Chanos on the Oil Majors

[oddlots]

Kind of startling analysis of the financial condition of the major oil companies from Jim Chanos. (They are effectively in liquidation mode.):

http://paul.kedrosky.com/archives/20..._integrat.html

[Rajiv]

Re: Chanos on the Oil Majors

Embedded video

[marvenger]

Re: Chanos on the Oil Majors

he's an interesting guy, sometimes he makes a lot of sense and you warm to him, sometimes he makes my skin crawl. I think he's underestimating China though. They'll have problems for sure but it seems he's a long term skeptic and I don't agree with that. I agree its hard for westerners to make money from them though.

[GRG55]

Re: Chanos on the Oil Majors

Kind of startling analysis of the financial condition of the major oil companies from Jim Chanos. (They are effectively in liquidation mode.):

http://paul.kedrosky.com/archives/20..._integrat.html

That the major multinational oil companies are in liquidation should be no surprise to anyone on iTulip. That fact has been pointed out a number of times on this forum in recent years, including this post from 06-22-09

[it's on a Select area thread so I've pulled it out and reposted below with some highlights added]

Here's a link to Matt Simmons' company webpage with all his recent presentations.

Simmons is an important contributor to the debate, especially since publishing "Twilight in the Desert", but examine what he says critically. Simmons is an investment banker and cannot fully divorce himself or his firm from the FIRE economy era.

Chris makes a good point above. If you were an employee in the petroleum industry through the FIRE economy era of the 1980s and 1990s, you spent much of your time trying to figure out how to support yourself and your family if [when :p] you got laid off. Moving to another employer when everyone is "downsizing" was not an option, and many professional geologist/geophysicist/engineering friends and associates of mine finally got discouraged enough to exit the industry permanently during those years.





As Simmons points out the petroleum industry is massively capital intensive [and continuously depleting]. And through the two decade decline in petroleum the publicly traded oil companies were under tremendous pressure from Wall Street to run their businesses in such a way that returns on capital were comparable to other investment alternatives. When your firm produces a fungible commodity the only viable strategy under that circumstance is "low cost, low cost, low cost", and the result of that included:

• An almost continuous contraction in all the major conventional oil companies as wave after wave of "restucturing" was met with approval by Wall Street analysts which gave the stock price a temporary pop...enough for the executives to cash in their most recently vested stock options. When the system rewards you for gutting your company guess what happens!

• The only firms that could "expand" were those that pursued mergers and acquisitions...which ultimately led to the creation of the "supermajor" oil companies ChevronTexaco, ExxonMobil, ConocoPhillips, and the poster child of that era, Sir John Browne's BP-Amoco-Arco. These were experiments to achieve the ever elusive cost reduction efficiencies from "economies of scale". They also generated handsome fees for the M&A departments of the major Wall Street investment banks, and therefore merited glowing buy recommendations from the analysts. The one thing these mergers didn't do was add any significant new petroleum supply.

• The creation of the "unconventional" energy company...Enron...which was lauded by Wall Street has having discovered an entirely new energy business model that seemingly generated tremendous profits using virtually no money...making for a spectacular "return on capital employed"...one that the conventional energy companies could not compete with, which resulted in even greater withdrawal of capital from the industry. Why would anyone invest in expensive and risky exploration, development, production or refining when the real money was to be made trading the "stuff" from an office in downtown Houston? Was Enron the ultimate manifestation of the "day-trader mentality" at the end of the last decade?
• The nadir at the end of the '90s was marked with the stampede by investors to the "New Economy", predictions in the Economist of $5.00 oil "forever", and much talk about petroleum being a "sunset industry"... As someone who was stumping around Toronto, NY, Boston and elsewhere trying to raise investor interest and money for my petroleum company I can assure you it was not a fun time. But as the new century got underway, those oil company executives who thrived in the prior two decades and couldn't understand that the world was changing eventually lost their jobs...BP's Sir John Browne who steadfastly insisted to the very end that "the natural price of oil" should be much lower, and kept running BP on that basis, being one of the more prominent casualties.

And here we are today...;)

...

[oddlots]

Re: Chanos on the Oil Majors

Thanks for repeating this. Makes sense. Another manifestation of a Gresham's dynamic at work in the economy at the hands of the FIRE economy.

[grapejelly]

Re: Chanos on the Oil Majors

the other thing happening in oil is the rise of competing government oil companies. Of course, they are managed by caretaker politicians so they deplete the stock of oil and gas, skimp on maintenance and don't do new exploration.

The for-profit oil companies are left with high risk projects that are huge gambles government owned companies won't take.

I think this is the case of government driving out private enterprise. The result will be a steep increase in the real price of oil. Even with the economic slowdown you haven't seen oil fall all that much. Yes, it's not $140/bbl. But it's not $20 either. And the reason is two-fold. One is that oil is a hedge against currency depreciation, much bigger than gold in that respect. Second, oil is more and more precious due to the governments taking over the oil business.

I think this is FAR more important as a contributor to peak cheap oil than anything else.