The major oil companies are lined up at Iraq's doorstep like football fans outside a beer stand at halftime. It's all the usual suspects: ExxonMobil, ConocoPhillips, British Petroleum, and Royal Dutch Shell – companies with nearly a century of history in Iraq. However, this time there are some giant newcomers.
China's national oil companies – Sinopec, Sinochem, and China National Offshore Oil Corp. – will be part of the bidding process. – Matt Badiali, May 2009, S&A Oil Report
Last month, Matt's readers took advantage of the interest in Iraqi oil through Addax Petroleum, a $4 billion Canadian oil company with operations primarily in Africa and the Middle East. The company owns stakes in two Iraqi oilfields comprising 20% of its total reserves. And its reserves are incredibly cheap – at half the worldwide average – due to perceived political risks.
Addax is preparing to drill into a potentially giant oilfield, called Sangaw North, this summer, and the additional reserves could send the share price soaring. As Matt wrote...
Iraq has 12 fields with more than 1 billion barrels at discovery, seven with more than 2 billion barrels, and five with more than 5 billion barrels... A 5 billion-barrel field would add 1 billion barrels... and represent a 200% gain on the shares.
But we may not get the chance to share those riches... On Monday, the South China Morning Post reported China's state-owned oil company, Sinopec, was considering an $8 billion bid for Addax. China National Petroleum Corp and CNOOC are also interested in Addax, as is the Korean National Oil Company. As Matt predicted, the major Asian oil producers want in on Iraqi oil, we just didn't expect them to take over our recommendation...
Addax publicly responded to the announcements, saying it had held "preliminary discussions" with a possible acquirer... and shares jumped double digits. Oil Report readers are now sitting on a 25% gain on their shares in one month... But the takeover talks are just beginning, and we'll likely see 100% or more on Addax once the deal closes.
Matt's most recent Oil Report recommendation is a major player in the booming Chinese silver industry. This company has doubled its silver production in the past two years (an amazing feat), and it has nearly quintupled its resource base to 198 million ounces in just four years – but it's just getting started. The company is building a new mine that could add 40% to 50% to its production in the next two years.
Plus, it is one of the lowest-cost silver producers in the world. It actually earns $2 per ounce of silver it mines – before it even sells the metal.
Despite its enormous growth potential, the market is pricing this company at a ridiculously low multiple. Its competitors trade in the neighborhood of 25 times earnings. Currently, Matt's recommendation trades for 10 times earnings. If it simply trades in line with competitors – not accounting for any future growth – subscribers will more than double our money.
If you're looking for a way to enter the precious metals market, this is the company for you. It's safe (zero debt) and could easily return over 100% this year. To learn more about the S&A Oil Report, and access Matt's recent report, click here...
A hotel REIT, Sunstone Hotel Investors, is handing over its 258-room W San Diego hotel to lenders because it can't renegotiate terms on the hotel's $65 million securitized mortgage. The company bought the W for $96 million in 2006 and hasn't produced enough monthly income to cover operating costs and interest since 2007.
The hotel has an occupancy rate of 69% and generated revenue per available room of less than $153. Sunstone estimates the value of the W hotel is "much less" than the $65 million balance on its mortgage.
And the REIT may be handing over the keys to some of its other 43 hotels... It recently changed a major bondholder provision, saying any default on a separate Sunstone loan of up to $300 million wouldn't trigger default with Sunstone bondholders (or cross-default). Previously, the cross-default threshold was $25 million.
If Real Estate Econometrics is right, there'll be a lot more Sunstones by the end of the year. The property research firm says defaults on commercial mortgages held at U.S. banks could hit a 17-year high by the fourth quarter, after hitting a 15-year high in the first quarter. Falling rent collections make it hard to service high debt loads… and the ensuing drops in real estate values make it hard to restructure loans. Commercial real estate is in a sort of deleveraging death spiral.
John Levy of John B. Levy & Company, a real estate investment bank in Richmond, Virginia, expressed the same general sentiment on a recent podcast: "There's no doubt about it. We are in the throes of a violent deleveraging." Levy says he's "never seen anything like these current conditions" and expects values to decline 25%-40% from their peak.
That's almost certainly optimistic, since deals like the John Hancock Tower in Boston have happened at prices 50% below peak.
Even though property values are falling, and real estate deals are imploding left and right, the recent market rally has helped more than three-dozen REITs raise more than $12 billion of new equity, which seems eerily familiar...
The combination of a market rally and rampant new share issuance from issuers whose future isn't terribly bright reminds me of 1999 and early 2000. That's when the Nasdaq soared from about 2,500 to a peak of just over 5,000, and IPOs were popping up everywhere like stretch marks on a fat man at a pie-eating contest.
