By Ethan Zuckerman, on January 10th, 2012
A few days back, I wrote a post about the Occupy Nigeria movement. As with many of my posts, my main goal was to research the issue and get a better understanding of what was going on and what I thought about it. The post has generated a good deal of feedback, some of it quite confrontational, some skeptical, some helpful in helping me understand the situation better. I’m particularly grateful for the last two types of feedback, as I feel like I understand the situation better than when I wrote the first post.
In my first post, I argued that removing the fuel subsidy is ultimately the right thing for Nigeria to do, as it is riddled with corruption, offers massive benefits to a few companies fortunate enough to have been awarded import contracts, and dominates the government budget at the expense of critical infrastructure projects. What I hadn’t understood fully is that the protests aren’t against removal of the subsidy per se, but about a lack of trust in government. As Nicholas Ibekwe, one of the organizers of the Occupy Nigeria protests in London explains, “Most organizers of the protest believe that removal of subsidy is not a bad thing. And I share that sentiment as well. However, the removal of subsidy in Nigeria is not about economics, it is mostly about trust, corruption and timing. The Nigerian government has not given the ordinary Nigerian reason to trust it.”
Put more simply by Chude Jideonwo on YNaija, “This is good policy badly executed, not because of timing necessarily as because of trust.” In the long run, Nigeria needs to eliminate a fuel subsidy that buys imported fuel – it makes very little economic sense for a nation to produce raw petroleum, export it to countries that refine it and subsidize its reimportation. It would make much more sense for the Nigerian government to help rebuild the nation’s refineries so the oil could be processed locally.
The problem is that, as Ibekwe and Jideonwo both explain, people don’t trust the Jonathan government to repurpose the subsidy to build infrastructure. Many of the arguments against subsidy removal focus on overspending in the Nigerian government, particularly on salaries and benefits to elected officials. The assumption – not without some justification – is that any savings from the subsidy will line the pockets of politicians at the expense of ordinary Nigerians.
Based on the feedback I’ve gotten from Nigerian friends, there’s no doubt that the subsidy removal was implemented poorly. Removing the subsidy in one fell swoop may have been designed to minimize opportunities for dissent (as each step of a gradual increase might invite protest), but it maximizes harm to the ordinary Nigerians who are struggling to cope with cost increases. The removal of the subsidy during the Christmas season had the additional complication of stranding some Nigerians in their home villages without sufficient funds to pay for transport home. And, as the commentators I quote above have pointed out, the Jonathan government simply doesn’t enjoy enough popular support and trust to have implemented these changes so unilaterally.
Alex Thurston at Sahel Blog argues against two arguments he sees me making in the piece. The first argument he sees me making is that removal of the subsidy is a good thing. I don’t think that’s what my argument was, precisely – I think removing the subsidy, ultimately, is something Nigeria needs to do. But as I’ve conceded here, I agree the move was made badly, without sufficient consideration of the harms to ordinary Nigerians, and I hope it will be rolled back and implemented in a more careful, considered way.
The second argument Thurston disagrees with is my contention that a protest against the subsidy is reactionary. Here I think he and I genuinely disagree. Thurston suggests that removal of the subsidy favors the 1% over the 99%, and suggests that because the World Bank and IMF would like to see the subsidy removed, the interests of the powerful favor subsidy removal. I don’t think it’s especially fair to equate the oft-maligned IMF and World Bank with the globally rich and powerful. There are lots of smart economists – including Nigerian Finance Minister Ngozi Okonjo-Iweala, former Managing Director of the World Bank – who are looking for solutions to Nigeria’s long-term economic woes, and who see removing the subsidy as a step towards economic reform.
There’s no doubt that removal of the subsidy is hurting the 99% in the short term. But poor and middle-class Nigerians were experiencing a great deal of economic misery before removal of the subsidy. In the long term, one way or another, Nigeria needs a functioning infrastructure, a working power grid, better roads and rail, better health care and education. In the long term, some of these services need to come from the government… and the government will gain legitimacy by providing services that people want and need, beyond cheap fuel.
Thurston and the Occupy protesters seem to be arguing that the government can’t and won’t provide those services, and therefore we should focus on the short term: maintaining a large subsidy on the import of foreign petroleum products. That mistrust of government’s ability to provide any services sounds more like the Tea Party than the Occupy movement to me. I’m not saying that the protesters are wrong in their mistrust of Jonathan’s government. I am saying that a government taking steps towards modifying a budget to provide essential goods and services appears more progressive than supporting a massive subsidy.
In US terms, this argument sounds like a very typical right-wing argument: we can’t trust the bloated, lazy government to produce public goods, so we should have very low taxes and rely on the private sector for any goods and services. In practical terms, removal of a fuel subsidy is a tax increase. It’s a badly implemented tax increase and it affects people who are ill able to afford it. But the goal is a progressive one, so long as you accept the notion that Ngozi Okonjo-Iweala and Jonathan are genuinely trying to build infrastructure and help the economy recover. If you don’t trust their motives, obviously, you won’t see this move as anything other than an opportunity for more corruption.
Do I think the subsidy removal was a good idea? I think it’s an admirable goal in the long run, but was badly implemented and should be rolled back and implemented gradually in closer consultation with a variety of non-government groups. Do I support the Occupy Nigeria movement? Yes, inasmuch as I think it’s great to see organized, peaceful, popular opposition to corruption in Nigeria. But I am deeply worried that the movement is focused on rolling back a change that, in the long run, is intended to correct some of the major problems of the Nigerian economy. Do I still think the movement is reactionary? Yes, in the literal sense that protesters are trying to roll back a change made by government, and more figuratively, because the movement questions the ability of the government to create positive change for the people. I hope the movement will become a broader anti-corruption movement, which I would see as less reactionary, more progressive and more in line with global Occupy movements.
Do I expect that this post will reduce the amount of angry email I’ve recently received? Probably not.  As several correspondents have pointed out, passions are understandably running very high around these issues. It’s hard to both critique and support a movement, but I think the issues here are complicated enough that it’s worth trying to do both simultaneously.
By Ethan Zuckerman, on January 9th, 2012
On January 1st, Nigerian President Goodluck Jonthan put into place a reform that he and key ministers have been discussing for years: he ended a 20-year old subsidy that kept Nigeria’s petrol prices the lowest on the continent. When Nigerians went back to work on Monday, the 2nd, they discovered that not only had petrol increased from $0.40 to $0.91 a litre, but the cost of private taxis, minibuses and other forms of transit had increased in price as well.
