David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Is the Deepwater Dead?

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest to subscribers. Here is a section:

    Marky Mark-ing to market cost and efficiency gains: More competitive than you think
    Contrary to popular belief, the US onshore isn’t the only sector seeing meaningful cost deflation and/or efficiency gains. While the ~60% reduction in DW rig rates has grabbed headlines, broad improvements, including drill-days (-30%-40%), steel costs (-30%), and various SURF/topsides costs (-10%-30%) have reduced total project costs by 30%-40%, in our view. And given the lag in response time, excess capacity and a moderate pick-up in activity, we expect cost and efficiency gains to be more durable than in the US onshore.

    But not all barrels are created equal. Only high quality resource can compete While all deepwater tends to get lumped together, the range of economics across projects is diverse (sub $30/bbl-$80+/bbl breakevens), with only high quality resource set to compete. We examine various drivers of project economics, many poorly understood, including fiscal terms, resource size, resource density, and proximity to infrastructure, and potential impact. We see high quality, pre-FID deepwater projects breaking even at roughly $40-$50/bbl.

    Meaningful challenges remain
    Though more competitive than the market believes, meaningful challenges will continue to drive an increasing share of discretionary capital to US shale, including: geologic risk, project execution risk, geopolitical risk, and capital inflexibility. Adjustments to development strategies and scope can mitigate some risk, and large, diverse IOC budgets will invest across the spectrum, but failure to revolve would demand a higher rate of return, with an increase to 15% required IRR (vs. 10%) increasing average breakevens by $7.5/bbl.

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    Your money market fund has changed

    This article by Darla Mercado for CNBC may be of interest to subscribers. Here is a section:

    All of that changed in September 2008, when Lehman Brothers filed for bankruptcy. The Reserve Primary Fund, a large money market fund, held Lehman bonds.

    In turn, institutional investors pulled billions of dollars from the fund, knocking its share price from the supposedly steady $1 to 97 cents on Sept. 16, 2008. It had "broken the buck."

    That crisis spurred new rules from the SEC, aimed at protecting smaller investors from large redemptions.

    Two key reforms came about: One would require so-called prime institutional money market funds (generally used by large investors) to have a floating net asset value rather than a fixed $1 share price.

    The other creates liquidity fees and "redemption gates," which are temporary halts on withdrawals to certain money market funds.

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    Email of the day on South Africa

    The South African courts are for the most part independent, competent and play a key role in holding the worst excesses of Zuma and his cronies in check - and hopefully ultimately ensuring they go to jail. The National Prosecuting Authority and the Hawks (part of the police) are 'captured' by Zuma and merely do his bidding - mostly to keep him out of jail (there are 786 charges of fraud, corruption and racketeering against him) and to torment people like Gordhan who seek to limit the thieving and waste. SA does not really have single party rule either - the moderate opposition DA now runs Johannesburg, Pretoria, Cape Town (and the Western Cape provincial government) and Port Elizabeth. The ANC secured only 53.9% of the overall vote in the recent municipal elections, much of that from the rural areas.

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    Google and 3D Printing Buildings

    This article by Katie Armstrong from 3D Printing Industry dated May 3rd may be of interest to subscribers. Here it is in full:

    3D printed buildings are the way of the future! At least that’s what Eric Schmidt, executive chairman of Google’s parent company, Alphabet, says.

    Imagine you could walk onto an empty block of land one day, and have a house built on it a few days later. Sounds like science fiction, doesn’t it? What if I told you it was already happening?
    A recent conference in Los Angeles saw Schmidt predict the technologies that would be game changers. The Milken Institute’s Global Conference, which brings together leaders from diverse sectors and industries around the world, explores solutions to today’s most pressing challenges in financial markets, industry sectors, health, government and education. Schmidt talked about synthetic meat made from plants, VR, self-driving cars, and 3D printing for buildings.

    Schmidt points out that constructing buildings, both residential and commercial, is time consuming, energy intensive, and costly. He said that construction represented 5% of the economy, but that homes and buildings built in an industrial environment could be cheaper, more efficient and built on 100% recyclable material.

    This isn’t the first time Schmidt has sung the praises of 3D printing technology and its potential applications. Back in 2013 he predicted the rise in the use of 3D printing, and he wasn’t wrong.
    The implications of 3D printed houses and infrastructure are incredible. Instead of a home taking months to build, it could take just days. A company in China claimed to have built 10 houses in under 24 hours in 2014, with all their materials coming from recycled waste materials.

    With the UN estimating that three billion people will need housing by 2030, large scale 3D printers are being suggested as a solution to this. They could be the solution to cheap, reliable housing which would replace slums in developing countries.


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    Hydrogen Heating a Step Closer as Government Adviser Backs UK Trials

    Radical plans to use hydrogen to heat UK homes and businesses have moved a step closer after the Government’s official climate advisers said the plan was “technically feasible” and called for major trials to be undertaken.

    In a report, the Committee on Climate Change identified using hydrogen in place of natural gas in the UK’s existing gas grid as one of the two “main options” for greening Britain’s heating supplies.

    It said the second was the use of heat pumps, which use a reverse refrigeration process to draw heat from the air, ground or a water source.

    The Government must decide by 2025 what role hydrogen will play in order to implement its chosen plan in time to hit its 2050 climate targets, Matthew Bell, the CCC chief executive, said.

    About 80pc of UK homes are currently heated using natural gas from the grid, which produces carbon dioxide when burnt.

