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It's All About Earnings, Hugh Johnson Says · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. At
• 0:32
  Speaker 1: a time when the stock market seems to be making
• 0:34
  Speaker 1: new highs every day, eking out a little bit more
• 0:38
  Speaker 1: in terms of gains without going crazy, a lot of
• 0:41
  Speaker 1: investors are seeing stocks is a good place to be
• 0:45
  Speaker 1: over the next three years. Among those Hugh Johnson, Chairman
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  Speaker 1: and Chief investment Officer at Hugh Johnson Advisers, which overseas
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  Speaker 1: more than a billion dollars and is based in Albany,
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  Speaker 1: New York. Hugh, thank you so much for joining us.
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  Speaker 1: First of all, I just want to get your main
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  Speaker 1: points that you laid out when you came up with
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  Speaker 1: forecasts for this year, next year, and the year after.
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  Speaker 1: The main thing is is earnings. You know, I think
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  Speaker 1: everybody that talks to me has the same question, and
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  Speaker 1: that is, how can you make the case for stocks
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  Speaker 1: having done what they've done, and even going even higher
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  Speaker 1: given all the problems in Washington, some of the international
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  Speaker 1: geopolitical concerns, concerns about getting healthcare through concerns about the
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  Speaker 1: tax tax cut, the Trump tax cut. How can you
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  Speaker 1: make the case for higher pricedents. Well, the answer to
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  Speaker 1: that question is this is all about earnings, and in
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  Speaker 1: a cold hearted way, we're looking at very positive growth
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  Speaker 1: and earnings both for two thousand and eighteen and two
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  Speaker 1: thousand and nineteen. And if you crunch the numbers, taking
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  Speaker 1: any consideration the earnings that I think lie ahead, you
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  Speaker 1: can make the case for higher stock prices four and
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  Speaker 1: a half percent between now in the end of two
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  Speaker 1: thousand and eighteen, and maybe as much as eleven percent
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  Speaker 1: ten point eight percent between now and the end of
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  Speaker 1: two thousand nineteen. So higher stock prices, and that might
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  Speaker 1: even be helped a little bit if we get a
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  Speaker 1: Trump tax cut, a lot, but some. So it's really
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  Speaker 1: all about earnings. You. I wonder if we could take
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  Speaker 1: a look from the investor perspective, because let's say you're
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  Speaker 1: already long stocks, or you have a portfolio that that
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  Speaker 1: favorite stocks. If you were to get out, if you
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  Speaker 1: were to sell, chances are you might have a gain,
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  Speaker 1: you'd have to pay the tax on it, and then
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  Speaker 1: you'd be faced with the question, what do you do
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  Speaker 1: with the cash? Correct, You certainly would be faced to that,
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  Speaker 1: and it would be not an easy not an easy challenge,
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  Speaker 1: to be honest with you. I mean, you know that
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  Speaker 1: interest rates are very low. You know that if you
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  Speaker 1: take that cash and you invested in the bond market
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  Speaker 1: at a time when the fellow reserve is uh interesting,
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  Speaker 1: increasing interest rates not only one more time perhaps in
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  Speaker 1: two seventeen, but three times in two thousand eighteen, you're
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  Speaker 1: likely to suffer a loss on that fixte income portfolio.
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  Speaker 1: So it's it's really a challenge, I mean a big challenge.
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  Speaker 1: I think the returns from the fixed income markets for
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  Speaker 1: two thousand eighteen two thousand nineteen are going to be
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  Speaker 1: close to zero. You'll get some money from the coupon,
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  Speaker 1: you'll lose money on the principle of the fixed income.
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  Speaker 1: So it is a challenge for sure. You know, I'm
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  Speaker 1: struck by the fact that your forecasts for next year
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  Speaker 1: in the year after don't include any sort of downturn.
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  Speaker 1: You see wages increasing, albeit not a lot, but steadily, uh,
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  Speaker 1: and you see just a general kind of continuation of
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  Speaker 1: what we've been seeing over the past year. I'm wondering
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  Speaker 1: what could make you change your mind, and why are
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  Speaker 1: you so confident that we won't see some sort of
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  Speaker 1: economic downturn where you're you never you never releast, you
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  Speaker 1: never that confident. I say these things, I forecast these things,
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  Speaker 1: you know, quite frankly, with my fingers tightly crossed. And
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  Speaker 1: you know, I assume you know we're at a low
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  Speaker 1: level of interest rates. Yes, the Federals there's gonna be
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  Speaker 1: raising interest rates. Yes, interest rates are going to be
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  Speaker 1: going higher. But I don't think we're at a level
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  Speaker 1: right now that really threatens the economic expansion. So making
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  Speaker 1: the forecast that the economy is going to continue to
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  Speaker 1: span through two eighteen nineteen is a little bit easier.