By Tuesday, the 3rd, protesters in Lagos were blocking access to petrol stations and shutting down stretches of motorways by building and burning barricades. On the 4th, protesters in Kano shut down petrol stations and threatened to burn down a newspaper they believed was supporting the removal of the subsidy. They occupied Silver Jubilee Square in the center of the city and attempted to maintain an encampment overnight, though police responded by firing tear gas and, allegedly, working with armed gangs to clear the square through violence and intimidation. The protests are led, in part, by two powerful trade unions, National Labour Congress and Trades Union Congress, who have promised to “occupy” Nigeria until the subsidies are restored. They plan a nationwide strike, beginning January 9th.
Michael Bociurkiw, writing in the Huffington Post, notes that it wasn’t obvious that petrol price increases would trigger such widespread protests. After all, there’s lots to protest in the country. Despite being sub-Saharan Africa’s largest producer of oil, most Nigerians are quite poor, the nation’s infrastructure is shambolic, and political corruption is widespread and well-documented. A rigged election in 2007 (and controversy over a mostly-clean election in 2011) led to some heated rhetoric, but little visible protest.
But petrol prices affect every aspect of life in Nigeria. The country has no (functioning) mass transit systems, which means urban dwellers are reliant on a complex system of minibuses, taxis and motorbikes, operated as private businesses. Those businesses will be sharply affected by the petrol price increase and pass the costs on to their customers. And because Nigeria’s electrical grid and power producing stations are notoriously unreliable, most businesses use generators to power their operations. Those generators have just become at least twice as expensive to operate, which is likely to increase prices at a wide variety of businesses. Complicating matters, Nigeria is least stable in the north, where tensions between Muslim and Christian groups have erupted into violence, and where the terrorist acts of Boko Haram, an extremist organization which wants all non-Islamic education and culture banned from Nigeria, have pushed President Goodluck Jonathan to declare a state of emergency in the North. Because the north is distant from the ports where Nigeria lands imports, goods are likely to increase sharply in price in the already troubled region.
Jonathan is not the first Nigerian leader to try to remove the fuel subsidy. Two of Nigeria’s military leaders – General Ibrahim Babangida and General Sani Abacha both tried to end the expensive program, and both were forced to back down due to popular opposition.
On the one hand, it’s exciting to see a Nigerian population that’s often overwhelmed into inaction taking to the streets. Stories about Muslim and Christian protesters finding agreement over shared prayer space – and images of Nigerian Christians encircling and protecting Muslim protesters at prayer in Kano – are genuinely encouraging. And there’s no doubt that making a living was a tough prospect for ordinary Nigerians with the subsidy in place and that a tough situation will get worse without it.
That said, ultimately, I think Nigeria needs to get rid of the subsidy. It’s incredibly expensive – depending on how you account for it, it cost between $8 billion and $16 billion in 2011. Nigeria’s tax authority collected just under $18 billion in 2010, and budgets for key sectors of the Nigerian economy are substantially smaller than the cost of the subsidy: defense spending is proposed at $6 billion, education at $2.5 billion, health at $1.8 billion. And while the subsidies make life easier for ordinary Nigerians, they’re a massive boon to the few companies the government allows to import refined petroleum… and contracts to import those petroleum products are a likely source of patronage revenues for corrupt government figures.
The IMF has pressured Nigeria to remove fuel subsidies for years, and Nigerian Finance Minister Ngozi Okonjo–Iweala, an internationally celebrated economist and anti-corruption reformer has been a powerful champion of reforms, offering long briefings to the President and other leaders on the importance of the reform effort. (Rumors have circulated that she threatened to resign if the subsidy wasn’t eliminated. She refuted those rumors in classic Nigerian fashion… on Twitter.)
Ideally, the Nigerian government would use the monies freed by eliminating the subsidy to address some of the country’s chronic problems: weak road and rail infrastructure, unreliable power, run-down refining facilities. It’s possible to imagine a Nigeria where imported petroleum products were less necessary, if the country had functioning rail systems, a reliable power grid minimizing the need for generators, and refineries that could produce diesel and gasoline locally. Given the history of corruption in the Nigerian government, it’s not hard to understand why many Nigerians are skeptical that the monies released from the subsidy will go anywhere other than in politicians’ pockets. As the BBC observes, many Nigerians feel like the fuel subsidy is the only government service they actually see.
If you want to understand opposition to removal of the subsidy, an oddly partisan view can be found on the Occupy Nigeria wikipedia page, which is quite far from NPOV, but a very interesting read nevertheless. Statements from Central Bank of Nigeria Governor Lamido Sanusi make the case for subsidy removal in a piece on Bloomberg News. His basic argument: Nigeria needs to borrow a lot of money to build infrastructure, and responsible lenders won’t give the country money as long as it keeps doing boneheaded stuff like subsidizing oil consumption instead of building infrastructure.
Even though I think Nigeria needs to end the subsidy, I would be surprised if Jonathan can sustain these changes in the face of a sustained strike. There’s tension already over the idea that this isn’t Jonathan’s “turn” at the presidency – there’s a popular notion that Nigeria’s presidency should rotate between northern Muslims and southern Christians. The previous president, the Muslim northerner Yar’Adua died in office, and Jonathan finished his term. Some believe that, by this rule of thumb, the 2011 president should have been a northerner… Some northern activists and some labor activists have made threats that they will make Nigeria “ungovernable” during a Jonathan administration. It’s not hard to see how protests over fuel could make Nigeria vastly harder to govern.
I’m interested to see Nigerian take on some of the rhetoric and tactics of the Occupy movement, including the occupation of a public square in Kano. I’ll be intrigued to see whether any of the global energy over Occupy goes to support the Nigerian protesters. The irony, I fear, is that while the global occupy movement seeks to equalize income disparities and fight government corruption, the Nigerian movement is currently pursuing radical and important reforms, and the Occupy Nigeria protesters are fighting against that change. Read one way, Occupy Nigeria is a conservative movement fighting to keep a dysfunctional status quo in place, which seems at odds with other branches of the movement.
By The Gold Report, on August 24th, 2011
 Thomson Reuters’ Commodity and Energy Specialist Christopher Henwood believes bailouts of too-big-to-fail companies and countries addicted to entitlements have cast an ominous shadow over the global economy. Nevertheless, he finds room for optimism as global economic turmoil puts downward pressure on energy prices, which should give the economy some breathing room. In this exclusive interview with The Energy Report, Chris shares a bit of his market knowledge and economic philosophy.
