tv Bloomberg Markets Americas Bloomberg October 19, 2020 10:00am-11:00am EDT
>> it is monday. it is 3:00 p.m. in london. we are 30 minutes into the u.s. trading day. i am guy johnson with my cohost in new york alix steel. we have got deals, but we don't have any stimulus. deals on the company level, but at the broader stimulus level, there is no deal. countdown to 48 hours. nonetheless, nice move higher in the equity market. it is also consumer discretionary, communication services as well. the dollar taking a backseat. you had a selloff in the bond market in europe. u.s. crude holding its own. staying with oil, conoco resourcesuying concho for $9.7 billion. that makes it the largest energy deal since the collapse in shale
demand. ryan, it is always a pleasure to talk to you. it was long in coming. everyone asking, what are you going to buy? tell us how you came up with this deal. >> it is great to be with you again today. we have been talking about the need for consolidation in business for quite some time. we need to put a value proposition together that offers investors a different way to think. we have done this with a transformative acquisition with concho resources. this brings in a bunch of low-cost supply resources government 23 billion barrels into the company. it is about a super strong balance sheet to manage the volatility we have seen in this business. it is about how you allocate capital for value, not for
growth. it is distributions we were going to give back to the shareholder. it is about having a sustainable business. the deal takes an energy transition that we know is coming for our planet. alix: can you give us insight into how competitive it was? if you look at the shell companies that were worth buying, there are only a handful. >> we are after quality. this is putting two super quality companies together for something special. we have said this repeatedly to the cost to acquisition needs to be below our $50 cost to supply threshold. resourcehe kind of that we are adding with concho's huge position in the midland basin. it is a great complement for our convention.
we are going to be a huge company in this space. we have a large position in the permian basin along with our position in california. we are going to become one of the largest producers in the business today. for investors to put money to work in your sector is increasingly high. can you talk to me about what investors are talking to you about this deal and why it makes sense? why would i want to put money to work in your company given all the headwinds in this space and how does this deal change that calculation? >> you have to look at the shareholder friendly value proposition we put forward. we are going to do that on 70% of our cash flow. 30% is going to go back to the shareholder. you underpin that with a safe growing dividend we offer. you look at that free cash flow yield combined with outlying
growth, we think we are putting a value proposition that competes in this space. we are going to be able to do that through the cycle because of the strong balance sheet we have. we cannot predict what the prices are going to be, but we can be resilient and have a balance sheet to manage through these ups and downs. we are combining great assets, great balance sheet together. these are two great quality companies coming together forming an even better company going forward. alix: not to get too nerdy for you, but something conoco is quite good at is managing decline rates, basically how quickly wells lose momentum. you are around 14%. concho has a higher decline rate. how are you going to manage it? how do you think about that? >> that is a great question. that goes to capital intensity.
how much capital do you have to put back into make your production flat and grow? we have one of the lowest decline rates in the business because of our global diversified portfolio and also these legacy assets around the world. their decline rates are just a little over 10% per year. this only moves it up to slightly over 12%. it starts very similar to where it is today. it grows a little over the next decade. that is why the capital intensity is low and why it does not take a lot of capital for us to get topline growth. we are committed to deliver returns back to the shareholders when we see spikes in commodity prices. we are able to be resilient as those prices come back down, which they inevitably do. alix: walk me through some of the synergies. how are you going to extract that $500 million in synergies?
