1/20/2020

Good morning,

I hope everyone had a good weekend and made plans to attend SGA's induction into the Oklahoma Hall of Fame this summer. SGA became the youngest player in NBA history to record a 20-rebound triple double as he demolished the T'Wolves last Monday night with a 20-20-10 line. The previous holder of that record? Some guy named Shaq. SGA also joins RUSS as the only guard to ever post a 20-point, 20-rebound triple-double over the last 30 seasons. SGA also vaulted to third all time in OKC Thunder history with his first career triple double. The list is RUSS in first with eleventy billion, snake with 7 or 8 or something, and then SGA, Ibaka, PG all with one. That list looks really awkward when Fox Sports OK decides to put it on their broadcast, which they did. All of this is courtesy of ESPN Stats & Info except for the tiny table that FSOK put together. Anyways, it seems like OKC rolls the dice on inducting Thunder players into its HOF before they become free agents to see if they stick around. One for two on that front so far as snake left and RUSS stayed. Why they did not try this with DION I will never know. OKC ended up going 2-2 last week which is an ideal result. The trade deadline is looming as February 6th is the day we will know for sure what Presti has in mind for the rest of this season and beyond. It seems likely that Gallo and Schroder will be traded. CP3 is doubtful and Adams is a possibility but both have nearly untradable contracts and CP3 isn't young. I am all in for draft picks. Get as many first rounders as possible and keep playing the odds of nailing a superstar or eight in the next few years. The latter half of the 2020 decade should belong to the Thunder and I wouldn't bet against Presti making the same mistakes he did on the first go round at building a dynasty. The #buckets blog for this week makes a terrible attempt at explaining a scene in Pretty Woman, BlackRock is changing its investment thesis, Iran keeps racking up problems quicker than Jay-Z's 99, U.S. and China agree on something for once, the Permian may finally see its growth spurt end, OPEC is seeing roses in 2020, a short squeeze could be on the way for natural gas price gamblers, and some smart people report that 2019 wasn't cold.

January 20, 2020

Barclays thinks E&P stocks could be Vivienne in Pretty Woman in 2020

• In this case, Vivienne represents E&Ps in the years 2015-2019 when she goes to a high end retailer and is mistreated by one of the sales workers (investors in this case) there. She then tells ole Edward about the experience and then Ed takes her back to blow everyone away with how posh Vivienne is b/c of all dat ca$h she is spending (E&Ps in 2020+) and blowing away the sales worker that turned her down (investors). E&Ps are walking into 2020 asking investors if they work on capital gains and of course they say yes. Then E&Ps inform them how they just made a big mistake. Big. Huge! I am spinning off free cash now. Barclays thinks 2020 will be a comeback year for E&Ps as the firm believes that executives "get it" now. By getting it, the firm is referring to E&P execs finally staying disciplined with capital and shifting their focus from production growth to increasing returns on capital. The equity investment community hasn't really bought into this paradigm shift yet and strip pricing for oil reflects that skepticism. If the newfound discipline verifies and sticks around, then production growth will moderate which should cause strip pricing to increase which should then cause free cash flow to increase and the circle of a profitable life actually comes into existence for E&Ps. Barclays calls out an OKC company as being in a prime position to take advantage of this: Devon Energy. Others who bought some expensive things last year like Occidental and Callon are on the opposite end of that spectrum. CAPEX discipline seems to be the flavor of the month, but we'll see if it sticks around when oil or gas prices increase materially.

BlackRock grows tired of funding black lung businesses

• Speaking of things that are in vogue. BlackRock, which is a major investment firm with over $7T (ya that T is for trillion) in assets that it manages, announced that it will begin to exit companies that "present a high sustainability-related risk." Coal companies fit into that paradigm shift as the odd man out. Laurence D. Fink, founder and CEO of BlackRock - his friends call him Larry probably, has the hope that BlackRock's announcement will persuade energy firms to rethink their carbon footprint. Mr. Fink said in his letter that "awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance." There is a solid chance that other major investment firms will announce something similar. A part of BlackRock's new ethos will be to create funds that shun fossil-fuel stocks altogether. Climate change is the driver behind all of this. Mr. Fink also wrote that "even if only a fraction of the science is right today, this is a much more structural, long-term crisis.” Climate activists and some members of Congress have been petitioning BlackRock to adopt sustainability principles into its investment strategy. Turns out, that pressure eventually paid dividends. Mr. Fink believes the millennial generation will further advance this type of financial shift as they become CEOs and heads of state. Probably not wrong. Fossil fuels are still needed at the moment. It was as early as the mid-2000s that Congress was holding meetings discussing the near term likelihood that the U.S. would not have enough natural gas production to meet its electricity demands and panic was about to settle in about a potential lack of fuel for power generation. Then, you know, the shale boom happened, energy became super cheap and it helped the U.S. economy boom after the 2008 crisis occurred. Despite all of this, BlackRock will remain one of the largest investors in fossil-fuel companies because of its size. A balance will need to be found in the push for fossil fuel companies to become more environmentally friendly and the need for oil and natural gas at cheap prices to help power the economy. Mr. Fink believes an energy transition away from fossil fuels in a material way will happen, but not in the near term as he said, "despite recent rapid advances in technology, the science does not yet exist to replace many of today’s essential uses of hydrocarbons. We need to be mindful of the economic, scientific, social and political realities of the energy transition.”

