In late May, a man driving a Tesla (NASDAQ:TSLA) Model S was killed in an auto accident that -- as reports are starting to show -- occurred while the car's Autopilot function was activated.
In this week's Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman talk with Motley Fool senior auto specialist John Rosevear about the crash -- what we know about why it happened, why Tesla is the only company with a product like this Autopilot software on the market, how the company can recover from the incident, and more.
Also, the hosts talk about Kinder Morgan's (NYSE:KMI) decision to sell $1.5 billion worth of pipelines this week, and what it means for the company's bottom line.
A transcript follows the video.
This podcast was recorded on Jul. 14, 2016.
Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, July 14th, 2016. We're talking about energy, materials, and industrials. I'm joined by Motley Fool analyst and one-man snappy dresser and newly married Mr. Taylor Muckerman. How's it going, man?
Taylor Muckerman: It's married -- wonderful -- absolutely. Best week of my life.
O'Reilly: Welcome to the land of matrimony and bliss and all that.
Muckerman: Thank you, I appreciate it. (laughs) Long time coming.
O'Reilly: This was in Portugal.
Muckerman: It was. Hence the jersey today. I didn't get to wear it on Monday because I was still there.
O'Reilly: They just won, too, right?
O'Reilly: Representing. Good time, obviously?
Muckerman: Best time of my life.
O'Reilly: That's what you want to hear from a guy after he gets married.
Muckerman: I keep having flashbacks, like, withdrawal.
O'Reilly: Why did you come back?
Muckerman: I had to, right? I love The Motley Fool.
O'Reilly: Touche. We need to have your wife on the show now.
Muckerman: We'll talk to her about it. If you want to talk event planning or weddings or bar mitzvahs, she'll be your girl.
O'Reilly: She could be on the CG show, that's a big market.
O'Reilly: Anyway, you've been gone for how many weeks -- two, three? I forgot what you look like.
Muckerman: (laughs) I was out of the office for two and a half, but I was completely off the grid for a week and a half.
O'Reilly: Got it. You missed some stuff.
Muckerman: I missed a couple episodes, yeah.
O'Reilly: You missed a couple episodes.
Muckerman: Seems like it carried on without me.
O'Reilly: Now that you're back: lots to cover today. We're actually going to -- we have to talk about this Tesla autopilot crash that happened out in Florida last month. For that, we have The Motley Fool's senior auto specialist joining us.
But first, Taylor, since you're back, we have to talk about what Kinder Morgan has been up to.
Muckerman: Absolutely. A couple different stories coming out of their camp lately.
O'Reilly: Their CEO, Steve Kean: I don't know if this guy has a private jet, I'm sure, but he's been pretty active lately.
Muckerman: I don't know: Kinder Morgan, they don't have private jets.
O'Reilly: Oh, they don't?!
Muckerman: No, that's one of the big things. They don't have [them].
O'Reilly: He's a billionaire, right?
Muckerman: Steve Kean? No.
O'Reilly: Oh, he's the CEO, the founder. Right, I apologize.
Muckerman: Rich Kinder is the billionaire, yeah.
O'Reilly: He has the private jet.
Muckerman: I actually interviewed Steve Kean when he was the chief operating officer down in their Houston office a few years back. I've seen him, obviously, take the next step, and he's the CEO now.
O'Reilly: So, can't wait to get your thoughts on this. Hit the wires last week: Kinder Morgan lined up the sale of -- correct me if I'm wrong -- half a pipeline that they own in the Southeast United States.
Muckerman: They own 50%, so they sold their whole stake.
O'Reilly: Oh, sold the rest of it, OK, to the other owner, which was Southern Company. It netted KMI $1.5 billion. What's interesting to me about this was, the second it happened, everybody was like, "Oh! Their financial troubles are over! They're going to increase the dividend and all that stuff." I was not wowed by the size of this deal.
Muckerman: No. Compared to their debt load of over $40 billion ...
O'Reilly: It's like $49 billion! It's 3.5%!
Muckerman: Yeah, pretty substantial. Just about the same or more than their actual market cap, is what their debt load is looking like.
This is something we've seen out of the company in the last month or so. This is just one of multiple pipelines that they've sold completely out of or an interest in to another company. They've also shelved multiple projects that they were thinking about moving forward with, just based on the fact that they didn't have as much buy-in from natural gas suppliers to flow through these pipelines. So the returns they're expecting weren't justified.
