Saturday, September 17, 2005

When Analysts Become Useless

Have you noticed the incredible split in the way major energy firms are managing themselves recently? ExxonMobil won't bid for new reserves. It's retiring chairman, the veteran Lee Raymond, opines that the price of a barrel of oil will eventually re-settle near $40, and everyone paying an effective takeover premium above that for reserves is making a major strategic error.

Meanwhile, Valero is buying up more refining assets, and now, even Canadian oil sands. At prices that indicate they believe energy prices are heading upward for a sustained time period.

Who is right? Both companies, and several of their competitors, are run by smart, veteran leaders with a lot of common sense and experience. It's really tough, from the outside, to know who is right. And someone clearly has to be right, or wrong, in this kind of situation.

What I do know, though, is that it makes virtually no sense to rely on any "analysts" in the brokerage community to add one iota of value to the analysis of this situation. Who would you rather listen to for your raw information- leaders of the major players in the sector, or outside observers with no industry experience who are paid for generating uncertainty, and, thus, trading income for their brokerage houses?

Not such a tough call, is it, when you put it that way?

Sure, sources like Daniel Yergin or other veteran managers or non-financial-sector observers are worth hearing out. But the uncertainty in this sector right now is not about abstruse technical analysis of financial asset price movements. Nor about customer behavior. It has more to do with assessments of global demand, the price inelasticities of that demand, the geopolitical dimensions of some of that demand, and the very real and gritty business of finding and producing crude oil and natural gas.

So who really believes any of the Street oil and gas analysts can add any value to what the the guys in the drivers' seats of the big players in this sector are already saying, and doing?

One industry veteran put it this way. Those energy producers who believe prices will fall back to pre-summer levels are behaving according to an implicit belief in the late Julian Simon's theory that commodity prices rise and fall to assure a near-constant time period of supply of any important basic commodity. That was the core of his famous bet with Paul Ehrlich over twenty years ago.

Those energy producers who are betting on higher prices implicitly believe that we have finally reached a peak of production of existing carbon-based energy sources. Ironically, deals like Valero's recent purchase of Canadian oil sands could well be the sort of action that will once again prove the other group of producers, and Julian Simon, correct.

For my money, I'm focusing on the actions of the major sector players, and the global economic demands on their products. Who needs biased brokerage analysts to interpret such clear cut information?

1 comment: said...

I think the bigger story here is the pervasive ability of sell-side analysts to generate derivative pronouncements and drivel, and then get away with labeling it as news.