The Energy Report: Chris, would you give me a brief roundup of what you perceive to be the issues surrounding the brutal market turmoil of the last week of July and into August?
Christopher Henwood: What we’re seeing is a cascading of events. If we go back even a little bit further into earlier July, it seemed like the market was at least temporarily hopeful during that time. But once it became clear that politics were going to trump and the economic well-being of the country was going to take a backseat, that really put the markets on their heels. We see the consequence of the debt ceiling debate and the lack of clear direction that came out of that. I’m a market-based guy, and I’ve lived my entire career in the markets. I think that there’s probably no better indicator of what the real result of any sort of policy or political wrangling is than how the markets interpret them. Now, they’re not always 100% right, but more often than not people who are very smart in general move their money accordingly. This is, I think, no exception to that.
TER: What about the S&P downgrade on August 5?
CH: The S&P downgrade is just the latest cascading element to this kind of waterfall of negative economic news we’re looking at. So, what we’re seeing is that the market is coming to the realization that the economic outlook here in the United States and globally is still pretty grim and that the oil markets in particular are taking a beating due, in large part, to their increased sensitivity to macroeconomic factors that are increasingly playing a dominant role in that marketplace.
Conversely, gold is an asset that’s soaring as traders and investors are flocking to what is a solid asset. I won’t say gold is a safe haven. I’ll say it’s a solid asset and one that is being looked to increasingly as a counterweight to economic risk. So, I think we’re seeing the markets play out the skepticism of what we have going on policy-wise and politically.
TER: We’ve seen Brent and West Texas Intermediate (WTI) crude prices weaken through this turmoil. I’m wondering if this disproves what some people have been saying that energy is something of a currency like gold has been.
CH: It is being treated by some as a currency. You have a lot more players outside of the pure oil industry who are influencing the price of oil and playing it as an economic barometer. I think that’s why you’re seeing oil taking such a beating. If that’s how you’re going to trade crude, whether it’s WTI or Brent, it really makes no difference, you’re taking a huge risk because crude is not a currency like gold. Crude is consumable. Does it have value? Yes. But, if you start to cross that line and move into currency-type status for WTI or Brent, I think you’re running huge risks and it’s entirely inappropriate.
TER: Do higher energy prices mean a stronger economy?
CH: I actually think it’s the converse. I think that the high energy prices we have seen have been largely event-driven moves. The Arab Spring has been a huge driver of increasing energy prices where the market had to price-in the uncertainty and the fear factor that the supply side of the equation was going to become disrupted over time, or even in the short-run. Now we’ve seen Libyan oil taken off the market, but we’ve also seen Saudi Arabia step in and fill that void to a large degree.
What I think has been driving oil prices to their current highs is on the supply-side of the equation. We saw this in the big run-up in 2007–2008. As a trader I fought that and went short crude on a number of occasions because I just didn’t see the justification from a fundamental perspective for the price of oil during that period. What was always being cited in the marketplace was this increased demand coming out of China and India that was going to drive crude oil prices over $200/barrel (bbl.) in the very near-term. Three months later we were trading down in the $30s. If the demand-side of the equation is driving that, how could that possibly change in just three months?
Steadily rising energy prices being reflected in increased demand in good economic times is a better characteristic of a healthy economy.
TER: What does this recent downturn mean to energy investors?
CH: Well, I think the term investor is broadly overused. I think it’s important to distinguish between the energy investor and the energy trader. I think they’re two distinct people. I never consider myself an investor. I always consider myself a trader. I think traders and investors operate under completely different risk parameters and completely different mindsets. So, toward your point for investors, I think obviously as price goes down, margins decrease and profits decrease for the energy companies. But as a trader, downside offers sometimes the greater opportunity because of that mindset to the successful bear trader in a falling market. So, I think the investor will probably take some lumps. But savvy traders will benefit as a result.
TER: As a trader you think in terms of over-bought and over-sold probably.
CH: Sometimes, yes.
TER: What about a term that traders probably don’t use, value. Do you see value in certain areas of the energies today?
CH: Sure. I was primarily a spread trader when I traded. So, you do see value. I’m not an equities specialist, and I don’t really follow energy equities as part of my role, but I actually did a show at the end of January on energy master limited partnerships (MLPs) for a lot of midstream assets. I think that sector probably has a lot of opportunity as infrastructure is continually and acceleratingly being built out because of the increased shale plays we’re seeing in various parts of the country such as the Marcellus, the Bakken in North Dakota, the Eagle Ford in Texas. All these new shale finds and these new increased natural gas finds are requiring increased infrastructure to deliver and to store it and to figure out how to best capture and transport all this new discovery. With that comes new infrastructure that needs to be built. So, the MLPs probably provide a nice value at this point and one that will continue to grow.
TER: What would a good trade be today in terms of shorter term and longer term?
CH: Shorter term, I think gasoline prices have found some support right here on this $2.77-$2.75/gallon level. A break below the 200-day moving average in gasoline would be a nice short-term play. Conversely, if it can struggle back above the $2.85 area, that would be a great short-term buy. So, in either direction there’s good opportunity. Looking at it economically, I’m more biased to the downside. I think gasoline prices will resist for a little bit longer but eventually they’ll fall under the weight of the underlying crude.
On a longer-term basis, I have to go back to what I’ve been talking for the past year and a half, gold. It’s something that, as I mentioned earlier, is being used as a counterweight to manage virtually any manner of financial risk right now in the marketplace, whether it be currency risk, inflation risk, deflation risk or sovereign debt risk. If I have risk exposure to grains in Russia, I’m going to buy gold against that currency risk and against everything else. Mexico has bought a ton of gold. South Korea and Thailand just added a significant amount of gold to their reserves as a hedge against what is perceived as global risk. I would wait until it dropped down to like the $1,650/ounce (oz.) area again. I think the next range you’re going to see in gold is $1,725–$1,800/oz. before it makes the next big move up. It’ll be driven by some sort of economic problem more likely coming out of the EU than anything else. We have Italy and Spain now moving to the fore because of their risk profiles and their being on the verge of bankruptcy, and that’s going to drive people to buy more gold to hedge against it.
So, longer term I think gold is where you have to go. Shorter term, as an energy play, I like gasoline on the short side.