Iran is facing more pressure than James Harden is to win a title

• OKC's former 6th man has become a superstar in Houston, but still has yet to even reach the Finals with his team. The closest he ever came was in 2018 when Chris Paul was his back-court mate and carried the Rockets during crunch time. That team came within a game of advancing to the Finals after they went up on Golden State 3-2 in the Western Conference Finals. However, towards the end of game 5, Chris Paul's hamstring decided it didn't like winning so it went ahead and injured itself and then Houston collapsed in games 6 and 7 because Harden was still terrified to close out big games. At least he has RUSS there now who isn't afraid of anything. Unfortunately, NBA rims have become terrified of the laser beams that RUSS shoots at them and mostly refuse to allow the ball to pass through. The world, mostly the U.S., is like NBA rims to Iran who is like RUSS's jump shot. No one wants to help Iran out right now. Britain, France, and Germany all announced last week that they would be triggering a dispute mechanism that is written in the 2015 Nuclear Agreement with Iran (JCPOA) because of how Iran has been ramping up its nuclear proliferation over the past few months. Britain, France, and Germany have decided that Iran has violated parts of the JCPOA due to its ramping up of its nuclear program. All of this really started when the U.S. decided to pull out of the JCPOA in May 2018 because it was believed to have been to lenient of an agreement in the minds of the Trump Administration. Since then, the U.S. has imposed a "maximum pressure" economic campaign that has basically shut out Iran from having access to the majority of the global economy. Most importantly to Iran, its oil export business has been shut down which is a major source of revenue for the country. This has likely been the cause of Iran lashing out over the past few months by attacking a major oil facility in Saudi Arabia a few months ago, shooting down a U.S. drone, and doing pirate activities in the Strait of Hormuz. There really hasn't been any type of militaristic response against Iran until the U.S. killed its top general, Qasem Soleimani, two weeks ago. That strike still seems like Iran was in on it. Feel free to check out last week's blog to read my mostly ridiculous, but could be true, theory on all of that. Anyways, Iran still claims its nuclear activity is geared towards peaceful purposes like power generation, but clearly the western powers see it differently. Boris Johnson, U.K.'s Prime Minister, has even hinted that the JCPOA needs to be replaced entirely as he said this on a British Broadcasting Corp. interview last week: "Let's work together to replace the JCPOA and get the Trump deal instead." Interesting comments.

U.S. and China sign "Phase 1" of the newly negotiated trade agreement

• The U.S. and China finally have something in place that will hopefully lead to the trade war between the world's two largest economies to slow down and maybe even end altogether. Mr. Trump picked a fight with China early on his presidency that ended up leading to both countries ratcheting up tariffs on each other over the next couple of years that ended up not really helping out either side. Instead, it just made a substantial amount of products more expensive for each country's citizens as the tariffs were pretty much just passed through to the end user and never really became a financial burden to either federal government. The trade war was likely needed with China in order to level the playing field a bit for U.S. companies trying to conduct business in the Far Eastern country. China has long been known to violate basic intellectual property rights and pretty much steal U.S. ingenuity, provide the intelligence to its nationalized companies, and have them start producing whatever it was they were importing from the U.S. Originally, the U.S. was aiming for a comprehensive trade agreement but China said that has been a non-starter from the beginning. Chinese leadership has a stance in place on how it will approach negotiations with the U.S. called the 40-40-20 plan. This means that 40% of what the U.S. wanted to be included in the trade agreement were reforms that China planned to do anyways, 40% were negotiable, but 20% were off limits. The "off limits" portion was, and is, a sticking point for the U.S. as American leadership has deemed a large portion of this 20% as "priority items" with one of the biggest being the desire to open up China's cloud-computing market. Both countries decided to compromise a bit by separating out the trade negotiation into two phases. Phase 1 highlights are below:

