Autonomous vehicles were a huge focus at this year's Consumer Electronics Show in Las Vegas. In this week's episode of Industry Focus: Energy, Sarah Priestley talks with Motley Fool Canada Premium analyst Taylor Muckerman about what he saw at CES last week regarding self-driving cars, some of the biggest stumbling blocks that self-driving tech is running into today, and when we might start to see fully-autonomous cars on the road.
Also, the hosts take a look at BP's (BP 6.38%) $1.7 billion hit to profits this quarter, and why the company is still paying up for the Deepwater Horizon spill; what we know so far about GE's (GE +2.10%) potential plans to split itself up, and what they would mean for the company's future; and more.
A full transcript follows the video.
This video was recorded on Jan. 18, 2018.
Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It's Thursday Jan. 18, and today we're going to be discussing Taylor's recent trip to CES in Las Vegas, GE, and BP. I'm your host, Sarah Priestley, and joining me in the studio is Motley Fool Canada Premium analyst and all around nice guy, Taylor Muckerman. Taylor, thank you for joining me! How are you doing?
Taylor Muckerman: Cheerio! [laughs] I'm great! How about you?
Priestley: I'm good. Have you caught some sun from Vegas?
Muckerman: No, it was actually the rainiest two days in Vegas history. The last day, sure, but the first two days were quite miserable.
Priestley: I'm trying not to show too much joy in my voice, because of all the snow right now. What was it like? Did you see anything cool?
Muckerman: There were a lot of people, so I didn't get to see a whole heck of a lot. But I think that's just par for the course out there every year. Got to ride in an autonomous car with Lyft.
Priestley: That's very cool.
Muckerman: They partnered with BMW for the show. It's not a permanent partnership, it was just something they were doing for the four days of the CES conference. Autonomous cars were a big hit, both in terms of car manufacturers and the technology providers behind the scenes.
Priestley: Was that the first trip you had taken in an autonomous vehicle?
Muckerman: I got driven to the airport in a Tesla Model X, the SUV. The guy took his hands off the steering wheel on the highway, going 80 miles an hour. That was pretty cool. This was point-to-point the entire ride, I think the driver touched their hands on the wheel once, to get us out of the parking lot initially. Thankfully, there was a ton of traffic, so it was just stop and go. But, the car handled itself quite nicely.
Priestley: Yeah, absolutely. It's kind of a testament to the quality of the tech, if it can deal with the traffic as it was, because Vegas is known to have really bad layouts. They don't have lines on the road, and they have a different system.
Muckerman: Yeah, it's all mayhem.
Priestley: So, it's probably very well done on BMW, and Aptiv is the company, formally Delphi, that came up with all the tech around it. On a couple of the articles I saw about this, they talked about the positioning of all the lidar and radar sensors. Did you notice those much when you were around the car?
Muckerman: You really don't, because they built them into the existing body kits of the car. There was a couple right on the right and left front fenders that looked like some vents that you would see on some sports cars. But they were actually cameras there. And they had the lidar, rather than the typical roof lidar that you see that's spinning around in the cylindrical form, it was actually just an addition below the two side view mirrors that I didn't even notice until the representative pointed it out. Very sleek, looked just like the BMW 5 Series you would buy off the showroom floor, only it can drive itself.
Priestley: That's impressive.
Muckerman: Even the monitors on the inside that were displaying all of the information being relayed back to the car from the lidar and radar and cameras, that was a stock display from BMW, so it was perfectly integrated into the car itself. The interior didn't need to be modified at all. They gave us a little iPad that they mounted in the back so you could follow the trip, and it would signify if it was on autonomous mode or manual mode. But that was the only modification there.
Priestley: Those iPads that you mentioned -- I heard that they're trying to test what level of information people are comfortable with when they're a passenger in these cars. So, do we want to know everything, or would we rather it just take us from point A to point B, and we just get out? What did you think of that interface? Was that more information than you would want? I know you were looking at it from an investment perspective, or more like an analyst perspective, but if you were just a passenger, what kind of level of information?