TER: You’ve managed a natural gas floor-trading operation in the past. Are you bullish on gas?
CH: I managed an operation for Goldman Sachs up until 1998. In 1998, I opened my own operation and I traded for myself from 1998 until mid-2009. I was on the floor the day natural gas trading opened for the first time in 1991. It was a real watershed moment on the floor in the energy business and for natural gas.
Right now we’re seeing natural gas in a very stable supply environment. With the development and proliferation of shale gas, the natural gas supply curve has been redefined all the way out. And every time the market starts to rally, we’ve seen producers selling into that rally in order to hedge that production. I think they’re becoming a little bit aggressive in terms of hedging their production given the flat projections for natural gas prices. But one thing I’ve learned as a trader is that as soon as everyone thinks something’s going one way, you can almost invariably bet your bottom dollar that something’s going to crop up that’s going to change the equation and redefine how that market is viewed across the board. Conventional wisdom quickly becomes a trap in this environment. So, I think longer term there’s tremendous upside here. I think what we’re seeing here now with prices at sub-$4/thousand cubic feet (Mcf) is probably a very good opportunity for some upward movement. I could easily see natural gas prices in the next several months run back up to almost $4.50/Mcf, maybe even $4.60/Mcf.
TER: Natural gas is half as polluting and one-fourth the cost of gasoline. What would it take to bring natural gas online for vehicles?
CH: I would welcome it. I think the first step would need to be a demonstrable demand. I’m not a fan of governments decreeing and mandating virtually anything. So, private industry would need to determine that there’s a real market and a real hunger for natural gas for vehicles among the population. We’ve already seen a number of fleets convert, which is great, and it’s easy to do where you have a fleet that returns to a specific base or operates within a certain range. You can build the infrastructure to fuel those vehicles, and that’s been very successful. I think the air quality in some of the major cities has improved as a result of the aggressive adoption of natural gas. I think it would be a great boom for natural gas domestically. It would be another supply piece and a great environmental benefit.
TER: Where are you seeing innovations in the energy industries?
CH: The greatest area of innovation the last three years has been in the development and the ongoing evolution in fracking technology. It has made huge strides. There were original forecasts that fracking of shale would only be economical if we were looking at $6/Mcf natural gas, and before that it was $8–$10/Mcf. That number has now come down and it’s been demonstrated that at $4/Mcf natural gas these fracking operations can still make money. And we’re seeing it now being exported to other countries around the world. Poland, for example, has identified a huge amount of shale resources. It has actually brought over some major U.S. companies to help them retrieve it. As that technology is brought to new areas, adapted and developed, it’s going to evolve. It’s the same thing in South America, where a number of countries are developing these programs.
Now the next level of innovation is going to have to be in the safety aspect for these drillings. The last thing this industry needs is a BP plc (NYSE:BP)-like disaster in the space that will really have much farther reaching consequences than the immediate damage to whatever water source that they’ve unfortunately harmed. So, the safety aspect—the drillings, the casings, what is in the fluid—all these things are getting much greater scrutiny. You’re going to see a lot of that applied in crude because nobody wants to see another disaster in any waters anywhere in the world. I believe in private industry’s ability to develop, to innovate and to be creative, which is what has defined energy in our country. And I think that’s going to continue.
TER: Efficiencies in fracking and safety must certainly translate into a play on services.
CH: Absolutely. Services are definitely going to be key, and they’re probably going to play a more important role as we go on. A lot of people weren’t even aware of the service aspect until the BP disaster when a number of the companies were involved in the process. It became the focal point in the discussion. And, I think that the services are definitely going to play an increasingly important role.
TER: When we first began our conversation today you told me you were pessimistic—”grim” was the word. Where is your pessimism, and is there any room for optimism here?
CH: My pessimism is mostly policy driven right now. The policy coming out of the United States and the handling of the European debt crisis highlight how money is being put into losing propositions. Cost cutting seems to be almost toxic to some of these countries that have enjoyed large entitlement programs and have an entitlement culture. I think that’s what we’re getting to in this country. So, my pessimism is driven by the fact that it seems that there are very few people willing to make very hard decisions economically in this country and across the globe.
As a self-supporting trader for many years, if you make a bad trade, you feel the pain. You’ve lost money, and you learn accordingly. What we’re seeing is companies that are too big to fail and banks that have taken outsized risks that are not feeling the pain. When they get into trouble, they get bailed out. And when countries get in trouble, they get bailed out. They’re not expected to curtail their activities to any extent, but they get bailed out. That’s what’s fueling my pessimism on the global macroeconomic scale and where I see it hurting energy prices.
Now I think there’s always cause for optimism. There are always people fighting for and injecting common sense economics into policy and into politics. I’m always hopeful that things will turn around and change. I’m always hopeful that there can be a new viewpoint, but I’m skeptical. So, again, politics and policy have made me skeptical and pessimistic but private industry and innovation give me optimism.
TER: Do you believe markets will correct these global policy errors?
CH: I believe they should. Unfortunately, what I think sometimes happens is that government and government agencies try to rein in the markets to correct a situation of their own causing. I think that’s an inherently flawed approach.
TER: We’re seeing lower energy prices as a result of the selloff in July and August. Is this going to be good for the economy?
CH: In the short to medium term they’re definitely going to be good—a net positive for the economy. You don’t ever want to see any price get depressed and then stay depressed for a long period of time because that’s indicative of some major economic problems. But if oil prices can establish a range, such as between $75/bbl. and $80/bbl., I think you’ll see a significant amount of relief in gasoline and fertilizer prices and petrochemicals and a lot of the consumer products in the value chain, including grains, milk, meat, cheese and bread. That would be a welcome relief.
TER: Thank you, Chris. I’ve enjoyed this very much.
CH: Thank you.
After coming within 43 votes of winning the Republican nomination for his local township committee, Commodity and Energy Specialist Christopher Henwood is evaluating his campaign to discover what worked and what didn’t work in much the same way as he might assess a move in energy prices in his day job at Thomson Reuters. Each day Chris’ work pits him squarely against the nuance and volatility of markets as he evaluates energy markets from both a technical and fundamental perspective. Chris has a law degree from Rutgers University School of Law–Newark in 2010, and was admitted to the New York State Bar in January 2011. He earned his undergraduate degree at Dickinson College.
