Williams Companies (NYSE:WMB) and Energy Transfer Partners (NYSE:ETP) are making headlines this week as their stock prices plummet, while auto companies are riding the sweet waves of consistently low oil prices by announcing strong guidance -- some of them even projecting into 2018.
In this week's Energy Industry Focus, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman talk about why the Energy Transfer Partners empire is tanking and what it would need to do to recover, why China is such an appealing market for automotive manufacturers, and what to make of Pioneer Natural Resources' (NYSE:PXD) share sell-off from last week.
A full transcript follows the video.
This podcast was recorded on Jan. 14, 2016.
Sean O'Reilly: Oil companies are in freefall while SUV sales continue to surge, on this energy edition of Industry Focus. Greetings, Fools! I am Sean O'Reilly, joining you from Fool headquarters in Alexandria, Va. It is Thursday, Jan. 14, 2016. Joining me to talk all things energy and industrials is Tyler Crowe and Taylor Muckerman. What's going on, guys?
Tyler Crowe: Hello, hello, hello.
O'Reilly: Looking sharp in your vest there.
Taylor Muckerman: Yeah, it's warm. Toasty. It's all I needed today.
O'Reilly: What is it outside?
Crowe: It's chilly.
O'Reilly: It was 28 earlier. A little chilly. Not chilly for SUV sales, though. As a follow-up to last week's story where, I think Tyler, you were talking about how SUV sales and truck sales are surging because gas is $1.90 or something.
Crowe: $1.77 when I came in. Alexandria, Va., today.
O'Reilly: You fill up whenever you come to Virginia, too.
Crowe: No, it's just like, the one turn I make to the office, I have to go right by a gas station, and right there, it's plastered right in front of my face. I drove in this morning, it said $1.77.
Muckerman: Did you get a Big Gulp?
Crowe: No. It's not a 7-Eleven.
Muckerman: No, it's not.
O'Reilly: What's a Big Gulp go for these days? Is gas cheaper than a Big Gulp? That's what I want to know.
Muckerman: It might actually be. A Big Gulp is smaller than a gallon of gas.
O'Reilly: Don't they pitch the Big Gulps as $1.09?
Muckerman: But you can't refill your gas tank for free if you're still in store.
O'Reilly: Oh, sorry. That's a good point, though, thank you. You must have taken some econ classes at some point. Anyway, as a follow-up to last week, basically, GM (NYSE:GM) just announced strong guidance for 2016. They're doing a $4 billion buyback; they're saying they're going to sell even more cars this year. I guess cheap oil prices are having an effect, huh?
Crowe: I guess you could say that.
O'Reilly: A little bit.
Crowe: Basically, they're guiding for $5.25, $5.75. Pretty large uptick from last year. One of the big things that I think a lot of people got excited from is, they're boosting their stock repurchase plan up to $9 billion, up from $5 billion, which is obviously saying, "We're doing pretty well, and we don't have to reinvest a whole lot in the business right now, so let's give it back to shareholders." And I think that's been something that shareholders of GM and Ford (NYSE:F) have been waiting for. "When is it our turn?" It's been quite a while since the downturn, and all the issues that GM has had over the years; I'm sure there's a lot of shareholders who've been itching -- "When is it our turn to make those returns?"
Muckerman: Well, they've returned a nice amount in the market since the big government intervention, I think, right?
Crowe: Yeah. Maybe, people just aren't noticing.
Muckerman: Yeah, that's fair.
Crowe: This would be the best part about it.
O'Reilly: So, Taylor, as Tyler mentioned, Ford announced decent guidance and results and everything. But they just announced crazy sales from China. Now, last I checked, the Chinese stock market is crashing; they're always tripping their circuit breaker, talking about a pullback and slowdown there, hardlining. But we're not seeing that in auto sales there. What was it, they sold 18% more cars in China than last year? Where's the dichotomy here?
Muckerman: I think what you're looking at is, the Chinese are used to purchasing consumer goods. I don't know if they're necessarily used to purchasing stock. It's a very retail-heavy stock market, and it's fairly new compared to the U.S. market. So I think they're still learning how to adjust to the crazy growth their market's had, and the skittishness that investors over there might have. I saw a survey that indicated they feel much more like gamblers over there, in terms of investing.
