China National Offshore Corporation (CNOOC, ticker CEO) is responsible for the current and future development of China's offshore oil and natural gas reserves. With a market capitalization of approximately $50Bn as of 6/07, CNOOC is undervalued.
Chinese Majors Valuation Comparison Chart:
Ticker: PTR
PetroChina [E&P: 100% 05 income, Marketing: minimal inc Refining: loss]
Proven Reserves: 19.56 BBoE (41% gas, 59% oil)
Reserves/Production: 18.4 years
Market Capitalization: $236Bn
Standardized Measure: $175.2Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.74x
Ticker: CEO
China Ntnl Offshr Oil Co [E&P 100% 05 Income]
Proven Reserves: 2.36 BBoE (68% oil)
R/P: 5.6 years
Market Capitalization: $50.0Bn
Standardized Measure: $25.2Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.504x
Ticker: SNP
Sinopec (China) [E&P: 70% 05 income, Marketing 15%, Chem: Refin: 15% loss]
Proven Reserves: 3.362 BBoE (14.7% gas, 85.3% oil)
R/P: 10.6 years
Market Capitalization: $95Bn
Standardized Measure: $44.1Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.46x
Notes: Market Capitalization values are from 6/07, but annual reserve and standardized measures are from 12/31/05, due to the fact that the year end 06 annual reports for the Chinese Majors are not available as of early 6/07.
Standardized measure is defined by FASB 69 as future expected cash flows from proven oil and gas properties, discounted by 10%. M0re information on the Standardized Measure can be found here: http://oilandnaturalgasreserves.blogspot.com/2006/11/
what-is-standardized-measure-of-oil.html
Brief Overview of the Chinese Oil Industry:
The Chinese oil industry is comprised of three firms: PetroChina, CNOOC and Sinopec. CNOOC, Petrochina and Sinopec were created in the early 1980's when the Chinese government split its emergent oil industry into three pieces based on geography: Petrochina in the Northeast, Sinopec in the South and CNOOC for offshore operations. This move by the Chinese government has been explained by Chinese analysts as an effort to foster internal competition based on a American model of the oil industry.
China fully intends for each of its three oil firms to become "Supermajors" in order to compete successfully internationally. China sees its domestic oil industry mainly responsible for securing oil and natural gas supplies, which is a top concern given China's ravenous appetite for energy. Note that this assertion concerning China and the Big 3 is based on comments from Chinese officials and also based on the latest presentations from the Baker Institute of Energy Studies, found here: http://www.rice.edu/energy/publications/nocs.html. PetroChina can be considered already nearly a Supermajor (at 6/07) with a market capitalization of approximately $US240Bn and proven oil and gas reserves of over 17 billion BOE, in a large part due to PetroChina's ownership of the Daquing oil field in Northern China, which is one of the four largest oil fields in the world. CNOOC is the smallest in terms of market capitalization of the Big 3 at approximately $US50Bn (at 6/07).
The question comes to mind: Does CNOOC's relatively low market capitalization mean that the firm has the most room to grow in becoming a Supermajor compared to Sinopec and PetroChina? The answer to this question is a qualified "yes," in that, with the lowest reserve base of the Big 3, and with very favorable prospects domestically and internationally (as explored in this post), it is possible that CNOOC's reserve base could increase at the highest rate. Note also that it has been the case in the past that the Chinese government -- which owns the majority of all Big 3 Chinese oil firms -- has given assistance to one of the Big 3 in order to help the firm become a more vigorous competitor to the largest firm, PetroChina. That is to say, based on its intended industry model, China will likely prefer to have three very competitive international supermajors and not just one (PetroChina) in the future.
Two examples come to mind in support of a multi-firm model for the Chinese oil industry: first, the Chinese government is directly paying Sinopec funds in order to offset losses in Sinopec's refining division, as the price of gasoline in China is at low levels, in order to support Sinopec's financial competitiveness. This transfer of funds to Sinopec can be viewed as support of Sinopec's competitive position vis-a-vis PetroChina.
Second, typically only one oil company in China will bid for oversees projects, in order for one Chinese Big 3 firm to not "outbid" another and make the project more expensive than it could be with multiple Chinese firms bidding -- sort of an understood cooperation between the firms -- because the base owner of all firms is the Chinese government. As an example of this understanding, Sinopec was given favor over PetroChina in bidding for the development of Iranian oil fields in 2005 through 2007.
In summary, it is the author's opinion that it is unlikely that PetroChina will win a significant majority of all oversees Chinese projects in the future, as China will most likely want to spread around future oversees projects in order to maintain meaningful competition between its Big 3.
CNOOC Producing Areas:
CNOOC mainly operates in offshore exploration and production (upstream operations). CNOOC currently derives approximately 94% of its oil and gas production from domestic (Chinese) offshore production. Going forward, Bohai Bay and oversees areas, mainly Africa and the Middle East (Iran) offer very high potential for reserve increases. The major producing areas are listed as follows:
Field Name 2006 Production (0il KBpd/gas mmcf/d) Reserves (oil MBoE/gas bcf) Notes
Bohai Bay 200.9 /64.5 933.4/765 Largest overall producing area, competes with PetroChina for development in Bohai, future prospects positive
Western South China Sea 40.4/251.8 190.5/2,648 Largest natural gas area, mainly develops reserves with oversees partners
Eastern South China Sea 105.9/23.1 200.2/792.0
East China Sea 1.5/21.2 20.4/390.0 Smallest area and reserves have not been increasing y/y
Oversees 24.0/130.3 145.3/1,636.5 Oversees represents mainly Indonesia and Australia, as Africa and Middle East deals are not counted in reserves as of 6/07
Bohai Bay:
Bohai Bay in Northern China is CNOOC's largest production area currently, and, over the near term, is the Company's highest priority development area. The area has significant potential, as in March, 2007, PetroChina discovered 7.3 Billion Barrels of Oil equivalent in Bohai Bay, the largest discovery in China over the last 30 years. (Development costs for the exploratary wells totaled $780M for PetroChina)(Note also PetroChina's stock moved up 12% with the announcement of the discovery). CNOOC has stated that it has several prospects for Bohai Bay going forward.
Near Term Production:
CNOOC has forecasted low production growth in 2007, of between 0% and 5%, as it brings new projects online. 5 projects are forecasted to come online in 2007 and are projected to reach full potential in 2008, 75% of these projects offshore China. CNOOC has forecasted investment expenses of $US512M development expenses.
Overseas:
CNOOC's two most substantial oversees projects are offshore Nigeria and offshore Iran. These two projects are discussed below.
Offshore Nigeria:
CNOOC in 2006 purchased 45% of Nigeria's offshore Alcpo Field for $US2.7Bn from the majority owner Nigeria National Oil Corporation (the national oil company of Nigeria). The field is classified as a "giant" field, with 620M barrels of oil proven total and 3.75 tcfe of natural gas (approximately 600MBOE), and oil numbers represent light, sweet oil. The reserve numbers are not consolidated in CNOOC's reserve numbers as the deal was completed in late 2006. The purchase price based on existing reserves represents $4.60 per barrel of equivalent. CNOOC's share of oil is expected to be 79,000 bpd of oil and liquids and 96,000 BOE per day of natural gas, according to PFC Energy. Further, the field has been lightly explored to date so further increases in reserves and production are possible going forward -- CNOOC has expressed the opinion that it is hopeful that oil only reserves will increase higher than 1 billion barrels.
CNOOC can consolidate more 45% of the purchase onto its books which means approximately a 20%-25% increase in overall reserves at the end of 2008 from this deal alone from CNOOC's current reserves base.
Offshore Iran:
The project with the most reserve upside for CNOOC is the development of the Pars natural gas field off offshore Iran, which was announced in late 06, amid opposition from the United States (due to sanctions, discussed below). The Pars gas field is the largest single, known natural gas field in the world, with Iranian reserves of an estimated 280 trillion cubic feet of natural gas, and an additional 17 billion barrel of natural gas liquids. The natural gas portion of the field is equivalent to an incredible 46 billion barrels of oil equivalent., which in turn, represents 17.7x total reserves of CNOOC at year end 05 (!).
Production is slated to start in 8 years (2014-2015), initially producing 20M tons of LNG a year -- equivalent to approximately 433,000 barrels per day. The numbers would presumably (although the author has not seen anything confirming this, the author's opinion only) move higher to the 1 million BOE range, as the field is of supergiant size.
Details of the joint development plan between Iranian National Oil Corporation and CNOOC -- including reserve recognition and income agreements -- have not been fully disclosed at as the date of this writing (6/07), although there have been contradictory reports out of China concerning the details of the agreement -- in late May 07, CNOOC reported that a final agreement was due in August 07, while a few days later, CNOOC denied that the Pars field agreement would be signed then. Most likely, CNOOC is trying to keep a low profile on this project due to the opposition from the US government, which has economic sanctions initiated against Iran. The US, for its part, is holding hearings in the US Congress and Senate to determine if CNOOC should face sanctions for this deal with Iran.
The question that is most important to investors is, will the agreement between Iran and CNOOC move forward? China, with its ravenous appetite for energy, is unlikely to drop the deal with anything less than extreme pressure from the US -- and even with extreme pressure, it is not clear that China will drop this deal. Iran is also not likely to drop the deal with China as it views cooperation with American, and to a lessor extent, European firms as unattractive, given its geopolitical situation. The question therefore becomes, will and can the US bring extraordinary pressure on CNOOC?
Typical pressure includes high level meetings and economic sanctions. It is beyond the scope of this analysis to completely judge if the deal will go forward. At this point, with the limited information available, the odds of the deal are placed at an even 50/50%.
Note however, even if the deal does not go through, more and more Islamic states are looking to cooperate with China verses the West on energy development due to geopolitical concerns, which is a positive for CNOOC and the Chinese Big 3.
Conclusion:
CNOOC represents a significant portion of future Chinese offshore oil production. CNOOC will see increasing competition from the other two Chinese Majors, Sinopec and PetroChina, as these firms move offshore, but CNOOC is forecasted to obtain its fair share of offshore reserves going forward. As such, CNOOC represents a compelling buy at its current market capitalization at 6/07 of $US50Bn.
Thursday, June 7, 2007
Wednesday, May 30, 2007
Petrobras
Petrobras (PBR), the national oil company of Brazil, is the most undervalued public major oil company (outside of Russia) on the basis of proven reserves of oil and natural gas. Petrobras is unique in the oil major universe in that it not only has a low valuation on the basis of proven reserves, but also has strong prospects for increasing oil and gas reserves and production. Further, Petrobras is the first oil major to move significantly into ethanol distribution and production. These factors are discussed in more detail below.
Valuation Comparison Chart:
Ticker: Company Name
Proven Reserves
Proven Reserve to Production (R/P)(years)
Probable & Possible Reserves
Enterprise Value (US dollars)
Standardized Measure (from 10-K 2005 -- PBR has not published its 2006 10-k as of 6/07)
Standardized Measure (proved)/Enterprise Value
PBR: Petrobras (Brazil) [E&P: 90% 05 income];
11.775 BBoE (17% gas, 83% oil);
15.4 years;
N/A;
$108Bn
$109Bn (YE 05 prices of oil and gas -- 06 values not available at 5/07)
Standardized Measure/Enterprise Value: 1.01x
PTR: PetroChina[E&P: 100% 05 income, Marketing: minimal inc Refining: loss]
19.56 BBoE (41% gas, 59% oil)
18.4 years
N/A
$198Bn
$175.2Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.88x
CEO
China Ntnl Offshr Oil Co [E&P 100% 05 Income]
2.36 BBoE (68% oil)
5.6 years
N/A
$34.3Bn
$25.2Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.73x
SNP
Sinopec (China)[E&P: 70% 05 income, Marketing 15%, Chem: Refin: 15% loss]
3.362 BBoE (14.7% gas, 85.3% oil)
10.6 years
N/A
$81Bn
$44.1Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.54x
XOM
ExxonMobile
[65% 05 income E&P, 22% ref & marketing]
13.37 BBoE (42% gas, 58% oil and NGL’s) reserves exclude oil sands
9.0 years
N/A
$392Bn
$99.2Bn (YE prices of oil and gas) (55% of standardized measure in US/Can/EU)
Standardized Measure/Enterprise Value: 0.25x
(Note: the figures above are dated as the market capitalization values are from mid 2006 and the reserve valuations are from year end 2005).
Petrobras operates in three main divisions: 1) Upstream: PBR develops oil and natural gas reserves mainly off the coast of Brazil, 2) Downstream: PBR refines and markets petroleum products mainly in Brazil, and 3) Ethanol: the Company distributes and exports ethanol.
