Petrodollars, deflation and your pension

Low oil prices put more money in the pockets of consumers but there is a hidden cost to your savings and ultimately your retirement.

In January I attended a Fund Managers conference in Geneva – clearly not my ‘metier’, but I’d  strongly recommend (and this will be the subject of a future post) going to events outside your own industry – you’ll be surprised, always, by what you learn.

 Anatole Kaletsky of Gavkal presented a macro view and noted that the decline in oil prices is causing a massive redistribution of petrodollars from producers to consumers. He suggested that the figure is in the order of 2.2 Trillion dollars annually.  

This is a big number but the figure is quite easy to get to.  Solving for 96 million bbls/day global production, 365 days a year and oil declining from $110/bbl to $35/bbl, one gets to $2.6Tn.  Not all of the produced oil is sold, and one can argue about the price end-points used, but as an order or magnitude it looks about right.

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Why Tesla will make the Taxi vs. Uber confrontation obsolete.

I recently watched “Made in Dagenham” – a feel-good film of how a small group of women fought the Ford corporation and the male-dominated unions that were supposed to represent them.  As much as the film is good and the subject (equal pay for women) is important, you couldn’t hope but noticing that the Dagenham factory that employed 57,000 workers in 1970, now employs zero workers… (at least not in the UK, and probably not anywhere).   

Last month we saw again, Parisian taxi drivers out on road-blocking go-slows to protest the non-taxi competition.   Whilst they may have a reasonable case that it is unfair competition (licence fees, regulations, tax and social charges etc), you have to love the irony that the founding story of Uber is of Travis Kalanick not being able to get a regular taxi in Paris one evening and thinking… hmm there has to be a better way of doing this.   If you’ve ever tried to get a taxi in Paris you’ll understand his frustration.

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Financing “Oil 2.0” will be more expensive. What is the WACC for your next Frac?

Just when revenues are hitting decade old lows, the cost of financing for your favourite oil company is going up…

The oil industry is all about boom and bust.  We live with inherently long investment cycles and have global macro-cycles layered on top.   I have speculated about the ability (or rather, inability) of the financial markets to respond to a second coming of the US shale industry in a previous post.  What is significant for all players is that the cost of capital is increasing across the board.

Typically companies finance themselves with a combination of debt and equity.   We may hear all sorts of nomenclature with term loans, revolvers, RBLs, mezzanine, bonds, kickers, warrants etc, but it is all either debt or equity in some form.  The average cost of financing a company can be simplified to the Weighted Average Cost of Capital (WACC) – where the cost of each component is weighted by its relative proportion in the mix:

WACC =   (%debt  *  cost of debt)  +  (%equity  *  cost of equity)

Importantly the %equity term should be thought of as 1-%debt, because when debt is not available, equity has to make up the delta.  The obvious case of this is exploration companies who have no access to debt are 100% equity funded. 

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