The Stros limp home tonight after losing their fifth straight game and fourth straight to the Reds, 7-5. Berkman is the only player hitting consistently well, and no one is pitching lights out at this point. Not a good combination, and the schedule is not favorable. The Stros begin a two week stretch of playing the Cubs and the Cards with Roy O taking the hill against the Cubs on Tuesday night in the Juice Box.
Shell reduces reserve estimates again. Here is the WSJ ($) article on the latest reduction.
Here are the previous posts on the Shell reduction of reserve controversy.
This Wall Street Journal ($) article reports on the Justice Department’s decision to open a criminal investigation into Ernst & Young LLP’s promotions of potentially abusive tax shelters. This investigation follows on the heels of a separate criminal investigation into sales of certain tax shelters at KPMG LLP. Here are prior posts on Ernst and KPMG’s recent legal troubles.
The investigation of Ernst reflects the continuation of the Justice Department’s continued effort to crack down on tax evaders and their professional advisers, including accounting firms, law firms and financial institutions. A plethora of tax-shelter sales spurred by the late-1990s economic boom and stock-market rally is estimated to have reduced federal tax revenues by billions.
Earlier this year, the Manhattan U.S. attorney’s office notified KPMG that it had begun a criminal investigation into the firm’s promotion of certain tax shelters that the IRS has deemed potentially abusive. The initiation of a criminal investigation into Ernst’s similar activities comes at a time of growing concern in the business community that there already are too few major accounting firms (it’s the “Big Four” now) to audit the world’s largest companies.
The criminal investigation of Ernst is somewhat surprising in that Ernst last summer reached a civil settlement — which included payment of a $15 million penalty — with the IRS to resolve allegations that it failed to register its tax-shelter strategies with the government and maintain lists of investors who participated in them. Ernst disbanded the division that had been involved in developing and marketing its most aggressive tax shelters and, as part of the IRS settlement, Ernst also instituted organizational changes aimed at ensuring future compliance with federal and state tax laws. As a result, it was thought that the IRS settlement concluded the government’s action against Ernst for past shelter-related matters.
Following on this Professor Ribstein post and this reply post here over the weekend regarding most airlines’ failure to hedge fuel costs, this NY Times article reports that the hedging of fuel costs also varies widely in other fuel intensive businesses. One reason is that the practice is risky:
In a vexing illustration of the risks associated with hedging, though, not every company has been so fortunate.
For instance, the PanOcean Energy Corporation, which produces oil in West Africa, lost $1.4 million in the most recent quarter by essentially agreeing to sell oil for about $30 a barrel when the price of oil climbed much higher – just below $40 a barrel last Friday. PanOcean made the bet as part of a loan agreement with its bank.
“It’s a crap-shoot, isn’t it?” said David Lyons, chief executive of PanOcean, no stranger to risk after developing a natural gas field in Tanzania in East Africa to complement operations in Gabon. “Personally I feel hedging activities are overdone, but it’s something our financial agreements require us to do.”
Many companies find it less risky (albeit more incompetent) simply to avoid hedging and pass along the increased fuel costs to their companies:
Many choose instead to raise costs for their customers, contributing to concerns about rising inflation.
One company opting for a fuel surcharge instead of hedges is Waste Management, the Houston-based garbage collection company with a fleet of 20,000 trucks around the nation. Heather Browne, a spokeswoman for Waste Management, said fuel costs still remain a relatively small amount of the company’s revenue, about 3 percent of $11.5 billion.
Nevertheless, hedging fuel costs is increasingly important for fuel dependent companies that serve a limited geographical area:
For companies with a more limited geographic reach and more dependent on the fuels that are becoming a bonanza in the oil patch, hedging is increasingly considered a necessity. Southwest Airlines exemplifies this trend, with 80 percent of its fuel needs hedged for this year and 2005, and 30 percent for 2006 at prices below $30 a barrel.
Alaska Air, which operates Alaska Airlines and Horizon Air, is also among the few that hedged a large share of its fuel consumption, about 40 percent this year and next, at prices from $25 to $27 a barrel. But even that was not sufficient, the company acknowledges.
“We’re not at the Southwest level,” Bradley D. Tilden, Alaska’s chief financial officer, said in an interview. With the company consuming about 400 million gallons of jet fuel a year, each penny increase in the price of the fuel costs the company $4 million a year, he said. Jet fuel prices have climbed to $1.17 a gallon from 76 cents a gallon this time last year.
Nevertheless, many major airlines remain slow to hedge:
Other airlines are struggling with the prospect of large losses after hedging fuel needs at relatively high prices, like Continental Airlines, which secured 80 percent of it fuel consumption at $40 a barrel this quarter and 45 percent at $36.40 a barrel for the third quarter.
Delta Air Lines and Northwest Airlines did not hedge at all this year and American Airlines, the nation’s largest carrier and a unit of the AMR Corporation, hedged less than 10 percent of its fuel needs for the second half of the year, according to a report by Lehman Brothers. Prying information from companies that placed erroneous bets on the price of fuel is sometimes akin to pulling teeth.
Finally, the NY Times piece observes correctly that the risk of hedging is not a reason to avoid it:
“People get their feelings hurt when they hedge poorly,” said J. C. Whorton, executive vice president of StratCom Advisors, a company that provides risk-management services. “But it’s most often the case that those companies that fail to hedge at all have done a very poor job.”
My prior post noted Warren Buffett’s distaste for investment in the airline industry because of its traditional lack of profitability. Could it be that the airline industry is simply an example of Mr. Buffett’s following observation about troubled businesses?:
“When a manager with a great reputation takes on a company with a poor one,
it is the company’s reputation that survives.”