No, oil and gas exploration company Apache Inc. (APA), is not directly tied to ancestral Native American lands in the American southwest - though I guess all US lands are ancestral Native American lands.  Nor, as far as I can determine, is the Apache tribe involved in management in any way.   Instead, the name was picked by using the first letters of the last names of Truman Anderson, Raymond Plank and Charles Arnao, the three founders of the company in 1954.  Helen Johnson, an early employee, was awarded a $25 United States savings bond for suggesting the “che” be added, thus the “Apache” name.  Raymond Plank has just retired this year after 54 years of service.

Apache Corporation has grown rapidly in the 54 years since its founding and is now a $26 billion (market cap) international oil and gas exploration, production and development company.  The company reached the $100 million earnings mark in 1996 and $1 billion mark in 2003.  Starting in 1999 Apache has had a steady string of acquisitions.  The acquisitions are continuing.  In April of this year agreement was reached with Marathon (MRO) to acquire 9 Permian Basin oil and gas fields.  This company seems to do acquisitions quite well.

Apache is active in seven regions around the world: the Gulf Coast (onshore and offshore), USA Central, Canada, Egypt, Australia, the North Sea and Australia.  On the the companies’ web site there is a map showing the seven regions they operate in (see it here).  By clicking on the captions on the map you get a summary and details of what the company is doing in that particular region.

Competitors include Exxon Mobil (XOM), BP plc (BP), and Anadarko Petroleum (APC) among others.

Apache, as of December 31 2008, had estimated proved reserves of 1,081 million barrels of crude oil, condensate and natural gas liquids along with 7.9 trillion cubic feet of natural gas.    Reserves are located in mid-continent USA (25%), Canada (22%), Gulf of Mexico area (14%), Egypt (14%), Australia (12%), North Sea (8%) and Argentina (5%).  Apache claims they replaced 122% of production in 2008.

Apache had a $5.25/share loss first quarter of 2009.  In the Earnings Transcript release Tom Banks, President of Corporate Planning and Investor Relations, said “Loss was the result of the continuing deterioration in north American gas prices at the end of 2008 which recorded 1.98 billion non-cash after tax reduction in the carrying value of oil and gas properties”   Also, revenue growth is down 48% year over year due to lower oil and gas prices (Yahoo Finance).  In general, however, Apache is regarded as a conservatively run company and should weather the current downturn better than some of its competitors.  Total cash is $1.38 billion and total debt $4.91 billion (Yahoo Finance).

I like to read annual reports.  The annual report always puts a positive spin on things, of course, but it does give you a feel as to where company enthusiasms lie.  The reports are usually available on the company website under “Investor” sections.  Unfortunately, the Apache website said the 2008 annual report was not yet available and when I clicked on the links to the 2007, 2006 and 2005 reports I got a “page not found” message.  Having done some web design I know it is very simple to create pdf links, so not sure what is going on here.

Apache seems to be a good, solid company in which to invest.  Oil and gas reserves are tangible assets that will hold value, it not appreciate, in today’s climate of currency devaluations.  Unlike gold, oil and gas have actual uses (think your car).  Oil, currently near $60 a barrel and natural gas still only marginally higher than 52 week lows, may drop if the current market upswing is just a bear market rally as many, including myself, think.  On the other hand, if you think that all “real” assets are on a tear due to currency debasements now may be the time to invest in apparently solid companies such as Apache selling for a little over 1/2 its 52 week high.

Disclosure: Long APA

“Look, Bruce!”, my 85 year old mother-in-law exclaimed, waving a letter over her head.  “My annuity is now up to $85,000.  I just can’t withdraw my money for 6 months.  I don’t need it now anyway, though”. That got my attention.  Why couldn’t she withdraw?   Turns out, Standard Life of Indiana, her annuity company had  sent her a second letter.  That letter informed all policy holders Standard Life was now under an “Order of Rehabilitation” with the state of Indiana.  The letter went on to assure policy holders that all annuity contract terms would be honored except “partial and full surrenders clauses”. This is kind of like a bank holiday for an insurance company.

