Monday, May 31, 2010

Shell Buys U.S. Shale Gas Assets for $4.7 Billion

According to NY Times, Shell is buying Shale gas assets of a small player in Northeast further fueling the land grabbing in the sector following Exxon's acquisition of XTO for $31B. We will see more energy companies divesting downstream retail & marketing assets in favor of more upstream positions, particularly in shale gas.  What is uncertain however following Obama's temporary ban of offshore drilling, how this industry might be regulated.
Royal Dutch Shell, the Anglo-Dutch oil and gas producer, said Friday that it had struck a deal to buy most of the assets of East Resources for $4.7 billion in cash, moving into the coveted sector of natural gas contained in shale deposits.
The Shell deal is with East Resources, an independent oil and gas company, its private equity backer Kohlberg Kravis Roberts and its financial adviser Jefferies.
“The opportunity now is to consolidate our tight gas portfolio, divest from non-core positions across North America, and to invest for profitable growth,” said Peter Voser, chief executive of Shell, calling the East Resources assets “the premier shale gas play in the Northeast U.S.”
Shell is getting 1.05 million acres of so-called tight gas properties in North America, in the northeastern states and the Rockies, which will make up most of the 1.3 million gas acres it is acquiring on the continent this year, and which it expects will produce 16 trillion cubic feet of gas in total.
“The U.S. tight gas resource base has allowed it to become self-sufficient in natural gas supply long-term,” said Jason Kenney, oil and gas analyst at ING in Edinburgh. “A couple of years ago that wasn’t the case. The technological boundaries have been pushed back.”
The Shell announcement comes in the wake of the BP oil leak in the Gulf of Mexico, and as the oil and gas industry is subject to increasing scrutiny.
On Thursday, Secretary of the Interior Ken Salazar said he would delay considering Shell’s request to drill five exploratory wells in the Arctic in the coming months.
Shell, the largest oil and gas producer in Europe, saw its shares rise 6.5 pence, or 0.36 percent, to 1,822 pence in late morning trading in London.
East Resources’s activities in the northeastern United States have centered around the Marcellus Shale area, extending south from New York through Pennsylvania into Appalachia. The area is known to contain  tight gas, or gas held in shale formations that make it difficult to extract.
While small and mid-level players like East Resources have solid access to the gas deposits, they cannot always afford to exploit them to the full.
“You have to throw a lot of capex at drilling,” Mr. Kenney said, referring to capital expenditures. While natural gas prices are modest in the United States now, he added, they are expected to rise.
That has prompted Shell’s rivals to enter the tight gas sector as well. Exxon Mobil agreed in December to buy XTO Energy, which was then the largest domestic natural gas producer in the United States, for $31 billion.
BP also holds huge North American gas assets. And Britain-based BG Group said this month that was entering a joint venture with Exco to exploit its natural gas assets in the southern states.

Tuesday, May 25, 2010

Iberdrola Sells US Gas Businesses for $1.3 Billion

Due to sweeping market changes in the gas industry as well as overleveraged Spanish utility giant Iberdrola has divested its gas utility companies in favor of building another 3,000MW of wind farms in the US to capitalize on Obama's subsidis for green energy.....

Iberdrola said on Tuesday it had agreed the $1.3bn sale of three gas businesses in the US, marking the latest in a series of non-core asset divestments at Spain’s largest electricity group.

The world’s biggest wind energy generator said it would sell Connecticut Natural Gas Corporation, Southern Connecticut Gas Company and the Berkshire Gas Company to UIL Holdings Corporation, parent of electric utility The United Illuminating Company.

Iberdrola said the sales were part of an ongoing divestment programme aimed at cutting debt and concentrating on core businesses. They follow the recent sales of its 2.7 per cent stake in EDP of Portugal, 15.7 per cent holding in Petroceltic and Seneca Lake gas assets.

The gas distributors – all located on the US northeastern seaboard and claim between them nearly 370,000 clients and annual volume sales of 1.6bn cubic metres (bcm) – were part of Energy East, the US group for which Iberdrola paid $4.5bn in 2008.

