Monday, March 30, 2009

Green Energy Investment is Risky without Government Backup

Source Article
Green energy plans in disarray as wind farm giant slashes investment | (article)

1) Alternative Energy is not able to compete with "Cheap" oil at this time.

2) Wind and Solar may be able to compete before Biofuels for Transport

3) There is no way to Project Competing Energy (Hydrocarbon) Costs reliably for the length of investment needed for Alternative Energy Infrastructure.

4) Government programs guaranteeing "Floor" pricing for alternatives and renewables only way to attract investment capital

The "Green Energy" movement - Renewables, Biofuels and oil substitutes like ethanol, are subject to energy market price volatility as a whole, and compete for capital with other energy projects.

The rapid spike and decline in oil prices over the last 18 months has shown that there is very little elasticity of demand for hydrocarbon-based energy. The infrastructure the world has invested in for the past 100+ years is based on the availability of hydrocarbon fuels (Coal, Natural gas, and Crude Oil derived refined products) as the primary energy source.

As long as the emerging "Green" energy sources cannot be guaranteed a "floor" price where government will make up the difference between production and market costs while the industry matures and is able to become competitive in the global energy free market, there will be very little incentive for private(NYSE:BBY) investment in these technologies and the infrastructures needed to support them.

The financial collapse of corn-based ethanol producers in the US is a prime example of why alternative and Bio energy will be a hazardous proposition for investors until a way to protect them from the bottom of oil's price swings can be initiated.

Relatively inexpensive oil will always be a threat to Green Energy business plans; they are building against a competitor that has years of investment and operating experience, in addition to loads of capital, with which to compete.

State oil firms pump based on how much cash they need to bring in to support the government that owns them, market lows are of little consequence to their plans. While the State-owned Oilcos love the high prices, the odds of a group of state-owned firms volume discipline being maintained at the expense of a bankrupt government is virtually nil.

The Super Major Multinational privately owned firms have been very selective about competing wit their core hydrocarbons businesses, they understand the economics better than anyone else.

Until some large governments embrace distributed-generation electrical production and the smart grid needed to make that model work, as a national security priority, the odds of significant amounts of electricity being produced by "Green" means is very slim indeed.

Biofuels for transport face an even tougher uphill fight without help to get the industry off the ground

Consolidation of Mid-Size Oil Firms is Sign of Current Market Conditions

Source Article: Suncor's Petro-Canada bid may spur more deals | (article)

1) Suncor(TSX:SU)/Petro-Canada(TSX:PCA) combination makes for stronger single entity

2) Merger will make access to capital easier- Oil sands are expensive development prospect through to production.

3) Creates a firm with broad interests and verticle integration

4) Other mergers are going to occur in "Mid-Major" firms, and not be limited by national borders

5) State Oil firms may look to reach out to create "hybrid" firms across borders like PDVSA-Citgo

Suncor's(TSX:SU) purchase/merger with Petro-Canada(TSX:PCA) makes sense for both the players, and advances Canada's overall energy interests by creating a player with deep pockets and a breadth of resources.

Firms of this size, while large by conventional standards, are dwarfed the Super Major Multinationals like Chevron(NYSE:CVX), ExxonMobil(NYSE:XOM), BP, Royal Dutch Petroleum (Shell(NYSE:RDS/A)(NYSE:RDS/A)) and Total. They compete with these firms for exploration and development properties, in distribution and retail in R & M operations, and for capital on the global lending market.

Bigger, in this business, means real and realized efficiencies of scale, and make economic sense. The combined entity will find access to capital an easier proposition, and be able to expand those savings over the entire range of both firms operations as they combine.

Look for other mergers to occur in Major or Mid-Major Oil firms. The time is right for strong firms to make moves before energy prices head precipitously back up, making the book values of known reserves prohibitively expensive.

The prospect of State-owned oil firms purchasing privately held firms in other markets shouldn't be discounted as a potential play, either.

Had Venezuela's current political posture not come to complicate the situation, the PDVSA-Citgo combination could be a blueprint as how to leverage a nation's natural resources into commercial interests that are far more than trading extracted natural resources for cash.