For more information policy holders were referred to the website: www.standardlifeofIndiana.com.  On the website the first question in the FAQ section is “What happened to Standard Life Insurance Company?” — a good, if not particularly encouraging starting point.  Other questions address issues such as financial condition and safety.  The answers were reassuring but vague and short on specifics.

The court filed “Order of Rehabilitation” document is more direct.  Basically, Indiana state Insurance Commissioner Jim Atterholt and his appointees now have control of Standard Life of Indiana.  All power formerly vested to the directors, officers and managers now resides with the State Commissioner.  For those who would like to see the court filed document go here. The rehab action is essential so as to prevent a run on the company while the state figures out just what the assets are worth.  A minimum of six months is needed and that time period may be extended.

Standard Life of Indiana may have been a good company at one time.  However, It was acquired in the 1990’s by Capital Assurance Corporation, a private company.  Obviously, they made  investment mistakes and were caught in last years slump.  I don’t know what the outcome will be for Standard Life’s 40,000 policy holders such as my mother-in-law.  It is probably safe to say that after the bad investments are written down and the legal and other state fees are assessed policy holders will take a significant haircut.

Now, I do not know a lot about annuities and the Standard Life of Indiana action is not new (the court document was filed December 18, 2008).  I do know that funds invested in fixed annuities and whole life policies go into the companies’ balance sheet and will take a hit along with the balance sheet.

The purpose of this article is to alert fixed annuity and whole life policy holders: You cannot assume you 100% safe.  The products are only as good as the company and its investments.   Annuities and life insurance is often sold to financially unsophisticated and/or elderly people.  Even with state regulation, the potential for abuse in these non-transparent investments is present

I would be careful with all fixed annuity and whole life products, especially those held by AIG affiliates (AIG), and large annuity providers such as Genworth (GNW), Hartford (HIG) and Allstate (ALL).

It is not easy to find the financial standing of many annuity and whole life holders.  Some, such as Standard Life of Indiana, are privately held.  Others are large company subsidiaries (with different names) or international firms such as Allianze or Aviva.  Many large banks with shaky balance sheets hold annuity money.  The rating firms gradings have been over optimistic in the past.  Those sophisticated in financial analysis may be able to track this stuff down but the vast majority of annuity and whole life policy holders are clueless.

Disclosure: No positions in any of the above mentioned companies

Families showering together may offend some sensibilities.   However, the April, 2009 issue of National Geographic Magazine has a photo (legs only, sorry) of a family doing just that.  Not only do they shower together, they do it standing in flat plastic containers to catch the soapy run off.  The run off is then used to water the garden.  This is one of many measures promoted by the state of South Australia to conserve water in the drought stricken area.  Water is so precious every last drop is reused as often as possible.

Often called Blue Gold, water is the ultimate commodity.   Why?  Simple, without it, for ourselves and our crops, we die.  Life cannot exist without water.  Yet, we often take clean water for granted.  We waste it and dump toxins in it.  In an increasingly crowded world that has to change.

Watts Water (WTS) a $780 million cap company has been around since 1874 and supplies water control systems in North America, Europe and China.  The company has been in China since 1994 but saw Chinese revenue decrease in 2008 due to currency, tax, wage and transportation issues.

The company website is www.wattsind.com The site provides access to SEC filings, annual reports from 2001, dividend and stock data, press releases, webcasts and other company information.

WTS manufactures valves and related products which insure water quality, conservation and control.  Recent focus has been on valves which prevent water back-flow.  Back-flow controls prevent dirty water from contaminating clean supplies.

Smartmoney magazine discusses how Watts Water may benefit from the US $789 billion stimulus plan.  See the article here.  Competitors include Flowserve Corp (FLS) and  some private firms.

Watts had negative publicity last month as it cut jobs but increased executive compensation (see article here).  Also, there are some litigation issues which have dragged on for several years (see the 2008 annual report).

