Tag Archives: Others

This will make you think twice about your long gold

This is an email sent by Cave Montazeri of Barclays Capital doing the rounds all over the market. Great piece and deserves to be read:”You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?” – Warren Buffett

Being a geek from the Golden State, I figured I ought to check those numbers:

Gold is traditionally weighed in Troy Ounces (31.1035 grammes). With the density of gold at 19.32 g/cm3, a troy ounce of gold would have a volume of 1.61 cm3. A metric tonne (equals 1,000kg = 32,150.72 troy ounces) of gold would therefore have a volume of 51,762 cm3 (i.e. 1.61 x 32,150.72), which would be equivalent to a cube of side 37.27cm (Approx. 1′ 3”).

According to the world Gold Council (www.gold.org), at the end of 2009, the total volume of gold ever mined was approximately 165,000 tonnes. That is equivalent to 8,540,730,000 cm3; or about 300,000 cubic feet, which matches that Warren Buffett said (“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction”). At current price of gold ($1,361) that is a total value of $7.2trn

Exxon Mobil’s market cap is $340bn so 10 Exxon Mobils would cost you $3.4trn (for ease of computation this is assuming to takeover premium). Alternatively, for $3.4trn you could also take 100% ownership of ALL the following companies: Exxon Mobil, Apple, Microsoft, Berkshire Hathaway, Walmart, Google, Procter & Gamble, IBM, J&J, GE, AT&T, Chevron, JP Morgan, Oracle, Coca-Cola, Pfizer, Wells Fargo, Cisco Systems, and Intel

Finally on his last point, according to the USDA, there is 922m acre of farmland in the US, of which 406m can be used for crops (the rest includes woodlands, pastureland, ponds, wastelands, etc…) at an average price of $3,500 per acre; for a total purchase price of $3.2trn (for ALL the farmland)

So the math adds up: $3.4trn worth of S&P 100 companies (10 XOMs for example) + $3.2trn for all the US farmlands + some pocket change left to spend on ipads and parties. Good job Warren Buffett. I’ll buy some farmland REITs.


In Memory of Matt Simmons

This article was published in Spain’s Cotizalia.com on 08/12/2010

Last Monday I received a short email from Matt Simmons’ institute. Mr. Simmons, oil guru, visionary of clean energy and author of one of the most fascinating and controversial books of the recent past, “Twilight In The Desert”, had passed away at the age of 67 years old. I was shocked.

For those of us who study oil and energy, Matt Simmons was always an essential reference to understand the complex world of energy. To me, he was an amazing personality and an absolute master in his field. Matt was humble, open, always ready to discuss different theories and innovations in the field of energy, and what’s most important, always interested in other people’s opinions. Matt didn’t speak from an altar to share his wisdom. He engaged in dialogue and open debate. And listened. Patiently. To everyone.

His loss is immense but his legacy is outstanding. Let me centre this article on some of his many achievements.

On one side, his analysis of the oil fields in Saudi Arabia was groundbreaking not only for the wealth of detail and clarity of the arguments, but also because it was the first time that someone had questioned official information with solid data. It might seem strange to my readers, but before “Twilight In The Desert” no one really questioned the official figures of reserves provided by the producing countries. Only a few years before Matt’s book Newsweek was warning of an “oil glut” based on precisely those official numbers!. Today, all of us who study oil and gas try to make an effort to challenge official numbers and study the issues that might impact the figures of proven and probable reserves in countries like Saudi Arabia, Iran, Iraq, Brazil, Russia, etc. Thanks to Matt Simmons we are all a lot more cautious with predictions of new production and, most of all, in estimating decline curves. And this caution has proven to be right when, delay after delay and revision after revision, we can all see that global oil production does not reach the 89mboepd mark even counting with Iraq and Tupi.

It is true that some of the predictions of “Twilight in the Desert” have been delayed, mostly due to the global recession’s impact on oil demand. But even the Kingdom of Saudi Arabia is now showing an unusual level of transparency and recognizing the need to preserve current reserves and monitor the declines of Ghwar, Khurais or Khursaniyah.

Many have criticized the “Peak Oil” theory, but reality has proven that supply issues are only growing and even those who criticize the theory must admit that it has been essential to help promote innovation and alternatives. Even the IEA admits that the “deficit of discoveries” is so large that the world will need investments of $26 trillion to replace consumed reserves by 2030.

But Matt Simmons also left us a tremendously interesting analysis of the opportunities provided by shale gas when analysts and companies said it was uneconomical at $10/mmbtu. Matt was proven right when he mentioned that costs would drop aggressively and proving that profitability of shale gas in Marcellus, Barnett or Haynesville was solid at $4.5/mmbtu.

Mr Simmons’ analysis of the new paradigm of natural gas as a clean, abundant and profitable source of energy and his studies of other alternative sources were also essential for the US administration’s advances in energy policy.