PBR Upstream Operations Analysis:
Petrobras derived approximately 90% of its net income from its upstream operations (Exploration and Production) according to its latest annual report (05). PBR produced an average of 1.77mbpd of oil -- out of a world average production of approximately 86 mpd of oil -- and expects to produce 1.919 mbpd of oil in 2007, as new projects come on line offsetting existing declines in existing oil fields.
Petrobras has good prospects for increasing oil and natural gas reserves on offshore Brazil as the company can explore more fully the Campos Basin, and then move down to the Santos Basin, to the south, of a similar geographic size to Campos (although the geology obviously differs). The Campos Basin is 100,000 square miles but has had significantly less exploration than the Gulf of Mexico, which produces a similar quantity of oil -- GoM produced approximately 1.8 mbpd of oil in 2005 while Campos produced approximately 1.7 mbpd of oil in 2005 -- and further exploration is promising. There is high interest from majors in all blocks offered in Campos for the purposes of oil and gas exploration.
Petrobras has a very large amount of territory to explore off the coast of Brazil -- as a comparison, the country is approximately the same size as the United States ex Alaska. Although Petrobras does not explicitly state that it hasn't fully explored the Amazon basin, the author has not seen anything that shows that PBR has spent a large amount of funds exploring this area. Note that most large offshore oil deposits occur in basins in a near proximity to rivers -- Campos and Santos basins notwithstanding, as these are not close to rivers (note that this last statement concerning is this author's opinion only, and the author is not a petroleum geologist).
Historically, the government of Brazil has awared Petrobras the vast majority of territory claims on offshore Brazil, and this is expected to continue in the intermediate term -- all blocks are opened by the Brazilian government to bids to cooperate with Petrobras and only one block is independently produced by a firm other than PBR -- although this could change as the Brazilian government has moved towards opening up the oil sector. Note however that most Brazilian domestic oil firms besides PBR do not currently have the capital to compete with PBR -- Petrobras estimates that in 2005 it developed more than 98% of Brazil's oil and gas reserves, according to its Annual Report filed with the SEC.
Oil Field Analysis:
Over 90% of Petrobras' reserves are located in the Campos Basin, 50 miles off the coast of Brazil, in deepwater (over 1000 meters). PBR's major fields in the Campos Basin are reported as follows:
Campos Basin:
Field Name: Estimated Size (oil barrels): 2006 Production Notes:
1a. Marilin 1.229 Billion 414,200 bpd Largest Field to date, peaked in 2002 at 586,312 barrels per day
1b. East Marlin see Marlin above 160,000 bpd 09 (0 now) Extension of the Marlin Field
1c. South Marlin see Marlin above 430,186 bpd 11 (185,740 now)
2a Barracuda 1.229 Billion 169,903 bpd Connects with Caratinga listed below
2b Caratinga connects w/ Barracuda above 141,198 bpd Both Caratinga and Barracuda have not peaked
3a. Albacorra N/A 114,878 bpd Peaked in 1998 at 199,800 bpd
3b. East Albacorra N/A 61,000 bpd Under development
4. Espadarte N/A 24,500 bpd Under development
5. Roncador N/A 84,000 bpd Under development
Petrobras' largest discovered field to date has been the Marlin field, which contains an estimated 1.7 billion barrels of remaining oil. This field has been in decline since 2002, from 586,312 bpd of production to 414,200 bpd currently. In the immediate area of Marlin are the East Marlin and South Marlin fields, which are forecasted to combine to produce a combined 590,200 barrels of oil in 2008. These two fields are forecasted to more than offset the projected declines from the main Marlin field in the near term.
Santos Basin:
Field Name: Estimated Size (oil barrels): 2006 Production Notes
1. Jubarte 600MBoe 180,000 (2011) Mainly heavy oil
2. Tupi 1.7 BBoe to 10 BBoe (initial) No Production time frame as of 6/2007
The Santos Basin has only been relatively lightly explored to date (mid 2007), although the basin lies in close proximity to Sao Paolo and therefore is a very good prospect to be developed economically. The largest potential discovery was made in October 2006 when PBR's partner UK's BP Group PLC discovered light oil in the Tupi field, initially estimated at between 1.7 to 10 BBoE, however, PBR later reported in 2.07 that it is too early to estimate the economically recoverable reserves of the Tupi discovery.
Notes on Petrobras' SEC vs SPE Reserves:
Petrobras' SPE stated oil reserves stand around 12Bn barrels of oil -- in comparison with its SEC stated reserves of slightly under 10 billion barrels. The significance of this fact is that SPE allows for the reporting of more "probable" oil reserves -- oil reserves that are commercially produceable with less than 90% certainty -- compared to SEC oil reserves guidelines, which mandate only proven (90% certainty) reserves are reported. Note that 12 billion barrels of oil are very large numbers -- in comparison, KMG -- the national oil company of Kazakhstan, reports approximately 8 billion barrels of oil in proven reserves according to the Baker Institute for Energy Studies (Kazakhstan is one of the hottest areas of the world for investment into the oil sector).
PBR Ethanol Production:
Petrobras is the world's largest distributor and exporter of ethanol fuel, exporting approximately 60% of global exports of ethanol. PBR has since 1980 purchased ethanol from Brazilian farms and distributed it for Brazil's own use and for export. Ethanol is at mid-2007 a relatively low percentage of overall net income, at less than 5% ($R189M/$R4.2Bn) of total 1Q 07 net consolidated income. Petrobras intends to expand its exports of ethanol from 850m litres in 2007 to 3.5bn litres a year by 2011 (367% total growth). Petrobras forecasts that ethanol will be Brazil's top commodity export in 2017, overtaking soya -- estimates are that ethanol will contribute $US24Bn to the Brazilian economy in 2015 (up from $US6Bn currently).
Petrobras is entering the production of ethanol by purchasing sugar fields -- integrating its distribution and marketing functions in the ethanol industry -- which may improve margins. Overall, Petrobras is forecasted to significantly improve profits going forward from ethanol fuel, although E&P will remian the largest segment for Petrobras in terms of profitability over the medium term.
Risk: Is Petrobras at Risk Due to Its Exposure to Deepwater Oil Production?
The largest risk to Petrobras is its deepwater oil and gas exposure: deepwater production is more expensive than onshore oil production, and deepwater production tends to undergo faster peak times and stronger declines. These factors are partially mitigated by Petrobras positive prospects, and overall undervaluation based on existing reserves, with faster depletion rates -- the standardized measure takes into account development costs.
Valuation Comparison Chart:
Ticker: Company Name
Proven Reserves
Proven Reserve to Production (R/P)(years)
Probable & Possible Reserves
Enterprise Value (US dollars)
Standardized Measure (from 10-K 2005 -- PBR has not published its 2006 10-k as of 6/07)
Standardized Measure (proved)/Enterprise Value
PBR: Petrobras (Brazil) [E&P: 90% 05 income];
11.775 BBoE (17% gas, 83% oil);
15.4 years;
N/A;
$108Bn
$109Bn (YE 05 prices of oil and gas -- 06 values not available at 5/07)
Standardized Measure/Enterprise Value: 1.01x
PTR: PetroChina[E&P: 100% 05 income, Marketing: minimal inc Refining: loss]
19.56 BBoE (41% gas, 59% oil)
18.4 years
N/A
$198Bn
$175.2Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.88x
CEO
China Ntnl Offshr Oil Co [E&P 100% 05 Income]
2.36 BBoE (68% oil)
5.6 years
N/A
$34.3Bn
$25.2Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.73x
SNP
Sinopec (China)[E&P: 70% 05 income, Marketing 15%, Chem: Refin: 15% loss]
3.362 BBoE (14.7% gas, 85.3% oil)
10.6 years
N/A
$81Bn
$44.1Bn (YE Chinese Prices)
Standardized Measure/Enterprise Value: 0.54x
XOM
ExxonMobile
[65% 05 income E&P, 22% ref & marketing]
13.37 BBoE (42% gas, 58% oil and NGL’s) reserves exclude oil sands
9.0 years
N/A
$392Bn
$99.2Bn (YE prices of oil and gas) (55% of standardized measure in US/Can/EU)
Standardized Measure/Enterprise Value: 0.25x
(Note: the figures above are dated as the market capitalization values are from mid 2006 and the reserve valuations are from year end 2005).
Petrobras operates in three main divisions: 1) Upstream: PBR develops oil and natural gas reserves mainly off the coast of Brazil, 2) Downstream: PBR refines and markets petroleum products mainly in Brazil, and 3) Ethanol: the Company distributes and exports ethanol.
PBR Upstream Operations Analysis:
Petrobras derived approximately 90% of its net income from its upstream operations (Exploration and Production) according to its latest annual report (05). PBR produced an average of 1.77mbpd of oil -- out of a world average production of approximately 86 mpd of oil -- and expects to produce 1.919 mbpd of oil in 2007, as new projects come on line offsetting existing declines in existing oil fields.
Petrobras has good prospects for increasing oil and natural gas reserves on offshore Brazil as the company can explore more fully the Campos Basin, and then move down to the Santos Basin, to the south, of a similar geographic size to Campos (although the geology obviously differs). The Campos Basin is 100,000 square miles but has had significantly less exploration than the Gulf of Mexico, which produces a similar quantity of oil -- GoM produced approximately 1.8 mbpd of oil in 2005 while Campos produced approximately 1.7 mbpd of oil in 2005 -- and further exploration is promising. There is high interest from majors in all blocks offered in Campos for the purposes of oil and gas exploration.
Petrobras has a very large amount of territory to explore off the coast of Brazil -- as a comparison, the country is approximately the same size as the United States ex Alaska. Although Petrobras does not explicitly state that it hasn't fully explored the Amazon basin, the author has not seen anything that shows that PBR has spent a large amount of funds exploring this area. Note that most large offshore oil deposits occur in basins in a near proximity to rivers -- Campos and Santos basins notwithstanding, as these are not close to rivers (note that this last statement concerning is this author's opinion only, and the author is not a petroleum geologist).
Historically, the government of Brazil has awared Petrobras the vast majority of territory claims on offshore Brazil, and this is expected to continue in the intermediate term -- all blocks are opened by the Brazilian government to bids to cooperate with Petrobras and only one block is independently produced by a firm other than PBR -- although this could change as the Brazilian government has moved towards opening up the oil sector. Note however that most Brazilian domestic oil firms besides PBR do not currently have the capital to compete with PBR -- Petrobras estimates that in 2005 it developed more than 98% of Brazil's oil and gas reserves, according to its Annual Report filed with the SEC.
Oil Field Analysis:
Over 90% of Petrobras' reserves are located in the Campos Basin, 50 miles off the coast of Brazil, in deepwater (over 1000 meters). PBR's major fields in the Campos Basin are reported as follows:
Campos Basin:
Field Name: Estimated Size (oil barrels): 2006 Production Notes:
1a. Marilin 1.229 Billion 414,200 bpd Largest Field to date, peaked in 2002 at 586,312 barrels per day
1b. East Marlin see Marlin above 160,000 bpd 09 (0 now) Extension of the Marlin Field
1c. South Marlin see Marlin above 430,186 bpd 11 (185,740 now)
2a Barracuda 1.229 Billion 169,903 bpd Connects with Caratinga listed below
2b Caratinga connects w/ Barracuda above 141,198 bpd Both Caratinga and Barracuda have not peaked
3a. Albacorra N/A 114,878 bpd Peaked in 1998 at 199,800 bpd
3b. East Albacorra N/A 61,000 bpd Under development
4. Espadarte N/A 24,500 bpd Under development
5. Roncador N/A 84,000 bpd Under development
Petrobras' largest discovered field to date has been the Marlin field, which contains an estimated 1.7 billion barrels of remaining oil. This field has been in decline since 2002, from 586,312 bpd of production to 414,200 bpd currently. In the immediate area of Marlin are the East Marlin and South Marlin fields, which are forecasted to combine to produce a combined 590,200 barrels of oil in 2008. These two fields are forecasted to more than offset the projected declines from the main Marlin field in the near term.
Santos Basin:
Field Name: Estimated Size (oil barrels): 2006 Production Notes
1. Jubarte 600MBoe 180,000 (2011) Mainly heavy oil
2. Tupi 1.7 BBoe to 10 BBoe (initial) No Production time frame as of 6/2007
The Santos Basin has only been relatively lightly explored to date (mid 2007), although the basin lies in close proximity to Sao Paolo and therefore is a very good prospect to be developed economically. The largest potential discovery was made in October 2006 when PBR's partner UK's BP Group PLC discovered light oil in the Tupi field, initially estimated at between 1.7 to 10 BBoE, however, PBR later reported in 2.07 that it is too early to estimate the economically recoverable reserves of the Tupi discovery.
