Cuba’s big oil find

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This NY Times article provides a decent overview of the recent news that two Canadian energy companies had discovered an oilfield in the Gulf of Mexico under Cuba’s control that has estimated reserves of 100 million barrels, albeit with the usual Times over-analysis regarding the business and political implications of the find.
Given that Cuba’s business infrastructure and capital resources are utterly incapable of developing such a field, Castro will have to import those resources. Given his typical business instincts, a meaningful development deal will likely not get done anytime soon. Unlike the Times, I view Cuba’s entry into exploration and production competition as a good thing. Unfortunately, Castro doesn’t know how to compete, so the impact will likely be minimal.

The way government addresses California’s chronic gasoline shortage

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This previous post from last summer told the story about a bizarre Federal Trade Commission investigation that had been launched into the planned closing of an unprofitable Royal Dutch/Shell Group refinery in California.
Shell had been unable for years to find a sucker, er, I mean, a buyer for the Bakersfield facility. Shell had lost more than $50 million over the past three years on the refinery and was facing between $30 million and $50 million in turnaround and environmental costs on the old facility. However, given that the closure would crimp gasoline supplies further in California — where supplies are already tight and prices the highest in the nation — both the federal government and the California state government pressured Shell to find a buyer rather than close the facility. Not surprisingly, buyers were not exactly lining up to bid on an obsolescent refinery, so last month the federal government agreed to let Shell exceed pollution standards in operating the facility in return for Shell keeping it open for another three months to find a buyer.
Well, Shell announced yesterday that it had finally found a buyer for the facility — Flying J Inc., a closely held Utah-based oil company that specializes in distributing diesal fuel to truckers. The purchase price was not announced publicly, but is estimated to be around $130 million by sources close to the deal.
So, let’s take stock here. Shell lost $50-$75 million to sell an asset for $130 million — not bad, but not the type of risk that Shell normally indulges to make a return on its investments. Rather than adopting policies necessary to induce major companies such as Shell to invest the capital necessary to build new refineries that would address the tight supplies in the Western part of the United States, the federal government and State of California took legal actions and then even compromised their sacrosanct environmental standards to prod Shell to sell an obsolescent facility to a tire kicker. Flying J is a good little company who will continue to operate the refinery, but it does not have the capital necessary to turnaround the declining production at the facility or build new refineries that are really needed to increase gasoline supplies. In the meantime, average gasoline prices in California have risen almost 27 cents a gallon to $1.93 from last year when the feds and the State of California started strong-arming Shell over its plans to sell the refinery.
My sense is that the postscript on this story is that the federal government and State of California’s actions in this matter have, in the long run, made California’s chronic gasoline supply problems worse. So it usually goes with governmental intervention into problems that markets should be resolving.

A worthy cause

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Dr. Charles Katz is a good friend and one of Houston’s finest otolaryngologists (i.e., ear, nose & throat doc).
Charles is also a marathoner and, over the past six years, he has raised over $40,000 in charitable donations for the Houston Food Bank in connection with running in the HP Houston Marathon. The Food Bank is the primary local charity that provides nutritious food to indigent families and individuals in the Houston metro area, and they perform this important charitable task effectively and efficiently.
Charles and 140 other Houston Food Bank sponsored runners are gearing up for this year’s marathon, which will take place this coming Sunday, January 16. Please consider making a donation to the Food Bank on this nifty donation page in Charles’ name or in the name of any of the other 140 Food Bank sponsored runners. It’s a worthy cause.

Markets working on the NYSE

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Following last week’s news that the price of a New York Stock Exchange seat had fallen to $1 million (a 63% drop from the peak price in 1999), this NY Times article examines the market forces that have caused the lackluster interest in the Exchange’s seats. As usual, the marketplace is the main reason, as it reacts to the NYSE’s increasingly obsolescent business model that has traditionally eschewed automation:

On an average day, the New York Stock Exchange trades 1.5 billion shares worth about $50 billion. Unlike almost all its competitors, it has traders on the floor who execute customer orders as well as their own orders in an effort to get the best price. Now the exchange has to decide how to maintain that identity while allowing more trades to be executed electronically.

