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tv   The David Rubenstein Show Peer to Peer Conversations  Bloomberg  May 12, 2019 2:00pm-2:30pm EDT

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alix: chevron takes the money and runs. ceo mike worth walks away from anadarko with a $1 million breakup fee, raising its buyback by 25%. occidental's ceo nails a big win. investors are skeptical. president trump versus iran. u.s. sanctions of industrials metals from iron to copper from iran while iran vows enrichment for 60 days. prepare for imo 2020, the company's head of oil trading talks about dislocation in the market. ♪ >
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alix: i'm alix steel and welcome to "bloomberg: commodities edge." 30 minutes focused on the companies, physical assets, and trading behind the physical -- hottest commodities with the smartest voices in the business. let's kick it off with spot on, our take on the story. joining me is tina davis, bloomberg's managing editor for energy, and the spotlight is on m&a. chevron takes its $1 billion breakup fee and walks away from its bid for anadarko. >> winning in any environment doesn't mean winning at any cost. in the commodity business, cost and capital discipline always matter, and an increased offer would have eroded value to shareholders and diminished returns on our capital. this was a good opportunity but was not a necessity for chevron and we are not desperate to do a deal. alix: well, the street liked it. they got a buyback of 25%. what is the takeaway here? tina: well, when is the last time you got $1 billion from doing nothing? chevron has proven, and we have seen several people commenting that capital discipline pays off
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and we've been calling him mr. discipline because he has come through the ranks of chevron in the downstream side, where you have to worry about every penny and focus on margins and that will pay off for shareholders today. we are seeing that in the stock price. alix: and not the stock price of occi or anadarko. also joining us is leslie bittel, joining us from a cell conference in las vegas. you used to go long occi. do you like the deal they are left with? leslie: nice to see you from las vegas. you know, i don't love this deal. i think occi is paying a pretty big premium. love the permian. i think there is a great job being done around structuring the capital structure, but overall, it is a lot of debt, a lot of cash out the door, and it doesn't leave occi in a position
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if you have a down cycle in the commodity to be defensive and that is a big change. they have been a big dividend payer for a long time. it is a big change for their shoulder base. -- shareholder base. alix: in the stock price, chevron does the buyback, they walk away and their stock is up. occi's stock has just gotten hammered. is this idiosyncratic? leslie: it depends on the asset. as you heard mike wirth say, he is not ruling out m&a, but he says they will not be stupid which is what investors like to , hear. as you mentioned, this is a huge premium for a deal. this was a fight occidental more or less picked. they went after anadarko very frequently and often and continued to raise the cash portion to make this as palatable as possible to anadarko, and they initially were rejected. whether anyone will start these kinds of bidding wars going forward, i think it is a little bit unusual, and certainly we haven't seen much of it in the energy industry on the big oil side. alix: no, we haven't. the names tossed around, endeavor, pioneer said they are not for sale. concho. are you playing all of the m&a we might see in the permian?
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leslie: i think it is tough to play, but do i think there is going to be m&a? i think the next part of the cycle is taking up the costs. we have been working at the wellhead level, bringing down costs there, making our everyday in the united states more defensive, but we have too many companies with too much overhead. in my mind, it makes sense and i expect to see it. who is the best candidate? i'm not sure i have a great insight into that but i do think this is going to be a 2019-2020 story. alix: so that reducing leverage and reducing synergies and cost and reducing overhead -- how do you play those themes? leslie: obviously, as you know, we are typically on the credit side of this. we are playing in some of the more stressed or distressed names in credit and the less known basins where we see the deleveraging story picking up.
