Detroit 3 beg for $25-billion lifeline

JULIE HIRSCHFELD DAVIS

Tuesday, November 18, 2008

WASHINGTON — The Detroit Three auto makers pleaded with the United States Congress Tuesday for a $25-billion (U.S.) lifeline to save their once-proud companies from collapse, warning of broader peril for the national economy as well.
It was an uphill battle, with the plan stalled on Capitol Hill amid opposition from Republicans and the Bush administration. But congressional leaders worked behind the scenes in an effort to hammer out a compromise that could speed some aid to the auto makers before year's end.

The executives of Chrysler LLC, Ford Motor Co. and General Motors Corp., as well as the United Auto Workers union chief, were pleading their case Tuesday afternoon before the Senate Banking Committee. A House panel was to hear from them Wednesday.
Majority Leader Steny Hoyer said Congress might have to return in December — rather than adjourning for the year this week, as expected — to push through an auto bailout.

“Dealing with the automobile crisis is a pressing need. We are talking about a lot of people ... and a great consequence to our economy,” said Mr. Hoyer, D-Md. “Obviously we are going to be back here, we think, in December.”
The financial situation for the auto makers grows more precarious by the day. Cash-strapped GM said it will delay reimbursing its dealers for rebates and other sales incentives and could run out of cash by year's end without government aid.

In the Senate, leaders were focusing on a plan favoured by the White House and GOP lawmakers to let the auto industry use a $25-billion loan program created by Congress in September — designed to help the companies develop more fuel-efficient vehicles — to tide them over financially until President-elect Barack Obama takes office.

However, House Speaker Nancy Pelosi, D-Calif., and other senior Democrats, who count environmental groups among their strongest supporters, have vehemently opposed that approach because it would divert federal money that was supposed to go toward the development of vehicles that use less gasoline.
Instead, they want to draw a separate $25-billion for the industry from the $700-billion Wall Street bailout — bringing the government's total aid to the car companies to $50-billion.

A Senate vote on that plan, which would also extend jobless benefits, could come as early as Thursday, but aides in both parties and lobbyists tracking the effort privately acknowledge it doesn't have the support to advance. Treasury Secretary Henry Paulson renewed the administration's opposition on Tuesday.

Even the car companies' strongest supporters conceded Tuesday that changing the terms of the fuel-efficiency loan program might be the only way to secure funding for them with Congress set to depart for the year and the firms in tough financial shape.

“While I believe we have to have retooling going into next year, if in the short run the only way we have to be able to get some immediate help is to take a portion of that, I would very reluctantly do that — but only because I believe President-elect Obama is going to be focused on retooling and on a manufacturing strategy next year,” said Sen. Debbie Stabenow, D-Mich.

The White House said the government shouldn't send any more money to the struggling auto industry on top of the already-approved loans.
“We don't think that taxpayers should be asked to throw money at a company that can't prove that it has a long-term path for success,” said White House Press Secretary Dana Perino.

Sen. Mitch McConnell, R-Ky., the minority leader, said that redirecting the existing loans was “a sound way to go forward,” and that he was working with Democratic Leader Harry Reid of Nevada to set a vote on such a plan.
“The auto industry obviously is very important, very important to my state, but there is a way to do this,” said Mr. McConnell, who has two Ford plants and a GM plant in his state.

Paulson, testifying on the House side, defended the administration's handling of the massive $700 billion bailout for the financial industry and said it should remain off-limits for Detroit, no matter how badly the automakers need help.
“There are other ways” to help them, he said.

At the same time, he testified, “I think it would be not a good thing, it would be something to be avoided, having one of the auto companies fail, particularly during this period of time.”

The industry mounted a feverish lobbying effort to secure funds they said were vital to their survival — and the health of the broader economy.
In an e-mail marked “urgent” and sent to owners of GM vehicles, Troy A. Clarke, president of GM North America, pleaded with them to e-mail their representatives in the House and Senate in support of a “bridge loan” for the industry — and ask their friends and family to do the same.

“Despite what you may be hearing, we are not asking Congress for a bailout but rather a loan that will be repaid,” Mr. Clarke said in the message.
That argument could be vital as bailout fatigue threatens to sap support for the car maker aid.

Copyright © 2002 Bell Globemedia Interactive

Big oil may be ready for big moves

Big oil may be ready for big moves

JOHN PORRETTO
Tuesday, November 18, 2008

HOUSTON — Big Oil is set to spend billions on new exploration in 2009, but in addition to ocean beds thousands of feet below the water's surface, major producers are surveying the balance sheets of vulnerable companies in the sector.

Major oil companies are sitting on enormous piles of cash after posting record profits in recent quarters, while crumbling stock and crude prices have made many smaller oil and gas companies potential targets.

The disparity in the energy sector comes as Exxon Mobil Corp., BP PLC and other oil giants find it increasingly difficult to secure new sources of fossil fuels the old-fashioned way — exploring and drilling for them.

Smaller producers that don't have the same massive capital reserves have been stung by a credit crisis that's severely limited or even paralyzed their ability to finance new exploration and production.