Muckerman: I think all three of us -- myself, Rex Moore, and David Kretzmann -- all kind of just forgot about the monitor the second we got into the car. Felt completely comfortable. We were talking, there was an engineer in the shotgun seat and a "driver" in the driver's seat just in case anything needed to be taken over manually. So, we were just busy talking to them the whole time, not really concerned about much other than other drivers on the road.
Priestley: I think, in this instance, there were 20 predetermined point-to-point locations that you could do this with. But, it actually used Lyft's app. Presumably, it told you you were getting in an autonomous vehicle.
Muckerman: It was funny, no one noticed it at first, but then when we revisited the app when it was on its way to us, the little car icon actually had a lidar graphic on top of its roof, so you could clearly see it was an autonomous car.
Priestley: And I bet people love that there, all the tech.
Muckerman: Yeah. Mark Cuban climbed out of one when we were in the parking lot, so, he came down for a ride. Baron Davis, former basketball player, was there as well.
Priestley: Wow! You're rubbing shoulders with, this is pretty much --
Muckerman: Yeah, paparazzi.
Priestley: [laughs] So, to get back to the investing perspective, this is obviously where Uber and Lyft are heading. Uber and Lyft are private companies, but Uber has suggested that it may go public in 2019. What do you think about this concept, for where it's heading? Do you think, as you've experienced it, this is going to be a really practical way for these companies to go forward?
Muckerman: Yeah, I think it's a no-brainer. Talking to the engineer in the front seat, and my own personal thoughts, and Rex chimed in as well that, maybe not entirely United States wide, North America wide, but within the next 10 years, I think in the next 20 years, you could see the majority of cars being sold autonomously driven. It will take a while to replace every car on the road with an autonomous vehicle. But I think you could see the majority of cars being sold in the next 20 years be autonomous. And the engineer said for sure in the next 10 years, you're going to see these rolling off the showroom floor for everyday drivers.
And you have not only the automotive manufacturers doing it, but then you have companies that would never think getting involved, like BlackBerry on the security side, because these cars are technically hackable because they're connected via wifi or satellite to the headquarters of these individual car manufacturers for updates and things like that, and collecting second-by-second data from their location-based GPS. So, it's hackable, and BlackBerry is focusing very heavily on this. They were well-represented there on the autonomous driving front. Then, NVIDIA, go figure, chasing down that $10 trillion automotive market with all of their GPUs that are revolutionizing so many industries -- AI, gaming, and now autonomous driving. NVIDIA, BlackBerry, and you mentioned Aptiv, which is spun out of Delphi, and multiple other companies out there. Investors, if you wanted a small stake in Uber, you could invest in SoftBank, because they just upped their investment. And I think GM has a stake in Lyft. So, there are some ways, but they're not completely public just yet -- thankfully, because you would have lost quite a bit of money on Uber, had they gone public not too long ago.
Priestley: Yeah. You mentioned GM. GM has committed to releasing 20 all-electric vehicles by 2023. So, they're going to put robot taxis on the road by 2019. That's a huge acceleration, especially when you have companies like Waymo, the subsidiary of Alphabet -- they've surpassed 4 million miles on road tests. So, you have this almost massive imbalance in the industry, companies that are capable of actually making these cars and putting them on the road, and the companies that have actually tested the tech and are probably most likely to get approved, regulatory-wise.
Muckerman: Yeah. The regulatory thing, I think, will be the biggest hangup. And Volvo has been working with Uber in Pittsburgh. They have self-driving Ubers going on there. Obviously, they show up with an engineer, collecting data and monitoring its driving performance. A lot of companies out there. Magna International, a company we cover in Stock Advisor Canada, one of the largest automotive companies in the world. They work with certain car parts to build for companies, or a car company can outsource the entire build out of the car. So, they work very well with BMW and a few other manufacturers. And they have their MAX4 autonomous system, similar to Aptiv, integrates directly into the preexisting body of a car. That goes all the way up to level four autonomous driving, which is enough to get you on the road without ever having to touch the steering wheel.
