Changing Global Energy Landscape with US Shale Gas – Part II

In mid- 2012, Kinder Morgan’s acquisition of El Paso for $38 billion,  resulted in a combined company called Kinder Morgan, Inc which is the largest operator of natural gas pipelines in the U.S. with 22% of the U.S. natural gas pipeline network,  connecting almost every gas field and consuming market in the U.S. The expanded pipeline network resulting from the Kinder Morgan-El Paso deal is expected to be especially significant in supplying gas to higher-priced electricity markets such as New York and Florida. The expanded pipeline network will permit the natural gas "bubble" to move downstream, in enough abundance to stimulate new products and locations.

This deal was a game changer because thousands of wells drilled to produce the record-setting "bubble" now have a record-setting pipeline network to get to market. This transaction affirms the potential of the shale gas discoveries, while countering apprehensions regarding stability of the natural gas market.

Sasol has announced a $10-billion facility in Louisiana to manufacture diesel fuel from natural gas, thus creating a new market for Haynesville Shale gas. That's not all. Dow has announced plans to build shale gas downstream capacities based on ethane and propane on the Gulf Coast, and Shell has also made known of their plans to build an ethylene cracker in Appalachia near the Marcellus Shale.

There are domestic and export implications for liquefied natural gas (LNG) as well. Last year, Cheniere Energy was the first company in 35 years to receive export approval for LNG from its Sabine Pass liquefaction facility and has signed an $8-billion contract with BG for supplying LNFG and another one with Spain's Gas Natural Fenosa for a total 7 million tons/year of LNG over 20 years.

The LNG exports are likely to be directed primarily to Asia, where in addition to the strong demand for LNG, the prices being paid for LNG are four times as high as the prices in the U.S. This demand for LNG in Asia is dominated by Japan and South Korea . These two countries together imported 64 percent of global LNG. Japan is replacing nuclear electricity generation capacity lost as a result of the earthquake and tsunami with LNG. Additional demand comes from China and India. China's import of LNG has increased considerably, driven by demand for electricity generation and air quality concerns. The oil companies of India &China have made significant investment in U.S. shale plays in an attempt to bring in supply to their own markets.

The tide has turned — the U.S. is on its way to being not only the supplier of the world's LNG, but other fuels as well. The U.S. is already on course this year to be a net exporter of gasoline, diesel and other fuels for the first time since the post-World War II economy of 1949 — a prospect that was unimaginable even a few years ago.

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Changing Global Energy Landscape with US Shale Gas - Part I (prepforum.wordpress.com)

Changing Global Energy Landscape with US Shale Gas – Part I

In the year 2009, United States surpassed Russia to become the world's leader in natural gas production, with production continuing to increase to 80 billion cubic feet/day in 2012. U.S. natural gas reserves are at their highest point since 1971, and year-on-year reserve additions doubled from 2010 to 2011, as a result of shale production. Shale gas, a natural gas found trapped in sedimentary rocks, made up only 1 % of U.S. natural gas production in 2000. It now amounts to 25 % of U.S. natural gas production and is expected to increase to nearly 50 % by 2035.  

Natural gas, cost-competitive with coal at half the carbon emissions, is becoming the fuel of choice for electricity generation. New EPA regulations on particulates, mercury, and other toxic emissions are forcing the closure or retirement of 28 GW or more of coal-burning capacity, or about 8.9 percent of total U.S. coal-burning capacity. Recent increases in coal transportation costs are also problematic for coal. In addition, demand for electricity is forecast to exhibit slow but steady growth over the next few decades. These factors, taken together, are expected to be the primary driver of demand for natural gas in electricity generation over the next several decades. Utilities and end users are choosing the lower emissions and lower capital requirements of natural gas-fired facilities over other fuels, sending the clear message that the risk of natural gas price volatility is a risk worth taking in the current difficult policy environment for coal.

The U.S. Energy Information Administration (EIA) estimates that 223 GW of new generation capacity will be needed between now and 2035, and that at least 60 percent of capacity additions are expected to be natural-gas-powered. However recently EIA has conceded that “the shale oil and shale gas resource estimates are highly uncertain and will remain so until they are extensively tested with production wells”, thus raising concerns the prospects of shale gas. Industry consultants and federal energy experts have privatelyvoiced scepticism about shale gas prospects. 

Scepticism also arises mainly due to the lack of marketability that has not only kept the natural gas price below $4/MMBTU, it has even resulted in the flaring of more than one-third of produced natural gas in 2011 in North Dakota. Without a pipeline, natural gas is not marketable. It's immobile, "stuck" near the production site. Pipelines are long-term investments that generate low returns. Revenue to the pipeline operators is generated by transmission fees on long-term contracts, insulating the operators from fluctuations in the natural gas commodity price.  

Notwithstanding the cynicism,  shale resources and other upstream assets continue to drive U.S. merger and acquisition activity, attracting foreign investors in the process.  In the next part we will look into some deals that validate that the potential of the shale gas discoveries.