Maybe back a few years ago, during the heyday of Kinder Morgan spending a ton of money, they might have accepted a lower return, expecting that they could then fill the rest of the contracted amount that you could actually flow through. But now, they're a little bit more hesitant because maybe they have reached their peak, or maybe even gone beyond the peak of how big they actually should be.
O'Reilly: Right. So, the sale was announced, and it did not take long for Kean to come out and say that the company was "very close," those were his words, to being able to reward shareholders via dividends or share buybacks. Does it seem to you like he's jumping the gun there? The proceeds, as I mentioned, represent 3.7% of their total debt load. The proceeds were just a little bit more than the company's entire free cash flow last year: $1.3 billion. The dividend previously cost $4 billion before they cut it.
They do have some projects. They just got approval for that $4 billion project for the tar sands up in Canada. I was like, you feel like a big swinger now again? I don't. (laughs)
Muckerman: Maybe on the share buybacks side. But I don't know if a dividend --
O'Reilly: Which I could see the argument for. It's down a bunch. I don't know, it's just like, really? What?
Muckerman: I don't know if I could justify, if I was the CEO, raising the dividend. It's still paying right around 2.5% yield, so it's not a terrible yield. It's definitely not in the 4% to 7.5% range, as it bounced back and forth between a couple years ago before they cut the dividend by 75% last year. But, I don't know. It seems a little too early, because even the energy industry hasn't fully recovered, much less Kinder Morgan itself.
O'Reilly: Right. And not only that, but this doesn't -- I went back through Capital IQ and looked at their cash flow statement, at the lines for debt issuances and debt retirements. They've rolled over $10 billion of debt every year, and they've done that for the last five years. That's business as usual, and that's fine. That's kind of what these MLP and pipeline operators do. But again, I could not see why the $1.5 billion made that big of a difference.
Muckerman: Yeah, you're right. It's just kind of a blip on the radar. They've also been downgraded in this credit sphere. It'll be interesting to see what interest rate they get as the next tranche of debt retires and they have to roll it over.
O'Reilly: That's actually a good point. It'll be interesting to see. They haven't hit the debt markets again, from what I know.
Muckerman: Yeah, not off the top of my head have I seen that, either.
O'Reilly: So, after selling this half of the pipeline, Steven Kean then attended a conference hosted by the EIA, the Energy Information Agency, where he said -- this is interesting. He's obviously talking his own book, which he should do. He talked about [how] the ability of renewable energy sources to fulfill our energy needs is overblown, and we will need natural gas. He noted that environmentalists used to love natural gas, but have since said that it's no good because it, too, contributes to greenhouse gas emissions. I actually looked into this point. Do you know the carbon emissions that happen from natural gas?
O'Reilly: Oh, you do?
Muckerman: Oh, no, I know that it happens, especially during the production process, as well, with flaring and whatnot.
O'Reilly: Right. So, I actually went to the EIA's website. They publish this sort of thing. Pounds of CO2 emitted per million British thermal units, BTUs of energy, for various fuels: Anthracite coal is 228.6 million. Diesel fuel is 161. Gasoline is 157. At about half of coal is natural gas at 117. That's not ... I mean, it's better. It's the best one on the list, but, it's not infinitely better, bottom line.
Muckerman: Yeah. It's still a fossil fuel. But, especially in America, you look at other countries, like Canada, for instance: 60% of their power comes from hydropower.
O'Reilly: It's that high?
Muckerman: That allows them to export the majority of the fossil fuels that they actually extract out of the ground, mainly to the United States. We're a big purchaser of natural gas, not only from Canada but from other countries as well. Europe, still very reliant on natural gas. It's going to be necessary for these big economies --
O'Reilly: So you agree with them?
Muckerman: I don't know how long it's going to be like this major need for base load power. In Portugal, where I was for my wedding, wind power is everywhere, solar power is gaining steam. They actually had four consecutive days in May this year that 100% of the electricity used in the country was produced by renewable energy.
O'Reilly: Wow! Yeah.
Muckerman: So, you see countries like that: Germany, very high up on the wind scale; Denmark, I think almost 50% of their power comes from wind. There are countries out there that are way ahead of the game in terms of renewable energy sources. But you're still talking about less than 50%, in most cases, from renewable sources. It's the lesser of evils is what I'm trying to say, in terms of coal or oil or natural gas for all electricity generation. And it's plentiful.