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  Speaker 1: The second thing is, I don't expect that we're going
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  Speaker 1: to have a move towards uh fiscal restraint. If anything,
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  Speaker 1: we're gonna have a move towards an easier fiscal policy,
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  Speaker 1: more generous fiscal policy in the form of tax cuts
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  Speaker 1: and spending increases. So it'd be really from the policy
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  Speaker 1: point of view, you'd say, gee, it's just it's just
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  Speaker 1: too early to say this, this thing is going to end. Uh,
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  Speaker 1: it looks like it's going to go further. But but
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  Speaker 1: talk to me at the end of well, at the
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  Speaker 1: middle of two thousand nineteen, when we have interest rate
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  Speaker 1: higher and we start to get much more nervous about
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  Speaker 1: federal budget deficits, and I think those are in the
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  Speaker 1: cars when we start to get that nervous, and then
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  Speaker 1: we're gonna move a shift in the in the different direction,
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  Speaker 1: and then you're gonna start to see it show up
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  Speaker 1: in the markets, and things are going to get a
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  Speaker 1: lot more a lot more dicey, and prospects for a
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  Speaker 1: turn down in the stock market and the economy will
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  Speaker 1: start to get certainly higher, if not real high. Alright,
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  Speaker 1: so he let's say your forecast is accurate, and things
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  Speaker 1: will kind of grind a law a little bit higher
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  Speaker 1: all the time over the next two and a half years.
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  Speaker 1: I'm wondering what's the best way for investors to allocate
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  Speaker 1: to markets. Is it by you know, passive funds that
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  Speaker 1: look to broad state look to capture gains and broad
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  Speaker 1: swaths of UH specific stock markets. Is it active managers?
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  Speaker 1: What are you advising clients? What's your approach that is
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  Speaker 1: a really great question, because you and I both know
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  Speaker 1: that that the passive investing has worked a lot better
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  Speaker 1: than active investing up until really this year, and this
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  Speaker 1: year we're starting to see a little bit of a
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  Speaker 1: shift and active managers have been doing a lot better.
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  Speaker 1: Whether you lose exchange traded funds for passive investing or
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  Speaker 1: you start to look at active managers, I'm not sure
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  Speaker 1: how what the outcome is going to be. The Only
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  Speaker 1: thing I can say with a lot of confidences, especially
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  Speaker 1: given my forecast, is that you need to have a
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  Speaker 1: meaningful allocation, whether it's passive or active, meaningful allocation to equities,
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  Speaker 1: in other words, don't go in the bunkers right now.
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  Speaker 1: For example, if your target of fifty equities and you've
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  Speaker 1: got a range of say thirty to sixt of toleration range,
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  Speaker 1: you might be up and around and I wouldn't change
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  Speaker 1: that whether it's active or passive. But your question, should
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  Speaker 1: it be active, should it be passive? Great question. We're
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  Speaker 1: all grappling with that question, and we're starting to see
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  Speaker 1: active managers outperform indexes or passive management. You have you
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  Speaker 1: ever had a customer or a client who pulled their
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  Speaker 1: account because the performance was let's say, two hundred basis
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  Speaker 1: points less than some benchmark. Does that really happen on
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  Speaker 1: a regular basis, Well, we've been lucky, we've been fortunate.
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  Speaker 1: We don't take of the levels of risk that they're
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  Speaker 1: going to give us that two hundred basis points below benchmark.
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  Speaker 1: If we did, I wouldn't be at all surprised if
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  Speaker 1: if investors did pull their poll stakes and and go
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  Speaker 1: to another another manager, because that's not what we promised them.
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  Speaker 1: We've promised them that we're going to be a roughly
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  Speaker 1: fifty basis points below fifty basis points above. We've had
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  Speaker 1: really good luck or fortune because we picked some really
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  Speaker 1: good stocks in the last couple of years, so we've
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  Speaker 1: been well above benchmark. I don't think we're for any
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  Speaker 1: long extended period of time, we'll be honestly going to
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  Speaker 1: depart very significantly from benchmark, and that means no downside
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  Speaker 1: and therefore no loss of customers on Our customers are
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  Speaker 1: quite frankly like us, are kind of risk averse. They
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  Speaker 1: really want you to do okay in an up market,
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  Speaker 1: but what they want more than anything is is really
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  Speaker 1: to preserve capital in the down market, because that's the
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  Speaker 1: secret long term performance. You real quick, how are you
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  Speaker 1: creating that insurance building it into the portfolio. You do
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  Speaker 1: it in a lot of different ways. There's a meaningful,
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  Speaker 1: you know, balanced portfolio. The second thing is you reduced
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  Speaker 1: risk by having high quality names in the portfolio. But
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  Speaker 1: much more importantly is to have a relative balance among
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  Speaker 1: things in the portfolio, so you don't make a significant
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  Speaker 1: bet when it comes to sector allocation. Sector allocation, you
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  Speaker 1: can certainly be overweight technology, maybe a little bit underweight analogy,
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  Speaker 1: but you have to have us. You have to have
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  Speaker 1: allocation to all my view, all eleven sectors in the market.
