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Making Deals in Gold and Energy
August 04, 2010
Natural resources deals are on the upswing.
In the second quarter, there were 142 announced deals totaling $37 billion in the oil and gas sector – that’s the highest level of M&A activity in 18 months. In the same period late year, M&A deals were worth just $14 billion.
Gold-mining deals have also been robust. Merrill Lynch-Bank of America says there were 13 transactions during the second quarter. Add that to the 15 deals in the first quarter and you have a busy market.
PricewaterhouseCoopers says the deal count in oil and gas was up 27 percent compared to the first half of 2009.
Asset sales represented 85 percent of the transactions as companies prepare for regulatory changes following BP’s Gulf of Mexico spill, PwC says. Many companies are downsizing conventional assets and replacing them with unconventional plays.
North American shale gas deals represented $13 billion of the latest quarter’s deals, nearly half coming from Asian companies looking to gain expertise in order to eventually develop shale deposits at home.
On the gold side, the $8.7 billion Newcrest Mining-Lihir Gold deal represented the first merger between senior gold producers since 2006. The bulk of the transactions were smaller companies joining forces or mid-tier producers buying early-stage companies.
Merrill Lynch-BoA calls the gold-mining sector a “buyer’s market,” saying the average deal in the second quarter was completed at a discount of 25 percent or greater. This could present a good opportunity for cash-rich producers to snatch up cheap assets.
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The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of June 30, 2010: Lihir Gold.
Chart of the Week - Oil Demand Returns
July 23, 2010
China was crowned the world’s top energy consumer earlier this week but demand growth in all parts of the world except Western Europe has pushed global oil demand growth past pre-financial crisis levels. Oil-industry analyst PIRA is forecasting demand growth will exceed 2 million barrels per day by mid-2011.
As you can see from the chart, demand growth in emerging Asia has remained steady throughout the crisis except for a hiccup in early 2009. Meanwhile, the U.S., Japan and the rest of the world experienced substantial contractions in demand.
PIRA says strong global economic growth—it estimates 4.2 percent GDP growth in 2010—will push global oil demand 1.95 million barrels per day higher than it was a year ago. More than 60 percent of this growth will come from China, India and other developing areas of the world such as the Middle East. The U.S. will kick in an additional 20 percent—adding 400,000 barrels per day in year-over-year demand growth.
That’s a strong pace that may slow down next year.
The International Energy Agency (IEA), the Paris-based agency that broke the news on China’s top status this week, is heading in the opposite direction. The IEA sees world oil demand increasing by 1.3 million barrels a day (1.6 percent) in 2011. That’s a slowdown from 2010 but close to the average 1.7 percent annual growth rate we saw from 2000-2007.
The pace of oil demand growth is going to depend on the pace of the recovery. If some of the economic fears come to fruition in Europe and even China, we could see global demand for oil suffer some setbacks.
This chart appeared in last week’s edition of the weekly Investor Alert. Sign up to receive the Investor Alert via email at http://www.usfunds.com/alert.
A New Age of Energy
July 21, 2010
Five years ago, nearly every natural resource investor knew two things to be true. First, South Africa was the world’s largest producer of gold and second, that the U.S. used more energy than anyone else in the world. Titles both countries had held for a century.
Now, both of those truisms are false.
The International Energy Agency (IEA) reported this week that China overtook the U.S. in energy consumption last year, outpacing the U.S. by 4 percent (2.252 billion tons vs. 2.170 billion tons). The IEA measures energy usage in tons of oil equivalent which includes all crude oil, nuclear power, coal, natural gas and renewable sources.
The IEA’s chief economist said the announcement begins “a new age in the industry of energy.”
While most, if not all, had predicted China would become the world’s largest energy user, many didn’t think it was going to happen for another five years. China’s rise to the top can largely be attributed to a decline in energy usage in the U.S. China’s 2009 energy usage was below that of the U.S. from 2004-2008, before the financial crisis.
In fact, just ten years ago China’s energy consumption was less than half that of the U.S., according to the Wall Street Journal. The U.S. remains the biggest energy consumer on a per capita basis, the IEA economist said, consuming three times more per citizen than China. The U.S. also consumes more than twice the amount of oil that China does in a day.
But like most things with China, that statistic won’t last long. The IEA reported in last year’s World Energy Outlook that China and India will represent more than half of all incremental demand increases by 2030.
Well aware of the global politics of energy, the Chinese government was quick to dismiss the story as an overestimation by the IEA. Probably not the last time we’ll see modesty from Beijing as the country continues to put “world’s largest” in front of more and more resources.
The Future Market for Alternative Cars
June 29, 2010
Tesla became the first American automaker to go public since 1956 today as shares began trading under the ticker TSLA on the Nasdaq. With its most expensive car selling for more than $100k, Tesla is looking to strike a chord with wealthy yet environmentally conscious car buyers. Later this year, Chevrolet hopes its Volt (a price tag about half the size of the Tesla Roadster) will become the first electric car for the masses.
Building this industry from the ground up isn’t an easy task. There were more than 260 million registered vehicles in the United States last year and only a small percentage of those are fueled by alternative energies.
The transportation sector consumed 27.92 quadrillion British thermal units (Btus) of energy in 2008, roughly 28 percent of all energy consumed in the U.S. Of that, petroleum products accounted for nearly 95 percent. Electricity and natural gas combined accounted for less than 3 percent.