O'Reilly: I know you're a huge bull on natural gas pipelines for reasons that you mentioned --
Muckerman: Maybe not the construction of more, but the use of existing, yeah.
O'Reilly: What do you think of shares of KMI these days?
Muckerman: They've come back since their lows, along with the industry. And they were punished a little bit more than most because of the dividend cut, and all the news around that. But The Motley Fool right now, in general, is feeling pretty good about it.
O'Reilly: A lot of people in this building do like it.
Muckerman: It was a [Motley Fool] Stock Advisor Best Buy Now from Tom's side of the scorecard the 1st of July, and then a week later, David named it as a Best Buy Now on his side of the scorecard in Stock Advisor. So, it's a company that seems to have taken some steps. Maybe people's tone changes a little bit if they decide to hike the dividend a little bit too early, because then they could be right back where they were a few months ago, retracing their steps. It's an interesting story to follow, and it's one that The Motley Fool does believe in.
O'Reilly: Awesome. For our next segment, as I mentioned, we had to talk about this Autopilot death. It seems like it's at the top of my Google news feed every day. Joining us to talk about it is Motley Fool senior auto specialist John Rosevear. How's it going, John?
John Rosevear: It's going well. And we've got a lot to talk about today.
O'Reilly: Yeah. Let's dive in. Just to rehash, a Tesla owner named Joshua Brown died in a collision on May 7th with an 18-wheeler tractor-trailer down in Florida. But I wanted to actually take a step back. Can you take us to school and tell us, what the heck is Autopilot?
Rosevear: OK. Autopilot is essentially an enhanced cruise control. It's a set of several driver assistance systems that together work like an enhanced cruise control; it uses cameras, radar, ultrasonic sensors, and some fancy Tesla software. In Tesla's words, what it does is "automatically steer down the highway, change lanes, and adjust speed in response to traffic." It's intended to, and again, these are Tesla's words, "help the car avoid hazards and reduce the driver's workload." So, it's not really a self-driving system. It's kind of one step past the latest and greatest adaptive cruise control and lane-keeping systems you might get on, really, any mainstream luxury car, and even some more mass-market models. You can load up a Ford Fusion with most of this stuff, for instance.
O'Reilly: There's an idea right there. Did you read that Dan Sparks piece last year? He drove, what, 60 or 90 miles -- do you remember, Taylor? -- in his Tesla in Colorado?
Rosevear: I did. He's far from the only one doing this kind of thing. That's kind of the issue. Tesla will tell you officially, you're not supposed to take your hands off the wheel. But Tesla owners are early adopters --
O'Reilly: Just check YouTube. (laughs)
Muckerman: Yeah, I was going to say.
Rosevear: I was just going to say! They have access to webcams! (laughs) It's all out there, it really is.
O'Reilly: Can you run down, really quick, the basic details of the accident?
Rosevear: OK. This gentleman, Mr. Joshua Brown, was 40 years old in Florida, owned a Tesla Model S. On May 7th, he was cruising at some speed on a road in Florida, and a tractor-trailer made a left turn in front of him. It appears that his car never slowed down and hit the trailer broadside with very bad results. Essentially, the top of the car was sheared off -- I've seen pictures of it. Poor Mr. Brown: our condolences to his family, etc. That was a really nasty one.
Tesla was not able, they say, to access the car's computer remotely because of the damage. They eventually sent an investigator to Florida to look at it, took all of the data from the car that they could download, took it home to headquarters, processed it, and discovered in late May that Autopilot was engaged. They had reported it to the National Highway Traffic Safety Administration some time before. They gave them that information. And then, towards the end of June, the federal agency said they were opening an investigation into this. And that's when Tesla disclosed it.
O'Reilly: Got it. This actually occurred before that big stock raise that Tesla did at the end of May. We're not going to talk too much about that. Obviously, that's up in the air. We could spend days going to sleep talking about SEC disclosure rules.
So, what's going on with the investigations? Obviously this is, of note, the first major death that I've heard of for a driverless or semi-driverless system.
Rosevear: It is the first major death; it is the first fatal accident in which a system that does this much is implicated. Certainly the first one for Tesla's Autopilot system, which is really, like I said, a bit of a step ahead of everybody else -- mostly because it will steer for you, it will change lanes automatically, which the other systems will not yet do.
