A couple of developments could be responsible for the company’s casual attitude to the loss of the Pan American sale. First, its two partners in the Macondo well, Anadarko Petroleum Corp. (NYSE: APC) and Japan’s MOEX, have kicked in $4 billion and $1 billion, respectively, to the reserve fund BP has set up to pay claims resulting for the explosion that killed 11 workers and dumped millions of barrels of oil into the Gulf of Mexico. Anadarko also relinquished its 25% stake in the well.

BP still has claims outstanding against Transocean Ltd. (NYSE: RIG) and Halliburton Co. (NYSE: HAL), demanding a minimum of $40 billion from Transocean and an unspecified amount from Halliburton. BP is also seeking compensation from Cameron International Corp. (NYSE: CAM), makers of the blowout preventer that failed.

A recent federal investigation may have strengthened BP’s position in relation to both these outstanding lawsuits, so much so that Anadarko was willing to pay now in exchange for getting immunity from further payments. BP has got to be counting on at least some payments coming from Transocean and Halliburton to help ease the total $42 billion the company has so far committed to the clean-up and claims funds.

BP has so far gotten off pretty lightly in claims payments, having paid out just over $7 billion of the $20 billion it put into the claims fund back in 2010. That could lead the company to believe that it may get off the hook for as little as half the full amount. Coupled with the encouraging (for BP) report from the latest federal investigation, the $42 billion commitment may cost BP far less.

So why increase asset sales? Here’s what BP said in a statement over the weekend: “BP’s current divestment programme is focused on the sale of non-strategic assets and not driven by a requirement to raise cash. As such, BP does not currently plan to divest additional assets to offset proceeds which would have been received from the [Pan American] transaction.”

The company thinks it sees an upper limit to its liability for the Macondo disaster that is smaller than it originally planned for and believes that now is the time to return to more normal operations. The company has received permission for new drilling in the Gulf and is restarting its other operations there as well. BP also has $18 billion in cash that is not committed to the Gulf clean-up and claims funds.

BP may be right about its chances, but taking its fights with Transocean and Halliburton to court is at least as risky for BP as it is for the others. If BP is found to have been grossly negligent, its fines could jump three-fold. Even if it is ajudged innocent of gross negligence, the company remains on the hook for nearly $16 billion.

BP’s charm offensive dealing with the effects of the spill has had its intended effect on US regulators. The company’s production restart and new drilling permit are the evidence of that. The second part of its charm offensive is now going to be directed at investors through re-instated dividends and asset sales that will boost profits.

The Pan American sale could still happen, but not because BP needs the cash. If the deal happens now, it will accrue to the benefit of shareholders. That’s a pretty slick transition. And it only took BP a year to make it happen. Look for Bob Dudley to get a nice bonus in his next pay review.

Paul Ausick

Agrium, Inc. (NYSE: AGU) named Bull of the Day at Zacks.
Agnico-Eagle Mines Ltd. (NYSE: AEM) Raised to Outperform at Credit Suisse.
American Express Company (NYSE: AXP) Cut to Hold at Jefferies.
AMR Corporation (NYSE: AMR) Raised to Outperform at Rodman & Renshaw.
BHP Billiton (NYSE: BHP) Raised to Outperform at Credit Suisse.
Capital One Financial Corp. (NYSE: COF) Cut to Hold at Jefferies.
Chipotle Mexican Grill Inc. (NYSE: CMG) Started as Outperform with $370 target at Credit Suisse.
China Petroleum & Chemical Corp. (NYSE: SNP) Started as Neutral at Credit Suisse.
CNOOC Ltd. (NYSE: CEO) Started as Outperform at Credit Suisse.
The Jones Group Inc. (NYSE: JNY) Value stock of the day at Zacks.
LM Ericsson Telephone Co. (NASDAQ: ERIC) Raised to Buy at Citigroup.
PetroChina Co. Ltd. (NYSE: PTR) Started as Neutral at Credit Suisse.
Riverbed Technology, Inc. (NASDAQ: RVBD) Cut to Equal-Weight at Barclays.
SodaStream International Ltd. (NASDAQ: SODA) Raised to Buy at Deutsche Bank.
Sonoco Products Co. (NYSE: SON) Cut to Hold at Argus.
Stillwater Mining Company (NYSE: SWC) Removed from Focus List ar Credit Suisse.
W.R. Berkley Corp. (NYSE: WRB) named Bear of the Day at Zacks.