>> we announced the 500 million. it represents about $5 billion 3.50 per share.$ it is substantial. there is a big piece of that. we made a decision inside our company to reduce some of the new venture exploration we are doing around the world. if we bring these companies together, we are creating a company with 23 billion barrels of resources. its average is below $30 a barrel. we need to think differently about how much resources we are going to be adding in the next 10 or 20 years through that exploration channel. there is going to be some capital reduction as we take our exploration program to face the new reality of what this company looks like as we bring conoco together.nd concho
we have a refined idea of where the synergies are going to come from. we expect to hit that run rate by the end of next year. 100% equity? was cash ever considered? structure?eal >> we talked about that with the board. the really hard part about this is transacting what people might consider a cyclic low in our business. we believe there is going to be a transition of covid related demand disruption. services will recover, which will lead to slow recovery in the oil business. supply and demand fundamentals improve over the next couple of years. taking all equity gives the concho shareholders the ability to participate in that. they are entering into a much more liquid company on the margins and tendering into a
much more stable and growing and substantial dividend to the shareholders. when they look at the combination of that, when percent equity made sense. -- 100% equity made sense. guy: sorry. >> all the financial metrics. our shareholders say we are getting better earnings per share, better returns, and better free cash flow yields. it made sense on the philips side to make this structure. does the logic of the deal to as good with a biden presidency? >> i think it transcends all of that. we have laid out a paris aligned framework that is consistent with our climate strategy risk as a company. we understand that we have got three things we have got to take care of. the world is demanding more action on climate change.
we also need to deliver reliable and affordable energy to all four corners of the world. the growing population is going to demand that. we have got to deliver financial returns back to the market. what we have laid out in terms of a paris aligned strategy with reduction targets for the next 20 years down to zero in -- to net zero0, emissions by 2050. alix: when do you tackle scope three emissions? >> what we have said is our plan deals with the scope one and two emissions. you have to change consumer behavior. we cannot change how the consumers are using our product. we advocate. we joined the climate leadership council.
we have to impact consumer behavior as we deal with this transition. science tells us that if everybody deals with their scope one and scope two emissions, you can reach net zero by 2050. is hard for me to let you go without talking about opec-plus supply and demand in balance. where do you sit? what is a fair price for oil? how are your operations running right now? >> i have to give a shout out to all of our employees. they ran remarkably well through the course of this year. it has been kind of a lost year for many people. the operations are running really well. weaker tail, significant. 400,000 barrel volume at the peak of the downturn. things are starting to recover. a little sideways movement on price today.
we have some resurgence in covid. we see it coming. we think we will get some recovery by the end of the year. it is probably a slower transition through the course of 2021 to get demand to pre-covid recovery levels. we see that happening, but not until the end of next year into 2022. we have to be careful how we think about how much money we andinto the growth vehicle how the transition is coming and the recovery. guy: thank you for your time today. we appreciate it. --n lance, concord conoco phillips german. nancy pelosi setting a tuesday deadline for a stimulus deal with the white house. we look at how to position around a u.s. election. in just a few up
>> we say that we have to freeze the design on some of these things. are we going with it or not? what is the language? i am optimistic. guy: house speaker nancy pelosi speaking yesterday on abc this week, striking an upbeat tone after setting a tuesday deadline for a stainless steel. joining us now is kevin cirilli. bc overthe mood in whether we get -- in d.c. over whether we get a deal done? kevin: new developments this
month. the president's chief of staff mark meadows saying he spoke with president trump for one hour on sunday. this comes as speaker pelosi says she would like there to be some type of deal in the next 24 to 48 hours. the president says he would like to see a price tag above the $2.2 trillion that house speaker nancy pelosi has set the price tag of the stimulus on. that is in stark contrast to what senate majority leader mitch mcconnell has put forward in the senate, about $500 billion to $700 billion. i spoke to one prominent republican donor on friday who told me there is a clear ideological divide among republicans in office and in the donor class that are deeply skeptical that more funds and thatlus are needed democrats and president trump are discussing. behind the scenes, president trump feels confident that he
would be able to get senate republicans on board should they ultimately reach an agreement that secretary mnuchin and speaker pelosi agree upon before midweek. that is just one day before the final presidential debate. alix: kevin cirilli, thank you. joining us now, jonathan golub, credit suisse chief u.s. equity strategist. it has been a while. 3200 so far is your s&p target close for 2020. what kind of stimulus does that imply? alix, i think there are these very conflicting market drivers. the economic data is coming in extremely well. retail sales, consumer confidence, even the inflation numbers are showing an economy that is in pretty healthy shape. quarter, we had a 23%
