A New Capex Campaign: Oil and Gas Services Set to BOOM on Energy ExpansionOct16

Today’s Featured Topic

A New Capex Campaign: Oil and Gas Services Set to BOOM on Energy Expansion

Although oil prices have boomed over the last year, energy equipment and service firms have continued to struggle, not seeing the strong returns that producer stocks have begun to reap. That may be about to change. Weak investment amid 2016’s anemic oil prices set back any sort of serious investment in new discovery and production, and continued neglect through 2017, even as the price of crude had begun to climb, is now beginning to bite at energy producers’ profitability. The industry now has little choice but to begin a serious capex campaign as pressure from too little capacity and too much production becomes a huge hurdle.

Oil and Gas services have struggled since 2015 and 2016 when oil giants and independent drillers made huge cuts in spending after the collapse in crude oil prices. The sector has gone into recovery, but most of the spending was expansion of US shale fields. However, that caused its own issues for companies like Schlumberger and Halliburton since a glut of oil in the Permian basin, the largest shale field in the world, has pushed local prices close to four-year lows, causing operators to slow down their drilling and production activity, therefore, hurting demand for oilfield services. However, this issue in and of itself is a result of underinvestment in energy capex, creating a sizeable pipeline shortage that has strangled the basin’s outgoing product while production has doubled.

To remedy this glut, new capacity is already being added, including Plains All American’s opening of a 90,000 barrel per day (bpd) crude oil pipeline expansion by the end of October. And Plains’ project is only a drop in the bucket compared to a further $300 billion in capex the Permian will need over the next 5 years to need to keep pace with growth projections.

Oil producers should be strongly incentivized to begin reinvesting into capital expenditures as pipeline and other infrastructure shortages are terrible for the energy industry’s bottom line. Although prices are Due to the Permian bottleneck, the basin’s crude was selling at as much as an $18 per barrel discount to the U.S. oil benchmark WTI.

The Permian’s pipeline woes are not an isolated case. Canadian oil futures were averaging a discount spread of nearly $20 against the US WTI benchmark through August due to similar pipeline shortages. Just last week, refinery maintenance in the Midwest caused the issue to reach a fever pitch, sending Canadian crude futures to only $28 per barrel, compared with $75 WTI, a discount spread of nearly $50, the widest recorded margin since 2008, according to Bloomberg.

Beyond shale, additional pressure on many large oil and gas producers to invest in capex is coming from executives that are reportedly pushing to replenish reserves, halt output declines and take advantage of a crude price rally after years of austerity. Paal Kibsgaard, Chief Executive Officer of Schlumberger, told a conference last month that the international production base needed double-digit growth in investment for the foreseeable future just to keep production at current levels.

Many projects are already underway:

Independent energy midstreamer Oneok recently unveiled plans for $1.4 billion of new natural gas infrastructure in Mont Belvieu, Texas, including a new 125,000-barrel-per-day (Bpd) NGL fractionator, a 200 million cubic feet per day (Mmcf/d) natural gas processing facility, and an expansion of the Arbuckle II pipeline by roughly 100,000 bpd.

Phillips 66 Partners and Andeavor are building the Grey Oak Pipeline, which could move as much as 800,000 bpd of Permian production to the Gulf Coast. Phillips 66 Partners and Andeavor plan to spend $2 billion to build the pipeline, which should start up by the end of 2019. The line would not only bring oil to refineries in the region but also to a new export dock under construction by Phillips 66 Partners.

Offshore equipment and service companies are also beginning to open the taps on spending. Transocean Ltd, a top supplier of drilling vessels, said last month that rates for its new high-spec vessels in the North Sea are now fetching $300,000 per day. IHS Markit now expects 2020 global offshore rig demand to average 521 units, up from a 2018 estimate of 453 units. According to Rystad, last year there was a 50% increase year/year in the number of offshore projects sanctioned with 62 financial investment decisions, followed by similar growth this year, with close to 100 projects likely to be sanctioned. Coupled with annual service price inflation of 5%, offshore oilfield service purchases are projected to grow by 11% per year toward 2022.