O'Reilly: Well, the size of their stock market compared to ours, relative to the size of each economy, it's infinitesimally small. It's way smaller. Not only that, but their government buys stock on the open market regularly.
Muckerman: Yeah, there's an lot more finagling going on over there. So I wouldn't necessarily translate stock market performance to consumer buying habits in China.
O'Reilly: So this seems to imply that the Chinese consumer's doing a little bit better than the headlines would lead you to believe.
Muckerman: Yeah, and you see that in retail sales over there as well. This has been, historically, not a super strong market for American car makers.
Muckerman: So if they can make headway like this, then that's a totally new opportunity that investors can get excited about.
O'Reilly: Yeah, was it Ford that said -- you may have missed it, and I can't recall, so it's fine. But I think Ford said, "We expect China to be huge for us someday."
Muckerman: You would imagine so. There's a very small portion of the population that does drive. You just have to wonder if they more or less skip traditional automotives and just wait for EVs to come out. But you haven't really seen too much growth there, either, in terms of overall market share capture from EVs. So I think it's got a few years to run here for traditional vehicle growth in China. And you're not seeing the only two companies that are producing high expectations, Magna International, which is an OEM parts supplier, they also build cars for smaller car companies, a Canadian company, but they do trade in the U.S. as well. They even boosted their 2018 guidance.
Muckerman: That's a few years down the line --
Muckerman: They see some positive things happening --
O'Reilly: Do they have a backlog? How can they do that with any confidence?
Muckerman: They do. So, they basically provide pretty much any parts you can think of.
O'Reilly: Spark plugs.
Muckerman: And, you see their name mentioned in the discussions when you talk about an Apple car or a Google car.
Muckerman: They could potentially be the builder. There's been rumors that an Apple executive visited a plant of theirs in Europe last summer.
Muckerman: So it's just a way for this company to maybe see some optionality, and maybe get into the autonomous-driving market without just being a parts supplier.
Crowe: And, tying it a little bit back to energy here, there's tons and tons of factors that go into the price of oil, and a lot of the sentiment going around it, and one of the things that has been talked about a lot, at least as of late, was that we should start to see a waning Chinese demand for oil. And when you see sales figures that we've seen for automotive as of late, it makes you wonder what the metrics they're looking for oil demand in China are.
Yeah, if we look at manufacturer purchasing indexes, they're very far down, and a lot of times, we gauge the Chinese economy on that manufacturing export sort of model. But if we're seeing such strong consumer demand, which is going to be one of the major drivers for oil, probably more so since it is primarily a transportation fuel, it does make you wonder, are the concerns that Chinese oil demand --
O'Reilly: Is that fair, yeah.
Crowe: -- is not waning as much as people are expecting it to.
O'Reilly: Well, whenever I see any of this stuff, I'm not surprised, like the stuff that's going on in China right now, with the stock market crashing and everything, because their current goal is to shift from an export-driven manufacturing economy to a consumer-driven economy, a little bit more like ours. And that's exactly what's happening. Their stock market is comprised mostly of export-driven manufacturers. It is what it is.
Crowe: Yeah, agreed.
O'Reilly: Before we move on, I want to put things in perspective. Tyler and I broke this out before we went in; the North American car market is still a lot bigger than Asia. Was it $200 million? Something like that? Yeah. For Q3. Pre-tax results by segment, and it's what it is.
Crowe: To give a comparison, Q3 pre-tax results by Ford's segments, regionally, North America was $2.6 billion. Asia Pacific, $20 million.
O'Reilly: For profit margins.
Crowe: Profit margins, yeah. So, let's keep it a little bit in perspective here.
O'Reilly: Before I move on, I wanted to point our listeners to the newly redesigned focus.fool.com. There, you'll discover a special discount on The Motley Fool's Stock Advisor newsletter that works out to $129 for all IF listeners, for a for a full two-year subscription to start your year off Foolishly. Just go to focus.fool.com to take advantage of this offer. Once again, that is focus.fool.com.
Next up, we're talking about the freefall in the Energy Transfer and Williams Companies. We are 14 days into the new year, and Williams Partners and Williams Companies are getting hammered, down 40%, and it's even dragging down other parts of the Energy Transfer empire as well. Tyler, cause for concern?