The purchase will further allow the company to consolidate its position in the country, where it expects to benefit from grants from stimulus funding as a result of president Barack Obama’s support for low-carbon energy.

Proceeds from the sale will be used to finance a €1.4bn project to upgrade and extend transmission lines and substations covering the states of Massachusetts, New Hampshire, and Maine, with an improved link into Canada.

Ignacio Sánchez Galán, Iberdrola’s executive chairman, said this year that almost 40 per cent of the company’s €18 bn capital spending between 2010 and 2012 would go into the US; primarily into wind farms and electricity transmission and distribution.

Iberdrola is already the second-largest wind company in the US, with almost 3,600 megawatts of installed capacity at the end of last year, and plans to double that and build a further 1,000MW a year for the next three years.

Sweeping Market Changes Leave Gazprom in an Unenviable Position

Thanks to the discovery of massive amount of shale gas in the US, the world’s gas markets have turned upside down where net LNG importers of LNG now have access to own reserves for decades. Even apparent in Russia’s recent softer and friendlier foreign policy, Russian gas cartel Gazprom has suddenly found itself in a difficult situation. The following article from today’s FT is quite revealing into the future of gas market supply & demand dynamics and price trends.

"Gazprom is under growing pressure to defend its market share in Europe and win new contracts in China, as sweeping change in global gas markets batters its position.

The Russian gas export monopoly was able to recover sales in the first quarter of this year after a disastrous 2009, which saw sales to Europe, its main market, and other countries fall 13 per cent, with the biggest drop coming in the first half of the year.

Net income fell 19 per cent last year as a result, pushing the company’s free cash flow into negative territory. Alexei Miller, the Gazprom chief executive, recently said sales to some European states were up 40 per cent so far this year compared with the same period last year. “This is a serious boost to our plans to exceed pre-crisis levels of gas production by 2013 and create new export routes,” he said.

But despite Mr Miller’s upbeat tone, analysts say the pressure is far from over with lower demand expected in summer. Gazprom is heading into one of its most difficult periods yet as uncertainty grows over levels of demand in Europe due to an influx of liquefied natural gas (LNG) from the Middle East, and as doubt increases over economic recovery in the eurozone.

The uncertainty is coming even as the state-controlled group must ratchet up spending on capital intensive new fields and carry through pledges to build major new pipelines into Europe: North Stream and South Stream. “The heady days of 2007 when Miller was predicting $200 oil and a trillion dollar capitalisation for Gazprom – these are long gone,” says one gas industry executive in Moscow. “As the new reality seeps in the question is what is next for Gazprom.”

“Gazprom has got to solve the price problems in Europe,” says Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, referring to the difference between prices in its oil price-linked long-term contracts and the cheaper prices on the spot market, where the LNG is sold. “The situation is not easing. We are going into summer when demand will go down. For the next 2 to 3 years it is going to be very very difficult for anyone trying to sell into Europe on oil linked prices.”

Gazprom has already been forced to react to the changing conditions in global gas markets, for the first time renegotiating its long-term oil price-linked contracts with European energy groups to allow for up to 15 per cent of sales to be linked to gas prices on the spot market.

It also said it was delaying development of the offshore Arctic Shtokman field by three years to launch production in 2016 after the surge in development in shale gas in the US dampened hopes for Gazprom exports there.

Gazprom had hoped to win up to 10 per cent of the US market, mainly sourcing supplies from the Shtokman field where it plans to develop LNG. But now these plans have turned out to be “wishful thinking”, according to Valery Nesterov, energy analyst at Troika Dialog.

The changes so far to its long term export contracts, however, might not be enough to maintain market share in Europe, Mr Stern says, as other producers such as those in Norway – which have offered more flexible terms for sales – continue to increase sales compared with Gazprom.

“They think they have solved it. But the way I see supply and demand they will still have problems,” he says. The gas group is indeed still in talks with its European energy partners on possible further changes to contract terms to make them more flexible. “This is a normal process,” says one person close to the group.

Part of the problem for Gazprom is that in previous years, it had been used as a tool to help achieve Vladimir Putin’s geopolitical ambitions, industry executives say.

