1 00:00:17,360 --> 00:00:19,800 Speaker 1: Hello, and welcome to a special edition of The Credit Edge. 2 00:00:19,800 --> 00:00:22,360 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:22,680 --> 00:00:24,600 Speaker 1: We're here to discuss the war in a Run and 4 00:00:24,640 --> 00:00:28,240 Speaker 1: its impact on credit markets. We're joined by Spencer Cutter, 5 00:00:28,280 --> 00:00:31,160 Speaker 1: who covers the energy sector for Bloomberg Intelligence. How are you, sponsor. 6 00:00:31,360 --> 00:00:33,080 Speaker 2: I'm doing great, James, Thanks for having me. 7 00:00:33,520 --> 00:00:36,159 Speaker 1: Also delighted to have Jody Lurie, who covers the consumer 8 00:00:36,200 --> 00:00:37,480 Speaker 1: and leisure sector for BI. 9 00:00:37,520 --> 00:00:40,839 Speaker 3: How's it going, Jody, fantastic, James, Thanks for having me. 10 00:00:41,400 --> 00:00:43,680 Speaker 1: Great to see you both. So global markets are getting 11 00:00:43,680 --> 00:00:45,760 Speaker 1: hammered by the conflict in the Middle East, which caused 12 00:00:45,800 --> 00:00:48,440 Speaker 1: a spike in energy prices. We'll get to the boost 13 00:00:48,479 --> 00:00:51,000 Speaker 1: for oil companies later, but for consumers that means higher 14 00:00:51,040 --> 00:00:53,960 Speaker 1: gas prices at the pump and more inflation across the board. 15 00:00:54,400 --> 00:00:57,640 Speaker 1: Many were already under severe pressure before this latest shock, 16 00:00:58,120 --> 00:01:01,920 Speaker 1: wrestling with the rising cost of staples and stagnant wages. 17 00:01:02,240 --> 00:01:04,800 Speaker 1: In addition, the war increases the risk of stagflation in 18 00:01:04,840 --> 00:01:07,919 Speaker 1: the US. That means more zombie borrowers as debt service 19 00:01:07,959 --> 00:01:12,199 Speaker 1: increases and revenue slides. But even before the US struck, 20 00:01:12,280 --> 00:01:15,959 Speaker 1: Iran credit markets were being menaced by concerns about AI 21 00:01:16,040 --> 00:01:19,520 Speaker 1: disruption that will mean more defaults by software companies. There 22 00:01:19,560 --> 00:01:23,280 Speaker 1: are also a lot of angst around private credit playing 23 00:01:23,319 --> 00:01:25,600 Speaker 1: in the background. Retail investors are having a bit of 24 00:01:25,600 --> 00:01:29,400 Speaker 1: a Roach Motel moment in that market. Overall, though spreads 25 00:01:29,400 --> 00:01:31,520 Speaker 1: haven't really moved that much, at least at the index level. 26 00:01:31,520 --> 00:01:34,040 Speaker 1: Maybe that means a bigger repricing to come the longer 27 00:01:34,040 --> 00:01:36,679 Speaker 1: the war goes on and the more dramatic it gets. 28 00:01:37,360 --> 00:01:39,479 Speaker 1: But we do know beneath the surface there's a ton 29 00:01:39,520 --> 00:01:42,280 Speaker 1: of what everyone likes to call dispersion within credit markets, 30 00:01:42,280 --> 00:01:45,040 Speaker 1: and that's only going to become more acute as investors 31 00:01:45,080 --> 00:01:47,880 Speaker 1: try to determine winners and losers from all of this. 32 00:01:48,200 --> 00:01:50,880 Speaker 1: That's what we have Bloomberg Intelligence for. Let's start with 33 00:01:50,880 --> 00:01:54,440 Speaker 1: the bad stuff. Jody was seeing airlines underperforming. They're obviously exposed. 