Cut from a long article written by Alan Kolher yesterday. Tonight on ABCTV news he was even more bullish.
It’s time for to look for opportunities now as well, which is where distressed hedge funds and the question of fundamentals versus speculation come in.
Australian gas stocks have been smashed in the past few weeks because, it’s rumoured, a fund managed by the brief Sydney billionaire Phil Mathews is liquidating his big energy bet to meet redemptions.
Mathews Capital became famous earlier this year when the oil price had its big run because it seemed he was a billionaire for a while as a result of an 80% return on his funds IN ONE MONTH. Now the oil tide is rushing out as quickly as it came in, and Mathews’ investors are taking their money out again.
His big bet was Santos, which has fallen 50% in two weeks while the crude oil price has fallen 30%. It is hedge fund panic upon hedge fund panic.
Did oil futures run up to $US147 a barrel because analysts peering into spreadsheets made considered judgements that Chinese demand and global output would result in that price, or because a bunch of hedge fund punters were looking for something else to bet on after the credit default swap market disappeared?
With oil futures back at $US72, we think we know the answer to that (global demand has not fallen by half, so it must be speculators), but we’re not entirely sure.
Buying from distressed hedge funds trying to meet redemptions is a very good idea it seems to me, and normally that would mean buying Santos from Phil Mathews for $10–11 a share. But you must be prepared for short-term losses even from that level, and anyway Queensland Gas Co might be a better bet, although there is not much in it.
At that price Santos is on a price/earnings (P/E) multiple of about 11 times, the cheapest it has been for a long time. Mathews doesn’t care; he needs cash. If you, on the other hand, have cash to invest you could do worse than be his “Reserve Bank” – that is, pawning his assets.
For comparison, the other four Queensland coal seam gas players are on the following P/Es: Origin, 11; Queensland Gas 9; Arrow Energy 34.
Although the Queensland coal seam gas fields will be developed, it will take longer now than before, and it is possible that not all four projects will get up. The winners will be those that have the strongest partners, because the LPG price is lower and funding is harder to get.
Queensland Gas is cheaper than Santos and its partner is Britain's BG Group; whereas Santos’s is Petronas. Last year BG’s profit was about $US7 billion; Malaysia's Petronas made $US10.6 billion. Arrow’s partner is Shell ($US31.9 billion), and Origin’s is ConocoPhillips ($US4.4 billion profit).
The point is that nothing fundamental has changed with coal seam gas, except that some of the speculative froth has come out of their share prices and out of the oil price as well.
This is just a microcosm of what’s happening more broadly. John Hussman, a US fund manager who writes interesting reports on his website, wrote last week:
“Look – a few weeks ago, there was a $700 billion pile of money on the table, but the only way for Wall Street and bureaucrats to get their paws on it was to scare the public out of its collective gourd. They succeeded, but created the psychology that the US was on the verge of depression if the bailout wasn't passed. Having created that psychology, the crisis took on a life of its own.
“I have argued since 2003 that the US financial system was pushing toward major credit difficulties. Earlier this year I noted that the eye of the storm would pass just about where we are today. These difficulties were largely expected. In response, the badly reasoned and childish panic coming out of Wall Street analysts these days is an embarrassment to the investment profession.”
This is man who saw it coming. His message now, and that of Warren Buffett, is: don’t join in the panic – buy from the panickers.
