NBR Transcripts-July 30, 2008
Wednesday, July 30, 2008Gas Supplies Drop & Oil Prices Rise
SUSIE GHARIB: A big rebound in oil prices today after a surprise drop in the nation's gasoline supplies. In New York trading, September crude futures jumped $4.58 to $126.77 a barrel. The news fueled a rally in oil stocks. Chevron shares spiked more than 5 percent and ExxonMobil rose almost 4.5 percent. High oil prices could mean strong quarterly profits for these big integrated energy companies. ExxonMobil reports earnings tomorrow. Chevron's numbers are released on Friday. Erika Miller has a preview of what to expect and the outlook for energy stocks.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: While it has been a dismal earnings season overall, that cannot be said of energy companies. ExxonMobil reports second quarter earnings tomorrow and Chevron reports Friday. Both are expected to post profit growth over 30 percent. Oppenheimer's Fadel Gheit says both companies can thank high oil prices for their strong profit growth.
FADEL GHEIT, SR. OIL ANALYST, OPPENHEIMER & CO.: The second quarter earnings will be a record because oil prices have doubled from a year ago. They're up almost 30 percent from the first quarter. So, what do you expect except record earnings.
MILLER: According to Thomson Reuters, energy is expected to be the best performing sector in the second quarter, with a gain of 25 percent. Analysts will be paying close attention to the oil companies' refining and marketing margins. Most firms don't produce enough oil on their own to meet refining needs, so they buy crude on the spot market where prices have roughly doubled from a year ago. Yet, analysts say energy companies can't raise retail prices for gasoline fast enough to cover their higher costs. But S&P analyst Tina Vital is optimistic about those refining and marketing margins.
TINA VITAL, OIL ANALYST, STANDARD & POOR'S: We expect their refining and marketing businesses to hold up, due to the fact that they are large, efficient processors of crude. And they can also handle the cost advantage to heavy sour blends.
MILLER: Oppenheimer's Gheit says the other big issue facing major oil companies is government interference including the possibility of a windfall profit tax in the U.S.
GHEIT: As higher oil price push earnings to record levels, governments, including our own and others, they can be greedy. They want to balance their budgets. They want to do a lot of things, so guess what? The most convenient things is to dip their hand in the pocket of oil companies.
MILLER: These concerns help explain why oil stocks have not done well this year, despite record profits. The American exchange oil index is down 12 percent. Vital says now is a good time to buy many big oil companies, partly on the expectation of increased production in coming years.
VITAL: We don't believe that these future production results as well as their reserves have been factored into their current stock prices. As a result we think the super majors are quite attractive.
MILLER: However, some analysts worry high energy prices could actually be a downfall for oil companies. If crude surges back to record levels, analysts fear that could choke off economic growth and cut demands for energy. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
One on One with Aubrey McClendon, CEO of Chesapeake Energy
SUSIE GHARIB: More now on the outlook for energy. A new study released today by the American Clean Skies Foundation says the U.S. has far more reserves of natural gas than previously estimated and this finding could be a potential remedy to the energy crisis. Joining us now to talk more about that study and the outlook for natural gas, Aubrey McClendon, chairman of the foundation and CEO of Chesapeake Energy, one of the nation's largest natural gas producers. Mr. McClendon, welcome to NIGHTLY BUSINESS REPORT.
AUBREY MCCLENDON, CEO, CHESAPEAKE ENERGY: Thanks, great to be with you tonight.
GHARIB: It's encouraging to hear about these plentiful reserves, but what do you think needs to be done to give incentives to industry and to businesses to find new ways to use natural gas as an energy source?