Notes on Petrobras' SEC vs SPE Reserves:
Petrobras' SPE stated oil reserves stand around 12Bn barrels of oil -- in comparison with its SEC stated reserves of slightly under 10 billion barrels. The significance of this fact is that SPE allows for the reporting of more "probable" oil reserves -- oil reserves that are commercially produceable with less than 90% certainty -- compared to SEC oil reserves guidelines, which mandate only proven (90% certainty) reserves are reported. Note that 12 billion barrels of oil are very large numbers -- in comparison, KMG -- the national oil company of Kazakhstan, reports approximately 8 billion barrels of oil in proven reserves according to the Baker Institute for Energy Studies (Kazakhstan is one of the hottest areas of the world for investment into the oil sector).
PBR Ethanol Production:
Petrobras is the world's largest distributor and exporter of ethanol fuel, exporting approximately 60% of global exports of ethanol. PBR has since 1980 purchased ethanol from Brazilian farms and distributed it for Brazil's own use and for export. Ethanol is at mid-2007 a relatively low percentage of overall net income, at less than 5% ($R189M/$R4.2Bn) of total 1Q 07 net consolidated income. Petrobras intends to expand its exports of ethanol from 850m litres in 2007 to 3.5bn litres a year by 2011 (367% total growth). Petrobras forecasts that ethanol will be Brazil's top commodity export in 2017, overtaking soya -- estimates are that ethanol will contribute $US24Bn to the Brazilian economy in 2015 (up from $US6Bn currently).
Petrobras is entering the production of ethanol by purchasing sugar fields -- integrating its distribution and marketing functions in the ethanol industry -- which may improve margins. Overall, Petrobras is forecasted to significantly improve profits going forward from ethanol fuel, although E&P will remian the largest segment for Petrobras in terms of profitability over the medium term.
Risk: Is Petrobras at Risk Due to Its Exposure to Deepwater Oil Production?
The largest risk to Petrobras is its deepwater oil and gas exposure: deepwater production is more expensive than onshore oil production, and deepwater production tends to undergo faster peak times and stronger declines. These factors are partially mitigated by Petrobras positive prospects, and overall undervaluation based on existing reserves, with faster depletion rates -- the standardized measure takes into account development costs.
Tuesday, May 22, 2007
Banking Institutions Valued By Net Tangible Assets
Banking Institions mainly derive their revenues and income from three sources: 1. net interest spread between assets and liabilities, 2. fees, and 3. Trading. Large Banking Institutions nowadays have several operating divisions accross several financial service areas but this general rule income derived from net interest spread, fees and trading generally holds. Bank of America, for example, reports its results in three divisions: 1. Consumer and Small Business Banking, 2. Corporate and Investment Banking, and 3. Wealth and Investment Management. BofA derives the largest percentage of its income from Net Interest Margin and Fees, and only in Investment Banking does the third catagory "trading" comprise a relatively large percentage of income (besides fees and net interest margin) -- trading as defined as gains on trading and holding of equities, bonds, options and other investments in its trading division.
Note further that a Bank is generally not a hedge fund so trading is presumably -- although perhaps not always -- a large percentage of income (but note that trading is a very large source of income for many if not most investment banks). Also note that the Wealth and Investment Management mainly accrues income from annual fees on assets under management, typically around 0.5% to 1.5% of total assets.
It follows from that the total amount of tangible assets on the bank's balance sheet -- generally to a banking institution, mainly investments and loans -- is a key source from which revenue and income is derived. It follows, with cavaets and exceptions (explored in detail below), that the size of a banking institution can be approximated by the value of the tangible assets on its balance sheet.
Which Banking Institution Boasts the Largest Tangible Asset Base?
From the above discussion, it is interesting to compare the largest publicly held banking institutions worldwide in terms of assets, as the size of the asset base has a large effect on profitability. A comparison of the largest publicly held banks worldwide at 5/07 shows some surprises in terms of which Banks are the largest (to a US based analyst), as shown below:
Largest Banking Institutions Listed By Tangible Assets:
Ticker; Company Name; PE (TTM/Proj); Tangible Assets; Price/Book Value; Price/Tangible Assets; Market Capitalization
DB; Deutsche Bank; 9.2/10.0; $2.20Tr; 1.60x; 3.4%; $74.9Bn;
BCS; Barclays; 10.4/9.7; $1.8Tr; 2.36x; 5.2%; $94.4Bn
ING; ING; 9.6/9.3; $1.58Tr; 1.76x; 6.2%; $96.8Bn
AZ; Allianz; 9.6/9.0; $1.46Tr; 1.34x; 6.5%; $94.5Bn
UBS; UBS; 13.5/10.7; $1.90Tr; 2.92x; 6.5%; $125Bn
CS; Credit Suisse; 9.2/10.5; $1.03Tr; 2.09x; 7.3%; $74.9Bn
ABN; ABN AMRO; 14.4/14.7; $1.18Tr; 2.65x; 7.5%; $88.7Bn
HBC; HSBC; 13.0/10.7; $1.68Tr; 1.99x; 12.8%; $215.8Bn
JPM; JP Morgan; 11.7/11.1; $1.30Tr; 1.53x; 13.8%; $179Bn
RY; Royal Bank of Canada; 15.9/na; $496Bn; 3.52x; 14.2%; $70.3Bn
C; Citigroup; 13.1/10.9; $1.84Tr; 2.24x; 14.7%; $271.1Bn
BAC; Bank of America; 10.9/9.7; $1.39Tr; 1.72x; 16.3%; $227.5Bn
WBK; Westpac (Australia); 15.5/13.6; $222.5Bn; 3.35x; 18.7%; $41.7Bn
WFC; Wells Fargo; 14.3/12.1; $482Bn; 2.63x; 25.1%; $121Bn
Notes on the above chart: in $US, at exchange rates as of 5/07, listed in ascending order of market capitalization/asset base, source: company SEC filings, and yahoo finance.
Surprising: Deutsche Bank Holds the Largest Asset Base:
Deutsche Bank at 3/07 posted assets of $2.20Trillion, significantly larger than Citigroup, which held assets of $1.84 Trillon at 12.06 -- that is, at an exchange rate of 1.35 Euro/Dollar, Deutsche Bank holds almost 20% more tangible asset than Citigroup. Deutsche Bank also holds 58% more assets than Bank of America. However, Deutsche Bank's profitability is significantly lower than Bank of America and Citigroup, and the market capitalization of Deutsche Bank is only $US74.9Bn compared to $227.5Bn for Bank of America and $271.1Bn for Citigroup. Why is the profitability of Deutsche Bank so much lower than Citigroup and Bank of America when DB posts a significantly higher asset base?
Deutsche Bank and Bank of America Operating Results Analysis:
It is clear that Bank of America and Citigroup are returning a much higher rate on their asset base than Deutsche Bank. In order to answer the conundrum of Deutsche Bank's relative low performance, a comparision by operating division is utilized here.
Bank of America 2006 Operating Performance by Division (Source: 2006 10-K)(note: Bank of America reports in three operating divisions)
I. Global Consumer and Small Business Banking: Assets: $382.4Bn; Return on Assets(06): 2.92%
2006 2005 2006 2005
Revenue: $41.7Bn $28.4Bn Net Income: $11.2Bn $7.0Bn
II. Global Corporate and Investment Banking: Assets: $689.3Bn, Return on Assets(06): 0.99%
2006 2005 2006 2005
Revenue: $22.7Bn $20.6Bn Net Income: $6.8Bn $6.4Bn
III. Global Wealth and Investment Management: Assets: $137.7Bn; Return on Assets(06): 1.74%
2006 2005 2006 2005
Revenue: $8.0Bn $7.3Bn Net Income: $2.4Bn $2.3Bn
2006 2005 2006 2005
Total Rev:$72.4Bn $56.3Bn Total Net Inc: $20.4Bn $15.7Bn
Deusche Bank 2006 Operating Performance (source: 2006 20-F, Euro/US$ exchange rate of 1.35)
(note: DB reports in two main divisions)
I. Corporate and Investment Banking Division: Assets: $1.37Bn; Return on Assets(06): 0.58%
2006 2005 2006 2005
Revenue: $25.2Bn $21.5Bn Net Income: $7.94Bn $6.42Bn
II. Private Clients and Asset Management Division: Assets: $166.9Bn; Return on Assets(06)1.56%
2006 2005 2006 2005
Revenue: $12.4Bn $11.5Bn Net Income: $2.6Bn $2.35Bn
2006 2005 2006 2005
Total Rev:$37.6Bn $33.0Bn Total Net Inc: $10.5Bn $8.77Bn
Discussion of DB and BAC 2006 Operating Performance:
The two most striking differences in operating performance between Deutsche Bank and Bank of America is 1) the low return on Assets in DB's Corporate and Investment Banking Division compared to the counterpart at BAC -- DB accrues only approximately half of BAC's return on assets, and 2) DB does not boast a strong retail banking and credit card network, but BAC does -- and BAC receives a return on assets of an incredible 2.73% on its retail and credit card banking division.
Credit Cards Have Largely Driven Bank of America's Improved 2006 Performance:
BAC's credit card division, according to the Company's 2006 10-K, returned an unbelievable 3.94% on assets in 2006. BAC's credit card division profits -- reported within BAC's Consumer and Small Business Division -- were $5.64Bn in 2006 (28% of total BAC company net income) on credit card assets of $143.2Bn. BAC credit card net income was up 442% from 2005. BAC explains that some of this growth was due to the merger with MBNA and some was due to organic growth, but does not elaborate further in its 10-K. However, it can be inferred with resonably certainty that pricing and/or organic growth was strong for BAC in 2006 as in 2005 the credit card division returned 1.57% on assets, growing to the abovementioned 3.94% in 2006.
Deutsche Bank contrasts with BAC, in that DB does not focus on credit cards, due in part to its historical lack of focus on consumer banking. DB was originally created over 80 years ago to finance trade between large German and International corporations -- and has never focused on consumer retail banking. Therefore credit cards are not a large source of income for DB and not likely to become one in the near future, as DB does not mention credit cards in its investment presentations and only mentions "credit cards" in passing reference 10 times in its 2006 annual report with the SEC.
Reasons for Low Return on Assets for Deutsche Bank's Corporate and Investment Banking Division:
DB funds its corporate banking activities mainly from both money markets and customer deposits, while Bank of America funds its corporate banking activities mainly from low interest cost deposits. As mentioned above, DB lacks the retail presence of Bank of America. This is significant as Bank of America has a significant source of low cost funding from retail banking accounts, on which they pay a low interest rate.
Bank of America maintained approximately $700Bn of deposits worldwide, representing nearly 100% of assets in its corporate and investment bank, while DB maintained $US550M of deposits worldwide, approximately 42% of assets in DB's corporate and investment bank. It remains the subject of another post if DB is generating an acceptable rate of return from its mix of deposits and money market funding, but it is clear that under similiar interest rate conditions it won' t match the returns on assets of Bank of America.
Note also, provisions for loan losses at Bank of America and DB are approximately equal and do not account for the differences in returns on assets.
Conclusion:
As analysed in this post, the difference in how the assets are funded and in what activities makes a difference in the profitability of the firm. Still it is a useful analysis to determine how, more exactly, the banking institutions derive income. In the case of Bank of America and Deutsche Bank, the differences in profitability mainly stem from the sources of funding (deposits vs money markets) and credit cards. Deutsche Bank remains interesting as an investment due to its high amount of assets that represent earning power and its relatively low market capitalization currently (5/07). Bank of America's credit card division should be closely watched as it is a major determinant of future income.
Note further that a Bank is generally not a hedge fund so trading is presumably -- although perhaps not always -- a large percentage of income (but note that trading is a very large source of income for many if not most investment banks). Also note that the Wealth and Investment Management mainly accrues income from annual fees on assets under management, typically around 0.5% to 1.5% of total assets.
It follows from that the total amount of tangible assets on the bank's balance sheet -- generally to a banking institution, mainly investments and loans -- is a key source from which revenue and income is derived. It follows, with cavaets and exceptions (explored in detail below), that the size of a banking institution can be approximated by the value of the tangible assets on its balance sheet.
Which Banking Institution Boasts the Largest Tangible Asset Base?