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  Speaker 1: You can't can significantly overweight small cap stucks. Have a
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  Speaker 1: meaningful allocation to large, mid, and small, but not so
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  Speaker 1: significantly different from the benchmark. In other words, don't take
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  Speaker 1: a lot of sector or capitalization risk. That's just simply
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  Speaker 1: a mistake, Thank you very much. Hugh Johnson, Chairman, chief
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  Speaker 1: investment Officer, Hugh Johnson Advisors. Well, let's say get more
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  Speaker 1: information about a group of companies that will be reporting
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  Speaker 1: their results. We're gonna get Eli, Lily and Biogen they'll
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  Speaker 1: come out with their results tomorrow. Plus we've got am
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  Speaker 1: Jen and Gilliad Sciences. This week, Bristol Myers, Squib, Murky, LII,
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  Speaker 1: Lily and for that we've got Sam Fizzelli. He's the
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  Speaker 1: director of research for Bloomberg Intelligence in London. Knows weything
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  Speaker 1: about these companies. Sam, thank you very much for spending
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  Speaker 1: time with us. Where do you want Where do you
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  Speaker 1: want to begin? What's the most important results or what
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  Speaker 1: should we be looking for this week? Because we've got
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  Speaker 1: a variety of companies, right, I'm going to begin with
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  Speaker 1: just talking about the large farmer companies because that's where
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  Speaker 1: I spend most of my time looking at things I
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  Speaker 1: want to do. Glaxo Smith Klein, we can, but you
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  Speaker 1: have to admit that I think the star of the
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  Speaker 1: show this week and frankly for the third quarter will
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  Speaker 1: be Eli Lily. Okay, so that's tomorrow. That's tomorrow. They've
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  Speaker 1: got some decent sales growth expected about six percent. But
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  Speaker 1: really what's going on in Lily is not only you're
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  Speaker 1: getting new drugs and some existing key drugs such as
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  Speaker 1: Trilicity and Jardians driving the top line and they're both
• 9:44
  Speaker 1: for diabetes and we know what a big problem that is,
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  Speaker 1: but it's really the margin story and Lily that's quite
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  Speaker 1: attractive and exciting and in that the company is working
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  Speaker 1: has got a long way to come and meet and
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  Speaker 1: beginning where near some of the others others peers obviously
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  Speaker 1: other other peers, therefore giving it an opportunity to give
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  Speaker 1: us almost three times its sales growth in EPs growth
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  Speaker 1: expectations for this quarter. So that that's really what's driving
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  Speaker 1: the excitement on that one. Can you give us a
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  Speaker 1: sense of what's driving that? Is that that they can
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  Speaker 1: price their drugs at a higher spot is because they're
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  Speaker 1: cutting staff. I mean, where are the where are the
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  Speaker 1: margins coming from? Well, I mean again, Lily has been
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  Speaker 1: one of those companies that, putting beer aside, has been
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  Speaker 1: at the low end of operating margins among all of
• 10:34
  Speaker 1: its what we call the thirteen large farmer peers if
• 10:37
  Speaker 1: you still want to call beer a large beyer a
• 10:40
  Speaker 1: large farmer company. So there's a lot of room for
• 10:43
  Speaker 1: for the performance there, and a lot of it that
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  Speaker 1: comes from basically a lot um operational leverage that they're
• 10:49
  Speaker 1: getting and also more consolidating its sales and and and
• 10:54
  Speaker 1: different aspects of their business, which the new CEO is
• 10:58
  Speaker 1: particularly focused on in terms of delivering, although it has
• 11:01
  Speaker 1: been a target for the past couple of years at
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  Speaker 1: least to get that margin the one they look at,
• 11:07
  Speaker 1: which is R and D plus scn A expenses as
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  Speaker 1: a percentage of sales to below and they're doing a
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  Speaker 1: pretty good job of getting that. So it's not just
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  Speaker 1: about drug pricing. In fact, if I may, Lily has
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  Speaker 1: been one of those that's not been uh particularly aggressive
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  Speaker 1: in its price rises, especially in the insulin area where
• 11:28
  Speaker 1: there's been a lot of attention recently diabetes, where if
• 11:31
  Speaker 1: you look at the net price of the insulin products
• 11:34
  Speaker 1: on the market, they've been flat for past three four
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  Speaker 1: five years, so no real net increasing prices. It's volume
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  Speaker 1: that's driving that well. And I just want to get
• 11:43
  Speaker 1: your thoughts and if you can look just a one
• 11:45
  Speaker 1: more about ELI Lily having to do with patent litigation
• 11:49
  Speaker 1: and patent interpretation, how's that can affect the company? Well,
• 11:54
  Speaker 1: I mean, you know, they have they're they're affected by
• 11:57
  Speaker 1: patent experience that they're like everybody else. They haven't anything
• 12:00
  Speaker 1: particularly um different to trying to protect their patents. And
• 12:05
  Speaker 1: they've got one that's coming up with a Limita, which
• 12:08
  Speaker 1: is a cancer drug a billion I have two billion
• 12:11
  Speaker 1: dollars of sales in total and that is going through
• 12:15
  Speaker 1: the motions. It was challenged by IPRs and it's one
• 12:18
  Speaker 1: some of those who has been challenged in the UK
• 12:20
  Speaker 1: and it won those So but eventually the molecule will
• 12:24
  Speaker 1: go off patterns and there's nothing you can do about that.