Thursday, March 26, 2009

Super Major Multinational Oil Firms Can Continue to Invest for the Future

Source Article: Shell Plans Major Investments in 2009, Tags Dividend Growth at $10 billion | (article)

1) Recent big profits give them strong balance sheets
2) Can Source Capital inexpensively right now
3) World Still Hungry for Hydrocarbons at any Price
4) OilCo's can control bio and alternative fuel assets at discount now.

Shell's announcement of capital expenditures remaining at high levels should come as no surprise. All the Supermajor Multinational Oil firms have plenty of cash and strong balance sheets, access to capital at very low rates, and an inelastic demand vs price in hydrocarbon based energy. ExxonMobil(NYSE:XOM) and Total are doing the same.

While prices are down right now, the historic run-up last year showed just how inelastic the core demand for oil, natural gas and refined products really is. While alternative fuels and conservation measures like hybrid and electric cars will reduce demand in the long run, those developments are still way out on the investment horizon.

The oil companies can also exert influence and a degree of control on the future of biofuels right now, and Valero's(NYSE:VLO) announced purchase of bankrupt VeraSun's ethanol production assets this week shows. BP, Chevron(NYSE:CVX) and ExxonMobil are all featuring alternative technologies in their advertising right now.

The collapse of oil prices created an opportunity to purchase overleveraged bio and alternative fuel assets at a discount, as the market price the VeraSun's and the like used to justify investment fell apart.

So the future for the Oil companies isn't just about crude, but the alternatives and substitutes being developed to supplant the world demand for crude. The Supermajors are expert and efficient conduits for product and capital, as they diversify into the other types of energy alternatives, that isn't going to change.

Discretionary Spending dip Hitting Casual Dining Sector

Source Article: Hard Times Are on the Menu at Restaurants | (article)

1) Discretionary Income is Being Spent more Conservatively
2) Adjusting Menus to "Fair Value" propositions key to traffic
3) Keep Signature Items as alternative to "promotional" menu to keep ticket prices fairly normal

Casual Dining is under attack as consumers adjust their spending habits. The dip in consumer confidence was certain to be followed by a dip in discretionary expenditures of all kinds.

Casual Dining, to most people, is one of the most discretionary of spending categories. The fact dinner has seen the biggest drop-off shows it's the family market making the biggest adjustments.

A Menu adjustment to feature "Value" items promotionally is the best way to drive traffic into the casual dining houses again. Whether you can "upsell" your seated customers back onto regular menu items will be the key to how successful the promotions are.

Cutting price across the board on the standard menu, or running "2 for 1" specials would be a more expensive, and more damaging to a quick bounce back when the economy turns. TGI Fridays is taking that approach. Once customers get used to your standard menu at half or reduced price, it's tough to drive them back to paying full markup again.

A chain with an extensive menu, like Cheesecake Factory(NAS:CAKE), really has to feature promotional specials to prevent a costly menu rebuild after the business comes back. Applebee's idea to bring out a new menu is a good alternative strategy.

As fast as the decline in same store sales occurred, a quarter or two of solid consumer sentiment will bring the sector back again. It's how the slump gets handled strategically now that will portend how fast each of the players recovers.

Capitalist Communist Regulators Block Coke's Bid

Source Article: China Blocks Coca-Cola’s $2.3 Billion Huiyuan Bid | (article)

1) Chinese Regulators Thinking Short-Term
2) Coke will invest and grow organically in China
3) Huiyuan Shareholders get Disservice from Regulators

The Chinese Blocking Coca-Cola(NYSE:KO) Corporations acquisition of juice-maker and rival Huiyuan just speeds up organic growth in this sector by Coca-Cola, which will become inevitable.

The regulators blocking the acquisition are not only engaging in protectionism, but will now "force" Coke to grow market share organically in the chinese domestic market through their own branding and products. This they will do, and eventually control the market share they were going to purchase through the acquisition.

Carbonated Soft Drinks are a slow growth portion of the packaged beverage business. It is a mature market, and in order to push volume and revenue growth, Coca-Cola must distribute and market other categories of packaged beverages.

Juices and juice blends, Teas of all flavors, energy drinks and bottled and flavored waters are all experiencing greater percentage gains in consumption annually than CSD's.

Coke, if the acquisition is ultimately denied, will need to emphasize these other categories of products in China in order to maintain volume growth, so all this move really does is give the Huiyuan shareholders a formidable competitor rather than a premium buyer for their shares in the product category.