34 00:01:54,600 --> 00:01:56,600 Speaker 1: But what's your take on how this all shakes out? 35 00:01:56,920 --> 00:01:59,480 Speaker 3: So, James, I just want to say that in your intro, 36 00:01:59,800 --> 00:02:03,880 Speaker 3: do you talk about zombies and cockroaches so to bias 37 00:02:04,120 --> 00:02:09,080 Speaker 3: the listener a little bit. I think the thing that 38 00:02:09,320 --> 00:02:11,640 Speaker 3: we have to put into perspective is that for as 39 00:02:11,680 --> 00:02:14,320 Speaker 3: much as we're seeing lots of elements of a caship 40 00:02:14,360 --> 00:02:16,760 Speaker 3: to comomy as much as we're seeing that companies that 41 00:02:16,800 --> 00:02:21,160 Speaker 3: are focused on lowering come consumers have been weaker positions, 42 00:02:21,240 --> 00:02:24,280 Speaker 3: such as McDonald's and have had to pivot around that. 43 00:02:25,080 --> 00:02:30,200 Speaker 3: The companies that are catering towards hiring come consumers, those 44 00:02:30,280 --> 00:02:34,480 Speaker 3: consumers who have the propensity and willingness to travel, those 45 00:02:34,520 --> 00:02:37,360 Speaker 3: are still doing okay. And I think that it's only 46 00:02:37,400 --> 00:02:41,680 Speaker 3: in a scenario where we have a multi year one 47 00:02:41,760 --> 00:02:44,720 Speaker 3: hundred dollars a barrel or hire in which we would 48 00:02:44,760 --> 00:02:48,839 Speaker 3: see a lot of these companies start to deteriorate. We've 49 00:02:48,840 --> 00:02:51,600 Speaker 3: already gone through the pandemic. That's the worst that it 50 00:02:51,639 --> 00:02:53,840 Speaker 3: could be, in my opinion, for many of these companies, 51 00:02:53,880 --> 00:02:57,600 Speaker 3: because they literally weren't allowed to operate. And so unless 52 00:02:57,680 --> 00:03:01,000 Speaker 3: we have that scenario, it's hard to imagine a situation 53 00:03:01,080 --> 00:03:07,519 Speaker 3: that's so whole scale stopping of activity for leisure companies. 54 00:03:07,800 --> 00:03:09,840 Speaker 1: We did have those during the pandemic, a trillion dollars 55 00:03:09,840 --> 00:03:13,960 Speaker 1: of fed liquidity that suddenly lifted everyone else of real 56 00:03:14,000 --> 00:03:16,040 Speaker 1: problem there. So I mean, do we expect there to 57 00:03:16,080 --> 00:03:18,240 Speaker 1: be support from the government for all of these sectors 58 00:03:18,320 --> 00:03:19,560 Speaker 1: that might be under pressure. 59 00:03:19,880 --> 00:03:22,920 Speaker 3: Yeah, the FED support was definitely instrumental, and it was 60 00:03:22,960 --> 00:03:25,480 Speaker 3: instrumental for companies that didn't even qualify, such as the 61 00:03:25,520 --> 00:03:29,720 Speaker 3: cruise lines, because just that liquidity pump into the markets 62 00:03:30,280 --> 00:03:34,320 Speaker 3: allowed investors to feel much more comfortable. And I think, James, 63 00:03:34,360 --> 00:03:36,800 Speaker 3: you bring up a good point that it's not even 64 00:03:36,840 --> 00:03:40,400 Speaker 3: so much the direct consequences of the Middle East and 65 00:03:40,680 --> 00:03:43,400 Speaker 3: of Iran that are an issue that we're monitoring. It's 66 00:03:43,440 --> 00:03:46,680 Speaker 3: really the market liquidity component that's where companies get into trouble. 67 00:03:46,720 --> 00:03:50,280 Speaker 3: That's where you've seen these problematic areas. You know, when 68 00:03:50,280 --> 00:03:53,240 Speaker 3: we saw that oil prices were really high in the 69 00:03:53,280 --> 00:03:57,480 Speaker 3: Arab springtime, we had lower interest rates, but then we 70 00:03:57,560 --> 00:04:01,800 Speaker 3: had a scenario where oil press is plummeted and all 71 00:04:01,840 --> 00:04:04,880 Speaker 3: of you know, I'm gonna look to Spenser to sort 72 00:04:04,880 --> 00:04:07,080 Speaker 3: of chime in here because I'm sort of playing to 73 00:04:07,880 --> 00:04:12,640 Speaker 3: my general knowledge. But we had so many hyl companies 74 00:04:12,640 --> 00:04:15,920 Speaker 3: who couldn't issue because all of high yield was affected 75 00:04:16,200 --> 00:04:18,359 Speaker 3: by the fact that oil companies were being whacked by 76 00:04:18,400 --> 00:04:19,119 Speaker 3: the ugly stick. 