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3/19/08

Eric's studmuffin just got lucky

"Better born lucky than rich" is a saying this Otto used to hear as a kid. It applies to Correa and Ecuador right now, cos whatever kind of mess they get into with neighbours, friends or the all-seeing-all-hearing Uncle Sam (dude, I ain't kidding...this is LatAm, not some hand-wringers ball up North where some politico hears static on his cellphone and cries Gestapo! to the New York Times), these Ecuador types who sit LITERALLY IN THE MIDDLE OF THE WORLD* are experiencing Latino paradise, aka making loads more money for doing the same thing as ever.

How? Oil. Black gold, Texas tea, there will be blood and death by 10-pin bowling. Now I'm going to show you a few charts, and all the stats come from the Ecuador Central Bank so they're all cool and legit. As usual you can click on the charts to make them bigger, and what we'll see in them is how Ecuador is going to be stinking rich this time next year.

First, the background. Ecuador runs on crude, and oil makes up around 60% all exports and is one serious chunk of total GDP. Make no mistake, Ecuador's economic fate is tied to its oil industry. If oil is good Ecuador is good, but if oil goes belly-up the caca hits the ventilador in the country, and bigtime, and fast. The production is split between private companies and the state-run PetroEcuador, and in the last 3 years production has been split like this (and while you're looking, take a wild guess as to exactly when Ecuador revoked OXY petroleum's concession, kicked them out of the country and handed to PetroEcuador).

Now Ecuador's production then slipped for a while, basically because PetroEcuador were starved of cash anyway,then suddenly got all the OXY concessions dumped in its lap with a "there you go...start pumping boyz" from the gov't. If you got no OPEX moolah, oil production drops. That's the way it is, but it didn't take long for the boringly predictable western media to start going on about how crappy socialism is cos Correa can't drill oil as fast as the guys that had been ripping the country off for years and leaving toxic messes in their wake. But once production started stepping up.......
........by sheer amazing freakin' coincidence the English speaking media decided to stop reporting about Ecuador production numbers. The moral of this is; they will never be straight with you guys up there...never. It's either bad news or STFU.

So here's where the record gets put in order.

Ecuador is now pumping at 520,000bbl/d. We know that cos it's the limit set by OPEC on the country's quota (and they'd never cheat the quota and try to pump more....oh noooooooooooo......well........only by 11,000bbl/d in December). Oil prices are rocketing. "DUH!" is the cry from the audience, but all the same you dudes have no idea how much that's going to benefit Correa's little corner of the planet. Take a look:

This is the total monthly gross revenues for crude exports that Ecuador bagged 2005-2007. They've already been reaping it in during the last 6 months of 2007. Also, the country is still exporting its crude at a good pace as this next chart shows..

...but you can see the trend line inclining slightly from just above the 68% line to just below it. This shouldn't come as a big surprise, cos Ecuador is growing GDP-wise too and will need a bit more fuel all the time to do its own internal thing.

Now that's what's been happening, but the real fun starts when we look at how things are shaping for 2008. To model this we have to do some ballparking, so here's what I'm using as my assumptions here:

1) Ecuador oil climbs to U$100/BBL average by December 2008. It sold at an average of U$77.2 in December 2007. I've made the curve sharp at the beginning of the year to match what we've seen in the spot market so far, then it climbs gradually to the $100 mark.

2) The percentage of exports to total production drops by 0.1% per month. That means December 2008 is at 65.9%. I'm trying to reflect in a simple way the internal growth and the demands it will place on crude production, that's all.

3) Production remains steady at 520,000bbl/d all year, and costs rise in proportion to the rise in oil price. No need to go in for all that 'growth' stuff you guys up there love so much.

And that chart totally, but totally rocks. The last round of "Correa's toast cos oil is crapping out" headlines from the bizwires came around the August/September time when oil exports were grossing around U$700m per month. We're now looking at a U$1000m per month scenario.

But wait...it gets better. Correa&Co want to raise the windfall tax on private oil companies to 70%. If we assume this hike happens in June 2008, this is what our model says will happen to the money Ecuador gets from crude, and that's PetroEcuador and the private companies minus their own profits.
Holy Fiscal Bonanzas Batman, it looks like oil loot nearly triples in just two years!

Believe me, that's a lotta cash for a little country like Ecuador, with 13.8 million people and a GDP of U$44.5Bn approx in 2007. In fact, under this forecast 12 month revenue growth would add up to 8.8% of 2007 GDP.....that's serious, serious money. And remember Ecuador doesn't have to do anything special here, all it needs to do is keep churning out the oil at today's rate. This is not grand planning coming to fruition, and it's not Nobel-Prize-for-Economics complicated. They just....got ...lucky.

On the other hand the gov't does have the choice on how it spends the bonanza about to fall in its lap, and if Correa is as good as his social-ticket word, the lot of the average Ecuadorian on the street is about to take a turn for the better. Which is great news for the locals, but what can we guys do to get a piece of the action? Easy, you listen to Otto's reco right now to buy Ecuador sovereign bonds. Ecuador is on a 773 basis point spread on the EMBI+ index tonight, which means they're going to give you at least 10% interest on your cash. And the cool kicker is that because you get in now while the world is snoozing, come the end of the year you'll be grabbing the decent interest rate and you'll be holding a bond that's worth more in itself. But whatever happens, don't worry about Ecuador not having the cash to service its debt, cos there's as much chance of Ecuador defaulting this year as there is the hole in my butt healing up.


*That one's for you, Shynade