profit beat, which was the best on record. so far, the companies that reported are almost matching that number this quarter. we need to get some form of stimulus. if we do not get something done until after inauguration day, it is going to hurt small businesses in the consumer. -- and the consumer. i don't think these numbers are going to continue unless we get some level. it does not have to be the big numbers trump is talking about, but it has to be some level of stimulus. we are seeing a pickup in covid. that could put a damper on economic activity, which will weigh on things. i think there is a real tug-of-war going on now. over here in europe, people are talking about the possibility of a double-dip recession. if we start to see cases picking up in the u.s., and the u.s. is
behind where we are in europe with a second wave, do we get that? how big of a catalyst could that be for a big shift in the market? jonathan: at the end of the day, this whole thing is because of covid. it is not a lack of stimulus. we were all talking back in march that we were going to go home for two or three weeks. this was going to pass us by. now we find that we are home for seven months. believed in august that if we did not get some form of stimulus, the market was good to have some indigestion. that has not come through. things have moved forward. there is a lot of optimism built into the market that we are going to have some kind of vaccine in the near term and life is going to get back to normal. if the covid situation becomes more dire, i think what you're going to see is the underlying economic data is going to roll
over, and then you are going to see pressure on earnings from the consumer. iix: at the same time, then expect we see a faster stimulus and more work by the fed. as an investor, how do you allocate to that where you have to price in more juice and also the risk? jonathan: alix, this is really the challenge. i think what a lot of people are doing, and this is why tech companies are doing as well as they are, because it forces you to say maybe this thing is going to go in reverse, maybe this thing is going to go forward. if we can see through this, what are the best long-term franchises? which kind of companies are able to whether this storm the best? they are the companies that are able to deliver the earnings. those are primarily tech related companies. it is not only those names. a little more than 50% of the s&p has profits higher this year
than they did in 2019, which means they are seeing absolutely no damage. you see this in areas like home improvement names, the kind of thiss that benefit from environment because consumer behavior is shifting. areas,can focus on those they dampen the effect whether or not we move forward or backwards on this virus. guy: how prepared is the market for a trump win? were the president to win, what do i buy and what do i sell? jonathan: the market at this point is discounting that biden is a winner, and the debate among investors right now is is it biden with the senate being democratic or a republican senate?
the market would clearly be surprised. and all of our work shows this, the outcome of the election probably matters much less than we think. the direction of covid matters, whether we can get stimulus stuff matters, but who is in the white house matters less. we have looked at baskets of companies that are the beneficiaries, for example, of lower taxes under trump versus higher taxes, potentially, under biden, and you are getting almost no difference in the performance of those kinds of stocks. why does that make sense? both of them are going to want to stimulate this economy and make it healthy. both of them are going to raise more debt, borrow more money, and pump it into the economy. biden may do that through green initiatives, and trump may do that by giving money back to people like you did in march and
april through checks from the government, but in both cases you are looking at borrow and stimulate policies, and we are probably overemphasizing the differences rather than the similarities from an economic and market perspective. alix: does that mean you are ok with higher taxes on wall street? jonathan: i am not ok with higher taxes. this is what we are seeing when i am talking to the largest hedge funds and largest neutral fund companies. do they really believe that in the middle of a pandemic with so many tens of millions of people who have been economically affected, do we really think that biden is going to push forward aggressive tax cuts? i think the answer is no. if he were to do that, it would be super problematic for the market. the consensus view right now is that he is going to do the good stuff, which is the stimulus, and he is going to hold off on
cleared,hong kong leg they need the shanghai leg cleared with regulators in china. this is even bigger in terms of the ipo side then the aramco ipo it is absolutely enormous. it could further accelerate this move of putting money to work in china. alix: i like the comparison. they are probably not siphoning off the majority of the dividends to the state. interesting to see how u.s. investors will have an appetite for this idea. we are going to look at the shift in the energy industry and how that could be changed by who is sitting in the white house. this is bloomberg. ♪ is bloomberg. ♪
let's stick with the energy thing. you have a group of 12 big oil companies collaborating on climate change. they are announcing they have made progress on carbon missions. bp, exxon, chevron, saudi aramco, all the big ones. joining me bob, it is good to get your perspective. walk me through some of the numbers about methane emissions, intensity. thank you very much, we are launching our performance report today. inset some targets back 2018, methane emission reduction as a percentage of overall upstream operations. instead of targeting .25 back then, our numbers came in now at .23, there are five by a third party.