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 JON C. OGG

China, in particular, stirs a lot of interest because its technically recoverable shale gas deposits are estimated to be about 1,275 trillion cubic feet (Tcf). That’s about 50% more than the estimated 862 Tcf of technically recoverable shale gas in the US. And US companies like Baker Hughes Inc. (NYSE: BHI), Halliburton Co. (NYSE: HAL), Schlumberger Ltd. (NYSE: SLB), and National Oilwell Varco, Inc. (NYSE: NOV) with both deep pockets and experience in shale gas exploration and production could get a crack at developing China’s vast shale gas deposits. US producers like Chesapeake Energy Corp. (NYSE: CHK) and Devon Energy Corp. (NYSE: DVN) are less likely partners, but such a deal is not impossible.

To date, no development of China’s shale gas resources has begun. The government is mulling plans both to offer subsidies to domestic E&P companies and to permit foreign company participation in extracting the gas. China’s approach to allowing its domestic companies to develop shale gas is something of a balance between granting licenses only to big players like Sinopec, formally China Petroleum & Chemical Corp. (NYSE: SNP), Cnooc Ltd. (NYSE: CEO), and China National Petroleum Co.’s Petrochina Ltd. (NYSE: PTR) and permitting smaller players to get into the hunt.

The government wants to avoid the development of hundreds of independent companies, as happened with the coal mining industry. The unlicensed coal mines were extraordinarily lethal to miners and riddled with corruption. The central government has fought hard to bring the miners under control in the last two years or so.

The Chinese have no experience or technology to develop their shale gas resources. Royal Dutch Shell plc (NYSE: RDS-A) has already been signed on by one of the two small Chinese companies to win a lease and the company has also formed a partnership with Petrochina.  Chevron Corp. (NYSE: CVX) and BP plc (NYSE: BP) are in discussions with Sinopec to form a partnership as well. Cnooc paid Chesapeake more than $2 billion for rights to participate in developing some Eagle Ford shale leases.

As China’s government continues to explore its options regarding shale gas development, one thing does seem clear. The government is leaning towards a less restrictive approach than it has taken with other hydrocarbon development. The country is also likely to adopt some sort of subsidy policy that would encourage shale gas development. That would be enough to really get foreign companies lined up to go to work.

Paul Ausick

With American companies moving operations to China and international companies preferring the cheaper Chinese-made goods, the Economic Policy Institute found the U.S. lost 2.8 million jobs in the past decade. While all states have been affected, 24/7 Wall St. looked at the ten states that lost the most jobs to China.

Over the past decade, American imports from China have grown much more than what the country has been able to export into it, causing a massive loss of jobs. “Between 2001 and 2010, the trade deficit with China eliminated or displaced 2.8 million jobs,” the EPI noted in a paper released this month. As would be expected, 1.9 million of those jobs, or nearly 70%, were in manufacturing, the EPI found. The greatest damage occurred in the computer and electronic parts industry, as well as several finished manufactured goods sectors such as apparel and motor vehicles and parts.

China was able to achieve manufacturing cost advantage by moving millions of laborers from rural areas to cities with newly built facilities. Even American companies such as Walmart (NYSE: WMT) cannot afford to buy goods made in the U.S. when they are made so much more efficiently — and of course, so much cheaper — abroad.

Cheap labor may well be the main reason for China’s manufacturing advantage, but currency manipulation could be another, the EPI states. While the cost of labor affected China’s exports, the currency manipulation, which happened despite China joining the World Trade Organization in 2001, distorted its imports. American policymakers have long assumed that as China’s huge middle class grew, U.S. companies’ sales to these new consumers would also grow. But it did not work out that way, the EPI reports: “as a result of China’s currency manipulation and other trade distorting practices, including extensive subsidies, legal and illegal barriers to imports, dumping and suppression of wages and labor rights, the envisioned flow of U.S. exports to China did not occur.” Added to its labor cost advantage, this currency manipulation has been devastating to many U.S. companies.