    The CCC estimates that if the UK is to comply with the Climate Change Act, which requires greenhouse gas emissions to be slashed to 20pc of their 1990 levels by 2050, the majority of homes and almost all businesses will need to cease burning natural gas.

    However, the CCC said the UK’s attempts at green heating so far had “been unsuccessful” and called for the Government to devise “a proper strategy”.

    This including doubling the rate of installation of heat pumps this parliament in homes that are not on the gas grid, many of which use heating oil, as well as conducting the “sizeable trials of hydrogen for heating”.

    “The main options for the decarbonisation of buildings on the gas grid in the 2030s and 2040s are heat pumps and low-carbon hydrogen,” the CCC said in a report.

    In addition, the UK could also use some district heating networks in urban areas, taking heat from a central source through insulated pipes to homes and businesses.

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    On Target: the Private Newsletter on Global Strategy from Martin Spring

    My thanks to the author for his ever-interesting report – here is the opening:

    Low-Risk Plan: ‘Shot Through the Heart’

    Those of you who have been following my opinions for a while know how much I favour a Browne Plan for those who don’t have the experience, skill or time to manage family wealth actively.

    Invented by the American strategist Harry Browne, such a plan promises steady long-term capital growth with minimal downside risk, requires no management beyond a simple annual portfolio view, and frees you from having to make any decisions about what’s happening in the markets. The concept is simple – ignoring fixed assets such as your home, you allocate a fixed proportion of your capital to each of several very different asset classes, but rebalancing periodically, moving capital from those that have gained in value into those that have fallen. You sell some expensive assets to buy more of those that have become cheaper.

    Browne recommended investing 25 per cent of your portfolio in each of just four assets -- shares, bonds, gold and cash.

    Anyone who followed such a plan in the US since 1970 would have achieved an average return of 8.35 per cent a year. In only five of those 45 years did the portfolio lose money, and always bouncing back strongly in the following year.

    The logic behind such a plan is…

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    Brad Katsuyama Q&A: I Do Not Think We Would Have Survived If It Was Just Hype

    Stock exchanges are part of the plumbing of Wall Street, and the details of how they’re run have never exactly captured the public imagination. That changed with Brad Katsuyama, 38, the co-founder and chief executive officer of IEX, who brought equity market structure to the mainstream as the hero of Michael Lewis’s book Flash Boys. Katsuyama was working as a trader at the Royal Bank of Canada, helping big investors buy stock, when he noticed it was getting increasingly difficult to do so without moving the price. As he investigated, he came to the conclusion that stock exchanges weren’t always looking out for investors’ interests and the market favored high-frequency traders at the expense of long-term investors. (In Lewis’s words, the market was “rigged.”) This led Katsuyama to start IEX, an exchange with a “speed bump” designed to slow down high-frequency traders on behalf of longer-term investors. After a grueling application process full of fierce resistance, IEX’s Investors Exchange gained approval from the U.S. Securities and Exchange Commission in June. “We just wanted a chance to compete,” says Katsuyama, who spoke with Matt Levine of Bloomberg View about the nuances of market structure shortly after the exchange went live in September.

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    I have seen the future and his name is Kevin

    Thanks to a subscriber for this note by Albert Edwards at SocGen which may be of interest to subscribers. Here is a section:

    Summers’ relaxed view on the debt build-up, particularly visible in the corporate sector, is in sharp contrast with our own view that this looks set to wreck the US economy. Summers was particularly dismissive of comparing debt to income as the former is a stock and the latter a flow concept. He thought it entirely appropriate in a world of lower interest rates that debt had reached record levels relative to income? belying, for example, the concerns expressed by the IMF this week. Should we worry about the chart below or not?

    The charts above and below have just been updated by my colleague Andrew Lapthorne (and using the S&P 1500 ex financials universe). Summers? point was we shouldn’t be too stressed about rising debt as 1) QE is driving up asset prices and higher debt does not look excessive relative to assets, and 2) rock-bottom interest rates mean the debt is easily serviceable. Now on the first point, Andrew shows that quoted company corporate debt has rocketed relative to assets to now exceed the madness last seen at the height of the 2000 TMT bubble. Indeed the problem with Summers? analysis in my view is that it is the higher debt that is being used to push up asset values (via share buybacks), just as it did during the housing bubble in 2005-7. And by pushing asset values well beyond fundamentals you build debt structures on false asset values, which only become apparent when the asset bubble bursts. And am I in any way reassured that the Fed sees no bubbles? No, I am not. These dudes will never identify an asset bubble? at least before the event!

    Andrew notes that the way corporate bond pricing models work (e.g. Moody’s KMV and Merton’s “distance to default” models) it is not just a company’s ability to pay its coupon that affects its valuation. Investors are in effect always asking, can this company repay its principal TODAY, even though the repayment is not actually due for 30 years. If asset values collapse in the event of a recession, corporate bond spreads will explode irrespective of the fact that they can easily pay the interest. But hang on a second, let’s just look at interest cover for the quoted sector, for Andrew finds that despite record low interest rates, cover has declined to levels last seen in the depths of the last recession (see chart below)! In the next recession a sharp decline in both profits and the equity market will reveal this Vortex of Debility. US corporate spreads will then explode as the economy is overwhelmed by corporate defaults and bankruptcies. And with the Fed having been the midwife of yet another financial crisis, what price do you give me for it to lose its independence?


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