McCLENDON: Well, there's a bill introduced last week by Representatives Emmanuel of Illinois and Bourne of Oklahoma and it's called the Nat Gas Act. And what it does is creates three types of incentives. First of all, incentives for service station owners to install compressed natural gas pumps, CNG pumps, creates incentives for manufacturers to make CNG vehicles and finally it gives incentives to consumers to buy cars that run on CNG and to buy home refueling devices that run off their home natural gas. So why are these incentives important? Well, it's because it will get people using a product that is in abundance in the United States - - 98 percent of our natural gas comes from the United States and Canada. It's cheaper by half than oil and it's about two-thirds cleaner. So what the concern has been is is there enough natural gas to start to move our transportation network away from oil, imported oil and move it towards domestic natural gas and we think our study today is a big first step in trying to change the perception about natural gas in this country.
GHARIB: I know that your company has been working very hard to drill and extract natural gas from the Haynesville (ph) shale -- I don't know what you call it, shale site in Louisiana. How confident are you that you will be able to extract natural gas from there in a plentiful supply?
McCLENDON: We're highly confident. First of all, we're the nation's number one producer of natural gas. We're the largest driller of new natural gas wells and we believe we know more about shale formations than anybody else in the industry for that matter perhaps in the world. And so when we six months ago discovered this field called the Haynesville in northwestern Louisiana, subsequent drilling leads us to believe that this is the fourth largest gas field in the world and probably the largest gas field in the United States by a big number. In fact, we think in one accumulation, we found enough gas to supply the whole United States with gas for another 10 years. And so, through the American Clean Skies Foundation, we hired a consulting firm to come in and take a look at what the data we're seeing and see if you arrive at the same conclusion. There will be more studies. There will be government studies. There will be a lot of industry studies that we think will corroborate what this study found.
GHARIB: But to what extent is your drilling activity going to be dependent on the price of natural gas? We have seen it drop from something like $14 down to $9 and some analysts are predicting $7 by next year. Is there a price level at which you're going to slow down your drilling activity?
McCLENDON: Well, the industry slows down whenever gas prices get below $8. Consumers slow down whenever gas prices get above $12 or 13. So I've been on record as saying that somewhere between $9 and $11 for (INAUDIBLE) BTU is a fair price for consumers, fair for producers and to give you some oil equivalency, it's the equivalent of $54-$66 so a real bargain from a BTU perspective if gas prices will settle in that range.
GHARIB: Mr. McClendon thank you so much for coming on our program. We really appreciate your time.
McCLENDON: I appreciate the opportunity, thank you.
GHARIB: My guest tonight, Aubrey McClendon, CEO of Chesapeake Energy.
"Street Critique" -Patrick O'Hare, Chief Market Analyst for Briefing.com
PAUL KANGAS: Tonight's "Street Critique" guest says he's not in the gloom and doom camp when it comes to the current stock market. He's Patrick O'Hare, chief market analyst at the financial information website briefing.com. Pat welcome back to NBR.
PATRICK O'HARE, CHIEF MARKET ANALYST, BRIEFING.COM: Hi, Paul, nice to be back with you.
KANGAS: Before we get to your stock picks, let's talk about this market. We've seen some sharp spikes higher. Is there a real chance for lasting strength here or is it just a trap for impatient bulls?
O'HARE: Well, we think, you know, you likely to see a couple of traps along the way here, but overall, we think the market is in store for better performance over the next year. Valuations are reasonable. Economic growth as we'll see in the Q2 GDP report Thursday is better than feared. And earnings growth is going to pick up noticeably in 2009 if the financial sector continues to cycle some really ugly results that began in the third quarter of last year.
KANGAS: Good reasons to have kind of a positive outlook, correct?
O'HARE: We think so.
KANGAS: All right.
O'HARE: And I'd add, too, there are about $3.5 trillion sitting in money market funds right now just ready to be put to work.
KANGAS: Good point. You write the bargain hunting column at briefing.com where you take a contrarian point of view finding beat-up stocks with strong fundamentals. That brings us to your first pick. Name and ticker please.
O'HARE: Right, it's Jack-in-the-Box. The symbol is JBX. The stock has really fallen on hard times, but we think a lot of the negative factors affecting its operating performance, namely, its exposure to hard-hit real estate markets in California, Arizona and Nevada, a slowdown in consumer spending and escalating food and packaging costs have been factored into the stock which is down about 50 percent from its high last May. At the current price, it trades about a 20 percent discount to its projected earnings growth rate which we think exposes a nice value-based idea for the patient investor.