77 00:04:19,360 --> 00:04:20,560 Speaker 1: Do you want to chime in, Spencer? 78 00:04:20,960 --> 00:04:25,320 Speaker 2: Yeah, So within the energy sector, I mean I think 79 00:04:25,520 --> 00:04:27,960 Speaker 2: there's a couple of things to factor into. What's the 80 00:04:28,000 --> 00:04:32,360 Speaker 2: impact here and is it different than prior energy spikes. 81 00:04:32,600 --> 00:04:34,320 Speaker 2: One is is this going to be a longer duration 82 00:04:34,480 --> 00:04:36,840 Speaker 2: or shorter duration spike? And I think that, you know, 83 00:04:36,880 --> 00:04:41,400 Speaker 2: obviously that's gonna to depend almost exclusively on what happens 84 00:04:41,440 --> 00:04:46,000 Speaker 2: in Iran, how long the hostilities last, how long does 85 00:04:46,040 --> 00:04:50,560 Speaker 2: the Strait of Hormuz closed or you know, largely closed. 86 00:04:51,320 --> 00:04:55,480 Speaker 2: And that's something that's different than in prior spikes. You know, 87 00:04:55,520 --> 00:04:57,719 Speaker 2: there's different reasons why old prices have spiked at the 88 00:04:57,760 --> 00:05:03,920 Speaker 2: past and today, you know, right now, the market sort 89 00:05:03,920 --> 00:05:05,520 Speaker 2: of assumes this is going to be a fairly short 90 00:05:05,640 --> 00:05:11,040 Speaker 2: term phenomenon. So you've seen, at least from bond perspective, 91 00:05:11,080 --> 00:05:16,280 Speaker 2: a credit perspective, a lot of people investors kind of 92 00:05:16,360 --> 00:05:18,279 Speaker 2: looking through this and saying, Okay, well, yeah, it's fine. 93 00:05:18,279 --> 00:05:18,559 Speaker 3: Oil. 94 00:05:18,720 --> 00:05:20,560 Speaker 2: Oil hit one hundred dollars a barrel, one hundred and 95 00:05:20,560 --> 00:05:23,440 Speaker 2: fifteen over the weekend. It's going to get back down 96 00:05:23,520 --> 00:05:26,839 Speaker 2: to you know, sixty dollars a barrel within the next 97 00:05:26,839 --> 00:05:29,120 Speaker 2: six months. So I'm not going to take a you know, 98 00:05:29,160 --> 00:05:31,560 Speaker 2: I'm not going to materially move my positions based on 99 00:05:31,560 --> 00:05:34,240 Speaker 2: this just yet. And you've seen that in the market. 100 00:05:34,320 --> 00:05:39,320 Speaker 2: So if you look at what sectors have performed well since, 101 00:05:39,480 --> 00:05:41,240 Speaker 2: you know, over the last week, if you look at 102 00:05:41,279 --> 00:05:44,640 Speaker 2: the investment grade market, you know, Energy was just kind 103 00:05:44,640 --> 00:05:46,400 Speaker 2: of average, is right in the middle of the pack, 104 00:05:47,360 --> 00:05:51,919 Speaker 2: lost ninety basis points and the Bloomberg investment Grade Corporate 105 00:05:51,920 --> 00:05:55,359 Speaker 2: Index was down ninety five basis points. So you know, 106 00:05:56,240 --> 00:05:59,040 Speaker 2: but if you look at the high yield market, energy 107 00:05:59,080 --> 00:06:02,039 Speaker 2: was one of the top perform lost seven basis points, 108 00:06:02,040 --> 00:06:04,440 Speaker 2: whereas that mark was down forty four basis points. And 109 00:06:04,480 --> 00:06:06,000 Speaker 2: I think a lot of that is just, you know, 110 00:06:06,040 --> 00:06:09,000 Speaker 2: where's this windfall of cash flow going to go if 111 00:06:09,000 --> 00:06:11,640 Speaker 2: and when you know these produce these producers can sell 112 00:06:11,680 --> 00:06:14,800 Speaker 2: their oil. Now you're still producing in the United States, 113 