy for 2009.

  55. 55
    BirdsofpreyRcool Says:

    z – GM itself has over $43B of debt on it’s balance sheet (and a coupla b’s of off-balance sheet stuff). GMAC has about $161B of debt. So, together, about $200B of debt.

  56. 56
    zman Says:

    BOP – but the GMAC debt is cars and car dealership stock, correct.

  57. 57
    ram Says:

    Holly crap!

  58. 58
    BirdsofpreyRcool Says:

    z – sure. and the GM debt is plants, and equipment, and tooling, and realestate, etc. The question is, what are the assets worth (at GM and GMAC) in a liquidation — or even marked-to-mrkt — scenario? And how much lower can or will those assets fall? When will they start to appreciate in value again?

  59. 59
    BirdsofpreyRcool Says:

    and, if no one wants to buy GM’s product, their tooling and equipment and plants aren’t worth that much.

    There is a LOT of excess capacity for auto-making in North America… has been for years. That excess capacity needs to go away before we can truly know the value of what’s left. Kind of like home values. Until the foreclosures and 2nd and 3rd and empty homes get absorbed by the mrkt (or torn down), home prices have not found a bottom.

  60. 60
    zman Says:

    wow, 19 below in Denver.


  61. 61
    ram Says:

    Appreciate, how can aging vehicles or equipment rise in value? GM dealers still are not selling cars with a sense of urgency. They are encouraging me to buy imports who are radically trying to deal.

  62. 62
    Sambone Says:

    Chill map


  63. 63
    BirdsofpreyRcool Says:

    ram, you’re right. plants and equipment don’t single-handedly appreciate in value… but, they are used to generate income. As long as income exceeds expenses, the plants and equipment are worth something. Also, auto-manuf’s need to spend a lot of capex a year, just to keep the plants, equipment, tooling up to date… not to mention, the cost of retooling for new product.

    These are the questions investors ask, when looking at the pile of debt. Basically, forget if the home itself is going to go up in value, but can the homeowner aford to continue to pay the mortgage? If not, what can we sell the home for in a foreclosure? Will it be enough to pay off the mortgage (debt)?

    The way GM unsecured bonds are trading, bondholders expect to receive about 15 cents on the dollar. There is no “equity” when bonds trade that low. There is only the “option value” that GM stays out of Chapter 11. Bonds trading at 15-20 cents tell you that the company is functionally bankrupt… it just hasn’t been formalized, yet. Unless some outside entity steps in and delivers a basket of money.

  64. 64
    zman Says:

    Stepping out for a flu shot. Hope to be back by the close.

  65. 65
    ram Says:

    “Federal Lawsuit Filed Against Treasury Secretary to Stop AIG Bailout Financing of Terrorist Activities” – The Feds suing the Feds? I got sick to my stomach reading this article. Since it was filed in Michigan, it sounds like high stakes shenanigans.

  66. 66
    VTZ Says:


    “feels like: -34 C” Nobody can complain to me, my car barely started.

    Apparently theres another cold snap coming from NW that will no doubt hit Denver area again.

  67. 67
    ram Says:

    It looks like the DEC options might be drifting away.

  68. 68
    Sambone Says:

