Philosophy of the Day
Tuesday, 13 May 2008
Thursday, 1 May 2008
No regret over Oil & Gas
BP and Shell both reported on Q1 this week and stunned the market with strong results. For example Shell Current Cost profit for Q1 was 12% up on the prior year, for BP the increase was 48%. The BP result was pretty exceptional but otherwise I'm not sure why there was so much surprise given that the current record oil prices are well known about. Under typical Production Sharing Contracts (PSCs) high oil prices have the effect of reducing volumes so it is wrong to look at production volumes in isolation without adjusting for this. The FT was grudging in it's appreciation commenting that without high oil prices it would be a very different story. But then, for me, the high oil price is the story.
As some of my friends know I have been predicting high oil prices for some time now. Over the past 12 months oil has more or less doubled to around $120. The head of OPEC Chakib Khelil has just warned that oil could hit $200. I think so too (just don't know when) and continue to invest accordingly.
As some of my friends know I have been predicting high oil prices for some time now. Over the past 12 months oil has more or less doubled to around $120. The head of OPEC Chakib Khelil has just warned that oil could hit $200. I think so too (just don't know when) and continue to invest accordingly.
Fuel Cells - Nearly here
Yesterday I attended the "Low Carbon and Fuel Cell Knowledge Transfer Network" (bit of a mouthful that) seminar on Fuel Cells. Four listed companies presented with others exhibiting. Interesting technology but despite low share prices (CMR Fuel Cells is valued at half it's cash holdings) I came away a little disappointed from an investment standpoint.
The fuel cell concept is not new having originally been invented in 1843 and, whilst used in the Apollo moon project, it is only now that commercial products are on the verge of being made available. There was a lot of talk at the show about how difficult they are to engineer for volume manufacture and to reduce the size of the devices to match modern requirements.
Ceres Power and Ceramic Fuel Cells both produce Combined Heat and Power (CHP) systems but on examination these are really just more efficient boilers, still running on natural gas, and producing a bit of electricity as well as heat. In the case of Ceres Power volume manufacturing is 3 years away, it is likely to be an expensive "top end" item which saves about 25% of fuel bills. OK in time that will make a significant dent in domestic fuel consumption but to my mind these need a Government subsidy (or much higher fuel prices) to make them really fly.
CMR make fuel cells for portable devices, laptops being the prime market targeted, but again a commercial product is still 3 years away.
I will continue to follow this sector but mostly through curiosity since I clearly have no way of being able to evaluate these companies technically nor come to any view on their ultimate profitability and hence current value. The OEMs themselves seem only to be cautiously investing in some of the companies, no doubt reflecting their uncertainty as to which technology will eventually succeed.
The fuel cell concept is not new having originally been invented in 1843 and, whilst used in the Apollo moon project, it is only now that commercial products are on the verge of being made available. There was a lot of talk at the show about how difficult they are to engineer for volume manufacture and to reduce the size of the devices to match modern requirements.
Ceres Power and Ceramic Fuel Cells both produce Combined Heat and Power (CHP) systems but on examination these are really just more efficient boilers, still running on natural gas, and producing a bit of electricity as well as heat. In the case of Ceres Power volume manufacturing is 3 years away, it is likely to be an expensive "top end" item which saves about 25% of fuel bills. OK in time that will make a significant dent in domestic fuel consumption but to my mind these need a Government subsidy (or much higher fuel prices) to make them really fly.
CMR make fuel cells for portable devices, laptops being the prime market targeted, but again a commercial product is still 3 years away.
I will continue to follow this sector but mostly through curiosity since I clearly have no way of being able to evaluate these companies technically nor come to any view on their ultimate profitability and hence current value. The OEMs themselves seem only to be cautiously investing in some of the companies, no doubt reflecting their uncertainty as to which technology will eventually succeed.
Sunday, 27 April 2008
Feelings of Regret over RBS?
I have to say I was wrong over Royal Bank of Scotland. I own some stock and supported them through the ABN.Amro acquisition. More recently I could see capital was very tight but I thought they would fight and manage to squeak through, making disposals where necessary, rather than do a u-turn on previous commitments and raise more capital, a huge embarrassment for CEO Sir Fred Goodwin. But with £5.9bn more write-offs the company probably had no choice and so launched a massive £12bn deeply discounted Rights Issue. As it turned out the capital raise was so well anticipated that the effect on the share price when it was announced was actually slightly positive. The company has now come clean and with a stronger capital base plus the option of disposals, will be better placed to move forward rather than the alternative of trying to fight with its back to the wall. Other banks may yet need to come to the market and RBS has the advantage of being first in the queue.
So I whilst was wrong about the capital situation, I was right in that the shares had recently fallen so low that almost every possible piece of bad news was already in the price. Ultimately I think the ABN acquisition will be good for RBS and create a stronger business. Whether or not it will create any shareholder value remains questionable.
So I whilst was wrong about the capital situation, I was right in that the shares had recently fallen so low that almost every possible piece of bad news was already in the price. Ultimately I think the ABN acquisition will be good for RBS and create a stronger business. Whether or not it will create any shareholder value remains questionable.
Monday, 21 April 2008
Saudi Arabian Oil Capacity Reaches Limit
News today is that Saudi Arabia state they do not expect to increase oil production capacity as far and as fast as previously hoped. The Saudi Arabian Oil Minister said current production is around 9mbpd against a capacity of 12.5mbpd but he had no real intention to increase that capacity any further at least in the period upto 2020. Obviously this raises the possibility that Saudi Arabia is unable to increase production, even if it wanted to, because of the high decline rates of existing fields.
Something else: Late last week T Boone Pickens the respected Texan oilman also said he thought global oil supply has peaked and so prices are likely to go up rather than down: “There are only 85 million barrels of oil in the market every day,” Mr. Pickens added. “I don’t think you can get it above 85 million – lock that number in, and we’ll see if I’m right.”