Watts has a PE of 13.7, price/sales ratio of  .53 and a well covered 2.1% dividend.   There have been 22 years of consecutive dividend payments.  Recent market rallies show WTS participating strongly.

China is suffering from major water quality problems while President Obama’s stimulus programs will benefit water infrastructure products in the US.  In a world increasingly needing clean water WTS seems to have a bright future.

This seems to be a solid, long established company.  Recent problems in China, litigation and perhaps ill timed layoffs and executive compensation issues may warrant some caution, however.

Disclosure: Long WTS

Derivatives: Gambling at Public Expense

Written by Bruce on April 15th, 2009

Arkansas, a oil and gas producing state?  Yes!  Southwestern Energy Company (SWN), an $11billion dollar (market cap) exploration and production company, is here.   Focusing on natural gas extraction from the Fayetteville Shale in the north central part of the state, the company has been a major player since 2004 when production started.

In addition to the Fayetteville play, the company has conventional wells and acreage in other parts of Arkansas, Texas and Oklahoma.  Southwestern also has midstream gathering and marketing subsidiaries.

Southwestern has an attractive, well organized and informative website at www.swn.com  At the site investors can find, among other things, news, annual reports, SEC filings plus they can request information.  There is a two page summary fact sheet which provides the highlights of Southwestern’s revenues and reserves.

Chesapeake Oil (CHK) and BP plc (BP) also are active in the Fayetteville.  BP plc acquired an interest in Chesapeake’s Fayetteville assets for $1.9 billion in late 2008 .  Chesapeake sold the stake to bolster its cash position.

Fayetteville Shale is black, organic rich, rock of Mississippian age (approximately 325 million years ago) and lies at a depth of 1,500 to 6,500 feet in north central Arkansas.  Typically a well is drilled vertically to just above the shale layer, then drilled horizontally for some 3,000 or more feet.  The horizontal boreholes intercept pre-existing vertical fractures.  Then, with the help up hydraulic fracturing, gas flows up the vertical fractures into the horizontal borehole from which it can be collected.  If you are interested you can view here, a short (10-15 minute) video of the process put out by Northern Oil & Gas.

Southwestern’s stock price, currently around 31, is below the July, 2008 high of 52, but well above the low of 19 in October of 2008.  The stock is up since October despite declining gas prices over the same period.

Since some 91% of the stock is held by institutional and mutual funds, thus redemption requests may negatively impact price.

Southwestern’s total proved reserves have increased from 1,026 bcfe (bcf equivalent) year end 2006 to 2,185 bcfe December 31, 2008.  Most of the increase has come from the Fayetteville shale, which now accounts for 1,545 bcfe or 71% of proven reserves.   Southwestern’s natural gas production from the Fayetteville has increased from 53.5 bcef a day in 2007 to an anticipated 229-232 bcef a day in 2009.  Reserve replacement was 386% in 2006, 474% in 2007 and 523% in 2008.  Southwestern seems to be finding lots of gas.

As of 12/31/2008 total cash was $196.28 million ($.571/share) and total debt was $734.5 million.  With the help of hedging, the company, unlike some of its peers, was profitable in the fourth quarter of 2008.  Levered Free Cash Flow (amount of cash available to stock holders after interest payments on debt), however, was  -$831.98 million.

Despite low gas prices Southwestern is still planning a capital program of $1.9 billion for 2009 with the major focus on the Fayetteville shale.  They plan to drill up to 650 wells.  Since, unconventional shale gas in recent years has been found to have lower F&D costs than conventional gas, hence the proliferation of horizontal drilling.

Howard M. Korell, Chairman and CEO sold some $3.2 million in stock the week of March 19-25, 2009.  Mr. Korell sold this stock some 3 weeks after the upbeat teleconference of February 27, 2009.  Mr. Korell intends to retire in the first quarter of 2010.  There are no reported insider buys so far this year.

Natural gas prices continue near record lows, currently the price is below $3.70/Mcf (Mcf is 1000 cubic feet).  Since late February, the price of oil has rebounded some 50%  while the price of gas continues to decline.