Companies may also focus on scaling up and capturing greater efficiency gains through M&A activity. Earlier this month, Offshore oil service giant Ensco plc agreed to buy Rowan Companies plc in a $2.4 billion all-stock deal. The combined fleet will be comprised of 82 units made up of 28 floaters and 54 jackups. Thirty-eight units out of the jackup fleet and 11 units of the floater fleet are high spec, giving the combined company one of the most capable fleets in the industry. This follows Ensco’s prior acquisition of Atwood Oceanics last year, and Transocean’s purchaseof Ocean Rig UDW in September.

Finally, Morgan Stanley’s view is that broad oil and gas services growth will be sustained around the globe. Last month, they issued a report predicting that oil and gas drillers are on the verge of a worldwide spending spree not seen since 2013. Due to unexpected spending from European oil majors, independent drillers, and Chinese LNG demand, the bank expects capital expenditures to rise 15% through 2020, compared to a measly 5% gain we have seen since 2016. In 2022, expenditures on finding and developing new oil and gas assets will rise by about 30% from this year to roughly $583 billion.

THEME ALERT

MRP added LONG oil and gas services to our list of themes on December 23, 2016. Although the Market Vectors Oil Services ETF (OIH) has declined by 28% vs the S&P’s 22% gain over that time period, sustained higher prices and the impending need for a serious boom in capital expenditures should set the OIH and the energy sector as a whole on a path toward very strong gains for the foreseeable future.

MRP also added LONG oil and US energy to our list of themes on April 8, 2016. Since then, the ProShares Ultra Bloomberg Crude Oil (UCO) and Energy Select Sector SPDR Fund ETF (XLE) have performed much better than the OIH, gaining 80% and 16%, respectively, vs the S&P’s return of 34%.

We’ve also summarized the following articles related to this topic in the Commoditiessection of today’s report.

O&G Services

• Why an Oilfield-Services Comeback May Be Underway
• The Permian Basin isn’t the oilfield with the worst pipeline problems
• Permian Needs $300B in CAPEX for Growth through 2023
• Why Oilfield Services Stocks Are Underperforming Despite A Strengthening Oil Market

Oil and Gas Services (OIH) vs US Energy (XLE) vs Crude Oil (UCO) vs Natural Gas (UNG) vs S&P 500 (SPY)

Disruptive Change Updates

FX Matters

The dollar’s ups and downs have had significant repercussions. The earnings of global companies, the trend of interest rates, commodity prices, and many nations’ economies – emerging markets in particular – have all been impacted. This issue of MRP’s Viewpoint first examines the forces driving the dollar’s fluctuations, then looks at where the buck might go next and offers some thoughts on what it could mean for the capital markets.

Joe Mac’s Market Viewpoint: FX Matters →

Finance

Millennial Finance

How millennials and savings apps are making asset managers wake up and smell the coffee

Traditionally unless you had a lot of money, you couldn’t get access to great financial tools and advice. This meant that a lot of people, younger people in particular, were largely ignored by the financial services industry. Many new services employ the technology that millennials use as second nature — smartphone apps and chatbots powered by artificial intelligence — and they are intended to create a savings habit.

They have attracted millions of users. While initial investments made by younger people are small compared with older savers, the start-ups’ growth trajectory and the economic power of millennials is posing a significant threat to the traditional sales strategies of large asset managers.

Moneybox has more than 125,000 investors on its platform, who typically put away £1,000 a year each. The average age is 31. The app offers three products: a Vanguard global equities fund, a Janus Henderson money market fund and an iShares global property equity fund, which charge 0.22 per cent to 0.24 per cent. Moneybox has a 0.45 per cent platform fee plus a £1-a-month subscription after three months.

WealthSimple has 100,000 users in Canada, the US and the UK, investing C$3bn (£1.74bn). It assigns an investment portfolio to each user based on their risk appetite, goals and values, including socially responsible investing options.