Muckerman: Bartender needs to cut them off.
O'Reilly: You've had enough!
Crowe: So, a lot of this has to go around the combination/merger/acquisition/whatever the heck you want to call it of Williams Companies and Energy Transfer. Last year, we had that drama around it where Williams said, "Hey, somebody made us an offer to buy, but we turn them down because we think the stock --"
O'Reilly: "We love working with more."
Crowe: And then Energy Transfer said to everybody, "We're the ones that are buying, we think we can make this happen, we're going to tell everybody it's worth it."
O'Reilly: I remember this, it sounded very high school at the time, and it sounds very high school now.
Crowe: Oh, it did. We're talking about hostile takeovers and everything. Now, we've had a couple balls start to roll in the MLP space where Kinder Morgan cut its dividend because a lot of people were getting concerned, "Oh, what if they lose their credit rating," so they had to make that big move to cut their dividends to keep their credit rating intact. Williams Companies just recently had its credit rating downgraded by Moody's, from one notch above investment down to just that one notch below into junk territory. Which is, for a large MLP, not very good. Not very good at all. So when you have a non-investment credit rating after having one, and you combine that with Williams Companies, Williams Partners, who has this massive backlog of projects they want to build out, we're talking $30 billion worth of projects --
O'Reilly: [singing] That they need to finance.
Crowe: And they need to find some money for it. And you combine that with the fact that Williams Companies is trying to merge with Energy Transfer, there's a lot of questions as to, could Williams Companies' shakier debt situation roll into Energy Transfer equity and compromise its debt ratings?
O'Reilly: Do you remember any breakup fees or anything?
Crowe: I do not remember if there's any breakup fees related to this one.
O'Reilly: I sort of wonder if everybody's going to be like, "OK, maybe we need to wait a little bit," or something.
Crowe: Whatever happens here -- because, if you look at how much the market is abusing this, you've got both Williams down more than 40%, Energy Transfer equity's down 39%, Energy Transfer Partners is down 23%, Sunoco Logistics Partners down 26% ... this is just in 2016 alone. These are big, big moves.
O'Reilly: It's two weeks into the year, man. This is a rough year.
Crowe: The market seems to be pricing in that management is going to do something here. Most likely, somewhere along the way, Williams is going to have a dividend cut, or something along those lines.
O'Reilly: What's their yield right now? You were saying earlier they're asking for the cut.
Crowe: Sorry, I don't have it in front of me right now. But it's in the high double digits.
O'Reilly: OK, I thought you said ...
Crowe: Mid- to high teens for Williams right now. Basically, that shuts off the equity market, they can't raise capital to build there, and with a junk rating, it's going to be more expensive to build. It's just begging for management to make a move and say something that they're going to do something to shore up the balance sheet or to cut its growth rate, something. But just sitting here and not doing anything ...
O'Reilly: There's plenty of precedent to cut that dividend. I mean ...
Crowe: Kinder Morgan just did it a month ago.
O'Reilly: Yeah. Plenty of precedent.
Crowe: Teekay Tankers did it a little while ago. Master limited partnerships that have, for years, I would say irresponsibly paid out too much money to shareholders in relation to what they've been bringing in. We talked about it with Kinder Morgan. As investors, we pushed for them to give us more cash, and they put themselves to the brink with paying out all that they could.
O'Reilly: I try to get out, and they keep pulling me back in. Little Godfather there, yeah?
Crowe: Well, that's the situation. I'm not surprised.
O'Reilly: Taylor, are you interested in any of these names right now? Doing a little nibbling at all?
Muckerman: Uh ... no.
O'Reilly: Cool. Conservatism wins the day.
Muckerman: Maybe add to a couple in the next few months, but right now, my only thought was just to buy an oil-linked ETF and just let it ride.
O'Reilly: Call it a day.
Muckerman: Yeah. Not a producer ETF, just a commodity ETF. And just wait 'til $60 to $80 oil comes back in three to five years.