The investigation is in fairly early stages. The National Highway Traffic Safety Administration, which is part of the Department of Transportation -- it's the main safety regulator when it comes to cars in the U.S. -- they sent Tesla a letter earlier this week, or at the end of last week, demanding a whole ton of information. Basically, they want to know details. For every car you've sold in the U.S. with Autopilot enabled: When have the various safety systems been employed? When and how many times have they had to brake automatically? When and how many times has it had to remind the owner to put their hands on the wheel? What percentage of the miles that the car has driven under Autopilot? Et cetera. They want it all in a spreadsheet; they want it all soon.
So Tesla's going to have to do that. And I think this is the first time the federal government has tried to really grapple with a system that's actually shipping. They've been talking about setting rules and guidelines going forward with self-driving systems as we move toward that, but Tesla shipped this thing, and it's out there. There's something like 70,000 cars out there with this system operational, that have activated Autopilot. And now the feds are coming in and saying: "We need to take a look at this and maybe start to set some rules and give some guidance, and maybe put some limits on what Tesla's done."
O'Reilly: Taylor, what did you think when you first heard about the story, and the stock offering, and all that?
Muckerman: My first thought was that it's already been scaled back to some degree, because last year, like we mentioned, YouTube videos of people climbing into the back seat of their Tesla --
O'Reilly: Oh my God!
Muckerman: -- leaving the driver's seat completely empty on the highway.
O'Reilly: Is that a "ghost riding the whip" thing?
Muckerman: Pretty much. Elon Musk actually came out in the public sphere and voiced his opinion of -- humans shouldn't necessarily be trusted just yet with fully autonomous cars. I believe they scaled back on what they had made available to folks in terms of the vehicle capabilities. I'm still a big believer that autonomous driving is going to take place in the next one or two decades; I hope it does. But this is obviously proof that we're just not quite ready for it to be fully autonomous. And maybe there just needs to be a little bit more training or instruction involved in how to use it. But then again, Elon Musk isn't riding shotgun with every single person with a Tesla. There has to be some level of trust involved with the purchaser and their decision-making. Unfortunately, humans are humans, and we all operate a little bit differently when it comes to this.
O'Reilly: John, you know a bunch of auto executives and players in the industry. What has been your feel for the rest of the auto industry's opinion about what happened, and the advent of driverless cars, and what's it going to take to prove the viability of actually having a driverless automobile?
Rosevear: First of all, if you go to a big automaker and you talk to the people who are doing their self-driving research and development and so forth --
O'Reilly: And they all are.
Muckerman: If they aren't, they won't be a car company for long.
Rosevear: Yeah. That's mostly true. So if you go there, and you get them away from a camera and you start asking them, they say, "Tesla released this thing too early." I mean, it's a beta system. The transitions between the different parts of the system aren't seamless. It's a beta system, it has holes in it, as you would expect.
There's a concept here with cars that have partial self-driving capability about handoff. The handoff problem, they call it: meaning that when the car goes, "Bing! Driver, you need to take over," it takes several seconds for somebody who's maybe been reading a book or whatever to refocus on the task at hand.
Muckerman: Just like texting and driving. That's the main crux of that whole issue, is that you think you can look up fast enough, but you still have to catch your bearings.
O'Reilly: Right, and those few seconds could mean the difference between life and death.
Rosevear: Right. But the thing is, and the thinking is, they have to build this into the system, to anticipate this so that the car gives you enough time to switch your attention back to the road. This is something Consumer Reports talked about. They came out this morning and said, "We think Tesla needs to dial this down." They had a bunch of concerns, which we can talk about.
But, that's the issue. We aren't going to get to full autonomy for years. It's going to take billions of miles of testing. It's really going to take cars that talk to each other, super-detailed maps of roads, all of that, to get fully autonomous cars. But we will see, and Tesla's Autopilot is maybe the first rough step in that direction -- there will be many more over the next few years -- partial-autonomy systems, systems that will automate highway driving.
Again, when you talk to the big companies, and the people working on this, there's a lot more care going into this than they think Tesla put into it. It's possible that Tesla would come back and say, "Hey, we put a lot of care into it!" And they would say that. But, more concern around the handoff points, when you hand it back to the driver: making sure everything works seamlessly, making sure you really have enough sensors. I know that there was an industry-insider blog that published some quotes from Toyota engineers shortly after Autopilot started shipping, where they said, "We don't really think Tesla has the sensors on the car to be ..."
Rosevear: Hear me out! "...lane-changing safely."