00:06:15,360 --> 00:06:17,120 Speaker 2: you don't have to deal with all the supply chain 114 00:06:17,160 --> 00:06:19,440 Speaker 2: logistically issues in the Middle East, and so now I 115 00:06:19,480 --> 00:06:21,800 Speaker 2: have a windfall selling my oil for you know, eighty 116 00:06:21,880 --> 00:06:26,320 Speaker 2: ninety hundred dollars a barrel. These small producers that are 117 00:06:26,360 --> 00:06:29,440 Speaker 2: still highly levered have single B credit ratings, are actually 118 00:06:29,440 --> 00:06:31,120 Speaker 2: going to have an opportunity to pay down a decent 119 00:06:31,160 --> 00:06:35,200 Speaker 2: amount of debt, whereas the larger producers they've already gotten 120 00:06:35,200 --> 00:06:38,799 Speaker 2: their leverage ratios down the you know, very comfortable levels 121 00:06:38,800 --> 00:06:41,200 Speaker 2: in the last couple of years, and now that you know, 122 00:06:41,240 --> 00:06:44,919 Speaker 2: they're paying out dividends and buying back stock. So so 123 00:06:45,000 --> 00:06:47,840 Speaker 2: the money's going in a different direction whether you're if 124 00:06:47,880 --> 00:06:49,560 Speaker 2: you're a Devon Energy, you've said I'm going to pay 125 00:06:49,560 --> 00:06:52,440 Speaker 2: out seventy percent of my free cash flow to buy 126 00:06:52,480 --> 00:06:57,640 Speaker 2: back stock and fund dividends. If you're WNT offshore sm Energy, 127 00:06:57,760 --> 00:07:00,120 Speaker 2: you're saying, hey, I still need to reduce debt. I'm 128 00:07:00,120 --> 00:07:02,080 Speaker 2: going to use this windfall for that. So it's it's 129 00:07:02,120 --> 00:07:04,400 Speaker 2: a bit of a different dynamic between the size of 130 00:07:04,440 --> 00:07:07,680 Speaker 2: the issuer and you know your expectations for the duration 131 00:07:07,760 --> 00:07:09,160 Speaker 2: of this conflict spencer. 132 00:07:09,200 --> 00:07:12,080 Speaker 3: We've seen in my area as well that a lot 133 00:07:12,120 --> 00:07:15,680 Speaker 3: of the stronger positioned companies have pivoted to share my 134 00:07:15,800 --> 00:07:19,040 Speaker 3: back's dividends and giving back in any way they can. 135 00:07:19,120 --> 00:07:21,840 Speaker 3: That is not the balance sheet repair because they're beyond that. 136 00:07:22,160 --> 00:07:24,680 Speaker 3: Do you think that a lot of your companies, because 137 00:07:24,880 --> 00:07:27,960 Speaker 3: the situation is so tenuous at the moment, do you 138 00:07:28,000 --> 00:07:32,040 Speaker 3: think that they're going to pivot away from that strategy 139 00:07:32,400 --> 00:07:35,440 Speaker 3: or does this give them more ammo to give back 140 00:07:35,480 --> 00:07:36,200 Speaker 3: to shareholders. 141 00:07:36,680 --> 00:07:39,000 Speaker 2: I think this just gives it more ama to get 142 00:07:39,000 --> 00:07:42,000 Speaker 2: back to sharls again. I think everybody right now thinks 143 00:07:42,080 --> 00:07:46,040 Speaker 2: this is a relatively short term event, and they get 144 00:07:46,080 --> 00:07:48,400 Speaker 2: by the end of this year, you know, oil is 145 00:07:48,440 --> 00:07:50,680 Speaker 2: going to be backed down. Let's keep in mind the 146 00:07:50,760 --> 00:07:54,400 Speaker 2: market generally thought. The market view was that we were 147 00:07:54,440 --> 00:07:59,160 Speaker 2: oversupplied from an oil standpoint coming into this. The only 148 00:07:59,200 --> 00:08:01,800 Speaker 2: thing keeping price is where they were was this overhang 149 00:08:01,840 --> 00:08:04,720 Speaker 2: of geopolitical risk. You know, there were aircraft carriers moving 150 00:08:04,760 --> 00:08:08,040 Speaker 2: into the Middle East, there were aircraft carriers before in 151 00:08:08,080 --> 00:08:11,440 Speaker 2: the Caribbean. It's like, what's going to happen. Nobody knows. 