O'Reilly: OK. So segment three is our mail bag. Leland Paine of Fairview, Texas, writes: "I'm really interested in what you, Taylor, and Tyler think about PXD. In the past, Motley Fool has high regard for the company, and last week, they sold 12 million shares at a price of $117. They announced the offering late Tuesday, Jan. 5, after closing at $125, and the stock opened up the next morning at $115. The funds are being used to fund production increases. Does this make sense for this company? WTI trading at $31, trending downward." What do you guys think? Taylor?
Muckerman: Well, that's Pioneer Natural Resources, you were talking about the ticker--
O'Reilly: Oh, yeah.
Muckerman: No big deal.
O'Reilly: I just assumed everybody knew. Just kidding.
Muckerman: Well, now they do.
Crowe: It is the energy show, after all.
Muckerman: That's right.
O'Reilly: This stock hasn't fallen much in the last year and a half.
Muckerman: Compared to its peers.
Crowe: Let me pull it up for you guys while you keep going.
Muckerman: Compared to the peers, no. Especially lately. And if you look at its multiples, it is trading higher than its peers. So relative to its peers, maybe a stock issuance wasn't a terrible idea.
O'Reilly: Right, get the money while the gettin's good.
Muckerman: Yeah, maybe they want to go buy a cheaper, smaller peer, or some assets from one of them. But you look at 7.6 EV-to-EBITDA multiple versus a peer group of about 12 people that I looked at, averaged 4.6. So it is trading higher. Much better debt profile. And it was, I guess, Wall Street looked at it as kind of an encouraging fact that this deal was fully subscribed.
O'Reilly: It wasn't surprising that --
Muckerman: Oil assets --
O'Reilly: -- it opened up a little down, because it was priced a little bit below the market. So that's fair.
Muckerman: But still, the $117 that it was offered at is still valuing shares much higher than its large-cap E&P peers. I think rightfully so. It's growing production thanks to some efficiencies that it's still getting from optimization, reduced cycle time from well to well, and longer frack lines. So it's doing things that are going to keep it competitive in this low-price market. And it's got tremendous assets in the Mid-con.
Crowe: Yeah, and one of the things they do slightly have going for them is, if you look at the way the cash lays out, it seems to be they're getting to the point where all of these efficiencies and price gains, and now, with, I guess you could say, the services companies giving them such a larger discount than what they were used to getting, they're starting to see a point where, for a while there, I think it was even when David Einhorn was looking at them as one of the staple examples of what's wrong in the shale patch. But they're starting to get to the point where there's capital discipline there, and those efficiencies are finally starting to catch up. Actually, pulling it up here, in the past 18 months, right about July of 2014 --
Crowe: That's when we started to see shakiness in the market, Pioneer's down 47% from there compared to then. To put that in a bit of perspective, Continental Resources is down 75% over that time. And Chesapeake Energy, everybody's favorite, is down 87%.
Muckerman: Speaking of Continental, they have zero hedges this year, because Harold Hamm stripped all those away, whereas Pioneer Natural Resources has, like, 80% to 85% of its 2016 production hedged.
Crowe: Yeah, they made some decent moves. It's hedged at $60, which doesn't sound fantastic.
O'Reilly: It sounds good right now.
Crowe: When you're comparing it to $29, $30, it sounds amazing.
O'Reilly: Looking like friggin' geniuses over here.
Muckerman: And that's what Harold Hamm just declared. He thinks the price is going to end in 2016 at $60 a barrel. So even if his prediction comes true, Pioneer isn't losing money on those hedges.
Crowe: Yeah. Another little added bonus that they have is, last year, they sold assets to Enterprise Products Partners, they netted about $1 billion but only got half of it. So this half of the year, they're getting an extra $500 million, which will help to pay for that capital spending. They kept their capital spending for 2016 just about level what they did last year, while still predicting 10% to 15% production growth. If you can get that kind of efficiency, you can't really fault them too much for being a little bit more aggressive while everybody else is reeling.
O'Reilly: I mean, it's been a little greedy while everyone else is being a little fearful. I don't know.
Crowe: It's not the worst thing in the world.
O'Reilly: No. OK, cool. That is it for us, folks. If you're a loyal listener and have questions or comments, we'd love to hear from you. Just email us at email@example.com. As always, 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 Tyler Crowe and Taylor Muckerman, I'm Sean O'Reilly. Thanks for listening, and Fool on!