As president, Mr Putin had overseen a period of empire-building by Gazprom that saw it lock in supplies at market prices from Central Asian producers to head off potential competition from the European Union, while also attempting to increase its hold over European markets – where it has traditionally supplied about 25 per cent of the continent’s imports – via the building of North Stream and South Stream pipelines.

Not all of these costly politically driven projects, however, appear to have had a strong economic foundation.

One of the biggest examples was a deal last year in which Gazprom agreed to buy back a 20 per cent stake in its oil arm, Gazpromneft, from Eni, the Italian oil major for more than $4bn, well above its market price, even as its revenues were falling and even though Gazprom already controlled the company.

The latest and most compelling example, analysts say, was Mr Putin’s recent proposal Gazprom merge with its Ukrainian counterpart, Naftogaz Ukrainy. Analysts said the proposal, which Ukraine has yet to agree to, was a blatant power play that would give Russia control over the “commanding heights” of the Ukrainian economy, but would significantly add to Gazprom’s already debt-burdened balance sheet.

Gazprom’s position is not to be envied. It must weigh having to boost investment in complex, logistically challenging new fields in the Yamal Peninsula against uncertainty in global markets.

It must continue investing because its production at existing fields is already in decline with the company itself forecasting output will drop from a maximum capacity of 600bn cu m to 400bn cu m by 2020. “There is always a concern about a turndown in demand,” said one person close to the gas group. “But it is the same people that two years ago said give us more gas who are now saying we don’t need any. In today’s situation no one can predict anything,” the person said, pointing out that other industry executives in the West are still warning of a supply gap in 20 years.

Against this backdrop, Gazprom’s negotiations with China on a big new supply deal are becoming increasingly important, as markets are expected to grow at a much faster pace there than in Europe.

Igor Sechin, Russia’s deputy prime minister for energy, recently said he expected a sales agreement to be reached by September this year. But talks on price have been going on for years. And “even if there is deal, it is going to be at least five years before gas flows to China,” Mr Stern says. “It is not going to solve the problems.”

Wednesday, May 12, 2010

SAP Buys Sybase for $5.8 billion - McDermott Takes on Ellison

SAP is turning into a US company with a more aggressive and growth-seeking stand in the marketplace. I tend to think this has large to do with my old friend Bill McDermott who is one of the most commercially gifted leaders I have ever met. SAP had to change course given Oracle's aggressive inorganic growth track  record in the last 5 years. IT stack will continue to consolidate and Sybase was in deed the right move provided that they continue to build a pipeline of targets and execute well to close and integrate them. The next domain SAP should look into Enterprise Content Management which offers another untapped growth opportunity for SAP over Oracle.

Here's the annoucement fro the Wall Street Journal -

$5.8 Billion Software Merger Intensifies Competition With Archrival Oracle.
SAP AG said it would pay $5.8 billion to buy fellow software maker Sybase Inc., a move that would give the German giant key technology in its battle against archrival Oracle Corp. in the business-software market.

SAP said it will pay $65 for each Sybase share—a 56% premium to Tuesday's closing price. SAP said it will pay cash, using its own reserves and a $3.5 billion loan. It expects the deal to close in the third quarter.

The deal is SAP's largest since its 2007 purchase of Business Objects SA for $6.8 billion and is another sign that the Walldorf, Germany, company, is departing from its historic tendency to eschew growth by acquisitions.

SAP, which makes software that businesses use for tasks like balancing the general ledger and managing inventory, replaced its chief executive in February with two co-CEOs. The new executives pledged to expand the company partly through acquisition. In March, SAP issued €1 billion ($1.27 billion) of debt, in part to build up its war chest for deals.

"We wanted to make a huge impact in the first 100 days," Bill McDermott, one of the co-CEOs, said in an interview. The deal marked a "newer, bolder SAP," he added.

Sybase, of Dublin, Calif., makes database software that competes with offerings from Oracle and International Business Machines Corp., although it trails far behind those two companies in market share.