KANGAS: And you prefer this over its larger peers, McDonald's and Burger King.
O'HARE: We do. On a relative basis, we really do like McDonald's, but on a relative basis we think right now that the upside return potential for Jack-in-the-Box is greater.
KANGAS: OK, now while your next pick is not a fast food operation, it does depend on consumer spending. Tell me more about this one.
O'HARE: Sure, It's American Express. The symbol is AXP and of course, American Express came off just really a lousy second quarter, took a $600 million increase to its U.S. lending reserves to account for some deteriorating credit conditions in the U.S. and the stock took quite a hit after that. It's down about 44 percent from its high, but it trades at about 12 times trailing 12-month earnings, which is about 40 percent discount its 10-year historical average. It's important for your readers to remember that it's been in business since 1850. It's seen its share of business cycles. It will get past this and we think it provides a nice opportunity here for the long-term investor.
KANGAS: Rival Visa reported this afternoon strong results and Mastercard is due out tomorrow. Are they all in the same boat?
O'HARE: No, actually, they actually have some different business models. Visa and Mastercard, they do the transaction processing so they don't have the credit exposure that American Express does. We saw after Wednesday's close that Visa reported a really strong number, stock was trading up and it set a nice tone for Mastercard ahead of its report on Thursday.
KANGAS: Very good. Pat, do you own American Express or Jack-in-the-Box shares or have any other disclosure to make?
O'HARE: No, I do not.
KANGAS: All right, I want to thank you very much for sharing your insight with us, Pat.
O'HARE: Thank you, Paul.
KANGAS: My guest, Patrick O'Hare, chief market strategist at briefing.com.
"Money File"-Cleaning Up Your Credit Report
SUSIE GHARIB: In the "Money File" tonight, with lay-offs on the rise, it's time to make sure your credit report is in order. Here's Harriet Johnson Brackey, personal finance columnist at the "South Florida Sun Sentinel."
HARRIET JOHNSON BRACKEY, PERSONAL FINANCE REPORTER, SO. FLORIDA SUN- SENTINEL: You should consider your credit report and credit score to be incredibly important right now. The economy's shaky, lenders are capping home equity lines and lowering credit card limits. But worst of all, unemployment is rising. So if you have any fears about your job, you should try to raise your credit score now because you may need to borrow later. Here's how you do it. Do not go to one of those credit repair companies. Two often, all they do is something you could have done yourself for free. Do get a copy of your credit report at each of the three major credit bureaus. Correct any errors, dispute inaccuracies at each bureau. Most negative information should drop off after seven years, so make sure it disappears. Get your payment habits into tip-top shape. Bills paid on time, not one day late, not one. And aim to work off your debt, to get it below 10 percent of your total credit limit. You also might want to take advantage of free credit report monitoring, which the credit bureau Transunion is offering to virtually all borrowers as part of a settlement of a lawsuit. That will alert you to anyone monkeying around with your report. If you do all of these things, you probably will have a good credit profile ready to show to lenders at a moment's notice. That's smart preparation for tough times. I'm Harriet Johnson Brackey.
Paul Kangas' Stocks in the News
PAUL KANGAS: That extension of the Fed's emergency borrowing helped stocks extend yesterday's rally. The Dow surged 157 points in the first hour of trading, while the NASDAQ was up 22 points. Another plus was payroll firm ADP's report that July private sector jobs rose 9,000. That was in July. The promising rally was blunted by that sharp jump in oil prices though. At 2:00 p.m. the Dow was up just 37 points and the NASDAQ down 16. But then a late wave of buying lifted the blue chips to the day's best levels at the final bell. The Dow Jones Industrial Average closed up 186.13 at 11,583.69. The NASDAQ up 10.10 at 2329.72. Standard & Poor's 500 was up 21.06 ending at 1284.26. Over in the bond market, the 10-year note fell 2/32 to 98 19/32. That lifted the yield to 4.05 percent. Topping the big board's active list on 21.4 million shares, Bank of America (BAC) moving up $1.39. This stock was one where the ban on naked short selling was extended by the SEC.