Priestley: That's incredible. We're really passing into Dylan's tech territory here.
Muckerman: [laughs] Back off!
Priestley: [laughs] I was just thinking Intel and their Mobileye acquisition, too. I think they have a deal, Intel with Mobileye, and Lyft and BMW have all created --
Muckerman: And Magna is part of the Intel and BMW as well.
Priestley: Yes, you're right! Absolutely! Just one small piece of news to add to this -- Lyft is opening a self-driving vehicle development facility in Palo Alto called Level 5, which I thought was nice.
Muckerman: Hah, yeah, that's the ultimate, that's the top of the heap, in terms of, I don't know if it's a certification or just, you unlock level five, but that's the best of the best.
Priestley: I think those bounds were created by regulators. And it's amazing to me, especially coming from a place that doesn't have the kind of state legislation that we have here, that different states react so differently to self-driving cars. You have self-driving tests going on in Boston, and obviously California is big, but then other states, it's been really difficult to push this through. So, yeah, cool story. Amazing first-time experience, I'm very jealous.
Muckerman: Yeah, it was wild. And they touched on Boston, saying that the streets are some of the most complex in the country, and that's just accelerating the learning curve for them, because they can take that and handle a country road with no problem, because there's just so many distractions and so many different forms of turns that they have to deal with in a city like Boston and Pittsburgh. I've read that the bridges in Pittsburgh are one of the biggest constraints, because you're on a road with no peripheral boundaries, so the computers kind of lost their minds a little bit, trying to bounce the lidar and radar off of nothing. So, that was one of the bigger challenges. But, they're in a city that's full of bridges, and they figured it out.
Priestley: And I think if they can start figuring it out in places like Boston, then places like London and that will have ... because, if you look at a lot of grid cities, like Indianapolis, for example, it must be fairly easy to map and get used to for all that. But, yeah, these older cities like Boston must be much, much more difficult.
We're going to talk about a couple of news items that have grabbed our attention recently. Something that grabbed my attention Tuesday is that BP is taking a $1.7 billion hit to its fourth-quarter earnings because of a settlement claim related to the 2010 Deepwater Horizon disaster. I'm sure everyone will remember the April 2010 blowout that caused an explosion on a rig in the Gulf of Mexico, sadly killing 11 crewmen and causing the largest oil spill in American history. The cost of the disaster is estimated to be $63 billion. The company reached a settlement with the U.S. government in 2015 for environmental damages for $20 billion, and the company is said to be in a separate U.S. settlement program for Gulf residents and businesses that's nearing close. This is the source of the recent charge.
The company was expected to report net income of $2.1 billion in the fourth quarter, according to analysts. But this charge and a previously announced $1.5 billion accounting charge for the U.S. tax overhaul makes that seem unlikely. So, Taylor, I think people are going to be surprised that BP is still feeling the effects of something that happened almost [eight] years ago. Can you put this into perspective for us? Is this a big deal? Do you think BP will fare fine?
Muckerman: You think about, what did they say, $3 billion this year, that's compared to $5.5 last year and $7 billion the year before. These charges have been adding up. But the good news is, they're trickling lower, so who knows. Maybe next year it'll only be $1 billion. I make that in jest. But, overall, they're estimating $65 billion for the Deepwater Horizon disaster. As you mentioned, almost a decade since it happened, or the better part of a decade. It's one of those long-tail risks that you entail if you're investing in the upstream or even the midstream, I guess it could be the downstream too, if something happens at a refinery. Definitely a big risk. Hopefully, this is the end of it. But I did read that judges have been pushing off some of the more "difficult" cases for these BP lawyers until the end. So, who knows what else is still left to be handled in the courtroom. Another $3 billion to be handed out in terms of fines and judgement.
