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Scary! Rising US-China Trade War Tensions Could Take 10% Off the S&P

Global markets continue to digest the impact of President Donald Trump’s Sunday evening tweetstorm. Meanwhile, analysts from some of the world’s biggest investment banks including UBS and Bank of America Merrill Lynch have detailed their forecasts for what a full-on trade war between the U.S. and China would look should the worst happen.

Among the many hair-raising projections is the prospect of the S&P 500 entering a correction by losing 10% of its value, which would almost certainly trigger a long-feared recession. That particular forecast was made by UBS analyst Keith Parker, according to CNBC. Parker specified that key European and American cyclical markets would bear the brunt of the declines.

S&P 500

| Source: Yahoo Finance

“FASTEN YOUR SEATBELT AND DON’T HOLD YOUR BREATH”

There is an old saying that when two elephants fight, it is the grass that suffers. In this case, both elephants will also sustain a significant amount of damage if Parker’s projections hold true. He predicts that a full-scale trade conflict between the world’s two biggest economies will see China shed anything from 1.2% to 1.5% of its GDP, which is equivalent to a drop of between $132 billion and $165 billion.

If China responds to Donald Trump’s threatened 25% tariff with a tariff increment of its own from 7% to 15% on approximately $60 billion worth of American imports, this could see the U.S. shed 0.1% of its GDP, or about $14 billion. In the ensuing scenario, Bank of America projects that China may hike tariffs on U.S.-made vehicles and reduce its soybean imports from the U.S. Meanwhile, Chinese imports of American soybeans have already fallen off a cliffsince 2017, dropping roughly 98% last year as China looks toward less antagonistic partners like Brazil.

According to a Bank of America report also cited by CNBC:

“Fasten your seatbelt and don’t hold your breath. The latest escalation of the trade war was completely unexpected, despite the strength of the economy and the markets. This is evident from the immediate negative reaction of U.S. equity futures to the news.”

As the two elephants knock heads, the amount they are erasing from each other’s economies is equivalent to the GDP of mid-sized nations. European and Asian economies will also feel some pain, according to UBS.

IS TRUMP BLUFFING?

According to the White House, the new 25% tariff regime that could potentially kick off this entire sequence of events will come into effect just after midnight on Friday. Expectedly, markets have been in virtual freefall since Monday, with the NASDAQ and S&P 500 both shedding close to 1% on Monday alone. The miserable market conditions continued through Tuesday, with little sign of respite as investors react with horror at the thought of a damaging 20th-century-style trade conflict between economic superpowers.

Dow

The Dow Jones Industrial Average continues to trend downward following Sunday evening’s shock announcement. | Source: Yahoo Finance

Not everyone believes that the panic is warranted, however. JPMorgan CEO Jamie Dimon, for example, believes that the shock announcement by Trump was nothing more than a way of cornering a formidable opponent and forcing them to negotiate. Speaking to CNN Money’s Poppy Harlow, Dimon stated that regardless of the market’s reaction, Trump will count it as a win because it has become the only successful way of getting the Chinese to the negotiating table on his terms.

Whether this is a considered masterstroke of strategy or simply a typical Trump action, it certainly appears to have done the trick. Chinese Vice Vice Premier Liu He will be part of a trade delegation to the U.S. later in the week, which at the very least is a sign that China is willing to give ground so as to avoid a damaging trade war.

Source: Scary! Rising US-China Trade War Tensions Could Take 10% Off the S&P

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Which Company Could Be The Next Permian Basin Acquisition Target?

Following the news that Chevron had agreed to pay a nearly 40% premium to acquire Anadarko Petroleum, investors quickly bid up the shares of other potential acquisition targets.

As I argued in the previous article, I believe the Permian was the key to the Anadarko acquisition, but there are plenty of other targets in the region. There are also several companies with the capability of making acquisitions.

In recent years, the few mergers and acquisitions in the oil and gas industry have been largely focused on the Permian Basin. The supermajor integrated oil and gas companies have been increasingly making forays into the Permian.

In addition to Chevron’s new acquisition, in 2017 ExxonMobil paid $6.6 billion to acquire Permian acreage from the Bass family of Fort Worth, Texas. ExxonMobil also spent $41 billion in 2009 to acquire XTO, which has a major presence in the Permian.

Permian Players

Today major acreage holders in the Permian Basin include the supermajors Chevron and ExxonMobil, as well as Occidental, Apache and Concho Resources. Occidental, in fact, reportedly attempted to acquire Anadarko prior to Chevron sealing the deal. But Occidental may now find itself in the crosshairs of a bigger player looking to shore up their Permian portfolio.

But there are many other major producers in the region, including ConocoPhillips, EOG Resources, Pioneer Natural Resources, Noble Energy, Devon Energy, and Diamondback Energy. Smaller producers in the region include WPX Energy, Parsley Energy, Cimarex Energy, Callon Petroleum, Centennial Resource Development, Jagged Peak Energy and Laredo Petroleum.

Let’s first take a look at the largest companies operating in the Permian according to enterprise value. This metric is preferred over market capitalization, because it includes a company’s debt. In the case of a potential acquisition, the acquiring company would be responsible for this debt in addition to the purchase price. Hence, it is a more comprehensive representation of a company’s market value.