SAP has struggled since the start of the recession. Its revenue declined 8% to €10.7 billion in 2009, as businesses held back on buying its software, which often costs millions of dollars and can take years to install.

Meanwhile, Oracle has continued to apply pressure and move deeper into SAP's turf. It has spent billions to acquire a series of smaller software makers over the years, including ones that make software similar to SAP's.

By acquiring Sybase, SAP would not only have its own database products but would gain access to several new technologies that its executives have recently touted, such as the ability to make applications available to mobile devices. The two companies will also be able to share so-called in-memory tools that can make applications run faster.

SAP first approached Sybase about two months ago—just a few weeks after Mr. McDermott took over—according to people familiar with the matter. Mr. McDermott had been friends with Sybase CEO John Chen for about 12 years, which helped the deal, these people said.

In the past, SAP has struggled to close deals, people familiar with the matter said. It has often come close to buying a company, only to find a reason to back away at the last minute, according to these people.

Mr. McDermott, however, was willing to be more aggressive than his predecessors, a person familiar with the matter said.

Ray Wang, an analyst with Altimeter Group who tracks software companies, said Sybase's technology will help SAP appeal to customers like big financial institutions and companies that want to give employees secure access to information-technology systems from mobile devices like BlackBerrys.

The Sybase deal also gives SAP database offerings that will make it less dependent on reselling software from Oracle. Mr. Wang sai d SAP sells about $1 billion worth of Oracle databases annually. As a company like SAP, "you want to reduce the amount of money you send to your competitor," he added.

Shares in Sybase surged 35% to $56.14 Wednesday on news that a deal was near, which was earlier reported by Bloomberg. Shares rose an additional 15% in after-hours trading to $64.50.

Peter Goldmacher, an analyst with Cowen & Co., said the deal seems to be a desperate move by SAP. "Their business is terrible," he said. "They've been out-executed at every turn by Oracle."

Mr. Goldmacher said he believes SAP will have a hard time convincing customers to move from Oracle database software to Sybase offerings.

Mr. McDermott said in the interview that the deal's success isn't dependent on SAP customers replacing their current database software with Sybase's version, but instead on the other technologies and the opportunities for growth they present.

Sybase will remain a standalone unit within SAP. Sybase's current leadership is expected to stay on.

Deutsche Bank and Barclays Capital are providing financing for SAP, and Bank of America Merrill Lynch advised Sybase. The Jones Day law firm advised SAP, and Shearman & Sterling was the legal advisor to Sybase.

Saturday, May 01, 2010

Ursula Burns launches Xerox into the future

I am glad to see that Xerox leadership finally does not talk about anything else but Smart Documents Strategy to “transform the company into the future”. This is the strategy we put together back in 2004 along with the idea of leap-frogging competition with bold acquisitions including ACS…It took them 7 years and many management reshuffling to "get it" and "get to it", finally. I think this might be too bold too big too late.

Ursula Burns launches Xerox into the future

(Fortune) -- Talk about bold. Just weeks after taking over as Xerox's CEO last July, Ursula Burns announced the biggest deal in the company's history: the $6.4 billion acquisition of Affiliated Computer Services, an outsourcing firm most people had never heard of. Xerox needed dramatic action.
After coming back under CEO Anne Mulcahy from its struggles in 2000, the company had to go on offense and advance its strategy for a digital age. It was a tall order at an outfit best known for putting images on the ultimate analog technology, paper.
Being bold has never been a challenge for Burns, 52, a mechanical engineer who got noticed at Xerox (XRXFortune 500) because she often spoke up bluntly in a famously -- and overly -- genteel culture. She becomes the first African-American woman to run a Fortune 500 company and succeeds Mulcahy as chairman in May.
Burns finds all that gratifying but is focused on further transforming Xerox; the stock price is barely half of what it was three years ago. She talked recently with Fortune's Geoff Colvin about changing Xerox's culture, what she learned in the recession, America's desperate shortage of engineers, and much else. Edited excerpts:
In a nonstop infotech revolution, Xerox's long-term strategy is a really interesting issue. So let me ask you Peter Drucker's famous question: What business are you in?
We're in the business of enabling our clients to focus on their real business while we take care of their document-intensive business processes behind the scenes. I'll use Fortune as an example. You're not in the business of printing a magazine. What we see about Fortune is the printed magazine.

