Investment Moats

Thanks to DanielXXX for highlighting this article. although its a bit old, it is relavant.

Australian oil explorers hampered by labour shortageGOLD COAST, Australia, May 9 (Reuters) – Oil and gas explorers in Australia’s waters could be forced to scale down their activities due to a global shortage of skilled labour and equipment, an industry conference was told on Tuesday.”The rate of exploration, notably for gas, is increasing such that old ideas about moving the workforce around will not meet the scale of need,” Petra Nelson, chief executive of employment consultants Gerard Daniels told the meeting in Queensland.

A new report from The Australian Petroleum Production and Exploration Association focused on the cost pressures and labour shortages being experienced by oil and gas majors and smaller local explorers.

It also highlighted declining oil production, saying Australia had only 17 years of remaining oil reserves against 117 years of gas, and that scarce workers were being channeled to gas projects considered easier to commercialise.

Royal Dutch Shell’s head of Asia-Pacific exploration, Wouter Hoogeveen said the industry faced losing half of its existing workforce to retirement within 10 years, with the average age of workers now standing at more than 45 years old.

“Human resources are a clear challenge,” Hoogeveen told Reuters on the conference sidelines.

“Costs for explorers are rising very steeply. There’s a hot market for rigs and seismic (testing) too, which could place constraints on what the industry can do.”

On Monday, Exxon Mobil Corp. said it would delay a final investment decision on its Gorgon liquefied natural gas joint-venture project until 2007 amid rumours that a shortage of manpower and equipment was causing a cost blow-out.

SMALLER COMPANIES HIT

Bruce Phillips, managing director of new producer Australian Worldwide Exploration told Reuters that burgeoning costs were a particular stress to smaller companies like his own.

“It’s hard to get a rig, and when you do the cost has blown out over the past year,” he said. “Available skilled labour is quickly snapped up so there’s terrible tightness there too.”

Western Australia has said it needs 20,000 new workers — 1 percent of the population in a state that already employs 10 percent in resources — to meet the needs of known projects alone. National estimates start at more than 30,000 workers.

The country’s flagship North West Shelf liquefied natural gas joint venture was criticised last year for hiring an Indonesian firm to manage construction of its fifth processing train, with joint venturers saying local staff were simply not available.

But Shell’s Hoogeveen said the company’s decision to increase 2006 drilling activity in Australian waters by fivefold on the previous year was in part motivated by the relative ease of convincing internal staff to make a transfer. “One of the secondary reasons for our focus on Australia is that it’s a little bit easier to attract internal people to work in Perth than some other parts of the oil exploration world.” ($1=A$1.30)

The UOB Kay hian reports gives numerous ways to value Ausgroup. The consensus figure is in the region of 72 cents. If that is the case, at 40 cents, there is so much margin of safety to buy now. Which begs the question why it has been languishing like this for such a long period of time. Not enough coverage? probably. But one should take such  forecast as a pinch of salt.

Below are some of the things that is interesting about investing in Ausgroup:

“It has been argued before that AusGroup is trading at a discount to its peers
due to its low margin (FY06 net margin was 4.7%). However, AusGroup’s peers
in Australia have an average net margin of 4.3% while its peers in Singapore
have an average net margin of 5.6%. Given that Cactus’ contributions to the
Group are expected to improve margin substantially to 6.2% and higher beyond
FY07, we feel that this argument is not justified.”

I feel that if margins is forcasted to improve substantially, so will share price given SGX’s record for placing a premium to net margin improvement and discount if the margin of a company fails miserably.

Key Risks

• Dependent on the oil and gas and mining-related industries. AusGroup is dependent on the oil and gas and mining related industries as they derive a majority of their business from the oil and gas and mining related industries. These industries are driven by the global demand for minerals and energy and could suffer in the event of a slowdown in demand. Management has recognised this risk and has undertaken steps to limit AusGroup’s exposure to a mining industry downturn.

• Non-recurrent, project-based work. A majority of AusGroup’s business is project-based and non-recurring. The Group therefore has to continue to be aggressive when tendering for projects and has to ensure that it is able to maintain its visibility as a premium engineering services provider. One way AusGroup is looking to increase cash flow stability is to look at more long-term maintenance contracts.

• Highly dependent on labour. AusGroup’s business relies heavily on its skilled labour as it is a key component to its business. Labour disputes, or the inability by management to retain staff, particularly the skilled engineers, tradesmen and experienced project staff could have an adverse effect on the Group’s future earnings. However, thus far, management has been able to maintain and even grow its labour force over the last few years.

• Exposure to cost overruns. Unforeseen circumstances, such as errors in estimation during fabrication, could result in cost overruns. AusGroup has taken steps to reduce this particular risk as most contracts are negotiated on a cost-plus basis or have clauses to compensate for fluctuations in material and labour costs.

• Exposure to credit risk of customers. A substantial portion of AusGroup’s projects involves progressive billing according to the stages of project completion. AusGroup extends open account credit terms of between 30 to 60 days to their customers for projects and are subjected to the risk of bad debts should any of its customers face financial difficulty. However, as most of AusGroup’s customers are large MNCs, the probability of any of them defaulting payment is relatively low. Furthermore, AusGroup’s management is also selective about the contracts they tender.

• Disputes, claims, defects or delays. AusGroup could encounter disputes with customers due to defects or delays, which could result in protracted litigation. This would have a negative impact on the Group’s earnings and financial position.

News from Bloomberg

Sept. 25 (Bloomberg) — Noble Group Ltd., which accounts for 10 percent of ethanol exports from Brazil, may start investing in production plants in the South American nation to benefit from forecast rising global demand.

“We want to position ourselves as a significant player in the global ethanol market,” Hong Kong-based Noble’s Chief Operating Officer Ricardo Leiman said Sept. 21. “The big opportunity in Brazilian ethanol is not only its domestic market but all these global markets.”

Brazil, the world’s biggest producer of sugar and ethanol, said last month prices of the fuel rose 20 percent in the past year. Investors including Bill Gates, Richard Branson and Vinod Khosla are pouring millions of dollars into biofuel companies on optimism that demand for alternative fuels will gain.

“Demand for ethanol will only be higher with many countries trying to move away from fossil fuels produced in unstable regions,” said Roger Groebli, head of equity research at ABN Amro Bank NV in Singapore, who personally holds shares in Noble. “I believe the vision of Noble, and I think in the medium-to-long term this is a very solid strategy to get market share.” [Read more…]