152 00:08:11,440 --> 00:08:14,000 Speaker 2: So that was pricing in an extra five to ten 153 00:08:14,040 --> 00:08:17,520 Speaker 2: dollars a barrel for oil if and when the Iran 154 00:08:17,640 --> 00:08:22,280 Speaker 2: conflict is resolved, as everybody kind of thinks, it will 155 00:08:22,920 --> 00:08:26,160 Speaker 2: not totally on board with that. But that's a different subject. Now, 156 00:08:26,200 --> 00:08:29,960 Speaker 2: all of a sudden, we're back to being very well 157 00:08:30,000 --> 00:08:33,240 Speaker 2: supplied from a global standpoint in terms of oil production, 158 00:08:33,880 --> 00:08:38,960 Speaker 2: and that geopolitical risk is theoretically off the table, so 159 00:08:38,960 --> 00:08:41,000 Speaker 2: oil prices come back down. So I think a lot 160 00:08:41,040 --> 00:08:44,360 Speaker 2: of people again are looking at this temporary and I 161 00:08:44,400 --> 00:08:49,360 Speaker 2: think the big investment grade companies they've been so focused 162 00:08:49,360 --> 00:08:52,240 Speaker 2: for the last two years year and a half. You know, 163 00:08:53,120 --> 00:08:55,160 Speaker 2: they came out of the twenty twenty downturn where oil 164 00:08:55,160 --> 00:08:58,079 Speaker 2: prices went to zero and a bunch of companies went bankrupt, 165 00:08:58,160 --> 00:09:01,240 Speaker 2: and everybody's like got religion and said, Okay, leverage is 166 00:09:01,240 --> 00:09:03,040 Speaker 2: not so good. I'm going to I'm going to use 167 00:09:03,200 --> 00:09:04,880 Speaker 2: all the free cash ule I can to pay down 168 00:09:04,920 --> 00:09:07,960 Speaker 2: debt and get my leverage ratio down to one times 169 00:09:08,040 --> 00:09:10,760 Speaker 2: if you're a producer, less than four times if you're 170 00:09:10,760 --> 00:09:13,200 Speaker 2: a midstream company and somewhere. But you know, oil field 171 00:09:13,280 --> 00:09:15,439 Speaker 2: services and the same sort of thing. So everybody was 172 00:09:15,440 --> 00:09:17,599 Speaker 2: getting their leverage ratios down, and then they kind of 173 00:09:17,679 --> 00:09:20,840 Speaker 2: hit their debt targets twenty twenty three, twenty twenty four, 174 00:09:20,880 --> 00:09:23,080 Speaker 2: and that's when they started ramping up, or twenty five 175 00:09:23,120 --> 00:09:26,320 Speaker 2: they started ramping up buybacks. And I think this is 176 00:09:26,360 --> 00:09:28,040 Speaker 2: just going to be, Hey, I have my debt targets 177 00:09:28,080 --> 00:09:29,600 Speaker 2: where I wanted to be. All of a sudden, I've 178 00:09:29,640 --> 00:09:32,760 Speaker 2: got an extra billion dollars of free cash. Locus oils 179 00:09:32,760 --> 00:09:35,080 Speaker 2: at one hundred bucks. I'm just going to have a 180 00:09:35,200 --> 00:09:37,720 Speaker 2: huge buyback. And the other thing to keep in mind 181 00:09:37,840 --> 00:09:43,359 Speaker 2: is even though these companies have been hyper focused on dividends. 182 00:09:43,720 --> 00:09:47,079 Speaker 2: They introduced the version of the concept of a variable dividend, 183 00:09:47,280 --> 00:09:48,800 Speaker 2: so you know, who knows how much it could be. 184 00:09:48,840 --> 00:09:51,240 Speaker 2: It depended on how much free cash will they generated 185 00:09:51,360 --> 00:09:53,680 Speaker 2: or end or stock buybacks, and they've been doing that 186 00:09:53,720 --> 00:09:56,480 Speaker 2: for the last year or two. Energy is still underperformed 187 00:09:56,480 --> 00:09:59,559 Speaker 2: the market pretty dramatically from an