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Changing Global Energy Landscape with US Shale Gas - Part II

Norms and Stereotypes in Corporate India

India is fast emerging as an innovation base and presents a large market opportunity to companies that are creating economical products and solutions for the country. At the same time, India also has its share of challenges in terms of lack of adequate infrastructure, bureaucratic bottlenecks, complex labor and taxation regulations etc.

But besides these major policy or investment constraints, there are these few other norms & stereotypes typical of the Indian corporate culture, which though are commonplace for most of us living in India, but if changed will work towards projecting a much better image of Indian businesses.

As Indians we are mostly casual about managing time and often tend to take others time for granted. It is not unusual to keep people waiting endlessly for hours together, after fixing up an appointment for a business meeting or for an interview. A person in the top rung of hierarchy will not feel the need to offer the hint of an apology for turning up late, while a person lower in the hierarchy will have a barrage of excuses for running late.

A common practice for businesses is to keep prolonging the payment to vendors, service providers, consultants & and finally not pay up, well knowing that people will refrain from going to courts due to the hassles and delays in the judicial process.

Lack of delegation of responsibilities or passing credit down to the team and lack of proper succession planning are handicaps in most Indian companies.

Gender disparity does persist in our society and permeates the corporate sector as well. In spite of having some highly successful Indian women CEOs, India Inc has had an abysmally low representation of women in senior management positions. Cases of sexual harassment go unreported or are mostly hushed up, particularly when the person in question holds a senior position. Recent sacking of iGate CEO has raised questions about the policies adopted by companies while hiring CEOs with a tarnished behavioral track record.

The need to be perceived as responsible companies with high standards of ethics & corporate governance calls for a change in such practices and norms. Adopting policies and practices to induce a culture of professionalism is a must for Indian companies with aspirations of becoming truly global companies. 

US Immigration Bill - impact on Indian IT industry

The Indian IT industry will be cautiously following the US immigration bill to be introduced this week by the US Senate, with the objective to provide for comprehensive immigration reform, increase visas for skilled workers; and beef up border security.

Passage of the bill could be a boon to high-tech companies like Intel Corp.  or Facebook Inc., who would be able to hire more highly skilled workers from abroad. But the US immigration bill is likely to impede the operations of the Indian IT services cos.

The IT services industry grew rapidly in the 1990s.  Due to the Y2K hype, businesses were apprehensive about their IT systems and so there was demand for IT service providers. Once the Y2K hype was over, the customers became conscious of their IT spending. Consequently, the suppliers had to hire overseas, particularly in India, and that paved way for the off-shoring trend that is currently seen.

Indian consulting firms like TCS and Wipro introduced off-shoring by charging lower prices per consultant. These firms basically enjoyed the labor arbitrage due to large number of consultants working in India enjoyed and competed in terms of pricing. Big IT consulting houses like IBM and Accenture had to hire IT professionals in India and charge similar prices per consultant. 

In order to maintain their cost advantage, besides deploying a large pool of offshore resources, the Indian IT services companies also paid lower wages to employees travelling to the U.S on H-1B or L-1 visas, as compared to equivalently skilled Americans. 

The proposed US Immigration bill proposes wage parity between guest workers in the U.S. and equivalently skilled Americans. As such the Indian outsourcing companies that have a large no of on-site employees on US work permits, will need to pay them higher salaries. This will negatively impact the cost advantage that the Indian IT services companies have enjoyed so far.

As per the proposed bill, the companies will have to pay a $10,000 fee per additional worker if the employer has 50 or more employees and more than 50 per cent of these workers are H-1B or L-1 employees without a green card petition pending. Domestic companies like TCS, Infosys and Wipro will have to pay USD 10,000 for each additional H-1B employee they would be hiring.

On the positive side, it will also enable 11 million workers in the US including 2.4 mill Indians to obtain American citizenship. Another proposal is to award residency to those who earn doctorates from U.S. universities in mathematics, engineering, science or technology.

Management of Indian IT services companies are concerned about the increase in compliance cost and higher turnaround times, which would fundamentally affect competitiveness and the margins of these companies.

As it will take a few more months for the bill to be implemented, the Indian government, and outsourcing industry will be closely following the debates. Meanwhile the Indian IT services companies may need to look at revamping their business models to remain competitive.

Markets - On the Roller Coaster

The excessive market euphoria that was apparent in the beginning of the month has faded and has given way to apprehensions for investors worldwide.

Even as the markets seemed to recover from the concerns over Cyprus bank run, tagging it a one off event, the news of political turmoil in Italy shook the European stock markets. Greece's ATHEX Composite was off 4.8%. US indexes opened in red today. This certainly signals nervousness and dampened sentiments of investors. The Asian markets will also be impacted negatively.

Bank deposits that were so far considered as safe investment options, no longer seem to be safe after the Cyprus government decided to levy taxes on deposits, in a bid to secure bailout package from the European Union. The banks have remained closed for about a week and are likely to reopen with the imposition of capital controls by Cypriot authorities. This will limit the ability of the customers to access and withdraw money for a certain period of time, and thus save the banks from bankruptcy. Either ways it is a no-win situation. A bailout deal will send the country into recession, encourage small investors to hoard cash, and prompt foreign depositors to shift to other investment bases.