Priestley: I think there's 400,000 individual Gulf residents and businesses that are levying claims against them. It was an awful thing to happen to the people in the region, and presumably, if they're pushing off some of the more heavy-hitting claims, that might be interesting to come. One question I did have for you that some listeners might have, too, is, obviously, BP is receiving a lot of the complaints, a lot of the claims against them for this. But people involved in making the rig, Hyundai, Transocean, how come it fell to BP, a lot of these claims?
Muckerman: I think, A, they were the operator, they own the lease, and I think they made a lot of the judgment calls that were recorded. So, I think the liability eventually fell to them. Transocean was fined. I don't have the numbers on how much. But they certainly got hit with more than just a slap on the wrist. And I think they probably lost a lot of faith with some of their customers. But they've learned from it. It's still a going concern, and doing well compared to the offshore oil space. So, I think BP took the ownership, because they had the ultimate upside based on the production of that well, so they face the ultimate downside as well. Just to put it into perspective, $65 billion is 2.5 times their trailing 12 months gross profit. It almost erases two and a half years of gross profit at this year's level. It's pretty significant.
Priestley: And the stock tracks Exxon's performance. In terms of stock performance over the past five years, which is a period I was looking at it, it has not had a huge impact. However, this charge is going to be carried on, and going to affect their break-even point on their per-barrel. Is this making them less competitive with everybody else in the industry? Or does everybody else in the industry has their own hangups? Which is what it feels like at the minute.
Muckerman: Yeah, I don't think this is as big of a hangup right now, but it has lingering effects, because $65 billion could be spent elsewhere. They sold off a lot of business units in order to pay for this, and rather than selling those off and reinvesting or just reinvesting without having to shed a lot of their assets, it definitely costs them a lot of future cash flow, and I think that's where they're going to be playing the most catch up if they still want to be compared to the majors of the world.
Whereas, you look at Exxon and Chevron, Exxon has had execution risks on the acquisition side with XTO Energy a while back on the natural gas side. Then, you have Royal Dutch Shell with BG Group. That could potentially bite them if natural gas doesn't recover in the LNG space. But, in terms of future performance, the outlook for that company definitely took a hit. But, as you mentioned, the stock performance doesn't seem to have. But you're looking at a lower dividend, and they've still been buying back shares at a small clip. But that future performance is what took a hit. Not necessarily the immediate numbers. I think their break-even is $50 a barrel. That's still pretty good. But I think they only have like 3 billion barrels or something like that of estimated reserves left. I don't know Exxon's and Chevron's, but I do know it's much higher than that. And they had to sell out of a lot of their renewable assets.
Priestley: I've been reading about the potential Saudi Aramco IPO this year, and their reserve figure is so mind-blowing that it makes everything else seem tiny.
Muckerman: It's like, why even bother producing oil at this point?
Priestley: Yeah, exactly. One more thing we want to talk about is the supposed separation of GE. There's more bad news for GE investors, which I think we both are?
Muckerman: Yeah, I am.
Priestley: So, we're both feeling the pain. The stock was down about 3% on Tuesday on the news that the company is considering a breakup. This fairly dramatic move has supposedly been instigated by the $6.2 billion charge the company has to take in the fourth quarter due to a reassessment of the company's reinsurance liabilities in the GE Capital business. Not to get too technical, but reinsurance is essentially when you pay the claims on policies sold by other insurers.
Muckerman: Insure the insurance.
Priestley: Yeah. It's a minefield. The policies causing GE a headache are underpriced long-term care agreements. Though the company hasn't sold reinsurance coverage since 2006, they're now having to pay on the policies as these claimants age. And, as we know, it's an aging population.
Muckerman: And they're living longer.