From the above discussion, it is interesting to compare the largest publicly held banking institutions worldwide in terms of assets, as the size of the asset base has a large effect on profitability. A comparison of the largest publicly held banks worldwide at 5/07 shows some surprises in terms of which Banks are the largest (to a US based analyst), as shown below:
Largest Banking Institutions Listed By Tangible Assets:
Ticker; Company Name; PE (TTM/Proj); Tangible Assets; Price/Book Value; Price/Tangible Assets; Market Capitalization
DB; Deutsche Bank; 9.2/10.0; $2.20Tr; 1.60x; 3.4%; $74.9Bn;
BCS; Barclays; 10.4/9.7; $1.8Tr; 2.36x; 5.2%; $94.4Bn
ING; ING; 9.6/9.3; $1.58Tr; 1.76x; 6.2%; $96.8Bn
AZ; Allianz; 9.6/9.0; $1.46Tr; 1.34x; 6.5%; $94.5Bn
UBS; UBS; 13.5/10.7; $1.90Tr; 2.92x; 6.5%; $125Bn
CS; Credit Suisse; 9.2/10.5; $1.03Tr; 2.09x; 7.3%; $74.9Bn
ABN; ABN AMRO; 14.4/14.7; $1.18Tr; 2.65x; 7.5%; $88.7Bn
HBC; HSBC; 13.0/10.7; $1.68Tr; 1.99x; 12.8%; $215.8Bn
JPM; JP Morgan; 11.7/11.1; $1.30Tr; 1.53x; 13.8%; $179Bn
RY; Royal Bank of Canada; 15.9/na; $496Bn; 3.52x; 14.2%; $70.3Bn
C; Citigroup; 13.1/10.9; $1.84Tr; 2.24x; 14.7%; $271.1Bn
BAC; Bank of America; 10.9/9.7; $1.39Tr; 1.72x; 16.3%; $227.5Bn
WBK; Westpac (Australia); 15.5/13.6; $222.5Bn; 3.35x; 18.7%; $41.7Bn
WFC; Wells Fargo; 14.3/12.1; $482Bn; 2.63x; 25.1%; $121Bn
Notes on the above chart: in $US, at exchange rates as of 5/07, listed in ascending order of market capitalization/asset base, source: company SEC filings, and yahoo finance.
Surprising: Deutsche Bank Holds the Largest Asset Base:
Deutsche Bank at 3/07 posted assets of $2.20Trillion, significantly larger than Citigroup, which held assets of $1.84 Trillon at 12.06 -- that is, at an exchange rate of 1.35 Euro/Dollar, Deutsche Bank holds almost 20% more tangible asset than Citigroup. Deutsche Bank also holds 58% more assets than Bank of America. However, Deutsche Bank's profitability is significantly lower than Bank of America and Citigroup, and the market capitalization of Deutsche Bank is only $US74.9Bn compared to $227.5Bn for Bank of America and $271.1Bn for Citigroup. Why is the profitability of Deutsche Bank so much lower than Citigroup and Bank of America when DB posts a significantly higher asset base?
Deutsche Bank and Bank of America Operating Results Analysis:
It is clear that Bank of America and Citigroup are returning a much higher rate on their asset base than Deutsche Bank. In order to answer the conundrum of Deutsche Bank's relative low performance, a comparision by operating division is utilized here.
Bank of America 2006 Operating Performance by Division (Source: 2006 10-K)(note: Bank of America reports in three operating divisions)
I. Global Consumer and Small Business Banking: Assets: $382.4Bn; Return on Assets(06): 2.92%
2006 2005 2006 2005
Revenue: $41.7Bn $28.4Bn Net Income: $11.2Bn $7.0Bn
II. Global Corporate and Investment Banking: Assets: $689.3Bn, Return on Assets(06): 0.99%
2006 2005 2006 2005
Revenue: $22.7Bn $20.6Bn Net Income: $6.8Bn $6.4Bn
III. Global Wealth and Investment Management: Assets: $137.7Bn; Return on Assets(06): 1.74%
2006 2005 2006 2005
Revenue: $8.0Bn $7.3Bn Net Income: $2.4Bn $2.3Bn
2006 2005 2006 2005
Total Rev:$72.4Bn $56.3Bn Total Net Inc: $20.4Bn $15.7Bn
Deusche Bank 2006 Operating Performance (source: 2006 20-F, Euro/US$ exchange rate of 1.35)
(note: DB reports in two main divisions)
I. Corporate and Investment Banking Division: Assets: $1.37Bn; Return on Assets(06): 0.58%
2006 2005 2006 2005
Revenue: $25.2Bn $21.5Bn Net Income: $7.94Bn $6.42Bn
II. Private Clients and Asset Management Division: Assets: $166.9Bn; Return on Assets(06)1.56%
2006 2005 2006 2005
Revenue: $12.4Bn $11.5Bn Net Income: $2.6Bn $2.35Bn
2006 2005 2006 2005
Total Rev:$37.6Bn $33.0Bn Total Net Inc: $10.5Bn $8.77Bn
Discussion of DB and BAC 2006 Operating Performance:
The two most striking differences in operating performance between Deutsche Bank and Bank of America is 1) the low return on Assets in DB's Corporate and Investment Banking Division compared to the counterpart at BAC -- DB accrues only approximately half of BAC's return on assets, and 2) DB does not boast a strong retail banking and credit card network, but BAC does -- and BAC receives a return on assets of an incredible 2.73% on its retail and credit card banking division.
Credit Cards Have Largely Driven Bank of America's Improved 2006 Performance:
BAC's credit card division, according to the Company's 2006 10-K, returned an unbelievable 3.94% on assets in 2006. BAC's credit card division profits -- reported within BAC's Consumer and Small Business Division -- were $5.64Bn in 2006 (28% of total BAC company net income) on credit card assets of $143.2Bn. BAC credit card net income was up 442% from 2005. BAC explains that some of this growth was due to the merger with MBNA and some was due to organic growth, but does not elaborate further in its 10-K. However, it can be inferred with resonably certainty that pricing and/or organic growth was strong for BAC in 2006 as in 2005 the credit card division returned 1.57% on assets, growing to the abovementioned 3.94% in 2006.
Deutsche Bank contrasts with BAC, in that DB does not focus on credit cards, due in part to its historical lack of focus on consumer banking. DB was originally created over 80 years ago to finance trade between large German and International corporations -- and has never focused on consumer retail banking. Therefore credit cards are not a large source of income for DB and not likely to become one in the near future, as DB does not mention credit cards in its investment presentations and only mentions "credit cards" in passing reference 10 times in its 2006 annual report with the SEC.
Reasons for Low Return on Assets for Deutsche Bank's Corporate and Investment Banking Division:
DB funds its corporate banking activities mainly from both money markets and customer deposits, while Bank of America funds its corporate banking activities mainly from low interest cost deposits. As mentioned above, DB lacks the retail presence of Bank of America. This is significant as Bank of America has a significant source of low cost funding from retail banking accounts, on which they pay a low interest rate.
Bank of America maintained approximately $700Bn of deposits worldwide, representing nearly 100% of assets in its corporate and investment bank, while DB maintained $US550M of deposits worldwide, approximately 42% of assets in DB's corporate and investment bank. It remains the subject of another post if DB is generating an acceptable rate of return from its mix of deposits and money market funding, but it is clear that under similiar interest rate conditions it won' t match the returns on assets of Bank of America.
Note also, provisions for loan losses at Bank of America and DB are approximately equal and do not account for the differences in returns on assets.
Conclusion:
As analysed in this post, the difference in how the assets are funded and in what activities makes a difference in the profitability of the firm. Still it is a useful analysis to determine how, more exactly, the banking institutions derive income. In the case of Bank of America and Deutsche Bank, the differences in profitability mainly stem from the sources of funding (deposits vs money markets) and credit cards. Deutsche Bank remains interesting as an investment due to its high amount of assets that represent earning power and its relatively low market capitalization currently (5/07). Bank of America's credit card division should be closely watched as it is a major determinant of future income.
Friday, May 18, 2007
Insurance Companies Valued By Net Tangible Assets
Insurance companies derive income mainly from two sources: 1) income derived from policy sales -- insurance policy and annuity sales -- and 2) income derived from their investment portfolios. The insurance business has been described by Warren Buffett (who knows the insurance business extremely well) in his legendary annual reports as follows (here paraphrased): an insurer collects funds from policy holders, invests those funds, and then over time pays claims to policy holders from its received funds. And, as usually over time competition drives the sum of payments for claims to equal or exceed the total amount of funds received from policy payments (ie the "Combined Ratio" tends to trend towards 100), the rate of return on the funds is a key driver of the overall earnings for an insurance company.
The Significance of a Large Investment Portfolio to Market Capitalization for Insurance Companies:
The larger the investment portfolio compared to the market capitalization of the insurer may mean that the insurer is undervalued, with caveats (caveats are discussed below). That is, an intelligent investor would like to see a large sum of tangible assets and net assets (assets-liabilities) on the balance sheet compared to the market value of the firm for a possible value investment.
Note that on the balance sheet of insurance companies, most of the tangible assets of an insurance company will be the insurer's investment portfolio, while on the liabilities side, the main liabilities will be estimated future claims by policy holders and debt. Valuation of the asset side is relatively straightforward -- as most of the investment portfolio is invested in bonds, which are written at cost or at market value. The liability side of the insurance company is the larger source of uncertainty, as the estimate of future liabilities is the assessment of the insurer's actuary and may be different depending on low probability events ("acts of God") and possible miscalculations by the actuary. But note that generally the larger the firm, the better the law of averages works for the valuation of the liabilities side. For example, more confidence can generally be placed on AIG's future expected policy claims (liabilities) vs a sub-$50M asset insurance company.
Caveats -- mentioned above -- concerning this measure of the assets to market value of the insurance firm include:
A. Whether the insurer is gaining market share, (that is, an insurance company with a declining market share may not be an attractive investment even if it has a large and profitable investment portfolio)
B. has a quality credit rating --lower rated insurers should sell at a lower multiple than higher rated insurers
C. has estimated its future policy claims appropriately, (the investor does not want to see too many "surprises" in policy claims)
D. has written appropriate policies -- is pricing risk appropriately.
Analysis of the Largest Insurance Companies Worldwide:
An analysis of the largest publicly held insurers (including life and P&C and excluding reinsurance only)-- shows that there is a large discrepancy between the largest insurers in terms of price to tangible assets, but less of a discrepancy in price to tangible book value, as shown in the following chart (companies listed from lowest to highest price/tangible assets):
Ticker; Company;P/E (Hist/Proj); Tangible Assets ($US); Price/Book Value; Market Cap/Assets; Market Capitalization
ING; ING; 9.6/9.3; $1.58Tr; 2.08x; 6.2%; $96.8Bn
AZ, Allianz; 9.6/9.0; $1.46Tr; 2.28x; 6.5%; $94.5Bn
MET; Metlife; 8.6/11.5; $527.5Bn; 1.76x; 9.6%; $50.8Bn
PRU ; Prudential; 14.9/12.7; $454.3Bn; 2.03x; 10.5%; $47.9Bn
AIG; AIG; 12.6/10.4; $869.8Bn; 2.02x; 21.5%; $187Bn
ACE; Ace Ltd; 8.2/8.6; $65.0Bn; 1.65x; 31.3%; $20.4Bn
CB ; Chubb Corp; 10.0/9.0; $50.2Bn; 1.65x; 44.0%; $22.1Bn
LFC; China Life; 10.2/22.4; $69.4Bn; 2.56x; 51.0%; $35.4Bn
Discussion of the Largest Insurance Companies' Asset Values:
A few figures are striking from the above chart. First, the total assets of the German based Allianz and the Netherlands-based ING are huge -- larger than AIG in the United States (AIG is the largest insurer in the US) by a significant margin -- Allianz holds tangible assets of $US1.46 Trillion at current Euro/Dollar exchange rates compared to AIG's $US869.8Bn in tangible assets. In other words, Allianz holds 68% more tangible assets than AIG, and ING holds a similar number of assets as Allianz.
Discussion of the Significance of the Higher Asset Values at AZ and ING vs AIG:
The first observation concerning the higher asset numbers is that AZ and ING are much more levered (hold more liabilities to equity) than AIG -- AZ is levered at 21.8x assets to equity, ING is levered at 29.0x assets to equity, while AIG is levered at a much lower 8.6x assets to equity. In other words, if AIG was levered at the same level as ING (29.0x), AIG would hold an incredible $2.9 Trillion of assets. Note also that AIG's net equity value (assets minus liabilities) is approximately $100Bn compared to $70.2Bn for Allianz; AIG on this measure can be considered a larger company.
