Bolivian Gas Is Starting to Stink

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MELBOURNE AUSTRALIA 4 December 2006 – Last week was another flat week for the All Ordinaries.  A 0.5% drop in the index on Friday helped ensure it had a negative return for the week.  In the US, markets were also negative with two down days at the end of the week threatening to push the Dow Jones Industrial Average down to the 12,000 point level.

While on the currency markets, the Aussie dollar continues to strengthen, again nudging above USD$0.79.  A move above the 80 cent level seems almost certain.  But we know what can happen when we put the house on it.

We noted with interest two news items over the weekend that could ensure continuing prosperity for the Australian market.  One is the finalization of Bolivia’s nationalization of its natural gas resources.  The second is the increased participation of private equity in the Australian market.

The nationalization of Bolivia’s natural gas industry means that the state, through the state run Yacimientos Petroliferos Fiscales Bolivianos (YPFB) will earn 82% of profits from the companies.  Needless to say, for those companies that are affected, they are not likely to be too happy with this result.  According to Agence France Presse (AFP), these companies include Exxonmobil (NYSE: XOM), BG Group (LON: BG.). (formerly British Gas), Total (EPA: FP) and Repsol (MCE: REP).

Paradoxically, Bolivian president Evo Morales said “Bolivia needs a lot of investment.”  Doesn’t quite seem the best way of attracting private firms to invest in the country if they know that 82% of profits will be skimmed off by the lecherous state run organization.  Alternatively, for those companies desperate enough to replenish their reserves they may see 18% of something as being preferable to 100% of nothing.

Bolivia is following in the footsteps of Venezuela with it’s nationalist agenda.  From the perspective of the poor in those countries it is not difficult to understand why they instinctively support these measures.  With oil and gas prices at such high levels, they all wonder why their natural resource on their land is being sold by a foreign company with the majority of profits going to that foreign company.  In return the employees are doubtless paid a fairly ordinary wage.

However, for companies that have no exposure to Bolivia, such as Woodside Petroleum (ASX: WPL), this could represent an excellent opportunity for them over the next few years as international companies in Bolivia stay there reluctantly, not wanting to alienate themselves from other Latin American countries and risk losing the remaining profits.

Yet, what will be the incentive for these firms to poor extra investment dollars into those countries?  Very little.  Over time it will be more likely that production levels fall as machinery and equipment is not maintained or updated.  Therefore a reduction in the supply will potentially lead to a rise in the prices traded for gas helping companies such as Woodside.

But it isn’t just the resources companies that could show strong potential.  The other news item that caught our attention was the story from Bloomberg News, “Australian takeovers Bolster Stocks as Miners, Oil Shares Slump.”  Of course, that seems to contradict the bullish outlook that we have maintained on the resources sector.

It is true that resources companies have fell quite considerably since peaks reached earlier this year.  And the focus has moved to the industrials in the market as private equity looks for value in the previously little touched Australian market.  Coles Myer has already flogged the Myer stores to private equity.

Brambles sold off part of its business to private equity.  Then Qantas moved onto the radar thanks to the help of Macquarie Bank.  And finally Fosters has started to look attractive thanks to good earnings, low debt and a strong brand name.

It’s difficult to know how much further the private equity bubble has to run.  However, given the fact that there has not been much private equity activity in the Australian market before, many of Australia’s companies, including the banks could be ripe for acquisition.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
Kris Sayce

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