Don Thurston Blog

Long term investments and other fables

News that the Chinese National Oil Company wants to buy Nexen is causing great debate. Other oil sand assets are receiving investor interest from national oil companies, pseudo private companies, many with political agendas. Justifying statements appear such as “these prospective buyers think long term; they have deep pockets; take greater risks and so on”.

These concepts lack substance. For example prospective investors that think long term are compared to whom? By inference they must be short term thinkers, a label applied to North American businesses that have a quarter over quarter comparative mentality. The timed value of money tells us that the quicker the return the better the investment. A longer period implies a lower rate of return and therefore a lower quality investment.

Having deep pockets is not germane to the argument either. Simply because the funds are available has nothing to do with the quality of the investment. An analyst recently justified a deal by Shell Oil with the explanation that the dollars involved were small compared to the company’s capacity to invest and OK as a result. While the impact may be limited the economics remain the driver. A similar argument tries to explain the proposal to buy Nexen. CANOOC’s capacity provides opportunities that make economic sense. Just because they can does not mean they should.

Taking greater risks begs for additional analysis. Deals will be done because of a desire to fill out a product line, secure a source of supply, for hedging and reduce competition. You count them up.

The point is to call any deal for what it is. If truly an investment, then spell out the metrics; if other wise then say so. Remember the excessive valuations  as the Government of Canada assembled PetroCanada. Whatever the motivation, return on investment was not one of them. To chastise competitive inaction because of lack of long-term thinking, or deep pockets or differing risk parameters simplifies the rationale to where the analysis is inadequate

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