• 12:26
  Speaker 1: You're you know, this is a formulation pattern that they've
• 12:28
  Speaker 1: been protecting and it seems to have the test of
• 12:31
  Speaker 1: time so far, but eventually it will come. Other than that,
• 12:34
  Speaker 1: there's nothing really in there that they're not doing any
• 12:37
  Speaker 1: special moves or if if you're referring to, for instance,
• 12:42
  Speaker 1: doing a deal with whether they with a tribe or
• 12:45
  Speaker 1: anything like that, nothing like, nothing like that has happened there.
• 12:48
  Speaker 1: I'd love to just get a quick overview of what
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  Speaker 1: to expect from Mark because it seems like they have
• 12:54
  Speaker 1: a less rosy expectation with respect to margins and how
• 12:58
  Speaker 1: much their sales could right right right, Yeah, So America
• 13:02
  Speaker 1: is in a very cut throat business at the moment,
• 13:04
  Speaker 1: in the cop throat business of emmano oncology in cancer
• 13:08
  Speaker 1: trying to get and it's working immune system, the patient's
• 13:12
  Speaker 1: immune system to attack their own cancer. So they are
• 13:15
  Speaker 1: they lead along with Bristol Myers, who had the first
• 13:19
  Speaker 1: drug on the market in this mechanism, in this in
• 13:23
  Speaker 1: this arena called the year Boy a few years back.
• 13:27
  Speaker 1: But basically it's so cutthro So you've got Astroseneca, Rush,
• 13:32
  Speaker 1: Bristol Myers and Mark all competing to get the biggest,
• 13:36
  Speaker 1: broadest indications and the largest number of combinations worked out
• 13:41
  Speaker 1: for treating cancer, which costs money and it needs marketing.
• 13:45
  Speaker 1: So what Mark has been very open with is we
• 13:48
  Speaker 1: are getting some sales potentially in the system. I mean,
• 13:51
  Speaker 1: the sales are expected to be about flat in three
• 13:53
  Speaker 1: Q versus last year because they've got generic expiries, but
• 13:57
  Speaker 1: don't expect margin evolution there. Because we've a twine, we're
• 14:00
  Speaker 1: going to have to invest in the business. W'd be
• 14:02
  Speaker 1: pretty open about this, which of course is a bit
• 14:04
  Speaker 1: tough when you really only have one drug that's growing,
• 14:06
  Speaker 1: We're gonna have to leave it there, unfortunately. Thank you
• 14:08
  Speaker 1: so much for joining us, Sam Fazzelli, director of research
• 14:10
  Speaker 1: for Bloomberg Intelligence, coming to us from London. Well, Haliburton
• 14:28
  Speaker 1: reported earnings this morning, Schlumberge last week, and here to
• 14:32
  Speaker 1: tell us what the highlights are. Liam Denning Bloomberg Gatflight
• 14:36
  Speaker 1: columnists covering energy. So what stood out from you with
• 14:40
  Speaker 1: respect to Haliburton's earnings. It shares are down slightly, although
• 14:43
  Speaker 1: not as down as schlumber Jay's. Yes, So the biggest
• 14:48
  Speaker 1: thing here is just the different messages coming out of
• 14:50
  Speaker 1: these two companies. So um, the key differences between Schlumberjo
• 14:54
  Speaker 1: and haliber and his halib And is much more North
• 14:56
  Speaker 1: America focused, like six revenue slamba, it's round a third.
• 15:01
  Speaker 1: So Haliburton whenever there's a big uptick in US activity,
• 15:05
  Speaker 1: particularly in the shale basins, Haliburton is the usual beneficiary.
