I spy with my little eye: Introducing Suitpossum’s map of Global Energy Geopolitics

Recently Google Maps has been blowing my (admittedly somewhat unstable) mind. It all started when I thought it would be great to travel around China, looking at Special Economic Zones. In the absense of cash to get a ticket to China though, I used Google Street View to drive through the outskirts of Hong Kong and to look longingly across the bay at Shenzhen, an economic engine on overdrive.

Virtual driving with Google streetview requires no petrol, but the system does rely on giant Google data centres sucking up huge quantities of electricity, so it ain’t exactly carbon-free travel yet. That’s a goal for the future, and in the spirit of a great transformation from carbon-intensive economies to a carbon-free one, I thought it would be interesting to use Google’s software to map the harware of global energy. Thus, I'm happy to introduce Suitpossum’s Map of Global Energy Geopolitics.

View Suitpossum's Global Energy Geopolitics in a larger map

It's the beginning of an ongoing project to break the global fossil fuel nexus down into easy-to-digest chunks. It's being created in conjunction with another map (to be introduced later), tracing the emergent geography of renewable energy. Ideally, over the next ten years or so, the importance of the former map will diminsh vis-a-vis the latter

The map is still under development, but thus far, the points of interest are split into 4 categories:

1) Oil (and gas) fields

This includes the gigantic Ghawar and Shaybah Oil Fields in Saudi Arabia, and badass fields in other important oil-exporting nations, like the Samotlor Field in Russia and the Tengiz Field in Kazakhstan. I recommend checking out the enormous dying Burgan oil field in Kuwait, which can literally be seen from the sky (seriously, it looks like pools of oil are coming to the surface). That's the field that was set alight by Iraqi troops during the first Gulf War. Nowadays though, it appears to be the Rumaila oil field in Iraq that's on fire.

Another aim of the map will be to profile unconventional and controversial oil and gas operations, such as shale gas deposits, and the obnoxious tar sands excavations in Fort MacKay, Canada. These are the focus of much environmental concern, not to mention dubious economics.

2) Oil (and gas) Terminals

The map has some special points for those who are interested in the world of commodity futures trading. To the left is Cushing, Oklahoma, the theoretical delivery point for all those WTI oil futures contracts that the financial press always talks about. I say 'theoretical', because about 95% of oil futures trades are made by daytrading speculators who have never actually seen real oil, never mind actually taken delivery of it. Cushing has however, recently seen some interesting investigations into oil market manipulation by physical oil traders. Another point of interest on the map is Sullom Voe, stuck out on the wilds of the Shetland Islands. That's where the ICE Brent Crude futures get settled, and you can use Google Streetview to drive right up to the entrance.

Another fun one is Henry Hub, south of Erath Louisiana. This is where a load of natural gas pipelines in the US meet, and it's also where NYMEX natural gas futures get settled. A particularly interesting curiosity just north of Erath is Lake Peignure, made famous when oil prospectors in the lake accidently drilled through the ceiling of a salt mining operation below, causing the entire lake to drain in a swirling vortex of doom that made the river flow backwards from the Gulf of Mexico. More recently, the salt caverns of Lake Peignure have become somewhat controversial storage facilities for natural gas.

Do take a look at the other oil and gas terminals. There's a really interesting one in the murky delta at Bonny, Nigeria, and another in the far reaches of De-Kastri, Russia. There's the Sangachal Terminal in Baku, Azerbaijan, right in the heart of the oil and gas operations of the Caspian sea. Finally, there is the amazing R’as Tanura Oil terminal in Saudi Arabia. Take a look at the town - it hosts Najmah, one of the gated communities for foreign expats that work for the world's largest oil company - Saudi Aramco. See if you can spot the golf course. One might say that political opinions on all this are somewhat fractious: Check this pissed off dude.

3) Coal fields

This aspect of the map remains underdeveloped. Coal tends to be less of a geopolitical issue than oil, due to it’s wide geographic spread and large quantities, but it's certaintly the dirtiest fossil-fuel of them all. Over the next few weeks I will be identifying key coal zones, which shouldn't be too hard, considering that the coal strip mines are about as subtle as bomb zones.

4) LNG operations, and other curiosities: This is going to be a section to trace exotic curiosities like Gas-to-Liquids (GTL) plants, coal liquefaction facilities, and liquified natural gas facilities like the one at Ras Laffan in Qatar. Ras Laffan looks like a cross between Star Trek and Mordor, except set in a desert. Take a look at some of the photos available on the Panaramio tool on Google Maps.

5) Strategic transportation routes

Finally, the map will seek to point out various chokepoints in energy transportation systems, including areas of pipeline vulnerability, and shipping lanes like the Strait of Hormuz that keep US generals up at night, popping Valium.

This project remains a work in progress, so any suggestions are most welcome. Hope it can be useful.

What if US failed to increase Debt Ceiling? (31 July 2011)

Deadline gets closer and closer, yet US have not come out a concrete solution to calm the world. Whether tax increases should be included in a deficit reduction agreement or not, both Democrats and Republicans are standing firm without compromise. Republicans insist that any deal to cut deficits should involve spending cuts only while Democrats have been demanding both spending cuts and tax increases.