The NYSE’s new business model is called the “hybrid market” model:

The . . . exchange’s ability to employ the automated market, called the hybrid market (humans in an auction, and computers matching orders) will determine whether the Big Board will keep attracting orders. If it fails, market share could fall.
. . . [T]he hybrid market will serve the exchange’s customers while maintaining the strengths of an auction market – namely the ability to get better prices rather than just deliver what appears on a computer screen. “The reason people come here is we have the best price 90 percent of the time and we have the best liquidity,” [said John Thain, the CEO of the NYSE]. “The more liquidity you have the better able you are to offer the best price, the more you have the best price, the more often the order flow comes to you. You cannot have one without the other.”

Nevertheless, the competition still expects the NYSE to continue losing market share, even under its new business model:

According to critics, more automation means that the New York Stock Exchange may lose its information advantage – the knowledge of what trades large players, such as mutual funds, are planning. Losing that knowledge could mean fewer orders. “There is a spiraling effect. As you lose the information, one customer takes his order off the floor, that translates to less information and less of an advantage,” said Chris Concannon, executive vice president at the Nasdaq exchange. He said he believed that the S.E.C.’s new rules and a hybrid model would erode the Big Board’s market share. “No single large electronic pool of liquidity will have more than 50 percent” of Big Board stock trading, he said.

And the NYSE’s changing nature better happen fast:

Critics and supporters agree that the New York Stock Exchange is not blessed with time. “The New York Central Railroad saw itself as a national icon and it was obliterated,” said Thomas Caldwell, chairman of Caldwell Asset Management and a buyer of four Big Board seats in the last year. “It ceased to exist. So many did. New York has to have a newer vision of itself and confidence in that vision.”

Now, I ask you, isn’t this a more effective and efficient way to change the NYSE than the method examined in this post and this post?

Beltran is gone

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Carlos Beltran elected to reject the Stros’ offer and sign elsewhere, probably with the Mets for $17 mil annually over seven years ($119 million).
As noted in this earlier post, this is really not a surprising result. Although it is a bit discouraging that the Stros put all their eggs in one basket in their pursuit of Beltran and came up with an empty basket, losing him is far from the disaster that many local media types will hype it to be.
As good as he is, Beltran is simply not worth $6 million more per season than J.D. Drew, another free agent outfielder on the market this off-season who signed with the Dodgers for $11 million per year over five years, even though Drew is more of an injury risk than Beltran. By focusing on Beltran and not considering other options, the Stros now find themselves in a position of having no centerfielder and really no good alternatives on the market. You will hear the mainstream media talk about Rice grad Jose Cruz, Jr. and the Mariners’ Randy Winn as centerfielders who could be acquired in a trade, but neither of them is a long term answer. Although both are only three years or so older than Beltran, neither of them was able to post a runs created against average (“RCAA,” explained here) statistic last season that was better than the 39 year old Bidg‘s.
You will also hear local media types talk about Jeremy Burnitz, but he is only marginally attractive. He is a 36 year old corner outfielder coming off a Coors Field-inflated season in which he generated an RCAA that was the same as Jeff Kent or Mike Lamb. Although that’s above-average, the Stros already have such a player in the younger Jason Lane, who can also play centerfield. Finally, speedy Stros farmhand Willy Tavares has not yet proven in the minors that he can generate a good enough on base percentage or hit with enough power to play effectively at the Major League level, so don’t expect him to be the answer.
An intriguing free agent possibility that remains on the market is Magglio Ordonez, a slugging 30 year old former White Sox corner outfielder who is a better hitter than Beltran. Unfortunately, the reason that Ordonez is still on the market is that he is an injury risk, as he is coming off knee surgery last season that led to the rare complication of bone marrow edema. A second surgery, performed in Austria, has reportedly cleared up the problem, but Ordonez was unable to return last season. So, he is a high injury risk and that has held down his value on the free agent market. The White Sox, Cubs and Orioles are reportedly the current bidders for his services. And oh, by the way, Ordonez is also represented by Beltran’s uber-agent, Scott Boras.
If the Stros could get reasonably comfortable with Ordonez’s rehabiliation from his surgery, then they could stick him in a corner outfield spot opposite of Berkman and place Lane in center as a adequate alternative until a purer centerfielder becomes available. Ordonez and Berkman whacking away at Minute Maid Park would not be a bad alternative to losing Beltran.
Finally, although I would not have objected to the Stros overpaying to keep Beltran, I think its fair to point out that it is rarely a good idea to overpay a player, even of Beltran’s stature. And make no mistake about it, Beltran will be overvalued when he finalizes his deal with the Mets or whoever. While this past season was the best of Beltran’s career and his batting line of .267(BA)/.367(OBA)/.548(SLG) was excellent, Beltran’s RCAA of 46 was considerably less than Berkman’s team-best 69 or J.D. Drew’s 66. Similarly, Beltran’s OPS (on base average + slugging percentage) of .915 tied him for 15th best in the National League, also well below Berkman’s sixth best of 1.016 and not even as good as the more pedestrian Burnitz’s OPS. Similarly, Beltran is one of the most gifted base stealers of all-time, but that’s generally an overvalued skill and not all that important for the Stros as they incorporate speedsters Adam Everett, Chris Burke, and Lane into the lineup. Beltran did walk 92 times last season, but 10 of those were intentional, so there is still a question about his strike zone patience.
Thus, Beltran will likely be a great player for which ever team signs him, but he’s still not Alex Rodriguez or Barry Bonds. The market has overvalued him and the Stros simply are not a rich enough team to overpay in the free agent market. With patience and wise use of their resources, the Stros can bounce back nicely from this disappointment. Signing Berkman and Roy Oswalt to long term deals, and persuading the Rocket to return, would be a nice start.

