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Beautiful Green Hedges / How do you say amazing bargain in Portugese? / Quantifying the impact of the Olympics on China's economy

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August 26, 2008 – Comments (4) | RELATED TICKERS: XTO , PBR

Beautiful Green Hedges

 

No I'm not talking about the type of hedges that line your front yard, but rather a company that has hedged its production of natural gas beautifully over the years.  As I have mentioned several times in the past, I am a shareholder of XTO.  One of the first things that first attracted me to this company when I originally purchased it in real life and gave it the green thumb in CAPS back in early 2007 was its amazing hedging ability.  XTO always seemed to be one step ahead of the market in placing its hedges, often enabling it to run circles around its competitors.  It appears as though XTO is at it again.

With natural gas currently sitting at $8.20 (and this is only after a huge $0.43 spike today), the company recently announced that it has hedged more than 70% of its remaining 2008 production at an average of $10.10.  Furthermore, it has hedged more than 40% of its 2009 production at an average of $12.31.   Kudos to the company's CEO Bob Simpson for doing such an outstanding job at running this company.  He's very well paid, but unlike many, many other CEOs he actually deserves it.

XTO Energy Updates Price Hedges

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How do you say amazing bargain in Portugese?

 

Petrobras is another company that I personally own in real life.  I cannot believe how absurdly cheap this company's stock is right now.  For whatever reason, be it fear of mid-game rule changes by the Brazilian government, scepticism that the high oil prices that we have seen over the past year are for real, or whatever PBR and PBR/A are an negócio surpreendente (that's supposedly Portugese for amazing bargain) right now. 

Yesterday Credit Suisse reiterated its "Buy" rating for PBR, stating:

"PBR stock price only embeds the value of its SEC proven reserves in a US$87/bbl oil scenario. Presalt prospects, refining, gas and power and value upside to oil prices above US$87 are all for free." 

WOW.  This basically sums up how I feel about Petrobras’ current share price as well (though I personally own the "A" shares (PBRA) instead of the regular). 

Jim Jubak (who never did return my e-mail the other day, but whose column I continue to read nonetheless) also did a favorable write-up on and purchased Petrobras for his personal portfolio this morning (see article: To mix oil and profits, think small)

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There has been a lot of talk on CAPS lately about the impact that the factories that the Chinese government shut down in an effort to clear the air prior to the Olympics has made the country's economy appear much weaker than it really is and has had a negative impact upon the price of oil, but I haven't seen any specific numbers about how much production capacity China actually shuttered during the games...until now. 

Bloomberg published an excellent article on the subject yesterday titled "Blue Skies for Beijing Need Marathon Plan That May Slow Economy" (link).  According to Goldman Sachs, China shut down factories in Beijing and areas surrounding it for two months.   It estimates that these areas account for a whopping 26% of China's economic output and the slowdown there may have shaved as much as 3% off of the country's GDP.

I am not sure if all of the aforementioned factories have been restarted yet or if the Chinese government will wait until after the Paralympic Games, which are in China from September 6–17, to give them all the green light, but the exact timing of the restart doesn't matter all that much.  What does matter is that China will resume its rapid growth and resource consumption in the near future...if it hasn't done so already.

Deej

Whose oil and gas plays include XTO, PBR/A, RIG, and one other nameless E&P

4 Comments – Post Your Own

#1) On August 26, 2008 at 4:08 PM, Garranova (86.16) wrote:

you would say, "barato pra caraca"

 The Brazilian govt and Petrobras is currently in a tizzy about how to set up their pre-salt prospects.  They are debating whether to set up a new company that would give royalties to the owners (presumably the people) much like Norway does.  

I believe that for PBR to get back on track this issue will need to be resolved.

Also, keep in mind that PBR is not set up for shareholders, it is set up so that managers can get 6 and 7 figure kickbacks from the companies they award contracts to.   Obviously there is plenty to go around and shareholders should still benefit, but the company still needs to actually execute on all its plans.  Big plans, too.  Lots of pipelines coming from offshore.  Lots of wells to drill.  Also, watch out for empire building.  Do these guy simply want to be the largest company of the world and the pride of Latin America?  Will this growth come at the expense of shareholders?  If Exxon is selling is PBR smart to buy?

 Enough with my rant.  PBR is cheap!

 

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#2) On August 26, 2008 at 5:08 PM, DemonDoug (73.55) wrote:

Gar, I believe that PBR does want to be the biggest company by market cap in the world.  There are some commentators that believe they very well could be, and I'm in the camp of "yes, that is possible."  I agree with Deej that PBR is a good investment, I still want it to drop though.

Deej, it's killing me that I can't figure out what your other E&P is.  The only other one I can think of is CHK but they do mostly nat gas, as much as we like XTO, it's crude that's the big time moneymaker.  Also there are plenty of companies involved in all sorts of oil-type operations, I'm not sure if you'd classify a company like MRO as e&p or SLB or OXY in there.

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#3) On August 26, 2008 at 5:32 PM, GNUBEE (24.85) wrote:

Demon,

Wow, 26%? ok with that stat I am more included to think that the olympics did influece China's materials consumption. Now to break down the correlation to oil....

I still don't agree with you, but the tables may be turning in your favor. If you are correct, my hat is off to you kind sir.

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#4) On August 26, 2008 at 10:44 PM, DemonDoug (73.55) wrote:

Gnubee, I'm a realist.  I'm very good at seeing a picture, and seeing the whole picture, not just looking at one piece and drawing a conclusion from it.  It took me a few days/weeks to draw the line between china industrial slowdown for olympics and overall energy demand slowdown, but once I saw it it was very obvious to me.

The Chinese have pledged to keep industrial production down through the 3rd week of September.  This is when you should seriously consider going long on any and all oil/energy plays.

I liken it thusly: Let's say you have a 1000 piece puzzle, and the puzzle is of a tropical island beach.  One person might get a few pieces of blue, and think that it's all clear skies.  Another might get a few pieces of sand and think it's a desert.  Still another might get some foliage, and think they are in the amazon forest.  Me, I look at all the pieces, and say "Aha - it's a tropical beach scene."  And invest accordingly.

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