equity standpoint, so it's 188 00:09:59,600 --> 00:10:02,880 Speaker 2: not really not getting the bang for the buck that 189 00:10:02,920 --> 00:10:04,480 Speaker 2: they had hoped for. So I think they're going to 190 00:10:04,520 --> 00:10:08,840 Speaker 2: continue to throw whatever they can at boosting shareholder returns 191 00:10:09,000 --> 00:10:11,320 Speaker 2: as long as they have that strong balance sheet. Again, 192 00:10:11,360 --> 00:10:13,560 Speaker 2: it's back to the smaller companies that don't have that 193 00:10:13,640 --> 00:10:15,880 Speaker 2: strong balance sheet. I think they're going to be the 194 00:10:15,920 --> 00:10:18,240 Speaker 2: ones that say, ah, here's my opportunity to pay down 195 00:10:18,240 --> 00:10:20,120 Speaker 2: something and reinforce the balance sheet. 196 00:10:20,360 --> 00:10:22,760 Speaker 3: Spencer, you touched on a few different points, you know, 197 00:10:22,840 --> 00:10:26,880 Speaker 3: one where they found religion back in fourteen fifteen sixteen. 198 00:10:26,920 --> 00:10:30,400 Speaker 3: That was fun. But I think there's been so many 199 00:10:30,400 --> 00:10:33,559 Speaker 3: instances of oil spikes, both short term and long term. 200 00:10:33,640 --> 00:10:37,280 Speaker 3: Right the beginning of the Great Financial Crisis, we saw 201 00:10:37,280 --> 00:10:42,040 Speaker 3: oil spikes shortly after nine to eleven. We've seen them 202 00:10:42,080 --> 00:10:44,680 Speaker 3: in a couple of different points in time where they've 203 00:10:44,679 --> 00:10:48,040 Speaker 3: been severe and short term or severe in long term, 204 00:10:48,080 --> 00:10:50,720 Speaker 3: like the Arab spring. What do you see this as 205 00:10:50,800 --> 00:10:53,000 Speaker 3: most comparable to. I know a lot of people have 206 00:10:53,080 --> 00:10:55,920 Speaker 3: been writing about the seventies, They've been writing about a 207 00:10:55,960 --> 00:10:58,920 Speaker 3: lot of different points. But what are you thinking when 208 00:10:58,960 --> 00:11:00,920 Speaker 3: you're looking at this, Because you know, I have my 209 00:11:01,000 --> 00:11:04,160 Speaker 3: thoughts or I have my ways of paralleling to my sector, 210 00:11:04,280 --> 00:11:07,280 Speaker 3: But I'm really curious as to how you were sort 211 00:11:07,280 --> 00:11:11,240 Speaker 3: of thinking about this being short term and what is 212 00:11:11,280 --> 00:11:12,080 Speaker 3: it most similar to. 213 00:11:12,760 --> 00:11:15,040 Speaker 2: On the one hand, there's a similarity to the seventies 214 00:11:15,080 --> 00:11:20,680 Speaker 2: because this is a Middle East driven, supply driven shock, 215 00:11:21,120 --> 00:11:26,520 Speaker 2: whereas you know twenty two it was really is COVID, 216 00:11:26,720 --> 00:11:28,800 Speaker 2: you know, to come back from COVID. But the thing 217 00:11:28,880 --> 00:11:33,240 Speaker 2: that's fundamentally different today than back in the seventies was 218 00:11:34,120 --> 00:11:37,800 Speaker 2: we now are kind of friendly with Saudi Arabia and 219 00:11:37,840 --> 00:11:42,840 Speaker 2: the UAE, and they were actually from the news reports 220 00:11:42,880 --> 00:11:46,920 Speaker 2: I've been reading advocating for this action in Iran. You 221 00:11:46,960 --> 00:11:51,959 Speaker 2: know that RAN's not a friend of theirs. So if again, 222 00:11:52,040 --> 00:11:56,199 Speaker 2: if the Iran hostilities are resolved, whether it's short term 223 00:11:56,280 --> 00:11:59,960 Speaker 2: or long term, I could very well see Saudi Arabia 224 00:12:00,200 --> 00:12:03,560 Speaker 2: saying hey, thank you, and we're gonna pay you back 225 00:12:03,600 --> 00:12:06,280 