By The Energy Report, on June 24th, 2011
 Schachter Asset Management Analyst and Investment Advisor Josef Schachter, who provides oil and gas research to Maison Placement Canada clients, is recommending a group of Canadian companies that are maintaining the delicate balance between oil, on which he is bearish, and natural gas, which he believes will soon enrich both producers and investors. In this exclusive interview with The Energy Report, Josef shares some value-priced names he feels are poised for big gains, along with natural gas’ rising price.
The Energy Report: You recently said that if gasoline prices continue to rise we should see West Texas Intermediate (WTI) oil in the low-$70s in the third through fourth quarters of 2011 (Q311–Q411). That represents an approximate 25% decline from current levels. Does that mean that the North American economy will be in trouble?
Josef Schachter: That’s the key. When you get $4/gal. gasoline at the pump, or $1.25–$1.35/liter in Canada, you start seeing demand destruction. If we look at the weekly Energy Information Administration (EIA) data for the week ending June 3, we can see that demand for finished motor gasoline was 9.16 million barrels (Mbbl.)—down 268,000 barrels on the week. And year-to-date (YTD), it’s down 0.3% to 8.956 Mbbl. per week. So, we’re already seeing demand destruction in the States from the handle of $4/gal. In Canada, we’re seeing the same thing; and Europe, of course, is showing much weaker demand. Japan also is showing much weaker demand, and we have the tightening of credit in China. Quantitative easing 2 (QE2) is now out of the way, so the stimulus is gone in the U.S.
There is probably a $30/bbl premium in the price of WTI oil, and 50% of that relates to Middle East issues with about 900,000 barrels per day (bpd) that have been cut off from Libya. If we see the Libya issue resolved in the next three to six months with Muammar Gaddafi going out, that production will come back on and will remove the pressure of the Arab Spring premium. The other 50% is the hedge and commodity funds.
If we see weakness in the economy, the whole commodity board will come down and we’ll see the U.S. dollar rally. We believe oil prices will lose that $15/bbl premium held by speculators in commodities and exchange traded funds (ETFs). The combination of the two could take $30 off the price of WTI oil, which is just around $93.40 today. Remember, when you have weak economic conditions, you trade below fair value. Recall Q109, while the fair value price might have been $50 for oil, we traded in the low-$30s.
TER: You use technical analysis quite extensively in your research reports, more than many sellside analysts. What are the charts telling you?
JS: My background is fundamental. I have an accounting background and am a Chartered Financial Analyst (CFA), so I come at it from a fundamental point of view. But I have had healthy respect and training from the technicians during my +30 years in the business, so I do look at the charts. We were at $112/bbl of WTI, now we’re at $98—and $94 is not that far away. If we break $94 on the charts, then it’s going down and looks like low-$70s. So, I think you must have respect for, and use all of, the disciplines. But I come at it from a supply/demand point of view; and, while the price of oil ran to $112 due to concerns about supply removal in the Middle East, that could be reversed if Libyan production comes back on because it’s a big producer.
TER: With $4/gal. gasoline, we’ve seen oil demand falling in the U.S. But what about natural gas, isn’t the reverse true? At the $4–$5 per-thousand-cubic-foot (Mcf) level, shouldn’t we be using a lot more gas? Isn’t that equivalent to about $1/gal. gasoline?
JS: Yes, we could see natural gas prices triple and still be the fuel of choice. The inventory picture has been high, but that’s coming down. Because of the Haynesville and the Marcellus and everything else, there was a perception that we have a natural-gas glut. We believe natural gas prices will go significantly above $5/Tcf this summer with big air-conditioning demand during the hurricane season. Over the winter of 2011–2012, we think NYMEX gas will trade north of $7/Mcf.
TER: Nat gas is quite a bit higher in Europe and Asia. Is there an arbitrage opportunity?
JS: There is currently no arbitrage capability, in terms of shipping natural gas from the United States to Europe or Asia. Remember, there are costs to do that. If prices in Japan are $10 or $12/Mcf and today we’re trading at $4.35/Mcf for NYMEX July, there’s an arbitrage there; but there are landed costs in building a facility. Cheniere Energy Partners L.P. (NYSE.A:CQP) and other companies are talking about this. It may cost $5/Mcf more to convert that into liquefied natural gas (LNG) and ship it to Japan due to distance, and it may not be enough of an arbitrage to attract the kind of capital needed.
TER: You’re bullish on natural gas and bearish on oil. Do you feel like gas prices will rise at the expense of oil, with investable dollars being redeployed into gas and gas stocks?
JS: That’s what we’ve been recommending to Maison’s institutional clients. If you look at some of the big-name oily stocks, they’ve already come down a bit from where they were. For instance, Suncor Energy Inc. (TSX.V:SU; NYSE:SU) was trading at $47 in February, and now it’s trading at $38. So, there’s been a bit of a haircut there. The big Canadian producer Imperial Oil Ltd. (TSX:IMO; NYSE.A:IMO) was $54 in February, when WTI oil was at $112/bbl, and now the stock is trading at $44.56.
So, we’ve already seen a correction in the oil names, and we think that will continue, especially if we see another $20–$30/bbl come off the price of oil. Gas stocks have done the reverse. At the beginning of the year, Encana Corp.(TSX:ECA; NYSE:ECA) was a $29 stock, and now it’s a $31 stock. That’s not a big move, but it’s gone up versus the oily names going down.
TER: Back in March, the Government of Quebec halted shale gas drilling until a safety evaluation could be completed. This could take up to two years and, with court challenges and environmentalists converging on this area as a battleground, it might take longer. What’s your feeling on this?
JS: There’s a pilot phase that will go on for the next two years. I believe six wells are forecast, two of which are being worked by a joint venture (JV) between Talisman Energy Inc. (TSX:TLM) and Questerre Energy Corp. (TSX:QEC). They’re going to be monitored by the government, which will have people onsite. What the companies will have to do is deal with local people and environmentalists, get approval from the farmers and explain what’s going on. They’re going to measure the methane before and after they start drilling since the companies want to prove that they’re not increasing the amount of methane from their activity. So, the industry has to prove its environmental case.
Quebec has a history of environmental legislation for mines; but in the end, it does approve the mines if they go through the environmental hurdles. I think the case will be the same here with natural gas. Companies might not be able to drill close to Montreal or Quebec City, but that’s the same issue with New York. However, in our minds, there will be activity; it’s just a question of when it happens. Remember also, there’s an election in Quebec in two years; and I believe the government wants to wait until after the election on this issue. So, it’s going to take that two-year window or more.
