Latest / Bloomberg Intelligence / Markets may be facing disrespectful tweet fatigue : Paulsen

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Markets may be facing disrespectful tweet fatigue : Paulsen · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
• 0:11
  Speaker 1: bring you the most important, noteworthy, and useful interviews for
• 0:15
  Speaker 1: you and your money, whether you're at the grocery store
• 0:17
  Speaker 1: or the trading floor. Find the Bloomberg P M L
• 0:20
  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. So,
• 0:33
  Speaker 1: now that companies are earning so much money and the
• 0:36
  Speaker 1: cash that they have is slashing around their balance sheets,
• 0:39
  Speaker 1: how much are they paying down that debt that they
• 0:43
  Speaker 1: have been borrowing, the trillions of dollars of debt that
• 0:45
  Speaker 1: they've been incurring over the past eight years. Here to
• 0:48
  Speaker 1: answer that question, Joel Levington, see your credit analyst for
• 0:52
  Speaker 1: Bloomberg Intelligence. He writes amazing reports. He joined us here
• 0:55
  Speaker 1: in our eleven three oh studios. Joel, you did a
• 0:58
  Speaker 1: study looking at lover ratios among companies. Basically, this is
• 1:02
  Speaker 1: the amount of death that they have relative to the
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  Speaker 1: income that they have. How do things look right now? Uh? Well,
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  Speaker 1: I'll tell you, Lisa, not that great. It's um uh.
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  Speaker 1: You know, metrics continue to remain elevated. We've done nine
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  Speaker 1: studies over the last five years, and we're right or
• 1:20
  Speaker 1: at the highest point for all the major reading classes
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  Speaker 1: except for the junkiest class, the single B T here,
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  Speaker 1: which has slightly improved. Okay, to be clear. In other words,
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  Speaker 1: corporate leverage has increased to the highest levels in data
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  Speaker 1: going back four years. Right, that's right, uh, and it
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  Speaker 1: has steadily increased even though the cash flows have increased
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  Speaker 1: profits have increased. That has not offset the rapid Uh,
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  Speaker 1: the rapid selling of debt. That's exactly right. And earnings
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  Speaker 1: are are robust and healthy. However, tables have turned towards
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  Speaker 1: capital allocation plans where it's share repurchases, dividends and acquisitions,
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  Speaker 1: and the can that's being used for those three items
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  Speaker 1: are at least exceeding cash that is being generated, and
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  Speaker 1: therefore leverage can't improve. Alright, So let's dig into here
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  Speaker 1: a little bit. I mean, you're starting to see investors
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  Speaker 1: express concern at all about leverage increasing or are they
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  Speaker 1: still pretty much in a free for all? Take my money,
• 2:19
  Speaker 1: you care. It's a great question. The beyond just the
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  Speaker 1: individual company specific items, where I hear at the most
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  Speaker 1: is in the triple B category, which has increased a
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  Speaker 1: lot over the last few years. Uh, and what I
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  Speaker 1: find it's very bifurcated. You could look at subsectors and
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  Speaker 1: I would say it. My thirty second takeaway on it
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  Speaker 1: is that insectors that the reading agencies view as stable,
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  Speaker 1: like consumer cyclical excuse me, consumer stables, as well as healthcare.
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  Speaker 1: The reading agencies have allowed the companies to level up
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  Speaker 1: much more than you would traditionally find, sometimes to even
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  Speaker 1: six times leverage, with the hope that a deal will
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  Speaker 1: pan out well and that cash flow will pay down
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  Speaker 1: debt over the next couple of years. Having been around
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  Speaker 1: the business for a long time, that never really happens
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  Speaker 1: exactly the way people plan. This is such an important
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  Speaker 1: conversation because everyone talks about how much earnings are increasing,
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  Speaker 1: but the other side of the balance sheet is also inflating,
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  Speaker 1: and frankly inflating at a faster pace. And I feel
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  Speaker 1: like this is a really important thing to realize. I
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  Speaker 1: want to shift gears a little bit because you highlighted
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  Speaker 1: another research piece that you put out that auto bonds
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  Speaker 1: have been among the worst performers of the year, and
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  Speaker 1: given what you've seen, you don't necessarily think that will change.
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  Speaker 1: That's right, you know, statistically, auto demand hinges on about
• 3:42
  Speaker 1: three factors. It's the price of the vehicle that you're buying,
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  Speaker 1: It's the loan rate uh that that you have, and
• 3:50
  Speaker 1: uh it's gas prices. As they rise, it makes it
• 3:54
  Speaker 1: tougher to bank that payment. And then so when you
• 3:57
  Speaker 1: look at those three things, they're all working again to us.