The last time I spoke with Matt Simmons he came for a chat at my fund. We spoke about the challenges of the electric car as a viable alternative to traditional vehicles, the difficulties to develop a coherent and sustainable energy policy in the US and the Macondo oil spill, where Matt was right as well when he warned of a much worse spill at a time when most analysts and experts still spoke of 5-10kbpd. His last comments to me were about the work he was doing on alternative energies that would be efficient and viable without massive subsidies. I am sure his team will continue the good work.

To all my readers, I recommend you to read or re-discover “Twilight in the Desert”, and if you can, read some of his papers from the Ocean Energy Research Institute in Rockland, Maine. I will remember the chats and debates and his lively and open personality, and as soon as I can, I will enjoy a wonderful Maine lobster in his memory. Rest in Peace.

Unemployment inflection

From one of my colleagues:

As of today, looks like the unemployment rate peak is behind us, and this long disastrous road of job losses that started December 2007 has ended. Job creation and job attrition look about flat. Unemployment would be able to fall naturally in the future without adding jobs because unemployment benefits run out and long-time unemployed people stop filing or reporting data–this is a data quirk, not necessarily a big positive per se.. Further, in the next 3 months, we get the once-a-decade US census hiring, which can be several hundred thousand jobs (though lined out by economists). All eyes are pointing now to expectations in June-Aug employment.

Combined with ISM’s running >50 for 7 months, global GDP coming in strong, and leading indicators running well above average (though maybe already having peaked on the recovery), seems we are in for slightly better economic picture than expected a few months ago.

Gotta be bullish for oil prices, as well as many globalized commodities. Goldman reporting US power demand running slightly above expectation in the US already, that may continue now, but admitedly its rather a shallow recovery (
Interest rates not really reacting to this data, except modestly on the front end. Further risks remain: the double dip on housing activity appears a growing risk, and end of March marks the completion of the Fed MBS purchasing program (read: mortgage rates will move higher). The sheer magnitude of bank write-downs coming on home mortgages is really just getting warmed up (the Fed kicked that can down the road, and we’re near the cul-de-sac). No idea how Fannie/Freddie even function post Fed purchasing program, they can’t warehouse all these mortgages and the banks aren’t holding new ones at all (85% securitization to Fannie/Freddie last year!)

So + industrial activity, slowly moving inflection on employment (but loads of slack to keep wages low for a while), and – on banking sector, lending. Seems that is a net/net positive environment for commodities and equities, neutral for bonds.

Tough times for equities

After years of solid performance, equities are a risk, more than an opportunity. A friend of mine said something very pertinent about the underperformance of equities versus corporate bonds: “If you can earn a 3% risk premium on the bonds why bother with equities”.
The market is on 10.4x 2009 P/E…  So stocks have fallen 45-50% and they are only marginally cheaper (in some cases more expensive!) than in 2007. The market 2009 EPS growth shows expectations of -13.3% , and dividend yield at 4.8% (6.7% for Telecoms, 6% for Oils, 4.6% for Industrials, Basic Materials Consumer Services, 3.8% for Technology, 3.4% for Healthcare and Consumer Goods).
See the picture? yields are at risk as well!. Does one really expect the yield of a 13% falling EPS market to stay sustainable at 5% in the current economic and credit environment? … Cash flows remain under pressure and so will dividend policies.
The new defensives are megacap oils (strong balance sheet, high yield and flexibility on capex) while telecoms and healthcare continue to perform well. However, it is only in telecoms and oils where I see “cycle management” of the balance sheet, true capex management and true focus on ROIC.
I believe this trend will continue. So far long Oils short the market has worked. The steep contango curve has helped, but it’s all about balance sheet today. I believe we will continue to enjoy performance versus the market while we see eranings downgrades everywhere, capital increases and dividend cuts.
But isn’t a 30% outperformance overdone? After all, it’s the biggest continued period of outperformance against the market and the underlying commodity since 1991.
Well, the good news is that the market will continue to find it difficult to “buy something else” but the bad news is that, like in 1991, if oil prices stay low we will see dividend cuts and drastic capex cuts.
In this environment, I cannot agree more with the messages of Morgan Stanley on the “new defensives” in the oil and gas sector: BG (hedged 80% of LNG output to 2010) and Tullow (no refinancing needs after the highly succesful capital increase) versus the highest geared stocks (and I disagree again with consensus) with dividend risk, BP or Statoil.  Stick with Exxon (ongoing buyback, $89bn in cash) and short Conoco.  Buffett was right when he bought into megacap oils in October 2008, but I believe he chose the wrong (relative to peers) stock, Conoco, with the most challenging production, earnings breakdown and growth profile of the US majors.
What? Stick with the expensive outperformers versus the cheap underperformers? Beware of this argument, because the cheap are getting more expensive as downgrades, and cuts in capex and dividend, feed through estimates. Remember that Total traded at 4xEV/DACF and after a 25% fall still trades at those estimated multiples… and the risk of going “nuclear” and putting billions in questionnable EPRs and nuclear plants is not to be overlooked.