There are a number of global energy companies, from Exxon-Mobil to India's Reliance, and some overpriced ones, such as Russia's AO Tatneft and America's Halliburton. Perhaps the best buy, available even to small investors through a New York Stock Exchange listing, is Petrokazakhstan, a Canadian-owned company with extraction rights in Kazakhstan.
At less than five times earnings, Petrokazakhstan is certainly a value. So why has the stock dipped in recent months, from highs above $45 to less than $30?
Factor one is all the turmoil in Central Asia. Kazakhstan has black gold, but there is "white revolution," as Bismarck called it, and some "red revolution" to boot, in several of its neighbors.
This is good for the long run; it will help, not hurt, Kazakhstan if some of its neighbors emulate its three-steps forward, one-step-back progress towards democracy. In the near term, of course, all the uncertainty is a reason for concern, particularly in combination with a somewhat uncertain U.S. policy.
When Kazakhstan held the best-run election in the region's history last year, the U.S. response was not to praise the regime, and encourage similar trends in Kazakhstan's neighbors, but to more or less stand silently by while the country's admittedly emerging democracy was trashed by European and U.S. critics. Bush administration strategy has not formed yet, but is a debate between simply cheering on the chaos, or forming some kind of proactive role working with Kazakhstan as a potential role model and catalyst. This bears watching.
ANOTHER PUTIN -- NOT
Factor two is the rumblings over allegedly broken contracts and back taxes that may be owed by several Kazakh firms. To many observers, these words are unsettlingly similar to those being heard to the north, from Russia's Vladimir Putin, especially since some of Petrokazakhstan's difficulties involve a dispute with Lukoil, and allegations of harassment of a Kazakh reporter by Russian authorities. On examination though, what these controversies have in common with Yukos, Russian mobile phone service provider VimpelCom, and other Russian assaults are the words, but little else but the words.
Kazakhstan has a small number of legitimate tax disputes that are less than one fiftieth the size of the Yukos affair in balance sheet and earnings terms. And while Russia is headed in a decidedly less investor-friendly and democratic direction, Kazakhstan's Nursultan Nazarbayev is inching, admittedly too slowly for some, the opposite way.
According to a senior U.S. State Department official, Bush policy towards the region is now, sensibly, edging towards Nazarbayev as a needed friend -- head of a country surrounded by turmoil, which has advanced farther on the democratic road than any of its neighbors. (The United States made a similar choice in 2001 with Pakistan, which is little more democratic than Kazakhstan, and arguably less.)
Meanwhile, Nazarbayev has gone out of his way to make clear that Kazakhstan's tax ministry will not go the way of Putin's out-of-control KGB-IRS in Moscow. All this is to the good.
Furthermore, Petrokazakhstan has established a share buyback plan -- a good sign of management self-confidence.
Our clients started buying Petrokazakhstan in the low $30s and were purchasing aggressively this week as oil held above $50 while the stock slid into the high $20s. The government has always been fair to the Canadian management as a senior official at the firm confirmed to me this week. There appears to be firm long-term support at $25, where the stock traded in early 2004 with oil still in the $30s.
If there are other energy companies trading at less than five times earnings, with a comparably stable business environment and political regime -- remember, "oil exporter" includes countries like Nigeria, Venezuela, Iraq, and Iran, all less democratic and more violent than Kazakhstan -- please send me an e-mail about them; they're hard to find. Still in.
Reviewing "Bottom Line" calls over the last six months, we find a few bad investments, about twice as many good ones, and a number of UNCHes. Two out of three (about) ain't bad; here are some highlights.
The worst call is easy to identify: We liked Indonesia after the tsunami, and liked it again a month ago, sensing a whiff of tax reform in the air. ("Tsunami investing," Jan. 7, and "Indonesia's tsunami opportunity," April 13.)
Well, so far so bad. President Susilo Bambang Yudhoyono has, as predicted, reacted skillfully as a crisis manager, and run an effective foreign economic policy. But his administration has yet to put together the kind of incentive-oriented economic growth package needed to defend the currency and spur a China-style surge of domestic business and job formation. Meanwhile, the Jakarta stock index has slumped nearly 20 percent in dollar terms since mid-March -- though it's still, at least, narrowly in the black for the year.
Yudhoyono will reportedly be visiting the United States in late May. Here's hoping, both for his country and for the sake of Bottom Line's position, that SBY hears a few words from George Bush -- or better still, from his advisors, before the trip -- about "personal income tax cuts."
We were short the dollar briefly after the U.S. election, believing that the failure to either support U.S. Treasury Secretary John Snow, or replace him, was creating a sense and the reality of Bush administration disarray. ("Fed-less, Treasury-less, $ less," Nov. 5, 2004.)
We covered, and went long, against both the Japanese yen and more so the euro, in December and January ("Strong dollar polities," Jan. 14), took some profits, and went long again in February ("Switzerland's wise peasants," Feb. 11), all in the $1.31 to $1.35 euro range.
This call hasn't moved far, but it's decidedly in the right direction, the trading as strong as $1.28 euro recently and stubbornly refusing to stay above $1.30. With U.S. inflation ticking up, and (Western) eurosclerosis still advancing -- now exacerbated by the potential crackup of the EU constitution vote, about which, more next week -- it's a position worth expanding. The dollar will see $1.20 and perhaps even $1.15 to the euro long before it ever sees $1.50.
EMERGING MARKETS MACRO
On April 1, in "Spreads too thin," this column advised:
"Emerging market debt and equities may have some mini-rallies in the coming months, but Bottom Line doesn't expect the Morgan Stanley Index ishares to break through, or probably even get close to, their recent high of $220. Those rallies will be not a buy, but a short, opportunity."
Since then, voila, the emerging market ishares have poked up into the $205 range twice, but bounced back down to below $200 this week. They should see $180 and possibly $160 in 2005, and may not break back through $220 for several years. Hold your shorts for now.
(Gregory Fossedal, firstname.lastname@example.org, is an advisor to investors on global development trends and ideopolitical risk, and a research fellow at the Alexis de Tocqueville Institution, adti.net. His clients may hold long and short positions in many of the investment securities and opportunities mentioned in his reports. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of his clients or AdTI. Furthermore, they are subject to change without notice.)