Lavrov Calls EU Charges Against Russia's Gazprom 'Unacceptable'
Russian Foreign Minister Sergei Lavrov said Wednesday that EU charges against Gazprom were an unacceptable attempt to retroactively apply the bloc's latest energy rules to earlier contracts. The European Union on Wednesday charged the Russian gas giant with overcharging buyers in Eastern Europe and hindering competition. Asked to comment on the case, Lavrov said in an interview with three radio stations: "All contracts in effect now that Gazprom signed with its partners, were signed with full respect of the legal regime that existed in the EU at the time." "After the EU adopted the so-called third energy package … there have been attempts, and they continue now, to retrospectively, retroactively apply those requirements to old contracts as well. That is absolutely unacceptable."
Mexico’s Pemex to Stick to Budget Austerity in 2016 Due to Low Oil Prices
The national oil company also expects partnerships with private firms to lessen financing pressure
MEXICO CITY—Mexico’s national oil company Petróleos Mexicanos will stick to an austere budget in 2016 after being forced to cut back spending this year due to lower oil prices, said Chief Financial Officer Mario Beauregard. Pemex is tapering its investment plans because of lower oil prices, like peers around the world, even as it battles to maintain output after a decadelong decline. The silver lining, Mr. Beauregard said in an interview late Tuesday, is that thanks to changes in the country’s energy laws, Pemex can form partnerships with private companies on projects that could otherwise be hard-pressed for funds. An energy overhaul signed into law last year allows private investment in oil and gas exploration and production for the first time in eight decades. Pemex is shouldering half of the $8.3 billion that the government cut from this year’s budget in response to lower oil prices, lowering planned capital expenditures for 2015 to $23.5 billion from $27.3 billion. Investment in 2016, although not yet determined, is likely to be similar to this year, Mr. Beauregard said. “Today, everyone’s redoing the numbers. They’re recalculating budgets after such a dramatic fall in oil prices, which is why we don’t have a number for what next year’s capital expenditures will be,” he said. “For 2016, we want to begin a downward trajectory on debt, to issue less debt or the same amount as this year.” While the new energy laws will increase competition for oil and gas production for the first time in Pemex’s 77-year history, the company said working with private partners is one way it can reduce its financing needs. Mr. Beauregard said the recent sale to BlackRock Inc. and private-equity firm First Reserve of a 45% stake in the Los Ramones natural-gas pipeline for $900 million is an example of how Pemex can generate new funds while keeping its operations through long-term supply contracts. First Reserve has also agreed to invest up to $1 billion with Pemex in a number of projects. Pemex is in talks with other potential investors. “At the end of the day, your portfolio of projects can remain the same without you making all those investments because you have the private sector,” Mr. Beauregard said. Pemex wants to keep the budget cuts from affecting crude oil output, which has steadily declined from a record 3.4 million barrels a day in 2004. Pemex expects to produce just under 2.3 million barrels a day in 2015 and 2.4 million in 2016, according to a preliminary forecast. Another benefit of the private-sector partnerships is that they will enable Pemex to relax its borrowing in coming years, Mr. Beauregard said. With the company paying most of its income—and all of its profits—to the federal government, Pemex has borrowed heavily in recent years for investment in exploration and production. Pemex’s tax burden is scheduled to fall over the next five years under the energy overhaul. The company plans to take on $15 billion in new debt this year, an amount that was authorized by Congress before oil prices fell from around $80 a barrel to less than $50. Pemex is estimating an average price for crude-oil of $50 a barrel for this year, and $55 a barrel in 2016. So far this year, Pemex has issued about $10 billion in debt, with $5 billion yet to be issued. Mr. Beauregard said the company is looking to keep funding costs low by issuing debt in euros or yen as the U.S. raises interest rates. With net debt around $78 billion, Pemex’s debt ratio is equivalent to around 1.5 times 12 months of earnings before interest, taxes, depreciation and amortization. “We feel that ratio is all right,” said Mr. Beauregard, although the aim in the future is to slow the rate of borrowing and maintain “sustainable” finances. By cutting its spending in 2015 and 2016, the Mexican government is sending a message to investors, Mr. Beauregard said. “We’re following the same strategy because it makes sense in the context of low oil prices. If your income falls, you have to cut your spending.” Moody’s Investors Service expects Pemex’s debt levels to rise in the medium term as it will take some years before the company’s tax burden is lowered substantially. “For these conditions to materially improve, the government will have to increase other sources of revenues and reduce the call on Pemex’s earnings, and the company will have to increase production and earnings from new investments and joint ventures with new industry entrants,” the firm said in a report.
