That’s what former Royal Dutch/Shell executive Walter van de Vijver is saying these days.
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Category Archives: Business – General
EnCana to buy Tom Brown for $2.7 billion
This NY Times article reports on Toronto-based EnCana Corporation‘s $2.7 billion cash offer to buy Denver-based independent oil and gas producer Tom Brown, Inc., which the Tom Brown board accepted yesterday. The price includes $350 million in Tom Brown debt that EnCana will assume. EnCana is Canada’s largest producer of natural gas.
Continental and Southwest Airlines release quarterly earnings reports
Houston-based Continental Airlines narrowed its first-quarter loss, and Dallas-based Southwest Airlines scratched out a small profit as both airlines struggled with higher fuel prices.
Continental, the nation’s fifth-largest airline in terms of traffic, had a net loss of $124 million ($1.88 per share) in the first quarter, compared with a loss of $221 million ($3.38 per share) for the first quarter of last year. Revenue jumped 11% to $2.27 billion from $2.04 billion. Business travel remained weak, as only 32.7% of Continental’s revenue came from high-priced business fares, down 4.8 percentage points from a year earlier. Fuel costs at Continental’s mainline operation jumped 6.1% over the high prices airlines faced a year ago amid Iraq war preparations.
The combination of high fuel costs and low fares has made for a very difficult environment for airlines, Continental’s chairman and chief executive, Gordon Bethune, warned “This is not sustainable. This industry doesn’t work at $38-a-barrel oil.”
Southwest, the sixth largest U.S. airline, remained profitable through the combination of lower costs than competing airlines and strong hedges it had in place against higher fuel prices. First-quarter net income rose 8.3% to $26 million from $24 million a year earlier while earnings per share remained flat at three cents. Revenue rose 9.8% to $1.48 billion from $1.35 billion, and the company offset higher fuel costs with $63 million of commodities hedging gains. Southwest’s mix of full-fare traffic, typically business travelers, was 36%, about the same as in the year-earlier period.
In other Continental news, this NY Times article reports on Continental’s offer to buy Colombia’s financially troubled airline, Avianca.
Corporate jets and shareholder returns
The following is the compelling synopsis of NYU finance professor David Yermack‘s paper, “Flights of Fancy: Corporate Jets, CEO Perquisites, and Inferior Shareholder Returns“, which will not go over well in certain boardrooms:
This paper studies perquisites of major company CEOs, focusing on personal use of company planes. For firms that have disclosed this managerial benefit, average shareholder returns under-perform market benchmarks by more than 4 percent annually, a severe gap far exceeding the costs of resources consumed. Around the date of the initial disclosure, firms’ stock prices drop by an average of 2 percent. Regression analysis finds negative associations between CEOs’ personal aircraft use and their compensation and percentage ownership, in accord with Jensen-Meckling (1976) and Fama (1980), but both relations have small magnitude.
Hat tip to Marginal Revolution for the link.
The economics of Fenway Park
Via the Sports Economist, here is an interesting Alan Greenburg story on how Boston Red Sox management is managing the economics of playing in the smallest big league ballpark while competing against the richest sports team in America, the New York Yankees.
‘Stros-Rockets joint venture wins summary judgment
This Chronicle story reports on the summary judgment that a joint venture comprised of the Astros and the NBA’s Houston Rockets obtained yesterday in their lawsuit seeking a declaratory judgment that the Astros’ television contract with Fox Sports Network allowed the Astros to opt out of the contract in favor of a better deal. The summary judgment removes a major obstacle for the team-owned Houston Regional Sports Network, which would carry Rockets games in 2005 and Astros games beginning in 2006. The network would end a two-decade relationship between the Astros and FSN’s predecessors (Home Sports Entertainment), one of the nation’s first regional sports networks.
This litigation highlights two important considerations regarding sports media contracts. First, in the quickly changing environment of media broadcasting, long term contracts are risky for both sides. In this particular contract, the Astros were the ones who were losing out, but it is at least as common for the media party to lose big on these contracts, as CBS has discovered in regard to its NCAA Basketball Tournament contract.
