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February 2019

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The Country Caller takes a look at the declining profits of the big Chinese oil companies and their view on the future

The second quarter of the fiscal year 2016 has been a tough one for oil and gas majors. While many were betting on a crude oil recovery, prices failed to recover. Companies saw massive declines in profits and cost cutting techniques, even as asset divestitures and employee layoffs remained the norm.

The losses from the declining oil prices have now extended to Asia and slithered to one of the world’s largest economies. China’s China Petroleum & Chemical Corp (ADR) (NYSE:SNP), the world’s biggest refiner, became the latest victim as its net income plunged to $3 billion representing a 22% decline when compared to the first half of the last year. Revenues also crashed 16% to 879.2 Yuan.

During a period of weak crude oil prices, the exploration and production business segments continue to suffer while the downstream segment of refining tend to gain. The same was the case with Sinopec, which saw its loss aggravate from 1.8 billion Yuan last year to 21.9 billion Yuan in the current year. The downstream segment however saw an increase in revenues from 15.3 billion Yuan to 32.6 billion Yuan.

Sinopec was not the only company that suffered the losses. Petrochina Company Limited (ADR) (NYSE:PTR), which is China’s largest oil and gas producer, saw its net income decline by 98% to 531 million Yuan. Cnooc, another major oil producer, also saw its net profit drop by half as profit fell from 14.7 million yuan from last year to 7.74 million Yuan in the latest period.

Despite bullish sentiments coming in from analysts in the US, these companies believe that an immediate recovery is not on the cards any time soon. As reported by Bloomberg, PetroChina said: “In the second half of 2016, the recovery of the global economy will remain weak and financial markets will tend to be unstable due to significant political events including Brexit.” The company further said: “The overall supply in the international oil market will continue to be sufficient and the global oil price is likely to keep fluctuating at a low level.”

HSBC prepared to move some staff from London to Paris, followed by UK Prime Minister Theresa May’s statement

HSBC Holdings plc (ADR) (NYSE:HSBC) Chief Executive Stuart Gulliver expressed the gradual move of some staff to Paris, following Brexit. While speaking at the World Economic Forum in Davos, Mr. Gulliver discussed UK Prime Minister Theresa May’s role towards the referendum, a day before the Prime Minister officially announced that Britain is moving out of the European single market.

HSBC has been one of the most vocal corporations on Brexit, stating that the outcome is not the most favorable to banks, but they are prepared. In the interview on Wednesday, Mr. Gulliver said that he plans to move the staff responsible for 20% of the trading revenue. He said, “Activities specifically covered by EU legislation will move, and looking at our own numbers, that’s about 20% of revenue.”

Previously, HSBC stated that more than 1,000 jobs would be required to move from London, which is the major hub for market access to whole Europe. The staff will start moving after two years when the process is completed. The shift of the staff will not take much time, as claimed by Mr. Gulliver. HSBC has all the licenses already placed for such a shift. The lender would only need to set up a subsidiary in France, which would take few months.

In a separate statement while speaking with Bloomberg, Mr. Gulliver expressed that the macro-economic conditions do not allow now to achieve Return on Equity (ROE) of 12%-13%. Therefore, the new targets are set to 10%, given the headwinds from low interest rates, Brexit move, and lack of growth in Europe.

HSBC stock has seen a significant gain in market value since the election day in November 2016. Banking sector has overall enjoyed the rally, but investors are still concerned about the continuation of the bull market. The stock trades higher in pre-market over Mr. Gulliver’s interview.

The Country Caller believes the company’s latest move is to be indicative of the notion that the impact of the oil crisis still prevails

Coming ahead of the OPEC meeting ending on a positive note, oil and natural gas prices rallied, leading to a positive sentiment being raised in the energy market. This paved ways for oil and gas super majors to ramp up investments and their exploration and production plans. However, seems like the same does not apply to British super major, BP plc (ADR) (NYSE:BP).

Bob Dudley, CEO of the company says he is yet not willing to ramp up capital spending, despite the energy price rally. More so, he stated that the oil and gas company will maintain its capex level below $17 billion in 2017 and 2018. What surprises us that this figure happens to be as much as $6 billion lower than 2014, the year when the haunting economic slowdown in crude and gas prices begun. The Country Caller believes the company’s latest move to be indicative of the notion that the impact of the oil crisis still prevails.