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  Speaker 1: If you're a car company, right, prices are already at
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  Speaker 1: the highest on record. That's a mixed change of people
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  Speaker 1: moving out of auto passenger cars and into cuvs and SUVs,
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  Speaker 1: So the prices working against you. Loan rates are already
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  Speaker 1: at their highs for the last five years, and of
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  Speaker 1: course you are expecting another like three hikes going forward.
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  Speaker 1: Can you give us a sense of which specific companies
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  Speaker 1: have been the worst performers in the bond world? Well,
• 4:30
  Speaker 1: forward in investment grade has been very very poor. UM.
• 4:34
  Speaker 1: I mean, do you think that investors might be pricing
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  Speaker 1: in a pretty substantial downgrade for Ford, because there's their
• 4:40
  Speaker 1: stocks have been down substantially as well, they've had turnover. Uh,
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  Speaker 1: they've really struggled to increase the profits. I don't think so.
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  Speaker 1: I think if you look at the forward bonds or
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  Speaker 1: g M bonds, uh, they trade as uh wide to
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  Speaker 1: their peers in consumer discretionary. But you can find a
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  Speaker 1: lot of retailers in that area too that have the
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  Speaker 1: wherewithal to down debt and may have less leverage and
• 5:02
  Speaker 1: maybe more cash flow. So I'm not sure that they've
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  Speaker 1: priced in a severe downturn or decline. I think what
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  Speaker 1: they see is that maybe they were priced too tight
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  Speaker 1: to begin with and are trying to reset valuation. You know,
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  Speaker 1: one thing I'm struck by is you're talking about the
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  Speaker 1: pressures on automakers and it includes higher costs for this
• 5:20
  Speaker 1: the goods that they purchase. And I'm wondering, especially as
• 5:23
  Speaker 1: we just finished that eventful G seven meeting, and that
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  Speaker 1: it seems like tariffs are going to be an ongoing theme.
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  Speaker 1: You know, are they going to be the prime losers
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  Speaker 1: from this because their input costs are gonna increase? And
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  Speaker 1: what other sectors are people not thinking about that also
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  Speaker 1: could be big losers. Well, I think you're totally right, Li.
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  Speaker 1: So when you think of raw material inflation, the auto
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  Speaker 1: market is so competitive, it's very very hard to pass
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  Speaker 1: these costs on. And when you think of rising rates
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  Speaker 1: and they have huge finance companies, many of them, Uh,
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  Speaker 1: you can't really pass that cost onto the consumer. You
• 5:57
  Speaker 1: have rising steel inflation. We were just talk about it earlier,
• 6:00
  Speaker 1: how addie auto suppliers down about sixteen seventent today because
• 6:05
  Speaker 1: they can pass UH raw material inflation through. So I
• 6:08
  Speaker 1: think these are the kinds of events that you could
• 6:10
  Speaker 1: start seeing pop up more frequently, and clearly that will
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  Speaker 1: not have a great impact on credit risk or bonds.
• 6:17
  Speaker 1: Is there another Is there another UH industry that could
• 6:20
  Speaker 1: also see UH sort of declines or pressure as a
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  Speaker 1: result of these increasing commodity prices. Well, in the industrial world,
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  Speaker 1: you do have a lot of use of oil and energy,
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  Speaker 1: so as those prices rise, I think you could see
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  Speaker 1: maybe in the machinery space where steel uses is also
• 6:37
  Speaker 1: quite high, so I could see margin compression happen over there,
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  Speaker 1: and maybe not the amount of expansion and that people
• 6:42
  Speaker 1: are expecting, and so that might be a place where
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  Speaker 1: you could see some problemats. Joel Livington, thank you so
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  Speaker 1: much for spending the time here. Joel Livington, senior credit
• 6:50
  Speaker 1: analyst for Bloomberg Intelligence, joining us here in our eleven
• 6:54
  Speaker 1: three oh studios. This study that they did on leverage
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  Speaker 1: trends really fascinating, showing just how much people have been
• 7:02
  Speaker 1: borrowing despite the increases in their earnings. Well, the market
• 7:21
  Speaker 1: is pretty much flat, despite the fact that we've had
• 7:25
  Speaker 1: quite a few pretty sensational headlines coming out over the
• 7:28
  Speaker 1: weekend and we expect more throughout the week. Why our
• 7:32
  Speaker 1: investors not responding at all to the escalating trade tensions
• 7:36
  Speaker 1: to the possible accord in Korea. Let's get some thoughts
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  Speaker 1: on that from James Paulson, chief investment strategist at the
• 7:43
  Speaker 1: Louth Whole Group in Minneapolis, Minnesota, and he joins us
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  Speaker 1: now by phone. James, thank you so much for being
• 7:49
  Speaker 1: with us. I'd love to get your sense, just to
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  Speaker 1: get this out of the way. You know, it feels
• 7:53
  Speaker 1: a little bit like the world is up in uh
• 7:57
  Speaker 1: in a in a roar of potential trade tensions and
• 8:00
  Speaker 1: people battling each other in with words and markets shrug
• 8:05
  Speaker 1: they do not care why. Well, it might be uh,
• 8:10
  Speaker 1: disrespectful tweet fatigue. I don't know, disrespectful tweet fatigue? Is that?