BP offloads North Sea pipeline stake
BP on Thursday unveiled the sale of another North Sea asset as it continues to wind down its exposure to mature assets in the oil and gas basin that is grappling with the collapse in crude prices. The London-listed oil major is to raise $453m through the sale of its 36 per cent stake in the Central Area Transmission System, one of Europe’s biggest gas pipeline networks, to Antin Infrastructure Partners, the private equity firm. The BP disposal comes in the same week that Bob Dudley, chief executive, predicted a “massive” wave of restructuring in the UK’s North Sea, warning that its mature fields will be hit hard by the 40 per cent plus collapse in Brent crude prices since last summer. Antin is already the largest shareholder in the CATS following a $1bn deal last year to buy a controlling stake from BG Group. Under the terms of the BP deal with Antin, the oil major will receive £302m for the transfer of its stake in CATS, plus potentially a further £22m, subject to closing adjustments on the transaction. Completion of the deal is expected by the end of the year. BP has been selling assets in the North Sea as part of a broader disposal programme following the Deepwater Horizon disaster in the Gulf of Mexico in 2010. The downsizing has been necessary to meet the cost of the clean-up, as well as pay compensation and regulatory fines. In 2012 BP agreed to sell $400m of North Sea gas assets to Perenco of France. Later that year it sold stakes in several North Sea oilfields in a $1bn deal with Taqa, the Abu Dhabi energy group. However, BP remains one of the biggest investors in the North Sea, for example through its $4.5bn Clair Ridge project west of Shetland. On Tuesday, Mr Dudley pointed to the prospect of “painful adjustment” in the North Sea if it was to remain a destination for future investment. “I think you’re going to see some massive restructuring going on,” he said at a conference in Texas. However, Trevor Garlick, head of BP’s operations in the North Sea, said on Thursday the oil major remains committed to the basin in spite of its divestment programme. “The North Sea is an important region for BP,” he said, adding BP would achieve “the completion of our major projects in the central North Sea and Shetland area, and continued management of our portfolio.”
Michael Kavanagh in London
Freeport-McMoRan weighs up selling minority stake in oil unit
Freeport-McMoRan is eyeing selling a minority stake in its oil and gas subsidiary as the world’s largest listed copper producer grapples with its large debt load and a commodities downturn. A possible initial public offering of stock in the oil and gas business could take place late this year and would highlight the standalone value of the oil and gas business, Freeport said on Thursday. The idea of an IPO follows previous declarations by Freeport that it would look at bringing in partners to part-fund capital spending, but the US-listed miner and petroleum producer said that it intended to retain control of the oil and gas business and would continue to explore alternative options. Freeport joins some of the world’s other large miners in considering radical restructuring in response to the commodities downturn. BHP Billiton is on the verge of spinning off unwanted assets into a new listed company, while Vale of Brazil is also considering an IPO of its base metals business. Freeport on Thursday announced a $2.5bn quarterly loss for the three months to March 31, primarily because of impairment charges on oil and gas assets and deferred tax arrangements. The first-quarter loss, which compares with $510m of net income in the same period a year ago, comes after Freeport slashed its dividend by more than 80 per cent in March. The company also posted a $2.9bn quarterly loss for the last three months of 2014. Freeport spent heavily to bulk up its oil and gas business with two big acquisitions for a combined $20bn in 2012. Freeport had been vowing to cut its debt load last year, and made some divestments, before admitting that its targets were unachievable given the weakness in copper and oil markets. Total net debt stood at almost $20bn at the end of March, Freeport said, slightly higher than at the same time a year earlier. Freeport vies with Chilean state-owned miner Codelco as the world’s largest copper producer, with operations in Africa, the Americas and Indonesia. Revenue for the three months to March 31 came to $4.2bn, down from $5bn in the same period a year earlier, although Freeport’s copper and gold output increased. The average sales price during the quarter for Freeport’s copper was 13 per cent lower than a year earlier. Gold was 9 per cent lower. On the oil and gas side, Freeport’s cash operating margin — its revenues less its cash production costs — more than halved.
