Partnership Perils
Research for Online Investors

by John Dalt

3/25/11

We reported two months ago that Russia signed a deal with BP to drill in the Arctic.  Russia controls more Arctic acreage than the U.S. and Canada combined.  Today, the New York Times reports that BP lost a court ruling concerning operations in Russia.

BP has a partnership with a group of Russian billionaires named TNK-BP.  Swedish courts ruled that the partnership requires all BP operations in Russia be conducted through the partnership.  BP’s contract with the Russian oil company Rosneft sought to sidestep the partnership.  The partners sued BP, and won.

BP ran the Arctic drilling through the partnership, but had a share swap agreement with Rosneft that would put them in an equity position for Russian oil production around their partners in TNK-BP.  The partners in TNK-BP may be trying to force a buyout from BP.  Rosneft has Putin’s backing, so the government may get involved to force the Russian partner’s hands.  One analyst said, “You can’t determine the ultimate outcome of the game in the third inning because the ballgame is not over.  It is going to be negotiated out.  How that will be handled remains to be seen.”

Russia is the world’s largest oil producer.  You may want to review our MarketToday article, Drill, Putin, Drill for more background information on Russian oil and Arctic drilling.

The plot is thickening in the eurozone.  European leaders met, but did not finalize the Permanent Rescue Fund as they were scheduled to.  Leaders decided to wait until June when the present agreement expires.  The new agreement is expected to increase the funds size from approximately $190 billion dollars to $330 billion dollars.  According to Reuters, leaders agreed to extend the time frame two years for countries to contribute their share of the bailout facility.

Portugal’s Prime Minister Jose Socrates attended and reiterated that his country did not need a bailout.  This was as interest rates on the country’s sovereign debt rose to over 8% on ten-year bonds and Standard & Poor’s downgraded their debt.

Any bailout request must come from Portugal’s parliament, and that probably will not happen until credit markets force lawmakers to take action.  The county’s treasury has to refund bonds in April and June.

Another worry for the eurozone and the International Monetary Fund is Spain.  Spain is credited with passing labor reforms and other austerity measures to avoid a financial crisis.  Credit markets have been favorable to their actions.  Guess who owns a one-third of Portugal’s debt?  Spain. As interest rates rise, Spain’s holdings must be written down.  A tangled web.

Germany has two regional elections this weekend.  Chancellor Angela Merkel’s party may take losses because of voter dissatisfaction with Germany’s participation in rescuing other eurozone countries.  Germans are upset their taxes go to help countries pay more generous retirement benefits than they enjoy.

The chart below illustrates the Dow adjusted for inflation since 1900. The inflation-adjusted Dow has traded within an extremely long-term upward sloping trend channel over the past 111 years. Notice that the secular bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. The magnitude of the decline during the financial crisis of 2009 was much less than what occurred with the bear markets that concluded in the early 1930s and early 1980s. The Dow has retraced 74% of the financial crisis bear market with the inflation-adjusted Dow currently trading 19% off its 1999 record high.

Chart courtesy of http://www.chartoftheday.com

To the mailbag:
My portfolio is still growing. I am so happy.---Buy, Sell, Hold subscriber G.C.

John’s reply:  Thanks for the kudos.  We have been on a great run. 43 winners in the last year, and no losers. A record.

Editor’s note:  I must leave the office early today to travel for a memorial service for an old friend.  I have helped his widow this past week, and am saddened by the stark reality of her loss.  As I was cleaning out and throwing away some of his personal affects, it is a sad reminder of the transitory nature of all that we busy ourselves with.  Enjoy your weekend with family.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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