This story isn’t new. Petroleum products accounted for 95 percent, 97 percent and 96 percent of energy usage by the transportation sector in 1965, 1985 and 2005, respectively.
While Tesla, Chevrolet and others battle it out in the electric car market, tycoons like T. Boone Pickens have been outspoken proponents of natural gas vehicles (NGVs).
Currently the U.S. only represents a smidgen of the global NGV market. Of the more than 10 million NGVs around the world, only 110,000 drive on America’s roadways. Many of these are in cities that have converted their municipal fleets of buses and trucks to liquefied natural gas (LNG).
As you can see from the chart, the U.S. trails China, Colombia and Argentina in the NGV market. More than half of the total vehicle population of Pakistan (52 percent) is NGVs, making it the world’s largest market.
Overall, the global NGV market has grown by more than 20 percent a year since 2000, according to the International Association for Natural Gas Vehicles (IANGV). In the past four years alone, the Asia-Pacific Region has increased its number of NGVs from just over 1 million to almost 6 million.
Some have argued that in order to increase the usage of NGVs in the U.S., there needs to be massive investment in fueling stations and infrastructure but that’s not necessarily true. There were 1,300 refueling stations servicing the 110,000 NGV vehicles as of 2007—roughly one station for every 85 vehicles, according to IANGV statistics.
That’s a substantially better ratio than the world’s leading NGV markets. In Pakistan, there is one fueling station for every 750 NGVs. In Iran it’s one for every 1631 vehicles. In India it’s one for every 1670.
In the near term, it’s unlikely either electric cars or NGVs will grab substantial market share in the U.S. auto business but after 2008’s sky-high gas prices and BP’s Gulf disaster, the American public may finally be ready for an alternative.
None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of March 31, 2010.
How a Drilling Ban Hurts the Little Guys
June 18, 2010
While the world waits for oil to stop gushing from the ocean floor, a large group of Americans are waiting to go back to work.
Offshore drilling has been shut down since the Deepwater Horizon accident in mid-April that claimed 11 lives and started the massive Gulf of Mexico spill. The longer it lasts, the more damage it will do to America’s energy sector.
Each of the 33 deepwater rigs operating in the Gulf prior to the drilling ban employed roughly 1,500 people and generated $1 million a day in economic activity, according to estimates by energy analysts at Raymond James. If the moratorium lasts a full year, the result could be a $12 billion drop in GDP and a loss of 50,000 jobs.
These are well-paying jobs, especially for the region. The typical support and lower-level workers earn up to $4,000 a month, and specialized positions pay well more than double that amount, according to the New York Times. In all, the idled rigs represent at least $165 million in monthly wages.
These workers, not Big Oil, are the ones bearing the brunt of the drilling ban and the politicking in Washington. It’s an inconvenience for ExxonMobil, Chevron and other major oil producers, but they can turn their attention to opportunities off Brazil, West Africa or Southeast Asia and come back when things settle down. The smaller companies that service and supply these rigs (and employ most of the workers) won’t be able to follow.
Laborde Marine, a service boat operator in the Gulf, wrote to Louisiana Sen. Mary Landrieu and Gov. Bobby Jindal to beg them to rethink the moratorium, which has idled the company’s 21 vessels. More than 4,000 deepwater wells and 700 ultradeepwater (depths of over 5,000 feet) wells have been drilled in the Gulf of Mexico without environmental consequence, Laborde’s executives pointed out. They called the moratorium “kneejerk.”
Beyond the jobs and affected businesses, the moratorium stands to have a significant impact on energy supply. Deepwater wells accounted for 80 percent of total production in the Gulf of Mexico in 2009 and nearly 25 percent of total U.S. production. The deepwater Gulf accounted for almost half of non-OPEC production growth in 2009.
Raymond James estimates that a 12-month moratorium will reduce U.S. production by 400,000 barrel per day. This would cancel out the expected 2011 production growth for Canada and Brazil combined.
In addition, reserve estimates for the outer continental shelf represent 60 percent of the oil and 40 percent of the natural gas resources remaining in the United States, according to the Minerals Management Service (MMS).
There’s no doubt that the U.S. has to make sure the proper safeguards and government oversight is in place to prevent future environmental disasters. But a moratorium that strangles an industry that supports an entire region of the country would just create a second disaster. Two wrongs don’t make a right.
The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of March 31, 2010: Chevron, Exxon Mobil
Net Asset Value
as of 09/02/2010
- Global Resources Fund
PSPFX $8.72 +0.08 - Gold and Precious Metals Fund
USERX $17.25 +0.18 - World Precious Minerals Fund
UNWPX $19.21 +0.13 - China Region Fund
USCOX $8.50 No Change - Eastern European Fund
EUROX $9.05 +0.03 - Global Emerging Markets Fund
GEMFX $8.15 +0.01 - Global MegaTrends Fund
MEGAX $7.67 +0.03 - All American Equity Fund
GBTFX $19.86 +0.15 - Holmes Growth Fund
ACBGX $15.79 +0.19 - Tax Free Fund
USUTX $12.61 No Change - Near-Term Tax Free Fund
NEARX $2.27 No Change - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change