A British futures trader who was arrested for allegedly contributing to the 2010 "flash crash" began his fight against extradition on Wednesday as US lawmakers pledged to investigate a case that raises questions over the fragility of markets and financial regulation. (FT) Navinder Singh Sarao has been charged in Chicago with wire fraud, commodities fraud, commodities manipulation and "spoofing", and will face trial if he is extradited. But blaming a solitary trader for the crash is disingenuous: it's like blaming a flea on an elephant's rump for a stampede, says the FT. In the news Clinton link to Russia uranium deals As the Russian atomic energy agency took charge of a company that controls one-fifth of all uranium production capacity in the US, a stream of cash made its way to former president Bill Clinton's charitable organisation. (NYT) Brazil's Petrobras takes $17bn hit The state-owned oil company has estimated its losses from corruption at R$6.2bn (US$2.1bn) and taken a R$44.6bn impairment charge. It released long-delayed audited financial statements for 2014 late on Wednesday, narrowly avoiding a late filing that could have set it on course for a technical default on some of its $137bn in debt. (FT) Setback for Comcast-TWC merger Federal Communications Commission staff recommended that the regulatory agency designate Comcast's proposed acquisition of Time Warner Cable for a hearing, according to people familiar with the matter - a significant blow for the companies' merger plans. (WSJ) Gazprom antitrust case Already chilly ties between the EU and Russia have turned icy cold, with years of worsening relations culminating in formal accusations that the state-controlled gas group abused its market position — but the antitrust case is unlikely to wreck a collaboration built on need. The FT's Alex Barker looks at the European Commission's arguments and the chances of a settlement. (FT) EU considers boosting Med patrols When EU leaders meet in Brussels today for a hastily called summit to address the migrant drownings in the Mediterranean, the most concrete "deliverable" is likely to be a pledge to "at least" double resources to the bloc's two maritime operations along Europe's southern coast. (brusselsblog) Facebook's costly empire-building Investments in building its empire have pushed costs up more than 80 per cent year on year, squeezing margins in the first quarter. Revenue of $3.5bn for the first three months of 2015 was lower than the consensus forecast for $3.6bn but 42 per cent higher than in the same period the year before. (FT) Pentagon to open Silicon Valley office The Pentagon plans to open its first office in Silicon Valley in an effort to tap commercial technology to develop more advanced weapons and intelligence systems. (defenseone) North Korea nuclear threat Chinese experts say Pyongyang has an atomic weapons arsenal of 20 warheads, far more than previous US estimates — and they believe the nation may be capable of doubling its stockpile by next year (WSJ) It's a big day for Amazon Web Services Details of AWS financials will be revealed today in an unusual move for a company known for being tight-lipped. The numbers are expected to show how quickly revenue has increased, and how deeply Amazon has been supporting the capital-intensive business of building the data centres behind AWS. Listen to our podcast on Amazon's pioneering cloud computing business. (FT) John McFarlane, Barclays' new chairman, will stamp his authority on the bank by writing to shareholders to outline his priorities on the day he succeeds Sir David Walker. The former chairman of Aviva, who engineered a rapid rebound at the insurer after taking charge during a crisis in 2013, is known by former colleagues as a hands-on and determined leader (FT) Deutsche Bank Authorities in the US and UK are expected to announce a settlement with the German bank over its alleged manipulation of Libor, the benchmark interbank lending rate. Meanwhile, the FT's John Gapper writes in praise of Deutsche Bank, arguing that Europe needs a global champion to compete with Wall Street's "bulge bracket" investment banks. (FT)
