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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (28322)	3/18/2005 11:35:38 AM
From: Elroy Jetson	Read Replies (1) \| Respond to of 306849

Unlike real estate developers, oil companies are conservative. When I was there: all projects of ordinary risk (like drilling an oil well in an existing field or a refinery expansion) had to pay 18% at an oil price of $32; projects of moderate risk (like a step-out, drilling a well adjacent to, but not in existing fields) had to pay 23% at an oil price of $32; risky projects (like wildcatting, speculative drilling in a new area based only upon the prophetic utterances of geology and geophysics) had to pay 32% at an oil price of $32. Once everything was said and done, there is a "slippage" between what you hoped and what actually happens. In the final analysis, all of these projects ended up producing a return of about 16.4%. So the slippage on ordinary projects was 1.6%, moderate risk slipped 6.6%, and high risk slipped 15.6% as some failed completely and others produced. The analysis is the same today except the hurdle oil price is $24 instead of $32. As I said, oil companies are much less optimistic about future oil prices today than they were in 1982. Also, as interest rates have declined since 1986, the cut-off rates have been brought down by 4% to 14%, 19% and 28%. This should be producing a completed project return of 12.4%, but that part is confidential. But only to a degree, because you can back it out from their return on capital published in the annual report. .

To: mishedlo who wrote (28322)	3/18/2005 5:03:39 PM
From: Wyätt Gwyön	Respond to of 306849

Won't they all make more money if no new projetcs come on line? yes, but if there were some conspiracy to choke capex, then you'd think some would be "cheating" (like OPEC in the old days, before peak oil, when they actually had shut-in capacity with which to cheat on quotas). that is, each party would be incentivized for personal selfish reasons to do the opposite of what the group should do. but in fact capex budgets are remarkably constrained, especially when you consider that there is high inflation already built into capex (the high oil demand has resulted in high prices for oil services as well, so $100 million of capex last year might be $115 million this year due to inflation alone, and does not represent a real increase in capex. i'm not sure capex is growing at all in real terms. it's not like they don't have the money to do it. according to WSJ, the five megacaps had total free cash flow last year of $67.4 BILLION. instead, they just build up huge cash hoards and idiotic analysts are pushing for "special dividends" instead of capex increases. this is great for me as an investor in the firms that the megacaps will perhaps eventually have to acquire to replace reserves once the price spiral gets out of control. you know, it's funny how things never matter until they matter, at which point...they matter. i was unprofitably shorting GM and buying eventually worthless GM puts a couple years ago for the reasons that caused it to implode this week. but i lost money because it didn't matter till this week. OTOH, many people have made generous contributions to the FNM put fund over the years, but i have more than a triple on the Jun 70 puts i bought a couple months ago because this investment luckily coincided with when the market decided all of FNM's cobwebs "mattered". when will it "matter" to the market that 94% of Exxon's reserve adds last year were gas fields in Qatar? LOL