Priestley: Exactly, living longer. It's creating a much bigger headache than they expected. The company got in outside actuaries and accountants, and they said they need to set aside $15 billion to cover the next seven years. For anyone listening who isn't familiar with GE, it's a 125-year-old company, they sell everything from airplane engines to hospital equipment. It was, at one point, the most valuable company in the United States. But it's been struggling. It lost more than $100 billion in market value last year on declining profit margins, inventory buildup, they've had falling sales in their power business. So, basically, it's adding to this mess. Flannery announced this, he had said in the November call that we would be looking at a charge coming down the pipeline, but I think that people underestimated the extent of this. Some analysts are saying that this actually wasn't a surprise for GE, and they may have already done valuation discussions and those kinds of things. Were you surprised by the news?
Muckerman: A little bit. As you mentioned, they sold off these businesses right after the financial crisis, Jeff Immelt did. But in that agreement, they agreed to keep these liabilities on their books for this reinsurance, vs. selling that off. I don't think it was included with the Genworth spin off, but around that same time, when they sold off their insurance business that Jack Welch bought in the '80s. Two different CEOs, one bought the business, one sold the business, and now the third CEO in this lineup has to deal with the ultimate mess of paying this $15 billion. As you mentioned, around $6 billion right now, and then $2 billion per year until 2024. So, it's going to be parsed out over time. Definitely interesting, now that he says the power, aviation, and healthcare businesses could be on the chopping block in parts or in whole as spinoffs.
Priestley: It's not pretty.
Muckerman: We'll get a clearer picture in the spring. But, definitely going to be a much different company moving forward.
Priestley: Yeah, a much smaller company.
Muckerman: Much smaller.
Priestley: We're seeing a lot of this. There's a lot of investor pressure to create more streamlined operations. I'm thinking off the top of my head, Hewlett-Packard, DowDuPont, Alcoa have all been broken up recently as I think people strive to be more efficient, nimble organizations. This is kind of the last huge conglomerate. Do you think if this goes, this is going to be the end of the conglomerate concept?
Muckerman: It could be. There's still a few out there, but I don't know if you'll see the formation of many more. Because DowDuPont tried, and they're pretty much reversing course less than a couple of years later. I think Agrium just brought Potash Corp. of Saskatchewan -- they didn't just buy them, but they just finalized it and changed their name to Nutrien. A little bit more aligned, in terms of their end users, than so many disparate businesses, as GE has. First off the bow, we're going to see the transportation and their current business be sold off. That current business is lighting and energy management. So, the foundation business of GE being sold off, in terms of light bulbs and Thomas Edison. This liability isn't the only thing that's going to tag them. They're also going to be more negatively affected from the tax reform than most every other company. A, in terms of their tax loss, it's going to be less, because the tax base will be a lower percentage, and B, because of higher tax charges on foreign profits. A double whammy.
Priestley: Yeah, it's really not good. From an investor perspective, this is undoubtedly going to make people nervous. However, I will say that I do think there's potential in breaking up these companies and creating profit centers, whereas before, you've had aspects of the business like healthcare, which has been incredibly successful masking -- I mean, they didn't even know that they were losing money to the extent that they were losing money on this insurance issue. In an organization that big, you can mask some of the success. And I think what we'll see is that being broken out.
Muckerman: Yeah. Hopefully they get a little bit more focused out of this out of this whole thing. One other thing we forgot to mention is that GE Capital has to shelf the dividend that they've been paying up to GE. More money going out, less money coming in.
Priestley: Yeah. [laughs] We don't have much good to say right now, do we?
Muckerman: Yeah. You know, that's when you've really got to start doing some digging and consider a contrarian outlook vs. the market.
Priestley: What is it, "be greedy when others are fearful and fearful when others are greedy"?
Muckerman: That's what they say. Harder done than said.
Priestley: It's very true. Well, thank you so much for joining me today and talking about CES and helping me get through the GE issue.
Muckerman: We'll cope together.
Priestley: [laughs] Yeah, we're in group therapy. That's it from us today. If you would like to get in touch, please feel free to email us at [email protected], or tweet us on Twitter @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For Taylor, I'm Sarah Priestley. Thanks for listening and Fool on!