Speaker 2: by opening up the spickett a little bit and you know, 226 00:12:06,360 --> 00:12:08,680 Speaker 2: get your your oil prices back down to fifty dollars 227 00:12:08,720 --> 00:12:11,080 Speaker 2: a barrel. Now that the producers in the United States 228 00:12:11,200 --> 00:12:12,920 Speaker 2: may not like it so much, but you and I 229 00:12:12,960 --> 00:12:15,280 Speaker 2: as consumers are going to certainly appreciate being able to 230 00:12:15,280 --> 00:12:17,360 Speaker 2: go to the gas station and fill up our tanks 231 00:12:17,360 --> 00:12:19,560 Speaker 2: for a lot less. So is it a supply shock? 232 00:12:19,640 --> 00:12:21,880 Speaker 2: Is it a demand shock? And what are the geopolitical 233 00:12:24,280 --> 00:12:27,680 Speaker 2: cards around the table? And it's just I think, you know, 234 00:12:28,080 --> 00:12:30,160 Speaker 2: I hate saying it's different this time, but kind of 235 00:12:30,200 --> 00:12:34,400 Speaker 2: is different this time, and largely because geopolitical situation is 236 00:12:34,520 --> 00:12:37,520 Speaker 2: much different today than it was, you know, a decade 237 00:12:37,600 --> 00:12:40,320 Speaker 2: or more a go. We've kind of got a lot 238 00:12:40,360 --> 00:12:44,440 Speaker 2: of the big producers, maybe not best friends, but you know, 239 00:12:44,600 --> 00:12:46,720 Speaker 2: kind of willing to cooperate and work with us. 240 00:12:46,920 --> 00:12:49,000 Speaker 1: And as we've talked about in the past, the twenty 241 00:12:49,120 --> 00:12:53,720 Speaker 1: fifteen twenty sixteen energy moves cleaned out a lot of 242 00:12:53,760 --> 00:12:56,599 Speaker 1: bad capital strutches, and everyone cleaned up the boundaries and 243 00:12:56,600 --> 00:12:58,600 Speaker 1: they got used to operating at a lot lower cost. Right, 244 00:12:58,679 --> 00:13:01,520 Speaker 1: So anything of what is it forty is a bit 245 00:13:01,520 --> 00:13:02,800 Speaker 1: of a windfall for these companies. 246 00:13:03,160 --> 00:13:07,320 Speaker 2: Yeah. So, yes, there were two major downturns you mentioned 247 00:13:07,400 --> 00:13:11,520 Speaker 2: twenty fifteen and sixteen, and that was really driven by 248 00:13:12,120 --> 00:13:15,760 Speaker 2: Saudi Arab was saying, hey US, Yeah, I want to 249 00:13:15,760 --> 00:13:21,680 Speaker 2: defend my market share from the budding US fracking production boom. 250 00:13:21,800 --> 00:13:25,200 Speaker 2: And so they dropped oil prices and did drive a 251 00:13:25,240 --> 00:13:29,959 Speaker 2: lot of the smaller US producers into bankruptcy. And then 252 00:13:29,960 --> 00:13:33,199 Speaker 2: you had the downturn in twenty twenty. And both of 253 00:13:33,240 --> 00:13:37,959 Speaker 2: those again combined forced companies to get religion and they 254 00:13:37,960 --> 00:13:42,160 Speaker 2: got their balance sheets in shape and so and it's 255 00:13:42,160 --> 00:13:45,160 Speaker 2: not only that, but you've also had technological and operational 256 00:13:45,200 --> 00:13:49,920 Speaker 2: improvements since then. So if you go back to twenty fifteen, 257 00:13:50,000 --> 00:13:53,480 Speaker 2: the first big downturn postfracking, you kind of needed oil 258 00:13:53,559 --> 00:13:56,080 Speaker 2: on the seventy dollars barrel range for most producers to 259 00:13:56,080 --> 00:13:57,959 Speaker 2: be able to break even on a long term free 260 00:13:58,040 --> 00:14:02,200 Speaker 2: cashual basis. That's back that has come down now too, 261 00:14:02,559 --> 00:14:04,800 Speaker 2: depending on where you are. If you're a good producer 262 00:14:04,840 --> 00:14:07,400 Speaker 2: with good acreage and the Permian, Yeah, forty