Back then, nobody thought stocks were risky, and hot tips oozed from every cabbie, bartender, and shoeshine boy.
Well, maybe it's not exactly like the tech bubble, since IPOs aren't the hot ticket today. But new equity is nonetheless being printed at a record pace... According to a recent Bloomberg story, more than 150 companies raised $82.2 billion in new equity last quarter – a faster pace of equity issuance than at the height of the equity bubble in 2000.
All the new shares have diluted corporate earnings by a little over 3%, using the S&P 500 as a benchmark. The widely watched index's total shares have grown 3.4% since March 31, meaning earnings are now divided by a larger number... making earnings per share into a smaller number. Standard & Poor's has reduced its 2009 earnings-per-share estimate to $57.23. With the S&P 500 around 940, it's selling for over 16 times earnings. That's historically about average.
In the February 2009 issue of True Wealth, Steve Sjuggerud pointed out how insane the yields of tax-free municipal bonds were in relation to Treasuries. He recommended readers buy a muni-bond ET
F...
The value has reached the point of ridiculousness. Today, when you compare a bond paying 5% tax-free interest to the alternatives (like earning a taxable next-to-nothing yield elsewhere), then you see how attractive these bonds are... You want to own the tax-free bonds – provided they're safe.
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Muni Bonds: Most Attractive in 50 Years of Data |
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Is Warren Buffett reading Steve? Buffett is taking full advantage of the ongoing deleveraging, recently buying muni bonds as hedge funds and other institutions dump them to meet margin calls. Berkshire Hathaway doubled its holdings of tax-free municipal bonds in nine months as yields reached "unthinkable" levels. Berkshire holds $4.05 billion as of March 31, up from $2.05 billion on June 30, 2008.
In December, muni bonds yielded twice as much as comparable U.S. Treasuries – an all-time record.
New highs: none.
In the mailbag... Guns are harder to find than gold coins. Where are you buying yours? Let us know here: feedback@stansberryresearch.com.
"In my opinion Americans are a little bit hysterical about communism. As soon as a societal function is performed by the Government they believe this is a sign of advancing communist ruling. In their eyes we in Europe seem to be all diehard communists who suffer under bureaucratic ruling with high taxes and a severe restriction of individual freedom. That is a misunderstanding. While a communist system is in principle undemocratic (ruling by the proletariat, whatever that means) and all the power is with the 'Nomenclatura' consisting of important party members (not elected) who are enriching themselves at the expense of the ordinary people. No freedom of speech. A not independent juridical system, and - most important- all the means of production are owned by the 'Party'. Knowing that, you cannot but admit that nor the US nor Europe are communist ruled. You could argue though that there are signs of a leftish tendency. I believe that this is a healthy reaction to the absurd and uncontrolled behaviour of economic subjects who have forgotten that even the most diehard kapitalist has certain societal responsibilities. We can think about societal destabilisation caused by these subjects and supported by the former government." – Paid-up subscriber Jaap Schwarz
Ferris comment: In the U.S., we've been living under a communist regime since I can remember. It's easy to prove it, too. Under communism, you don't own anything. It's all the property of the people (the government).
No matter where you live in the U.S., if you stop paying the rent on your home, the real owner (the government) will show up and kick you out. The rent I'm referring to is property tax. If you stop paying it, no court in the country will do anything but find you guilty of not paying your taxes.
So private property is nonexistent in the U.S. The federales can kick your front door in anytime they want, abuse you any way they feel like, and destroy everything you own. When they do, you will have no legal recourse.
No freedom. No justice. Moot freedom of speech "privileges." What else do you call this but communism?
"You guys have covered the high demand for guns and the soaring stock prices of major gun makers but I'm not sure you realize how scarce guns and especially ammunition have become. I just recently purchased a new pistol and had to do quite a bit of digging to find it as it was back ordered indefinitely at most dealers. This goes for a large number of handguns. Ammo is even harder to find, no matter what caliber you are looking for. It is sold out online and even in stores. I spoke to a young guy working in the hunting section of the local Dick's over the weekend and he said IF he gets any handgun ammo in stock he will literally sell out by lunchtime. They have signs posted limiting you to only 2 boxes of ammo at a time but it doesn't appear that they have to worry about enforcing that rule. Perhaps bullets will become a form of currency in the not too distant future...hope I can find some!" – Paid-up subscriber Nick Vassello
Ferris comment: That reminds me, I gotta get me a gun...
Regards,
Dan Ferris
Medford, Oregon
June 9, 2009