Although Finance Malaysia reckons that the Congress would pass the bill to increase debt ceiling, let us analyzed and prepare for the unfortunate outcome. What if the debt ceiling limit is not raised by 2nd August?

1. US bondholders will get paid first, while other payments such as social security, military payment, and Medicare services will stall.
2. Downgrading by rating agencies is unavoidable, which will lead to an increase in Treasury's borrowing costs.
3. US will be losing its AAA ratings, damaging the important role of USD as one of the world's preferred currency.
4. USD will slump to yet another all-time low, while Gold price will recorded yet another all-time high
5. Commodities prices traded in USD will shoot up.
6. Inflation rate in Emerging Markets will pushed up by rising resources and food prices.
7. Hence, this will dampen the growth of the economy and China being the world's growth engine will stall by high inflation, lower domestic consumption.

It's such a nightmare for the world's economy. Anyway, Finance Malaysia thinks that both Democrats and Republicans will reach a solution and pass the debt limit increase. Ultimately, who is going to blamed for if US default? Both sides of politicians, not only Obama. The world is just not prepared for such unfortunate events while recovery is just started.

US Debt Ceiling: What is that exactly?

Time is running out. We still have 3 more days to the very decisive day of 2nd August 2011 for US politicians to reach an agreement to increase the US debt ceiling. Everyday we heard this word "Debt Ceiling" repeating be it via TV, radio, newspaper and social media, but do we exactly know what does it mean?

Once again, Finance Malaysia blog strive to provide the knowledge to public regarding the most discussed economic issue now. So, what is debt ceiling?

The debt ceiling is a cap set by Congress on the amount of debt that the federal government can legally borrow. The cap applies to debt owed to the public plus debt owed to federal government trust funds such as those for social security and Medicare.

Why US need debt ceiling?

With debt ceiling, US can only borrow to finance their budget with the limit given. This will put a stop on the amount US can borrow to avoid US from over borrowing, which is very dangerous for the economic health of US.

What is the current limit?

The current limit was USD 14.29 trillion, which was raised in Feb 2010. It was not the first time, yet it would not be the last. The first limit was set in 1917 with USD 11.5 billion. Since then, it has been increased nearly 100 times.

New Fund: AmAsia Pacific REITs

Despite the current high level of share market globally, especially in Asia, there is still hanging fruits waiting for investor to grab. One of it was REITs, which lags behind its share market peers in terms of valuation. With this, AmMutual launched their latest fund which focuses on REITs investment on 18th July 2011.

The fund aims to provide regular income and to a lesser extent capital appreciation by investing in REITs. To achieve the investment objective, 70% to 98% of the fund's NAV will be invested in REITs listed in Asia Pacific region, which includes but not limited to Australia, Hong Kong, Japan, Malaysia, New Zealand, Singapore, South Korea, Taiwan and Thailand. In addition to country diversification, the Fund will also diversify into different REITs sectors such as residential, commercial and industrial. The fund will hold between 2% to 30% of its NAV in liquid assets.

Strategy Employed...

The manager employs an active allocation strategy, which means the asset allocation decisions will be made after reviewing the macroeconomic trends and REITs market outlook of the respective countries in the Asia Pacifc region. Among the criteria are:

• track record
• investment portfolio
• financial status
• income distribution policy
• cost factors of REIT

Any distribution?

Subject to availability of income, distribution is paid at least once a year.

AmAsia Pacific REITs is suitable for investors who:

• wish to have investment exposure through a diversified portfolio of REITs in the Asia Pacific region. Portfolio diversification is obtained by investing in REITs of various sub-sectors (for example, residential, commercial, industrial within the REITs sector) listed in various countries; and
• seek regular income and, to a lesser extent capital appreciation over the Medium to Long Term.

Source: AmMutual and the Fund's prospectus

Click here to download the fund's prospectus

Sell European Bank Stocks? Part III

Everyone who has followed this blog knows about my long lasting skepticism (4 years now, and I am just waiting for a reason to change my mind) when it comes to bank stocks. For instance, one year ago, August 16th 2010, I wrote the following on this blog in Sell European Bank Stocks?

* August 16th, 2010: “my n-month verdict for the EU banking sector is underperform!”

That was a good call (and actually confirmed by my academic research on banking assets and not only a gut-feeling produced by media digestion) since the FTSE Eurofirst Banks index has underperformed the overall European stock market (FTSE Eurofirst 300) with a whopping 25% since then! The banking index is down more than 20% and the general index is up about 5%


* July 20th, 2011: “the 12-month underperformance of the EU banking sector has been 25%!”