TER: What are the plays that you’re recommending for investors today?
JS: We like companies in Western Canada, where there are multizone liquids-rich natural gas areas. Oil is in some of the plays like the Cardium Formation or the Doe Creek. So, we like companies like Delphi Energy Corp. (TSX:DEE), Vero Energy Inc. (TSX:VRO) and Galleon Energy Inc. (TSX:GO). We also like some Canadian-domiciled companies dealing with international markets like Niko Resources Ltd. (TSX:NKO), which is in India, Indonesia, Kurdistan, Trinidad, Madagascar and a number of other places.
In the past, we’ve been fans of Sterling Resources Ltd. (TSX.V:SLG), which is in the North Sea, the Netherlands and offshore Romania; however, currently we are on the sidelines due to their ongoing difficulties in Romania. We like WesternZagros Resources Ltd. (TSX.V:WZR), which has just completed a very exciting well, Sarqala-1, in the Kurdistan region of Iraq and will spud another well, called Mil Qasim-1, in July. We like a company in Egypt, called Sea Dragon Energy Inc. (TSX.V:SDX). It has the same management team that was successful with Centurion Energy International Inc., which was acquired by Dana Gas PJSC (ADX:DANA) in 2007. A lot of Canadian-domiciled companies are taking the modern technologies around the world and are doing very well with that.
TER: You mentioned Delphi and WesternZagros, which are your top-two picks. One thing that jumps out at me is that neither of these companies has had spectacular returns. So, is this your contrarian gas play?
JS: Yes. DEE got hurt because of their gas bias, but they always had land with liquids-rich capability. For example, in 2009, Delphi was producing about 15% oil and 85% natural gas. This year, it’s going to do about 27% oil and liquids—and that number will go north of 30% by the end of the year. It’s going to generate over 50% of its revenue from oil and liquids; so cash flow will go up, and production volumes will go from 6,700 boe/d in Q109 to north of 9,500 boe/d by year-end. Delphi is doing the right things, in terms of the mix. It’s going after the liquids-rich capabilities on its land, but the company always has the dry gas sitting in its inventory; so, when gas prices go back to $7–$8/Mcf, Delphi can move those assets. In the meantime, it can increase its net asset value (NAV) and cash flow by going after the liquids. It’s similar to the gold business—when prices are low, you go after your best veins; and when prices are high, you go after your bad veins.
TER: Your target price on Delphi is $4, which implies a 60%–65% return, but I noticed the company’s NAV is $3.78. It sounds like a very conservative target price.
JS: Yes. And that’s because we’re looking for Delphi to trade at a ratio of its cash flows, and we’re looking at it annualizing about $0.60 in cash flow by Q411. The cash flow multiple should be no greater than the proven reserve life index (RLI); and, if you have seven-and-one-half years of proven reserves, you also have probable and possible reserves, tax pools and land value to protect the value for shareholders.
So, we take an approach in which a company’s maximum cash flow multiple should be equal to its proven RLI. However, we didn’t even use that in this case. So, you could argue that we may have an even higher target, but our view is to use a reasonable target that we can see makes sense. Then, if it gets to that target and the company is doing better than expected, we can always review it again and come up with a new target.
TER: Your other top pick was WesternZagros, on which you have a target price of $1.50. That represents a roughly 175% return. What are the risks here?
JS: Well, this is in Kurdistan and now the Baghdad and Kurdistan governments are getting their collective act together, in terms of allowing money to be paid to the players in the area, which makes a lot of sense to us. WesternZagros has a lot of cash on the balance sheet, so it has enough for the next phase of drilling. What we like about the company is that the Sarqala-1 well has tested at 9,444 bpd light, +40-degree oil. So, it may have a massive oil field there. WesternZagros’ biggest shareholders are George Soros and John Paulson. Thus, we have big, international investors that believe this company has a big land spread, very attractive base and has proven that there is light oil on it.
TER: You went to the SEPAC Oil & Gas Investor Showcase in Calgary at the end of May. What was the atmosphere there? What did you hear?
JS: If a company is in natural gas only, it’s not generating a lot of cash flow and not making any money. And if it has any debt, it has problems. So, almost every company was trying to draw attention to itself saying, “Let’s find the liquids-rich or oily stuff and use the new technologies to harvest our lands.” Nearly every company was carrying the flag of “liquids-oily” to draw attention.
From my perspective, they’re doing what they have to do in these tough times. But it is getting easier. The basin in Western Canada is gassier, with small pools where the new technologies will help with the oil recovery. But in the long run, we’re going to need a much higher natural gas price for the industry to be successful—not only to get a cash flow but also to start generating free cash flow and net income. That’s when people can see that it’s not just trading dollars in the industry, but also making real money.
TER: Can the small guys survive?
JS: Again, they’ve got to go get land where the big boys aren’t pushing up prices exorbitantly. That means they will have to go into areas that are not ‘hot.’ Everybody loves the Duvernay or the Cardium, but land prices are rising above $5,000/acre. A little company can’t do that today. So, it must have had the land in inventory that it holds or has farmed in from a big boy. But the key thing is that the company will have to be away from where the big boys are located. Companies like Delphi, Galleon and Vero were buying low-priced land in these hot areas before the big boys come in—and where the little guys now just can’t compete.
TER: That makes sense. Josef, do you have any further thoughts that you’d like to leave with our readers?
JS: Just that we’re cautious right now with QE2 over and with all the country risks in Europe. I think almost everybody agrees that Greece has problems that cannot be fixed. At some point, it will have to face the moment and resolve these issues with haircuts everywhere, which is deflationary. So, if that’s the case, and we have a weaker U.S. economy along with Europe, China and Japan, we think there’s a chance for a severe correction. So, we’re not saying investors should go out and buy things right away, but rather build up their buy lists.
Sometime this fall, the market could have a 10%, or even 30%, correction. I’m not sure which one it will be; it depends upon how serious the problems in Europe become. And, of course, Americans are facing their debt issues. So, if we do see a severe 30% correction, some stocks could go down much more than that; so, you want to be ready to be a buyer. We’re saying if you have oily names right now, sell them and lighten up your exposure. If you have to be exposed to energy, be in the natural gas-focused names, but sit there with some decent cash reserves underweighting the sector and be ready to be a buyer sometime this fall when the pain is over.
TER: Great advice. Thank you, Josef.
JS: Thank you.
