A significant energy deal

Written by Andrew Szabo
Thursday, 11 March 2010 01:00

Occasionally a proposed deal comes along that encapsulates several important trends. Such is the case with the bid by a joint venture of Royal Dutch Shell and PetroChina for Arrow Energy of Australia. Arrow Energy extracts methane (natural gas) from coal beds. Arrow announced the bid on March 8, saying it was “non-binding” and “conditional.” The bid is said to be 3.3 billion Australian dollars (about 2.97 billion U.S. dollars). Price action after the announcement suggests that traders expect an improved bid to come along.

One large scale trend has been for international oil companies to seek major new assets in politically stable countries governed by rule of law. Consider the problems Shell has faced with thinly disguised government expropriation in Russia (with the Sakhalin II venture) and with violence and vandalism in Nigeria.

The twin monsters

Written by Andrew Szabo
Thursday, 25 February 2010 01:00

Late last Thursday afternoon, the Federal Reserve Board announced a hike in the discount rate of one quarter percent, from 0.50% to 0.75%. The late afternoon timing and outside of a regular Fed meeting were unusual. In a flurry, a number of Fed governors stressed that the Fed was not intending to tighten drastically, but rather to “normalize.” The U.S. bond and stock markets took the news (as spun by the Fed governors) calmly.

Fed monetary policy remains, obviously, extremely accommodative, and there are excellent reasons to go slow. Unemployment as measured by the U.S. Bureau of Labor Statistics is running at a high 10.6% (not seasonally adjusted). U.S. consumers remain overburdened with debt. Both commercial and residential real estate in most US markets are still suffering from financial emphysema.

New world of oil and gas exploration

Written by Andrew Szabo
Thursday, 18 February 2010 01:00

We have been developing the theme in this column that the twin areas of energy and energy conservation present the great growth play of the next decade and perhaps much longer. I was in Houston, Texas, recently attending the NAPE Expo. Visiting with some of the leading-edge vendors and oil services providers gave me the thought to discuss three areas of technology that are transforming oil and gas exploration. These relate to detection of fossil fuel deposits, drilling methods and extraction techniques.

In the eras of Rockefeller and (later) Getty and T. Boone Pickens, choosing a place to drill was more art and luck than science. On the other hand, vast lakes of unexplored deposits were there for the finding. Today, we face the opposite situation. There is much less in the way of virgin territory (at least onshore), but the detection science is formidable.

Federal Reserve must rein in credit

Written by Andrew Szabo
Thursday, 11 February 2010 16:54

The United States Federal Reserve Bank, having floored the economic accelerator during the all-out stimulus program beginning in 2008, now has its foot hovering over the brake. How soon it will brake and how much remains uncertain and highly dependent on shifting economic data.

More on Roth IRAs

Written by Andrew Szabo
Thursday, 04 February 2010 01:00

Author’s note: This column is not a substitute for individualized advice from an adviser or accountant. Copyright (c) 2010, Greenwich Financial Management Inc., a registered investment adviser.

Q: What are the current limits for contribution to a Roth IRA?

You can contribute as much as $5,000 for the 2009 tax year (or $6,000 if you reach 50 or older by the end of the tax year, a so-called “catch-up contribution”). However, you must have “qualifying income” at least equal to the amount contributed.

Your questions answered about a Roth IRA

Written by Andrew Szabo
Thursday, 28 January 2010 01:00

Author’s note: The following article touches on tax aspects of certain investments. Andrew Szabo is not offering tax advice. The article is not a substitute for the expert tax advice that an accountant or tax lawyer might customize to meet the needs of an individual client.

Q: Why would I want to contribute to a Roth IRA in the first place rather than to traditional retirement plan?

It depends whether you expect to do better contributing pre-tax dollars or post-tax dollars. Traditional qualifying retirement plans include the traditional IRA, SEPP IRA, 401(k), 403(b) (for non-profit entities) and 457(b) (for government entities). You may make contributions to such plans from income without paying any federal or state income tax — subject to restrictions — although you do have to pay Social Security and Medicare withholding tax.

More on oil and gas tax incentives

Written by Andrew Szabo
Thursday, 21 January 2010 01:00

Author’s note: This column is not a substitute for individualized advice from an adviser or accountant. Copyright (c) 2009, Greenwich Financial Management Inc., a registered investment adviser.

Q: What category of partnership risk does the investor take in an independent oil and gas drilling direct participation program?

If the investor is seeking to offset passive income, such as from rents, the investor may go in as a limited partner from the start; risk is limited to loss of investment. If the investor seeks to offset ordinary income, or portfolio income, then the investor must go in as general partner and face unlimited liability.

Questions about oil and gas incentives?

Written by Andrew Szabo
Thursday, 14 January 2010 01:00

Author’s note: This column is not a substitute for individualized advice from an adviser or accountant.

Q. For what sorts of investor might an oil and gas drilling partnership be suitable?

A. These are partnerships designed to bring together sponsors with experience in oil and gas drilling with investors seeking to participate in the risks and rewards of drilling. They are most suitable for accredited individual investors paying U.S. income taxes in a high marginal tax bracket and who have ample financial liquidity set aside.

The final lap for reform bill

Written by Andrew Szabo
Thursday, 07 January 2010 01:00

The House and Senate have finally passed their different versions of health care reform. The two chambers now must now work out a bill that is acceptable to both sides, a messy process that legislators call “reconciliation.”

The final vote in each house was straight party line, with the Democrats forced to make many compromises to keep their own cadres in line. In the Senate discussions, a recalcitrant Sen. Joseph Lieberman (elected as an independent, after his Democratic primary defeat in 2008, he wields leverage as a swing vote) finally helped kill the last residue of a “public option.” The House meanwhile passed a greatly watered down public option that also failed to impress or satisfy many liberals. Do not expect any form of government sponsored and administered health care insurance to make it out of the reconciliation process.

Risk and return in oil and gas

Written by Andrew Szabo
Wednesday, 23 December 2009 01:00

If we look at these independent oil and gas partnerships as an investment, aside from the tax incentives provided by the government, other important aspect of risk and return to consider are the expenses incurred to extract the deposits, the actual productivity of the wells and its “return curve” over time, and the market price of oil and gas.