Replies to post #533 on The Rising Influence of Rising Affluence

[DewDiligence]

Iraq, Shell Consortium Finalize Majnoon Agreement

[Shell and its partners must see something I don’t to agree to work for such a pittance—see details below. As noted in the annotations to #msg-44486337, I fail to see how Iraq will be a material driver of earnings growth for any of the publicly-traded energy companies.]

http://finance.yahoo.com/news/Iraq-completes-Shellled-deal-apf-40534713.html?x=0&.v=2

›By Sinan Salaheddin
Sunday January 17, 2010, 11:42 am EST

BAGHDAD (AP) -- Iraq gave final approval Sunday to a deal by a Shell-led consortium to develop one of its largest oil fields, marking a crucial step toward the nation's postwar rebuilding by boosting the production of its most lucrative resource.

Royal Dutch Shell PLC and its partner, Malaysia's state-run Petronas, won the right to develop the 12.5 billion barrel Majnoon field last month during Iraq's second postwar bidding round. As part of the deal, Shell and Petronas will pay the Iraqi government a $150 million signing bonus.

At a Baghdad signing ceremony, Oil Minister Hussain al-Shahristani hailed the deal as a "major step that will transform the region from an area of misery and deprivation into a prosperous one."

Shell Chief Executive Peter Voser said his company looks "forward to a good cooperation with the government," but he refused to say how much money will be spent on the project.

The oil deal for Majnoon, located in Basra province near the Iranian border, was one of seven that the Iraqi government awarded last month.

The 20-year contract calls for the companies to be paid $1.39 per barrel produced above current output levels. The businesses have said they hope to raise production from the current 45,900 barrels per day to 1.8 million barrels per day by 2020.

The Majnoon field was discovered in 1976 and was partially developed until the Iran-Iraq war halted work there in the early 1980s. Oil production resumed in 2002.

For Iraq, the oil deals mark a crucial step forward in the country's so-far faltering bid to raise oil output. Although it sits atop the world's third-largest proven reserves of conventional crude oil, Iraq produces a comparatively modest 2.5 million barrels per day, of which about 1.9 million barrels a day are exported.

Decades of neglect of the fields have been compounded by the effects of the fighting and sabotage after the 2003 U.S.-led invasion to oust Saddam Hussein. That violence has meant that Iraq has been unable to even reach its prewar output levels of oil. Crude oil sales account for roughly 90 percent of the government's budget.

Of the seven deals awarded in December, Iraq's Cabinet has approved four, including Majnoon. The Cabinet has asked for changes to proposals for the remaining three -- awarded to consortiums led by Russia's private oil giant Lukoil, China's CNPC and Russia's Gazprom -- before signing off on them as expected by the end of the month.

On Monday, the Iraqi government will give final approval to a contract to develop the Gharraf field in the southern Nasiriyah province, which is believed to hold 863 million barrels of oil. That deal, won by a partnership between Petronas and Japan's Japex, seeks to pump 230,000 barrels from Gharraf daily by 2023, for $1.49 per barrel.

On Jan. 26, the government is scheduled to sign off on contracts to let Angola's Sonangol develop two oil fields in the northern province of Ninevah, about 225 miles (360 kilometers) northwest of Baghdad.

Sonangol will be paid $6 per barrel produced from the Nejma field, which holds an estimated 858 barrels, and it plans to raise output to 110,000 barrels per day by 2019. The company also is seeking to develop the nearby Qayara field for $5 per barrel. There are an estimated 807 million barrels in Qayara, and Sonangol plans to produce 120,000 a day within nine years.

Last June, Iraq awarded only one oil deal, to BP PLC and its partner CNPC of China, for the 17.8 billion-barrel Rumaila field in Basra. The field is the nation's largest, and two other foreign business consortiums have since revised their bids to develop two other prized oil fields nearby.