-China is required to buy an additional $200B in U.S. goods and services from 2017 levels (more on this in a second)

-The U.S. is required to lower tariffs on $120B of Chinese imports to 7.5% from 15%

-Calls for the U.S. to not impose an additional 15% tariff on $156B worth of goods that was scheduled to go in effect on December 15, 2019 (negotiations for Phase 1 started prior to December 15th)

-China is required to stop forcing foreign companies to transfer tech to Chinese companies as a condition for market access

-Intellectual property resolutions were included but not specified

-China is required to remove barriers for entry so U.S. banking, insurance, and other financial services could expand in China

-Measures were included to prevent China from manipulating its currency in order to better balance trade deficits and economic advantages

-A dispute resolution (that will probably be completely ignored by Mr. Trump if we are all being honest because I doubt the mechanism says "all disputes will be resolved by random Twitter fights")

• Overall it seems like a very positive step forward. Energy made it on the list of additional goods and services to be purchased from China. Part of the $200B in goods and services includes $30.1B worth of U.S. energy products in 2020 and at least another $45.5B in 2021. According to S&P, crude oil and liquefied natural gas imports are expected to make up the majority of the additional energy purchases from the U.S. Mr. Trump gave a shout out to a couple of OKC energy titans as he singled out Harold Hamm and Larry Nichols by giving them bro hugs during his press conference although things got awkward when Mr. Trump and Mr. Hamm both turned their head the same way on their bro hug and accidentally kissed each other on the cheek. That last part may or may not be the truth. We'll never know for sure. Phase 1 is done for now. Phase 2 is likely not to be negotiated until after U.S. elections take place in November.

The mighty Permian might actually start slowing down its production growth

• This would be great news if it were to actually become truth, but the Permian is pretty much like LeBron James -- it gets older, but somehow only seems to get better. The Permian has grown its production substantially over the last decade. Oil production went from less than 1mmbopd in 2009 to over 4mmbopd in 2019. Gas production has increased by 5bcf/d+ from 2009 to 2019. The oil production growth represented a 371% increase over the decade and gas a 217% rate. Pretty phenomenal stuff there and the Permian has been a significant driver in propelling the U.S. to being the top oil producer in the world. The Permian has killed off domestic and global oil and gas prices though which has made it increasingly difficult for shale E&Ps to make a case that the industry can survive long-term. Slowing growth would certainly help their cause. Texas Independent Producers and Royalty Owners Association (TIPRO) believes oil and gas production growth out of the Permian will begin to slow down in 2020 due to "a number of potential geopolitical issues, along with independents changing their business plans to emphasize shareholder returns over growth." Several independent producers across the U.S. provided early warning signs in their 3Q earnings calls that production growth would not be the primary focus in 2020. Instead, returning cash to shareholders and living within cash flow would be the foundation of all decision making. We'll see how that plays out though. U.S. producers have never been able to resist growing at all cost when a high oil price shows up.

OPEC sees a brighter future for oil demand in 2020

• The Portland Trailblazers were supposed to have a brighter 2020 as well after its nice playoff run it had in 2019 in which we saw Dame savagely wave goodbye to the RUSS and PG led Thunder. The ripple effect of that series made OKC go nuclear in the off-season after PG requested a trade. This may end up being the best thing that happened to OKC in the long-term, but short-term it was gut wrenching to realize the first era of Thunder hoops was over after RUSS was officially traded. OPEC is forecasting 2020 to be more like the Miami Heat than the Blazers. Oil demand is supposed to topple the 100mmbpd mark for the first time in world history, according to OPEC. The cartel is calling for oil demand to increase by 1.22mmbpd to rise to 100.98mmbpd. This represents an increase of 140mbpd from its 2020 forecast that was issued in December 2019. Nice positive fundamental coming out for oil prices although there was some bad news issued in the same note. 2019 demand is being reported as only increasing by 930mbpd to finish at 99.77mmbpd, which represents a 50mbpd decrease from OPEC's previous 2019 prediction. OPEC and Russia have already agreed to further cut production in 2020 by agreeing to lower output by another 500mpbd altogether in its November 2019 meeting. Analysts believe the countries involved in this agreement, mostly Saudi Arabia, were already at these production levels so strip price really was not effected by the positive announcement. All in, OPEC has cut oil production by 1.7mmbpd from 2018 levels and this will go through at least March 31, 2020. Overall a bullish report issued by OPEC, but there is still a substantial amount of oil output that can be "switched on" in a quick time frame. So any run in oil prices will likely be capped barring a catastrophic event.