“You have a lot of smaller producers with a lot of property, but many are constrained right now,” said Brian Youngberg, an energy analyst at Edward Jones. “Then you have the major integrated companies with deep pockets that could potentially buy these reserves at relatively attractive prices. You're probably going to see this happen as we move through 2009.”

In the long run, consumers could benefit if the deep-pocketed majors step in and finish some projects that might otherwise go undeveloped by smaller, struggling producers. Increased production puts downward pressure on prices.

No one predicts the mega-deals of the late 1990s, when oil fell to near $10 (U.S.) a barrel and the couplings included Exxon and Mobil and BP and Amoco, creating today's behemoths. But observers say consolidation is inevitable given the enormous stockpiles of capital at the ready, paired with the bargain prices for some companies.

Exxon Mobil, the world's largest publicly traded oil company, said recently it has $37-billion in cash.

At the same time, the economic downturn and a significant drop in commodity prices have erased huge chunks of market value for other energy companies, including independent oil and natural gas producers with rights to potentially oil-rich tracts of land and sea.

Independents concentrate solely on exploration and production, forgoing refining and marketing operations. Among those mentioned by analysts as possibly appealing to larger rivals are Apache Corp., Devon Energy Corp. and Chesapeake Energy Corp.

Chesapeake, the largest U.S. natural gas producer, has been rumoured as a takeover target of BP — speculation possibly fueled by BP taking an interest in certain Chesapeake ventures in the past few months.

BP, Europe's second-largest oil company, said in September its U.S. arm plans to buy a 25 per cent stake in Chesapeake's Fayetteville Shale assets in Arkansas for $1.9 billion. A month earlier, BP said it had bought similar Chesapeake assets in Oklahoma for $1.7 billion.

In the past week, Chesapeake sold even more natural gas assets to Norwegian energy company StatoilHydro for $3.38-billion.

Chesapeake shares have fallen roughly 60 per cent in the past six months and, in October, billionaire chief executive Aubrey K. McClendon said he sold “substantially all” of his stock in the company to meet margin loan calls.

“It may come to the point where some of these bigger companies decide they'd rather buy the whole company,” Mr. Youngberg said.

But Mr. Youngberg and other analysts say the oil giants are likely to proceed cautiously given the uncertain economic times and potential for a prolonged recession that has already slashed energy demand.

For now, there's plenty of money in the coffers for big oil.

Exxon Mobil, BP and rivals Chevron Corp., Royal Dutch Shell PLC and ConocoPhillips posted combined earnings of $44.4-billion in the most-recent quarter, up 58 per cent from the same three-month period a year earlier. The biggest reason was oil prices that soared to a record above $147 per barrel in July and remained above $100 when the third quarter ended Sept. 30.

Since the July record, prices have tumbled about 60 per cent.

In a recent research report titled “Big Oil Should Step on the Gas,” Credit Suisse energy analyst Mark Flannery noted the majors' ongoing challenges finding new, substantive supplies of oil and gas.

Even though most people recognize the names of the giant multinationals — Exxon Mobil, Shell, BP and others — they control less than 10 per cent of the world's oil reserves. Most proven reserves — about 80 per cent — are held by national, state-run companies like those in Venezuela and Saudi Arabia.

Exxon Mobil may be the world's largest investor-owned oil company, but it produces only about 3 per cent of the world's crude.

“Big Oil has a growth problem for sure but is extremely well capitalized and we now see an M&A window opening,” Mr. Flannery wrote.

The companies themselves typically don't talk about potential buyouts, saying only that they're aware of opportunities.

As for the majors grabbing too big a share of the production business, it's important to keep in mind the majority of crude and natural gas is supplied by smaller, independent companies.

Altogether, the nation's roughly 5,000 independent operators account for 68 per cent of oil and 82 per cent of the natural gas produced in the U.S., according to the Independent Petroleum Association of America.

In the past, Big Oil has shown restraint on potential buying sprees, even when flush with cash.

In fact, Exxon, BP, Chevron, Shell and ConocoPhillips plowed about 55 per cent of the cash they made from their businesses into stock buybacks and dividends last year, according to Rice University's James A. Baker III Institute for Public Policy.

The percentage they've spent on acquisitions, meanwhile, has remained flat for the past several years, in the low-single digits.

And the industry's integrated giants aren't the only ones looking for bargains that might complement their operations.

Large independent Occidental Petroleum Co. has acknowledged it's been shopping in the past couple of months — and even made offers — but hasn't struck any deals.

In a conference call with analysts last month, Occidental chief financial officer Steve Chazen said deals have fallen through in part because targeted companies want offers based on stock prices of six months ago, not current values.

That tactic may change if the current energy slump lingers into next year — when times may really get tough for some in the industry, Mr. Chazen said.

“I think there's a lack of reality, and the small producers, I think, are going to have a very difficult time with banks, getting more capital at this point,” he said on the Oct. 28 call.

Jed Shreve, a principal for Deloitte Financial Advisory Services LLP, which advises energy clients, said on a recent Webcast that with as many as 10,000 companies in the U.S. alone, the oil patch is well placed for more consolidation.

It's “a very diverse group of companies, very fragmented,” he said, “and that would suggest imminent activity will be ripe in the future.”

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