Rosevear: They need several different radar sensors, or a LiDAR [light detection and ranging] sensor, stuff that really isn't commercially available. They're like, "Even when we get the sensors, which is probably going to be a couple years from now, we're not even going to ship it for a while because we have to test it, test it, test it, test it."
Muckerman: That makes sense based on the story. Tesla's basically saying that the car couldn't discern whether it was a truck or a bright sky. Because it was a white tractor-trailer.
Rosevear: Yes. Right. They have got radar and other systems, a camera system looking forward, and then it was confused because it was a white tractor-trailer. To which, I've had people in Detroit texting me over the past couple days saying, "Are you kidding me?" But, sure enough, the system missed it.
This is where we say: There's a system called LiDAR that bounces lasers off things to give a car or some other vehicle a very detailed view of its environment at all times. A lot of the automakers say LiDAR systems are key to real self-driving cars. There's a lot of effort going into developing better ones, more affordable ones, and so forth, that can be installed. Elon Musk says, "We don't need LiDAR. We can make up the difference with software and really good maps and so forth." And there's some question now as to whether he might have to rethink that before going any further with Autopilot.
O'Reilly: Got it. Before we wrap up here, bottom line, I guess we can go around the table: Is this critical for Tesla? Do I need to run and sell any shares that I fictionally own?
Muckerman: I'll take the first stab so we can let John close us out. Personally, I don't think so. It's something that Tesla could cease, at least for the time being. These updates can all be done over WiFi in your own home. If you look at Volkswagen, for instance, they're not getting killed, and they have to ...
O'Reilly: Have to pay $15 billion! (laughs)
Muckerman: Exactly! Granted, they're a much larger company, but this can be fixed, I feel, much easier than something that Volkswagen, or Toyota, with their braking issues a year or two ago, had to deal with. I don't think this is any reason to sell the stock.
O'Reilly: Got it. Correct me if I'm wrong, anybody, but my understanding is the guy was actually watching a movie when he --
Rosevear: We don't know that for sure. There was a DVD in the car or something like that. We don't know that for sure.
O'Reilly: OK, I'll back off of that point. But, to Taylor's point, it definitely seems like this isn't critical. But I would like to see some credence given to public opinion, and maybe dialing some of this back a little bit.
Muckerman: Yeah. I think Tesla needs a little bit more answers, other than "The car got confused between a truck and a white sky."
O'Reilly: And then say: "Do the math." Anyway. John?
Rosevear: I think this is growing pains. Tesla is this scrappy Silicon Valley start-up, and as they get bigger, they're becoming a car company. The other big automakers are like, "OK, guys, if you're going to be a big car company, you have to play like a big car company. You have to test like a big car company. You have to approach the regulators like a big car company." This is a lot of what I'm hearing from people in the industry.
Is this going to kill Tesla? Absolutely not. Will the NHTSA come back and say, "OK, you have to do more or less what Consumer Reports is calling on you to do" -- which is, for instance, disable the auto-steering function until they can make sure people are keeping their hands on the steering wheel, and maybe stop calling it Autopilot because it's not really an autopilot yet?
O'Reilly: That is a little misleading.
Muckerman: Could be, yeah. And maybe this instance, as unfortunate as it is, lends a little bit of caution to the early adopters that own Teslas and use this technology, because it's not mandatory, you don't have to use it. These people are choosing to use it. It is a risk. Risks are naturally inherent in being an early adopter. Maybe people use a little bit more caution, even if Tesla doesn't scale back any more.
Rosevear: I think that will happen. One more point about the early adopters: Tesla's gearing up to sell half a million cars a year in a few years. They're about to move past the early adopters. The well-heeled techies who have mostly been Tesla's audience so far, yeah, they get what a beta system is. They get that the system is rough, it has limits. That's fine. They're cool with that. When my mom or your mom or whoever buys a Tesla, somebody more mainstream who isn't a professional techie, who isn't a software person -- it has got to work, period. Every time.
Muckerman: Most beta systems usually don't involve death. So this is much more serious!
O'Reilly: Yeah. Thank you for your time, John!
Rosevear: All right. Thank you; my pleasure!
O'Reilly: That is it for us, folks. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at IndustryFocus@Fool.com. Once again, that's IndustryFocus@Fool.com. As usual, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Taylor Muckerman, I am Sean O'Reilly. Thanks for listening and Fool on!