Toronto Star

Big Oil’s big appetite looms in oilpatch


Few things are easier than beating up on Big Oil for soaring gasoline prices. (Full disclosure: Lookahead owns stock in Exxon Mobil Corp.) Fact is, though, oil company profits dropped in last year’s third quarter — by 25 per cent in the case of Chevron Corp. — and the prospects for full-year profits aren’t rosy. Oil-stock prices have reacted accordingl­y, a lesson that higher pump prices aren’t the most reliable buy signal for investors. Speaking of which, when crude futures jumped 4 per cent last Wednesday, crossing the $100 (U.S.) per barrel threshold for the first time, pump prices in Toronto rose just 1.9 per cent. What’s going on? Adequate supplies of gasoline in Canada and the U.S. last fall kept Big Oil from passing along crude-price increases, for the sake of preserving market share. Most Big Oil producers are also heavily invested in the “downstream,” which translates into tens of thousands of filling stations, along with sprawling refinery and pipeline networks. With an effective ceiling on what they can charge at the pump, Big Oil watches with growing anxiety as the cost of crude eats up a larger share of the pump price the market will bear. So Chevron actually failed to turn a profit on its enormous downstream business in last year’s third quarter. Big Oil is effectivel­y in the same boat as OPEC, which dares not let its posted price rise too high for fear of triggering a drop in demand. What this means for oilpatch-minded investors is that cashing in on crude prices driven higher mostly by spot-market speculator­s is the need to focus on “upstream” firms that are pure plays in production.

Attractive offerings in this group are thinner than you might imagine, given the new, higher Alberta royalty rates on junior producers, who’ve also not yet recovered from losing the benefits of the incometrus­t structures to which they converted before federal finance minister Jim Flaherty effectivel­y closed that loophole in 2006.

Best, then, to stick with the players heavily or exclusivel­y committed to the oilsands. That’s the reason we expect the next phase of global oil consolidat­ion to sweep some or all of Suncor Energy Inc., EnCana Corp., Talisman Energy Inc., Nexen Inc. and Canadian Natural Resources Ltd. into Big Oil’s maw. Big Oil globally is reservepoo­r, and it’s a lot cheaper and less risky to buy reserves on the stock market than to go looking for it in the Arctic Circle.

Transparen­cy issues

The real problem with sovereign wealth funds?

Hint: It’s not that state-controlled wealth funds are poised to swallow the infrastruc­ture of Western capitalism, a fear among some Cassandras after the recent bailouts by SWFs of megabanks and brokers Citigroup Inc., Merrill Lynch & Co., Morgan Stanley Co. and Swiss banking giant UBS AG.

The problem is that SWFs are models of non-transparen­cy.

Imagine waking up tomorrow to discover that Beijing had taken minority stakes in each of Canada’s Big Five banks. That’s just happened to Australia’s Big Three, with the manager of China’s biggest pool of sovereign wealth buying into National Australia Bank, Commonweal­th Bank and Australia and New Zealand Bank.

The stakes are trifling, less than 1 per cent in each of the Aussie lenders. The big worry is that Beijing denied — indeed, is still attempting to deny — that it has an interest in getting its foot in the door of Australia’s commercial banking system. Confronted with the share registry showing its newly acquired Australian banking stakes, China’s State Administra­tion of Foreign Exchange (SAFE), manager of $1.4 trillion in Chinese reserves, still denies any knowledge of SAFE’s investment, and has rather quaintly asked the press not to report the story.

The U.S., by contrast, tries with considerab­le success to rein in stealth acquirers by forcing them not only to disclose their holdings, but explain their purpose — namely, are they a stepping-stone for a full-blown takeover? That gives companies vulnerable to takeover a chance to mount an auction or stave off the acquirer with special dividend payouts, measures that benefit ordinary shareholde­rs.

Signs of the times

Winning the New Hampshire primary was long a prerequisi­te to securing a party’s presidenti­al nomination, but Barack Obama won’t be able to take the Democratic nomination to the bank after his likely victory in the Granite State’s primary tomorrow. Bill Clinton was the first to foil the New Hampshire curse with his second-place finish in 1992, and George W. Bush failed to win the state in 2000 . . . “Fallacy is the new truth,” complains a contributo­r to Michigan-based Lake Superior State University’s latest annual survey of overused words and phrases, in reference to “[age] 70 is the new 50” and “chocolate is the new sex” (we thought Texas Hold ‘Em was) . . . Another sign of dire straits for U.S. newspapers: The Miami Herald is outsourcin­g the copy editing of a weekly community news section to India, starting this month. Since it’s long appeared to us that many papers of our acquaintan­ce must be outsourcin­g predicates to Mumbai and tense agreements to Hong Kong, we don’t expect South Florida readers to notice much difference.

Ties that bind, literally

Arguably, no central banker has acted with more alacrity in coping with the global credit crunch than Jean-Claude Trichet, president of the European Central Bank. Official France famously shuts down in August, and Lyons native Trichet was skippering sailboats and motor launches in St. Malo on the Brittany coast when the trouble first presented itself that month. He was on the case immediatel­y, however, thanks to — what else? — a certain indispensi­ble device made in Waterloo, Ont., by which the ECB began pouring hundreds of billions of euros’ worth of liquidity into the global financial system. “It was the first financial market crisis fought by BlackBerry from the beach,” the U.K. Financial Times said in a recent Trichet profile.

Apart from the prowess by which the ECB has eclipsed the U.S. Federal Reserve Board in this financial upheaval for the history books, Trichet represents the new unity among Europe’s 46 nations in other, more aesthetic ways. For instance, Trichet dedicated a memorable 2004 speech in Holland to the growing cultural unity of the world’s smallest continent. “European-ness,” Trichet said on that occasion, “means being unable fully to understand my own country’s literature and poetry — Montaigne, Châteaubri­and, Baudelaire and Mallarmé — without understand­ing Dante and Boccaccio, Cervantes and St. John of the Cross, Shakespear­e and Sterne, Goethe and Heine.”

On this side of the Atlantic, the last major public figure with a cranium large enough to accommodat­e Cervantes, Montaigne and Goethe was Pierre Trudeau. Alas.

This day in history

On this fateful day in 1913, the process of obtaining this substance from crude oil was patented.

(Answer, reverse: enilosag)

Quotable tycoon

“I don’t think [rising crude-oil prices] are particular­ly good for anybody, including Chevron, because it disrupts the economy. My great fear is that there could be an economic recession if the price gets too high.” —David O’Reilly, CEO of Chevron Corp., the second-largest U.S. oil giant after Exxon Mobil Corp. Last week, crude hit an intra-day high of more than $100 for the first time in history.

 ?? MICHAEL PROBST/AP PHOTO ?? David Olive argues that no central banker has acted with more alacrity in coping with the global credit crunch than Europe’s Jean-Claude Trichet.
MICHAEL PROBST/AP PHOTO David Olive argues that no central banker has acted with more alacrity in coping with the global credit crunch than Europe’s Jean-Claude Trichet.
 ?? ADRIAN WYLD/THE CANADIAN PRESS ?? This could be the year that Canadian oilpatch firms like EnCana Corp. will find themselves in Big Oil’s maw, speculates David Olive.
ADRIAN WYLD/THE CANADIAN PRESS This could be the year that Canadian oilpatch firms like EnCana Corp. will find themselves in Big Oil’s maw, speculates David Olive.

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