Petronas Keeps Eye Out for Shale Assets - WSJ

• EARNINGS
• JUNE 8, 2011, 12:47 P.M. ET

Petronas Keeps Eye Out for Shale Assets

http://online.wsj.com/article/SB10001424052702304259304576373030718744452.html

By ANKUR RELIA

KUALA LUMPUR, Malaysia—Petroliam Nasional Bhd. reported a 36% jump in fiscal-year profit and said it is open to acquiring more shale assets as the state-owned company seeks to bolster its exposure to nonconventional energy sources.

"The future is going to be gas, be it conventional or unconventional. Moving forward we have to get into unconventional gas," President and Chief Executive Shamsul Azhar Abbas Shamsul said Wednesday. "We remain open to further acquisitions. I think over the last three to four years we have been left behind with regard to catching up to become a global energy player, so it's basically catching up for us."

Petronas, as the company is known, recently bought half of Progress Energy Resources Corp.'s working interest in the Altares, Lily and Kahta properties in northeastern British Columbia for $1.1 billion. Petronas will work with Progress to develop a portion of its Montney shale assets in the area.

With the deal, Petronas joined other global oil companies investing in shale, including Chinese state-owned oil company Cnooc Ltd. and Norway-based Statoil ASA.

Mr. Shamsul said Malaysia needs to find additional supplies of gas. "As far as Malaysia's requirement is concerned, there has been a shortfall over the last three years. We continue to have a shortfall," he said.

He said the company, the country's only Fortune 500 company and the country's most profitable firm, soon will announce a gas-field development off the Malaysian peninsula's shore. Gas from the project will last for 10 to 15 years, he said.

Petronas's earnings received help from gains and higher oil prices.

Net profit rose to 54.85 billion ringgit ($18.25 billion) for the year ended March 31, compared with 40.29 billion ringgit a year earlier.

Revenue rose 14% to 241.23 billion ringgit.

The company booked a gain of 9.2 billion ringgit from the stock-market listing of Petronas Chemicals Group Bhd. and Malaysia Marine & Heavy Engineering Holdings Bhd. in the third quarter. Earnings before income tax, depreciation and amortization—which excludes the gain—rose 18% to 107.9 billion ringgit.

Return on average capital employed increased to 17.5% from 15.9%, Mr. Abbas said.

Crude-oil prices have been rising in recent months as expectations that supply disruptions from the political conflicts in the Middle East and North Africa threatens would spread to neighboring large oil-producing countries.

Petronas said it plans to spend 300 billion ringgit over the next five years to replace or refurbish its Malaysian oil and gas production assets, which average between 19 years and 28 years old. The company had forecast spending between 250 billion ringgit and 280 billion ringgit.

Mr. Shamsul said additional financial resources will be required for mergers and acquisitions to drive growth and outpace escalating costs.

Write to Ankur Relia at ankur.relia@dowjones.com

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Welcome to IPOville - economist.com

http://www.economist.com/node/18805850

Internet companies

Welcome to IPOville

Social-media firms see champagne; others see bubbles

Jun 9th 2011 | SAN FRANCISCO | from the print edition

INITIAL public offerings (IPOs) of internet start-ups are like buses: you wait ages for one to arrive, then several turn up at once. After years in the doldrums, the IPO market for technology firms has suddenly sprung to life again in America.

LinkedIn, a social network for professionals, kicked things off last month with a flotation on the New York Stock Exchange (NYSE) that valued it at $8.8 billion—572 times its profits last year—at the end of the first day of trading. Now a number of web outfits, including Groupon, which offers online coupons, and Pandora Media, an internet-radio firm, are queuing to join the party. Other start-ups could soon add themselves to the crowd, notably Zynga, the creator of addictive online games such as FarmVille, in which players grow turnips and breed pigs.

Web companies from China, Russia and elsewhere are also rushing to list on American exchanges. Shortly after LinkedIn’s stunning debut, which saw its share price more than double, Yandex, Russia’s largest search engine, floated its shares on the NYSE. Its price soared by more than 50% on the first day of trading. These first-day “pops”, as bankers call them, have stoked fears that a new internet bubble is inflating and reignited a furious debate about how best to value web start-ups.

Groupon’s potential price tag ($15 billion, by one estimate) is already controversial. Labelled “the fastest-growing company ever” by ardent fans, the firm has turned a simple concept into a money-spinner. Customers sign up to receive offers from local firms. Groupon spices up the process by, say, having some offers expire unless a certain minimum number of people subscribe to them. This prompts people to nag their friends to shop at the same boutique or eat at the same diner—hence the “group” in Groupon.

The firm typically keeps roughly half of the money that customers fork out, with the rest going to the businesses that actually supply the goods and services. Last year its revenues were $713m. In the first quarter of 2011 it took in a breathtaking $645m. Although Groupon is less than three years old, it operates in 43 countries and has no fewer than 83m subscribers.