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  Speaker 1: Is that like going to be a thing? D TF?
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  Speaker 1: It's just t ts. I just think you know that
• 8:23
  Speaker 1: we've we've seen this story quite a bit in the
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  Speaker 1: last almost two years now. A lot of rhetoric, a
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  Speaker 1: lot of tough rhetoric even among countries now, but little
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  Speaker 1: really happens. And so that there has been market moves
• 8:41
  Speaker 1: in the past has been fairly significant on news like
• 8:44
  Speaker 1: we've had lately, and to no avail, and if you
• 8:48
  Speaker 1: sold out, you lost out because the markets sort of recovered.
• 8:52
  Speaker 1: And so I do think that the marketplace is becoming
• 8:57
  Speaker 1: a little less sensitive to that, reducing their eat it
• 9:00
  Speaker 1: to that type of flow of news. Now, if something
• 9:03
  Speaker 1: really happened fundamentally, um, certainly there'd be a different response.
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  Speaker 1: But but just tough talk. It's kind of we're getting
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  Speaker 1: used to tough talk. That's been the modus opera for
• 9:15
  Speaker 1: for the last couple years, even leading up to the election.
• 9:17
  Speaker 1: I think we're we're sort of adjusting how much we
• 9:20
  Speaker 1: move markets on the basis of that. And then the
• 9:23
  Speaker 1: other thing least, there's just such a good fundamental story
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  Speaker 1: under this right now, you know, with with just strong
• 9:29
  Speaker 1: economy here in the United States and high confident, strong
• 9:32
  Speaker 1: earnings UM, and I think there's also a growing abolishness
• 9:37
  Speaker 1: out there optimism about markets breaking out to the upside.
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  Speaker 1: So all those I think are factors keeping this market, uh,
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  Speaker 1: pretty healthy. In the face of some pretty striking headline news.
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  Speaker 1: One thing that I've foundishesting is that big tech has
• 9:52
  Speaker 1: continued to lead the rally. And I'm looking at the NASDAC,
• 9:55
  Speaker 1: which is just off a record high and has continued
• 9:59
  Speaker 1: to climb to about the year, out performing the other indiceason.
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  Speaker 1: I'm just wondering, you know, given some of the concerns
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  Speaker 1: around Facebook, given the incredible amount of debt that Netflix
• 10:08
  Speaker 1: is incurring to finance the entire business model, I mean,
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  Speaker 1: do you think that this has gone too far? Do
• 10:13
  Speaker 1: you think that this is just the beginning? Well, that's
• 10:16
  Speaker 1: a good question. I uh throde a piece a little
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  Speaker 1: bit called dot com deja vu uh here late last week. Uh.
• 10:23
  Speaker 1: There's certainly some you know, evidence that the movement of
• 10:28
  Speaker 1: tech stocks relatively overall market is is a little bit
• 10:32
  Speaker 1: uh like dot com here in the late ninety nines.