Something else: Late last week T Boone Pickens the respected Texan oilman also said he thought global oil supply has peaked and so prices are likely to go up rather than down: “There are only 85 million barrels of oil in the market every day,” Mr. Pickens added. “I don’t think you can get it above 85 million – lock that number in, and we’ll see if I’m right.”
Thursday, 17 April 2008
Pabrai - A day at Work
For about a year now I've been following a sucessful US investor called Mohnish Pabrai whom has been operating since 1999 very much in the mould of Warren Buffett. I'm not going a write much about him here - you will need to read his book The Dhandho Investor or look at his website (only you will need a login from him). Pabrai recently published a transcript of his annual investor meeting which was held in September last year. There was obviously a lot of discussion at this meeting about his performance, past investments and philosophy but to me the most interesting point he made was to say a bit about how he works. You see it is easy to read up on the many investment principles but very difficult, without sharing an office with other investors, to find out how they actually work and find opportunities.
In the case of Pabrai he says he goes to work each day very much as a man of leisure and simply reads generally until he comes across something of interest. Then after only an hour or two on such specific idea he quickly decides whether or not to take it further. Somewhere else I read that he often only spends a couple of days of further research before investing.
That might not seem much to know about but is actually very useful information to me. As I sit down at my desk each day I don't really need to be there at all and unless a company I follow is reporting results there isn't anything I really need to do. Yet the possibilities are limitless - look at share prices, set up data base filters, read company accounts and brokers notes, try sector and company specific reasearch, read magazine and internet articles and so on. Once you start to look there is a huge amount of investment comment and "advice" available but the best opportunities come from digging much deeper. How to do that without being influenced by the market and journalistic chatter is key.
Incidentally the Pabrai Fund PIF3 (open to non US investors) returned -12.4% in the first quarter of 2008 after a loss of 7.8% in 2007. Naturally Pabrai focusses very much on his longer term record for this fund of an average of 15% pa since 2002. Not much different to me so I think I'll stick to managing my own money!
Quote from Pabrai I've taken from SmartMoney on how he can beat the market: "Lots of other investment managers have large teams; they have a lot more brainpower, they've got a lot more resources. The only advantage Pabrai funds have, which is why we have done better than the market, is attitude — my ability to be patient and not be swayed psychologically".
In the case of Pabrai he says he goes to work each day very much as a man of leisure and simply reads generally until he comes across something of interest. Then after only an hour or two on such specific idea he quickly decides whether or not to take it further. Somewhere else I read that he often only spends a couple of days of further research before investing.
That might not seem much to know about but is actually very useful information to me. As I sit down at my desk each day I don't really need to be there at all and unless a company I follow is reporting results there isn't anything I really need to do. Yet the possibilities are limitless - look at share prices, set up data base filters, read company accounts and brokers notes, try sector and company specific reasearch, read magazine and internet articles and so on. Once you start to look there is a huge amount of investment comment and "advice" available but the best opportunities come from digging much deeper. How to do that without being influenced by the market and journalistic chatter is key.
Incidentally the Pabrai Fund PIF3 (open to non US investors) returned -12.4% in the first quarter of 2008 after a loss of 7.8% in 2007. Naturally Pabrai focusses very much on his longer term record for this fund of an average of 15% pa since 2002. Not much different to me so I think I'll stick to managing my own money!
Quote from Pabrai I've taken from SmartMoney on how he can beat the market: "Lots of other investment managers have large teams; they have a lot more brainpower, they've got a lot more resources. The only advantage Pabrai funds have, which is why we have done better than the market, is attitude — my ability to be patient and not be swayed psychologically".
Oil Update
A couple of interesting pieces of news this week providing further evidence for a fragile global oil supply outlook. On Tuesday the FT reported the vice-president of Lukoil as saying that he believed that last year's Russian oil production of 10m barrels a day was effectively the most that would ever be produced and that Russia had therefore "peaked". Even the Russian Government admits that oil production has reached a plateau. As other oil producing regions reach maturity we can expect more stories like that from Russia, although this is highly significant because Russia had been seen as an important source of oil to supply the ever increasing demands from China.
Then today an internal report prepared for the Nigerian government highlights the risk that by 2015 Nigeria could lose a third of it's oil output unless it can find ways to further boost investment in the sector. The Nigerian situation is interesting because it shows how countries which try to take more control over their oil resources tend to under invest themselves and also have difficulty in attracting the foreign capital they need to reach full potential. Nigeria has in any case lost a lot of production because of the security situation in the Delta Region forcing Shell for example to shut down some facilities.
The importance of this factor is often not fully appreciated by those sceptical of "Peak Oil" theories such that, even if there is enough oil in the ground, the cost and difficulty of extracting it is increasing fast and whilst the high oil price should theoretically provide the rewards and incentives, in certain countries and indeed globally, there might not be enough investment and skilled resources available to make it happen.
Then today an internal report prepared for the Nigerian government highlights the risk that by 2015 Nigeria could lose a third of it's oil output unless it can find ways to further boost investment in the sector. The Nigerian situation is interesting because it shows how countries which try to take more control over their oil resources tend to under invest themselves and also have difficulty in attracting the foreign capital they need to reach full potential. Nigeria has in any case lost a lot of production because of the security situation in the Delta Region forcing Shell for example to shut down some facilities.
The importance of this factor is often not fully appreciated by those sceptical of "Peak Oil" theories such that, even if there is enough oil in the ground, the cost and difficulty of extracting it is increasing fast and whilst the high oil price should theoretically provide the rewards and incentives, in certain countries and indeed globally, there might not be enough investment and skilled resources available to make it happen.
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