petec

Has anyone looked at ACS, the Spanish construction company that has a majority stake in Hochtief as well as a complicated non-recourse-debt-funded stake in Iberdrola? I looked at it a while ago and decided it was too complex but it is a lot cheaper now, on under 5x headline eps and yielding over 10%. Just wondering if anyone can save me some work on it ;)

TXLaw: I should clarify that by 'tens of cents' I mean 10-99c, not 'teens'! The comment stems from a distant recollection that input costs for Qatar and Gorgon LNG projects are in the $0.40+ range but a quick websearch has failed to come up with evidence for this. I will let you know if I find anything more.

I would say that the market, by and large, looks at NAVs of proved resources plus risked unproved (i.e. maybe 50% of unproved). The key determinant of the NAV is then the gas price assumed, and IMHO the gas stocks are only just starting to look cheap if you use a conservative estimate of the marginal cost as the long run gas price. I'd be very wary of assuming that there is value in the creation of a global gas market for several reasons. First, the liquefaction and gasification of LNG is very expensive and eats a lot of the delta between current US gas prices and 'global gas' (i.e. Asian LNG) prices. Second, shale gas reserves are being found all over the world so there's no reason to assume that global gas prices will be high in 10 years (i.e. when the infrastructure is starting to gain scale). And third, the US is not a particularly low cost gas producer globally: many of the LNG liquefaction plants operating today have supply costs measured in tens of cents, I believe. That's not to say that the startup of 1-2-3bcf/day of liquefaction in the US won't shift the supply/demand balance for a year or so occasionally, but supply will respond and ultimately the price will be set by the (currently falling) marginal cost of gas. Rather, the opportunity in US stocks comes when they are pricing in a below-marginal-cost price of gas for eternity, which they might be beginning to do. (IMHO the real significance of a global gas market, and of demand shifting from oil to gas, and of shale oil and other new sources of oil, is that we might be entering a 20-30 year period of declining energy costs. Hope so.)

eclectic, who are MOI and do you have a link to the video? I personally can't see value in CRESY unless Argentina lifts its ag price restrictions (and even then I'm not an ag bull) but I see opportunity in IRSA, the property subsid.

I don't think natural gas tanking is a global phenomenon; it is local to the US/Canada. Gazprom's problem is government control.

I personally would not value JPM at 12x earnings. In some ways it is a great franchise, but it is highly levered and leverage = risk. I'd cap out at 10x in a market where I can get unleveraged great franchises on 14x (e.g. 3M).

I like the fact that he is using BV and TBV as his measures of intrinsic value rather than normalised earnings, because book values are far more knowable than normalised earnings. I think he's hit the nail on the head with his buyback thinking. Buying back anywhere near $60 would be very aggressive in my opinion: I can't stand management teams that buy back above a conservative estimate of IV and you have to make a lot of assumptions to get to an IV of $60. (I'm long JPM on a low cost base.)

Depends on your time horizon. How does the dollar do if treasury yields rise (inevitable at some point) and shale oil significantly reduces oil imports, which account for >80% of the trade deficit?

Thanks. I think he's dead right but just maybe not on a 2013/4 timeframe. It takes years to build LNG export infrastructure and lots of it will have to be built to overcome the current localised supply/demand imbalance. Plus, a $9 global price does not translate into a $9 local one once infrastructure and operating costs are taken into account. Will be interesting to see how it plays out!

bmichaud - the shale technologies have dramatically lowered the marginal cost because production growth at the low end of the demand curve shoves the whole curve to the right, making the high cost stuff unnecessary at the same level of demand. I'd be very interested to know what your friend thinks will link the North American market with the global one. Currently the North American natgas market can't export much and very little demand can switch from oil to gas, so I don't see how global pricing is relevant until one of those things changes. And that's way further out than 2013/4. I don't see gas much above $4-5 in 2014 unless production declines are severe, and I doubt they will be. Does anyone have any data on how much associated gas is being produced by 'liquids' wells? Because there seem to be differing opinions on this point.

I've just begun a position in UPL, more because I have known it for years than because I've scoured every other option. I think it trades on roughly its proved NAV assuming a marginal cost of $4, and its 2P NAV assuming a marginal cost of $3, so I don't see long term downside. I do see, and am hoping for, short term downside because there is a lot of optimism out there and I'd love to buy in size as others throw in the towel. Here's hoping. On the long term view I'd caution people not to confuse demand increases with price rises. I'm very bullish on long term gas demand (due to the oil/gas differential) but not necessarily on the price (because the marginal cost continues to fall - in other words, supply can meet demand). The marginal cost is king and it's very hard to work out what it is and how much further it can fall.

Israel is pretty tiny compared to all the Arab states, too, but it's won every time it's fought them. But I agree that (if they have any sense) their poilcy is to encourage internal change.

bmichaud, I don't understand your argument fully (more a comment on my capacity for macroeconomics than your explanation!) but I cannot see how the Japanese situation can be susrtainable in the long term. IIRC, Japan's working-age population is falling at 0.6% a year this decade and accelerating to double that in the 2030s. This will make it very hard to grow GDP at a rapid rate. Yet its government debt:GDP is 100% and rising at 10% a year. Surely this has to end either with big tax rises/cuts in government spending, or rapid inflation? Put another way, you're right that governments with control over their currency can "spend-then-print" so long as they control inflation - but that is a key caveat and it is not compatible with building debt for ever. The only bright spot I can see is that total debt (govt+corp+private) has been falling slowly. So perhaps there will come a point where corp/private releveraging can allow the government to delever without sucking money out of the economy. But I don't see it, not when government spending is driven by entitlements (get worse with aging) and interest (which are 25% of tax intake even when rates are 1%).

I hope they sell some. I understand their deflation thesis but the derivatives give them great protection there. There's no need to hold the bonds and you'd have to be out of your mind to say they have a margin of safety (vs. the other reason for holding them, which is a macro bet on deflation). Go to cash and wait for opportunities.

That's how I view my KO :)

Why would we posit that anyone would find it easier to hold gold for 40 years than a truly top class stock like KO?

Moore, you are right that choosing MCD as a comparison is a case of hindsight investing. But so is choosing today's gold price as representative of the value of gold. Gold *might* be in an almighty bubble. The 1999 price *might* be equally representative, and at that point even Kodak had performed better, at least from 1974 which is the furthest back that I have data. (I don't believe 1999 is representative, but you get the point.) My view is that whether it should or not, gold will likely maintain its purchasing power over long periods of time. That's not a bad result. But great businesses, few and far between though they are, have a record of increasing their purchasing power over time. Surely that's a better result? More controversially I'd also argue that disciplined investors can add to the return on stocks by buying below intrinsic value, whereas intrinsic value is hard to calculate for gold and buy/sell decisions have largely to be based on macro analysis, and we all know how hard that is. For me it is a total no-brainer, especially after the run gold has had. But then my father used to say that the term 'no-brainer', logically, ought to refer a decision taken by a person with no brain. Time will tell! ;)