Some Oil Companies Bet Wrong

One of the oldest bits of Wall Street wisdom is the adage that, behind all the smart sounding blather and forward looking statements, in reality "nobody knows anything."

Houston Chronicle business correspondent Loren Stefy could have just as easily used that as his hook for his recent story profiling three energy companies whose hedging on the price of oil cost them all of the upside in the recent price bubble, and put them into the red.

Loren Steffy: Hedging prunes oil companies' results

Consider Houston-based Newfield Exploration. In its second-quarter earnings release, Newfield said its production blew pastthe most optimistic forecasts, and it raised its full-year estimates by as much as 26 percent.
Yet the company reported a $244 million loss because of a "net unrealized loss on commodity derivatives of $508 million" before taxes.
In other words, it made a wrong-way bet on oil prices. So far this year, the stock's fallen 14 percent.
Anadarko Petroleum, based in The Woodlands and one of the country's biggest independent producers, has a similar story. Its derivatives losses ballooned to more than $1.6 billion before taxes, pullingnet income down to a measly $23 million compared with more than $1.3billion a year earlier.
Just like Newfield, Anadarko's shareholders have paid the price. Its
shares have fallen almost 13 percent so far this year.

...

As a general rule, consumers (Southwest and Continental, for example) want to hedge against rising prices, while producers (oil companies) want to hedge against lower ones. In this case, the producers seem to have protected themselves from record profits.

Oops!

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Californians Buying Mexican Gas May Face Hidden Costs

The irascible blogger WC Varones yesterday reported on a story about San Diego residents driving to Mexico to fuel up, taking advantage of federale-subsidized prices.

W.C. Varones Blog: Beggar nation

Americans crossing the border to buy subsidized gas in Mexico:

A surge of drivers from the United States eager to escape record high gasoline prices flooded gas stations near the border crossing Saturday.
Motorists with California plates moved steadily through service stations. [...]
Lopez estimated that demand was up 30 percent from an ordinary weekend.
Workers at the stations surveyed attributed the increase to motorists from the United States.
Mexican gasoline comes from Pemex, the national oil company, and is subsidized by the federal government.Regular unleaded (87 octane) gasoline sells for $2.54 per gallon in the city, premium (91 octane) for $3.20 per gallon and diesel for $2.20 per gallon.

But is it such a good deal in the long run?

I asked some friends of mine from San Diego, and their responses were completely negative. One told me "You don't want Pemex. By the time it's trickled through the different levels of corruption five different politicians all have tanks full of pure and pockets lined with pesos and the fuel is about 10 percent water. Even the high-octane option'll make your car rattle and stink and run like shit."

Another friend said simply "I absolutely ruined an engine in a jeep on that trash."

Bear in mind that the plural of anecdote is not "data" but their response bears consideration.

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More Bloggotage About CE And Fuel Prices

Marketnews' Christine Persaud just blogged about the tacit impact of fuel prices on the cost of doing business, in response to my column last Tuesday about fleet management.

MarketnewsGadgetTalk: How is the Price of Gas Affecting Your Business?

As you can see, the rising price of gas affects more than just the consumer. So if you're buying a big ticket item and have to pay for delivery when you never had to before, don't blame the retailer, at least not during these trying times. And if you don't have to pay, appreciate that offering even more now. As for retailers, if your sales rep is skimping on visits as of late, it probably has nothing to do with your relationship, or your importance as a business partner.

As I commented on her blog, I was talking yesterday with one of my sales rep friends. He puts in about 100km a year covering Alberta. He said that last year his average fuel bill was $500/month, as opposed to the $1500 he just paid for this May.

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This Week In Marketnews: Gas Prices And Company Vehicles

Custom Corner: Fleet Management & the Price of Gas

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$100 Oil continues to elude us

The price of oil continues to act like the plot in an over-wrought straight-to-DVD suspense movie. You know, where the protagonist wanders through the empty house, and the camera lingers on the closet door, on her face, on the telephone on the nightstand, on the shuttered window, on her face, and back to the closet door, all while the musical score gets eerier and eerier until the suspense has been building for so long you want to shout "JUST JUMP OUT AT HER ALREADY!"

Yahoo!: Oil prices slip further from record heights

New York's main contract, light sweet crude for January delivery, sank 95 cents to 96.34 dollars per barrel. The contract had hit an historic 99.29 dollars on Wednesday.
Elsewhere Friday, London's Brent North Sea crude for January delivery fell 48 cents to 94.02 dollars per barrel, after striking an all-time peak of 96.53 dollars on Wednesday.
This week, crude futures failed to top 100 dollars, despite US government data which showed that American energy stockpiles fell more heavily than expected last week.