That's right -- we don't own any printing presses.
But without someone who could supply you with that solution, Fortunewould be less than it could be. What we do is manage document-intensive business processes for our clients around the world so that they can focus on what they really do.

We do that by applying technology. We do it in a global way, so that if you have locations around the world and you want to communicate with your people in a fairly consistent way, I can do that for you. It will look the same, feel the same, be delivered in the same time and the same format. All the information you want present will be there; anything you want redacted will be gone. You shouldn't have to worry about that.
That leads to the deal you recently closed: your acquisition of Affiliated Computer Services. Wall Street initially didn't like it. What did you find so compelling?
It was all about extending our capabilities, expanding our reach. Xerox is a technology company that's global and has an amazing brand. ACS is a business-process outsourcing company that knows business processes and how to manage them to be significantly more efficient. Business processes are all around documents, containers of information.
So a document doesn't have to be a piece of paper.
Very often it's not. At the end phase, many documents end up on paper. But in the beginning they are digital files, photographic images, phone calls, voice data. All of that is key to having a business process work.
Xerox is really good at managing documents, and we're definitely good at managing through a process. So what's close to our core that we're really great at, that we can extend by utilizing the things we have that are differentiators -- technology, brand, global reach?
Business process was what we settled on. In ACS we saw a great company that was already diversified. It needed a brand. It needed technology to make this work more efficient, more automated. And it needed global reach. And we have all three.
Your stock dropped on the announcement of this deal. Why were investors worried, and what did you say to make them understand?
We announced that we were spending quite a bit of money, a lot of it in the form of stock, so investors were not too thrilled about the dilution, obviously. But they were also just confused. Who is ACS? What is business-process outsourcing? And why are you engaged in it?
The stock took a big drop, and we had to start speaking to our shareholders and go back to basics: explain what Xerox was about, the capabilities of our company, and why this acquisition was a natural extension of the company.
We also had to explain that it was a financially good deal. Will it be accretive in all aspects for the shareholders? Is it a reasonable price? We got over that fairly quickly. People understood the dilution. We also had to explain the longer-term story about how this will grow cash generation, and remind them that we are pretty good operators.
When the infotech revolution was getting started in the 1960s, reputable experts said paper would soon disappear. Of course, exactly the opposite happened -- we use more every year. How come?
I don't think paper will go away. I do believe that the value of paper will change, and Xerox is working on changing that value. Consider a color page. Actual life is in color, but you keep reproducing it in black and white. You remove value. It's a bad thing to do. You retain more information, you act quicker, you can learn faster if things are in color. The reason they're not in color is that it's too expensive. So we're working to make color less expensive.
I bring that up because as color becomes more available, black-and white becomes less necessary. We are making things obsolete as we invent and create. We cannot be afraid of driving ourselves out of certain businesses.
We're the creator of digital publishing with the Docutech machine years ago. We could say, "We're going to protect that at all costs," but if we did that, we would close a whole bunch of doors that have opportunity behind them, and we'd go out of business because somebody else would open those doors.
The copying machine literally obsoleted a whole bunch of secretaries' work, right? But we opened up a whole new set of opportunities. Every move we make is focused on doing that same thing.
Xerox has a famously strong culture, but you've said it could use a little adjusting. What did you mean?
Let me note the strong points. We are nice. And I mean that in a very good way. If you get sick, we'll take care of you. We're not one of these mechanical cultures. We are real people working with real people. It's phenomenal.
We are a team-based company. Diversity is important. Everybody thinks racial and gender diversity is important for sure, but differences in how you work, what your points of view are, are things that we love.
Some of those things can become a hindrance, especially when you need to move quickly, which is just about every day. This niceness sometimes leads to lack of motion, lack of decision.
We have great operators in our company all around the globe, and we haven't quite given them comfort in operating independently. They can do it. So I want them to actually start doing it. Walk in here and use your brain, take chances. Not being reckless. But they know what to do. They don't have to call me to do it.
