Doot Doot Forward
FD50?
Monday blog leads off with what else but Bank of America! BofA struggles in the first quarter and misses expected profit levels ($.23/share v. $.41/share). Of course, this still means they pulled in $1.2B in profit, so no worries about bankruptcy. Also, that includes $776 million from the VISA sale, so about 40% of the profit total has nothing to do with the bank’s operations.
From FT.com, Bank of America looks for cash money to boost its balance sheet, elects to pull some cash out of their China Construction Bank investment. See, that looks better in the press compared to getting money from a private equity group, but it’s still selling part of your assets for cash all the same. Don’t delude yourself into thinking that BofA would be considering reducing their CCB position of they didn’t need to money for their capital ratios.
In other earnings news, pharma drugs are really popular. Really, really popular. Consumers love them some chemically induced clear sinuses and rigid members.
You might have noticed that gas is getting a little pricey. Well, we should get used to it… oil hits $117 a barrel. However, the more interesting oil news comes from the sandy sands of Saudi Arabia: Productions increase? Not so fast, my friend.
Saudi Arabia, the world’s biggest oil producer, has put on hold any plans to further increase long-term production capacity from its vast oil fields, its most powerful policymakers have said.
In a series of statements, including one by the king himself, the kingdom has warned consumers it does not reckon there is a need for further expansion, an assumption disputed by the world’s biggest developed countries.
Abdullah Jum’ah, chief executive of Saudi Aramco, the kingdom’s oil company, said in a closed door meeting with oil ministers and executives in Rome on Sunday that market signals were ’imperfect’ and that there were uncertainties created by the move away from oil, the world’s worsening economic outlook and the recent turbulance in the financial markets, according to one person who took notes at the discussions. This has impacted Saudi Arabia’s view on the profitability of investing billions of additional dollars into its industry at this point, Gulf sources said.
In a recent interview with Argus, an industry newsletter, Ali Naimi, Saudi Arabia’s energy minister, made clear Saudi Arabia had “no plans” to embark on its next phase of expansion. “We are idling at around 9m bpd and we will reach capacity of 12.5m bpd by 2009.”
Recent announcements will harden the view of those sceptics who argue the kingdom is unable to boost production because of the high decline rates at its fields – a view that is still in the minority among those in the industry and one Riyadh emphatically rejects.
Count me in the minority. The Kingdom is beholden to no one and it can tell the world anything it wants about its oil. Almost everything the outside world knows about the Saudi oil industry is based on conjecture and hearsay. No one outside of Saudi Arabia even knows for sure how much oil they ship out every month… they just count the ships leaving, look at how deep they are in the water, and then make an educated guess as to how much oil is inside. No, I am actually serious.
Imperfect signals or no, their excuses reek of bovine manure. When these expansion plans were originally laid, years ago, oil was trading for far less than it is now. Even if oil were to fall back to the bargain basement price of $60 a barrel, it would probably be no less than what they expected when the plans were drawn up. The cost of oil field development has increased significantly since then (whenever “then” was), but so has the price of oil.
In the end, I believe this is as clear a signal that they can send about their production capacity. They are telling the world: “Look, busters, we think we can get up to 12.5mbpd, but 15 ain’t happening, so you better start figuring out how to deal with it.” I also think they’re still going to spend the money, and I think they’ll actually move forward with the projects they are talking about, but the message here, in my opinion, is that these projects won’t be “Expansion” projects but they will be “replacement” projects.
Why don’t they come out and say this straight up? Two things: 1) can you being to imagine the panic it would cause? At least this way the populace remains in the dark while the people who need to know get the message; 2) In my second hand study of the Middle East, I have been given the impression that straight up rejection is something that is not natural to the culture in the Kingdom. Excuses, reasons, and delays, yes. They’ll delay you for so long you give up. Getting them to tell you “no” is more difficult. This fits in well with the current oil announcements: delay, rationalize, excuse… just don’t give a straight rejection of “we can’t”.
In the end we won’t know the truth of the matter until it happens either way. The Kingdom can say whatever it wants, and it is under no obligation to give out any information about anything it does. (As a further example, when I reference increases in Saudi well drilling activity, that’s based largely on second hand accounts and cobbled together info on how many drilling rigs Saudi-Aramco is leasing.) If, in 2012 (or whatever) they say “we’ve changed out mind, and now we’ll restart the projects” then fine. I’ll be wrong then, but until that point I’ll stand by my intuition.
By the way, these projects are like high school science fair homework assignments. This crap takes years (3-5 or more) to complete, so that decisions have to be made far in advance for the impact of the additional oil to be timely. Take that into consideration when weighing the veracity of the Kingdom’s rationalization.
L33t,
John Law