I have included the integrated supermajors that could have the ability to make major acquisitions, three of the larger exploration and production companies (which could make an acquisition or be a target themselves), and Anadarko for comparison. All data were retrieved from the S&P Capital IQ database.

Metrics for major oil companies operating in the Permian Basin.

Metrics for major oil companies operating in the Permian Basin.

Robert Rapier

  • EV – Enterprise value at the close on April 12, 2019 in billions of U.S. dollars
  • EBITDA – TTM earnings before interest, tax, depreciation, and amortization in billions of U.S. dollars
  • TTM – Trailing 12 months
  • FCF – Free cash flow in billions of U.S. dollars
  • Debt – Net debt at the end of the previous fiscal quarter
  • 2018 Res – Total proved oil and gas reserves in billion barrels of oil equivalent at year-end 2018
  • EV/Res – The value of the company divided by its proved reserves

Potential Buyers

Based on their size and debt metrics, ExxonMobil and Chevron still appear to be the most capable of pulling off a major deal. Shell has been moving in the direction of becoming a natural gas company, and has already made major capital expenditures in this area in recent years. Further, in 2016 they made their own major acquisition — a $70 billion deal for BG Group.  Meanwhile, Total hasn’t shown much interest in the Permian.

BP may not have an appetite for an acquisition as it continues to be weighed down by its obligations from the 2010 Deepwater Horizon oil spill. As an aside, the continued fallout from that disaster has also resulted in BP having the cheapest reserves on the books by far of any company listed in the table. Also note that the EV/Res metric for integrated supermajors isn’t directly comparable to pure oil producers like Anadarko, as the former also have midstream and refining assets.

ConocoPhillips appears to be the most attractive target for an acquisition from a pure valuation perspective, but as the largest pure oil company it would be a large bite for even ExxonMobil. With respect to making an acquisition, ConocoPhillips CEO Ryan Lance stated earlier this year that the company isn’t feeling any pressure to do so.

Occidental also falls into the category of potentially making an acquisition or of being acquired. On a relative basis, they are more expensive than ConocoPhillips, but on an absolute basis the price would be more manageable.

What about smaller players like Parsley, WPX Energy, or Cimarex Energy? Based on the price movement following the announcement of the Chevron-Anadarko deal, investors are clearly betting that more deals will follow. Below are some of the metrics of potential acquisition targets (with Anadarko for comparison), including some of the large players listed in the previous table:

Metrics for smaller oil companies operating in the Permian Basin.

Metrics for smaller oil companies operating in the Permian Basin.

Robert Rapier

  • 1-Day Change – Change in share price on April 12, 2019, the day the Chevron-Anadarko deal was announced

Note that the double-digit gains of both Pioneer Natural Resources and Parley Energy imply that investors believe they could be next on the acquisition list. Parsley looks attractively priced according to its enterprise value and total reserves. Several other companies stand out, such as Devon Energy and Cimarex, although all of these companies outspent their cash flow in 2018. An acquisition by one of the larger players could give them the efficiencies and economies of scale to rectify that.

Another name on the list that stands out is Diamondback Energy, which has long been one of my favorite Permian Basin oil companies. Diamondback has been an outstanding performer in recent years, but now looks to be the most richly valued according to several metrics following its 2018 acquisition of Energen.

The biggest challenge with the smaller players is that they may not have enough reserves to really move the profit needle for the biggest players. Laredo Petroleum’s 200+ million barrels of oil and gas reserves might not be sufficiently appealing to ExxonMobil, which had 24 billion barrels of reserves at the end of 2018. But it could be appealing to a company like EOG Resources, which closed the year with 2.8 billion barrels of reserves.

Ultimately, price and valuation are only part of the equation. Anadarko wasn’t the cheapest acquisition target for Chevron, but Chevron liked the synergies of Anadarko’s locations. Thus, every major operator in the Permian is more likely to acquire companies whose properties are adjacent to their own. A deeper dive thus becomes an exercise in not only value, but in studying maps of the Permian producers — large and small.

Robert Rapier has over 25 years of experience in the energy industry as an engineer and an investor. Follow him on Twitter @rrapier or at Investing Daily.

Robert Rapier is a chemical engineer in the energy industry. Robert has 25 years of international engineering experience in the chemicals, oil and gas, and renewable ene…

Source: Which Company Could Be The Next Permian Basin Acquisition Target?

Fewer Billionaires, Poorer Billionaires On African Continent In 2019

Buffeted by plunging stock prices and weaker currencies, the number of African billionaires has shrunk to just 20, down from 23 a year ago. Four people fell off Forbes’ annual list of the continent’s richest since last year while one returned to the ranks after a four-year absence. All but four members of the list have smaller fortunes than a year ago.For the eighth year in a row, Aliko Dangote of Nigeria is Africa’s richest person……

Source: Fewer Billionaires, Poorer Billionaires On African Continent In 2019

New Survey Shows China Not Dead Yet

China’s services sector growth rose for the second month in a row and hit its highest level since June 2018 , according to the Caixin China General Services Business Activity Index, released on Friday. Caixin said that increased foreign demand for Made in China goods and improving business confidence helped. The Index hit 53.9 in December from 53.8 in November and 50.8 in October. While the number is generally flat from November, it is much higher than the third-quarter average and comes at a time when trade tensions remain high.

Source: New Survey Shows China Not Dead Yet

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