Oil Companies Selling Less Oil for More Money

We’re wondering this morning exactly what kind of effect peak oil will have on oil investments, reader. At a glance, it doesn’t seem that lucrative. A bank with no money is as valuable as a two-legged stool. It’s the same in the oil sector. If oil production is falling…what are oil companies going to sell?

Santos’ (ASX:STO) latest quarterly production report gave us some sort of answer. They’ll sell less oil – for more money.

That’s quite an equation. Our year nine maths teacher never taught us that.

Australia’s second biggest oil company has lost 7.3% of its overall quarterly production in the last year. A lot of other oil companies have gone the same way. A natural decline is partly responsible for this. You can only pump so much out of an oil well before it starts to show its age. Some of the largest oil fields on the planet are starting to resemble Elizabeth Taylor.

Santos has new reserves to draw on – particularly reserves of gas. And some of its lost production is due to planned shutdowns. We don’t expect to see Santos company executives out on the street, puffing on harmonicas with their hats upturned for spare change.

In fact, the latest quarterly result shows something. Oil companies are currently benefiting from the lack of oil. Not suffering. The decline in production has been widespread enough to push up prices. And the rise in prices has more than compensated for lower production.

And what have Santos investors to show for it? Well, they’ve got 15% more capital than this time last year. That return includes the greatest correction in the oil price since a lucky bloke almost slipped on some slick, black stuff seeping out of the ground in North America two centuries ago.

And don’t let the recent correction irk you if you like the idea of oil investment. This story will be good for years. It’s one of those “buy-on-the-dips” investment strategies. We don’t know when it’ll turn upwards again. But we know that oil companies aren’t finding reserves fast enough to replace production. Here’s a survey of some bigger oil companies that are getting cheaper.

US Home Sales Fall by 2.6%

The thing is, it might not be worth investing until those companies’ prices have the chance to go up again. Like we said, we don’t know when that’ll be. But they might be getting cheaper again today.

Wall Street lost almost 2% last night as the housing slump worsened. June home sales fell in the US by 2.6%. They’re at a 10-year low. There are too many houses.

So there’s every chance those stocks above will shedding a bit of market cap today. We’ll be spending the weekend wondering when they’ll turn around. It’s a matter of ‘when’, not ‘if’.

Rio May Have Solved the Pilbara Puzzle

And hey…lookee here. Rio Tinto (ASX:RIO) just handed an iron junior access to its rail infrastructure in the Pilbara. From today’s Herald Sun in Melbourne:

“In a landmark deal that could unlock millions of tonnes of stranded iron ore in Western Australia’s Pilbara, resources giant Rio Tinto has signed a “mine-gate” sales agreement with junior miner Iron Ore Holdings (ASX:IOH)… Rio’s deal with Iron Ore Holdings could give the juniors an alternative way of unlocking their stranded iron ore reserves that is palatable to both mining giants.”

What’s so great about that? Well, IOH isn’t going to lease Rio’s rail line to ship its own ore. It’s just going to sell the ore to Rio. Then Rio can ship it wherever it wants, once IOH has delivered the material to Rio’s stockyard.

This could open up the massive iron reserves in Western Australia. At the moment, a lot of them are ‘snowed in’…the small companies with iron interests have no access to rail lines. Rio and BHP are stubbornly refusing to offer access.

It also raises further issues in the iron ore industry. The market could view it in a couple of ways…investors might see it as a plus, because Pilbara iron ore juniors now have a business. Or they might see it as a minus, because Rio won’t offer the same prices as China.

Naturally BHP and Rio Tinto will make a profit margin. So juniors can expect less than the contract rates the two big-wigs have just settled.

The article above lists the following juniors that are active in the Pilbara: Atlas Iron, United Minerals, Aurox Resources, BC Iron, Ausquest, Ferraus Resources, Cazaly Resources, Aquila Resources, Cape Lambert Iron Ore, Australasian Resources and Polaris Metals.

They may benefit from this, depending on how the market has valued them. Most of those stocks were down one or two percent yesterday.

But though they might be getting lower prices, there could potentially be a greater volume of iron moving through the Pilbara region. That’s excellent news for Rio and BHP. It’s even better news for a small-cap iron crushing service Diggers and Drillers readers know about.

Commonwealth Bank Ominous on Rates

Finally for the week, Commonwealth Bank (ASX:CBA) is getting ominous on the next round of mortgage rate rises. As that article points out, the big banks have added 0.5% to their rates in the last year. That’s above the RBA’s movements. It’s like two extra interest rates rises.

But the average cost of funding for banks is still increasing. You can see for yourself. Commonwealth Bank’s growth in interest costs accelerated from 8.2% to 13% in the second half of last year. As you can see from the Dow’s movements yesterday, the source of the credit crunch hasn’t improved since then. There’s a good chance the banks will keep doing the RBA’s job for it – whether it wants them to or not.