The Andrea Yates case

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Dru Stevenson over at the South Texas Law Professor does a good job in this post of analyzing the current status of the Andrea Yates case. Professor Stevenson’s thoughts are insightful, particularly his point about the trend in big cases of prosecutors abandoning the principle of prosecutorial discretion in favor of career advancement.

Phillies spammer sentenced

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I’m glad the feds got this guy. Think what might have happened when the Eagles get beat in the NFL playoffs?

Frank E. Vandiver, RIP

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Former Rice University and Texas A&M University history professor and president Frank E. Vandiver, who was one of A&M’s most prominent professors over the past quarter century, died Friday in College Station at the age of 79.
During Vandiver?s tenure as president from 1981 to 1988, Texas A&M exploded in growth, reaching the the $100 million mark in research volume and becoming one of the nation?s largest enrollment universities. A&M’s endowment also surpassed $1 billion during Mr. Vandiver’s tenure. Prior to moving to A&M, Mr. Vandiver was acting president of Rice University in Houston from 1968-70.
Mr. Vandiver wrote and edited more than 20 books, including Mighty Stonewall, Their Tattered Flags: The Epic of the Confederacy and Black Jack: The Life and Times of John J. Pershing, the latter of which was a finalist for the National Book Award.
Mr. Vandiver is legendary in Texas history circles for publishing his first professional article at the age of 15 and earning his master’s degree at the age of 19. Mr. Vandiver was the son of an academic, and his family lived next door to Albert Einstein for a time during Mr. Vandiver’s youth while his father was a visiting professor at Princeton. In addition to Rice and A&M, Mr. Vandiver also taught history at Washington University in St. Louis, the U.S. Military Academy at West Point, and Oxford University in England.
After stepping down as president of A&M in 1988, Mr. Vandiver continued to teach at the university as a distinguished professor and holder of the John H. and Sara Lindsey Chair in Liberal Arts. Mr. Vandiver also served as the director of the Mosher Institute for International Policy Studies, which is an A&M think tank.
Mr. Vandiver is survived by his wife, Renee, three children and six grandchildren, and was preceded in death by his first wife, Susie. Funeral services for Vandiver are pending with Hillier Funeral Home in Bryan.

Ken Lay promotes his website

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The Houston Chronicle’s main Enron reporter — Mary Flood — weighs in today with this piece on how former Enron chairman and CEO Kenneth Lay is using sponsored links to direct websurfers to his website. Sponsored links appear prominently in searches for a word or name in an Internet search engine. They serve the dual purpose of making websites more noticeable and being a revenue source for search engines.
What are the chances that any prospective juror at Mr. Lay’s criminal trial who admits to reading Mr. Lay’s website will make in on the jury? Slim and none, in my view.