For a tense period on Wednesday evening, those gathered for the press conference of Brazil’s corruption-plagued Petrobras began to sense a feeling of déjà vu. The state-controlled oil company had announced it was planning to release at 6pm its long-delayed audited financial results for the second half of last year. But as the minutes ticked past the appointed hour, some journalists began to fear a repeat of January, when the company kept them waiting until 4am before releasing an unaudited version of the same figures. Then at 7.30pm, Aldemir Bendine, the new chief executive of Petrobras handpicked by President Dilma Rousseff to rescue it from its problems, finally appeared with the board in tow. “Thanks for your patience,” he said. Since November, when Petrobras revealed its books were suspected to be so tainted by a huge corruption scandal that PwC, its auditor, had refused to sign off on them, Latin America’s largest country has been on tenterhooks wondering what would become of its most important company. The country’s dominant oil explorer, refiner and importer of fuel is at the centre of a corruption scandal in which former executives allegedly colluded with contractors and politicians to loot billions from the company. Failure to produce independently audited figures for the final two quarters of last year by the end of this month would have violated some of the covenants of Petrobras’s large borrowings — it recorded net debt of $106.2bn at December 31. Missing this deadline would have set Petrobras on a path towards a possible technical default and created a systemic risk for Brazil’s national accounts. That threat was at least averted on Wednesday when Mr Bendine unveiled financial results that he said had been audited without qualification by PwC. “The likely avoidance of debt acceleration at Petrobras would remove any near-term need of extraordinary support for the company, an event that would have increased the government’s financial challenges,” analysts at Moody’s, the rating agency, said.
More video But any euphoria about the aversion of bankruptcy was swiftly replaced in Brazil by appalled wonder at the scale of Petrobras’s losses. The company recorded a total one-off hit of R$50.8bn (US$16.8bn) — of which R$6.2bn directly related to continuing corruption investigations into the company and R$44.6bn of impairment charges connected to delays at its refinery projects and falls in the global oil price. These charges drove the company to a net loss of R$21.6bn for last year compared with a profit of R$23.6bn in 2013.It ranked as the biggest nominal loss by any publicly-traded Brazilian company since 1986, according to the Economatica consultancy. Once trusted by retail investors for its regular dividends, this year there would be no payout to preserve cash. “Petrobras billions in the red is the biggest admission ever of corruption and bad management for a Brazilian company. [This is] a historic date,” said José Roberto de Toledo, a columnist for newspaper O Estado de S. Paulo, on Twitter. Mr Bendine said the financial results represented a conservative estimate of the company’s losses. The corruption figure could grow, however, if the investigations reveal further schemes. “If some credible revelation comes up that significantly alters [this value] of course we will have to review it,” he added. Mr Bendine seemed to backtrack on government promises that Petrobras would not sell off part of its crown jewel — the so-called pre-salt oilfields in the deep waters of the South Atlantic that the company discovered to much fanfare in 2007. Petrobras has ruled out selling pre-salt assets already in production but is open to taking on partners for those in the exploratory phase, said Mr Bendine. “There are situations where we could look for a partner to help us in the exploration of [pre-salt] fields that are high-risk,” he added. Petrobras also said it would slash investments next year to about $25bn, down 37 per cent from its original forecast of $39.5bn. While Petrobras has painted itself as a victim of the corruption scandal, Mr Bendine said the company was not going to take the matter lying down. He classed the R$6.2bn of losses related to the corruption investigation as “recoverable”, adding that he expected Petrobras to begin to receive part of the money back in May. The company hinted it might sue some of its former contractors for damages. This would help it offset some of the potential losses it is facing from investor lawsuits in the US, where it has a listing. Lawyers said the matter was a timely warning to companies of the importance of ensuring their legal compliance was in order. “We are advising Brazilian companies of all sorts on implementing compliance programmes,” said Andrew Haynes, partner and co-head of the Brazilian practice at Norton Rose Fulbright. “They are being scrutinised by investors as never before.” Other lawyers warned that with Petrobras co-operating fully with authorities, including most probably those in the US, the investigations were likely to extend to its contractors and suppliers round the world. “This thing is probably going to grow larger very quickly,” said Richard Smith, head of regulatory and governmental investigations with Norton Rose Fulbright in the US.