You're passionate about math, science, and engineering. What's the state of education in those things in the U.S. today?
Very, very, very poor.
How big a problem is that?
It's one of the most important structural problems we have in this nation.
The world is full of opportunities -- every day there's something new that you can do. For example, you could make dirty water potable. Why does anyone not have potable water? Because it's a problem that hasn't been solved yet, but it can be.
Working on telephone lines -- you don't need a Ph.D. to do it, but you need to be able to read, discern, analyze problems. We are structurally creating an underclass that will be hard to fix. If we don't have people who can create value, they will be servers forever. This is not an insurmountable problem. If you get kids when they're young from just about any background, you can create people who are capable of utilizing science, technology, math, and engineering to solve problems.
If you look at the list of the top nations and try to find out where we are in reading, math, and any science, it is stunning. I don't look at the list anymore because it's an embarrassment. We are the best nation in the world. We created the Internet and little iPods and copying and printing machines and MRI devices and artificial hearts. That's all science and engineering. Who's going to create those things?
You've been president or CEO through this entire historic recession. What did you learn?
What I learned is that it could be, and it was for us, a good time to change. When things are okay, there's not that much of an impetus to turn things around. I learned that sitting still is probably not the best thing to do when things are changing a lot.
The best thing to do is move. We lost almost $2 billion of revenue. We changed the inside operations to ensure that we were liquid and profitable. We hunkered down, but we wanted to make sure we kept investing to differentiate ourselves.
That's an exercise that many companies go through in tough times -- deciding "What's our essence -- what won't we cut even if we have to cut everything else?"
This is not the first time that we've done this. The last time was in 2000, a little bit more self-inflicted. This time it was not self-inflicted. But every time we get into a really big shake, we have to step back and say, "Really, what are you about?"
What are some of the technologies you're developing now that you believe will be most important?
One is fairly simple but very important. Hundreds of billions of pages are printed in the world, not all of them on digital devices. I'm trying to get them all to digital devices. Eighty-plus percent of those are printed in black and white. So one of the big investments we have is in trying to make color more affordable.
We launched a product last year called ColorQube that lowers the price of color printing for an average business document by 62%. It's solid-ink technology, sustainable, 90% less solid waste, Significantly less energy utilization.
Solid ink?
It's basically a crayon, but don't try to put a crayon in this machine, please. It's obviously a higher formulation. It's a crayon that you melt, and you can print with less of everything.
The second big investment we have is in smart document technologies. Most containers of information -- paper, whatever -- have tons of information, and it's generally manipulated by human beings.
For example, during discovery in litigation, lawyers and their clerks look at stacks and stacks of paper, and they might say, "Okay, everything that has Geoffrey in it, I want it in pile A." Then if it has your Social Security number, your last name, any private information, I want it redacted -- you get a marker and you black it out. Smart document technologies allow us to scan, store, categorize, and retrieve documents intelligently.
You've spent your whole career in one organization. I think you were on the speed-dial lists of all the headhunters, but you didn't leave. What's your advice to a young person starting out today who wants to be a CEO?
First, don't start out wanting to be a CEO. You're going to be really disappointed if you do that because you may end up doing things you don't love.
Find something that you love to do, and find a place that you really like to do it in. I found something I loved to do. I'm a mechanical engineer by training, and I loved it. I still do. My son is a nuclear engineer at MIT, a junior, and I get the same vibe from him. Your work has to be compelling. You spend a lot of time doing it.
And the reason I never left -- even though I had, as you say, opportunities to leave -- is that this company was my family. I don't mean that in a mooshy way. I had friends here. I saw the world with this place. I learned to lead in this company. I got to work on these great problems.
And whenever I felt like leaving, it was generally because something bad was happening to this company. A good friend of mine who's a board member said to me, "You can't stay when times are good only. You've got to stay when times are bad. If you have a relationship that's a good one, you have to help in the tough times."
And every single time I could have left, the day or the month after I didn't leave, I was so happy I didn't. To top of page