to me, this is really good news. it is earlier than i thought it would be possible. it just shows when companies get together and really focus on technology around methane detection, monitoring, measurements, reductions, that these big 12 companies can do a lot. i think everybody was a little bit surprised when we got all of the numbers. alix: we just talked to ryan lance and asked him about issues, and he said he wants a carbon tax, that would make everything a lot easier. i'm wondering how big oil companies are thinking about it in terms of reducing emissions and the policies or reducing emissions irrespective of the policy. bob: these are 12 of the biggest companies in the world, some of
them are national oil companies, some of them are free national. it gets into national governments in some cases however, many of the companies would absolutely support a carbon tax. something that you tax,if you don't have a absolutely will modify behavior. broadly, we are in support of putting value on carbon, many companies support the carbon tax, and i agree with them. the language around the way that we talk about this industry is not apples with apples, we need some sort of common form of language to make things happen
for people to understand it better. the big oil companies probably are able to communicate with each other and understand each other, but the industry as a whole can't. don't we need to semper fi things? bob: well, -- don't we need to simplify things? bob: well, actually the common language on methane intensity and carbon intensity as well. you are absolutely right. a common language is very important all across the world. but if you can put together, and i like the idea, personally, of a carbon tax in the u.s. where you basically define carbon -- i think that george schultz and his coalition actually taxed. language is really important and definitions are important. i couldn't agree with you more and heading these 12 big companies around the world to find methane intensity and
carbon intensity has been a big breakthrough. too often, i agree with you, too many people to these terms. alix: where is the definition right now on scope 3? countries, different have different responsibilities in how they wind up financing their state and their stakeholders actually are. bob: good question. 3 is broadly the emissions and the products by any company or virtually any sector. it's not broadly well-defined, people throw it around. all the companies have different definitions. some of them use it every time they have a value or a molecule of energy moving through the chain. guy: i think unfortunately we may have lost dudley.
the conversation that is important right now, we are continuing to watch what is happening with opec. the situation with opec becomes more and more difficult by the as somebody noted to me earlier in one of the reports that i read. we are basically seeing a change in front of opec, very difficult to see whether or not things are going to change. the saudi oil minister says no one in the market should doubt the group's commitment and compensation cuts that will be filled by year-end. amory, what can i expect out of today's meeting? when does that policy change come? get any policy changes today, this is just a meeting but they basically take stock of the state of play in the market and they look at each other's clients.
right now turning into the opening remarks, we just heard from the prince as well as from alexander novak, and there was a hint about the uncertainty in the markets and that they want to do more. to do that, that would be at the next big meeting. sets the me, just stage of whether or not they are going to taper or not. thethey going to perform on market or are they going to continue to keep that production back? basically, tweaking the deal. i have to say, the prince was punchy in the last meeting. we had a presser and he said to me, to those gamblers against the market, i'm going to make you ouch like hell. he said they want to nip any negative trends in the bud, he has these principles, predict, prevent, and be proactive. wants said for anyone who to bet on our result, "make my day." a similar tone he gave in
that last one. alexander novak usually comes across a little bit more bullish, but he said the situation is fragile, the markets are uncertain and recovery is slow down. after you have mohammad bin salman and president vladimir putin speaking twice in one week and then you have their two deputies at the oil meeting today talking about the uncertainty in the market, i think it really opens the door that they're not going to taper, they are not going to put more barrels back or if they do it is not going to be the full 1.8. alix: you talk about cooperation, novak saying i agree with our saudi colleagues. is any other country on that same page? >> welcome here is the thing. they call the shots. these are the two biggest producers. the saudi oil minister represents opec and on the other side is alexander novak. for all that they have had with their trouble this year, we saw
that obviously in march and april when they had the oil price war on top of the supply issues with covid-19, at the end of the day, they have been able to get some of these cheaters like iraq, like nigeria, to come on board. going toe problems is be, aside the fact that this is going to be harder for countries that economically are really struggling, nigeria, iraq, is going to be libya. libya is only just getting back to the market. basically they were producing nothing given what is going on in their country. about 500,000 barrels per day. oilre january, before the was halted and tied up, they were at 1.2. this is going to be another headache and them longer-term, america, therers could be more coming on the market. there was some quite solid data out of china a little bit earlier on.