Industrial use, residential heating and electricity generation are the major markets for natural gas.  Recession has reduced industrial demand,  the onset of warm weather is dropping heating demand and recession has also somewhat lowered utilities demand.  At the same time, thanks to companies like Southwestern, supplies are increasing, a “perfect storm” driving down gas prices.

We will probably continue to see low gas prices for the next several months.  On the other hand, with the increasing scarcity of oil, I expect natural gas demand to eventually grow as it replaces oil as an energy source.  T. Boone Pickens envisions natural gas replacing or augmenting oil for powering vehicles, a great idea, but this is still in its early developmental stage.

Another wild card is soon to come online LNG production worldwide.  LNG imports, their cost basis and potential impact on US prices probably can only be estimated at this point.

Although Southwestern is rapidly growing reserves and is a low cost producer at around $3/Mcf (scroll down here to see chart), low gas prices will drag on income.  Already some of the higher cost producing companies are shutting down rigs as natural gas prices drop below production cost.  This will eventually tighten supply.  Long term this is bullish for Southwestern.  Dollar devaluation of course (if it occurs) will only make natural gas reserves more valuable.

Demand trends and Southwestern’s levered free cash flow, for now, are bearish.  I would keep on eye on natural gas prices and Southwestern’s debt costs.  A gas price upturn , say above $4.40 mcf, may indicate an entry point into this stock.  Long term investors who don’t want to time the market could consider any significant price dip as an entry point.

Disclosure: None

If parties, unknown to you,  had multimillion dollar bets that your $200 thousand house will burn down in the coming year, would you be upset?  I suspect so.  Some of those parties may need money,  may send an arsonist over, maybe not even tell you in time to get your family out.  Well… Welcome to the world of derivatives.  Only, forget the $200,000 house, start thinking in the billions and trillions.

Now, sit down, these figures may shock you:  The face (notional) value of derivatives held by US commercial banks is over $200 trillion dollars and the total derivative market over $700 trillion. Don’t believe me?  Click here for the US government’s 4th quarter OCC Report, released last Friday.  Read the first two bullets.  Remember, this is just derivatives held by US commercial banks, the total market is, as mentioned above, over $700 trillion (see here).

How much is $700 trillion dollars?  Temple University math professor John Allen Paulos says: “A million dollars a day for 2,000 years is only three-quarters of a trillion dollars”   Well, think about it a minute or so, then go figure $700 trillion.

Okay, these figures are scary and many derivatives are useful and can be unwound.  Derivatives are also useful hedges for farmers, miners and others to smooth out market fluctuations.  They increase liquidity and facilitate transactions.  Credit Default Swaps (CDSs) can measure perceived risk.  The purpose of this article is not to demonize all derivatives.  My question is: why do commercial banks doing with over $200 trillion of them?  This amount is almost four times larger than the total GNP of the entire world, more than all the combined stock and bond values of the world.  Their is only one explanation and that is large scale leveraged speculation.  Another, maybe more accurate term, would be gambling.

Which banks hold much of these derivatives?  The OCC report tells us.  It is five large commercial banks.  They are JP Morgan Chase (JPM), Citibank (C), Bank of America (BAC), HSBC Bank USA, and Goldman Sachs (GS).  Some 82%  of the holdings are interest rate swaps.  Swaps are risky with winners and losers.  Goldman Sachs is most deeply involved.

Now, like me, you may wonder what the hoot is going on here?  Credit Default Swap (CDSs)  didn’t even exist 14 years ago. Now they are a $62  trillion dollar market.  Interest swaps started slowly in the 1980’s, the five banks above alone hold $162 trillion worth.  Why is this rapidly growing market so huge?  A recent  Newsweek article even mentioned the market will be in the Quadrillions soon.

Glass-Steagal was repealed in 1999, allowing banks and others, equipped with sophisticated computer systems, to plunge into derivative trading.    A worldwide, unlimited casino opened up.  Hedge funds, banks, insurance companies took advantage.

