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Credit Market Overview: The Energy-Numbers Muddle Is All Good for Wall Street

Jim Delaney submits:

When Bjorn Lomborg's book, "The Skeptical Environmentalist," was first published in 2001, murmurings were that the Ronald Ray-gun-ites had finally slipped one of their own in amongst the tree huggers and that he had performed the scientific equivalent of a sound-bite interview on all of the data supporting the thesis of an ever growing hole in the ozone layer; producing research of his own claiming that we weren't all going to fry under a laser-beam-like sun by next Tuesday. Anything else, it was thought at the time, was impossible.

We all know a bit better today as the scandal surrounding blocked paper publishing and admonitions within the scientific community for anyone not supporting the growing "O-hole" suppositions has been brought under the bright light of public scrutiny.

While not nearly as cloak and dagger as the goings-on in the environmental scientific community, and unfortunately an all too familiar story line, the Internal Department of Energy has recently found that the U.S. Government faces "critical" shortcomings in the integrity of its oil-inventory data.

The documents, received through a Freedom of Information Act request, show a number of errors in the weekly reports issued by the Energy Information Agency, with one report last September 30th being so off the mark that it caused a $4.05 or 5.84% jump in the price of crude. Is it possible that the much maligned "speculators" are not completely to blame? Where's Bjorn when you need him?

With systems that have not been updated in 30 years and much of the input still done by hand, according to a report prepared by SAIC Inc., finding errors is nearly impossible. Stephen Harvey, director of the EIA's office of oil and gas, which puts out the weekly data, did not seem surprised when asked about the quality of the reports his team produces, "Should you be concerned? Yes. Is it as good as we'd like it to be? No.", was his response, adding in defense of the data that "It's probably a whole lot better than some of the other countries where we'd like to know this information".

While that might be true, Steve, I'm not sure those "other countries" are costing their citizenry thousands of lives and spending billions of dollars each year securing the supply of said oil in the mid-East. Maybe it's time to sharpen that pencil a bit.

Not depending on government data and most probably engaging those nasty investment bankers on Avarice Avenue, or Wall Street, whichever you prefer, a number of companies in the energy business are eyeing each other as acquisition targets, with a few already pulling the trigger.

T. Boone Pickens' quote from way back in the early '80's that "It's cheaper to find oil on Wall St. than in the ground", has not been lost on today's energy resource companies. Were T. Boone quoted today he might have replaced "oil" with "natural gas" but the idea would be exactly the same. Exxon Mobil ( XOM ) paid $30BN for XTO Energy Inc. ( XTO ) in December and Schlumberger Ltd. ( SLB ) bought rival Smith International Inc. ( SII ) for $11BN plus more recently. The deals appear to be going on at all levels, as Consol Energy Inc.'s ( CNX ) acquisition of Dominion Resources for a cool $3.48BN attests.

Needless to say, with fees on some of these deals running in the tens of millions the I-bankers and the acquisitors that are paying them seem to have a better handle on the supply and demand numbers than the EIA.

CDS spreads on the Oil & Gas Drilling sector, a 14-company composite put together by CMA and published on Bloomberg, pretty much followed the rest of the market during the Jan/Feb correction, widening to 109bps on 2/10. Since then spreads have been as low as 95bps on 3/8 and closed last night at 104bps.

The Oil & Gas Exploration and Production CDS composite also peaked on 2/10 at 149bps but made a new low of 120bps on 3/12 before closing last night at 130bps.

With multiple sovereign debt crises affecting investors' views of everything below the supra-macro level, in broad brush fashion it cannot be determined how much of the spread movement in the sub-indices mentioned above is due to M&A and how much can be attributed to the probability of the world imploding.

What can be said is that with the kind of money being thrown around the energy space at the moment, if we do muddle through the current dilemmas the majors will be well positioned to take advantage of the growth that follows.

See also The M&A Recovery on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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