In a conversation with Bloomberg on Tuesday in Switzerland, Mr. Dudley stated: “I think we are climbing very, very slowly out of a very tough period for the industry. Our focus now is to get our own engine moving again.”

On one side while the company is holding its capital spend level tight, it is aiming for growth on the flip side. According to Mr. Dudley, the energy giant is seeking to invest more than $4 billion on properties since the end of 2016. The company has also come out of paying a substantially material portion of the huge costs associated with the Gulf of Mexico oil spill. Hard to neglect the positive sentiment in the energy industry, Mr. Dudley also added how the company would now be well positioned to cover its payout from its income given that the price reached $55 per barrel in 2017. Both West Texas Intermediate and Brent crude continue to trade above $50 per barrel currently.

European banking stocks are undervalued amid challenging environment and low interest rates

Barclays Plc (NYSE:BCS) upgraded at HSBC Holdings from Hold to Buy ahead of the FOMC meeting by the Federal Reserve. Barclays rose the highest in the European markets after the Bank of Japan introduced further stimulus in its economy.

Analyst at HSBC said that the disposal of unwanted assets by Barclays is great for the British bank as it is creating value for itself. Barclays Have been successful is selling its non-core business since the chief executive, Jes Staley, took over the office last year. Mr. Staley directed the banks towards focusing on its core markets, UK and US. Moreover, several non-core businesses have been sold and still many deals are lined up in the coming weeks as banks face challenging conditions.

Barclays is set to sell its retail business in Italy along with few a credit card businesses in the Middle East. Several wealth management businesses in Asia are also in the pipeline to be sold. The bank looks to improve on Return on Equity by disposing off unprofitable assets and businesses. Barclays also found success in selling some of its African stake which had elements of political and foreign exchange risk.  

Mr. Staley’s strategy to simplify its business model is recognized by analyst at HSBC. Mr. Staley said in his earnings call: “The strategy remains the right one in our view. We will reduce our non-core drag by over a billion pounds from 2016 to 2017.”

Despite the declining year-over-year profits in the second quarter, Barclays stock rose on the earnings release. The stock is down almost 33% year-to-date; however, the stock is up 3.71% in pre-market on Wednesday. Majority of the analysts suggest a Buy on the stock due to its relatively better value against its peers. Banking stocks are also comparatively undervalued against the other sectors.

Barclays said that the Federal Reserve may surprise Wall Street by a rate hike on Wednesday. Theoretically, the banks prefer a rate hike for their own net interest margins.

Mylan’s generic EpiPen will be available next week, priced at $300 per injector

Mylan NV (NASDAQ:MYL) announced its first authorized generic EpiPen on Friday, December 16. The USP two-pack Auto-Injector is expected to be available next week at wholesale acquisition cost of $300 per epinephrine injector, about 50% lower than WAC of its EpiPen 2-Pak Auto-Injectors. Consequently, Mylan shares traded in green on Friday, rising slightly by 0.16% during active trading. 

According to Mylan, the product is administered in a similar fashion to its EpiPen auto-injector, which has been in the market for about 30 years. Moreover, it offers same device functionality and drug formulation. The new offering marks a positive for Mylan shares, which have declined more than 34% year-to-date through Friday. 

Following the announcement, MYL CEO Heather Bresch stated her thoughts over consumers’ struggle to pay for prescription drugs. She also reviewed the $20.24 billion company’s history and called the company’s new offering as unprecedented and decisive. She believes that Mylan’s recent launch, alongside improvements to its patient access programs will aid the patients significantly and provide considerable savings to payors. 

Ms. Bresch also called for pharmaceutical pricing system reform. She believes that the current pricing system is not designed for today’s healthcare system and rising costs are impacting new patients every day. She further emphasized on government leaders and healthcare industry participants working in collaboration to address the aforementioned issues and ensure greater patient access to medical care. 

However, Heather failed to explain why the generic version was launched about five months after the Pennsylvania-based company said it would be available in several weeks. According to Marketwatch, experts believed that the timeline given in August was unrealistic. 

