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David Fuller and Eoin Treacy's Comment of the Day
Category - Energy

Email of the day on caution at potential areas of resistance

“You have been calling for some ‘consolidation’ for equity markets for a number of weeks now (which I expected too), but this just hasn’t come to pass. Instead we have seen a relentless charge higher in virtually every market. You’ve stated that it’s liquidity driven which until recently at least, little participation from the professional money managers. Short term yields no longer can be relied upon as a risk indicator with the Fed deliberately compressing yields at the front end. To what extent, if any, has this recent episode viewed the way you look at markets through a charting lense. A despondent sceptic of this rally here, it seems the only winning strategy is just to ride the liquidity train, and rotate one’s positions towards riskier assets (travel, emerging etc) as the new safe havens (tech) reach maturity.



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OPEC+ Set to Extend Oil Cuts as Meeting Called for Weekend

This article by Javier Blas and Grant Smith for Bloomberg may be of interest to subscribers. Here is a section:

But members of the 23-nation OPEC+ alliance have a lot to gain by preserving their agreement. They have helped engineer a doubling in Brent prices since April, easing pressure on their government budgets of oil-rich nations.

The accord has also revived the fortunes of major energy companies like Exxon Mobil Corp. and Royal Dutch Shell Plc, and prompted some U.S. producers to consider restarting wells just weeks after they were idled.

The deal in April set out historic cuts of 9.7 million barrels a day, or roughly 10% of global oil supplies, to offset the unprecedented collapse in demand caused by the virus lockdowns. Then a few weeks later, Saudi Arabia and its closest allies in the Persian Gulf promised additional supply restraint of 1.2 million barrels a day in June.

Those reductions were set to ease to 7.7 million barrels a day from July 1. so failure to reach an agreement this month could have brought a flood of oil back onto the market and undermined a tentative recovery as countries start emerging from coronavirus lockdowns.

With American shale production starting to come back online, OPEC’s careful management of the demand recovery is crucial.



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Elon Musk's SpaceX Readies First Astronaut Launch by Private Firm

This article by Andy Pasztor for the Wall Street Journal may be of interest to subscribers. Here is a section:

SpaceX’s efforts to launch astronauts into orbit have suffered various delays, totaling about four years, including two catastrophic explosions of its Falcon 9 rocket and nagging safety concerns about the Dragon capsule riding on top.

Having a reliable American system would mean NASA astronauts no longer need to piggyback on Russian rockets and spacecraft, as they have since the aging U.S. space-shuttle fleet was retired nine years ago. Looking ahead, NASA and White House officials envision emphasizing deep-space exploration as part of a commitment to relying on similar corporate-government teams. Those would include company-led endeavors, with relatively limited federal oversight, taking astronauts to the moon as soon as 2024 and later to Mars or beyond.

Along those lines, Mr. Musk’s team has proposed a mammoth rocket carrying a companion deep-space craft—partly stainless steel and reaching some 40 stories together—intended to eventually transport large numbers of passengers. So far, NASA has committed $135 million to help develop the portion that could serve as a lunar lander.

Some longtime NASA watchers see the current mission as a crucial steppingstone, perhaps as significant in some ways as the Gemini missions of the mid-1960s that paved the way for the Apollo moon landings. But this time, making the government “a customer rather than operator is as astonishing as it is bold for NASA,” said Mark Albrecht, a former White House space adviser and retired senior industry executive. “NASA will take the blame for failure and allow SpaceX to receive most of the glory of success.”



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Email of the day on inconsistency in medium-term trends.

Eoin - appreciate your use of both the P&F and weekly chart against the moving average in your discussion of Microsoft.  When evaluating the consistency pattern of stocks (Microsoft and others), how do you "adjust" for circumstances such as COVID 19?  Clearly, Microsoft was negatively impacted like many other equities in the COVID induced meltdown, but has also rebounded more smartly than others.  Thanks, as always, for your insight and willingness to share same.



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Musings From The Oil Patch May 5th 2020

Thanks to subscriber for this edition of Allen Brooks’ every interesting report for PPHB. Here is a section:

These large stock buybacks, coupled with increased debt, despite low interest rates, have contributed to a remarkable decline in corporate cash balances.  Cash balances for S&P 500 Index companies have fallen to the lowest level since 1980, while debt has soared.  Based on how volatile these two measures have become, we wonder whether, following the recession we certainly are in, cash on company balance sheets becomes a prized asset.  Likewise, will debt become toxic?  Given very low interest rates, something not likely to change anytime soon, will corporate executives adjust how they manage their balance sheets?  

Traditionally, dividends account for about 2% and share buybacks about 3% of the historical annual average stock market return of 5%.  The cessation of share buybacks would cut investor return expectations more than in half, and returns will be further reduced to the extent that dividends are eliminated and/or restricted.  That will be a huge blow to investors who sought out stock market returns to replace those lost from bonds due to low interest rates.  The neighboring chart shows that about 6% of buyback programs, representing 14% of the expected value of buybacks for energy, have been suspended so far this year.  We certainly expect these numbers to rise as the year unfolds, regardless of legal restrictions imposed by government relief payments, due to cash-preservation steps by managements following the oil price collapse.  