The snag is that the company is still bleeding red ink. It lost $390m in 2010 and $103m in the first quarter of this year. Critics find this alarming. Groupon retorts that it is simply spending heavily to scoop up subscribers while the market it created is in its infancy. In its IPO prospectus, it urges investors to focus on other measures, such as free cashflow (operating cashflow minus capital expenditure), which was positive last year, and the arcane-sounding “adjusted consolidated segment operating income”, which excludes such things as cash spent on online marketing.

“The path to success will have twists and turns, moments of brilliance and other moments of sheer stupidity. Knowing that this will at times be a bumpy ride, we thank you for considering joining us,” writes Groupon’s boss, Andrew Mason, in a letter to potential stockholders. Not everyone is reassured.

How should one value a money-losing firm in a new industry? PwC, a consultancy, ranks web firms according to their “value per user”. This is calculated by dividing a start-up’s estimated worth (derived from venture-funding rounds, equity transactions on secondary markets and so on) by the number of its users.

By this benchmark, Groupon scores well, just below Facebook and Renren, a Chinese social network with a listing in America (see chart). But such measures do not reflect the risks of Groupon’s model. The company may boast 83m users, but only 16m have actually bought a Groupon. Its success outside America has been patchy: just 9% of its subscribers in London have ever bought anything from it.

Facebook enjoys a powerful network effect; Groupon, less so. It must spend a fortune to keep signing up new subscribers. Hence its keenness to steer investors towards a measure that excludes marketing costs. Groupon’s growth has attracted big competitors such as LivingSocial as well as a host of smaller start-ups. These rivals could poach its users with cheaper deals. And they could offer retailers better terms, too, in the process threatening Groupon’s fat margins.

All this shows why setting an offering price for shares in an IPO is so tricky. “It’s more an art than a science,” says Paul Bard of Renaissance Capital, an IPO research firm in America. Investment banks are supposed to be masters of that art. But some people, such as Peter Thiel, a big early investor in Facebook and LinkedIn, have accused the banks involved in the LinkedIn transaction of drastically underpricing the shares.

Bankers have sometimes been accused of underpricing deals so that their investment clients can make a swift killing on a firm’s shares. However in this case Mr Thiel’s gripe was that the banks failed to appreciate LinkedIn’s tremendous potential. Perhaps it never occurred to the bankers involved that people would pay so much for such a risky stock.

Yet there is something to be said for erring on the side of caution when setting initial offer prices. Elizabeth Demers, a professor at INSEAD, a business school near Paris, points out that what companies lose in terms of hard cash in the early days can often be made up for in terms of the publicity they get when the news media applaud the explosive rise in their share prices. They can also launch secondary issues of other shares at the new price established by the IPO. Unless, of course, this really is a bubble, and it bursts.

from the print edition | Business

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The wacky world of gold

http://www.economist.com/node/18774624

Mining

The wacky world of gold

Why gold bugs no longer love gold miners

Jun 2nd 2011 | from the print edition

STRIKING gold is generally considered a slice of good luck. Owning it, however, is a sign that you fear the worst. Some people buy the yellow stuff because they think it looks pretty, to be sure. But the quintessential gold bug is an investor who expects every form of paper wealth to collapse, along with civilisation itself.

Gold is not like other commodities. The demand for iron ore depends on down-to-earth things, such as how many steel girders Chinese builders are using. The demand for gold depends on airier considerations, such as whether you think Barack Obama is the Anti-Christ.

Not all gold investors stockpile guns and tinned food in remote cabins, of course. Nor are they all fans of Glenn Beck, an American pundit who preaches doom and urges his listeners to buy gold. But most agree that the world is a scary place. The euro zone is tottering, America’s deficit is alarming and inflation is looming, they reckon. Such fears have ramped the price of gold up to an incredible $1,545 a troy ounce, up almost sixfold in a decade.

As mines age, extracting gold gets harder and costlier. Ores give up less of the metal—average grades have fallen by 30% since 1999 according to GFMS, a consultancy. And ore must be hauled up Yet gold miners’ shares have failed to keep pace (see chart). This is new. Gold and gold-mining shares used to rise and fall in lockstep. Over the past five years, however, the price of gold has trebled while the value of gold miners has merely doubled. Investors in firms that shift, crush and process rocks are more grounded, it seems, than those who invest in bullion.

As mines age, extracting gold gets harder and costlier. Ores give up less of the metal—average grades have fallen by 30% since 1999 according to GFMS, a consultancy. And ore must be hauled up from ever greater depths. Fuel is pricier. So, too, are labour and equipment, since the global minerals boom has driven up demand for miners and drills. A decade ago the average cost of extracting an ounce of gold from the ground stood at a little over $200. In 2010 it hit $857, says GFMS—though this figure depends in part on the gold price. When gold was $200 an ounce, nuggets that cost $800 to extract stayed buried.

Finding new seams to replace depleted ones is becoming harder. Metals Economics Group, a mining consultancy, estimates that in 2002 gold miners spent $500m on exploration. By 2008 they were spending $3 billion but finding much less. All the easy gold has been mined already.

