Thursday, July 28, 2005

why buy milk when the cow is so cheap?

It's a scary new world

Larry Edelson says that while people think CNOOC (The Chinese National Offshore Oil Company) wants to buy Unocal because the Chinese want to secure oil, that is only part of the story. The lowly truth is that it is a screaming bargain. "Two years ago, when oil was trading at much lower levels, Unocal's reserves, based on the price-per-barrel of crude, were valued at $64 billion. But the total value of Unocal's shares was just $11.38 billion. So, in effect, by buying its shares, you could have bought its reserves for the equivalent of just 14.8 cents on the dollar." Remember, this was two years ago.

Now, we fast-forward to today, where it gets even better! Mr. Edelson takes up the story and says that he figures that "Unocal's reserves are at $102 billion. So you can buy the reserves for a puny 9.5 cents on the dollar."

I guess the old saying is true - got to have money to make money.

The CNOOC story rolls on - we'll see what happens when the bids are voted in August. I expect China to raise their bid. They've also been making noises about buying other, bigger oil companies that don't have American suitors like Chevron, should this deal fall through.

Persistant, are the Chinese.

Bill Bonner is casually walking by, and hears us talking about China. Off the top of his head, he comes up with a perfectly apt simile when he opines that "China is almost the exact opposite of the United States. If they are joined at the hip, commercially, it is strange beast they make. One works; the other eats. One saves; the other spends. One gets rich; the other gets poorer every day." Leaving me standing there with my mouth open at the unexpected profundity of it all, he walks off!!


At 6:48 PM, August 01, 2005, Anonymous Whitehall said...

Not so fast! Sure, 14 cent on the dollar for oil in the GROUND as estimated reserves. It takes some bucks to support the extract and deliver of that oil to market. Plus, we round eyes have been a bit over-enthusiastic in our estimates of late.

Better to compare Unocal's valuation against other oil companies of similar arrangements.

I expect that Chevron and Exxon and the Chinese have decent valuation methods. If these existing bids are so low, then why haven't other companies stepped up and outbid them?

At 10:39 AM, August 02, 2005, Blogger monkeygrinder said...

Thanks for your comments - you are right, it isn't just a simple flip of 19 billion to get a investment return of tenfold.

China is probably more concerned about the fact that Unocal has substanstial southeast asian reserves than in winning the lottery.

Put another way, it isn't the value of the reserves in money, it is the value of the oil itself...


Post a Comment

<< Home