24/7 Wall St. has looked at the ten states that have had the greatest number of jobs displaced or lost to China in the past decade based on the EPI report: Growing U.S. Trade Deficit with China Cost 2.8 Million Jobs Between 2001 and 2010. We also included the number of jobs lost through imports and gained through exports due to trade with China.

The EPI research does not make an exact forecast of how many more American jobs may be lost due to China’s manufacturing cost advantages and questionable trade policies. And the damage, of course, did not suddenly end in 2010, and is almost certainly ongoing. In fact, nearly half a million jobs were lost or displaced from 2008 to 2010 alone. The joblessness problem in the U.S. is so severe that any added erosion of employment opportunities from forces outside the country will make a recovery of the American economy all the more difficult.

These are the ten states losing the most jobs to China.

The US Energy Information Administration estimates the China sits on top of about 1,275 trillion cubic feet of shale gas, which is about 50% more than the agency’s estimate for US deposits. The Chinese companies are looking for partners to develop the shale gas resources, and the expertise is in the foreign major integrated oil companies, the oil field services companies, and the drillers.

Royal Dutch Shell plc (NYSE: RDS-A) has signed a deal with a small Chinese gas company to explore, making it the first of the major integrated companies to get a toehold in exploration for shale gas in China. PetroChina has also formed a partnership with Shell and both Chevron Corp. (NYSE: CVX) and BP plc (NYSE: BP) are reportedly talking with Sinopec to create exploration joint ventures, and Norway’s Statoil ASA (NYSE: STO) is also seeking shale-gas assets in China.

The start of a boom in exploration for shale gas inevitably begins with the majors because that is their basic business. But it’s difficult to imagine that these companies will get any sort of participatory deal in the production of the gas. More likely is a fee-based deal where the companies are paid their expenses plus a defined amount for every cubic foot produced.

More likely to see bigger profits are the services companies like Halliburton Co. (NYSE: HAL) and Schlumberger Ltd. (NYSE: SLB) and the drillers like Baker Hughes Inc. (NYSE: BHI) and National Oilwell Varco, Inc. (NYSE: NOV) with extensive onshore experience. It is unlikely that US producers like Devon Energy Corp. (NYSE: DEV) or Chesapeake Energy Corp. (NYSE: CHK) will derive much benefit from the Chinese push into shale gas development, but if one of the producers does some creative thinking it’s possible.

The good news is likely to last a relatively short time however. Sinopec’s chairman has said that he expects unconventional gas like shale gas and coal-bed methane to drive growth for the company in the future. And getting Sinopec and the others to the point where they are self-sufficient could take up to four years.

And the Chinese certainly intend only to rent the technology they need now and to demand a transfer of technology from its partners so that the partners can be cut loose eventually. This pattern has been played out in solar PV development, wind turbine development, and virtually every sort of information technology development in China.

It’s still very early days in the Chinese shale gas industry. But the broad outline is well-established and well-rehearsed. There’s no reason to expect shale gas development to follow a different script.

Paul Ausick

And there’s plenty of work for the likes of Nalco Holding Co. (NYSE: NLC),Clean Harbors, Inc. (NYSE: CLH), and Newpark Resources, Inc. (NYSE: NR). A ruptured crude oil pipeline belonging to Exxon Mobil Corp. (NYSE: XOM) dumped an estimated 1,000 barrels of oil into the Yellowstone River about 10 miles upstream of Billings, Montana. In China’s Bohai Bay, a well operated by ConocoPhillips Corp. (NYSE: COP) and China’s Cnooc Ltd. (NYSE: CEO) has leaked about 1,500 barrels of oil, and a well in the North Sea operated by Royal Dutch Shell plc (NYSE: RDS-A) has leaked about 1,300 barrels into the waters off the coast of Scotland.