After a successful investment stewardship at Richardson Greenshields of Canada Limited (RGCL), and the Royal Bank purchase of that firm, Josef set up his own investment advisory business, Schachter Asset Management Inc. (SAMI) in late 1996. Mr. Schachter has nearly 40 years of experience in the Canadian investment management industry. He was the market strategist and director at Richardson Greenshields, as well as a member of its Investment Policy Committee. He holds the Chartered Financial Analyst designation and is a past chairman of the Canadian Council of Financial Analysts.
Currently, Mr. Schachter and his research team provide oil and gas research coverage to the institutional clients of Maison Placements Canada and presents to, and consults, various industry companies and organizations. Mr. Schachter is a frequent guest on BNN and is regularly quoted in such news and financial publications as the Globe and Mail, National Post and Business Edge—the latter of which awarded Mr. Schachter its “Stock Picker of the Year” award in 2003, 2004 and 2007. He is also a regular on various radio shows including Michael Campbell’s “Money Talks.”
By The Energy Report, on February 25th, 2011
 West Texas Intermediate (WTI) oil is trading at a significant discount to Brent crude, the latter of which is used to price two-thirds of globally traded crude oil. WTI, on the other hand, is the commodity underlying Nymex futures contracts and has, more often than not, traded slightly above Brent. Although the current Brent/WTI divergence is widening, disruptions in equilibrium don’t tend to last. “True energy demand,” says Raymond James Director of Energy Research Marshall Adkins, “will ultimately bring WTI in line with global oil prices.” Marshall reveals how equity investors can profit from oil service providers in this exclusive interview with The Energy Report.
The Energy Report: At what price per barrel of oil does the economy start to suffer? I guess that’s a trickle down to the gasoline question. Consumers seem comfortable with gasoline prices close to the $3/gallon range right now; but what’s the breaking point? If you could address both the oil and gasoline, that would be great.
Marshall Adkins: There’s no set number. It’s a graduated scale that becomes more painful, and then demand suffers more as prices rise. But many other variables also go into that calculation; when new all-time highs are set, it seems more painful than revisiting old highs. In 2008, for example, we saw oil prices ramp-up to $145/barrel. As the price rose from $100–$145/bbl., we saw meaningful destruction in U.S. demand for oil and oil products. But because we’ve already been there, I wouldn’t expect to see as great a demand reduction at the same price levels we saw in 2008. So, it’s both a function of absolute price and how long it stays at that price. But, summarizing that into a more succinct answer, I would say that as we move up into the low $100s, we’ll start seeing it cramp U.S. consumption. I’m focusing just on the U.S. here because, given the devaluation of the U.S. dollar and numerous other currencies, many countries don’t actually see the same oil price increases we’re seeing here; so, you get a whole different pricing dynamic there.
Switching to gasoline, what I find interesting is that if we go back to ‘08 when gasoline prices surged to the $3/gallon range, we saw CNN and all the news networks interviewing disgruntled consumers at the gas pump who were eager to blame evil oil companies for the high prices. It was in the news every day, and people were acutely aware of gas surging to $3/gallon and the pain it inflicted upon the economy. Here we are above $3/gallon again—at roughly $3.15 depending on where you are—and nobody’s interviewing people at the gas pump. So, it just doesn’t seem as painful a situation now that we’re again pushing toward $100/bbl. crude right now.
TER: Once you’ve tested those levels, you don’t have the shock value anymore.
MA: Yes. The shock value is certainly lower, no doubt. That also brings up another important point. When we quote oil prices today, we’re quoting West Texas Intermediate, which is priced out of the Cushing hub in central Oklahoma. Currently, there’s a meaningful bottleneck of supply in the middle of North America. We have a lot of increased oil production out of Canada, the Bakken and the Permian Basin that all congregate in Cushing, Oklahoma; and at the current time, we don’t possess the ability to really move that oil out.
So, Cushing and WTI are trading at a huge discount to all other oil prices around the world. In fact, there was an unprecedented $17 discount between WTI and Brent at the February 17 close. So, you’ve got to be careful about what price we refer to today because there’s a massive disconnect from what we normally look at. Now, gasoline prices are going to be more closely related to the global price of crude, which is well over $100/bbl. right now in almost every area, and that’s driving the roughly $3.15/gallon gasoline number. It doesn’t seem to be a major impediment, yet; but in ‘08 as we went through these same levels, demand growth was already beginning to slow meaningfully due to pricing.
TER: What about arbitrage opportunities between WTI and, say, Brent? Are there opportunities like that for investors?
MA: No, because the problem is structural in nature. The average investor can’t take advantage of structural imbalance. Now, the companies involved with transporting oil will look at that price differential and ultimately react by building more takeaway capacity. However, this is very similar to the disconnect that occurred in Rocky Mountain natural gas prices 5–10 years ago where prices always traded at a huge discount in the Rockies versus Henry Hub because there wasn’t takeaway capacity. Once we built the Rocky Mountain Express Pipeline, we saw equilibration between the two. So, once you build the pipeline takeaway capacity, that arbitrage (arb) opportunity will disappear.
TER: Do rising oil prices inflict as much pain on China’s economy as they do on North American and other economies?
MA: Sure, energy is essentially a tax on the economy whether it’s U.S. or Chinese. Obviously, to the extent that China allows the yuan to appreciate versus the USD, it doesn’t see the same pressure we do in percentage terms. But, yes, it’s going to be a drag on China’s economy as prices go higher. The difference between the U.S. and China right now is that it’s seeing meaningful inflation across the board, a lot of which is driven by high energy prices.
TER: At what level do we see the price of energy putting enough pressure on the economic structure to force us into alternative sources of energy?
MA: That’s a really good question, and that’s really the most important issue. At what price can we develop solar, wind and other sources of energy to offset the high prices? As a transportation fuel, there aren’t a lot of short-term alternatives. Clearly, we’re making a push toward electric vehicles (EVs) but at the end of the day those are still a long way off from being practical substitutes for gasoline- or diesel-powered cars and trucks.
So, what are the other alternatives? Solar, at $150/bbl. oil, certainly works; wind, maybe not quite as much. But to the extent that you start to move up to the mid-$100 level, people will start to find alternatives. EVs will become more attractive, and people can afford to buy more expensive EVs and more expensive battery systems, etc. It’s the same with solar and, to a lesser degree, wind. Yes, there will be alternatives that become more attractive and that’s the way a free market economy should work. Prices will drive the rationality [of moving to alternative energy sources] and not political edicts that always seem to fail. So, there will be a solution to high oil prices—and that solution is high oil prices. It’ll crimp short-term demand and it will allow alternative sources of energy to be exploited and brought to market on a long-term basis.
