A Massive Cut in NOCs Spending Seems Unlikely

The sell-off of common stocks the past several weeks has cut more than a trillion dollars off shareholder wealth globally and has re-ignited concerns over a double-dip recession taking hold in the US and/or Europe. Fear of slower growth for developed economies has helped drive the spot price of oil well off of its high for the year and as of this writing leaves it nearly half of its July 2008 all-time high, but still well above the lows recorded in December of 2008. With all of the dark clouds over global stock markets and oil’s spot market, one wonders if the spending spigot of NOCs is next in line for a downward adjustment. I think that there are three good reasons to believe that NOC spending, particularly in the BRIC countries (Brazil, Russia, India and China), will not be significantly curtailed.
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Insurance Pitfalls to Avoid Post-Deepwater Horizon Disaster

Oil and gas companies have all felt the burden of rising insurance premiums in the wake of the Deepwater Horizon explosion and the largest oil spill in American history. According to the Associated Press, the BP oil spill created one of the biggest losses in the energy market and drove energy premiums up between 10-30%. Just as energy underwriting was easing and premiums were going down, the oil spill drove up deep water operations insurance by 25-30% and deep water drilling by more than 100%. New safety measures including timely inspections of deep water operations, certification of equipment to prevent well blowouts will add to the already rising costs companies are facing.
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Loren Steffy: Too sweet to beat on energy bid?

Kelcy Warren, the Dallas billionaire who leads the pipeline company Energy Transfer Equity, says he doesn’t like to get caught in auctions.

Apparently he means it. The CEO, who started in the business working with his father as a welder’s assistant, has sweetened ETE’s offer for Houston-based Southern Union in such a way that rival bidders are going to have a hard time topping it.

On Tuesday, ETE raised its bid for Southern Union to $5.1 billion, or about $40 a share. The move came in response to a $39-a-share offer from Williams Cos. of Tulsa, Okla., which in turn had trumped ETE’s original bid of $33.

Williams has been silent all week as it tries to figure out its next move, but it appears ETE may have outmaneuvered its Tulsa rival.

“We learned a little bit from our last offer,” Warren told the Chronicle’s Simone Sebastian earlier this week.

While ETE’s original bid was obviously too low, Southern Union begins to look expensive if the price moves much above $40. ETE removed a key stumbling block in its earlier all-stock offer by allowing Southern Union’s shareholders to choose either cash or shares of ETE partnerships. ETE committed to paying as much as 60 percent of the purchase price in cash.

The revised bid also ditched one of the more controversial components of ETE’s earlier offer: $50 million post-merger consulting agreements for both Southern Union CEO George Lindemann and COO Eric Herschmann. Still, Lindemann, Herschmann and other Southern Union insiders have indicated they favor hooking up with ETE, in part, because the Dallas company’s partnership structure would reduce the tax consequences of the deal.

Breakup fee

As if to nudge the support of Southern Union’s shareholders, the new ETE deal tweaked the already bloated breakup fee, which could have been as much as $135 million to more than $212 million, according to regulatory filings.

The breakup fee merely ladles another expense on the deal for Williams should it decide to counter. What’s more, it’s not clear that Williams can extract the same cost savings that ETE hopes to gain.

ETE’s network is a better fit with Southern Union’s, resulting in greater potential efficiencies and savings.

“The assets are so complementary to each other and create more efficient movement of natural gas and natural gas liquids,” Warren said.

Southern Union investors, including billionaire Carl Icahn, are hoping for a higher offer from Williams or some other latecomer. Southern Union’s shares closed Thursday at $42.27, about $2 more than ETE’s latest offer.

Wishful thinking

Arbitrageurs — investors who in this case would profit by exploiting the difference between the bids – are betting that Williams would counter at $42 or higher, but that may be wishful thinking.

The offer on the table from ETE is already higher than 95 percent of similar pipeline company takeovers relative to earnings, according to an analysis by Bloomberg News.

In other words, the deal appears to have hit its price ceiling.

Warren may have found a way to quash an auction, but Southern Union’s shareholders owe Williams a thank-you. Its presence in the deal helped get them about $900 million and stripped out some of the more onerous provisions of ETE’s first offer.

*Clarification: In Wednesday’s column, Angela Shaw’s comment that coverage by the Securities Investor Protection Corp. for Stanford Financial’s investors would benefit 80 percent of them referred only to those investors who bought certificates of deposit through Stanford’s SIPC-insured brokerage. Investors who bought CDs from Stanford’s bank or other operations wouldn’t be eligible for SIPC coverage.