The leaks — and there are plenty of others — have led to a slowdown in offshore drilling and, in the US, more opposition to a plan by Transcanada Corp. (NYSE: TRP) to build the 1,700-mile Keystone XL pipeline to carry crude from the oil sands region of western Alberta to the Gulf Coast. And the new regulatory regime is not just taking hold in the US either.

The five countries surrounding the Caspian Sea and its 30 billion barrels of oil have negotiated an agreement to establish an emergency response mechanism for potential oil spills. Greenland has just published its spill response plan even though test wells off the country’s west coast have so far shown no commercial quantities of oil or gas.

The plan with the largest effect appears to come from the United Nations Environment Programme, related to pollution of drinking water in Nigeria’s Ogoniland. The UN conducted a 14-month study of the effects of 50 years of oil drilling and transportation in the region and concluded that the situation is much worse than originally believed. The clean-up effort is expected to surpass that which followed the Gulf of Mexico spill last year with officials estimating recovery could take 25-30 years.

Tighter regulations and the development by governments of detailed emergency response plans means that companies like Nalco and Clean Harbors have an opportunity to shop their expertise more widely around the world. The work would not be just clean-up, but could also involve specialized consulting.

When Clean Harbors announced its second quarter results earlier this month, the company also indicated it is shopping around for acquisitions. Nalco has also reported second quarter earnings and raised its guidance for both EPS and revenues for the full fiscal year. Nalco has also agreed to a merger with Ecolab Inc. (NYSE: ECL) that is expected to close in the fourth quarter.

Clean Harbors posted an all-time high earlier this month and the stock closed yesterday at $51.57, in a 52-week range of $29.35-$59.35. Clean Harbor shares are up nearly 70% in the past 12 months. Nalco’s shares jumped in mid-July on the merger agreement with Ecolab. Shares closed yesterday at $33.48, in a 52-week range of $21.98-$37.34.

Paul Ausick

This is the largest deal in the oil sands since last year’s acquisition by China Petroleum & Chemical Corp. (NYSE: SNP), or Sinopec, of the oil sands assets of ConocoPhillips Corp. (NYSE: COP) for $4.65 billion. Cnooc expects the deal to close by the end of this year, assuming regulatory approvals and an acceptance by two-thirds of Opti’s creditors. So far about 55% of noteholders have approved the deal.

And why not? Opti’s shares are trading for $0.12 on the Toronto exchange and its market cap is about $32.4 million. Cnooc is paying $34 million to shareholders, a premium of just 5.5%. Considering that Opti’s shares have lost 93% of their value in the past 12 months and that the company had filed for bankruptcy just a week ago, the company’s shareholders are probably glad to get anything at all.

Cnooc already owns a nearly 17% stake in oil sands developer MEG Energy Ltd. which it bought more than six years ago. When completed, this project could produce up to 500,000 barrels/day of crude.

Sinopec owns the 9% stake in the Syncrude project that it bought from Conoco, as well as a 50% stake in the stalled Northern Lights project that it shares with Total SA. Another big Chinese oil company, PetroChina Co. Ltd. (NYSE: PTR), owns a 60% stake in two properties held by Athabasca Oil Sands Corp.

China’s large oil companies have invested heavily in projects based in Africa, South America, and North America, including two deals between Cnooc and Chesapeake Energy Corp. (NYSE: CHK) which give Cnooc a stake in two large shale gas projects in the US.

There are sure to be more such deals as the global supply of oil slides and the costs of developing difficult and expensive projects such as those in the Canadian oil sands get even more expensive. China’s investments in these projects represent both a hedge against falling supply and a hedge against a weak dollar.

Paul Ausick

Aluminum Corporation of China, or Chinalco, is a holding company and the controlling shareholder in Aluminum Corporation of China Ltd. (NYSE: ACH), or Chalco. Along with China National Offshore Oil Corp. and China Unicom, which respectively control Cnooc Ltd. (NYSE: CEO) and China Unicom (Hong Kong) Ltd. (NYSE: CHU), Chalco has been named as one of 17 state-owned enterprises to have irregularities and other violations in their financial statements to the Chinese government in fiscal year 2009. China’s Xinhua news agency reports that by March of this year 735 irregularities had been corrected and “65 people responsible for the irregularities or violations have been punished.”