Al-Shahristani said one of those deals -- a partnership among Italy's Eni, U.S.'s Occidental Petroleum Corp. and South Korea's KOGAS -- will be approved next Friday. He said oil production from those fields could boost output to 12 million barrels per day within by 2017, although some analysts call that an overly optimistic target.‹

[DewDiligence]

Occidental Is Oily

[This write-up from Barron’s is about a month old, but the valuation numbers haven’t changed much in that time. Does anyone here like/dislike this name? T.i.a. for your reasons.]

http://online.barrons.com/article/SB126204178413208161.html

›Oil explorer is undervalued and could raise its dividend

DECEMBER 29, 2009
By AVI SALZMAN

Natural gas is a hot commodity right now. T. Boone Pickens exalts it as the future of energy, politicians praise its relative cleanliness, and major oil companies want a piece of its growth potential. Crude oil, by contrast, is out of favor -- it's dirty, and harder to find. But energy investors looking for upside in 2010 could be better served by sticking with oil, and in particular Occidental Petroleum (Ticker: OXY).

Los Angeles-based energy producer Occidental drills for natural gas, too, but of the major U.S. energy producers few are as heavily weighted to oil. About 74% of Occidental's proved reserves are made up of oil, versus about 33% for the exploration and production group as a whole, according to Pavel Molchanov, an analyst at Raymond James who rates the company at Outperform.

Unlike gas, oil is a global commodity, allowing companies that produce it to grow with the world-wide economy. Natural gas is primarily a domestic commodity because it can't be as easily transported, and its price is currently held back because of a supply surplus and tepid demand. Domestic natural-gas consumption is expected to decline another 0.4% in 2010, according to the Energy Information Administration. Oil has also seen slackened demand, but should get a boost as the global economy recovers.

Occidental trades at about 14 times analysts' estimates for 2010 earnings per share, well below other exploration and production names, which trade as a group at about 17 times. Since the beginning of the year, the company's shares have risen about 37% versus 45% for other explorers. In the past three months, it has inched forward 4%, against 11% growth for its peers.

"Right now, with investors having a lot of risk appetite, it has not done as well as many of its smaller peers," Molchanov says. "But it goes without saying that if the risk appetite diminishes, Occidental could well do better."

By industry standards, the company's balance sheet is pristine. It boasts an 8% long-term-debt-to-capital ratio, versus a 33% average for peers. Occidental's consistent free cash flow allows it to offer a 1.6% dividend yield, higher than many competitors. One portfolio manager who specializes in dividend stocks says she expects that dividend to grow -- possibly by as much as 15% to 20% next year.

"Its valuation, its strong balance sheet and good dividend-growth potential are really what make the stock attractive," says Judy Saryan, who co-manages Eaton Vance's dividend funds, which hold Occidental stock. "I believe the market at some point in the next 12 months will recognize that combination of positives and give the company more credit."

New discoveries could also provide significant upside. A recent find in Kern County, Calif., has proven particularly promising, driving volume growth in the company's most recent quarter. One analyst says the California find could be the key to the stock's growth.

"It looks like it could be extremely exciting," says Thomas Driscoll, an analyst at Barclays Capital who rates the stock at Overweight. "That's the play that's likely to drive the shares higher."

Although Occidental drills primarily in the U.S., it also has extensive operations in South America and the Middle East. In fact, Occidental has signed on to become one of the first oil companies to explore in Iraq since Saddam Hussein was toppled.

And despite the company's conservative reputation, an aggressive move this fall could pay off. Although Occidental tends to return much of its cash to investors in the form of buybacks and dividends, it made a particularly opportunistic acquisition this year, picking up Citigroup's energy trading group Phibro on the cheap in October.

The sale came at a time when Citi had drawn fire for the $100 million in compensation it paid to Phibro's top trader, and the company was desperate to pay back government bailout loans and restore its public image.

Citi sold Phibro to Occidental for $250 million -- about the value of Phibro's cash and marketable securities, according to Occidental. The division averaged earnings of $371 million annually over the past five years. In general, analysts haven't yet included Phibro earnings in their projections for Occidental.

To be sure, the acquisition could introduce new risks into Occidental's business model, because the company had generally steered clear of aggressive energy trading in the past. Executives at the firm have said they don't expect Phibro to make aggressive moves, and the company won't be hedging against energy prices.

Sluggish oil prices could also hold the stock back over the next year. Observers tend to expect oil to trade between about $65 and $85 a barrel. If the average oil price stays around the top of that range, Occidental's stock should benefit.

"You need some help from oil to be excited about the company," Driscoll says. "We've been using a $75-a-barrel projection. It doesn't seem to be overly aggressive. It looks very achievable."

If the global economy grows in the next year, Occidental could be an engine of that growth. And that should make it attractive to investors.‹