Nothing better exemplifies both the Random Walk and the principle that a watched pot never boils than the price of oil. I don't doubt that it will happen, but it won't do it when any of the usual suspects say that it will.

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Understanding Oil

There's a great and lengthy essay over on Econbrowser about the factors underlying the price of oil.

Econbrowser: Well then, would $100 a barrel worry you?

In my opinion, the key question as to whether an oil price increase would push the economy into a recession remains the context of the price change. The oil price increases over the last few months were not associated with any actual disruption in petroleum supplies, and do not have the same potential to change consumer sentiment and spending patterns as dramatically as occurred in many of the earlier historical oil shocks. For this reason, even if oil does go above $100, my biggest concern remains the housing sector and financial problems.

I'm not saying there's anything to feel good about in Econbrowser's essay, but there's a good sense of perspective that's worth absorbing.

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Concerns about $100 oil, again

From Dealbreaker.com's Opening Bell:

Crude Oil Breaches $90 a Barrel on Dollar Drop Against Euro (Bloomberg)

So we're officialy on $100 watch. We've been talking about this for a couple days, but now that we've crossed, er, breached the $90 mark, it's really time to start talking about the triple digits. Time to play a game. Enter the date in the comments that you think oil will cross $100. Can't guarantee that there's a prize, but if there were, closest answer would win it.

Never mind that the commentariat talks about $100 oil every time the barrel price crosses a round-number threshold: whether $60, $70, $80, or now $90, can $100 a barrel be far off?

On the one hand, I'm primarily in favor of high oil. The more oil costs, the greater the impetus for investment in both exploration and alternative energy sources. Also, unlike smoking (which is a real addiction) high oil correlates with reduced consumption, as we saw last year.

On the other, is $100 oil really that big a bogeyman when the move in the barrel price is based mostly on a declining US$? As a metric, it's not particularly objective, no?

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Venezuelan engineers fleeing to the oilsands

WSJ.com:Fleeing Chávez, Oil Workers Flock To Frigid Alberta reported on Dealbreaker's Opening Bell

FORT McMURRAY, Alberta -- Before he left Venezuela in April for this petroleum outpost in northern Alberta, Freddy Mendez heard tales about bone-chilling winter cold and lumbering moose. Since he's come to town, he's seen two black bears in his neighborhood. Still, the toughest adjustment is the late-night sun.
"You get a lot of work done when the sun doesn't set until 11," he says, stifling a yawn. "But it's so hard getting the kids to bed."
The 45-year-old engineer is part of a swelling colony of Venezuelan expats who say they were driven into exile by a hostile government.

(Subscription required to view the whole thing)

That's right, make fun of our wildlife and our extreme latitude. The american media can always be counted on to reinforce stereotypes about Canada, eh.

Frankly, given the labor crunch here, Venezuela's loss is our gain. Last year I was talking about the labor woes in the oil patch with a friend in California, to which he asked "Would you like some of our Mexicans?" My response was "If they can weld or drive a truck, sure!"

I suspect that the reason that we're importing Venezuelans is because we've run out of Newfies and Nova Scotians. Believe me, latin guitar music in our pubs will make a refreshing change from fiddles and sea shantys.

Dealbreaker's Joe Wiesenthal of course had some good points to make about the situation:

This story could be titled: More Evidence of the Deterioration of Venezuela Pt. 32492432. Apparently, a number of oil workers, particularly engineering types, have decided to leave Venezeula and head for the rough lifestyle of the Canadian oil sands, in Alberta. By all accounts, the conditions are terrible up there. Totally cold and miserable and unlike anything in warm Venezuela. Even the oil itself sucks, since it's mixed with sand and other non-oil elements that cost a fortune to remove. So the fact that folks are heading up to the great white north says something about how bad things have become back home. Undoubtedly, Chavez still believes that the industry can just be run by "the people" as long as it's only goal is to serve the people, but we're guessing it won't be so easy. Meanwhile, these expats flocking to Canada must be turning their money into Canadian dollars, which only pushes up that currency's value, bringing it closer to US dollar parity. Hopefully they're sending back remittances and thus reconverting.

Despite his lame stereotype about our weather (it may be true, but it's still a stereotype), he's more or less on point about our resource economy continuing to push the CAD$ towards parity with the US$, no matter how unwillingly.

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