The big gold-mining firms have turned to acquisitions to boost their reserves. Last year Australia’s Newcrest bought an Aussie rival, Lihir Gold, for $8.7 billion. By value, 31% of the mining deals last year involved gold, according to the consulting arm of PwC. Merged firms seek to cut costs, and often end up spending less on exploration than they did separately. That makes it even less likely that they will find much more gold.

The world’s miners dug up 2,689 tonnes of gold last year. Granted, that was a record. But, despite the huge surge in investment, it was only a few flakes more than the total output a decade ago.

Investing in gold miners carries risks unrelated to the price of the metal. Mergers can flop. As readily recoverable reserves dwindle in stable places such as North America and Australia, miners are forced to operate in more troublesome ones, such as Latin America and Africa. Huge investments can yield disappointing returns if promising mines turn out to contain less glitter than predicted.

Gold bugs, by definition, bet that the price of gold will go up and up. Miners sometimes do the opposite. Many hedged their wares, selling gold forward to ensure smooth cash flows and to raise money to dig more mines. This may have seemed prudent at the time. But it repelled gold bugs and, as the gold price rose ever higher, it hurt the miners’ profits, too. Barrick Gold, the world’s biggest gold miner, and AngloGold Ashanti, the third-largest, have both spent billions unwinding hedges over the past couple of years.

Gold bugs are often allergic to other metals. Gold miners are not. Many produce copper, too, since it often sits in the same ore bodies as gold. In April Barrick offered $7.7 billion to trump a Chinese bid for Equinox, an Australian copper miner. The heavy demand in China and short global supply for “red gold” makes Barrick’s move look sensible. But gold bugs hated it. Barrick’s shares fell sharply after the bid was revealed.

Most damaging of all for the marriage between gold bugs and gold miners has been the arrival of a seductive new financial tool. Exchange-traded funds (ETFs), backed by physical gold, offer investors direct exposure to the gold price without any exposure to gold miners themselves. They have become popular: in less than a decade gold ETFs have gone from nothing to holding some 2,200 tonnes of gold—nearly a whole year’s production.

If the world goes to hell, gold bugs will say: “I told you so.” But if investors ever wake up and notice that the yellow metal is little more useful than tulips, the gold bugs will be burned. The miners, less so.

from the print edition | Business

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http://www.economist.com/node/18805607?story_id=18805607&fsrc=rss

The OPEC meeting

Drill will

Disharmony at OPEC breeds uncertainty over the oil price

Jun 9th 2011 | VIENNA | from the print edition

FOR an organisation committed to “co-ordinating and unifying” the policies of its members, the lack of harmony on display at the twice-yearly OPEC meeting in Vienna on June 8th was rather unfortunate. The seating arrangements may not have helped: the representatives of Libya and those of Qatar—which is backing rebel forces in their battle against Colonel Qaddafi—were side by side.

Rather than reading from an official communiqué, OPEC’s secretary-general, Abdalla el-Badri, admitted that after a “thorough debate” on the oil markets the group had been “unable to reach a consensus” between those countries wanting a production increase and those happy to do nothing. Hardly fighting talk but an unusual admission that not all was sweetness and light. The news that OPEC production quotas would not budge immediately sent oil prices upward.

Rumours circulated that Saudi Arabia had walked out. The lack of agreement counts as a defeat for the kingdom, which had wanted to signal that more oil would be available to a market where a barrel of Brent crude now fetches $118 compared with an average of $80 in 2010.

Many thought that quotas might at least be adjusted to take account of reality. In May OPEC pumped 29m barrels a day (b/d) of oil (including Iran, which is not in the quota system) whereas official quotas, last formally changed in 2007, stand at 24.8m b/d. Others expected OPEC to agree to pump up to 30.5m b/d to tame prices.

But OPEC is split into two camps, those with spare capacity (of which Saudi Arabia controls 70%) and those that cannot pump any more oil. The first camp worries that the lofty bill for a barrel of oil is damaging the world economy and a further price spike could destroy demand. Countries in the second camp, such as Iran, are happy with the high price and do not want more oil to get onto the market.

Mr el-Badri accepted that members had disagreed over data on supply and demand. The numbers are not clear-cut. Although the International Energy Agency, an energy consumers’ club, has said that demand will grow by 1.3m b/d this year (after rising by an amazing 2.8m b/d in 2010; see article), there are signs that high prices are having an effect. Oil use in rich countries shrank by 2.8% in March compared with a year ago; growth in emerging markets slowed to 4%.

As Bill Farren-Price of PPI, a consultancy, points out, it is more informative to watch what Saudi Arabia does than what OPEC says. OPEC supply is down by 1.3m b/d since Libya’s oil disappeared from the market. The Saudis have already pledged to fill that gap and have made crude available. They may be tempted to go it alone and pump even more oil in order to keep prices in check before a rise in seasonal demand. If consumption is already on the wane, however, new supply could see prices tumble, at least temporarily. That would not improve the mood when OPEC next gathers in December.

All information on this website is for educational purposes only and is not intended to provide financial advise. Any statements about profits or income, expressed or implied, does not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold MinKL Invest harmless in any and all ways.