We have received requests to offer some nuggets on the Energy sector. We are here to serve.
As most of you are aware, ConocoPhillips spun off its refining unit to focus on E& P ( that is exploration and production for you Saeed). E&P stocks it seems are valued on how fast they grow production while folks that also do refining such as Exxon are valued on the cash they return to shareholders in the form of dividends and buybacks.
So where is the story, you ask.
Conocos oil reserves are 14.2 times annual production. If it targets 3% annual production growth, it would need to add reserves equal to 1.26 times production to keep reserves/ production ratio constant. For 5% growth, this jumps to 1.48x of production.
This requires investment of about $16 billion. It also pays $3 billion in dividends.
But its cash flow from operations is only $14 billion! $5 billion short!
So it has to sell assets. Asset price depend on crude price. Assuming brent crude price of $85/ barrel they can manage - by also shifting production mix( more oil less gas?). Brent now is at $111/barrel. Watch out below if brent crude drops below $85/barrel.
Our crack staff determined the number of views in the last 6.5 hours was 8. We are trying to develop a strategy to increase viewership. Part of this strategy would include a technology transfer arrangement with CAFE to institude some creative games such as counting to million within this thread. Each time a new nugget is posted, the counter will be zeroed out. Negotiations are in full swing to get some CAFE engineers onboard to iron out the technical details.
We are pleased to report a 550% increase in views/h ( a proxy for revenue) since the announcement of this synergistic arrangement with the good folks at CAFE. We are actively trying to recruit the highly sought after phenom, Mr. Hakuna the Matata. While he comes at a premium, we believe the move will pay for itself, and then some.
The views/ h has plateud. However, we believe the prospect of Matata the Hakuna joining us prevented the inevitable lide in this rate from lofty levels.
In other developments, several readers indicated their surprise at Tuesday’s news that US company stocks were expected to rise, further buoyed by share buybacks. The readers did not question the anticipated increase in stock prices. They questioned the wisdom of such financial engineering, especially since the S&P500 is up 120% from the 2009 lows!
Dear readers, we are so proud of you.
PS Source of buyback news - Tuesday WSJ. You knew that.
This franchise is going through a tough phase. While markets have rebounded, most investors have sworn off stocks. Hence a tough period for financial columns.
That positive smile conveyed your message loud and clear - that the economy is expected to pick up. As you are most definitely aware, this year, the lead Economists are packed together witheir estimates ofa 2.2 to 2.6% growth. Over the last 30 years only 2 years have had such a consensus.
Why such agreement? It seems the honorable pundits have been wrong so often, they found it safer to be wrong as a group. Surely, your estimate is based on an independent analysis.
Source this weeks wsj
Thanks as always for visiting. We are honored.
You are our only customer. We have a staff member dedicated to monitoring visits to this thread. We can work out special arrangements ala VIG for you to visit us.
Readers will recall we had highlighted the effect of low interest rates on non cash expenses for companies with large pension plans. Today's WSJ had another article on the sake topic.
There is nothing new under the sun ( except climate change which is both real and new).
The earning for companies in the S&P 500 increased by $78 billion overnight. This did not require higher margins cost cutting increased sales or other usual suspects. It was achieved as a result od the TEMPORARY pension relief provision included as part of a transportation law signed by President Obama. The discount rate needed to calculate present value of future pension obligations was incelreased. Higher the discount rate, loser the present value of a fixed future obligations.
So magically lots of previously underfunded pensions got fully funded.
Here is the related post on Sept 2 for benefit of readers who are still recalling.
US home prices have rebounded. With one difference from 2007. More purchases cash down. Several made by investors, private equity and various ETFs. These investors arr not interested in flipping property for profit. They arr interested in rental income.
Buying home for Renting to others used to be a mom and pop operation. But with interest rates so low, people are going after this strategy to earn rental income.
Now the rental yield is calculated simply as annual rental income/Price of property*100. As more such properties are bought for renting out purpose, increased demand raises Property Price.
Increased rental units supply drops rent. So rental yield goes down. Figure in costs to maintain property do repairs, and the yield is not attractive as investors thought.
How can Exxons oil production increase 48% in last ~ 6 years and also by 1% in same time span? The 48% increase is per share production increase. The 1% is total production increase.
So what gives. It is the cash waster on buybacks. Instead of CAPEX. These buybacks were done in 2007 when stock price was highm and buybacks continue unabated.
Again, our readers know better than to chase a stock purely due to buybacks.
^ Right on cue,
last weekends WSJ States that P/E of us oil stocks is around 11-13. Precisely because of buybacks, reduced Capex spending. The ratio for European stocks is 7-9. Cause more Capex less buybacks. Exxon being king of buybacks probably has ratio of 14. All ratios based on next year estimated earnings.
So which stock would I prefer. European oil stocks. Less expectations. So higher return possibility. Time will tell. Need to look into Total (tot).
As always do YOUR OWN HOMEWORK. This column is for tossing ideas around. Not to be used to make on the spot decisions.
PS - The information related to P/E ratios appeared in the summary thread elsewhere.
I don’t hve guts to read this 