Systemically important institutions have no business being major players in this market.  Certainly, taxpayers have not agreed to participate, much less bail out the losers.

The claim is made that derivatives are just paper entities in which assets and liabilities zero out.  Well, yes, there is truth to that.  But, this high-stakes gambling, like all gambling, has winners and losers.  Consider Bear Sterns, AIG and Lehman Brothers, all losers.  In a deleveraging world, we are getting more and more losers.  It doesn’t take much of a shift in a $600 trillion market to wipe out huge companies in days, look at AIG.  Look at what would have happened to Citigroup without taxpayer money.

So, how dangerous are derivatives?  Warren Buffett called Credit Default Swaps “financial weapons of mass destruction”.  AIG proved him right.

Forbes magazine, in their March 16, 2009 issue, has an article on how Lawrence Summers (currently heading the White House’s National Economic Council) entered into interest rate swaps at Harvard University which “burdened Harvard with a multibillion-dollar bet on interest rates that went against it”.  The Forbes article goes on to say that bad  derivative bets may have adversely affected univerisites and hospitals around the nation.

AIGFP  insured CDS derivatives, lost their bets, didn’t have the money to make good, even all of AIG couldn’t make good.  So now the American taxpayer was told they must make good, to the tune of hundreds of billions of dollars.  American taxpayers are the losers, financial institutions world wide are the winners.  Now, after AIG, tell me how you can possibly think derivatives are not dangerous.  And, doesn’t it strike you as strange: few are talking, even now, about reining in the derivative markets?

The megabanks are heavily into interest rate swaps, with a combined notional value of over $150 billion according to the OCC report.  If these systemically important institutions start losing on their interest rate derivatives, which the OCC Report said they did in the 4th quarter,  will we the taxpayers be on the hook to  bail them out again?  Remember the interest rate swap market is much bigger than the CDS market which got AIGFP into trouble.

Derivative trading seems to be a huge, unregulated market, run by the self-appointed elite all over the world amongst themselves.  They use OPM (other people’s money) skimming off profits.  Forget lotteries, forget sports betting, forget Vegas.  This stuff is the ultimate!  A powerful elixir those in power cannot resist playing with.  Doing this for there personal accounts is one thing but  Holding the world economy as hostange and involving taxpayers as backups for losses, however, is criminal.

One wonders how much of the pre TARP scare mongering last fall was true.   Now, the bailouts are bankrupting our nation and there is no end in sight.   We need to start listening to people like Richard Shelby and Ron Paul, not Paulson, Geithner and their cronies at the big banks and Goldman Sachs.  It is time to make those responsible take their losses.

The US government has printed, borrowed or promised some $14 trillion so far.  And guess what: It hasn’t worked! The London protestors suddenly don’t look so foolish, they at least aren’t bankrupting us.  AIG, FANNIE, FREDDIE, JP Morgan, Bank of America, Citigroup, Goldman Sachs want even more of our money, there is no end in sight.   This is insanity!

Disclosures: none

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Here are some definitions and references:  For the definition of financial derivatives see here.  Interest rate swaps are some 82% of the derivative market, see interest rate derivative information here. Another large chunk of the market (7%) are Credit Default Swaps (CDSs).  See the definition of CDSs here.  The OCC’s latest quarterly report, released last Friday has a wealth of information.  See the just released 4th quarter OCC report here

ATP Oil & Gas Corporation (ATPG) is small ($178 million market cap.) oil and natural gas acquisition, development, and production company engaged (mostly) in the Gulf of Mexico.  It also has a significant presence in the North Sea.

Competitors in the Gulf include Apache (APA), Forest Oil (FST) and Newfield (NFX).

Reserves: ATP Oil & Gas Corporation’s estimated net proved reserves on December 31, 2008 were 713.6 billion cubic feet equivalent.  At $4 per 1000 cubic feet this works out to a reserve value of $2,582 billion or roughly $70 a share.  The reserves were “comprised of 321.7 billion cubic feet of natural gas and 65.3 million barrels of crude oil.” or approximately 2/3 oil and 1/3 natural gas by value.  For more detailed reserve reports see the Ryder Scott reports for the Gulf area here and the North Sea area here (pdf formats).  A press release on March 2, 2009 claimed that ATPG replaced 214% of its oil and gas production in 2008 (see here).