• 15:08
  Speaker 1: And so when Slumberge reported on Friday, North America was
• 15:12
  Speaker 1: kind of the only bright spot in their earnings, which
• 15:14
  Speaker 1: made it very likely that Haliburton was going to step
• 15:16
  Speaker 1: up and beat earnings. And and that's exactly what it
• 15:19
  Speaker 1: did on on Monday morning. Well, I just just explained
• 15:22
  Speaker 1: why North America is doing so much better than everywhere
• 15:25
  Speaker 1: else for them. So a big reason is it's really
• 15:30
  Speaker 1: a timing thing, and it's this is actually kind of
• 15:32
  Speaker 1: the crux of the difference between the two companies, and
• 15:34
  Speaker 1: it kind of reflects a big difference in the global
• 15:37
  Speaker 1: or market what we're seeing at the moment is in
• 15:40
  Speaker 1: the old days, what would happen is the all price
• 15:42
  Speaker 1: would collapse and then everyone would stop investing, and then
• 15:47
  Speaker 1: the all price would rise, But then it would take
• 15:49
  Speaker 1: several years for everyone to you know, find new wells
• 15:53
  Speaker 1: of fine new prospects, drill wells, bring the oil into production,
• 15:56
  Speaker 1: and so you have a fairly long cycle. What shale
• 15:58
  Speaker 1: has done is it's kind of short cirkuted that what
• 16:01
  Speaker 1: happens is the old price has come down, but then
• 16:04
  Speaker 1: as soon as the old price gets back above fifty
• 16:07
  Speaker 1: bucks or so, and particularly a year out, which is
• 16:10
  Speaker 1: when MP companies are hedging their future production, they all
• 16:13
  Speaker 1: kind of get back to work, which then caps the rally.
• 16:17
  Speaker 1: And so that's a big difference we've seen in schlimber
• 16:19
  Speaker 1: Jan Haliburton's outlook. Schlimberja is saying things are slowing down
• 16:22
  Speaker 1: in North America. All prices are gonna rise. We're going
• 16:25
  Speaker 1: to see a big uptick in international drilling coming through.
• 16:29
  Speaker 1: Haliburton less certain about that, all right, Leo, let me
• 16:33
  Speaker 1: just go to a couple of sort of points here,
• 16:34
  Speaker 1: right because a crude or right now trading on the
• 16:36
  Speaker 1: NIMEX seventy six cents for a barrel. That's West Texas.
• 16:41
  Speaker 1: Let's go through margins when it comes to Haliburton, good margins, right,
• 16:45
  Speaker 1: they have very good margins. They kind of took a
• 16:48
  Speaker 1: hit earlier this year. You may remember they issued a
• 16:50
  Speaker 1: profit warning the first quarter and that, But wasn't that
• 16:54
  Speaker 1: to take some some of their capacity out of the
• 16:58
  Speaker 1: market and to then prepare air for what they thought
• 17:01
  Speaker 1: was going to and has happened, which is this extensive tracking. Yeah,
• 17:04
  Speaker 1: and they were actually talking. What they did was actually
• 17:07
  Speaker 1: they put more capacity into the market, so they had
• 17:09
  Speaker 1: to take a big post up front to redeploy that stuff.
• 17:12
  Speaker 1: And it's it's paid off because there their incremental margins
• 17:15
  Speaker 1: since then have been have been up quite sharply. What
• 17:17
  Speaker 1: about efficiency gains, because they're pointing to the fact, and
• 17:20
  Speaker 1: you've written about this that it's that they are focused
• 17:23
  Speaker 1: on the fact that it's going to cost a lot
• 17:24
  Speaker 1: less money in the future to get whatever you want
• 17:27
  Speaker 1: out of the ground, whether it's the shale oil or
• 17:29
  Speaker 1: regular oil. That's right. One of the one of the
• 17:31
  Speaker 1: points actually made on the coolest morning was they said,
• 17:34
  Speaker 1: look you look at the rig count. It's it's way
• 17:36
  Speaker 1: down on what it was. But the fact is people
• 17:40
  Speaker 1: are drilling alonger wells. They said, actually foot for foot,
• 17:44
  Speaker 1: we're actually drilling as much this year as we did
• 17:47
  Speaker 1: when all was at a hundred bucks. So maybe you
• 17:49
  Speaker 1: can get rid of the Baker hughes like weakly, you know, up, down, sideways,
• 17:53
  Speaker 1: you know which way it moves. Because tech this is
• 17:55
  Speaker 1: as much a technology story. Well yeah, makesure week, But
• 18:00
  Speaker 1: I mean is this true though that? I mean it
• 18:02