However it would not be straightforward for AIG in the above example to add a very large sum of tangible assets. Note that these are the two ways in which insurance companies gain assets, by selling either 1. insurance policies and/or 2. annuities (it is generally not the case that an insurance company will borrow money from the bond market or banks only to invest in bonds). In order for AIG to gain the number of assets of either Allianz or ING, AIG would have to either 1) underwrite a sum total of 70% more insurance policies than AIG currently has on its books and fund these policies from debt, and/or 2) sell a very large number of annuities. It would likely be very difficult to gain an incredible $700M of new policies for any firm, at an acceptable risk/pricing profile.
It follows that, the high value of tangible assets reflects that both AZ and ING are huge firms, which dominate their respective country's insurance markets and the EU. Further, one could say that the tangible assets that both AZ and ING are most likely "quality" -- meaning assets in which the companies can derive increased earnings from investment earnings -- although the high leverage places more importance on the soundness of the company's respective underwriting policies and liability and interest rate management policies.
Do the Higher Asset Values of AZ and ING Mean that they are Undervalued?
It is argued here that both AZ and ING are somewhat undervalued, compared to the large insurance universe. The price/tangible book value of AZ and ING are equivalent to AIG at approximately 2x, but the assets are as mentioned above higher, leading to higher earnings leverage with more variability. The S&P credit rating of AZ and ING are AA- and AA respectively, compared to AIG's AAA rating -- so all insurers have very strong ratings, although it is possible AZ is in line for a credit upgrade with a few more quarters of strong profitability. The European economies are improving currently (mid-2007) with reforms instituted.
Lower Differences in Price/Tangible Book Value in the Large Insurance Universe:
The second salient feature of the above is that the differences in the price/tangible book value is less dramatic than the price/asset values. Possibly an interpretation of this is that the market will give limited credit to a higher risk profile -- more asset leverage. Further, all the large insurers listed above have many analysts following them, so the likelihood of hidden value between the firms is less.
The Significance of a Large Investment Portfolio to Market Capitalization for Insurance Companies:
The larger the investment portfolio compared to the market capitalization of the insurer may mean that the insurer is undervalued, with caveats (caveats are discussed below). That is, an intelligent investor would like to see a large sum of tangible assets and net assets (assets-liabilities) on the balance sheet compared to the market value of the firm for a possible value investment.
Note that on the balance sheet of insurance companies, most of the tangible assets of an insurance company will be the insurer's investment portfolio, while on the liabilities side, the main liabilities will be estimated future claims by policy holders and debt. Valuation of the asset side is relatively straightforward -- as most of the investment portfolio is invested in bonds, which are written at cost or at market value. The liability side of the insurance company is the larger source of uncertainty, as the estimate of future liabilities is the assessment of the insurer's actuary and may be different depending on low probability events ("acts of God") and possible miscalculations by the actuary. But note that generally the larger the firm, the better the law of averages works for the valuation of the liabilities side. For example, more confidence can generally be placed on AIG's future expected policy claims (liabilities) vs a sub-$50M asset insurance company.
Caveats -- mentioned above -- concerning this measure of the assets to market value of the insurance firm include:
A. Whether the insurer is gaining market share, (that is, an insurance company with a declining market share may not be an attractive investment even if it has a large and profitable investment portfolio)
B. has a quality credit rating --lower rated insurers should sell at a lower multiple than higher rated insurers
C. has estimated its future policy claims appropriately, (the investor does not want to see too many "surprises" in policy claims)
D. has written appropriate policies -- is pricing risk appropriately.
Analysis of the Largest Insurance Companies Worldwide:
An analysis of the largest publicly held insurers (including life and P&C and excluding reinsurance only)-- shows that there is a large discrepancy between the largest insurers in terms of price to tangible assets, but less of a discrepancy in price to tangible book value, as shown in the following chart (companies listed from lowest to highest price/tangible assets):
Ticker; Company;P/E (Hist/Proj); Tangible Assets ($US); Price/Book Value; Market Cap/Assets; Market Capitalization
ING; ING; 9.6/9.3; $1.58Tr; 2.08x; 6.2%; $96.8Bn
AZ, Allianz; 9.6/9.0; $1.46Tr; 2.28x; 6.5%; $94.5Bn
MET; Metlife; 8.6/11.5; $527.5Bn; 1.76x; 9.6%; $50.8Bn
PRU ; Prudential; 14.9/12.7; $454.3Bn; 2.03x; 10.5%; $47.9Bn
AIG; AIG; 12.6/10.4; $869.8Bn; 2.02x; 21.5%; $187Bn
ACE; Ace Ltd; 8.2/8.6; $65.0Bn; 1.65x; 31.3%; $20.4Bn
CB ; Chubb Corp; 10.0/9.0; $50.2Bn; 1.65x; 44.0%; $22.1Bn
LFC; China Life; 10.2/22.4; $69.4Bn; 2.56x; 51.0%; $35.4Bn
Discussion of the Largest Insurance Companies' Asset Values:
A few figures are striking from the above chart. First, the total assets of the German based Allianz and the Netherlands-based ING are huge -- larger than AIG in the United States (AIG is the largest insurer in the US) by a significant margin -- Allianz holds tangible assets of $US1.46 Trillion at current Euro/Dollar exchange rates compared to AIG's $US869.8Bn in tangible assets. In other words, Allianz holds 68% more tangible assets than AIG, and ING holds a similar number of assets as Allianz.
Discussion of the Significance of the Higher Asset Values at AZ and ING vs AIG:
The first observation concerning the higher asset numbers is that AZ and ING are much more levered (hold more liabilities to equity) than AIG -- AZ is levered at 21.8x assets to equity, ING is levered at 29.0x assets to equity, while AIG is levered at a much lower 8.6x assets to equity. In other words, if AIG was levered at the same level as ING (29.0x), AIG would hold an incredible $2.9 Trillion of assets. Note also that AIG's net equity value (assets minus liabilities) is approximately $100Bn compared to $70.2Bn for Allianz; AIG on this measure can be considered a larger company.
However it would not be straightforward for AIG in the above example to add a very large sum of tangible assets. Note that these are the two ways in which insurance companies gain assets, by selling either 1. insurance policies and/or 2. annuities (it is generally not the case that an insurance company will borrow money from the bond market or banks only to invest in bonds). In order for AIG to gain the number of assets of either Allianz or ING, AIG would have to either 1) underwrite a sum total of 70% more insurance policies than AIG currently has on its books and fund these policies from debt, and/or 2) sell a very large number of annuities. It would likely be very difficult to gain an incredible $700M of new policies for any firm, at an acceptable risk/pricing profile.
It follows that, the high value of tangible assets reflects that both AZ and ING are huge firms, which dominate their respective country's insurance markets and the EU. Further, one could say that the tangible assets that both AZ and ING are most likely "quality" -- meaning assets in which the companies can derive increased earnings from investment earnings -- although the high leverage places more importance on the soundness of the company's respective underwriting policies and liability and interest rate management policies.
Do the Higher Asset Values of AZ and ING Mean that they are Undervalued?
It is argued here that both AZ and ING are somewhat undervalued, compared to the large insurance universe. The price/tangible book value of AZ and ING are equivalent to AIG at approximately 2x, but the assets are as mentioned above higher, leading to higher earnings leverage with more variability. The S&P credit rating of AZ and ING are AA- and AA respectively, compared to AIG's AAA rating -- so all insurers have very strong ratings, although it is possible AZ is in line for a credit upgrade with a few more quarters of strong profitability. The European economies are improving currently (mid-2007) with reforms instituted.
Lower Differences in Price/Tangible Book Value in the Large Insurance Universe:
The second salient feature of the above is that the differences in the price/tangible book value is less dramatic than the price/asset values. Possibly an interpretation of this is that the market will give limited credit to a higher risk profile -- more asset leverage. Further, all the large insurers listed above have many analysts following them, so the likelihood of hidden value between the firms is less.
Wednesday, April 25, 2007
The Publicly Held Exchange Industry -- Any Value Left?
The publicly owned exchange industry is comprised of the firms that own and operate the world's major and minor stock and commodity exchanges. The exchange industry is a relatively "new" industry, in the sense that almost all of the publicly owned exchanges went public -- that is, demutualized (meaning to transition to a for-profit corporation from not for profit) -- from 2000 onward.
Most of the largest exchanges are now, as of 2007, publicly owned including the NYSE Group, NASDAQ, the Hong Kong Exchanges Group, the Chicago Mercantile Exchange and London Stock Exchange, for example. Notable exceptions are the AMEX (which plans to demutualize in 2007), all Indian and Mainland Chinese exchanges, all Japanese exchanges, and all Latin American (exchanges except those with ties to BME).
All publicly held exchanges are valued as of 4/07 as follows:
Ticker; Company; Enterprise Value $US; P/E – trailing/projected; Earnings Increase(Y/Y); Stock Apprec (Last 2 Years); Trading Volume Annual Increases(04-06)
NYX; NYSE Euronext; $12.56Bn; 62.8x/24.7x; +402%; 203%; Approx 10%
NDAQ; Nasdaq; $3.0Bn; 43.8x/19.3x; +106%; -10%; Approx 10%
LON:LSE; London Stock Exchange; $5.1Bn; 36.3x/na; +80%; 200%; 33% (06 only)
CME; Chicago Merc Exchange; $19.53Bn; 45.2x/28.7x; +32%; 113%; 31%(06 and 3 mo 07)
BOT; CBOT Holdings; $9.63Bn; 52.3x/33.1x; 125%; 97%; 19%
NMX; NYMEX Holdings; $11.1Bn; 66.9x/34x; 118%; -5% (IPO 11/06); 40%
TSE:X; TSX Group (Toronto); $3.0Bn; 25x/na; 27%; 150%; 27% (06 and 3 mo 07)
SAfrica: JSE; Johannesburg; $891M; 42.0x/na; +107% (EBT);1,685%(public on 4/05); 25% (but -20% in 2003)
S:S68; Singapore Stock Exchange; $4.9Bn 25.2x/na; +72%; 250%(public on 12/00); Flat to Slightly Negative 04-06
HK:388; Hong Kong Exchanges; $10.8Bn; 33.7x/na; +88%; 71% (LTM); 72% in 2006
ESP:BME; BME(Spain); $4.34Bn; 55x/na; +36%; 33% (LTM); 50% in 2006
SWE:OMX; OMX(Nordic Countries); $3.1Bn; 23x/na; +68%; +70%(LTM);20%
ASX:ASX Australian Stock Exchange; $4.05Bn; 35.4x/na; +32%; +130%; 40%(2006)
NOR:OSLO; Oslo Bors; $550M; 13.5x/na; +70%; +70%; 50%
NZ:NZX; New Zealand Stock Exchange; $169M; 35.6x/na; +31%; +475% since IPO in 04; Flat volume in 07
Valuations of the Exchange Industry:
Based on a comparison of the stocks in the industry, certain facts and trends are evident. First, there are few bargains in the exchange universe, with current P/E's (at 4.24.07) of 30x or more, up to 60x, due mainly to very high stock appreciation across the board in the industry. Most of the appreciation has occurred in only the past two years and, in certain cases, only in 2007. For example, OMX Group which represents the stock exchanges for the Nordic Countries -- Stockholm, Copenhagen, Finland, Island, and the Baltic Countries -- has appreciated approximately 70% this year and mainly in March and April 07, from relatively flat performance in 2005 and 2006. Stock performance has been extremely positive even challenging commodity based stocks in total return since 2004.
The high appreciation has led to quite high valuations for certain exchanges, if to compare with valuations in other industries. For example, CME -- Chicago Mercantile Exchange -- is valued at approximately 20% more than Cameco in terms of market capitalization -- $19.5Bn vs $16.5Bn. Cameco is the world's largest miner of Uranium, providing 20% of the world's supply of Uranium, while CME is one of three US based commodity exchanges, albeit the largest, and one of several international commodity exchanges -- so faces significant competition. The comparison in terms of value from an "eyeball test" appears to favor Cameco vs CME. Additionally, major commodity exchanges are planned to open in the Middle East and Russia -- translating to potentially more competition going forward in the commodity exchange industry.
Trading Volume is The Key Driver of Income
Second, it becomes clear that the number one driver of earnings for stock based exchanges are fees on trading volume. Exchanges earn income in three main areas -- 1. transaction fees: a small fee per transaction, typically well less than 1 cent per share, but dependent on the exchange, 2. Listing fees, based on a flat fee year per company and new fees per company IPO's, and 3. Information services, outsourcing their trading technology to other exchanges and partners.