The accounting irregularities for the 17 companies included overstatement of assets, profits, and liabilities by $292.4 million, $405 million, and $528 million, respectively. Undercounted assets totaled $446 million, while undercounted profits totaled $185 million, and undercounted liabilities totaled $385 million.

In the case of Chinalco, the problems appear to be violations of Chinese rules more than accounting irregularities. Chinalco included 11 companies in its 2008 financial report that failed to meet profit targets by the end of 2009 and launched or acquired 10 projects for which Chinalco did not have permission from the state. The total investment in the 10 projects topped $1.4 billion in 2008. Chinalco also got slapped for some irregularities in its senior managers’ shareholdings.

The troubles at Chinalco are reasonably small, but they should be the final straw needed to kill speculation about the company’s rumored intention to buy Alcoa, Inc. (NYSE: AA). The truth could be that China just doesn’t want to be embarrassed by another rejection of a bid for a large US firm. And Chinalco probably doesn’t want more scrutiny from the SEC after getting raked over by Chinese regulators.

Running afoul of China’s regulations governing state-owned enterprises is not the only issue. The so-called “Facebook of China,” Renren Inc. (NYSE: RENN) had to correct its financial statements just before its IPO earlier this month. Shares officially opened at $19.50, climbed to $24, and closed the first day’s trading at $18.01. Shares are now trading at around $12. Busted IPO for sure.

Hong-Kong based financial software maker Longtop Financial Technologies Ltd. (NYSE: LFT) lost its CFO, saw its auditing firm resign, and watched the US SEC initiate an investigation of the company’s financial reports. Shares had fallen -25% since the beginning of May before trading was halted last week. Longtop’s CFO was also an independent director and chairman of Renren’s audit committee.

Advanced Battery Technologies, Inc. (NASDAQ: ABAT) and China MediaExpress (OTC: CCME) are both Chinese reverse merger companies. Advanced Battery’s chairman has been accused of selling a key subsidiary to himself without compensating the company. A report by a short-seller has led to a -33% drop in the share price and a bevy of shareholder lawsuits. Advanced Battery makes lithium-ion batteries for electric vehicles, including its own line of motorbikes and scooters. China MediaExpress, the billboard company, saw its share price fall from near $20 to around $1.50 following a short-seller’s report regarding reporting irregularities.

China Shen Zhou Mining & Resources, Inc. (AMEX: SHZ) is one of China’s leading miners of rare earth minerals and other metals. If any company should be making money, this is one. But the company’s auditing firm issued a “going concern” note to China Shen Zhou’s 2010 10-K. The auditors apparently don’t agree that a private placement of $20 million in common stock and another $7.2 million in warrants is enough to keep the company going for all of 2011. China Shen Zhou’s stock peaked at $10.84/share in January, and trades at about $4.10 today.

While each of these companies may exemplify a different aspect of what’s going on with Chinese firms, they all have one thing in common: they’re Chinese. That is, they must operate under the constraints of Chinese regulations, which are a little hard to pin down at times. The major problem that firms face is that the Chinese government has given inflation fighting a pre-eminent position in its policy making. Higher interest rates, lower lending limits, and reduced liquidity make profitability uncertain.

There are also, apparently, more than a few executives willing to cut corners in pursuit of riches. Accounting rules in China are different from US SEC GAAP accounting rules, and taking advantage of those differences leads to different numbers on both Chinese and US reports, which leads to reports from short-sellers who smell blood in the water, and eventually to government investigations on both sides of the Pacific.

Finally, it’s also worth noting that China faces a serious real estate bubble and that many well-known investors are counseling short positions on Chinese real estate. But real estate, like copper, can be used by China’s small- and medium-sized firms as collateral for low-cost loans while the country’s banks are prohibited from making more loans.

China wants to grow its economy by about 8% annually in an effort to keep up with population growth, rising wages, and large numbers of retirees. To date the country’s exports, wild lending, and government funding have pushed GDP growth above 10% for a number of years. Ratcheting back to 8% means cooling the economy, as the government has done.