Caterpillar Nudges Profit Forecast Higher
Caterpillar Inc. nudged its earnings forecast higher for 2015 but still expects to fall well short of last year’s level amid falling sales of equipment related to oil and gas exploration and continued weakness in mining. Rivals in Europe and Japan, whose weaker currencies give them cost advantages, are stepping up price competition, Mike DeWalt, a Caterpillar vice president, said in a conference call with analysts. “It’s just a tough business now,” he said. “It’s dog eat dog.” The Peoria, Ill.-based maker of construction and mining equipment said it expects earnings per share of about $4.70 for the full year, down from $5.88 in 2014. Previously, Caterpillar forecast earnings of $4.60 a share for 2015. Profit in the first quarter grew 20% from a year earlier, partly due to “very good cost control,” Mr. DeWalt said. Caterpillar maintained its earlier forecast that sales for the full year will total about $50 billion, down 9% from 2014. That reflects weaker markets for engines used in oil drilling as well as for construction equipment in China and railroad locomotives in the U.S. The company’s order backlog at the end of the first quarter was down nearly 15% from a year earlier. Meanwhile, overdue amounts payable by customers of the financing unit grew to 3.08% of the portfolio from 2.44% a year earlier. A spokeswoman said the first-quarter average for 2001 through 2014 was 3.26%. China’s slowing economy is a worry, executives said, but they hope for improvement in Europe as a weaker euro spurs exports, cheaper oil reduces costs and low interest rates encourage spending. “I think we’re in the early stages of what will be a recovery” in Europe, said Caterpillar Chief Executive Doug Oberhelman. “I don’t think it will be a boom.” The company faces a persistent slump in mining equipment, sluggishness in construction machinery in much of the world and a more recent slowdown in its most profitable business, engines used for such things as generating electricity, pushing gas through pipelines, running industrial machines and powering trains and ships. Despite those pressures, Andy Kaplowitz, an analyst at Barclays Bank, urged Caterpillar to stick with its program of repurchasing shares to support the stock price. Caterpillar said it bought back $400 million of stock in the first quarter and expects to continue repurchases at about that quarterly rate this year, though it said priorities “can change based on business and market conditions.” Mr. Kaplowitz also said Caterpillar probably needs to be more aggressive about scaling back production capacity, especially in mining. Caterpillar has manufacturing capacity for annual sales of $80 billion to $100 billion, but sales now are running at around $50 billion a year, the analyst said. Brad Halverson, Caterpillar’s chief financial officer, said the company had closed or shrunk 20 facilities since 2013 and shed 15,000 jobs. Still, he said, Caterpillar needs enough capacity “to be ready for the upturn.” Mr. Kaplowitz said the company may be overestimating its needs: “The world is going to come back but maybe not in as big a way as Caterpillar believes.” Stephen Volkmann, an analyst at Jefferies Group, said Caterpillar had “done a pretty good job” controlling costs and funneling cash to shareholders. He said the company seemed an unlikely target for activist investors seeking major changes and had no unrelated businesses to shed. “There’s nothing obvious to spin [off] or sell,” Mr. Volkmann said. Profit in the first quarter rose to $1.11 billion from $922 million a year earlier. Earnings per share increased to $1.81 from $1.44. Analysts had forecast earnings of $1.35 for the latest quarter. Caterpillar earnings benefited by 14 cents a share from the sale of the company’s remaining stake in a logistics business. Sales slipped 4% to $12.7 billion.