Two other financial planning services that are popular with millennials are entering the investment market. Plum, a robo-adviser tool that works over Facebook’s Messenger service, rolled out six investment funds to its 200,000 users last month. Revolut, which has more than 2.6m users across Europe, plans to offer exchange traded funds soon. FT

Construction & Real Estate

Housing

Vancouver Leads Canada’s First Home Sales Decline in Five Months

Canadian home sales declined for the first time in five months as activity in Vancouver and Toronto weakened. Sales in the west coast city fell by 1.5 percent in September and benchmark prices declined 1.2 percent, the Canadian Real Estate Association said Monday. In Toronto, the nation’s biggest city, sales fell 0.5 percent and benchmark prices rose 0.1 percent.

Activity across the country fell by 0.4 percent, bringing the 12-month decline to 8.9 percent, according to the Ottawa-based realtor group. Sales fell in about half of the country’s real estate markets, with buyers and sellers still being influenced by rising mortgage rates and tougher qualification rules introduced at the start of the year, CREA President Barb Sukkau said.

Some markets nonetheless saw sales increase in September, including Montreal with a 1.9 percent gain and the Fraser Valley near Vancouver with a 8 percent rise. B

Services

Robotics & Automation

How Robots and Drones Will Change Retail Forever

Resembling oversize Roombas topped with Ikea shelving, Kiva robots can carry up to 750 pounds of goods in their 40-odd cubbies. After a customer places an order, a robot carrying the desired item scoots over to a worker, who reads on a screen what item to pick and what cubby it’s located in, scans a bar code and places the item in a bright-yellow bin that travels by conveyor belt to a packing station. AI suggests an appropriate box size; a worker places the item in the box, which a robot tapes shut and, after applying a shipping label, sends on its way. Humans are needed mostly for grasping and placing, tasks that robots haven’t mastered yet.

Amazon’s robots signal a sea change in how the things we buy will be aggregated, stored and delivered. The company requires one minute of human labor to get a package onto a truck, but that number is headed to zero. Autonomous warehouses will merge with autonomous manufacturing and delivery to form a fully automated supply chain.

We are in the early days of what might be called the “physical cloud,” an e-commerce ecosystem that functions like the internet itself. Netflix caches the movies you stream at a data center physically close to you; Amazon is building warehouse after warehouse to store goods closer to consumers. And the storage systems at those warehouses are looking more like the data-storage systems in the cloud. Instead of storing similar items in the same place, Amazon’s warehouses store multiples of the same item at random locations, known only to the robots. Trying to find an Instapot at one of Amazon’s warehouses would be like trying to find where in the cloud one of your emails is stored. Of course, you don’t have to. You just tap your screen and the email appears. No humans are involved.

Delivery is about to change drastically too. Amazon, Google, Uber and many startups are working on autonomous delivery drones that will one day connect us to the physical cloud. Remember the days before ride-sharing apps, when we hailed cabs with our hands or a phone call? Uber and Lyft made it easier. Now imagine summoning power tools or appliances delivered by drones. We may someday store objects we own in the physical cloud the same we way store photos in the digital one. WSJ

Payments

How Fintech Companies Are Helping The Failing Credit Card Sector

A 2016 Bankrate study revealed that 67% of people under the age of 30 do not have a credit card, which is an interesting statistic in light of the fintech boom and amid the lack of trust that banks have following the financial crisis.

In the UK credit card debt hit £72.1 billion in June 2018, which was £2,650 per household. Alongside this, 8.3 million in the UK are unable to pay off debt or bills.

How can the fintech industry provide a better service? A good example here would be challenger bank Tandem, which launched a credit card that offers cashback on purchases, no exchange fees when spending abroad and real time updates on purchases after acquiring the banking arm of Harrods.

Something similar is happening in the US with the credit card startup Petal, which offers a credit card that is for those who are new to credit and are just establishing credit. Also, as the approval process is different from others, Petal’s annual percentage rate is up to 50% lower than other entry-level credit cards.