TER: Did you attend the North American Prospects Expo this year?
MA: Yes. It has obviously turned into a huge industry event. The exploration and production (E&P) business in the U.S. has been transformed on an unprecedented level over the last five years. What do I mean by that? On the natural gas side, well productivities are up a staggering amount. These horizontal gas wells are 5x–10x more productive per well than they were just five years ago. We’re starting to see the same in U.S. oil formations where we’re transforming our ability to reverse what has been a 30-year decline in U.S. onshore oil production. The application of horizontal and hydraulic-fracturing (fracking) technology has enabled us to access reserves that previously weren’t accessible on an economic basis. The NAPE is just one offshoot of this larger phenomenon of a very healthy E&P business in the U.S., particularly on the oil side. That should continue unless the government creates impediments to it.
TER: Marshall, what’s the outlook for capital spending in 2011?
MA: We think it’ll be very robust on the oil side, up nicely. On the gas side, we think it’ll be down just because we brought on so much gas that gas prices are going to be relatively depressed. So, it’ll crimp the price flows on that side but oil is going to be very healthy. And we’re looking for a modest increase in capex over the next year in the high single-digit range.
TER: Regarding gas, do you expect producers to quit drilling and explorers to quit exploring when leases begin to expire?
MA: First of all, the amount of drilling associated with leasehold activities is likely overstated by a lot of people. It’s a piece—but not a very big piece—of the puzzle. What has surprised us over the last four months is the amount of drilling in dry gas areas like the Haynesville Shale, which we assumed would fall off very sharply. We’re actually seeing an increase in the percentage of wells being drilled not to hold production, but rather being built on existing acreages already held by production despite weak gas prices. This is due to a combination of factors, including high liquids content in “oily” gas plays, which makes sub-$4 gas irrelevant, the fact that some gas plays work at $4 gas and the increase in joint venture (JV) agreements and pre-funded drilling programs. So, yes, the rig count will be sticky on the way down, despite relatively low gas prices. We don’t expect a collapse in the gas rig count or gas-drilling activity.
TER: What about oilfield-service pricing? Is this a service provider’s market?
MA: We’re seeing pricing improve in anything related to horizontal drilling. Certainly, pricing has been very robust in pressure pumping and high-end land rigs are seeing solid price improvements. So, it’s a relatively healthy environment, but not across the board—it’s really more related to products and services associated with horizontal drilling activity and production.
TER: What did you think of President Obama’s State of the Union address in January? He made some comments about energy independence.
MA: Well, we’ve obviously been targeting energy independence since the Carter days and yet we’ve done nothing but become more dependent on other sources. The reality is that it’s very difficult for the government to mandate a change; change has to be backed up by financially based market incentives. Pure and simple, the energy consumer and/or producer will react when prices go up. So, leave it to the free market and this thing will solve itself over time. I think it’s going to be very difficult for the government to mandate that we switch to a certain type of EV. It has never worked in the past. It won’t work this time and it doesn’t help to demonize the oil and gas companies, as that’s where a lot of employment is coming from in a very low-employment environment.
Oil and gas are among the true natural assets we have here, and I thought Obama demonized the domestic energy business. In his State of the Union address, he noted that all of us could agree oil companies are making too much money. Since when does the president decide who makes too much money? Can we all agree that Apple makes too much money because it’s a virtual monopoly? Maybe, maybe not—but I assure you, the margins and profits in the energy business are meaningfully lower than that of Apple or Microsoft, which the administration chooses not to demonize, yet. So, I think the goal is admirable but it has to be backed up by the market wanting and needing it. When that happens, change will occur and the government won’t be able to mandate it successfully. It’ll try because oftentimes the government thinks it’s more powerful than it is; the market is the ultimate arbiter.
TER: Are there some companies that look particularly good to you now? Oilfield service, E&P, vertically integrated or whatever you’d like to discuss.
MA: I would like to stay focused on the area I cover, which is oil services. If I had to mention just one name, it would be National Oilwell Varco, Inc. (NYSE:NOV)—the world’s dominant player in building energy infrastructure for drilling and exploration. NOV provides the equipment rigs used to drill around the world. Currently, the energy business is going through a massive reinvestment phase, replacing 20- to 30-year-old rigs with new technology and capabilities—and NOV is the go-to name for most people that want to build a new rig or new rig equipment. I think we’re in the early stages of infrastructure buildout right now, and National Oilwell Varco will be the beneficiary of that buildout for many years to come. So, if I had to steer people to one, and only one, name it would probably be NOV.
TER: Are there any others you’d like to mention?
MA: We like the oil service and diversified companies—names like Halliburton Co. (NYSE:HAL), Weatherford International Ltd. (NYSE:WFT), Schlumberger Ltd. (NYSE:SLB) and Baker Hughes Inc. (NYSE:BHI). All these companies have excellent international exposure, which we see benefiting from the high oil prices around the world. We think that’s a longer-term sustainable trend. These companies are not expensive when compared to the broader market, and they should grow earnings meaningfully higher than the broader market over the next five years. So, after NOV would be the diversified oil service companies.
TER: Last question—we’ve seen some increase in merger and acquisition (M&A) activity in the energy sector. Do you expect this to pick up?
MA: I don’t know if it’ll pick up because it’s been awfully active recently, at least in the offshore drilling sector, with Ensco PLC (NYSE:ESV) buying Pride International Inc. (NYSE:PDE) and Hercules Offshore Inc.’s (NASDAQ:HERO) acquisition of Seahawk Drilling in recent weeks. Do we expect that to continue? Yes. I think we’re going to see a lot of M&A and a lot of companies raising capital to facilitate future growth.
TER: Thank you, Marshall; I’ve enjoyed meeting you.
MA: Well, thank you for the time.
Marshall Adkins focuses on oilfield services and products, in addition to leading the Raymond James energy research team. He and his group have won a number of honors for stock-picking abilities over the past 15 years and the group is also well known for its deep insight into oil and gas fundamentals. Prior to joining Raymond James in 1995, he spent 10 years in the oilfield services industry as a project manager, corporate financial analyst, sales manager and engineer. Marshall holds a B.S. degree in petroleum engineering and an MBA from the University of Texas at Austin.
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