• 10:36
  Speaker 1: Over the last five years UM, for example, UH, technology
• 10:41
  Speaker 1: stocks within the SP five hundred of outperformed UM the
• 10:45
  Speaker 1: overall market by more than two to one UM at
• 10:49
  Speaker 1: the x Tech SMP five. If you look at the
• 10:52
  Speaker 1: last two or three years, tech stocks have outperformed the
• 10:55
  Speaker 1: x Tech SMP five hundred more by more than three
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  Speaker 1: to one, and the last year UH text docs ab
• 11:03
  Speaker 1: outperformed the S and B X tech by more than
• 11:05
  Speaker 1: four to one. Uh and even year to date roughly
• 11:09
  Speaker 1: tech stocks are up around the FO and X tech
• 11:13
  Speaker 1: is roughly flat. So UM there's a quite a dominance
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  Speaker 1: here of of tech stocks being the only game in
• 11:21
  Speaker 1: town that's leading. Much like the five years the let
• 11:24
  Speaker 1: up to two thousand. On a relative basis, Lisa S
• 11:28
  Speaker 1: and P five x technology to the overall SP has
• 11:33
  Speaker 1: fallen about half as much on a relative basis in
• 11:36
  Speaker 1: the last five years than it did during the dot
• 11:39
  Speaker 1: com So you could argue on a performance basis that
• 11:42
  Speaker 1: we've been experiencing almost a half a dot com type
• 11:45
  Speaker 1: of environment. I do think it's uh, it's a warning
• 11:49
  Speaker 1: sign of of concentration in a in a few popular names,
• 11:54
  Speaker 1: that all the flows are going into UM and ignoring
• 11:58
  Speaker 1: some of the potential risk that come with that. But
• 12:01
  Speaker 1: who knows how long that can continue. We we've you
• 12:04
  Speaker 1: could see that in and it continued to go on
• 12:07
  Speaker 1: as well. But I do think it's a growing risk. Well,
• 12:09
  Speaker 1: can we just dig in a little bit as to
• 12:12
  Speaker 1: how that risk could play out? Is the risk that
• 12:14
  Speaker 1: There could be, say, a big regulatory push with Facebook
• 12:18
  Speaker 1: and all of a sudden that brings down the entire
• 12:21
  Speaker 1: market just because they've become so dominant. Or is it
• 12:23
  Speaker 1: you know, the whole uh smartphone supercycle and then to
• 12:27
  Speaker 1: decline there? I mean that the kind of kind of
• 12:29
  Speaker 1: thing that could trigger this or would it be sort
• 12:31
  Speaker 1: of more wholesale Well, um, there could be a number
• 12:35
  Speaker 1: of things. I think what the risk suggests is just
• 12:38
  Speaker 1: the vulnerability is increasing, and if it increases enough, oftentimes
• 12:44
  Speaker 1: it could be any one of a number of different catalysts,
• 12:48
  Speaker 1: each of each of which individually might not even be
• 12:51
  Speaker 1: that important. But if you've got a vulnerable enough market,
• 12:53
  Speaker 1: it could be the straw that breaks the camel's back.
• 12:56
  Speaker 1: It could be something, as you say, direct, some new
• 13:00
  Speaker 1: is item directly related to the technology space itself. I
• 13:04
  Speaker 1: have noted earlier this year that there's a big difference
• 13:07
  Speaker 1: if you took the Fang plus index New York stage
• 13:11
  Speaker 1: fang plus index has about ten of those stocks most popular,
• 13:14
  Speaker 1: and you divide them up to those that are regulated
• 13:17
  Speaker 1: versus those that they're not. And I don't mean they
• 13:20
  Speaker 1: are regulated, but that those that rely more on social
• 13:24
  Speaker 1: uh reselling customer information for advertising purposes versus those of
• 13:29
  Speaker 1: selling actual product. Um, you already see quite a divergence.
• 13:33
  Speaker 1: The non regulated quote unquote are doing far better than
• 13:37
  Speaker 1: the regulated fangs, so the markets already discounting that risk.
• 13:40
  Speaker 1: If there was something official that came out, that certainly
• 13:44
  Speaker 1: could be a tipping point for tech leadership, but it
• 13:47
  Speaker 1: might also just happen because the tenure yield reaches a
• 13:50
  Speaker 1: point that starts to scare people, or inflation picks up,
• 13:53
  Speaker 1: and since everyone's in those areas, if if they do
• 13:57
  Speaker 1: start to sell, they're going to see the most selling
• 13:59
  Speaker 1: pressure as well. Just before I let you go, what
• 14:03
  Speaker 1: is the highest conviction trade you have right now? You know? Uh, Lisa,
• 14:09
  Speaker 1: I would I would add a little cash and maybe
• 14:15
  Speaker 1: a commod of the E T f uh in my
• 14:18
  Speaker 1: equity portfolio that stay in equities, but I'd sort of
• 14:21
  Speaker 1: change up how I'm writing them. Maybe have a little
• 14:25
  Speaker 1: cash if we do hit an air pocket, you can
• 14:27
  Speaker 1: go back in. And I like the commod of the
• 14:29
  Speaker 1: E T f UH. Commodities I think are going to
• 14:32
  Speaker 1: continue to go up. So those would be two things
• 14:34
  Speaker 1: I throw out as a possibility. Not have everything in
• 14:37
  Speaker 1: in in the current momentum of technology right now, and
• 14:40
  Speaker 1: just real quick, what would you sell in order to
• 14:43
  Speaker 1: raise more cash and invest I'd sell some of those
• 14:46
  Speaker 1: popular tech names right now. I pat myself in the
• 14:49
  Speaker 1: back for owning them. Well happen and shure that I
• 14:54
  Speaker 1: made a great decision and I give some of that
• 14:57
  Speaker 1: away to somebody that wants them real bad right now.