Well, I still have opinions on the EU banking sector and it is mostly negative! I am not as negative as I have been earlier but I believe in a continuing underperformance of the banking sector, nonetheless. Despite the drastic fall in valuation! Caveat emptor, though, this is not based on my research since I have to wait for some data I need to be released but it is more a result of some other more or less obvious facts related to European banks. For instance, banks are clearly becoming more regulated, almost utility-like, and this will affect them more than people think, I believe. Also, ROE will be much lower than before (perhaps halved) and I think this has not been acknowledged enough. And finally, the Euro zone will either collapse or undergo significant stress which is bad for European banks. I think it is inevitable. All of this is quite obvious, I admit, and the issue is just that I estimate that I am more negative than consensus!

I will be back on my research and on whether that confirms my negative outlook. Until then, caveat emptor! And do your own research!!

New Fund: HwangDBS China Select Fund

The Fund is a wholesale feeder fund that aims to achieve capital appreciation over the long term by investing in a collective investment scheme, namely the China Select Fund, a Cayman Islands-domiciled sub-fund of Citi Investment Trust (Cayman) II managed by Citigroup First Investment Management Limited (the "Target Fund"). Being a wholesale fund in nature, this Fund is open for sale to Qualified Investors only.

The Manager will invest a minimum of 95% to maximum of 99.8% of the Fund's NAV in units of the Target Fund and a maximum 5% in deposits. The base currency of the Target Fund is US dollar.

3 reasons to invest in this fund:

What is the permitted investments for the Target Fund?

It is expected that approximately 70% to 100% of the Target Fund's portfolio will be invested directly and indirectly in equity securities issued by companies which are listed or being offered in an initial public offer on official stock markets in Hong Kong, China (A Share and B Share markets), the United States, Taiwan, Singapore and other countries.

Other than that, the fund may also use financial derivative instruments (including index futures, index options and index and currency swaps) to hedge market and currency risk only.

How about China A shares?

NO. The Target Fund will not directly invest in China A shares, but may use Access Products to gain exposure. Access Products will generally account for approximately 10% to 30% of the Target Fund's portfolio.

What is Access Products?

It represents an obligation of the relevant Access Product issuer to pay to the Target Fund an economic return equivalent to holding the underlying A Shares. It will be valued on a mark-to-market basis on each valuation day by the relevant Access Product issuer and independent verification (at least on a weekly basis).

A 10% performance fee will be charged to the fund if the appreciation in the NAV during the relevant performance period is above the high watermark of the Target Fund.

Click here to download the Product Kit

Click here to download the Information Memorandum

Source: HwangDBS Investment Management

New IPO: Bumi Armada

Bumi Armada Bhd (BAB) is seeking a listing on 21st July 2011 with an enlarged share capital of 2.93bn shares of RM0.20 each on the Main Market of Bursa Malaysia. Based on the retail IPO price of RM3.03 per share, BAB will have a market capitalization of RM8.87bn. It expects to raise gross proceeds of about RM1.95bn from the flotation. Some 38% of the proceeds will be used to pare down bank borrowings while 29% and 28% will be used for capital expenditure and working capital respectively. The balance 5% will be used to pay listing expenses.

Company Profile

Bumi Armada Berhad is the largest owner and operator of offshore support vessels in Malaysia and is an established and trusted service partner in the oil and gas industry. It had established a strong position in FPSO systems, a growing Transport & Installation business and competency in management of large projects.

With head office in Kuala Lumpur, Malaysia and shore-bases in several countries around the globe, BAB currently serve clients in South East Asia, Congo, India, Mexico, Africa, Venezuela and the Caspian Sea region

Principal Activities

BAB has 4 main business units, which are:

1. floating production, storage and offloading system (FPSO)
2. offshore support vessel (OSV)
3. transport and installation (T&I)
4. oilfield services (OFS)

It also has 2 support units, which are:

1. fleet management services (FMS)
2. engineering, procurement and construction (EPC)

Nevertheless, the company’s bread and butter is its FPSO and OSV business, which generated about 45% and 55% of revenue in FY09 respectively and 44% and 34% in FY10. BAB’s record of consistent execution and its in-house expertise throughout the value chain allows the group to expand its vessel deployment footprint beyond its base in Malaysia to more than 10 countries in Asia, Africa and Latin America.

Investment Catalysts:

1. High oil prices to support E&P spending
2. Higher energy demand from global economic recovery
3. Industry moving towards 1-stop solutions, where BAB's 3 combined core businesses would qualify it as a 1-stop solution provider
4. Targeting a niche market in FPSO, which only a few FPSO owners in the market due to the high capex required
5. Strong RM5.8bn order book and customer base, which should keep BAB busy over the next 2-3 years
6. Active corporate branding

Valuation given by OSK Research:

We are initiating coverage on BAB with a Subscribe/Buy recommendation with fair value of RM3.65 based on sum-of-parts valuation. This is equivalent to a PER of 18x FY12 EPS, a valuation which is fair given the company’s sheer size and its ability to provide 1-stop solutions starting from the O&G exploration to decommissioning stage. Also, since an estimated more than 70% of its business provides recurring income and constant cash flow, the stock deserves a premium valuation over other local O&G supporting companies, who are dependent on one-off jobs.

Source: OSK Research dated 7 July 2011