As Exhibit 17 shows, energy in the S&P 500 Index was the fourth lowest sector, ranked by dollars committed to share buybacks.  Not a surprise, given the oil price crash of 2014, was the sharp decline in dollars spent on share buybacks over the last five years compared to the last 10 years.  The amount of money spent on energy share buybacks for 2015-2019 was only 31% of the 10-year expenditures.  We will not be surprised to see the next 5-year period having even less money spent on stock buybacks, unless there is a miracle recovery in oil prices.  

If we consider what investor returns by sector of the S&P 500 were in the fourth quarter of 2019, energy topped the list with nearly a 10.5% yield.  That was nearly 80% greater than the yield of the S&P 500 Index.  That will change in 2020, and likely in 2021, as we expect that is how long it will take for the oil market to balance.  The unanswered question is how the risk profile for investing in energy stocks may change, as well as investing in the stock market overall?



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Email of the day on dividend champions and contenders

I am really enjoying Mr Treacy’s comments of the day and look forward to it every morning.

Mr Treacy in today’s update mentioned key sectors that have the most chance of trending up over the next decade – and alluded to a couple shares (e.g. Google and Apple) that may make it to dividend aristocrat list in 10-15 years.

It would be great if Mr Treacy could provide a list of top 20-50 shares that have steadily increased dividends over the last 10 years and based on trends have the highest probably on making it to dividend aristocrat list in 10-15 years.



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'Instead of Coronavirus, the Hunger Will Kill Us' A Global Food Crisis Looms

This article by Abdi Latif Dahir for The New York Times may be of interest to subscribers. Here is a section:

The coronavirus has sometimes been called an equalizer because it has sickened both rich and poor, but when it comes to food, the commonality ends. It is poor people, including large segments of poorer nations, who are now going hungry and facing the prospect of starving.

“The coronavirus has been anything but a great equalizer,” said Asha Jaffar, a volunteer who brought food to families in the Nairobi slum of Kibera after the fatal stampede. “It’s been the great revealer, pulling the curtain back on the class divide and exposing how deeply unequal this country is.”

Already, 135 million people had been facing acute food shortages, but now with the pandemic, 130 million more could go hungry in 2020, said Arif Husain, chief economist at the World Food Program, a United Nations agency. Altogether, an estimated 265 million people could be pushed to the brink of starvation by year’s end.

While the system of food distribution and retailing in rich nations is organized and automated, he said, systems in developing countries are “labor intensive,” making “these supply chains much more vulnerable to Covid-19 and social distancing regulations.”



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Email of the day on uranium

Thanks for the insightful video, as always, Eoin. Have you had a look at the uranium sector lately? The spot price has jumped along with the miners, including Cameco and Denison which jumped 26% yesterday. Is the long-awaited supply crunch coming into play and how long will the uptrend last? Your thoughts on this will be appreciated.



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GM Plots an EV Comeback Inside Its Secretive Battery Lab

This article by Bill Howard for Extreme Tech may be of interest to subscribers. Here is a section:

In 2019, about 3 million pickups were sold out of 17 million vehicles. Nobody knows the size of the EV pickup market initially, or how badly EV range suffers under a heavy load (Tesla owners have known range tanks when a Model S or Model X tows a trailer), or if buyers are willing to pay extra to get the large batteries that allow 300 t0 400 miles of range on pickups.

As for the market for all plug-in vehicles – battery electric vehicles and plug-in hybrids – the final 2019 US sales numbers for light vehicles amount to combustion-engine-only cars, 98.1 percent of the market, BEVs and PHEVs 1.9 percent.

There is some hope – among environmentalists, at least – that Americans, in the wake of the coronavirus slowdown, will appreciate the cleaner skies in major cities and adopt plug-in vehicles to keep the air clear and clean. GM’s battery R&D is for its worldwide markets, not just the US, and it may find more traction outside the US. Depending on how many people and businesses have money to spend on new cars in the next year.

At the Ultium rollout, GM cited forecasters who called for EV volumes to double between 2025 and 2030 to 3 million units annually – one in six vehicles sold – and added its belief the numbers could be “materially higher.”



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Saudis, Russians End Oil-Price War With Deep Output Cut

This article by Javier Blas for Bloomberg may be of interest to subscribers. Here is a section:

Saudi Arabia and Russia ended a devastating oil price war on Thursday, agreeing to slash output together with other members of the OPEC+ alliance in an effort to lift the market from a pandemic-driven collapse.

The tentative deal came after strong pressure from U.S. President Donald Trump and American lawmakers, who fear thousands of job losses in the U.S. shale patch, not to mention Wall Street chaos. The price crash has also threatened the stability of oil-dependent nations and forced companies from Exxon Mobil Corp. to small independents to rein in spending.

OPEC and its allies, meeting by video conference, agreed to cut production by about 10 million barrels a day in May and June, delegates said, asking not to be identified ahead of an official statement. Saudi Arabia and Russia, the biggest producers in the group, will each take output down to about 8.5 million a day, with all members agreeing to cut supply by 23%, one delegate said.

“Both Saudi and Russia were going to have to cut anyway, and these cuts allow them to win political points too,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd.

While the headline cut equates to a historic reduction of about 10% of global supply, it makes up just a fraction of the demand loss, which some traders estimate at as much as 35 million barrels a day.



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