Worries in the Middle East

The Middle East is not immune to the problems around the world and to some degree it’s probably more vulnerable as these countries have not faced a crisis in a while. Thus they are likely to have more excess fat around the edges. We are finding from headlines that Kuwait is having a bank crisis.  Meanwhile Dubai, the city of construction cranes, will likely to soon be called the city with half finished projects as hundreds of billions of construction projects are canceled due to a slowdown in the economy.   

So why do we care what is taking place in the Middle (of nowhere) East? Two reasons:

1. Oil. Our "friends" in the Middle East cannot afford to cut their oil production to support high oil prices. They have billions of dollars of debt coming due that they have to refinance. Though the logical thing to do to maximize the value of their reserves in the long-run (long run is the key word) is to cut oil production, they cannot afford to do that as they need oil revenues (any revenues) NOW!
2. Countries of the Middle East will not big buyers of US Government debt, as they'll need money at home. Another natural buyer of US Treasuries is going away.

Exxon Apostasy Continued…

A very interesting cover story article in BusinessWeek about Exxon Mobil (XOM).  I am usually skeptical of cover story articles, especially from BusinessWeek as in the past they've been contrarian indicators. This time they are onto something (ok, that is maybe because I agree with them).   As I've written in the past, Exxon is a classic religion stock, meaning investors own it because it has done so well in the past and because it is the best-managed oil company.  Exxon is not analyzed; it is just owned -- bought or inherited and never sold.  Well, neither reason is enough to just blindly own a stock which is what happens when a company becomes a religion stock.

Exxon may have the best balance sheet in the industry and may even have the best management (some may argue with this point as management has NOT grown reserves but this maybe results of the company just hitting its natural growth limits meaning it is simply too big).   Allow me to point out another issue -- every barrel it sells it needs to replaced and, according to the article, it has had a hard time achieving that goal.   

Some interesting points:

In 2007 the company replenished just 76% of the approximately 1.52 billion barrels it produced that year, according to its Securities & Exchange Commission filing.   

The 2008 numbers, to be reported this month, seem certain to be worse. That's because the SEC considers only those reserves that are economically viable at the price of oil on the last day of the year. On Dec. 31, 2008, a barrel of crude sold for $44.60, less than half the 2007 year-end price of $95.98. The lower the price of oil, the lower the percentage of Exxon's reserves that would clear the hurdle. 

It gets worse…

Exxon is actually shrinking. According to analysts, since 2004 it has replaced more than 80% of the approximately 1.5 billion barrels of oil it sells each year with natural gas, which in the U.S. is worth barely half the price of oil. So when Exxon uses gas to replenish its 72-billion-barrel resource base, it erodes its own value.   Oppenheimer & Co. has determined that Exxon's "proven reserves," when one takes into consideration the lower value of gas, are 17.9 million barrels, or 21% less than the amount the company reported in 2007.

P.S. Pictures are by my father Naum Katsenelson.

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