    By Jessica Resnick-Ault

    NEW YORK (Dow Jones)–The good news is that, for more than three years, Valero
    Energy Corp. (VLO) has been bracing for an economic downturn. The bad news is
    the global financial crisis hit before the oil refiner’s plans were complete.
    The largest U.S. independent refiner, Valero has divested itself of several
    assets in an effort to run the most efficient system possible, and has begun to
    implement a plan to cut operating costs. Despite these efforts, the company’s
    shares have been hard hit this year.
    San Antonio, Texas-based Valero’s stock has fallen about 70% in the past year,
    compared with a decline of about 41% in the Standard & Poor’s 500-stock index,
    of which it is a component. The stock decline has largely come from tepid
    demand for gasoline, which has impacted the company’s operating income. Amid
    the tough economic climate, Valero has taken two refineries off the block,
    stepping back a strategy publicized last year, in which it planned large-scale
    divestiture of underperforming assets.
    Falling demand for gasoline coupled with projections for a decline in demand
    for diesel fuel have hurt profits for Valero, which produces fuel at 15
    refineries across North America. The decline in Valero’s shares, which recently
    were trading at $19.51, has matched that of stocks across the refining sector.
    Within that sector, though, Valero has maintained a competitive share value.
    Its shares trade at a price/earnings multiple of 2.6 as opposed to 4.8 for the
    sector, according to FactSet Research. Their forward P/E multiple is 4.5, below
    the 5.3 average for the sector.
    While Valero faces a tough climate, executives say they plan to invest in
    refinery upgrades that will allow them to process more diesel, meeting
    expectations that demand for the fuel may surge by 2012.
    Valero’s stable financial position, large size in its industry, and prudent
    scaling back of capital expenditure should help it remain stable during the
    current tumultuous market.
    “They’ll survive, but they’re not without their vulnerable spots,” said Chi
    Chow, a Denver-based analyst with Tristone Capital. Chow has a “market perform”
    rating on Valero, similar to a “hold” rating, and suggests a target price of
    $20.00 for Valero’s shares.
    During 2009, Valero will likely need to weather a weakening diesel-fuel
    market and other storms in the market.

    Preparing For The Worst

    When Chief Executive Bill Klesse took the helm of Valero in January 2006, he
    pledged to create a network of refineries that could weather any economic
    climate. Klesse planned to sell underperforming assets, and to invest in a core
    group of large refineries that could turn the cheapest, sludgiest grades of
    crude oil into gasoline.
    Klesse sold one refinery in 2007 and a second in 2008, and implemented a
    program to increase operational efficiency at the remaining plants in mid 2008.
    But a deal to sell a third refinery fell through, and that plant remains on the
    block, with Valero in talks with prospective bidders.Two other refineries
    originally slated for sale have been taken off the table.
    Tepid gasoline demand cut the market value of those assets in the middle of
    2008, while tight lending conditions diminished buyers’ ability to pay the
    prices Valero sought for them. As a result, Valero continues to operate several
    refineries that don’t fit in with Klesse’s vision of operating the most
    efficient refining system.
    Despite those refineries, Valero says it can use cheap grades of crude to
    profitably produce gasoline and diesel. “We have large complex refineries that
    can take advantage of differentials and pricing in crude oils,” said Bill Day,
    a spokesman for Valero. By buying the cheapest grades of crude oil, Valero can
    profit in an environment where gasoline is selling for less than the cost of
    the crude required to produce it.

    Pain At The Pump

    But even Valero’s most efficient refineries are contending with a falling
    value for their primary product, gasoline, amid tepid demand. Returns on
    producing diesel, which have been a bright spot for Valero and other refiners
    this year, may decline in 2009 if a recession in Europe eats away at diesel
    demand there.
    “From an industry standpoint, fundamentals are moving against you,” said Ann
    Kohler, an analyst with New York-based investment bank Caris & Co.
    As the global market works to right itself, Valero may see demand for its core
    products increase late in 2010, Kohler said. As inefficient competitors close
    refineries and other refineries cut the amount of product they produce,
    conditions for Valero will likely ultimately improve.
    Relatively tiny competitors operating single refineries with capacities below
    50,000 barrels a day are most likely to be shut, according to George Pilko, a
    Houston-based refining consultant and the founder of Pilko & Associates.
    However, Valero’s peers, including Tesoro Corp. (TSO) and Sunoco Inc. (SUN),
    which operate large refining systems, have cut spending as Valero has and also
    are likely to survive the current fluctuations in the market.