Financials: Total cash is $215 million or $5.97/share.  Note, that as of March 25 cash per share is more than the share price.  Total debt is $1.37 billion.  Trailing PE is 1.46 and forward PE is 5.37.  Of course, forward PE’s are only estimates and can be wildly off.  $472 million in recent asset sales have boosted the cash position, so debt should be manageable in today’s low oil and gas price environment.

Insiders: According to Yahoo Finance there are no publicly reported insider sales since the first of the year. There has been over $900,000 acquisitions and purchases since the first of the year.

Summary:  Reserve data, financials, and insider transactions all look bullish to me.  Both oil and gas have been rising the last few weeks.  Even as I write this post, ATPG is on a tear.   The stock bottomed at $2.75 in early March.  Now, on March 25, at over $5 a share, it is up over 80%.   With close to $70/share in reserve value, the stock still seems significantly undervalued.  This could be both a resource and momentum play.

The company seems to have weathered to the 2008 oil and gas price downturn well with asset sales and decreased production.

It should be noted that, due its large Gulf of Mexico presence, ATP Oil & Gas is susceptible to hurricane damage.  The company claimed that Hurricane Ike in 2008 had “minimal impact”.

Disclosure: Long ATPG

Most Americans cannot even remotely fathom why a company that is near bankruptcy will hand out bonuses.  This is especially true when those companies only exist today because they were bailed out by taxpayers.

Apparently in “Wall Street Culture” bonuses are an integral part of compensation.  But, in “Main Street Culture” bonuses, if they even exist, are reserved only for extraordinarily good job performance.  But now, suddenly, thanks to TARP, Main Street owns Wall Street, or at least some of it.

Companies such as AIG, Citigroup, Bank of America and to a lesser extent, other TARP recipients have a new owner: “We the People”.  And, unlike the former owners, the wiped out share holders, these new owners have fiery spokesmen in Congress.

The culture of entitlement is now being told what to do by Joe the plumber, Jill the waitress and Mike, the laid off auto worker.  They don’t vote proxies but they can and do email and write their congressmen.

Well, Congress is having a real hissy fit.  Thursday night I watched representative Earl Pomeroy from North Dakota grandstanding on TV.  Earl told AIGFP employees “you disgust us, by any measure you are disgraced professional losers…”.  On and on he went.  He must have been either an attorney or an actor in his pre congressional days.  Probably an attorney,  I don’t think North Dakota has many actors.

Reportedly, 11 AIG executives have resigned over the bonus brouhaha.  And now, Thursday evening, the House passed a bill - boy, that was fast - to tax bonuses up to 90%.  Apparently, there is to be a surtax, on bonuses paid to employees earning more than $250,000 if the institution received  more than $5 billion U.S. in bailouts.

Congress is doing what it does best (or worst): passing legislation.   Congressional members can’t wait to tell their constituents they voted against the “outrageous bonuses” come next election.  It would be political suicide to be on the other side of this issue.

Of course, all this is mostly show.  The bonus amounts are minuscule compared to bailout amounts.  The country would much better served by debating how to avoid future AIG type debacles.

So, AIG and other TARP companies:  Welcome to government ownership.  You will have to play by different rules from now on.  Instead of a free wheeling entrepreneurial culture you will have to learn to deal with red tape, committees, delays and political pandering.  Get used to it.

Yet, look at it this way.  None of the AIGFP employees and many of the AIG’s non Financial Products employees would probably even have jobs if it wasn’t for the US taxpayer.  Would you want “Derivatives Trader at AIG” on your resume?  AIG and other TARP recipients, you brought this on themselves.  Now you guys are morphed into beauraucrats.  Take your cue from Mr. Pomeroy.  Speech lessons anyone?

Disclosure: Taxpayer ownership only.