The latest of this new breed of credit card startups is Jaja, a fintech that has partnered with Visa, which also recently launched a ‘FinTech fast-track program’ to help early stage startups gain access to its global payments network. Others that have joined the program include Revolut and Wirecard. Forbes

Streaming

You’re About to Drown in Streaming Subscriptions

The notion that streaming services might someday totally supplant the monolithic cable package has glittered on the horizon for years now. But as that future becomes increasingly the present, an uncomfortable reality has set in: There’s too much. To Netflix, Amazon Prime, Hulu, and HBO Now, add WarnerMedia, Disney, and Apple as omnibus, general interest streaming destinations. Investors have poured a billion dollars into something called Quibi, which has an unfortunate name but exclusive Guillermo del Toro content. And the niche options continue to proliferate as well, whether it’s DC Universe or College Humor. If we’re not at the breaking point yet, we’re surely about to find it.

But while tailored, a la carte services have long been the promise of streaming TV, it’s starting to look more like a series of pricey buffets. Competing megacorporations are all pumping billions into original content, much of it designed for mass appeal. As more megaservices fill the landscape, one wonders how long before the niche upstarts feel the squeeze. And as your streaming options continue to kaleidoscope, what’s coming next looks promising, sure, but also daunting. Especially given who it’s coming from.

The combination of the digital distributor, whether it’s the mobile phone or the ISP, and the content delivery – that’s the bleak future we’re headed toward. It’s not going to work out for consumers. WIRED

Manufacturing & Logistics

Industrials

Construction hit by longest decline in lending since 2011

British banks are cutting lending to UK construction companies at the most sustained rate for seven years, highlighting the pressure on the sector as uncertainty around Brexit creates fears of a downturn. Outstanding loans to construction and civil engineering businesses contracted in each of the six months to August, the most recent period for which data are available, according to the Bank of England. That marks the longest run of declines since the first half of 2011. The total stock of loans fell by £1.5bn over the period, with contraction in each of the five sub-sectors, including housebuilding, commercial construction and civil engineering.

Bank chiefs have raised concerns about several areas of the UK economy in recent months, but construction is the first sector to show concrete evidence of a sustained slowdown in lending as lenders become increasingly cautious. Noble Francis, economics director at the Construction Products Association, said: “There hasn’t been substantial growth in demand for lending — companies are meeting the demand that’s there, but adopting a bit of a wait-and-see attitude toward new projects.” He added that uncertainty in the London housing market was a key driver of the declines, as prices had already started to fall. FT

Satellites

China’s two new satellites are a step towards completion of its Space Silk Road

China has successfully launched another two satellites that will be part of its native BeiDou Navigation Satellite System (BDS) – the country’s competitor to the American GPS system. The satellites will bolster China’s ambitious Space Silk Road project – the country’s programme to boost its global revenue from positioning and navigation systems.

The launch was significant for multiple reasons. First, the BeiDou Navigation Satellite System was built with China’s requirements for national security, and socioeconomic development in mind. The BDS reportedly provides a positioning accuracy of up to 2.5m, rivaling the 20m accuracy offered by USA’s GPS. This makes the satellite system strategically important to the Chinese military.

The services offered by the satellites are applicable in multiple fields. They are used for communication, surveying, weather monitoring, mapping, disaster mitigation and relief, emergency search and rescue, and many more. BDS even forms the backbone of the Chinese autonomous driving industry.

By 2020, China plans to have a completed constellation of 35 satellites in Medium Earth Orbit (MEO) at about a 22,000km altitude. An additional five will be in geostationary orbit, and three more in inclined geosynchronous orbits at an altitude of 35,786km. The two new satellites make up the 39th and 40th of the BeiDou constellation, and are the 15th and 16th in the BDS-3 system. Over the years, the project has become more and more significant for the BRI, being dubbed the ‘Space Silk Road’. TNW