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they have done so much, some names have done a lot as far as getting their wellhead costs down and that is leading to a pretty meaningful deleveraging. some of these companies are going from 4, 5 times down to less than two times levered going into 2020 and that is attractive. alix: wrapping up here with you, tina, other names on the list? what do you want to talk about? tina: the names we hear most often are pioneer, concho, and diamondback. obviously, we heard from pioneer's ceo who had thoughts on the deal this past week. he threw in the name of parsley energy, his son's company. not as a potential target, but one of the top four operators in the permian. so if you are looking for exposure to the permian, those are the top names on the list. alix: no, didn't come back just to sell myself. bloomberg's tina davis, leslie biddle, great to see you. coming up hitting iran where it , hurts. the u.s. sanctions metal purchases from the country, iran's largest non-oil related
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source of export revenue. and as we head to break, citi says buy the dip in oil. supply is tight. there you have a pipeline -- the orange pipeline has been contaminated and russia oil is still off-line. they are going to move about 15 million barrels off-line from eastern europe. how the market absorbs that keys -- key to oil prices. ♪
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alix: i'm alix steel and this is "bloomberg: commodities edge." time now for the data dig. we are going to delve deep into the market trends of the week. the highlight, the selloff, the bloomberg agricultural spot index going to the lowest since july 2009. ag is a poster child for the trade war between u.s. and china, plus supplies from last year piling up in silos and
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bins and bags. i want to stay with soybeans for a second because data from china, overall they imported 18% less beans than last year. part of it is trade, part of it is less demand because of a swine fever killing off hogs, but the competition changed as well. the green bars are the imports from brazil and blue is from the u.s. you can see how much we are not importing from the u.s. and how brazil has taken over there. finally, oil inventories. there was a big surprise draw of 4 million barrels last week. the draw mostly in the u.s. gulf coast. midwest inventories did rise 1.6 million barrels. the future of these inventories in part depends on how much iranian oil is taken off the market. president trump issued new sanctions on its steel, aluminum, and copper industries after iran threatened to abandon limits on uranium enrichment. >> i think it was intentionally ambiguous. we will have to wait to see what iran's actions actually are. they've made a number of statements about actions they have threatened to do to get the world to jump.
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alix: i am joined by kevin o'brien, monitoring global inventories. the question everyone wants to know is how tight is the actual market in terms of inventories? kevin: we are seeing some really interesting data come out, that looking at the global market year on year, 140 million barrel increase. 66 million in the year to date. about 44 million in the last 30 days alone. so we are seeing relatively well supplied market globally and when you begin to dissect that into individual markets, it is different patterns usually but not something we haven't seen in the market, but in the data. alix: so the chart shows the .ndividual regions like oecd non-oecd if you backout china. walk us through what this chart tells you. kevin: there is a lot of activity going on here, but we start breaking down individual regions and countries. china, for example. we have seen half of the build over the past year, 66 million
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barrels coming from china. we have seen that continued pattern. it really started around the end of the third quarter last year, a very strong build going into the fourth quarter, and we really don't see any change in that. u.s. has been steady production out of the permian. going over to opec, we have seen that it has flattened out based on some of the moves, but what gets interesting and part of your other story is what is happening in iran. in the last 30 days, we saw a 10 million barrel decline in iran. about 8.9 million overall went to opec, but iran was leading the drawdown in the last 30 days alone. alix: do we have any read on how that is combined with your global inventory data? kevin: not yet but it is a factor people are trying to focus on, like people talk about dark ships and other shipments of uranium product in particular. there are some sources we are trying to develop to sort of all that picture together, but it is important also realize that when you are looking at what the u.s. government is talking about, the iranian economy, about 40% of -- about 14% of that is around energy.
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it is a well letters a fight economy. so it has some other sources of economic activity that can take hits from sanctions. alix: take out those industrial metals now at the end of the day. so in the market, convergence -- divergence of different markets. on the one hand, the flat price rolling over and then crisis spreads blowing out. based on your inventory data, which one is right? kevin: not necessarily which one is right. our thesis is can you provide almost real-time inventory numbers not just in the u.s., not just in cushing -- that is a well-documented number -- but that 80% of the rest of the market that we think the more we can provide visibility into china, opec, iran, saudi arabia, you will have further reductions of those spreads and a further reduction of volatility. alix: we have seen from china, you expect that to continue? the buildup in inventory? kevin: it is an interesting dynamic that has been continually mentioned for several months now. if you saw china slow some of the build, that puts further pressure on other markets to absorb that and you might have
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backward pressure on pricing. it could become a buyer again into the market. people should keep an eye in china. alix: kevin, thank you so much. good to get the data on real-time inventory. kevin o'brien of orbital insights. thank you. now, we want to battle it out with u.s. supply, because we are in the middle of first-quarter earnings season for u.s. emps. good to see you. what have we learned so far, your big takeaway? jeanine: so far, q1 is not the queen quarter that emp needs. sentiment remains pretty challenge right now and emp is a show me story, which means at this point number one, managing needs to hit their numbers. number two, they really need to continue to drive home the narrative on capital discipline, which has taken over emp land. alix: if they were mixed or were mushy on production for the first quarter, did they lower the back half of the year? does that put pressure on? jeanine: that's a good point. we have seen an uptick on investor concerns on execution, particularly in the back half of
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the year. in general, for our large-cap names under coverage, most of them beat q1 oil estimates but q2 was a little softer. so of the companies that did give q2 oil guidance, more than half of our names missed consensus estimates and broadly speaking, some companies are calling for flat or down production for q2. so you've got concho, devon, noble, pioneer calling for that. as he said not a lot of , companies have touched the full-year guidance. it is pretty early in the year, so that puts more pressure on the back half. we will say stay tuned for next quarter. alix: let's get into the good and the bad. one stock that performed well? eog? jeanine: we would highlight eog. in terms of the q1 themes, eog pretty much executed on them all very well and the market continues to reward them for that. so on the numbers, they had a cash flow beat, they beat on oil production and capex.