Short squeeze in the works for Natural Gas?

• Natural gas futures have been getting worked worse than the Golden State Warriors in most of their games this year. Producers have become too efficient in producing natty gas and demand has increased, but just not enough to offset the massive influx of supply that has occurred over the past couple of years. Plus, the Permian kills off everything so single commodity producers of natural gas have to compete with that which hasn't turned out well. According to PointLogic, a snap increase in natural gas prices could be on the horizon. The research firm had this nifty little explanation in one of its articles last week:

"Open short positions advanced by 24,673 contracts to 397,92 total positions, which is up a whopping near 600% year-over-year. This is a major set-up for a big time short squeeze. Historically speaking, when short interest develops to these sorts of lofty levels, the imbalance does not resolve tranquilly over the course of weeks to months, but instead will typically trigger a massive price spike. Still, the CFTC data showed that long positions rose by 15,295 contracts last week to 146,199 contracts. While smaller than the gain in shorts, it was the seventh consecutive weekly gain in long positions and the biggest weekly gain since early March 2019.

• Winter forecasts are calling for below average temperatures for the remainder of January and through February for the most part. No one really knows what will actually happen but the spread between the Global Forecast System (GFS) and the European (ECMWF -- way too long of an acronym that doesn't make sense and is not fun to even try to pronounce as a word, boring) has been narrowing. GFS typically forecasts the weather to be on the colder side whereas ECMANFHSVHJE is typically on the warmer side. Both are now predicting a colder than usual second half of Jan and first half of Feb. If that verifies, then this could be the catalysts to trigger a short squeeze and cause NYMEX natural gas prices to sky-rocket due to short position holders trying to cover their positions and minimize their losses. Long story short, natural gas prices are dependent on cold weather to increase in any type of material way, per usual.

Speaking of things that aren't cold though, 2019 turned out to be pretty warm

• NASA and the U.S. National Oceanic and Atmospheric Administration (NOAA) both employ scientists who study things and create stuff that is kind of cool like rocket ships and whatever it is the NOAA creates. Both also track historical weather data too apparently. Both agencies found that 2019 was the second hottest year in recorded history, which started in 1880. Five of the warmest years recorded since 1880 have been the last five. Nine of the ten warmest years have occurred since 2005. Yikes. NASA stated that "in 2019, the global annual temperature was 0.98 degrees C or 1.8 degrees F higher than the baseline period of 1951-1980." NASA and the NOAA both agree that the primary driver behind the rising annual temperatures can be attributed to human activity - primarily the production of greenhouse gases like dramyond green's breath when he tries to talk trash. NASA's Goddard Institute for Space Studies Director Gavin Schmidt said in a press call that "every decade since the 1960s has been warmer than the decade previously, and not by a small amount." NOAA also reported that 2019 was the second wettest year on record in the U.S. which helped to ease drought concerns in some areas of the country, but the precipitation also ended up causing $20B in damages in areas hit by flooding and things like that.

Thoughts of the week:

• The MLB is in crisis mode with the whole sign stealing saga that has been raging over the past couple of weeks. This Astros thing is wild. Their manager and GM were suspended for a year by the MLB after being found guilty of sign stealing but were fired 30 minutes after the announcement by Astros ownership. Then the Red Sox manager was fired for doing the same thing. There is a video of Astros star Jose Altuve very clearly telling his Astros teammates to not rip off his jersey after he hit a walk-off home run in the 2019 ALCS to send the Astros to the World Series and beat the Yankees. His reasoning for not wanting his jersey ripped off at the time, which is a custom in that situation, was because he is a shy and his wife would get mad at him. Now that looks fishy considering part of how the Astros might have cheated was by installing buzzers inside their player's jerseys and buzzing it whenever the pitch was supposed to be off speed. That is a massive advantage for a batter if he knows he is about to see a fastball. If Altuve is found to be guilty of this, then he might be suspended for life. The Astros World Series title won in 2017 should maybe be stripped as well.

• Everyone should be allowed to slide tackle one person per year with no type of punishment for doing so. Not to harm anyone. More so for the sake of entertainment.

• The Thunder's up and down week was perfect. Win some, lose about the same, don't finish with a top 10 record in the league, keep both draft picks in 2020, and then make the playoffs. This is one of the only years that mediocrity should be celebrated.