• 15:00
  Speaker 1: And Paulson, thank you so much for being with us.
• 15:02
  Speaker 1: Always a pleasure speaking with you. Jim Paulson is chief
• 15:04
  Speaker 1: investment strategist at the louth Hole Group. Coming to us
• 15:07
  Speaker 1: from Minneapolis, Minnesota, with its beautiful lakes. There's a lot
• 15:27
  Speaker 1: of focus on where people are putting their money, on
• 15:30
  Speaker 1: whether it is responsible UH. And our next guest wants
• 15:35
  Speaker 1: to responsibly build UH. He builds homes offices using containers,
• 15:43
  Speaker 1: the containers, shipping containers that are no longer being circulated.
• 15:47
  Speaker 1: I want to welcome Paul Galavin, Chairman and chief executive
• 15:50
  Speaker 1: officer of SG Blocks. Paul, your company is fastenating. Can
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  Speaker 1: you just give us a rundown? What does it do so?
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  Speaker 1: instruments of construction. The value proposition is a safer building
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  Speaker 1: are they pretty? Though? There's they're pretty? I mean, do
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  Speaker 1: from your perspective? Given the fact that I imagine there
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  Speaker 1: was a glut of containers at one point, the shipping
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  Speaker 1: industry took a pretty big hit. You know, how how
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  Speaker 1: much were they discounted for you? Our pricing is arranged
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  Speaker 1: on a sort of permanent basis with a partner we've
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  Speaker 1: had since inception conglobal industries who have fifteen locations and
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  Speaker 1: manage the overwhelming domestic inventory. So pricing is not normally
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  Speaker 1: an issue for US. Even now with the tariffs and
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  Speaker 1: the increase in steel prices, etcetera. Know that we don't
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  Speaker 1: anticipate that being a problem for US. Conglobal has an
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  Speaker 1: enormous inventory in the States already. Okay, so you don't
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  Speaker 1: think that that's going to increase the demand for UH
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  Speaker 1: that at that moment. All right. Um, And you guys
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  Speaker 1: went public last year, right correct? About a year ago?
• 17:36
  Speaker 1: About a year ago? And what was that experience like?
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  Speaker 1: It was an extremely invigorating, enthusiastic, exhausting experience. The I
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• 18:01
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• 18:04
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  Speaker 1: better alternative than traditional construction. How much do you pay
• 19:47
  Speaker 1: for each container? That varies between the age of use
• 19:52
  Speaker 1: and condition. It can range from two thousand to for
• 19:57
  Speaker 1: a new one. Do you feel like when there are
• 19:59
  Speaker 1: more containers on the market that represents something broader about
• 20:05
  Speaker 1: the economy, Because I know people look at the shipping
• 20:06
  Speaker 1: the dry bulk index for example, sort of you know,
• 20:09
  Speaker 1: the harbinger of doom if it drops too much. And
• 20:12
  Speaker 1: I'm just wondering, you know, if you shipping companies start
• 20:14
  Speaker 1: to try to sell their containers, does that have a
• 20:16
  Speaker 1: similar kind of residence. No, it's a good strategy for
• 20:22
  Speaker 1: the shipping companies to monetize assets that have been depreciated,
• 20:26
  Speaker 1: in other words, when they don't need them anymore. Yeah, well,
• 20:28
  Speaker 1: when the value of the net income isn't as valuable
• 20:31
  Speaker 1: to them, and they could sell the commodity and see
• 20:34
  Speaker 1: it repurposed in the economy and get a strike price
• 20:36
  Speaker 1: for that. From our perspective, the containers are building up
• 20:41
