Here’s a thought for all those now basking in the Houston heat. Having demonstrated their stupidity in lending on so-called “sub-prime” mortgages, how do we know that the financial institutions won’t make – or already have made – the same mistakes in the energy sector?
After all, making a judgment call on whether or not to lend someone money to buy a house should be a simple exercise. The due diligence involved should be straightforward – but, of course, it seems now as if it was rarely carried out. If it had been, the lenders probably wouldn’t be in the mess they now are.
This raises the question, though, as to whether lenders act any differently when it comes to, say, lending to build a new drilling rig, developing a new oil field, or whatever. What level of real due diligence do they undertake in cases like this?
I ask the question now because some believe that the industry is heading towards a position of supply-side overcapacity. According to investment bankers Lehman Brothers, the oil price will fall back to $80 or so fairly soon, and that, of course, would more than likely result in a cutback in new activity, leaving a lot of supply-side companies with idle assets.
Personally, I think they’re talking through their choke valves, but nevertheless, Lehman is a respected organisation and what it says should be listened to.
But then we have to face the fact that the market is extremely turbulent and becoming more complex.
For example, a week or so back, most would have assumed that Russian oil production growth was a reasonably solid bet. But some Russian sources have said that production has either already peaked or is about to. This is not good news for the oil-price bears, but neither is it particularly helpful for those who have to make decisions about whether to grant big loans or not.
Of course, we also have to recognise that, nowadays, there are different types of investors and lenders. I’m more interested in, and supportive of, organisations that are looking to the medium and long term, and particularly new energy technologies. These are the investors that need real help and good-quality advice; but, of course, in the UK, they are, inevitably, pretty thin on the ground.
Others – especially so-called private equity companies – rarely, if ever, actually create anything new, and are certainly not interested in the sustainability of anything other than their annual bonus schemes. In fact, as I’m writing this, there are ongoing negotiations between Expro and a collection of PE companies and others all keen to buy Expro at what appears to be a huge premium to its share value. The talk is of a price of about £1.6billion, which is a massive amount of money for a company that analysts believe will produce pre-tax profits for this financial year of only £76.5million.
So what’s going on? Well, this is, of course, purely a financial deal. The PE companies probably don’t even have much of an idea of what Expro actually does or, indeed, could do in the future, because that’s of no importance to them. The only thing that interests them is whether, in three years or so, they can sell it to someone else for considerably more than they paid for it – by which time the company will probably be registered somewhere warm to ensure they pay a minimum amount of tax on their gains.
Now this would all be fine, wouldn’t it, if there was strong evidence that, while all this money “churning” was going on, there was also plenty of new money going into new energy technology companies as well? That is certainly the case in the US.
In the UK, this is a lesson we have yet to learn, although if I’m honest, I don’t actually think it’s a lesson we will ever learn. While at the Offshore Technology Conference this week, it might help if visiting UK financial institutions took a real look around the show rather private cabals in smart hotels. They would undoubtedly be surprised to find that, although the US financial sector is in a deeper mess than British counterparts, the Americans are still investing in new technologies and new companies.
The UK has a dismal record in taking risks on new technology, and it is unlikely this will improve. Only this week, I was highly amused that BBC television got all excited because a university was testing a hydrogen refuelling station with a couple of fuel-cell cars. I hadn’t got the heart to tell them that almost every other civilised Western country was already doing this and the UK was, in fact, nearly 10 years behind.
So here’s another side of the coin when making investment decisions. Do UK investors and banks actually know enough about these new technologies to be able to make sensible judgments about them? Though there are a couple of exceptions, the answer is probably “no”. But on the other hand, are they even interested in knowing more about them? Given their recent performance, the answer to that is probably “no” as well.