Banks, dividends, sifs

Last week I was reading that it is almost a consensus among the analysts that no german bank is going to pay dividends in spring 2009. Even more, some of them might try to raise additional capital from shareholders (e.g. postbank and commerzbank). Also the insurers might cut partially the dividends (for sure allianz, not so sure munchener re).

What if scenario ... what if austrian and french banks are going to do the same? It looks like it is more and more probable that sifs will not cash anymore next year the generous dividends from BCR and BRD, which were the biggest part of their regular income. Without bank dividends and without selling any participations, the sifs will run out of cash next year. And for sure 2009 will not be a good year for fire selling minority participations. Maybe Dinel Staicu, Chelu and Fercala are focused now on their power fights, and they do not see the tsunami coming. That reminds me of something Giovani Becali was saying 2 days ago about Gigi Becali: "he is rich as he was till now, but he just has currently no cash :)". I hope we will not say next year about sifs - they owe 5% of the romanian banking system, but they cannot cover their operating costs.

PS. One more thing about banks: Allianz and Commerzbank renegociated last week their initial sale agreement regarding DresdnerBank. The total transaction amounts now only 5 billion euro (down from 10) and still the biggest chunk of it are Commerzbank shares and not cash. The only improvement is that the transaction will be done in one step and not in 2 steps as planned, avoiding a capital raise, which would have been hard to digest for the Commerzbank shareholders. The numbers used by sifs or analysts when evaluating TLV or BCR must be strongly adjusted. 6 billion euro for BCR or 1 billion euro for TLV are fairy-tales from past times.

Petrom

As topic introduction for a discussion on agf.ro, I collected some facts about Petrom. Just not to search for the numbers during the discussions, to support the different oppinions :)

- the price paid by OMV for takeover was 0,2158. Also the 8% shares distributed to employees will be also sold at this price.
- the last dividend was 0,0191 (roughly, 10% of the current price)
- EPS after 9m: 0,04 ron (roughly, 20% of the current price)
- Erste's target price for SNP (published in nov 2008) is 0,6 ron
- the well known profit structure of Petrom: exploration brings profit, refining and marketing are loosing money. Discussion topic: when or what can move refining and marketing to profit?

About Exploration

- q3 domestic production cost 45 ron/boe. I would say this would stabilize for the moment.
- q3 realized crude price 247 ron/boe. The crude price is falling, but usd is jumping. I would rate that by the end of the year, the realized crude price will fall to 150 ron/boe.
- according to 2007 annual report, the domestic replacement rate is 38%.
- according to 2007 annual report, domestic and international production is approximately 197,000 boe/d and proved reserves are around 894 mn boe. Discussion topic: reserves trend.
- the new Komsomolskoe Kazakhstan oil field is expected to produce about 2800 boe/day. Now, the whole Petrom production is arround 197.000 boe/day

Of course, Petrom's profit is highly dependent from the international oil price and the exchange rate usd/ron. Until marketing division will deliver results.

About marketing & refining

- dominant market share in Romania
- refining margin in q3 was almost 0

The one time events impacting the 2008 financials:

- provisions were created for the employee claims (diminishing profit in q2)

- Petrom hedges the crude price (selling in advance at higher prices) and this is visible in q3 in the financial result (raising profit in q3)
(quote from report: Should oil prices drop below USD 65/bbl in 2009, the hedge would still pay out an additional USD 15/bbl to actual oil prices. The put spreads were financed via calls in order to avoid initial investment (zero cost structure), whereby Petrom will not be able to profit from oil prices above approximately USD 110/bbl in 2009 for the above stated volume)


- Arpechim was written off in q3. What's next? Sell? Close? Company executives stated clear that they do not expect the unit to be profitable.

- future investment: 860 MW Brazi power plant. Is Petrom moving to power generation market?

Personal oppinion: as long as it trades under the takeover price (0.21 ron), SNP is a buy. However, it is a defensive share and not very interesting for the kind of traders staying daily on agf.ro

I would wish Petrom to be some kind of indicator for the whole romanian economy. Similar to General Electric. If GE goes well, the whole US economy goes well. If not, than not :)

BRD

I just want to make a note for myself(sometime in the future, I will read what I wrote here to analyse where I was right or wrong):

Societe Generale buys almost daily BRD shares. Since more than 1 month. Of course, they are major shareholder and have another perspective. Should I join the party?

This note is also part of my attempt to keep an overview on the situation and base only on facts. They are buying, that's a fact. I cannot say now if they are incredible smart or plain stupid.