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on the capital discipline team, they continued to reaffirm they are committed to keeping the capex budget the same this year as well as shareholder friendly themes. they increased the dividend by 31%, which is a lot. and lastly, on execution, we very much like their q1 oil beat was essentially all performance. and that tells us that the underlying asset is performing well and not related to anything like timing that may go away. and we also like that the q1 capex beat was entirely on cost reductions. we think that is repeatable. alix: on the other side, continental is one that you highlighted as not having the strongest quarter. walk us through why. jeanine: their quarter was more nuanced, i would say, and the market has put them in the penalty box for that. they had a big cash flow beat and they had a good operations update. however, where things fell a little bit flat for investors was on the capital discipline side. so on q1 capex, they missed consensus by about 6% and capex
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and capital continues to be the near-term proxy for capital discipline. and even though management did a good job of reaffirming they are keeping the budget where it is today, there is still skepticism in the market that some of that free cash flow is going to be piled back into the drill bit or put toward strategic acquisitions instead of being returned to shareholders. alix: so to round it out for me, what does this all mean for m&a going forward? jeanine: for m&a, it is topical recently. specifically the anadarko-chevron-occi news. it has highlighted three things from the energy side. number one, we have been in a journalist drought in emp, and consolidation is step one and what we think generally investors want to see for this space is -- step one in a multi-year self-help story for emp. free cash flow is another thing we also highlight. it has been front and center. the capital discipline narrative is really resonating with people for that, and for the deal, it
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really showed that for anadarko and chevron, it was more of a hand in glove type transaction. but the anadarko-occi deal really highlighted the free cash flow. alix: great stuff. really appreciate it. our oil and gas analyst at barclays. time now for the note of the week from the libyan national oil company chairman, who says , "i cannot foresee any scenario other than an immediate cease-fire in which libya's oil exports are not severely impacted by the conflicts of the violent swing of the pendulum one way or another. it threatens to take off-line much of libya's oil production and along with it, libya's prospects." coming up on the program, global head of oil trading on imo 2020, next on "bloomberg: commodities edge." ♪
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alix: i'm alix steel, and this is "bloomberg: commodities edge." it's time now for the bnef brief, which gives us in-depth analysis on clean energy, advanced transport commodities, and emerging technologies. today, california solar energy. joining me, logan goldie-scott from bloomberg nef. residential solar installations in california jumped last year. what was your take away from that? logan: the changing rate structures and state and federal subsidies have helped really boost the opportunity for residential solar plus storage in california.
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so as a combination of these factors, we have seen the market grow from only a few hundred installations a couple of years ago to nearly 10,000 in the market today. alix: does that continue? logan: we expect so. so the economics of solar plus storage are already looking attractive, ranging from 2, 5, and 8 years in this state, and we expect them to become more attractive as the cost of edie of pv and batteries continues to fall. these cost reductions will have to significantly offset value. alix: what is the payback for that, solar plus battery? you have to be a lot to get it in your home. how many years until you break even? logan: at the moment, it depends on the utility, but we are looking at paybacks between five and eight years in california for solar plus storage. alix: is that a lot? is that a little? logan: that is a relatively attractive payback, so once you bring in financing mechanisms
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such as leases, you are likely to see consumers begin to look at theirs as a viable option. alix: tell me, which companies are getting the most market share from this? logan: from a provider standpoint, it is a very highly concentrated market with lg chem and tesla making up the lion's share of all installations and there was a survey of solar installers in 2018 that that consumers, over 80% of consumers requested products from only one of those two companies, and that speaks to the concentration. alix: logan, we really appreciate it. logan goldie-scot of bloomberg nef. now, we turn to commodity in chief where we focus on one executive in the commodity world. today, it is the co-head of oil trading at trafigura. i asked if we were ready for caps on sulfur content in marine fuel.