my question is the second largest consumer of oil on the planet, how big a factor is that in opec's thinking right now, or has china bought all the oil that it needs? >> it is a really good question. china is completely driving the function, covering asia for that matter, but more so china. if market conditions don't change exactly like they are now, you would probably have to see some of that tapering but china is the one that has been leading the engine of economic growth and expansion. it has been the same way in terms of oil, oil markets as well. that is a fine line they are dealing with. they are dealing with a tale of two cities. asia, we're seeing refining move back up. asia is doing well, we are demand take backup, but it is the west, it is europe, the united states were you see this resurgence of covid-19, this uncertainty that the ministers were talking about and these negative trends and developments are going to be there.
really the saving grace for opec plus. alix: you need china and you need to get cold. dudley,h us now, bob head of the ogci. sorry we lost it, i know you are joining us on the phone now. we were talking about when these big oil companies across the globe, how they are thinking about that right now in this environment. bob: yes, thanks. a thunderstorm went over and completely knocked out my internet. the companies are of course working with their customers, working with sectors to reduce their emissions. doesn't matter whether it is airlines or steel or aluminum. on, the oilk going and gas climate initiative to reduce the carbon intensity of the fuels that are produced. it is on everybody's radar
screen regardless of the definitions that you use and i think what you will start to see, there's other sectors that would like to form og ci-type groups within their own sectors whether that is steel or chemicals. set up aas billion-dollar fund investing in many things that actually takes co2 out of the air and has worked really hard on carbon capture use in storage. it is almost required in any parent scenario to remove carbon from industrial processes. so everybody is in action. there is no milestone on that just yet, but where there is a will, there is a way. we are all going in the right direction, will make some good progress on that. guy: do you think this industry is better positioned for the medium-term under a set of
governments that take a harder line when it comes to climate change? because investors can see progress, they understand what is happening in terms of the seelations, and they can the government industry and investors all pulling in the same direction. what do you think this industry does better when it has a government that takes a more la x approach to climate change? i'm obviously contrasting the trump administration and the potential widening administration. bob: well, -- biden administration. about the these are most responsive to market forces and laws that you can get. everybody in this industry response to market forces. the united states, particularly quickly and laws and regulations. i think that unrealistic projections or requirements on get a fast may not
response that is required of the world energy system is so large and so complex and we are looking at a future where there is probably going to be 2 billion more people on the there ay 2040 and 2050, lot of unintended consequences. that knows industry how to engineer things, and get things done, and shift directions on it. so we'll see. i'm not going to really comment on the election, but there's a lot of hope around climate change that might not match the actual complexity of the planet. i don't know anybody in our group that isn't entirely focused on this. restructuring big on reductions in staff and this has still remained one of the top of the agenda of all 12 companies. alix: we really appreciate that.
