Is Hugo Chavez Getting Nervous?

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Venezuelan president Hugo Chavez loves railing against the United States.  Unfortunately, his country exports about 40% of its oil to those imperialist Yankees and owns three refineries in the United States through Citgo.  The Orinoco belt produces most of the country’s oil, a heavy, high sulfur content (“sour”) oil.  Sour oil needs specialized refineries, and these are located primarily in the United States.  Venezuela has expanded its customer base, notably increasing exports to China.  As a socialist, Chavez nationalized the country’s oil industry to help fund his government.  He needs to spend about $3 billion a year on oilfield maintenance, but hasn’t.  The result: declining production.  And bad news keeps coming for Mr. Chavez.

Two small reasons for Chavez to worry...

In Columbus, Mississippi, KiOR (NASDAQ: KIOR) has recently announced that its commercial plant has started producing oil from cellulose.  Using a standard process known as fluid catalytic cracking and proprietary catalysts, KiOR claims it can produce high quality oil from non-food sources of cellulose: Southern yellow pine, to be exact.  As mentioned in the link above, there are some unanswered questions about production, but at least there is some oil flowing out of the plant.  The company plans a second, significantly larger plant in Natchez, Mississippi.  Of course, the company has to sell enough oil or its refined products to get it through early 2013, when cash will likely run out.  Understandably, management is focused on keeping production going regardless of yield.  This is a speculative investment and may join many other biofuel companies in bankruptcy court.

A more conventional energy play comes from Calumet Specialty Products Partners (NASDAQ: CLMT).  This limited partnership produces a variety of specialty hydrocarbon products.   Recently, the company’s Karns City, Pennsylvania plant declared plans for production of oil from natural gas.  Using German technology called the Fischer-Tropsch process, Calumet tentatively plans to produce 1,000 bpd of oil from natural gas.  The beauty of Fischer-Tropsch is that it’s well established, and by tweaking reaction conditions, the character of the oil produced can be changed to suit Calumet’s needs.  The beauty of using natural gas is that it produces a low sulfur product.  While 1000 bpd won’t do much for American energy independence, it will help Calumet’s energy independence, and that is a very beautiful thing.  Almost as beautiful as its 8.3% dividend, or its return on equity of 26%, or its five year PEG of 0.62.

And two big reason to worry...

No mention of Fischer-Tropsch can exclude South African oil company Sasol (NYSE: SSL).  For 50 years, Sasol provided South Africa with petroleum products courtesy of the Fischer-Tropsch process.  Sasol primarily used coal as a feedstock, but over the years learned something about using natural gas, too.  Today, Sasol is exporting its Fischer-Tropsch expertise around the globe.  It built a plant in Qatar, and by 2015 hopes to produce as much as 450,000 bpd from natural gas.  Calcasieu Parish, Louisiana tentatively will host another Sasol gas to liquid petroleum plant.  China had contracted Sasol to perform a feasibility study for converting its coal to oil, but nothing more has come of this.  Sasol needs this business.  The company has significant debt, and the stock is down 10% for the past two years.  It’s 6% dividend is nice, but I wonder if it can be sustained given its negative earnings growth over the past year.

Lastly, there’s Russian shale oil.  As reported in Forbes magazine, the Siberian Bazhenov field, currently producing oil via vertical drilling, exhibits geology similar to the Bakken shale oil fields in North America.   Exxon Mobil (NYSE: XOM) and Russian oil firm Rosneft recently signed a deal to bring tight oil technology to Bazhenov.  They hope that with development of new fields and stranded shale oil, this field, eighty times the size of the Bakken, will produce one million bpd by 2020.  Russia reportedly needs Ural oil at $150/barrel (vs current price of $118/barrel) to balance its budget, so they need Exxon Mobil’s expertise to tap into this shale oil.  Exxon Mobil looks good as it trades at a PE of 9.5 and pays a 2.56% dividend.  The dividend has steadily increased since 2002.  The company enjoys a AAA credit rating from Standard and Poor’s, routinely achieves a ROE of over 23% and carries manageable debt.  Being one of the largest oil companies in the world doesn’t hurt either.

Foolish Final Thoughts

President Chavez once said “We must be ready for an aggression.”  He may need to be ready for a recession, too.  The combined forces of declining oil production in Venezuela and the declining oil prices/increasing oil production in the United States reduces the need for sour Venezuelan oil.  The resurgence of Fischer Tropsch technology and further development of Bazhenov oil shale will only add to the world’s supply of oil. This bodes well for capitalists, particularly for those investing in Calumet or Exxon Mobil.  For Mr. Chavez, well, I think he needs to keep the Tums handy.  

dylan588 has a position in KiOR and Calumet. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Sasol. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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