  Speaker 1: really there has become a technology story when you're talking
• 18:04
  Speaker 1: about energy markets. Absolutely. I mean this has been a
• 18:07
  Speaker 1: theme for at least the past year. You know, Halibut
• 18:10
  Speaker 1: and struck, this alliance with Microsoft. We're seeing these kind
• 18:12
  Speaker 1: of alliances being struggled over the sector. So there was
• 18:16
  Speaker 1: sort of an implication there when you're talking about how
• 18:18
  Speaker 1: Schlumberge seems confident that prices are going to rise and
• 18:21
  Speaker 1: Haliburton seems less sure of that. It's part of that,
• 18:26
  Speaker 1: first of all, that Schlumberja needs prices to rise in
• 18:30
  Speaker 1: order to hit its projections, and how high does it
• 18:32
  Speaker 1: have to see prices rise? And what's Haliburton seeing as
• 18:35
  Speaker 1: far as a projected crude value in the future. Well,
• 18:39
  Speaker 1: let's Let's let's note first that they're both talking their
• 18:42
  Speaker 1: own book, right, so of course, but this is important
• 18:44
  Speaker 1: to see how they're talking there. I would say it's
• 18:47
  Speaker 1: less it's less a price level, and it's more to
• 18:49
  Speaker 1: do with something that Haliburton raised on the call, which
• 18:51
  Speaker 1: I think was very interesting. So if you go back
• 18:54
  Speaker 1: to that point I made about the short cycle kind
• 18:56
  Speaker 1: of nature of shale, with shale drillers, all they need
• 19:00
  Speaker 1: to see is the al price to get appreciably above
• 19:03
  Speaker 1: fifty bucks a barrel over the next twelve months for
• 19:08
  Speaker 1: an international project. And this is the point Haliberta made.
• 19:11
  Speaker 1: If you're going to drill a deep water field somewhere
• 19:13
  Speaker 1: in Africa, you not only need to see that price
• 19:16
  Speaker 1: rise above fifty bucks or whatever level it is that
• 19:18
  Speaker 1: you need for the next twelve months, you've got to
• 19:21
  Speaker 1: think it's going to hold that for at least three
• 19:23
  Speaker 1: to four years, because otherwise, why would you drill a
• 19:26
  Speaker 1: well that isn't going to start producing the two to
• 19:28
  Speaker 1: three four years. And I think that's the key challenge. Well,
• 19:34
  Speaker 1: that's also the challenge for investors, right because of whether
• 19:36
  Speaker 1: your long term depends how much money you're going to
• 19:38
  Speaker 1: put in the ground to get out what's going to
• 19:39
  Speaker 1: pay you back? Right, And that's why we've seen, particularly
• 19:42
  Speaker 1: with the international companies. You know, even though this is
• 19:45
  Speaker 1: apparently a historic opportunity to invest well, prices of rigs
• 19:50
  Speaker 1: and that sort of thing are low. You'll notice all
• 19:52
  Speaker 1: their investors are basically saying, pay us dividends because we
• 19:55
  Speaker 1: don't want you putting it in the ground. Thanks very
• 19:57
  Speaker 1: much for joining us and always appreciate your column. So
• 20:00
  Speaker 1: he's our Gadfly columnist when it comes to energy, mining
• 20:03
  Speaker 1: and commodities, Liam Denning, and you can follow him on
• 20:07
  Speaker 1: Twitter at Liam Denning. It's time to pay up. Well,
• 20:22
  Speaker 1: Friday is the time to pay up, and next week
• 20:25
  Speaker 1: might be the time to pay up if you happen
• 20:27
  Speaker 1: to be the Venezuelan nationally owned the oil company. Here
• 20:30
  Speaker 1: to tell us more about the debt situation and Venezuela
• 20:33
  Speaker 1: is Jamine Patel, our senior credit analyst for Bloomberg Intelligence,
• 20:38
  Speaker 1: and Jamine, thanks very much for being with us. Appreciate it.
• 20:41
  Speaker 1: Maybe just set out for people exactly how much does
• 20:44
  Speaker 1: PETA vesa, oh will it be able to pay? And
• 20:47
  Speaker 1: then maybe just describe the relationship that it has with
• 20:51
  Speaker 1: ros Neft and how that might sort of play into
• 20:53
  Speaker 1: all of this. Sure, First of all, thank you for
• 20:56
  Speaker 1: having me um to to your first question, how much
• 21:00
  Speaker 1: how much? Instead of oh, we really have to look
• 21:02
  Speaker 1: at both Peta Vesta and and the Venezuela sovereign jet
• 21:07
  Speaker 1: because you know, it's sort of hard to to differentiate
• 21:10
  Speaker 1: between the two. The two are are really quite integrated.
