So I decided to look at SPX like a giant American Corporation (let me call it “ACo”) with a market cap of US$33 trillion - genius, isn’t it?
2/n
At any one point, I can buy or sell ACo. Thereby the market offers me a price/share - currently US$ 4,410.
In return, I receive a value per share. Isn’t that how it works? Price is what I pay, value is what I get?
3/n
So I looked at the financials of ACo (SPX) and its FCF. Also, I know, I need to know the price of money.
After all, my alternative is to buy the US 10Y Treasury risk free - genius again!
4/n
Let me tell u: ACo is a wonderful company. I checked. It produces countless product & service we use daily.
iPhones or Software so I can do this; petroleum products; cars; food; banking, insurance, health care services; it even builds houses. I love that …!
5/n
It gets better. ACo achieves great margins, suggesting it has a moat. So wide that it returns 20cent for each $ of shareholder capital invested.
Ok, it does not mean mgmt returns it to me. They mostly keep it to expand the business & make more $, so they explained.
6/n
Anyway, after checking it all out I’m convinced ACo has wide moat around its economic castle which will allow it to defend its revenue growth, margins & cost for 30 years.
American Corporation is bad ass good. I’m trigger happy…! Check for yourself…!
7/n
In fact, for my DCF I will assume ACo will grow as fast as it did bw 2015-2019 while retaining 11% FCF to sales margin until 2030.
Let’s make America great again.
8/n
Ok, I think I’m better off to allow for margins to reduce a tiny bit after 2030.
I mean ACo will not invent a new iPhone each decade. Also, American presidents love to spend taxes. Then there is climate change. Re-building our energy system will squeeze margin a bit etc
9/n
Lastly, I have to consider the cost of capital of which the 10-Year Treasury is part. Not a big deal.
The yield is currently 3.5%. But hey, it once was as high as 16%. That seems silly to me. I just ignore that and assume 3.5% to keep it simple.
What is ACo worth now?
10/n
Well, now I am lost. Why is everyone and their brother buying when my DCF says this ShitCo is worth only 3,201/share?
Why is this stonk trading at US$4,140/share? What if the 10Y goes to 4% or ACo margins contract?
India likes a "GOOD" deal - also in crude oil - and is about to teach Russia a lesson what that means.
Spoiler 1: it's not a pretty one!
Spoiler 2: China & Turkey will learn quickly..!
Let's look at the Indian-Russo crude oil bromance.
1/x Thread
Before the invasion in Feb 2022, Russia exported some 2.8mbpd (55%) of its 5.5mbpd crude to Europe by way of pipeline (Druzhba) & sea transportation (seaborne).
But not just crude oil...
2/x
Russia also sold products such as diesel or jet to Europe for a total of 1.4mbpd in petroleum product exports.
In other worlds, G7 sanctioned as introduced in Dec 2022 required 4.2+mbpd of crude & products to be re-shuffeled in globally. Big numbers!
For now, Red Sea disruptions due to Houthi attacking commercial vessels randomly remains a ton-mile story, not a crude oil story.
Within different shipping segments the picture of diverting cargo around the Suez Canal remains a Container Vessel story, to a less extent also a Product Tanker & Crude Oil tanker story.
Container Vessels owners have been the most consequent in diverting cargo.
Since Nov, the number of container vessels crossing the Suez Canal has collapsed by 80% in both directions.
2/n
Crude Oil tankers from the Middle East (Saudi Arabia; UAE; Iraq; Kuwait; Qatar or Oman) to Europe are also lower but our high frequency data does not yet show a similar collapse.
It also nicely illustrates how changing Russian crude flows (Urals diverted to India & China and away from Europe) have increased traffic through the Suez Canal - good for Egypt as Russian dark fleet vessels will or cannot seek an alternative route to ship oil from the Baltics to India.
Brazil is is an interesting microcosm to study in the oil industry.
It's a large, growing consumer of petroleum products. It's the 8th largest producer of crude oil in Dec 2023 as well as a large producer & consumer of biofuels.
Most importantly, it's energy agency reports the data in detail & timely (unlike most countries globally).
1/n
Brazil's resource wealth (mainly offshore) is well documented but it struggled for years to follow through.
Finally, it does with an exit rate of 3.9mbpd of oil production in 2023. Only the US, SA, RUS, CAD, IRQ, CN & IRN (incl condi; in this order) produced more that month. That's 50% growth since Jan 2018!
2/n
Better still, most such production growth reaches the international market. In Dec 2023, Brazil exported 1.7mbpd of crude oil - an ATH.
Remember, in oil net exports is the key number to measure.
Shall we look at the European NatGas market together?
Will Europe have to freeze this winter, after much mild weather luck last winter?
Will TTF drag coal prices up as last winter?
Thread 1/n
Our rolling forecast upfront for those of you with a little ADD:
Best-estimate today, Europe will exit the winter 23/24 in March at or around 40% storage levels (red line) which suggests TTF doesn't have to spike, ceteris paribus. Is it a bear? Neither.
Let me explain.
2/n
Natgas has unique characteristics for a commodity:
Supply is inelastic while demand is highly ELASTIC: Colder temps >> demand goes up exponentially & vice versa.
Not all demand is equal but heating buildings (HH & retail demand) is 65-70% of winter demand (Oct-Mar).
In 2023, BYD will sell some 3 million passanger cars, of which 1.5m will likely be Battery Electric Vehicles (BEV) & the rest Plug-in Hybrids (PHEV). At least that is what we see coming from tracking monthly figures.
2/n Note: table incomplete due to poor company breakouts
BYD's Chairman shared somewhat bigger sales targets recently. He hopes to "double last year's sales to 3.6 million units".