Secondly, following the lead of the New York Yankees, baseball clubs are increasingly inclined to own their own media outlets to maximize their ability to generate revenue. Major League Baseball is the only major professional sport without a salary cap on players’ salaries and its teams also do not share any meaningful media revenue. Consequently, baseball clubs are constantly under pressure to increase their sources of revenue. That is the bet that the Astros are making in establishing the Houston Regional Sports Network.
Was that “Remember the Alamo” or “Forget the Alamo”?
This Wall Street Journal ($) story reports that The Walt Disney Co.‘s $100 million production of “The Alamo” tanked over the weekend, grossing only an estimated $9.2 million domestically.
The failure is not well-timed. Disney and its chief executive officer, Michael Eisner, are under pressure to meet or exceed the company’s financial targets of 30% earnings growth in the wake of a shareholder revolt that resulted in the Disney board stripping Mr. Eisner of his chairman title.
Disney’s film studio, which had a great year in 2003, has been trying to make it through a shaky stretch of its release schedule this year without a major bomb. “The Alamo,” however, is a clear loser that may struggle to take in even $25 million or $30 million in U.S. theaters at its present pace. Moreover, its prospects overseas are believed to be poor because few foreigners know about the historical event upon which the movie is based. Although the failure of a single film typically doesn’t affect the stock price of Disney much, it is imperative for Disney management to keep its share price up in order to fend off the Comcast, Inc. unsolicited all-stock offer for the company that Disney’s board rejected in February.
“The Alamo” opened to mixed reviews last weekend.
Coke general counsel quits
This Wall Street Journal ($) story reports on the continuing turmoil at the top executive levels of Coca-Cola Company as its general counsel, Deval L. Patrick, has resigned amid criticism from some company directors over his handling of government investigations and a shareholder class action lawsuit relating to allegations of accounting fraud. Here is the NY Times article on the resignation.
The company’s board is already conducting its first-ever outside search for a new chairman and chief executive to succeed Douglas Daft, who plans to retire later this year. Steven J. Heyer, Coke’s president and chief operating officer, probably will leave the company if isn’t named to replace Mr. Daft.
The U.S. attorney’s office in Atlanta and the Securities and Exchange Commission have been conducting wide-ranging investigations into Coke since last summer after a former company auditor made allegations of accounting fraud in a wrongful-termination lawsuit against the company. Mr. Patrick had no role in the alleged misconduct.
One of the most serious allegations is that Coke engaged in “channel stuffing” and overstated its financial results in recent years by shipping excessive beverage concentrate to bottlers in Japan, North America and elsewhere. On a related note, a federal district court in Atlanta denied Coke’s motion to dismiss a shareholder’s class-action lawsuit filed in 2000 and allowed the plaintiffs to pursue discovery on several parts of the lawsuit, including the channel stuffing allegations.
Draft Shell report pins blame on former key executives
This Wall Street Journal ($) story reports that a draft Royal Dutch/Shell Audit Committee report primarily blames Shell’s former chairman, Philip Watts, and former exploration-and-production chief, Walter van de Vijver, for the company’s massive energy-reserve overbooking that was revealed earlier this year. As reported earlier here, Shell’s boards ousted Messrs. Watt and van de Vijver early last month. The report — prepared by Shell’s audit committee and a team of outside attorneys from law firm Davis Polk & Wardwell — is currently circulating among board members and investigators.
In early January, Shell dramatically reduced its estimate of oil and natural gas reserves by 20%, which is a key investor evaluation tool of an energy company’s value. Last month, Shell again trimmed its reserves and announced that it was delaying its annual report until the completion of further reserve reviews. As a result, investigators in Europe and the U.S., including the Securities and Exchange Commission, are probing Shell’s previous overstatements relating to its reserves.