    Hoping For The Best

    Valero and its investors are banking on that potential improvement.
    Valero says improvement could come in the short term: If lower gasoline prices
    spark consumer demand, the company’s outlook could brighten.
    Others say the turnaround won’t be as fast. If Valero beats analyst estimates
    for 2009 earnings of $3.51 a share, its stock will still be at an attractive
    level, said John Parry, an analyst at Norwalk, Conn.-based research firm IHS
    Herold. If annual earnings return to about $4 to $5 a share – in line with
    higher estimates,its share price could surge to $30 or $40, he said.
    “I think, for the typical investor who’s going to hold something for a couple
    of years, you’re probably not going to go wrong [with Valero],” said portfolio
    manager Bob Auer, whose Indianapolis-based Growth Fund holds Valero shares.
    While legislation in the U.S. and other countries has attempted to encourage
    more widespread use of renewable fuels, Auer noted that global dependence on
    petroleum products remains.
    So long as demand for fuel remains, Valero says it will try to match its
    production to the fuels that are in the highest demand. But the changes won’t
    happen overnight, according to spokesman Day. “Refiners can try to gauge where
    the trends are going, and what will be in demand, and adjust accordingly, but
    that takes several years,” he said.
    Because Valero has been cutting back on capital projects, Parry, Chow, and
    other analysts say it may see some competitors – particularly large integrated
    oil companies – meet consumer need more rapidly.

    (Jessica Resnick-Ault covers conventional oil refining and alternative fuels
    for Dow Jones Newswires.

    Dow Jones Newswires
    12-15-08 1400ET
    .- – 02 00 PM EST 12-15-08

  69. 69
    BirdsofpreyRcool Says:

    Those Kansas City Southern railroad notes I mentioned this morning…. well, price talk is out and it’s just simply amazing: 13% coupon, priced at a discount to yield almost 17%. And the deal’s not done yet.


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    Sambone Says:

    What backs the KCS bonds? R They unsecured?

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    BirdsofpreyRcool Says:

    Sam – yes. senior unsecured notes due 2013. The railroad’s Kansas City Southern Railway Co. unit is the issuer. I don’t know the asset base there, but it’s always better to be issued at the operating company level (than at the holdco level), all else equal.

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    BirdsofpreyRcool Says:

    Sam – it’s the same issuing entity as the 7.5% senior notes due 2009 that KSU is taking out. looking at the Q now to see asset allocation.

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    VTZ Says:

    BOP – that is unreal… thanks for the updates.

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    BirdsofpreyRcool Says:

    Sam – it looks like KCSRC (the issuer) represents all the US-based operations of KSC railroad. The other subsidiary (which is a non-guarantor of the notes) looks to be KCS’s Mexian operations. Historically, the US/Mexico operations are about 50/50 income generation.

    No doubt, 17% yield on an asset-based company (like a railroad). even with a B1/B+ rating, is an attractive yield.

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    BirdsofpreyRcool Says:

    VTZ – “unreal” sums it up succinctly.

    By the way, your oil sand (“don’t call them TAR SANDS”) report this weekend was awesome. Extremely helpful and well-written. Thank you for your time and effort. It is greatly appreciated!

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    zman Says:

    Ram – right now it does not look great. The senate flubbing the bailout last week botched my pre OPEC exit strategy within about an hours time. This morning was promising but then Madoff madness spooked everything. Now I’m looking for a “how much worse can it get” rally and a little help from the Cartel. Very tough, head-fakey market. Not concerned with getting even but just minimizing December losses if possible at this point. It still feels like a bottom forming in the groups, but with fits and starts.

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    BirdsofpreyRcool Says:

    At current levels, the high yield bond market is pricing in a 75% default rate. At the height of the last recession, the default rate got to around 10%. Personally, i think high yield bonds (not the triple-C stuff, but the high single-B, low double-B) will outperform equities next year.

    But, if/when credit gets better, equities will too.

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    ram Says:

    Thanks for the response without scolding.

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    Sambone Says:


    I would agree with High yield outperforming. Ya just gotta pick tha right one is all!

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    BirdsofpreyRcool Says:

    just checked, the new Kansas City Southern bonds will be rated B2 / BB- and managed by Morgan Stanley and B of A.

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    zman Says:

    Ram – same stuff as I’ve been peddling applies as to what does better. Low leverage, bigger cap, hedged. In the end, market likely to dictate unless there is some kind of oil outlier event. As things stand now, I’ll be out all day Wednesday and much of Thursday. Do I scold? Hmmm, have to make that a new year’s resolution.

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    BirdsofpreyRcool Says:

    Sam – no doubt! Just look for hard asset-value, cash-flow coverage, protected end market, and capacity constaints. the rest is easy… right?

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