  Speaker 1: on our side of the pond because we're not manufacturing
• 20:46
  Speaker 1: what we need to. So at s G Blocks, we
• 20:49
  Speaker 1: take that container, which is a symbol of our failed
• 20:53
  Speaker 1: manufacturing sector, and we use that as a manufactured product
• 20:58
  Speaker 1: and We use that for apartments and hotels and stores
• 21:01
  Speaker 1: and offices. And at this time we're finishing up a
• 21:05
  Speaker 1: school building in the heart of Los Angeles on Wilshire Boulevard,
• 21:09
  Speaker 1: and we're working very hard to educate the investor base
• 21:13
  Speaker 1: and the consuming base that construction doesn't have to be
• 21:17
  Speaker 1: so slow and expensive. S G Blocks modular construction is
• 21:22
  Speaker 1: a better way to build. Paul Galvin, thank you so
• 21:25
  Speaker 1: much for being with us. Paul Galvin, Chairman and chief
• 21:26
  Speaker 1: executive of SG Blocks talking about taking shipping containers and
• 21:32
  Speaker 1: making them into buildings and the US has become a
• 21:51
  Speaker 1: major player in global oil markets, but there is a
• 21:55
  Speaker 1: problem for the nation in its pursuit of dominance in
• 21:59
  Speaker 1: the crew industry, and that is the infrastructure. UH is,
• 22:03
  Speaker 1: let's say, behind the times when it comes to shipping
• 22:06
  Speaker 1: around moving around the oil within the United States. To
• 22:10
  Speaker 1: join us and speak about this issue that's caused the
• 22:13
  Speaker 1: gap between say Brent and w t I to gap
• 22:15
  Speaker 1: out ten dollars or Brent in West Texas to eighteen
• 22:18
  Speaker 1: dollars is Tyler Rosenlicht. He's Cod and Steers Senior vice
• 22:23
  Speaker 1: president and portfolio manager of Midstream Energy that's focusing on
• 22:27
  Speaker 1: MLPs and other energy portfolios as well as nick kotsoft Us.
• 22:31
  Speaker 1: He is a senior vice president and portfolio manager of
• 22:33
  Speaker 1: Commodities Trading, Commodity Futures, etcetera. Tyler, I want to start
• 22:37
  Speaker 1: with you and just talk a little bit about the
• 22:39
  Speaker 1: problem that has caused this divergence between the Brent price
• 22:43
  Speaker 1: on one hand and w t I on the other.
• 22:46
  Speaker 1: Why is this such a problem right now? Yeah, So,
• 22:48
  Speaker 1: you know, one of the things that I think the
• 22:50
  Speaker 1: market has been surprised by is how robust and quickly
• 22:53
  Speaker 1: North American energy production has grown. And when you think
• 22:55
  Speaker 1: about the disconnect between getting it to market, having pipelines
• 22:58
  Speaker 1: and other infrastructure you need actually get it to where
• 23:00
  Speaker 1: it needs to go, versus the production profile. You can
• 23:03
  Speaker 1: have these periods in time where you know, maybe it's
• 23:05
  Speaker 1: coming out of the ground at a really fast rate,
• 23:07
  Speaker 1: but you can't actually fit it on a pipeline, so
• 23:10
  Speaker 1: you need to move it by rail or by truck
• 23:12
  Speaker 1: or by some other means. That's going to be a
• 23:13
  Speaker 1: lot more expensive. So what we're seeing today, you know,
• 23:16
  Speaker 1: particularly all the way out in West Texas, is a
• 23:19
  Speaker 1: lot of energy production, but we don't have the pipeline
• 23:22
  Speaker 1: infrastructure that you need to actually move it to Cushing
• 23:25
  Speaker 1: or to the Gulf coast, and so what you see
• 23:27
  Speaker 1: is truckers coming in and actually moving that oil by truck,
• 23:30
  Speaker 1: and that's a much more expensive way to transport energy commodities. Um.
• 23:33
  Speaker 1: You know, our view is it's gonna persist for a
• 23:35
  Speaker 1: little while. You know, it takes a while for these
• 23:37
  Speaker 1: new pipeline projects to actually be completed, and there's a
• 23:41
  Speaker 1: few that we think will stage in sort of second
• 23:43
  Speaker 1: half of nineteen early two thousand twenty, So expect to
• 23:46
  Speaker 1: see these wide differentials for a while. But midstream businesses
• 23:49
  Speaker 1: do have a good history of building infrastructure when these
• 23:52
  Speaker 1: sort of arbitrage opportunities exist, and there's a lot of
• 23:54
  Speaker 1: projects being worked on. You know, Nick, I'm struck by
• 23:57
  Speaker 1: the concept that people are talking about building again in
• 24:00
  Speaker 1: the oil patch right now as oil prices surge this year,
• 24:05
  Speaker 1: not today but just generally over the past few months.