Clear Channel (CCU) a $0.04 gain. It came out of the Standard & Poor's 500 Index today, replaced by Davida (ph).
Citigroup (C) $0.36 gain.
Merrill Lynch (MER) moved up $0.66.
And then Wachovia (WB) with an advance of $1.38 a share.
Washington Mutual (WM) $0.31 rise.
General Electric (GE) up $0.57.
EMC Corp (EMC) $1.01 advance.
Kraft Foods (KFT), which had good earnings out last week, up $0.55.
And then the big loser in the actives, Elan Plc (ELN), the Irish pharmaceutical, tumbling $14.12. That's a 42 percent drop. Mid-stage trials of the company's Alzheimer's drug are inconclusive and also raised concerns about side effects. Elan's partner, Wyeth stock tumbled $5.37 to $39.74.
Visa (V) up $2.48. After the close, the company reported third quarter earnings of $0.59, $0.11 better than the Street was expecting. In after hours trading, the stock was up another $1.05. It just went public incidentally last March at $44 a share. It's had a good ride.
Avon Products (AVP) rang up a nice gain of $6.54. Second quarter earnings, $0.55, up from $0.26 a year ago. Revenues up 17 percent on strong international sales.
FMC Corp (FMC), the chemical company, up $8.25. Second quarter earnings $1.29, up from $0.90 last year. Revenues rose 23 percent.
And then Cummins (CMI), the diesel engine company, up $4.48. Second quarter earnings $1.49, well above $1.06 last year. The company boosted its 2008 sales guidance from plus 12 percent to a 15 percent rise.
Energizer (ENR), the battery company, down $2.80. Third quarter earnings, $1.13, up from $1.06 last year, but that was $0.13 below the Street consensus and the company also gave a cautious outlook.
Then we see Kemet (KEM) losing 42 percent of its value, all the way down to $1.72 today. The company makes electronic components like capacitors and it posted a first quarter loss of $2.33 versus earnings of $0.08 last year. The company will cut 640 jobs in part of a restructuring.
Trex Company (TWP), which makes fences and decking and things like that, up $2.98, a real turnaround. Second quarter earnings of $0.52, way up from $0.17 last year.
And then a familiar name, Lubrizol (LZ) up $2.80. Second quarter earnings came in at $1.06, $1.26 versus $1.16 on a 17 percent rise in revenues.
And then Arcelormittal (MT), the big steel holding company, was up $7.50. Second quarter earnings, $4.19, way up from $1.97 last year. NASDAQ's most active, Apple (AAPL) up $2.80.
Research in Motion (RIMM) gained $3.16.
Google (GOOG) $0.41 drop.
Qualcomm (QCOM) was up $0.72.
Microsoft (MSFT) $0.12 advance there.
Intel (INTC) showed no change on the day.
Cisco Systems (CSCO) down $0.25.
First Solar (FSLR) up $7.43.
And a $0.02 gain in Amgen (AMGN).
Baidu.com (BIDU) a $2.12 advance.
Electronic Arts (ERTS) down $3.11. After the close, the company had first quarter earnings of - I should say a loss of $0.42, almost double the loss of $0.22 a year ago.
And then Garmin Ltd (GRMN) down $9.87. The manufacturer of global planning system or positioning systems had second quarter earnings of $1.19, up from $0.98, but the company delayed its (INAUDIBLE) until next July, quite a disappointment.
And then finally, Starbucks (SBUX) fell $0.32. After the close, the coffee chain posted lower than expected third quarter earnings of $0.16 per share, $0.02 below analysts' estimates. The coffee chain now sees 2009 full year earnings of as much as $1 a share. Analysts were looking for $0.92. The stock traded above $15 in after hour's activity.
