As we have seen before, Nat gas prices are at multi-year lows, with oil/Nat gas prices at multi-year high. In 2007, KKR, a private equite firm, had bought TXU, a utility, which was also involved in Nat gas. Unfirtunately for KKR, its purchase was il-timed, since Nat gas prices drop like a ton of bricks since then.
Fast forward to now - KKR is buying Nat gas reserves from WXU Energy, another Nat gas producer, for 306 million, which is 24% below what was expected. WXU plans to use the proceeds for oil exploration and production. WXU's charter is to increase production. Since Nat gas production at these prices is not viable, they are changing their focus to oil.
For private equity firms, it is not about production. They can buy assets at cheap prices and wait for prices to turn around.
WSJ April 3
My 2 paisa - So where does this lead us - if more such deals occur, oil production would increase, Nat gas production woud decrease. This, coupled with Nat gas plants replacing coal power plants could lead to Nat gas prices recovering, oil prices giving back some of its gains. Also some of the geopolitical risks such as Iran woul dhopefully fade away, dropping oil prices further. Equilibrium returns.
Also, this is an example of buying an asset at its lows and waiting patiently for value to win over. Are there risks? Of course.
Our good friend GSBot reported Alan Mulally of Ford got $30M compensation for the year 2011. Just read in todays WSJ JC Pennys CEO received ~ 52M compensation in 2011, most of which were stock options. What a joke. Will look at Penny's earnings and see what % of earnings went to the esteemed CEO.
Just checked JC Pennys income statment - net income for last 3 years in $M: 249, 348, -152 or an average of $150M per year. So the CEO's compensation of $52M was about 34% of the company's average net income over last 3 years! This is just insane.
It is that time of the week again, a Saturday. Todays WSJ - Inteligent Investor, Jason Zweig
In 2012 , $9 billion has gone into dividend funds/etfs, while other US funds have net outflow of $7 billion.
Most are going in for wrong reason - yield > treasury. They underestimate rsk of dividend funds. Last year dividend funds outpderformed S&P500 index bu 8%. So folks are chasing returns. They forget that in 2007 lots of bankks paid dividends, but dividend funds dropped 35%. Thru 2009, they lost 54%. Now, technology and consumer staples dominate dividends. So investors could get overexposure to technology.
Article states investors hsould choose such funds for rtight reasons - that companies paying dividneds long time run stable businesses. But dont expect them to give you safety of treasuries.
The inbox was flooded wit protests about only one nugget - so here is one more from today WSJ.
Big Pharma is expected to lose $35 billion in revenue from patent expirations this year. So it is going on an aquisition spree to make up for this loss. Problem - it probably is overpaying.
Roche Holdings's 3rd bid for Illimuina was rejected inspite of a 89% premium! Globally, $18.5 billion worth deals have been announced this year.
2011 was not a big aquisition year. Why? In the period 2008-2010, mega deals were done : Pfizer-Wyeth, Novartis-Alcon, Roche-Genentech. (While I dont have figures, I believe the average size was around $30 billion!).
In the period mid 2011-end 2011, big Pharma shored up its balance sheet by paying down debt. So now aquisition is back in fashion. Gilead Science pais an 89% premium for Pharmasset recently.
During the boom years, the median price for an aquisition was 11.9 times EBITDA (earnings before interest, taxes, depreciation and amortization). The median price in the last 3 years is 11 times EBITDA, not far from boom years. That is expensive, says the article.
My 2 cents - Pfizer circa 2000 had a stock price of ~ 55. Since then it destroyed shareholder value by aquiring Warner Labmert (for $70 billion I think - with Lipitor the main drug), followed by aquisition of Pharmacia (for ~ $50 billion I think), and lastly Wyeth (~30 B). It reached a minimum of ~ $13 per share, which shows that overpaying for any aquisition is destructive.
^ I should have added Pfizer at 55 was expensive and slated for a fall anyway. It it used its stock price as currency, the aquisitions may not have been ill advised. Dont know if they paid cash or stock. Now it is ar 22 (plus oaid abt 4-5% dividend in that period of decline).
European companies are raising money through the bond market more in 2012 vs. borrowing from banks. They have raised $180B thru bonds, an increase of 38% from a year ago. They have boorrowed $113B from banks, a decrease of 45% from a year ago! In 2007, loans from banks were 5 times money raised by bonds!! Now that is a huge turnaround. The last time this happened was in 2009 when banks froze lending.
Why is this happenin now? Euro banks exposed to sovereign debt, higre pressure from regulators to shore up balance sheet.
Natural gas is now at multi-yr lows, while oil is at ~ 4 yr highs. There was an article in Sat WSJ re: if Nat gas can be a contrarian play.
My additions - so view with healthy skepticism
Exxon paid $41 billion for a Nat gas company (XTO Energy) In December 2009 when Nat gas prices were quite high. So with Nat gas inventories high, and increased production from fracking, Exxon has to either cut Nat gas production or lose money while Nat gas prices remain low. If Nat gas prices remain low, and logic prevails (a big if), this could pressure Exxon stock for at least next 2 years. Exxon share price dropped to 69.5 after announcement. Now it is at ~ 84.
On the other hand, as a mirror image of Exxon's high priced acquisiton, a private equity firm recenty acquired gas fields from one of the oil companies recently. They were more interested in the low valuation and are willing to sit on it without producing Nat gas. And wait for turnaround in Nat gas price. A classic contrarian play.
The faithful followers of this thread flooded my inbox with request for details of the Nat gas article. So here goes:
Sat Apr 28 WSJ Jason Zweig Intelligent Investor.
Each day, US nat gas inventory rises by 3 billion ft3. Nat gas company shares down by 22% over last year. Nat gas price down 5X over last 4 years. US inventories up 56% over last year. By autumn, there may be no storage space in the US. So production wells may have to be sealed.
Nat gas, which is normally 10 times cheaper than oil, is now 50 times cheaper. So naturally, there will be a shift from coal and diesel to Nat gas - that is happening. The increase in demand will happen - so Nat gas prices will rise - sometime down the road.
With that as backdrop, names of some Nat gas plays were provided.
It is that time again. Saturday - a good nugget day as regular readers are well aware. As a bonus- I am throwing in a Friday may 11 nugget.
Investors are the best contrarian indicators. They rush into equities when they are skyrocketing and vice oversaw. In 2000 pct of stock exposuren in 401k was 69 while it dropped to 43 pct at end of 2011. Now predictably investors are overexposed to bonds!
Article ended stating as boomers retire there could be more outflows from equities. (THIS has nothing to do with contrarian aspect of herd behavior)
baad e no bahar = spring air 