"Kee" Points with Jim Kee, Ph.D.

Last week I would say the international data (mostly Europe) was a little bit better than the US data, which has been weak/mixed. I intend to address the state of the US economy in next week’s Kee Points. This week I want to report on some of the highlights of STMM’s 10th Annual Energy Symposium, which was held last Wednesday and included eleven speakers (as a disclosure, this is what I heard and wrote down, which may or may not reflect the actual intentions of the speakers and is not a reflection of the opinions of STMM).

 

Greg Valliere, Chief Political Strategist, Potomac Research Group: Greg is a returning speaker who gave us an insider’s view of Washington politics. He had a couple of themes: (1) Fed will start raising rates later rather than sooner, if at all, this year and (2) Less government spending restraint going forward. Most people are unaware of the dramatic decline in the budget deficit, from over 10% of GDP a few years ago to around 2.3% now. Meaningful tax reform is not likely until after the 2016 Presidential election, and will most likely be corporate tax reform (including lowering taxes on repatriated foreign earnings) rather than individual tax reform. There is zero chance of tax hikes coming from this Congress; zero chance of immigration reform. Democrats are scared of the Clinton Foundation exposure, but there’s no credible Democrat to challenge Hillary Clinton. Elizabeth Warren prefers being a provocateur, is anti-Wall Street, and doesn’t want the Native American issues resurfacing, so will not run. The top 7 Republican candidates in order from least likely to most likely are,  (7) Chris Christi (6) Ohio Governor John Kasich (5) Ted Cruz (4) Rand Paul (3) Scott Walker (2) Marco Rubio (1) Jeb Bush (narrow favorite because he has the money). Overall Hillary Clinton seems inevitable, but the country seems to like “8 years and out” as well. It is too early to call now. House will likely stay Republican for years. Worries include unfunded liabilities like in Illinois, whose credit rating was downgraded two levels to junk status by Moody’s Investors Service. Chicago will raise taxes, driving people out, and start looking more and more like Detroit.

 

Peter Zeihan, Geopolitical Strategist, Zeihan on Geopolitics: Another returning speaker, Peter reiterated his conviction that the US, with the most arable land and navigable waterways of any country in the world, will remain the world’s superpower for years to come: “US is going to be fine no matter what.” Shale is going through its second revolution (each well is smarter than the last) and lower energy prices will be a boon to the efficiency of industry –gas, one of the biggest industrial commodities, is almost free. Super majors (e.g. Exxon, Chevron, etc.) for the first time last year didn’t produce the majority of crude oil in the US. The first victim of cheap natural gas is coal. Our interest in Middle East stability is lower than it used to be.

 

RJ Johnston, CEO of Eurasia Group (energy geostrategist): No OPEC production cuts are expected this year. Most of the demand response to lower oil prices this year has been from the US because of all of the taxes and subsidies in the rest of the world that distort prices there. Russia trying to make deals to supply oil to China, but needs Western company expertise to do it, and that has been hurt by sanctions imposed upon Russia. Sanctions will remain in place but there will be no new ones. China is no longer characterized by “insatiable demand,” as growth is moderating there and other priorities like pollution are taking precedent. China is also becoming less energy intensive. The Saudis are more dependent on Asia than ever before but have more competition supplying Asia from Iraq, Iran, US, etc.

 

Daniel Ahn, Senior Advisor to the Chief Economist, US Department of State. Dr. Ahn addressed the state of the conflict with “ISIL,” the current acronym for the jihadist group which means the Islamic State of Iraq and Syria. Ahn said that they see themselves as the modern successor to history’s earlier Islamic crusaders. They attempt to fund themselves by taking over refineries and selling oil on the black market. But they run off or kill the talent it takes to run them, and most of their operations have been destroyed by US air strikes.

 

Ed Whitacre interviewed by Jeanie Wyatt: The former AT&T CEO demonstrated why he was chosen to lead General Motors as CEO during the financial crisis: He obviously cared about things other than a resume builder (which he didn’t need) like the city and people of Detroit and surrounding areas/companies as well as the people at General Motors.

 

Chris Sighinolfi, Senior Vice President and Equity Research Analyst with Jefferies & Co, interviewed by STMM Director of Equity Research Christian Ledoux: MLPs (Master Limited Partnerships) have been a good, income-generating asset class for the past several years, but there are downsides (like the collapse in oil prices and the underperformance of MLPs last year and year-to-date for 2015). Chris highlighted other risks, including  a misunderstanding of taxes on MLP distributions and the potential pitfalls of what are known as Incentive Distribution Rights (IDRs). The complexities are too much for a Kee Points discussion, but MLPs all have a general partner with an IDR. As an MLP grows, more of its cash flow goes to the general partner. For example, cash flow growth may exceed, say, 8%, but the IDRs are structured such that the distribution to the limited partners only grows by, say, 3%. Acquisitions in the MLP space were also discussed and the positives (price appreciation) and negatives (taxable event) were highlighted from the recent Kinder Morgan and Williams Companies transactions.

 

The Honorable Christi Craddick, Chairman of the Texas Railroad Commission, interviewed by me: The Texas Railroad Commission was founded in 1891 to regulate railroads in Texas and eventually buses, trucking, and oil and gas. Overtime regulation of everything except oil and gas was ceded to the federal government, but the Commission kept the name Texas Railroad Commission. Chairman Craddick talked of the importance of a healthy oil and gas industry to the state and to the country, and of the efforts to police and control any detrimental environmental threats. Many are unaware of the Commission’s dedication to the responsible development of the oil and gas industry in Texas, and I think that was the biggest point that Chairman Craddick made. She also openly advocated for a lift on the ban on crude oil exports (a ban initiated by President Ford in 1975 in response to the 1973 Arab oil embargo).

 

Duncan Wood, Director of the Mexico Institute of the Woodrow Wilson Center for Scholars: Mexico is improving but has a long way to go with regard to establishing the rule of law versus widespread corruption, so don’t get too excited. Even with recent reforms to attract capital, most contract terms between the Mexican government and private companies leave too much control with the Mexican government, so companies won’t invest there. Mexican economists generally go to M.I.T. if they favor the government running the economy; they go to the University of Chicago if they favor private markets.

 

Amy Myers Jaffe, Executive Director of Energy and Sustainability, University of California – Davis: Saudis are pumping to keep the price down with Russia (and Iran) as targets, “US shale frackers are just in the crossfire,” or, “everything else is collateral damage.” Russians and Iranians agitate to keep prices up, Saudi Arabia pumps oil to keep prices down. There is a global inventory overhang as China cannot store any more oil (all facilities are full). China’s “recession” is worse than the government says, which shows up in a lot of statistics. Keeping oil prices up are: institutional investors fulfilling their “commodities” allocations; government stockpiling; rig count drops; the threat of war. Oil prices could go down further - overall pretty bearish on energy investments longer-term, and short-term price cannot be forecasted by anyone.

 

Available PowerPoint presentations from the speakers are located on our website www.stmmltd.com.