Surveying the publicly held exchange firms, fees on trading volume for almost all of the exchanges is the largest profit center, and also is the fastest growing profit center across firms in the exchange industry. For example, the Olso Stock Exchange -- a quite small regional exchange by international standards (but still with a current market capitalization of $550M!) -- earned 62.7% of total 2006 operating income in equity trading fees, and 28% from information services. For Olso, equity trading fees were up 45% in 2006 and 49% in 2005 year over year, while information services also grew at a good clip, 33% in 2006 but only 7% in 2005.
Numbers of listed firms has been relatively flat across most of the stock exchanges, with the single exception (of the firms listed above) of the London Stock Exchange, which has seen approximately a 10% annual increase in numbers of firms listed since 2002. Part of this reason may be Sarbanes Oxley in the United States, which has made cost and compliance burdensome for public firms. Nevertheless, trading fees have been a much higher driver of profits for London than exchange fees.
Note also it is possible for the exchanges to come up with new products that could potentially be popular with investors and lead to higher fees, based on revenues from these products, such as interest rate derivatives, new index funds, etc. However, in the introduciton of these products, the exchanges will compete with the major brokerages for market share.
For Some Exchanges, Higher Fees Are the Main Driver of Trading Volume Revenues
Trading volume revenues can increase either from 1) higher trading volume or 2) higher fees per share traded. For Nasdaq and NYSE Group, the volumes traded have not increased by more than 10% over the last 3 years, but income has increased well in excess of 30%. This is mainly due to higher fees, although fee information is difficult to find in the exchanges' 10-k's. Investors should be cognizant that there are already grumblings in the major brokerages that the fees are becoming too high. Citigroup, for example, has instituted a group to investigate a separate system to trade shares that does not depend on the major exchanges' systems, to combat high fees (see: http://www.businessweek.com/bwdaily/dnflash/jan2006/nf20060119_8684_db035.htm).
In addition, the investor should also be wary of steep rises in trading volume in international markets. For example, the Australian stock exchange has experienced trading volume increases of 50% in 2006. Perhaps this is due to increased activity by funds and hedge funds internationally. But, in comparison, the New Zealand Stock Exchange (NZX), with a somewhat similar economy and demographic situation, has seen flat to slightly declining trading volumes in 2007. The NZX's CEO's conclusion regarding flat to lower trading volume is that trading volumes will always be cyclical and this is good advice for the investor -- to be mindful of the cycle of the exchange and economy in terms of trading volume -- but on the positive side as countries experience economic growth generally over time trading volume will increase.
Does Value Exist in the Exchange Industry?
The London Stock Exchange, NASDAQ and Oslo mainly stand out as potentially undervalued. Olso is on this list due to the relatively low p/e ratio of 13x -- but the exchange appears overvalued on first glace due to its market value of $US550M, serving as the main exchange for a country of only 4 million people. NASDAQ, interestingly, owns 28.8% of the London Stock Exchange, acquired in a failed takeover attempt and this action may have made both firms relatively undervalued in comparison to the rest of the industry.
The London Stock Exchange Appears The Most Undervalued
London has very strong volume growth that appears more sustainable than other smaller international exchanges, as it is the major regional center and is well positioned against the US exchanges as the key world financial center. Europe as a whole is showing surprisingly strong economic growth, coming off a low growth base with economic reforms instituted. The CEO has publicly stated that the current market capitalization of $5.1Bn is undervalued (and therefore will not accept the $5.1Bn bid from NASDAQ, although it is possible that prestige issues may also be present in the decision not to sell to the relatively upstart NASDAQ). London's p/e is reasonable in comparison with the industry at approximately 36x 2006 earnings. The only concern is the possibility that NASDAQ will dump its approximately 30% stake causing a significant decline. Mitigating this possibility is that NASDAQ hopefully (probably) will see that London remains a good investment -- and evidence here is that NASDAQ of course attempted to buy London.
Most of the largest exchanges are now, as of 2007, publicly owned including the NYSE Group, NASDAQ, the Hong Kong Exchanges Group, the Chicago Mercantile Exchange and London Stock Exchange, for example. Notable exceptions are the AMEX (which plans to demutualize in 2007), all Indian and Mainland Chinese exchanges, all Japanese exchanges, and all Latin American (exchanges except those with ties to BME).
All publicly held exchanges are valued as of 4/07 as follows:
Ticker; Company; Enterprise Value $US; P/E – trailing/projected; Earnings Increase(Y/Y); Stock Apprec (Last 2 Years); Trading Volume Annual Increases(04-06)
NYX; NYSE Euronext; $12.56Bn; 62.8x/24.7x; +402%; 203%; Approx 10%
NDAQ; Nasdaq; $3.0Bn; 43.8x/19.3x; +106%; -10%; Approx 10%
LON:LSE; London Stock Exchange; $5.1Bn; 36.3x/na; +80%; 200%; 33% (06 only)
CME; Chicago Merc Exchange; $19.53Bn; 45.2x/28.7x; +32%; 113%; 31%(06 and 3 mo 07)
BOT; CBOT Holdings; $9.63Bn; 52.3x/33.1x; 125%; 97%; 19%
NMX; NYMEX Holdings; $11.1Bn; 66.9x/34x; 118%; -5% (IPO 11/06); 40%
TSE:X; TSX Group (Toronto); $3.0Bn; 25x/na; 27%; 150%; 27% (06 and 3 mo 07)
SAfrica: JSE; Johannesburg; $891M; 42.0x/na; +107% (EBT);1,685%(public on 4/05); 25% (but -20% in 2003)
S:S68; Singapore Stock Exchange; $4.9Bn 25.2x/na; +72%; 250%(public on 12/00); Flat to Slightly Negative 04-06
HK:388; Hong Kong Exchanges; $10.8Bn; 33.7x/na; +88%; 71% (LTM); 72% in 2006
ESP:BME; BME(Spain); $4.34Bn; 55x/na; +36%; 33% (LTM); 50% in 2006
SWE:OMX; OMX(Nordic Countries); $3.1Bn; 23x/na; +68%; +70%(LTM);20%
ASX:ASX Australian Stock Exchange; $4.05Bn; 35.4x/na; +32%; +130%; 40%(2006)
NOR:OSLO; Oslo Bors; $550M; 13.5x/na; +70%; +70%; 50%
NZ:NZX; New Zealand Stock Exchange; $169M; 35.6x/na; +31%; +475% since IPO in 04; Flat volume in 07
Valuations of the Exchange Industry:
Based on a comparison of the stocks in the industry, certain facts and trends are evident. First, there are few bargains in the exchange universe, with current P/E's (at 4.24.07) of 30x or more, up to 60x, due mainly to very high stock appreciation across the board in the industry. Most of the appreciation has occurred in only the past two years and, in certain cases, only in 2007. For example, OMX Group which represents the stock exchanges for the Nordic Countries -- Stockholm, Copenhagen, Finland, Island, and the Baltic Countries -- has appreciated approximately 70% this year and mainly in March and April 07, from relatively flat performance in 2005 and 2006. Stock performance has been extremely positive even challenging commodity based stocks in total return since 2004.
The high appreciation has led to quite high valuations for certain exchanges, if to compare with valuations in other industries. For example, CME -- Chicago Mercantile Exchange -- is valued at approximately 20% more than Cameco in terms of market capitalization -- $19.5Bn vs $16.5Bn. Cameco is the world's largest miner of Uranium, providing 20% of the world's supply of Uranium, while CME is one of three US based commodity exchanges, albeit the largest, and one of several international commodity exchanges -- so faces significant competition. The comparison in terms of value from an "eyeball test" appears to favor Cameco vs CME. Additionally, major commodity exchanges are planned to open in the Middle East and Russia -- translating to potentially more competition going forward in the commodity exchange industry.
Trading Volume is The Key Driver of Income
Second, it becomes clear that the number one driver of earnings for stock based exchanges are fees on trading volume. Exchanges earn income in three main areas -- 1. transaction fees: a small fee per transaction, typically well less than 1 cent per share, but dependent on the exchange, 2. Listing fees, based on a flat fee year per company and new fees per company IPO's, and 3. Information services, outsourcing their trading technology to other exchanges and partners.
Surveying the publicly held exchange firms, fees on trading volume for almost all of the exchanges is the largest profit center, and also is the fastest growing profit center across firms in the exchange industry. For example, the Olso Stock Exchange -- a quite small regional exchange by international standards (but still with a current market capitalization of $550M!) -- earned 62.7% of total 2006 operating income in equity trading fees, and 28% from information services. For Olso, equity trading fees were up 45% in 2006 and 49% in 2005 year over year, while information services also grew at a good clip, 33% in 2006 but only 7% in 2005.
Numbers of listed firms has been relatively flat across most of the stock exchanges, with the single exception (of the firms listed above) of the London Stock Exchange, which has seen approximately a 10% annual increase in numbers of firms listed since 2002. Part of this reason may be Sarbanes Oxley in the United States, which has made cost and compliance burdensome for public firms. Nevertheless, trading fees have been a much higher driver of profits for London than exchange fees.
Note also it is possible for the exchanges to come up with new products that could potentially be popular with investors and lead to higher fees, based on revenues from these products, such as interest rate derivatives, new index funds, etc. However, in the introduciton of these products, the exchanges will compete with the major brokerages for market share.
For Some Exchanges, Higher Fees Are the Main Driver of Trading Volume Revenues
Trading volume revenues can increase either from 1) higher trading volume or 2) higher fees per share traded. For Nasdaq and NYSE Group, the volumes traded have not increased by more than 10% over the last 3 years, but income has increased well in excess of 30%. This is mainly due to higher fees, although fee information is difficult to find in the exchanges' 10-k's. Investors should be cognizant that there are already grumblings in the major brokerages that the fees are becoming too high. Citigroup, for example, has instituted a group to investigate a separate system to trade shares that does not depend on the major exchanges' systems, to combat high fees (see: http://www.businessweek.com/bwdaily/dnflash/jan2006/nf20060119_8684_db035.htm).
In addition, the investor should also be wary of steep rises in trading volume in international markets. For example, the Australian stock exchange has experienced trading volume increases of 50% in 2006. Perhaps this is due to increased activity by funds and hedge funds internationally. But, in comparison, the New Zealand Stock Exchange (NZX), with a somewhat similar economy and demographic situation, has seen flat to slightly declining trading volumes in 2007. The NZX's CEO's conclusion regarding flat to lower trading volume is that trading volumes will always be cyclical and this is good advice for the investor -- to be mindful of the cycle of the exchange and economy in terms of trading volume -- but on the positive side as countries experience economic growth generally over time trading volume will increase.
Does Value Exist in the Exchange Industry?
The London Stock Exchange, NASDAQ and Oslo mainly stand out as potentially undervalued. Olso is on this list due to the relatively low p/e ratio of 13x -- but the exchange appears overvalued on first glace due to its market value of $US550M, serving as the main exchange for a country of only 4 million people. NASDAQ, interestingly, owns 28.8% of the London Stock Exchange, acquired in a failed takeover attempt and this action may have made both firms relatively undervalued in comparison to the rest of the industry.
The London Stock Exchange Appears The Most Undervalued
London has very strong volume growth that appears more sustainable than other smaller international exchanges, as it is the major regional center and is well positioned against the US exchanges as the key world financial center. Europe as a whole is showing surprisingly strong economic growth, coming off a low growth base with economic reforms instituted. The CEO has publicly stated that the current market capitalization of $5.1Bn is undervalued (and therefore will not accept the $5.1Bn bid from NASDAQ, although it is possible that prestige issues may also be present in the decision not to sell to the relatively upstart NASDAQ). London's p/e is reasonable in comparison with the industry at approximately 36x 2006 earnings. The only concern is the possibility that NASDAQ will dump its approximately 30% stake causing a significant decline. Mitigating this possibility is that NASDAQ hopefully (probably) will see that London remains a good investment -- and evidence here is that NASDAQ of course attempted to buy London.
Thursday, April 12, 2007
Northgate Minerals: Undervalued
Northgate Minerals (NXG) is an intermediate sized copper and gold miner – approximately 60% copper and 40% gold in valuation by production -- and is undervalued on a reserve basis of proven and indicated ore reserves.