The fear that banking crisis may spread over to other European countries has spooked the investors. Adding another element of uncertainty to Euro Zone, is the inability of Italian politicians so far, to put together a new coalition government since parliamentary elections in late February. All these factors put together may cause a decrease in the inflow of global funds arising from the loss of investor confidence in the Euro Zone.

In India too, the United Progressive Alliance (UPA) coalition government may find it difficult to sustain due to withdrawal of support from alliances, thus creating conditions for early elections. After DMK pulled out of the  last week, the Samajwadi party has threatened to withdraw support too. If the Foreign Institutional Investors perceive that the Indian government will not have with enough bandwidth to carry out the envisaged and much needed economic reforms this year, then India too will see a decrease in the inflow of FII funds, which provide liquidity to the market.

As the sentiments have turned pessimistic, global markets will look up to political stability and announcement of measures for risk / crisis management to continue with the further run. 

Global Markets - Riding high on sentiments

Worldwide markets are echoing bullish sentiments.

The US Dow Jones Industrial Average index has surpassed its 2007 high and continues to make new all-time highs. The Standard & Poor’s 500 Index too is trading at post-2007 highs. Asian & European markets are rallying too based on cues from the US market. Indian markets are recovering from February lows.

All this barely a week after the US sequestration set in on March 1, 2013!!

The bullish markets have revived positive sentiments and created excitement, but it also warrants cautiousness. In wake of the upsurge, the markets appear to be discounting all negative news and taking ahead the rally based on selective good news or on expectations of continued monetary easing by the respective Central Banks.

The US market has chosen to focus on and celebrate the news of drop in US jobless claims monthly average to a 5 yr low, while ignoring the data that US trade deficit has widened in January to $44 billion and the US year end productivity has dropped to 1.9%, the biggest decline since 2008. As per the Sequester, about $85 billion in spending reductions will automatically occur in US by the end of Fiscal Year 2013.

The UK market was up on hope of cut in interest rates by Bank of England (BOE). UK’s manufacturing sector has contracted and this posses a major challenge for UK’s economy. BOE left its key lending rate unchanged in March. The European stock markets fell marginally after the European Central Bank kept rates on hold as expected.

Bank of Japan too kept its policy unchanged and decided not to step up monetary stimulus. Nikkei has been trading strong.

In India, on 28th Feb, the Finance Minister had presented the annual budget, aimed at reducing the widening fiscal deficit by cutting down government expenditure, increasing revenue and promoting growth. The quarterly GDP growth figure has slipped to 4.5%, the lowest in a decade. The market crashed after the budget speech was delivered by the Finance Minister, but recovered in the 1st week of March, following global cues. The uptrend may remain intact if the global markets are up as the speculation build up around Reserve Bank of India cutting interest rates to spur growth.

The markets are climbing higher, raising the hope that maybe the worst is behind us. But the question is whether the new highs will hold and for how long, particularly when the rally seems to be based more on market optimism rather than fundamentals. 

Market Reaction to new CEO announcement

On 21st Nov, Indian generic drug maker Cipla Ltd. announced its plans to acquire South African firm  Cipla Medpro. Subsequent to the announcement that is likely to boost its prospects in Africa, and is expected to be accretive to earning, Cipla Ltd. shares rose by more than 3 % after the announcement and were trading at Rs 390 on NSE.

On 22nd Nov, Cipla Ltd announced the appointment of Mr. Subhanu Saxena as Chief Executive Officer. Mr. Saxena has rich work experience of over 25 years, in industries as varied as FMCG, consulting, banking and pharmaceuticals. Following the announcement of the appointment of new CEO, Cipla share fell down during the day while the NIFTY index showed a upward movement. Cipla share price clearly did not follow the pattern in sync with the movement of NIFTY. 

This weak movement of the share price on 22nd Nov could have something to do with the announcement of new CEO appointment. Generally some market reaction is expected around the announcement day of a CEO appointment. In considering CEO candidates, boards of directors and selection committees are almost always concerned about the market reaction on the company’s share price.

At times markets tend to react unfavourably to the announcement of a new CEO, as investors may anticipate some amount of uncertainty involved with the change in CEO. There are other instances when there have been positive abnormal returns around the announcement of an outside CEO appointment. In such cases, results suggest that new outsider CEO appointments can be considered as beneficial to investors because they bring in knowledge from other organizations and can objectively evaluate and challenge the current strategy of the company and incorporate new and fresh ideas

.

Though the initial market reaction is in anticipation of  the CEO’s likelihood of success, however a  latest research by HBR shows that there is no positive correlation between how a company’s stock fares upon the announcement of a new CEO and the share price over that CEO’s tenure so the initial market reaction should not be considered an indicator of the CEO's likely performance.

Irrespective of the initial market reaction, it will only be evident over a period of time how the new CEO steers the Cipla towards higher levels of growth and creates value for the shareholders.