Of 22 analysts viewing the stock at FactSet Fundamentals, 13 recommended it as Buy, one rated it as Overweight, whilst eight analysts advised holding the shares. The consensus PT also stands at $50.72, with about 34% upside potential over December 16’s close.

The new price cut represents the cheapest deal for Xbox One yet

Microsoft Corporation (NASDAQ:MSFT) has announced this week that select Xbox One consoles will be available at $249 for a limited time as part of Summer Sale. The price cut applies to all 500GB versions of Xbox One including bundles like the white Quantum Break bundle, Gears of War: Ultimate Edition and the Name Your Game bundle.

This is the third price cut Microsoft has announced since E3 2016. The first price cut was announced before E3 2016 and it was effectively permanent with the introduction of Xbox One S. Microsoft further slashed the price by $20 shortly in a bid to clear inventory. The current price cut carries the same plan to clear out existing stock to make room for the new Xbox One S console which is scheduled to launch on August 2.

In the meantime, the new price of $249 presents a tempting opportunity for anyone willing to pick up an Xbox One this year. You basically get a free game with any 500GB bundle you pick for the lot. But some customers may just be uninterested in the current Xbox One. The new Xbox One S represents a refreshing change with a 40% slimmer chassis that is by far the biggest improvement over the existing console. The current Xbox One design has been disliked by some due to its big and bulky nature. The new console houses the power supply internally and adds features such as 4K support, High Dynamic Range (HDR) support and improved controller with Bluetooth functionality.

Xbox One has multiple first-party exclusives in the pipeline for 2016 such as Forza Horizon 3, ReCore and Gears of War 4. The price cut should help Microsoft attract potential buyers while also clearing out existing stock in the process.

Bernstein has made a new list for large-cap banks in order to better assess their workings over the next five years

Following the slowdown in the credit market, Bernstein has come up with its own taxonomy for large-cap banks. The equity firm has divided these banks into sub categories on the basis of their expected performance over the next five years. The categories include “quality compounders,” “aspiring quality compounders,” “over-capitalized low earner,” and “builder distributors.”

Wells Fargo & Co. (NYSE:WFC) and U.S. Bancorp (NYSE:USB) fall within the first category, which also consists of BB&T Corporation (NYSE:BBT), PNC Financial Services Group Inc. (NYSE:PNC) and SunTrust Banks, Inc. (NYSE:STI). Regions Financial Corp. (NYSE:RF) is the only financial institution in the overcapitalized low-earner category, while the builder distributor category consists of Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), and JPMorgan Chase & Co. (NYSE:JPM).

Bernstein expects these banks to provide handsome regulatory capital returns this year as well as next year owing to constrained balance sheet growth, lower payouts, and additional profits from utilizing kickers. The growth stories could be very well-poised in the near future given the Comprehensive Capital Analysis and Review (CCAR) is within the prescribed threshold.

On the Bank of America front, it has reportedly settled the case with the Federal Home Loan Bank of Seattle for $190 million. The lawsuit was regarding mortgage-related complaints. The bank is also a recognized institution on Bloomberg’s gender equality index now.

According to Thomson Reuters, Bank of America has 10 Strong Buy, 16 Buy and 5 Hold recommendations currently. The 12-month mean consensus price target for the stock is $17.47, reflecting 21.66% upside potential over its closing price of $14.36 yesterday.

Google is reportedly set to announce two new Pixel devices in place of its Project Ara smartphone

The latest reports have backed Alphabet Inc. (NASDAQ:GOOGL) to launch two new Pixel smartphone devices, as the tech giant has decided to call off its highly anticipated modular smartphone Project Ara. Google was earlier believed to be working on a modular smartphone concept, dubbed Project Ara, which would allow users to simply upgrade main components of the smartphone device and not constantly replace their entire smartphone device. The news was first reported by Android Police, who has claimed that its close reliable sources have confirmed that the tech giant will be announcing two new Pixel smartphone devices by the coming month of October. There has not been any significant news regarding the rumored Pixel devices from Google but there is a high chance that the upcoming devices could make an instant impact in the smartphone world.