bob, thank you very much. guy? guy: just getting a few headlines out of the u.k., they might add to the confusion as to where this rated stories ultimately heading. the leader of the u.k. response he basically is indicating that the u.k. is well-prepared for what he says are australian terms. there will be some recognition , and no u.k. government deal, apparently, is not a preferred outcome. michael speaking to the house of commons right now. this is bloomberg. ♪
>> 15 days left to go before the election, investors suspecting a blue wave. >> we've seen investors across asset classes increasing the price in the possibility that the democrats will win the white house and congress and of course, in equities, that shows us invest on green energy and infrastructure and treasuries, the thinking is that increased fiscal stimulus will perhaps spur inflation leading to higher treasury yields. we take that idea a step further and there is increasingly the growing that the federal reserve will need to focus more on interest rate increases. in september, the federal reserve made clear that it is going to keep rates lower for longer and is willing to
tolerate higher inflation perhaps about 2% in order to get more robust employment. when you look at the bloomberg, futures overnight index plus show that currently, rates will stay on hold until at least late 2021. goldman sachs says when you look , the rates ois show that there is some pricing early 2025 off in and the goldman sachs strategist said that if that rate hike were to happen before them, it would not be significant for the front because theuncker first type would be further out past that but you can see higher volatility around the five-year mark and that is because the belly of the part of the yield curve that captures a big part of that hiking cycle. as a result it is more sensitive to changing perceptions around interest rates and as well, the implied volatility is currently at or near record lows. goldman sachs recommends investors use longer options on swaps to position for potential
fed rate hikes. of course, all that depends on this conviction that you are going to get massive fiscal stimulus that am point. i struggle to believe that many people can see beyond the end of their nose right now given what is happening in terms of the virus story and hopefully the economic response to it, but good to mention the upcoming election. thank you very much, indeed. let's talk more about what is happening in the week for central banks. bloomberg's chief economic and policy correspondent joining us now. mike, what do you make of that? mike: it might be a bit premature, but that is what financial markets do. if we want to get an answer, we have a chance this week. an enormous number of fed speakers out there, their next meeting is two days after the u.s. election. they will have a pretty good idea of what we are going to get some kind of stimulus or not going forward, but you got four
members of the board of governors speaking including the chairman, he spoke today, didn't say anything about policy. you've also got the vice-chairman speaking. you got six fed bank presidents who are speaking and they are always opinionated about this stuff, so we will find out. what is wall street worried about? the first thing is bubbles. the fed keeps pumping money into the economy, you're going to get bubbles is what wall street is worried about. and then the feds might have to tighten rates in order to bring down the danger of something. however, a number of officials said we don't want to use monetary policy to deal with this, we want to use macro credential tools, try to bring it down slowly if we have to. the second is really more to the point of what scarlet was talking about. treasury issuance. package, a big fiscal you are going to have a lot more treasuries coming to market and
that means that the u.s. government is going to have to pay a lot more in interest. what happens if the interest rate goes up? interest rates are very, very low on u.s. treasury holdings right now, but you can see the blue line that is the inflation rate. when inflation went up earlier in the decade, we saw interest rates go up. is the fed going to be forced to push them back higher? is the fed going to buy a lot more treasuries in order to keep that from happening? it is not their objective ever to directly try to help the federal government finance its budget deficit and that would be a very dangerous kind of support to provide, but i do expect, i think asset purchases have worked. they're are holding down longer-term rates and i expect there to be ongoing purchases,
probably not geared to the federal deficit. >> so what do we watch going forward to see whether the scenario outlined by goldman's tax comes true? watch inflation expectations right now. they are not sending a message that there is a real danger. they rose along with the economy over the summer but they have pretty much flatlined in recent weeks. alix: excellent, thank you very much, a pleasure to get that perspective. this is bloomberg.
bond trader as well in terms of what is happening here. there is the belief that maybe -- was going to come down. i wonder as well what this week will bring in terms of actual news for the tech sector as well. we are going to be talking to intel a little later on in the week. a lot of corporate news going through. will that change what is happening? from a macro perspective these days, i just wonder whether or not the big current iran stimulus and the election will actually be the biggest. alix: the fed, how can you not going to have're the fed in the market and lower yields for longer. range, isout of a that still enough for you to rotate into value? earning expectations are high, but still, if you have a tenure below 1%, audi you not own it
technology assuming that we go through with a lot of our guest on the show? you prices are high, if want to continue to own all of that. if you want to top sliced some of those positions. you wonder whether you get huge stimulus coming for next year, whether or not that is going to continue that trend. alix: and what we learned from companies reported next week, if you beat, you are not necessarily rewarded for it. what does that mean for guys like netflix? biggest euro may be the trade on a biden win. european close is coming up next.
guy: from london, i'm guy steel what you need to know from europe? wales will go into a tough two-week lockdown on friday. paris, london, vienna all in forcing the restrictions. enact ais looking to near total lockdown. the pound is trading higher, brexit talks continuing. bloomberg reported that the u.k. is prepared to water down a boris johnson's internal market but london warns that it won't carry on talks after year-end. and the euro back up and running. technical problems causing a trading problem for most of the morning here in europe. let's check the markets and show you the ones that were open for the full day to give you an idea of what has been goi