Trying to put a price on fear

There’s short-term panic and long-term fear.

Both are at work in the financial markets this morning. The common factor, of course, is Libya, where Muammar Gaddafi seems determined to fight for control to “the last man standing” in the words of his son Seif al-Islam. Libya pumps about 1.6 million barrels of oil a day (making it the eighth largest OPEC producer)—or at least it did before protests calling for an end to Gaddafi’s 40-year dictatorship sent Western oil companies scrambling to evacuate their employees.

Short-term panic has sent prices for West Texas Intermediate crude oil as high as $94.49 a barrel, the highest since October 2008, in New York this morning. Brent, the European oil benchmark, climbed to $108.57 in European trading. (Libya is a major source of Europe’s oil. The United States is not a big importer of Libyan oil.)

Gold advanced another 1.1% as of 9:30 this morning after climbing 1.2% yesterday. Silver was up 3.8% on Monday and has moved up another 3.1% today.

When nobody knows what’s going to happen and when the worst of possible outcomes all seem possible, markets tend to swing to extremes. Read more

And the winners among oil stocks from the Egyptian crisis are…

Interesting pattern in today’s big winners on the New York Stock Exchange: the list is dominated by the names of relatively small, predominantly domestic energy producers.

As of the end of trading in New York today you would have found these stocks among the big percentage winners: Oasis Petroleum (OAS) up 5.9%, Brigham Exploration (BEXP) up 3.4%, Ultra Petroleum (UPL) 4.6%, Swift Energy (SFY) up 3.22%, Chesapeake Energy (CHK) 8.1%, and Berry Petroleum (BRY) up 4.9%.

These energy companies don’t have a whole lot in common—some natural gas producers (Ultra Petroleum and Chesapeake Energy); some produce oil from oil shales (Oasis and Brigham); some work in traditional fields in California (Berry).

But they do have in common a lack of exposure not just to Egypt but also to the Middle East. They’re up as a bet that we’re seeing the beginning of a wave of instability in the region that will make oil from “safe” sources increasingly valuable.

I don’t think I’d chase these here—although I don’t think this trend is over or a flash-in-the-pan, I just don’t want to buy after 10% gains in just two days.

If you like the logic of these stocks, however, I’d suggest that you take a look at oil producers from Canada’s oil sands. Read more

Update Petrobras (PBR)

Disappointment on Petrobras (PBR). Although it’s disappointment that investors will ultimately get over.

The government is charging Petrobras more than expected to buy 5 billion barrels of oil reserves. (Pre-transfer the company has proven reserves of 15 billion barrels.) The price of $42.5 billion, to be paid in new stock, works out to $8.50 a barrel. That’s more than the $7.50 oil industry analysts had been expecting.

And since the price determines not only how many new shares the company will issue to the government, but also how many shares it will have to offer to minority shareholders in a related rights offering, the higher price works out to a lot of dilution for existing shareholders. The company will sell $32.5 billion in shares in that rights offering.

The total of $75 billion is more than three times larger than the $22.1 billion raised in the Agricultural Bank of China initial public offering. That offering is the largest IPO ever

The deal with the government is part of a complicated financing package. The government gets a bigger stake in the oil company and its recent finds in the deep waters of the South Atlantic and in exchange Petrobras gets 5 billion barrels of reserves that it can use to back addition loans.

That’s not exactly a minor benefit since the company has estimated its capital spending needs at more than $224 billion over the next five years.

But this is exactly where it gets tricky. Read more

Update Petrobras (PBR)

(I’m on vacation until August 24. Until then JubakPicks.com will operate on a reduced schedule of one or two posts a day. I’ll resume the full schedule when I return.)

Forget about news that Petrobras (PBR)–one of the stocks in my long-term Jubak Picks 50 portfolio– has made a new oil discovery off Angola with at least 500 million barrels of oil. Or that it is beginning production from the Urugua off-shore oil field this week.

The only discovery that counts for Petrobras shares is what price the Brazilian government will charge the company for as much as 5 billion barrels of deepwater reserves in the deep, deep water pre-salt deposits off Brazil’s South Atlantic coast.

As part of a complex plan to finance the development of the offshore fields such as the apparently giant Tupi field that Petrobras has discovered but now needs to put into production, the government plans to sell Petrobras 5 billion barrels of reserves. The company will raise the purchase price for the reserves through a stock offering. The new reserves would then give the company assets that it could use to back the debt or equity financing it needs to develop these new fields. The cost of that has been put at $224 billion by Petrobras.

So, in essence, the price that the administration of Brazilian President Luiz Inacio Lula da Silva charges partially state-owned oil company will determine how much Petrobras has to pay to finance this development. Estimates in the last week or so range from $5 to $6 a barrel—or about $30 billion—to $8 a barrel—or about $40 billion.

A higher price for the reserves would make it harder for Petrobras to sell stock to cover the purchase price—since investors would be getting fewer barrels of oil for their money. That would increase the number of shares Petrobras would have to issue to raise the purchase price. And that would, in turn, increase the dilution suffered by existing shareholders as a result of the sale of new shares.

The government has had difficulty settling on a price and the share sale has been repeatedly delayed. On June 22 Petrobras delayed the sale of shares until September. That pushes the offering dangerously close to the October presidential election.

That increases the risk of more political intervention—which makes already nervous investors even more nervous. Read more

Update Transocean (RIG)

The best you can say about Transocean (RIG) is that it has a tin ear for public opinion.

The company’s public response to the Deepwater Horizon disaster in April has been to say 1) It wasn’t our fault and 2) We’re not on the hook for very much money.

Even if true, and there’s a good chance both statements are true, this isn’t exactly how a company that gives a damn responds to what is on a clear path to being the biggest oil spill and oil-related environmental disaster in U.S. history.

And to continue the company’s sure-footed response (if sticking your foot in your mouth is sure-footed, that is), Transocean declared a $1 billion dividend to shareholders as the environmental disaster was still unfolding.

Predictably the dividend payout has raised the wrath of U.S. politicians. Senator Ron Wyden (D.-OR) and 17 colleagues have asked the Department of Justice to launch an investigation into Transocean’s financial transactions casting the dividend payment as an attempt by the company to avoid paying claims arising from the spill. The logic of the Senators’ letter escapes me: If Transocean is found liable for a big payout from the disaster, its $1 billion dividend payout certainly won’t change the size of the judgment. Transocean generated more than $5 billion in cash from operations in 2009 and could raise billions more in the capital markets to pay any conceivable judgment.

The stock dropped $5.28 or almost 9% today on news of the request for an investigation by Justice.

Political grandstanding aside, Wall Street is busy at work trying to figure out how big a hit the company will take from the Deepwater Horizon disaster. Read more