Ticker; Company; Primary Reserves; Sec. Reserves (2); Gross Value Reserves (1); (2)/(1)
NXG; Northgate Minerals; 1.88M Tons Copper; 8.5 M ou Gold; $15.9Bn; $622M; 3.9%
GSS; Golden Star; 4.15M ou Gold; n/a; $2.49Bn; $1.15Bn; 46%
EGO; Eldorado; 9.7M ou; Gold; n/a; $5.82Bn; $2.10Bn; 36.1%
ABX; Barrick Gold; 139 M ou Gold; 933M ou Sil & 6.2BlbsCu; $109Bn; $26Bn; 23.9%
PCU; Southern Peru; 33M Tons Copper; n/a; $198Bn; $23.2Bn; 11.7%
Assumed prices of copper: $2.50 lb, Gold: $600 ou
The number of pure play public copper miners is limited so comparisons are difficult -- Southern Peru is a large cap copper miner so is not directly applicable to NXG (note that large cap miners should trade at a premium to smaller miners). However, in general, gold companies sell at a higher EV/gross value of ore reserves. On either basis, comparison to gold or copper miners, NXG trades at a discount to reserves.
NXG has one medium sized gold and copper mine in production currently (Kemess South) – in production until 3Q09, and two medium sized mines in the works – Kemess South and Young Davidson. These mines are analyzed in more detail below.
The most important factors in the valuation of a mining company – in order of importance – are 1) geology of the mining properties, 2) the political situation of the country and local government and 3) local and transportation infrastructure.
1) Geology:
Northgate has 1 mine in production and 2 mines under development: Kemess South is in production currently and expected to end production at 3Q 09, Kemess North expected production in late-2007 and Young Davidson, which is expected to start production in 2009-10. Note that the main concerns are for the potential production of Kemess North, which is most likely not a geological problem, but a political problem (to be addressed below).
Kemess North:
There are proven and inferred resources of 4.1 million ounces of gold in only the Kemess North mine (for comparison, the largest gold miner is Barrick Gold with 140M ounces gold total). Also 1.3 billon pounds copper indicated at Kemess North (comparison: Phelps Dodge reports 46 billion ounces copper total). These numbers for Kemess North only are numbers comparable to the total reserves of an intermediate gold and copper miner.
NXG's Kemess North Mine is expected to begin production in late 2007, and will last for 11 years. http://www.northgateexploration.ca/frame_kemess_north. Kemess North is only 7 km north of Kemess South, so the geology strikes me (a bit unscientifically though) to be similar. Apparently the grade is a bit lower but not much. Northgate refers to the North as the "Kemess expansion."
Production from Kemess North is projected at 250,000 ouces au a year, Kemess South is currently at 300,000 ou au a year, copper production from North is set at 112 M ou ag a year while South currently is set at 75 M ou ag per year. Kemess North is being delayed however currently due to potential pollution issues concerning an Indian Tribe, part of the First Nations Group. This issue is the most important issue concerning Kemess North, and is addressed in detail below.
An economic assessment by Mining Watch Canada – which mainly focuses on environmental issues in Canada, but is still provides detailed Net Present Values of mining properties – assessed the NPV of Kemess North at $C1.9Bn at conservative assumptions for prices of gold and copper:
“If one assumes Option 1 but with Gold/Copper prices of $US500/$US1.80 then after-tax earnings reach $1,911.5
million over the life of the mine with an IRR of 47.6%, far above the credit adjusted
risk free return of 5.625% and much higher that the generally-accepted
required return 10% - 15% of for projects of this nature.”
http://www.miningwatch.ca/updir/Kemess_North_Economic_Review.pdf
Young Davidson Mine:
Northgate has the Young-Davidson mine earmarked after 2008 (probably 2009 to 2011) -- 170,000 ou au a year albeit higher cash costs due to a lower grade of reserves. Indicated reserves at Young-Davidson have are approximately 2 M Ou Au http://www.northgateminerals.com/frame_press_release.html
2) Political Situation:
As a general rule, the political situation concerning mining in Canada is favorable – however NXG has potential problems concerning an Indian Tribe – the Te Skay Tribe of the First Nations Group (the First Nations Group represents Northern Canadian Native American Tribes) – that is delaying the project due to the proposed contamination of a lake in northern British Columbia from the Kemess North project. First Nations isn't sure if it will contaminate the lake, so they have asked for and received 90 more days to see if the project will or will not be approved. Currently the trial is set for May 14th, 2007.
In the author’s view, this political problem is the most risky aspect of an investment into NXG. However I am mainly assured that the mine will be approved -- if I put a “probability” on the approval, 80% likelihood – for the following reasons.
- The mine is far removed from local cities and populations, in Northern British Columbia, as the Kemess Mine is a "major" employer providing only 450 jobs. The tax authorities and the town and of course company want the Kemess North Project, but the tribe may or may not want it, depending on how it affects the lake.
- Further, Northern British Columbia is very similar in territory and population density to Yukon Territory, which is approximately than 50% the size of Alaska but has only 29,900 people. Yukon Territory is much less densely populated than Alaska. Population density of 0.06 per km2 compared to Alaska, 1.09 people per Mile2. It is mainly empty space -- Indian "tribe" that the First Nations Represents does not live close to the project, but has ancestors who lived there, and the tribe is relatively small, approximately 350 people. http://www.rcmp-grc.gc.ca/bc/programs/aps/profiles/north/tsaykeh_full_e.htm
- There are no towns around Lake Duncan and if you look at a map there are a lot of Lakes the same size/larger right in the same area. It is pure wilderness around this mine for 100's -- more like about 500 miles. No roads, only can reach by plane/helicopter. One railroad there but that is almost entirely for freight (that's how NXG ships out the metals). Not a single person from the tribes lives within 50 to 100 miles of Lake Duncan -- well maybe one or two recluses who lives off hunting -- but the elders of the tribes all live in small towns and or Vancouver. Te Skay is actually originally centered as a tribe in Southern BC.
- Note that the Te Skay tribe reached a settlement with the BC government about a different project by BC Hydro which flooded the area: Payouts of about a million Canadian dollars a year and an upfront settlement.
http://www2.news.gov.bc.ca/news_releases_2005-2009/2006OTP0184-001498.htm
- The final decision lies with the Premier (governor) Gordon Campbell and the government of BC -- the mine is located in northern British Columbia, but is very under populated -- there are no roads and the mine is a fly in/fly out operation.
- The First Nations appears to be mainly an economic grouping -- they operate several businesses in BC -- hotels, fishing places. Lake Duncan is not a direct economically beneficial tourist destination because no tourists go there or even get close to going there.
- Further to the above point, my impression is that First Nations views mining and other natural resource projects in BC as like Native American tribes in the US view gaming -- a way to make money. If Northgate pays them a million or so a year for Kemess North that will not affect the economics very much at all -- 4.1 million ounces of gold total and 120 million pounds of copper a year (estimates for Kemess North) are huge numbers – NPV mentioned above is $C1.9Bn.
- The Premier of BC Gordon Campbell has the final say on the Kemess North project. Campbell has run politically on an economic prosperity platform. The head of the BC Mining Council (also required signature for the project to go forward) has a background in the oil and gas industry. Both are, in my opinion, cognizant of environmental and Indian rights but place as a first priority economic growth. As Campbell likes to say “British Columbia is open for business.”
As a final note, if the Kemess North project does not go through, (I assess approximately at a 20% chance) then NXG can take the $C190M it costs to develop the mine and look elsewhere, probably Young Davidson.
3) Infrastructure:
Both Kemess projects have established infrastructure – ore is shipped by existing railways – and established transportation infrastructure for getting workers to the mine. See http://www.northgateexploration.com/frame_kemess_mine.html for more detail.
Young Davidson exists next to a traditional mining town – Matachewan in Northern Ontario with a population of les than 400 – but the town is apparently eager to see the mine developed. As far as I can tell, no railways are close to the north but roads access is available. http://www.northgateminerals.com/frame_young_davidson.html
Conclusion:
As there are few intermediate copper and gold miners in the investable universe, and fewer with existing and very promising properties in geopolitically stable areas of the world, Northgate Minerals is unique and represents a compelling buy at the current valuation.
Ticker; Company; Primary Reserves; Sec. Reserves (2); Gross Value Reserves (1); (2)/(1)
NXG; Northgate Minerals; 1.88M Tons Copper; 8.5 M ou Gold; $15.9Bn; $622M; 3.9%
GSS; Golden Star; 4.15M ou Gold; n/a; $2.49Bn; $1.15Bn; 46%
EGO; Eldorado; 9.7M ou; Gold; n/a; $5.82Bn; $2.10Bn; 36.1%
ABX; Barrick Gold; 139 M ou Gold; 933M ou Sil & 6.2BlbsCu; $109Bn; $26Bn; 23.9%
PCU; Southern Peru; 33M Tons Copper; n/a; $198Bn; $23.2Bn; 11.7%
Assumed prices of copper: $2.50 lb, Gold: $600 ou
The number of pure play public copper miners is limited so comparisons are difficult -- Southern Peru is a large cap copper miner so is not directly applicable to NXG (note that large cap miners should trade at a premium to smaller miners). However, in general, gold companies sell at a higher EV/gross value of ore reserves. On either basis, comparison to gold or copper miners, NXG trades at a discount to reserves.
NXG has one medium sized gold and copper mine in production currently (Kemess South) – in production until 3Q09, and two medium sized mines in the works – Kemess South and Young Davidson. These mines are analyzed in more detail below.
The most important factors in the valuation of a mining company – in order of importance – are 1) geology of the mining properties, 2) the political situation of the country and local government and 3) local and transportation infrastructure.
1) Geology:
Northgate has 1 mine in production and 2 mines under development: Kemess South is in production currently and expected to end production at 3Q 09, Kemess North expected production in late-2007 and Young Davidson, which is expected to start production in 2009-10. Note that the main concerns are for the potential production of Kemess North, which is most likely not a geological problem, but a political problem (to be addressed below).
Kemess North:
There are proven and inferred resources of 4.1 million ounces of gold in only the Kemess North mine (for comparison, the largest gold miner is Barrick Gold with 140M ounces gold total). Also 1.3 billon pounds copper indicated at Kemess North (comparison: Phelps Dodge reports 46 billion ounces copper total). These numbers for Kemess North only are numbers comparable to the total reserves of an intermediate gold and copper miner.
NXG's Kemess North Mine is expected to begin production in late 2007, and will last for 11 years. http://www.northgateexploration.ca/frame_kemess_north. Kemess North is only 7 km north of Kemess South, so the geology strikes me (a bit unscientifically though) to be similar. Apparently the grade is a bit lower but not much. Northgate refers to the North as the "Kemess expansion."
Production from Kemess North is projected at 250,000 ouces au a year, Kemess South is currently at 300,000 ou au a year, copper production from North is set at 112 M ou ag a year while South currently is set at 75 M ou ag per year. Kemess North is being delayed however currently due to potential pollution issues concerning an Indian Tribe, part of the First Nations Group. This issue is the most important issue concerning Kemess North, and is addressed in detail below.
An economic assessment by Mining Watch Canada – which mainly focuses on environmental issues in Canada, but is still provides detailed Net Present Values of mining properties – assessed the NPV of Kemess North at $C1.9Bn at conservative assumptions for prices of gold and copper:
“If one assumes Option 1 but with Gold/Copper prices of $US500/$US1.80 then after-tax earnings reach $1,911.5
million over the life of the mine with an IRR of 47.6%, far above the credit adjusted
risk free return of 5.625% and much higher that the generally-accepted
required return 10% - 15% of for projects of this nature.”
http://www.miningwatch.ca/updir/Kemess_North_Economic_Review.pdf
Young Davidson Mine:
Northgate has the Young-Davidson mine earmarked after 2008 (probably 2009 to 2011) -- 170,000 ou au a year albeit higher cash costs due to a lower grade of reserves. Indicated reserves at Young-Davidson have are approximately 2 M Ou Au http://www.northgateminerals.com/frame_press_release.html
2) Political Situation:
As a general rule, the political situation concerning mining in Canada is favorable – however NXG has potential problems concerning an Indian Tribe – the Te Skay Tribe of the First Nations Group (the First Nations Group represents Northern Canadian Native American Tribes) – that is delaying the project due to the proposed contamination of a lake in northern British Columbia from the Kemess North project. First Nations isn't sure if it will contaminate the lake, so they have asked for and received 90 more days to see if the project will or will not be approved. Currently the trial is set for May 14th, 2007.
In the author’s view, this political problem is the most risky aspect of an investment into NXG. However I am mainly assured that the mine will be approved -- if I put a “probability” on the approval, 80% likelihood – for the following reasons.
- The mine is far removed from local cities and populations, in Northern British Columbia, as the Kemess Mine is a "major" employer providing only 450 jobs. The tax authorities and the town and of course company want the Kemess North Project, but the tribe may or may not want it, depending on how it affects the lake.