The travesty of the Reliant Resources criminal case
As noted earlier here, Houston-based Reliant Resources and four individuals are facing a criminal prosecution in San Francisco in connection with the shutting down of California power plants in 2000 allegedly to increase the price of electricity in that state.
William Anderson over at the Mises Economic Blog has posted this cogent analysis that persuasively contends that the indictment makes no sense from an economic standpoint and can only be explained in political terms. The entire post is well worth reading, and here are a couple of Mr. Anderson’s points:
The California electricity fiasco has been well-documented in the press, and on this page as well. Economists like George Reisman have destroyed the many myths that sprang up while the state was suffering through rolling blackouts and extremely high wholesale rates. However, as is usually the case when energy issues come to the fore, in the end the political classes always lay all the blame upon energy producers. (This is logical, as the only other alternative would be for politicians to blame themselves, which is an impossibility in this politicized age.)
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[A]t the risk of being a voice in the wilderness, let me say that the only fraudulent thing here is the indictment itself. As one who has devoted much of his time to the study of federal crimes, I can say that once again we have a case in which government prosecutors have built a series of ?crimes? around an activity that was perfectly legal. Furthermore, the indictment not only alleges criminal behavior where there was none, but also goes one step further: it attempts to repeal the laws of economics. (In other words, if Ashcroft is correct here, then perhaps one can expect federal goon squads to conduct raids on economics professors whenever they attempt to explain laws of supply and demand.)
Mr. Anderson then addresses the fundamental economic illogic of the theory of the government’s case:
There is another problem, one that the government has conveniently ignored. If a reduction in supply of a good, ceteris paribus, leads to price increases, then the addition of supply must lead to price decreases. In other words, if Reliant?s alleged actions first led to price increases, then when Reliant?s plants came back on line ? and other producers rushed into the market to take advantage of the price increases by providing more electricity ? the prices would then fall.
Unless there were government interference in the market for electricity, withholding electricity in order for a company to enjoy higher prices would be a self-defeating strategy. As noted previously, not only would the addition of later supplies drive down the price, the higher prices would entice companies selling electricity elsewhere to divert their supplies to California, thus placing more electricity for sale than had been their previously.
Second, since shutdowns and startups are costly activities, companies like Reliant that would use such strategies would likely be making themselves worse off in the long run. That is because the gains from higher prices would be short-lived at best, and when one factors in the startup and shutdown costs, then the company would ultimately earn a lower net income than it would have received had it kept the plant on line.
Now, I am not saying anything that would be particularly profound, at least to an economist or someone in the electricity business. Furthermore, the article does not say if the ?scheme? even worked. Yes, it does say that prices rose, but it does not say that later they came back down. In other words, if Reliant had the ?power? to ?manipulate? the market, as the DOJ indictment alleges, then why did electricity prices eventually fall, as was the case in California, and prices were falling even before the government stepped in with unwise price controls over the western power grids.
Mr. Anderson then sums up with laser-like precision:
The California electricity crisis provided the opportunities for people to learn about the dangers of price controls. Instead, we have learned yet another lesson about the political classes and how they will ?manipulate? the political ?markets? (if I may use such a term) to turn the truth on its head. Furthermore, this indictment sets a very bad precedent in the energy markets as a whole.
That is because the United States has not seen a new oil refinery built since the Gerald Ford Administration in the mid-1970s, and refineries are being pushed to the limits. That means that any time a refinery is temporarily shut down for explosions, accidents, or even simple maintenance, that the DOJ now is going to look to see if criminal indictments can be handed down against oil producers for ?withholding fuels.?
As the power of governments at all levels has grown exponentially in recent decades, so has the prison population of this country. That is no accident. Today, we see more and more the government using criminal charges as a way not only to punish supposed ?criminals,? but also to engage in political manipulation. The Reliant indictments simply are another cog in the giant wheel of federal injustice.
A suggestion for defense attorneys in the Reliant Resources case — Mr. Anderson just might be a wonderful defense expert witness!