• 24:08
  Speaker 1: But two years ago, three years ago, it was a
• 24:11
  Speaker 1: very different setting. Me. How much do these product projects
• 24:14
  Speaker 1: to create the pipeline's hinge on just the price of oil?
• 24:19
  Speaker 1: I think, Um, there is certainly part of it does
• 24:21
  Speaker 1: rely on the on the on the price of oil.
• 24:24
  Speaker 1: But given the long lee times that you have for
• 24:26
  Speaker 1: these infrastructure projects, it's important to you know, be able
• 24:30
  Speaker 1: to plan multiple years out into the future. Um So,
• 24:35
  Speaker 1: I think when whether it's an e MP company producing
• 24:38
  Speaker 1: new projects or pipeline company building new pipe, you take
• 24:42
  Speaker 1: maybe a three to five year view, and that view
• 24:45
  Speaker 1: of the long term price is going to be somewhat
• 24:48
  Speaker 1: lower than where current oil prices are now. So you'll
• 24:50
  Speaker 1: say we're gonna base our investments on fifty to fifty
• 24:54
  Speaker 1: five dollar oil. Where oil now you know it's trading well,
• 25:00
  Speaker 1: I mean, I guess that. Another way to ask this
• 25:02
  Speaker 1: is does the volatility, particularly the volatility that we've seen
• 25:05
  Speaker 1: over the past three years of oil prices make it
• 25:09
  Speaker 1: difficult to raise capital for these projects at economic levels? Yeah,
• 25:16
  Speaker 1: So maybe I can start with that because I think
• 25:19
  Speaker 1: you might ask why do we have the wide differentials today?
• 25:22
  Speaker 1: You know, why didn't we just build the pipelines a
• 25:24
  Speaker 1: few years ago when we saw a line of sight
• 25:26
  Speaker 1: into the Permian production increasing? And I think one of
• 25:28
  Speaker 1: the issues was oil volatility was really high. And when
• 25:31
  Speaker 1: you think about building a new pipeline project, most midstream
• 25:34
  Speaker 1: businesses aren't going to pursue that unless they get long
• 25:36
  Speaker 1: term contracts that sort of fix at least a minimal
• 25:39
  Speaker 1: acceptable return. And we expected some of these projects to
• 25:42
  Speaker 1: be announced last year, even in two thousands sixteen, and
• 25:45
  Speaker 1: they weren't. And part of that was because a lot
• 25:47
  Speaker 1: of E m P s were concerned oils really volatile.
• 25:49
  Speaker 1: How can they have confidence in the next five or
• 25:52
  Speaker 1: six years sufficient to underpin say a ten year takeaway
• 25:55
  Speaker 1: agreement with a midstream company. So I think volatility and
• 25:58
  Speaker 1: the commodity price does really do a lot when you
• 26:00
  Speaker 1: think about capital budgets and building infrastructure and green lighting
• 26:03
  Speaker 1: new products and wells and that sort of thing. And
• 26:06
  Speaker 1: even if we did go back only a couple of
• 26:07
  Speaker 1: years ago, there was some level of of underestimating the
• 26:12
  Speaker 1: amount of US supply. So you know, these companies, easy
• 26:15
  Speaker 1: and P companies became a lot more efficient. We're using
• 26:19
  Speaker 1: improvements and technology to increase the amount of supply coming
• 26:23
  Speaker 1: out of the US, only to find ourselves in the
• 26:25
  Speaker 1: situation where now where there's not enough pipe to get
• 26:28
  Speaker 1: it to the to the refiner or to the international markets.
• 26:31
  Speaker 1: So I'm really glad you guys are here today. Earlier
• 26:34
  Speaker 1: this morning, bloom Brooke News reported that black Rock is
• 26:37
  Speaker 1: trying to get further invested in liquefied natural gas projects,
• 26:41
  Speaker 1: in particular pipelines. Um. And this is interesting on a
• 26:45
  Speaker 1: number of different levels, but it sort of represents to
• 26:48
  Speaker 1: me the trillions of dollars that have been raised for
• 26:51
  Speaker 1: interest infrastructure funds around the world, and you know, the
• 26:55
  Speaker 1: question of where they're going to put it, and I'm wondering,
• 26:59
  Speaker 1: you know, have you uh Tyler has seen a real
• 27:01
  Speaker 1: increase just an the amount of money and interest in
• 27:05
  Speaker 1: investing in some of these projects today versus say, three
• 27:08
  Speaker 1: years ago. Absolutely, I think a few years ago, um,
• 27:12
  Speaker 1: you're sort of staring into the abyss of a down
• 27:14
  Speaker 1: cycle and energy and midstream energy, and these businesses traded
• 27:17
  Speaker 1: at fairly high multiples. So on the publicly listed side,
• 27:20
  Speaker 1: you've seen multiples contract a lot, and typically private equity
• 27:24
  Speaker 1: was a capital source but wasn't really driving the ship.