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ben: refiners tried to get better at producing low self are -- sulfur materials, but we still think there is an imbalance. we have got this problem we are calling the 350-350. we think there are 350,000 barrels a day of excess sulfur levels. we think there are 350,000 barrels a day with too little sulfur distillates. that has to be priced by the market and the market has to price to solve that. we need to incentivize people to make the distillers, distillate to incentivize people to use , fuel from a different source. it will be an interesting six months. there will be any number of dislocations that companies like trafigura will try to take advantage of. that is effectively what we do. we see creases in the market and try to fix those creases by moving products in one location to another, one timeframe or another, or one quality versus another. >> do you have a read on how trafigura will be
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compliant? will it be using a lower sulfur fuel, scrubbers, what is your read? ben: a combination of things. you have to be compliant, so we have invested about $1.5 billion in vessels over the last few years, 38 rebuilds, variety of sizes. all of these have scrubbers. so i think we took it seriously, we saw it coming. potentially the market was slow to really believe this was going to occur because it required some investment. so yes, trafigura is prepared. alix: are you worried about the open loop scrubber ban that is permeating all over the world? ben: there were conversations around it last week. it is a concern. all we need is clarity. that is what we need. if you get the rules, you can live by the rules and that is partly what happened with imo 2020. it was announced so far in advance, but it has been the last six to 12 months people have spent money because they now believe it is going to occur. the type of scrubbers is clearly another big issue, but people have been investing knowing what the rules are. what you can't do is continually change the rules.
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that won't work for the industry. alix: what do you do with the new vessels you will be buying? you don't have to retrofit or anything like that. with the longer-term goal that the imo 2020 is supposed to be, what is your decision around that? ben: the new vessels are completely compliant with rules and regulations as they are now. alix: is ti technology, different engine, the scrubber? is it operated by lng or batteries, for example? ben: it is probably technology. you have an existing technology on your vessels that satisfied all the regulations we have now. if that changes, then we will have to deal with that change. but we produce these vessels in line with all of the rules and regulations, and we are happy with the investment we made. alix: what do you expect the shipping costs to do in the short-term over imo with everyone getting their ducks in a row? ben: the first six months, it could be very lively and probably a little messy around the world. there are any number of large
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locations where you can bunker your vessels. singapore is a good example, but there are smaller locations. all of these locations have divulged the types of you will they have in storage, the ship runners have to change the types of fuels they have in their vessels. it is not this broader 350-350 problem that creates the interest of the volatility, it is on a local level and a port by port level where you are going to see dislocations. it is not easy to change over a system like this that quickly, so i would say first three to six months, there will be some entertaining times but the market will, as always, work it out. alix: that was my interview with ben luckock of trafigura. gen z is ushering in a new stampede, meat without the moo. think veggie burgers. tyson foods announcing a new meatless protein in the next few months. plus, big burger chains like mcdonald's and burger king are trying to woo younger vegetarians. and beyond meat's recent ipo could push companies like kellogg and kraft heinz to spend more on veggie innovations. alternative meat is
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still tiny compared to the animal protein market but there , is a lot at stake when it comes to your dinner plate. and here is what is on my commodity radar. next week, it is all about wednesday, sugar week. iea monthly oil report, plus year earnings. that does it for "bloomberg: commodities edge." ♪
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♪ david: how do you pick up insider trading? jay: we do use computer algorithms. and we do catch people. david: what is the biggest investment mistake? jay: i will give you a couple. diversify, keep costs low, and not panic. david: the sec pays government salaries, which are modest, to say the least. jay: i think our people have the respect of wall street. david: well, they are respected. i was trying to get them a raise. [laughter] >> would you fix your tie, please? david: well, people wouldn't recognize me if my tie was fixed, but ok. just leave it this way. alright. ♪


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