• 21:14
  Speaker 1: And to the extent that at investor doesn't have funds
• 21:17
  Speaker 1: to make its bond payments, then um, I think you
• 21:20
  Speaker 1: have to you have to turn to the sovereign. So
• 21:23
  Speaker 1: the total they're if you're looking at the at the
• 21:25
  Speaker 1: total bonds is about sixty seven billion, but you have
• 21:30
  Speaker 1: to add to that somewhere around fifty billion of loans
• 21:34
  Speaker 1: primarily from from China, Russia and UH, you know through
• 21:40
  Speaker 1: potentially through Rosneft as well, so that number could be
• 21:43
  Speaker 1: as highs undred and twenty billion. Now, what's coming to
• 21:46
  Speaker 1: do this week and next week is UH is an
• 21:49
  Speaker 1: amatizing amatization payment on a on a secured bond that's
• 21:54
  Speaker 1: about eighty four eight d forty million, and then there
• 21:59
  Speaker 1: is about one a little over a billion dollars on
• 22:03
  Speaker 1: a on a regular on secure bond coming due in
• 22:06
  Speaker 1: November the second. Yeah, but jaymen, let's just take a
• 22:09
  Speaker 1: step back for for a moment. So Venezuela is obviously
• 22:12
  Speaker 1: deeply troubled from a political point of view, and literally,
• 22:16
  Speaker 1: uh people are starving in the country, with an average
• 22:20
  Speaker 1: weight loss of I think twenty pounds in the past
• 22:22
  Speaker 1: year or two among the population. I mean, there's been
• 22:26
  Speaker 1: a huge shortage of food. There have been longlines for
• 22:29
  Speaker 1: the most basic supplies, a lot of tension rising, and
• 22:32
  Speaker 1: there is a question about whether a default on the
• 22:36
  Speaker 1: nation's sovereign debt would force the current leader, Maduro UH
• 22:42
  Speaker 1: to exit, right, I mean so, so the question is,
• 22:45
  Speaker 1: is Venezuela about default given that they have more than
• 22:48
  Speaker 1: two billion dollars coming due in the next two weeks
• 22:51
  Speaker 1: with limited resources to cover that. Well, Um, you know
• 22:57
  Speaker 1: that that that's the big question at this point, and
• 22:59
  Speaker 1: it really has come down to crunch times of these guys. Um,
• 23:03
  Speaker 1: it's entirely possible that they will make the payments. Um.
• 23:07
  Speaker 1: The history here has been every time a maturity has
• 23:10
  Speaker 1: come to you, they have somehow come up with the funds,
• 23:12
  Speaker 1: either by securing SITCO or borrowing from from outside sources. Uh.
• 23:18
  Speaker 1: To to to make the payments, cutting capex, cutting their
• 23:22
  Speaker 1: imports um in order to fill that cash flow gap.
• 23:25
  Speaker 1: So um, it appears that they are working on a
• 23:29
  Speaker 1: deal with Rosine to enter into either some mapter tales
• 23:32
  Speaker 1: or jvs which potentially will come up with enough consideration
• 23:36
  Speaker 1: to make these payments. Total payments are somewhere between three
• 23:39
  Speaker 1: and three and a half billion, because the two billion
• 23:42
  Speaker 1: or so and and some interest payments. Okay, that's a
• 23:47
  Speaker 1: two weeks about three and a half bills. Well, actually
• 23:49
  Speaker 1: over the next week or so, there's one on Friday,
• 23:51
  Speaker 1: and then there's one on November the TEWOD, so October
• 23:54
  Speaker 1: twenty seven and November the SEWOD, So they really cannot
• 23:59
  Speaker 1: afford it to fall. I mean, I think I think
• 24:00
  Speaker 1: a default would be would be almost unthinkable just given
• 24:04
  Speaker 1: uh that petty best accounts for something like their effects flows.
• 24:09
  Speaker 1: So if petty Vest were to stop functioning as it
• 24:12
  Speaker 1: does right now, which would potentially happen in default, I
• 24:16
  Speaker 1: think things would go from bad to verse for for
• 24:18
  Speaker 1: the people UH as as well as obviously the government.
• 24:22
  Speaker 1: So I think even the opposition really doesn't want to
• 24:24
  Speaker 1: want to see a default here. Jaman, how did they
• 24:27
  Speaker 1: sell the stuff to begin with. I mean, it's not
• 24:29
  Speaker 1: as if the situation in Venezuela is that new. No, No,
• 24:34
  Speaker 1: it isn't. It's it's it's been going on for a while.