The denial of this purchase is a short-term and short-sited move on the Chinese regulator's part.

Saturday, March 21, 2009

Starbucks Instant Coffee Move a Curious One

Source Article: Starbucks has high hopes for its instant coffee | (article)

1) Is Move to Instant a "Value" Play
2) Detracts from Barista-prepared "Core" premium offering
3) May Cut In-Store Visits if Successful - Reduce retail profitability
4) Is this the beginning of migrating the Starbucks(NAS:SBUX) business model to become a CPG firm?


Starbucks(NAS:SBUX) introduction of it's "Via" instant coffee product is a curious one for a company struggling to improve performance at it's retail stores.

Is bringing "Via" to Costco(NAS:COST) and Target(NYSE:TGT), and eventually Wal-Mart(NYSE:WMT), a shrewd way to increase overall corporate revenues, or a way to begin to migrate the company model from a retail coffeehouse-based chain to a CPG company?

Starbucks(NAS:SBUX) retail locations have been the driving force behind the firm from it's inception. To make a move to deemphasize any focus on retail is a bit of a head scratcher.

If Via is Starbucks(NAS:SBUX) move to a "Value" product in response to the current tough consumer spending environment, then introducing an expensive alternative for a category (Instant Coffee) considered to be an inferior substitute in their primary North American markets is a tough sell to make.

Is this a more strategic and long-term plan to deemphasize retail and become a premium coffee purveyor through traditional retailing channels? That makes more sense, and putting a premium instant in as the transition begins would be a way to expand those channels and get customers looking at Starbucks(NAS:SBUX) products that would have never considered the brand before.

There's no way to know yet if this is the eventual direction of the business, but the new Starbucks(NAS:SBUX) initiatives to bolster the retail side have been underwhelming, up to this point in time.

The Starbucks(NAS:SBUX) experience was and is about good quality brewed coffee or coffee/espresso-based drinks, excellent customer service and ambiance at the sites. With the margin that coffee delivers, it's hard to imagine that they cannot retool margins and still deliver a retail experience that addresses the current consumer sentiment.

Is Via a misstep, or the beginning of Starbucks(NAS:SBUX) migrating to a new business model? Only time will tell.

Don't Just Stand There, Do Something!

Originally published as feature article in "The Meter" Condevco's newsletter in the March 4 Edition

As we have watched the last month unfold in our little corner of the petroleum field, we have seen:

1) Jobbers filing for bankruptcy, of both the chapter 11 and 7 varieties.

2) Store chains being sold either in whole or in part, and

3) Stations going up for sale with prices that do not reflect the reality of the markets, either in real estate or retail convenience and gasoline.

Here’s a recent conversation I had with a friend who shall remain anonymous.

Ron, “Hey, did you get those listings you were talking about from that client?”

Friend, “No, I went and looked at them but the client is in them upside-down. The businesses aren’t making money and poorly managed, and what they need to get won’t work in this market, so I didn’t take the listings.”

Ron, “Well, do they want to fix the businesses so they can get more down the road?” (I had sent them over a consulting proposal at this friend’s request)

Friend, “They don’t want to spend any money on the business right now”

Ron, “OK, so they aren’t breaking even, can’t sell the stations for what they paid for them, and they don’t want to work on fixing the business”

Friend, “That’s right”.

While I find that a hard to believe conversation, but that’s not the only thing I’m seeing that makes me think the “fight” is leaving lots of folks in the business right now.

In a different time, I guess the owners could figure someone would rescue them by “purchasing the problems” before too long. I have to say, I don’t think that’s the case now. If you have assets that aren’t performing, hoping isn’t the way to go. It’s time to become a retailer again.

Jobbers are going into bankruptcy with no apparent plans for coming out. If you want to be broken up, just skip the Chapter 11 step and get yourself dissolved.

That means pricing your motor fuels as competitively as you are able to, keeping your stores clean and stocked with current and timely product, and making sure your Customer Service Associates are doing all they can for your customers as they walk in.

Condevco is the Customer Service Training and Store Merchandising authority, we can help you freshen up your stores and employees without major expenditures. Be sure to watch for Darcee’s first feature article for The Meter, “Eight Easy Ways to Freshen your Store and Energize your Employee’s Customer Service”

To ask Ron and Darcee for Consulting Help, visit our web site! (Click here)