- Further, Northern British Columbia is very similar in territory and population density to Yukon Territory, which is approximately than 50% the size of Alaska but has only 29,900 people. Yukon Territory is much less densely populated than Alaska. Population density of 0.06 per km2 compared to Alaska, 1.09 people per Mile2. It is mainly empty space -- Indian "tribe" that the First Nations Represents does not live close to the project, but has ancestors who lived there, and the tribe is relatively small, approximately 350 people. http://www.rcmp-grc.gc.ca/bc/programs/aps/profiles/north/tsaykeh_full_e.htm
- There are no towns around Lake Duncan and if you look at a map there are a lot of Lakes the same size/larger right in the same area. It is pure wilderness around this mine for 100's -- more like about 500 miles. No roads, only can reach by plane/helicopter. One railroad there but that is almost entirely for freight (that's how NXG ships out the metals). Not a single person from the tribes lives within 50 to 100 miles of Lake Duncan -- well maybe one or two recluses who lives off hunting -- but the elders of the tribes all live in small towns and or Vancouver. Te Skay is actually originally centered as a tribe in Southern BC.
- Note that the Te Skay tribe reached a settlement with the BC government about a different project by BC Hydro which flooded the area: Payouts of about a million Canadian dollars a year and an upfront settlement.
http://www2.news.gov.bc.ca/news_releases_2005-2009/2006OTP0184-001498.htm
- The final decision lies with the Premier (governor) Gordon Campbell and the government of BC -- the mine is located in northern British Columbia, but is very under populated -- there are no roads and the mine is a fly in/fly out operation.
- The First Nations appears to be mainly an economic grouping -- they operate several businesses in BC -- hotels, fishing places. Lake Duncan is not a direct economically beneficial tourist destination because no tourists go there or even get close to going there.
- Further to the above point, my impression is that First Nations views mining and other natural resource projects in BC as like Native American tribes in the US view gaming -- a way to make money. If Northgate pays them a million or so a year for Kemess North that will not affect the economics very much at all -- 4.1 million ounces of gold total and 120 million pounds of copper a year (estimates for Kemess North) are huge numbers – NPV mentioned above is $C1.9Bn.
- The Premier of BC Gordon Campbell has the final say on the Kemess North project. Campbell has run politically on an economic prosperity platform. The head of the BC Mining Council (also required signature for the project to go forward) has a background in the oil and gas industry. Both are, in my opinion, cognizant of environmental and Indian rights but place as a first priority economic growth. As Campbell likes to say “British Columbia is open for business.”
As a final note, if the Kemess North project does not go through, (I assess approximately at a 20% chance) then NXG can take the $C190M it costs to develop the mine and look elsewhere, probably Young Davidson.
3) Infrastructure:
Both Kemess projects have established infrastructure – ore is shipped by existing railways – and established transportation infrastructure for getting workers to the mine. See http://www.northgateexploration.com/frame_kemess_mine.html for more detail.
Young Davidson exists next to a traditional mining town – Matachewan in Northern Ontario with a population of les than 400 – but the town is apparently eager to see the mine developed. As far as I can tell, no railways are close to the north but roads access is available. http://www.northgateminerals.com/frame_young_davidson.html
Conclusion:
As there are few intermediate copper and gold miners in the investable universe, and fewer with existing and very promising properties in geopolitically stable areas of the world, Northgate Minerals is unique and represents a compelling buy at the current valuation.
Wednesday, April 11, 2007
Cost/Ton is the Appropriate Measure to Value Coal Companies
A previous post in this blog asked the question: can an investor value coal companies based on gross value of reserves? The answer give there was "maybe." A clearer answer to value a coal company is: a much more appropriate valuation is cost/ton compared to the price/ton of coal.
Cost/ton is defined as the lifting costs per ton of coal -- an investor would compare this cost with the selling price of coal (both current and future). The difference would be the margin -- a large gross margin, of course, indicative of good profitability.
Rev/Ton - Cost/Ton Dependent on Geographic Region:
Certain producing geographic areas for coal have stronger margins than others. In Central Appalachia, International Coal Group (ticker: ICO) is producing coal at a cost/ton of $42 with an additional $4 in start up costs, while Central Appalachian coal prices are at estimated $45 to $48 until 2009 (coal contracts are of 1 to 3 years in duration). This does not leave a high margin. -- However note that ICO has operations in Illinois which are at higher gross margin, leading the overall company in profitability, but the company's main area of operations is Appalachia.
Note that both the Western US and Australia are approximately twice as profitable as the Eastern US on a margin per ton basis for Peabody Energy -- the United States #1 coal producer. Peabody Energy -- with its operations in the western and eastern US, and Australia, reports the following costs per ton in its geographic areas.
2006
Operations Rev/Ton Costs/Ton Margin %Margin
Eastern U.S. $37.96 32.24 5.72 15.1%
Western U.S. 10.66 7.47 3.19 29.9%
Australia 64.31 43.82 20.49 31.9%
In the US, it appears that those companies without exposure to the Eastern US and Appalachia have a stronger rev/ton - cost/ton margin:
Reserves (mm tons); Res Life (years); % Owned (vs leased); Reserve Value; EV/Reserve Value; Cost/Ton (total company); Rev/Coal (average co); Margin %
Peabody 9,479; 46; 42%; 214,946; 5.9%; 13.42; 22.68; 40.8%
Consol 4,546; 65; 56%; 170,721; 3.9%; 23.80; 37.55; 36.6%
Arch 3,076; 29; 13%; 52,525; 11.3%; 13.08; 17.08; 23.4%
Massey 2,260; 52; 16%; 106,501; 2.7%; 42.33; 47.12; 10.2%
Foundation 1,708; 26; 45%; 30,744; 6.9%; 14.30; 18.88; 24.3%
ICO 1,060; 72; 72%; 42,158; 2.1%; 38.00; 39.00; 2.5%
Alliance 549; 26; 5%; 20,749; 6.6%; n/a; 37.79; n/a
Alpha* 490; 19; 3%; 26,460; 6.1%; 45.96; 54.00; 14.9%
James River 225; 24; 7%; 10,393; 3.1%; $42; 46.19; 9.1%
Information on costs/ton from the respective company 2006 year end financial statements.
*Alpha Natural Resources holds approximately 35% of its resources as Metallurgical coal which is priced at $75/ton.
Potential Improvement in Rev/Ton - Cost/Ton:
The way to improve margin for a coal company is to 1) decrease operating costs, 2) open and/or find improved geological mines and/or 3) realize a higher price for coal (the price of coal is set in contracts and in the spot market).
On decreasing operating costs, (1 above) a reasonable assumption is that coal company costs will, all other things equal -- ie no drastic cost reduction programs announced -- increase in the future, due to general construction and worker price inflation as well as more and more difficult geology (in Appalachia, several sources have stated that the easy-to-mine coal has already been mined, making geological improvements in coal recovery less likely -- although note that several sources state that in Illinois and the West the easy to mine coal is still abundant).
An example of increasing cash costs per ton is Massey Energy -- which operating in the East and Midwestern US -- reported the following costs/ton for the past 3 years as of 2006:
2006 2005 2004
Produced tons sold (millions) 39.1 42.3 40.4
Produced coal revenue ($ millions) $1,902.3 $1,777.7 $1,456.7
Produced coal revenue per ton $48.71 $42.02 $36.02
Average operating cash cost per ton $42.33 $35.62 $30.50
Future Coal Prices
The question on 3) above to improve margin is: what is the future direction of coal prices? Coal appears to be on a slight uptrend, favored by continuing demand, more difficult to produce reserves on the east coast, but under pressure currently from environmental concerns. Note that the utility TXU announced that they are dropping their permit requests for 8 coal-fired electricity plants, -- moving to nuclear powered plants -- reducing the number of planned coal power plants from 11 to 3. This could potentially signal a move from other utilities away from less-clean coal.
Conclusion
Caution should be applied for the investor currently in Appalachian heavy coal companies. Overall, the steep upward price appreciation in the US appears to be mitigated, so dramatic improvements in profitability -- based on higher future coal prices -- does not appear to be realistic -- although this does not include other geographic regions such as Australia, China and Russia, which have their own unique pricing and operating dynamics.
Cost/ton is defined as the lifting costs per ton of coal -- an investor would compare this cost with the selling price of coal (both current and future). The difference would be the margin -- a large gross margin, of course, indicative of good profitability.
Rev/Ton - Cost/Ton Dependent on Geographic Region:
Certain producing geographic areas for coal have stronger margins than others. In Central Appalachia, International Coal Group (ticker: ICO) is producing coal at a cost/ton of $42 with an additional $4 in start up costs, while Central Appalachian coal prices are at estimated $45 to $48 until 2009 (coal contracts are of 1 to 3 years in duration). This does not leave a high margin. -- However note that ICO has operations in Illinois which are at higher gross margin, leading the overall company in profitability, but the company's main area of operations is Appalachia.
Note that both the Western US and Australia are approximately twice as profitable as the Eastern US on a margin per ton basis for Peabody Energy -- the United States #1 coal producer. Peabody Energy -- with its operations in the western and eastern US, and Australia, reports the following costs per ton in its geographic areas.
2006
Operations Rev/Ton Costs/Ton Margin %Margin
Eastern U.S. $37.96 32.24 5.72 15.1%
Western U.S. 10.66 7.47 3.19 29.9%
Australia 64.31 43.82 20.49 31.9%
In the US, it appears that those companies without exposure to the Eastern US and Appalachia have a stronger rev/ton - cost/ton margin:
Reserves (mm tons); Res Life (years); % Owned (vs leased); Reserve Value; EV/Reserve Value; Cost/Ton (total company); Rev/Coal (average co); Margin %
Peabody 9,479; 46; 42%; 214,946; 5.9%; 13.42; 22.68; 40.8%
Consol 4,546; 65; 56%; 170,721; 3.9%; 23.80; 37.55; 36.6%
Arch 3,076; 29; 13%; 52,525; 11.3%; 13.08; 17.08; 23.4%
Massey 2,260; 52; 16%; 106,501; 2.7%; 42.33; 47.12; 10.2%
Foundation 1,708; 26; 45%; 30,744; 6.9%; 14.30; 18.88; 24.3%
ICO 1,060; 72; 72%; 42,158; 2.1%; 38.00; 39.00; 2.5%
Alliance 549; 26; 5%; 20,749; 6.6%; n/a; 37.79; n/a
Alpha* 490; 19; 3%; 26,460; 6.1%; 45.96; 54.00; 14.9%
James River 225; 24; 7%; 10,393; 3.1%; $42; 46.19; 9.1%
Information on costs/ton from the respective company 2006 year end financial statements.
*Alpha Natural Resources holds approximately 35% of its resources as Metallurgical coal which is priced at $75/ton.
Potential Improvement in Rev/Ton - Cost/Ton:
The way to improve margin for a coal company is to 1) decrease operating costs, 2) open and/or find improved geological mines and/or 3) realize a higher price for coal (the price of coal is set in contracts and in the spot market).
On decreasing operating costs, (1 above) a reasonable assumption is that coal company costs will, all other things equal -- ie no drastic cost reduction programs announced -- increase in the future, due to general construction and worker price inflation as well as more and more difficult geology (in Appalachia, several sources have stated that the easy-to-mine coal has already been mined, making geological improvements in coal recovery less likely -- although note that several sources state that in Illinois and the West the easy to mine coal is still abundant).
An example of increasing cash costs per ton is Massey Energy -- which operating in the East and Midwestern US -- reported the following costs/ton for the past 3 years as of 2006:
2006 2005 2004
Produced tons sold (millions) 39.1 42.3 40.4
Produced coal revenue ($ millions) $1,902.3 $1,777.7 $1,456.7
Produced coal revenue per ton $48.71 $42.02 $36.02
Average operating cash cost per ton $42.33 $35.62 $30.50
Future Coal Prices
The question on 3) above to improve margin is: what is the future direction of coal prices? Coal appears to be on a slight uptrend, favored by continuing demand, more difficult to produce reserves on the east coast, but under pressure currently from environmental concerns. Note that the utility TXU announced that they are dropping their permit requests for 8 coal-fired electricity plants, -- moving to nuclear powered plants -- reducing the number of planned coal power plants from 11 to 3. This could potentially signal a move from other utilities away from less-clean coal.
Conclusion
Caution should be applied for the investor currently in Appalachian heavy coal companies. Overall, the steep upward price appreciation in the US appears to be mitigated, so dramatic improvements in profitability -- based on higher future coal prices -- does not appear to be realistic -- although this does not include other geographic regions such as Australia, China and Russia, which have their own unique pricing and operating dynamics.
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