• 27:26
  Speaker 1: But that's really changed. So since kind of early two
• 27:29
  Speaker 1: thousands seventeen and in accelerating over the last six months,
• 27:32
  Speaker 1: we've seen a lot of private equity investors be at
• 27:35
  Speaker 1: the big infrastructure funds or some of the more niche
• 27:37
  Speaker 1: energy infrastructure businesses actually step in and either provide capital
• 27:41
  Speaker 1: to publicly traded partnerships or acquired discrete assets, or build themselves. Um.
• 27:46
  Speaker 1: They're actually paying very high multiples to get access to
• 27:49
  Speaker 1: these businesses and to these assets, which, um, when you
• 27:52
  Speaker 1: think about it, there's a huge incentive for private to
• 27:54
  Speaker 1: deploy their money. They've got a very low cost of capital,
• 27:57
  Speaker 1: much lower than the many publicly traded MLPs today. These
• 28:00
  Speaker 1: are commercial businesses that can grow, that can typically pass
• 28:03
  Speaker 1: things like inflation onto their customers. And so when you
• 28:06
  Speaker 1: think about sitting on this war chest of a trillion
• 28:08
  Speaker 1: dollars or whatever for infrastructure, you know, we think this
• 28:11
  Speaker 1: is a really attractive place for for that capital to
• 28:13
  Speaker 1: be spent. You know, I'm struck nick by the idea
• 28:16
  Speaker 1: that multiples are high. Basically they're buying expensive companies are investing. Uh,
• 28:22
  Speaker 1: They're they're making expensive bets. Right now, I'm wondering what
• 28:25
  Speaker 1: is the sort of price of oil that a lot
• 28:29
  Speaker 1: of these projects hinge on to be profitable. I think
• 28:33
  Speaker 1: most planning is probably done in the fifty to fifty
• 28:37
  Speaker 1: five dollar range. And I say that because if you
• 28:39
  Speaker 1: were to look at where companies are now hedging the
• 28:41
  Speaker 1: price of oil, A majority of the hedges are being
• 28:44
  Speaker 1: put on at around fifties to fifty five. As long
• 28:47
  Speaker 1: as companies are getting an economic return, you know, that's
• 28:50
  Speaker 1: really the balancing point for for crew prices right now.
• 28:54
  Speaker 1: And it's interesting to note that when we talk about
• 28:56
  Speaker 1: these differentials, that's actually what a lot of EMPs, for instance,
• 28:59
  Speaker 1: are are getting at the at their sort of local
• 29:02
  Speaker 1: pricing points today. So, yeah, Brent might be at seventy five,
• 29:06
  Speaker 1: but if there's an eighteen dollar differential between Midland and
• 29:09
  Speaker 1: the Gulf Coast, um, someone that's actually producing energy in
• 29:12
  Speaker 1: West Texas only going to get fifty seven dollars. And
• 29:15
  Speaker 1: so I think it's important to note that, you know,
• 29:16
  Speaker 1: just because that's what you sort of see as the
• 29:18
  Speaker 1: headline price. Um, there's a lower price being received in
• 29:21
  Speaker 1: these businesses are economic. Thank you so much for being
• 29:23
  Speaker 1: with me a really important topic. Conan Steers Tyler rosen Licht.
• 29:27
  Speaker 1: He's senior vice president and portfolio manager of Midstream Energy
• 29:31
  Speaker 1: and Conan Steers. Nick Kutsoftis he is senior vice president
• 29:34
  Speaker 1: and portfolio manager looking at the commodity space. Thanks for
• 29:42
  Speaker 1: listening to the Bloomberg P and L Podcast. You can
• 29:44
  Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or
• 29:48
  Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on
• 29:52
  Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 29:56
  Speaker 1: It's one before the podcast. You can always catch us
• 29:58
  Speaker 1: worldwide on Bloomberg Video