The problem is that the constant accelerate/brake pattern is hard to control. China essentially has no choice but to keep the shell game going. If it stops, no one will know for sure where the pea is. 

We have a saying here at 24/7 Wall St.: KNOW WHAT YOU ARE INVESTING IN!  It is getting hard to trust anything out of China at the moment.  Maybe trusting Chinese accounting is becoming the same as trusting that Chinese vitamins are even half of what they are supposed to be.  Welcome to the World of Knock-Off Accounting.

Paul Ausick

The deal is about the same size as the one Anadarko struck last year with Japan’s Mitsui & Co. for $1.5 billion to develop assets in the Marcellus shale. It is about one-third the size of the recently announced $4.75 billion sale by Chesapeake Energy Corp. (NYSE: CHK) of its Fayetteville shale  assets to BHP Billiton Ltd. (NYSE: BHP). China’s Cnooc Ltd. (NYSE: CEO) bought a one-third stake in certain Chesapeake assets last year for $1.08 billion.

The assets that KNOC acquired produce both oil and gas. Of the 80,000 net acres in the Eagle Ford play, 75% of production is oil, which is now being produced at the rate of 28,000 barrels/day. That’s about one-half of the increased production of 60,000 barrels/day that KNOC has set as a target for this year. By the end of 2011, KNOC plans to produce 240,000 barrels/day.

The benefit to Anadarko is that the deal frees up more of the company’s capital to develop more of its acreage. The Eagle Ford play is rich in liquids, both oil and condensates, which sell for higher prices than natural gas.

KNOC also acquired a 95% stake in oil blocks in Kazakhstan for $515 million from a subsidiary of commodity trading house Vitol Group, according to Bloomberg.

Anadarko shares are up about 2.5% this morning.

Paul Ausick

That deal sailed through regulatory approvals and Cnooc must have figured that this approach was much better than an outright takeover because the company has once again completed a deal with Chesapeake that will give Cnooc a one-third interest in a shale gas play called the Niobrara, located where the states of Wyoming, Colorado, Nebraska, and Kansas meet. The Chinese have discovered that not being greedy pays off.

In this latest deal, Cnooc will pay Chesapeake $570 million for its share of Chesapeake’s 800,000-acre leasehold in the Niobrara, and has agreed to pay up to another $697 million to fund drilling and other costs in the area. That is similar to the deal in the Eagle Ford play, where Cnooc agreed to pay up to $1.1 billion in drilling costs.

Chesapeake expects to have 20 rigs working the Niobrara by the end of 2012, and 40 rigs on the Eagle Ford by the same time. Currently the company has 5 rigs on the Niobrara and 10 on the Eagle Ford. There’s no way the company could reach those higher targets without help.

Cnooc also paid $3.1 billion for a 50% stake in a joint venture with Argentina’s Bridas Energy Holdings’ Pan American Energy joint venture with BP plc (NYSE: BP). BP sold its 60% stake in Pan American to Bridas for $7.1 billion in November. Cnooc paid an additional $2.5 billion for the BP stake.

The deals with Chesapeake do not involve any exports of either natural gas or liquids from the US to China. The investments by Cnooc are essentially hedges against rising prices and falling supply.

The other thing that Cnooc gains is technology to develop its own shale gas fields in China. Here’s what Chesapeake’s CEO said in the announcement, “Moreover, this project will advance the efforts of both the U.S. and China to reduce greenhouse gas emissions and accelerate commercial opportunities for the development of shale gas resources in China, furthering the objectives of the U.S. – China Shale Gas Resource Initiative announced by the White House on November 17, 2009.”

Transferring technology to China to develop its shale gas fields is in the US’s best interests. First, if enough gas can be developed, China will burn less coal, which the whole planet will appreciate. Second, US companies like Chesapeake will earn money from working in China. Other possible beneficiaries include the oil field services companies like Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), and Baker Hughes Inc. (NYSE: BHI).

Chesapeake shares are up more than 4% in early trading, and have set a new 52-week high of near $28.50. That’s good news for a stock that traded near $67/share in July 2008.

Paul Ausick