Enron outside directors settlement

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On the heels of this post earlier this week about the impending outside directors’ settlement in the WorldCom case, this NY Times article reports on the impending $168 million settlement involving the class action securities fraud and related claims against eighteen former directors on Enron Corp.’s Board of Directors. Most of the settling directors were outside directors of Enron.
This settlement has actually been in the works for several months as the class action plaintiffs’ lawyers became concerned that the extraordinary defense costs of Enron’s former officers and directors would soon exhaust the insurance proceeds available to fund a settlement under Enron’s officers & directors’ liability insurance policies.
Consequently, in October, the plaintiffs reached a tentative settlement with the Enron board members that provided for payment of the remaining insurance proceeds ($200 million) under the O&D policies despite the fact that such a result would leave dozens of former Enron officers and directors not included in the settlement without insurance coverage for their defense costs. In addition, certain settling directors agreed to pay an additional total of $13 million out of their own pockets, which was essentially 10% of each such director’s net gain from their Enron stock sales during the class period. The D&O liability insurers agreed to contribute $155 million toward the settlement, which exhausted the insurance coverage for the non-settling directors and officers.
With that agreement in principle in hand, Enron’s outside directors in late October obtained an injunction against Enron’s O&D liability insurers from the U.S. District Court in Houston that enjoined the insurers from using any further policy proceeds to pay defense costs of former Enron officers and directors pending the District Court’s consideration of the proposed settlement. Since that time, the plaintiffs, the outside directors, and non-settling former Enron officers and directors such as Kenneth Lay and Jeffrey Skilling have cut a deal in which $13 million of the insurance proceeds will be set aside for their future defense costs in return for the non-settling officers and directors’ consent to the outside directors’ settlement. The class action plaintiffs will get $155 million of the remaining insurance proceeds under the settlement and $32 million of the proceeds has been earmarked in the settlement for the Enron bankruptcy estate. The settlement does not include many former Enron officers, including all former Enron officers who have either pleaded guilty to criminal charges or who are currently facing criminal charges.
The outside directors settlement is the fourth major settlement in the class action lawsuit that was commenced against Enron’s former officers, directors, and financial institutions nearly three years ago on the heels of Enron’s hyper-publicized accounting scandal. Including the latest settlement, the class action has generated just under $500 million, which is really rather paltry compared to the over $30 billion in damages that the plaintiffs have alleged in the class action.
Indeed, contrary to the generally laudatory press accounts relating to this and other settlements in cases such as Enron and WorldCom, the handling of the Enron class action by the plaintiffs’ lead lawyers — Lerach Coughlin Stoia Geller Rudman & Robbins LLP — has been subject to sharp criticism among professionals close to the case. The genesis of that criticism was the plaintiffs’ lawyers alleged involvement in allowing a proposed $750 million settlement with Arthur Andersen slip away in early 2002 during the early stages while Anderson was still a going concern operation. In addition to the substantial settlement payment, that proposed settlement would have involved a resolution of the criminal charges against Andersen in a manner that would have allowed Andersen to continue in business as a major accounting firm, saving thousands of jobs in the process. When the proposed deal allegedly blew up in a dispute between the plaintiffs’ lawyers and the financial institution defendants, Andersen’s criminal trial went forward, resulting in the felony conviction of Andersen that prompted Andersen’s demise as an accounting firm. Andersen remains a defendant in the Enron class action, but it is a virtual shell that no longer has the resources necessary to pay $750 million in either damages or a settlement in the Enron class action. Consequently, the plaintiff’s lawyers appear to have left a considerable amount on the table, and have not made up for it yet.
Nevertheless, the plaintiffs in the class action are still seeking billions in damages from a large group of financial institutions for allegedly assisting Enron in defrauding shareholders and creditors. The financial institutions include J.P. Morgan Chase & Co., Citigroup Inc., Merrill Lynch & Co., and Credit Suisse First Boston, to name just a few.
The Enron directors paying the total of $13 million out of their pockets are Robert Belfer, Norman Blake, Ronnie Chan, John Duncan, Joe Foy, Wendy Gramm, Robert Jaedicke, Charles LeMaistre, Rebecca Mark-Jubasche and Ken Harrison. The other directors covered by the settlement who are not required to pony up any money out their own pockets are Paulo Ferraz-Pererira, John Mendelsohn, Jerome Meyer, Frank Savage, John Urquhart, John Wakeham, Charles Walker and Herbert Winokur. As is typical in such deals, none of the directors are admitting any wrongdoing as part of the settlement, which still requires final court approval.