Short position

by **Cals** Sat 16 Jul 2016, 17:37

Saturday, 16 July 2016

Short position

Shale oil still rules

SOON after the September 2014 oil price crash happened, many predicted that it was the beginning of the end of shale oil production.
With the oil price at around US$50 a barrel, the slow death of shale was said to be the only outcome, as cheaper producers led by Saudi Arabia kept production up to stress out their competitors, especially the shale players.
But a recent report by leading international energy research and consultancy group Wood Mackenzie says that United States shale oil production is the lowest-cost option for future oil production and is likely to attract more investment than competing products such as deepwater fields. How come the change of fortune? Shale producers have been the most successful in cutting costs and improving productivity compared with all other producers, Wood Mackenzie states.

Shale drillers have cut the cost of producing new supplies of oil by as much as 40% in the past two years by pushing for lower rates from the firms that provide equipment such as rigs, pipes and other services. The companies have also improved productivity at the wells themselves by better locating drilling sites to make the most of “sweet spots” in the reservoirs and other initiatives.
Traditional oil producers are struggling to reduce their cost by that much. Both national oil companies (NOCs) and international oil companies (IOCs) dominate the oil and gas arena with their huge production installations the world over. However, many of these are idle now.
Some reckon that one reason shale producers have been able to react to the new low oil price environment is because they are privately funded and have been investing in the latest technology.
On the flip side, the IOCs and NOCs had made huge investments in deep-water projects when the price of oil was more than US$100 per barrel. It is left to be seen if they can now unwind those positions and reduce their operating costs as effectively as shale producers can.
Should M-REITs be allowed to develop property?
NEW guidelines being proposed for Malaysian real estate investment trusts (M-REITs) allow these companies to embark on greenfield property development projects.
The proposal is to set a 15% cap on M-REITs’ total asset value for property development, acquisition of vacant land as well as property under construction. Is this the way to go?
Detractors point to the simple notion that REITs, as an investment class, were created to cater to seekers of property yields stemming from mature buildings, be they in the form of office blocks, hotels or retail malls, among others. If investors wanted to enjoy the growth of property development enterprises, there are always the pure listed property developers to invest in. Such companies face development risk, something which REITs are not exposed to. On the flip side, the move to allow M-REITs to dabble in property development has also taken place in markets like Singapore and Hong Kong. So, what’s the rationale? The move is said to enable M-REITs to create more value for their investors.
Under current requirements, M-REITs that hold old and outdated properties would have to sell these buildings back to their sponsors to be redeveloped, and then repurchase these properties later. Hence, allowing M-REITs to undertake redevelopment of their old properties will enable them to enhance the property yield for the benefit of unit holders.
Similarly, allowing M-REITs to acquire vacant land for purposes of developing new properties will enable them to grow their portfolio of income-generating real estate. In addition, there are safeguards – aside from the 15% cap, M-REITs embarking on development must continue to hold completed properties for at least two years from completion to ensure that the project was aimed at generating income for the REIT.
The good news is that the investing public are being given a chance to air their views on this matter, so if they don’t really like this proposal (along with any of the other 16 enhancements proposed to M-REITs by the Securities Commission), they ought to voice their concerns accordingly.
Giving a helping hand to the economy
THE jury is out whether the interest rate cut will be a huge boost to the economy.
Firstly, any rate cut will make loans cheaper and that should help spending. The property and auto sectors were picked as the immediate beneficiaries of a lower cost of financing.
The last cut in funding costs took place during the 2008 global financial crisis when there was a clear threat to growth. Stimulus packages here in Malaysia and around the world, along with aggressive rate cuts, helped to cushion the decline in economic activity and eventually pushed growth rates up.
Looking at how things are going around us, Bank Negara’s move to cut the overnight policy rate is what it calls a pre-emptive move. It means that given what they know about how the economy is performing, a lower interest rate should help. Just how much is the question.
The situation then and now is different. Private consumption, predominantly from household spending, helped with economic growth. There was ample elbow room then when household debt to gross domestic product was in the 60% range. Today, it is close to 90%.
Furthermore, loans growth was slackening and when people require less funding, it spells trouble.
Also, with the pressure of the high cost of living being felt, cheaper financing should free up some spending for those households feeling the pinch, but just how will it boost growth is yet to be seen.
With the global economy not looking in the pink of health, Bank Negara governor Datuk Muhammad Ibrahim in his statement said the bank had projected what the growth would be in the second half of 2016 and in 2017, and decided to take action now in determining the interest rate.
With consumer and business sentiment low and with corporate profits sliding, the cut in interest rates is something that should tide the economy through until Budget 2017 when the fiscal side of stimulus will be watched for.