• 24:37
  Speaker 1: But you know, when oil prices are at a hundred
• 24:40
  Speaker 1: dollars of barrel or higher, Uh, it's much easier to
• 24:44
  Speaker 1: manage your your your balances um at forty dollars forty
• 24:49
  Speaker 1: five dollars um, particularly when you don't have a rainy
• 24:52
  Speaker 1: day fund, when you haven't prepared for it, things urry
• 24:56
  Speaker 1: very quickly. Uh. Now, the government just to answer you
• 25:00
  Speaker 1: know earlier question if if there is a default, I
• 25:02
  Speaker 1: think I think there's a good chance that uh President
• 25:06
  Speaker 1: Muduro it would have to uh potentially leave this post,
• 25:10
  Speaker 1: potentially even leave the country. UM. So I think I
• 25:13
  Speaker 1: think they will do everything they can to to make
• 25:15
  Speaker 1: this particular payment. Uh and then don't forget there at
• 25:18
  Speaker 1: election coming due a presidential election in uh towards the
• 25:21
  Speaker 1: end of next year, November of next year, at which
• 25:24
  Speaker 1: point Venezuela has some some fairly heavy majorities coming to
• 25:29
  Speaker 1: you that they have to make. So can we just
• 25:32
  Speaker 1: get a sense of why Russia and China are continuing
• 25:36
  Speaker 1: to lend to Venezuela when Venezuela doesn't seem to be
• 25:38
  Speaker 1: getting more credit worthy uh and is igniting ire among
• 25:42
  Speaker 1: other big economies like the US. Well, I think I
• 25:47
  Speaker 1: think China to me seems to be pretty much maxed
• 25:50
  Speaker 1: out at this point. I don't think they're going to
• 25:52
  Speaker 1: be putting a lot more um uh in terms of
• 25:56
  Speaker 1: investment in the country. H. Russia has has a potentially
• 26:00
  Speaker 1: different agenda. Much of it may be political Venezuela's ties
• 26:04
  Speaker 1: to Cuba some of the other Caribbean nations UM. But
• 26:09
  Speaker 1: it's also a way for them to ensure that they
• 26:11
  Speaker 1: have a steady supply of oil UM going forward. Not
• 26:15
  Speaker 1: that Russia itself doesn't uh, it is not a heavy
• 26:18
  Speaker 1: oil producer, but uh, this this just gives them that
• 26:22
  Speaker 1: one additional avenue and and then a lot of it
• 26:24
  Speaker 1: is political as well, political influence, political economic ties. The
• 26:30
  Speaker 1: two countries have been tied for a long time. There
• 26:32
  Speaker 1: have been significant arms sales from from Venezuela to excuse me,
• 26:38
  Speaker 1: from Russia to Venezuela, So I think it will sort
• 26:41
  Speaker 1: of ties in with that. Just quickly, jamine if if
• 26:45
  Speaker 1: you got a call from an investor who recently had
• 26:48
  Speaker 1: purchased some of this Venezuelan Petave said that what would
• 26:51
  Speaker 1: you be explaining to them that they may they may
• 26:54
  Speaker 1: not know. I mean, they might know about the risks
• 26:56
  Speaker 1: of of repayment, but what about the potential for unexpected activity,
• 27:01
  Speaker 1: whether it's from Russia, China or indeed even the Venezuelan regime. Well,
• 27:06
  Speaker 1: I think you really have to differentiate between the long
• 27:09
  Speaker 1: term and the short term bond holders, the the the
• 27:11
  Speaker 1: immediate bonds that are coming to the ones that I
• 27:13
  Speaker 1: talked about on Friday and and next week. UM. You know,
• 27:17
  Speaker 1: at this point it really depends upon whether they this
• 27:19
  Speaker 1: Russian deal comes through. Um. And and that's not even
• 27:23
  Speaker 1: getting into the technical side of of of things, because
• 27:27
  Speaker 1: there is no great sperod on these payments. So if
• 27:29
  Speaker 1: they don't make them, the bond holes could there they
• 27:31
  Speaker 1: could call it default. UM. For the long term bondholders, UM,
• 27:36
  Speaker 1: it's it's you've got a country here which has got
• 27:40
  Speaker 1: in oil reserves, so it's not a solvency issue. It
• 27:42
  Speaker 1: really has a liquidity issue. UM. And if if there
• 27:46
  Speaker 1: is a regime change, and that's really what what the
• 27:50
  Speaker 1: bond holders will be looking for in the long run, UM,
• 27:53
  Speaker 1: then that would open up all sorts of avenues for
• 27:56
  Speaker 1: additional aid, because then they could reengage with the IMF,
• 28:00
  Speaker 1: big agreen age with the us UH. Some of the
• 28:02
  Speaker 1: sanctions we lifted and so on. We're gonna have to
• 28:04
  Speaker 1: leave it there. Thank you so much for joining us.
• 28:06
  Speaker 1: Jaman Patel, Senior credit strategist for Bloomberg Intelligence, talking about
• 28:10
  Speaker 1: Venezuela debt coming do. Thanks for listening to the Bloomberg
• 28:17
  Speaker 1: P and L podcast. You can subscribe and listen to
• 28:19
  Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 28:24
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 28:28
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 28:31
  Speaker 1: You can always catch us worldwide on Bloomberg Radio