Wall Street Journal Transcript

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Chinese Entering Deals With Pan Energy In South America And Syncrude In Canada In Efforts To Get Involved In The Energy Scene Yet Remain Non-Operators

On Thursday June 3, 2010, 11:57 am EDT
67 WALL STREET, New York - June 3, 2010 - The Wall Street Transcript has just published its Oil and Gas Production and Distribution Report offering a timely review of the sector to serious investors and industry executives. This Special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Increase in Petroleum Industry M&A - Demand Dynamics Drive Oil and Natural Gas Pricing - Regulatory and Public Policy Issues - Concerns Over Refinery Capacity - Bifurcated Pricing and Market Outlook

Companies include: Kinder Morgan (KMP); Anadarko (APC); Apache (APA); Arena Resources (ARD); Arrow (AOE.AX); BG Group (BG.L); BJ Services (BJS); BP (BP); Baker Hughes (BHI); and many more.

In the following brief excerpt from the Oil And Gas Report, expert analysts discuss the outlook for the sector and for investors.

Faisel Khan is a Director at Citigroup Investment Research and Analysis, where he covers the integrated oil, refining and integrated natural gas industries. Mr. Khan was ranked number two in the natural gas sector in both the 2007 and 2008 Institutional Investor surveys. He has been either first or second in the Greenwich Associates polls from 2007 to 2010. Mr. Khan graduated from the University of Pennsylvania with a B.S. in engineering and a B.A. in economics, with minors in mathematics and actuarial science. He is a CFA charterholder.

TWST: Do integrated energy companies really exist at this point?

Mr. Khan: It's good question. Historically, integrated oil companies had to be involved in the entire vertical value chain. Today the impetus for the integrated structure is being called into question. In theory, some of the integrated oil companies are operating very distinct businesses that are not well integrated.

TWST: Are the majors out there spending money and doing work, or are they sitting on what they have?

Mr. Khan: No, you have to go back and look at the last few cycles in this industry. If you go back to the 1990s and look at the majors back then, they did trade closer to parity in terms of valuation on proved reserves to a lot of the independent oil and gas companies because they were perceived to have growth. Mobil (XOM) had growth; Conoco (COP) had growth; Chevron (CVX) had growth. These were companies that were growing production at mid-single digits every year, and that basically was in a low oil and gas price environment. What you had happen in the latter part of the 1990s and the early part of the last decade was that all these guys consolidated because prices were so low after the 1998 Asian currency crisis. So the general philosophy in the industry was that if prices are going to be low for a long time, they'll need to consolidate and take costs of the system.

So the big talking points 10 years ago were synergies and cost reductions - how much will drop through to the bottom line? I think the industry was not prepared for the huge amount of demand growth that came out of the emerging markets. And in 2004 and 2005, they got it completely wrong. What happened is that you had the industry taking capacity out of the system at precisely the time when the world needed it. And OPEC wasn't exactly expanding their production capabilities either. So the industry was not prepared for the type of growth that was going to come out of China, India, Brazil and the rest of the world.

TWST: Does the industry have the expertise to go ahead and develop these other sources?

Mr. Khan: Absolutely, yes they do. Exxon, Chevron and Occidental, and of course the majors in Europe, have the engineering and technical expertise. Exxon invests almost $1 billion a year in R&D, and the vast majority of that goes towards trying to find better ways to produce oil out of the ground. Chevron spends a little less than $1 billion a year in R&D. So all those efforts are designed to give the majors a competitive advantage when it comes to technology in the industry.

TWST: What about the capital point of view? Are the funds available to carry out all these different projects?

Mr. Khan: Yes, right now Exxon and Chevron have almost no net debt on their balance sheets, and they are producing free cash flow. At $80 crude, Exxon and Chevron produce free cash flow above and beyond their dividend and their stated share repurchase program.

TWST: So no capital constraints for the space?

Mr. Khan: No, the returns on capital at $80 crude can vary. If we're talking about long-lived projects, 10 to 20 years, then the returns on capital are probably in the mid- to high teens. On the higher-risk projects, you're probably looking at returns on capital somewhere in the low 20s at $80 crude.

TWST: What about new competition? We see and read a lot about China and India, and their energy needs. Are they becoming tougher competitors for these opportunities?

Mr. Khan: Definitely, they want to be a part of everything. But they realize that it's better to partner up than try to do new projects alone. We've seen Chinese companies enter into deals in South America with Pan Energy, Syncrude in Canada, coal seam gas to LNG in Australia. These are all joint venture investments. These are examples of how the Chinese want to get involved, but they don't want to be the operator. It appears at this point that it may be easier to partner up with one of the majors and get into these projects, rather than go it alone. The Chinese oil and gas companies have become providers of capital.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

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