by Shawn Narancich, CFAVice President of Research
Parking Planes in the Desert The fact that Fed Ex reported quarterly earnings that nearly doubled is not nearly as important as the factors cited for reducing its current quarterly outlook—namely slower economic growth. The freight delivery companies are important bellwethers for investors because their businesses touch a significant percentage of worldwide output. The news that management lowered its estimate of global GDP growth this year from 2.9 percent to 2.3 percent sent a chill through the financial markets, particularly after both Europe and China reported another month of declining manufacturing activity. Part and parcel with its dimmer economic outlook, Fed Ex cited high oil prices as one of the reasons for idling aircraft until higher margin airfreight demand improves. Despite these discouraging developments and other notable lukewarm earnings reports, equity markets retained an underlying bid and held up relatively well, with the S&P 500 declining by just 0.5 percent amid a recovery in benchmark Treasuries.
Home Sweet Home Has the housing market bottomed? This is a top-of-mind question for many investors nowadays amid homebuilder stocks rocketing higher some 75 percent since last fall. Well, pick your poison, because several key housing reports this week lent credence to opinions of those in both camps. February housing starts and new home sales both undershot estimates while declining in February, but starts are near a three-year-high. Similarly, February existing home sales declined, but are up nearly 9 percent in the past year. Against a backdrop of generationally low mortgage rates and firming labor markets, housing affordability has improved markedly, with notable homebuilder optimism signaling that we have indeed seen the worst of the housing decline. Warm weather has probably pulled forward some demand for housing, but the rise in new housing permits signals better activity and firmer pricing despite a continued overhang of shadow inventory in the existing home market.
You Just Can’t Make This Stuff Up The improbable saga of Brazil versus Chevron et al continued this week with news that the host of the 2016 Summer Olympics has filed criminal charges against the oil producer and its drilling contractor, Transocean Offshore, following an oil spill there last November. So how many thousands of barrels spewed into the sea to precipitate such drastic action? As many as ... three. To put this into perspective, BP spilled over five million barrels in the Gulf of Mexico in 2010. Despite cleaning up the minor spill, remediating the well, and putting a containment device on the area that recently spilled another one barrel—Chevron now faces multi-million dollar fines and the leader of its Brazilian operation up to 31 years in jail.
Although as Chevron’s lawyer stated, “Not even one sardine perished in this spill,” the company has been barred from drilling any more wells offshore Brazil. This tempest in a teapot does more than discourage other oil companies from investing in Brazil; it makes drilling contractors like Transocean (once bitten twice shy after Macondo anyway) rethink their commitment to providing the services necessary for Brazil to monetize its deepwater riches.Brazilmay have up to 25 billion barrels of oil in the Santos Basin, but without the high-tech drilling rigs and associated services from other contractors, all this oil will do them little good underneath 6,000 feet of seawater and two miles of salt.
With deep water drilling markets notably tight and leading-edge dayrates breaching $600,000, Brazil does not have the captive audience it may believe amid target-rich acreage elsewhere. In fact, one of its biggest competitors for drilling and completion services used to be its “neighbor,” West Africa offshore Angola. When the continents were joined, it was all one big oil deposit. So while losing foreign direct investment from the major oil companies may not be top of mind for state-owned oil company Petrobras, its cavalier treatment of oil service companies like Transocean could cause its erstwhile enablers to ply more contractor-friendly markets elsewhere.
Our Takeaway from the Week
- The stock market remains resilient amid more mixed economic data
- The worst is behind us in housing
- Brazilshould avoid irrational treatment of its oil service suppliers