Wind of change

This crisis is not the end of capitalism and the raise of communism, as some journalists write. Marx will not come back. There are just big changes that must be done. I will give few examples:

1. Global markets, local regulating bodies. Some decades ago, each German land was having its own police restricted to that land. If somebody steals a car in Bavaria and runs away in Hessen, bad luck for bavarian police. They were supposed to stop at the border and give the case to their hessischen coleagues. Goldman Sachs takes 10.000 millions usd from FED and go to speculate on romanian currency. If they would speculate against usd, of course, they would get no money from FED for that. We need global regulating bodies.

2. Rating agencies. They are payed by issuers, not by investors. If Lehman Brother issued some certificates, they also payed Moody's to assign a rating to those certificates. Of course, they cannot assign a bad one, because they are payed by Lehman. Even more, the rating considers more the solvability of the issuer and not what is in that sold package. The whole concept of rating agencies must be changed.

3. Equity market laws. They are so old and that even old respectable companies ignore them. Theoretically and legally, Porsche owns 30% of VW. Practically, they own 30% shares and 41% call options. But the current laws are too old and they do not oblige Porsche to make public the fact that they actually/potentially have 71%. According to current law, a shareholder is defined only by the number of shares he has. The laws are from the times when only shares were traded.

4. Derivates markets. Actual free float of VW was 5%, but the naked short sellers were short 10%. They could not even close their positions. They had no idea that Porsche, major shareholder, owns 41% of VW by owning calls! The regulating body had no idea that the short sell positions are bigger than the free float. Until Porsche made a volunteer public statement. The short sellers had no other option than go bankrupt or beg for mercy from Porsche. Why? Because the laws are too old and no more effective.

5. Market principles: I like the free market, the place where the price is decided by sellers and buyers. But there is no book about it, where it is written that third parties can join and influence the price. What about oil market? The producer want to sell it with 70-90 dollars per barrel. But the speculators push the price to 150. Why? Is it because producers want to sell fast and go back to drilling? No, it is just a free market big enough to attract big speculators. I think these markets should be regulated to allow only producers and rafineries as consumers to trade. It is not a restriction of the free market concept. Just the speculators should stay out when establishing the price for basic goods that everybody needs.

Soon 1 euro = 4 ron and even more

On the long run, I am optimist about the romanian economy and its long struggle to catch up with the EU level.

On short term, dark clouds are coming! Very dark and very soon! The initial attempt of Isarescu to keep the exchange rate stable was a good thing because it had a symbolic message for the investment bankers: guys, this is not your playground! You can play, but do not ignore the fundamentals. But it's the fundamentals that will force Isarescu to let the ron to go over the level of 4 ron for 1 euro.

The euro loans are prohibitive now in Romania! The banks cannot finance such loans. And the RON loans are also prohibitive because Isarescu keeps the rates too high to reduce inflation. Soon, he will drop the rates because economy cannot survive with the current loan conditions and inflation poses no risk. When that will happen or even forecasting that, the ron will drop. We need it also because we want to cut imports and support export, we need it because the capital inflows (from investors or from romanians living abroad) will drop dramatically. There is no other chance that to let the ron drop. I try to watch it objective :)

Overview

Despite of the turbulent period, I am trying to keep an overview on what is happening:

1. Finance: The situation of the western banks relaxed due to the gov support. But the financial system seems to break away in other parts: more and more east european countries face financing problems (mainly Ukraine and Hungary). On top of that, Austria cancelled the bond auction because of the too big yields requested by banks for a loan to a AAA rated western country. This is a very bad sign. Why? Banks can be saved as long countries have access to credit! If also the countries have problems to get money, there is nobody left.

2. Auto: the sales dropped in October in Germany by 8,2%. And they plunged in US 32%. These numbers are dramatically, they are impacting not only GM or Ford, but the whole industry, Toyota and german automakers.

3. Raw materials industries: everything goes down, inclusive oil and gold. This makes me anxious actually - gold is going down, despite its reputation of safe harbor during recessions.

4. Constructions: plunging all over the world, but US starts signaling a bottom.

In these conditions, we should be happy if the xmas rally will bring djia and dax 25% away from the highs. This would make djia about 10500 and dax around 6000. The fundamentals are pretty bad now and these are the tops that (I believe) we can still reach this year. Maybe this will be supported by dramatic rate cuts made by ECB in the next 2-3 months.
On the down side, there is plenty of room and I am afraid we are going to see new lows next year.

Regarding the romanian market, I just want to note that one anomaly is fixed or on the way to be fixed: Petrom share was trading far below the price paid by OMV and the price the employees will pay for the 8% stake. Yesterday it came back to normal levels. But bad news are coming also from this area: Petrom reduces their ambitious investment plans. It is a symbolic bad news, Petrom being for me kind of GE of Romania, pointing where the whole economy is heading.