According to numerous credible sites, Google will release its “Pixel” and “Pixel XL” smartphone devices which could feature high-end specification and top-of-the-line hardware offerings. Interestingly, there have been strong rumors that the next generation of Pixel smartphone devices will have similar traits as the upcoming Google Nexus devices. So, there is a high chance that HTC will be involved in the designing and production for the rumored Google Pixel smartphone devices.

Even though the latest reports have pointed towards Project Ara being called off but there is still a high chance that the promising smartphone concept will see the light of day in the near future. Previously, there were numerous reliable reports stating that Google had successfully managed to find partners to collaborate on its Project Ara. Hopefully, Google will shed some light on when it plans to finally introduce a modular smartphone device.

Demand will undoubtedly exceed expectations for the Model 3 but will Tesla Motors Inc (NASDAQ:TSLA) be able to get enough cars off its production ramp in time?

Tesla Motors Inc’s (NASDAQ:TSLA) Model 3 launch looks to be one of the most exciting in history with analysts predicting more than a hundred thousand orders even before the end of the year and the launch of the Model 3. Considering the fact that Tesla, as a company, has only ever sold slightly upwards of a hundred thousand cars since its first roadster in 2008, the problem becomes visible. Tesla is trying to launch a mass market car but the question of whether it can ramp up production in time to meet orders by its launch date is dubious, considering its Model S and Model X backlog and the fact that Tesla has billions of dollars’ worth of orders on the first day alone.

The $35,000 car is the first mass market product by the world’s youngest automobile company. Over the past months, Tesla has assuaged analysts and investors by introducing improvements to its production line, injecting confidence in its ability to fulfil demand. The company has also made some smart decisions regarding the Model 3 such as the use of steel instead of aluminum which makes the car cheaper and easier to produce, all while cutting labor costs. However, the company still has a back log of orders for Model X and the older Model S cars, some going back as much as 3 years. The company succeeded in delivering 50,580 cars to customers in 2015 but with the Model 3 coming out in late 2017, the company will have to ramp up production for all 3 models substantially.

According to Tesla CEO Elon Musk however, everything is under control. Analyst expectations have been blown away with 180,000 orders coming in within the first 24 hours. That’s $7.5 billion worth of orders in a day. In the next 18 months, that number could be multiplied many times and while that is great news in terms of establishing demand, the company’s production line has become all the more important. Mr. Musk is not worried and promises 500,000 in annual sales by 2020. That’s ten times the current production ramp today.

Analysts at Goldman Sachs slashed their rating on Whiting Petroleum from a Buy to a Neutral, citing further downward pressure on the company’s stock

Whiting Petroleum Corp (NYSE:WLL) stock slipped nearly 2% in today’s pre-market trading session, after analysts at Goldman Sachs slashed its rating on the company from a Buy to a Neutral. The oil and gas company have previously failed to produce any positive update and news to its shareholders as its stock took a turn for the worst, falling a little over 73% in the last twelve months.

Analysts at Goldman Sachs downgraded their rating on Whiting Petroleum stock as the research firm expects the company’s stock price can face further pressure in the near-term. The potential downward tick in the stock price is based on Whiting Petroleum’s decision to reduce debt, which can in turn cause dilution in the coming quarters. The research firm has also made a downward revision in its twelve-month price target to $12.75, down from its previous rating of $13.75.

The oil and gas company has previously posted disappointing top and bottom line results for its first quarter of 2016, after which Whiting’s share price declined nearly 2% in the extended trading session. Whiting Petroleum managed to generate $292 million in total revenues which failed to beat the Street’s estimates of $344.86 million. Additionally, the company posted adjusted loss per share (LPS) of 84 cents, trailing behind its consensus estimate by 12 cents.

Whiting Petroleum has underperformed its peers and oil prices, especially after the company announced its debt exchange deal. However, several investment banks on Wall Street including the likes of Morgan Stanley and Canaccord launched bullish comments after the company revealed its debt exchange deal.

Morgan Stanley upgraded Whiting Petroleum stock from an Underweight to an Equal Weight, citing favorable risk/reward profile. The research firm believes that the aforementioned debt deal will remove the leverage overhang in the near-term. Whiting Petroleum stock has now surged more than 9% in the last three months, compared to Dow Jones Index which rose nearly 1.5%.