bucks or 263 00:14:07,440 --> 00:14:09,959 Speaker 2: even less thirty thirty to forty dollars a barrel. You're 264 00:14:10,000 --> 00:14:12,320 Speaker 2: gonna be fine if you're in some of the other 265 00:14:12,559 --> 00:14:16,800 Speaker 2: regions the Bakan, I mean, Continental Resources shut down all 266 00:14:16,840 --> 00:14:19,920 Speaker 2: their production in the Bachan last year with oil and 267 00:14:20,480 --> 00:14:23,040 Speaker 2: round sixty. So it kind of depends a little bit 268 00:14:23,040 --> 00:14:26,160 Speaker 2: where you are. But generally speaking, if you a broad 269 00:14:26,200 --> 00:14:29,680 Speaker 2: brush for the US producers, if oil is fifty five 270 00:14:29,720 --> 00:14:33,800 Speaker 2: dollars a barrel or higher, you're going to see production 271 00:14:34,720 --> 00:14:39,040 Speaker 2: rates remain flat and most producers are going to be 272 00:14:39,080 --> 00:14:42,160 Speaker 2: able to generate a modest amount of free cash flow. 273 00:14:42,920 --> 00:14:45,240 Speaker 2: You get down below fifty, that's when you start seeing 274 00:14:45,240 --> 00:14:46,840 Speaker 2: a lot of companies saying, all right, I'm going to 275 00:14:46,920 --> 00:14:49,040 Speaker 2: cut back on my production, I'm going to cut back 276 00:14:49,040 --> 00:14:51,400 Speaker 2: on capex. I'm going to try to preserve as much 277 00:14:51,600 --> 00:14:54,080 Speaker 2: cash and capital as I can to get through this downturn, 278 00:14:55,080 --> 00:14:56,760 Speaker 2: and for many of them free cash. So it kind 279 00:14:56,760 --> 00:15:00,480 Speaker 2: of goes to zero or pretty close to it. Fifty 280 00:15:00,480 --> 00:15:03,359 Speaker 2: five or sixty. Yeah, everybody's doing well. 281 00:15:03,480 --> 00:15:06,280 Speaker 1: And right now over one hundred. Let's say there is 282 00:15:06,400 --> 00:15:09,080 Speaker 1: extra supply and it brings it down a bit, but 283 00:15:09,120 --> 00:15:12,360 Speaker 1: you're still seeing a pretty big windfull of these companies. 284 00:15:13,040 --> 00:15:15,120 Speaker 1: What you're saying, though, is that the bigger companies will 285 00:15:15,120 --> 00:15:17,160 Speaker 1: give it back to shareholder and the smaller ones might 286 00:15:17,480 --> 00:15:19,160 Speaker 1: do something with a bounds sheet. But it's not going 287 00:15:19,200 --> 00:15:20,560 Speaker 1: to be a huge credit positive. 288 00:15:20,920 --> 00:15:22,680 Speaker 2: Well, it's not going to be. I don't think you're 289 00:15:22,720 --> 00:15:24,440 Speaker 2: going to see much of a credit positive move for 290 00:15:24,480 --> 00:15:26,640 Speaker 2: the bigger companies because, like you said, I think they 291 00:15:26,680 --> 00:15:28,600 Speaker 2: are going to be sending most of that money out 292 00:15:28,600 --> 00:15:33,440 Speaker 2: the door to shareholders. For the smaller companies, yeah, I 293 00:15:33,480 --> 00:15:36,640 Speaker 2: do think this does have the opportunity for them to 294 00:15:36,720 --> 00:15:40,800 Speaker 2: pay down some debt and actually make a meaningful improvement 295 00:15:40,840 --> 00:15:45,400 Speaker 2: on their credit metrics, which is why you've seen energy 296 00:15:45,680 --> 00:15:49,000 Speaker 2: outperformed in the high yield market over the last week, 297 00:15:49,320 --> 00:15:51,200 Speaker 2: not so much in the investment grade market. And if 298 00:15:51,200 --> 00:15:54,800 Speaker 2: you look at the companies within energy that we're leading 299 00:15:54,840 --> 00:16:01,080 Speaker 2: that charge, they were all the much smaller single BE producers, 300 00:16:02,040 --> 00:16:05,480 Speaker 2: small refiners that are more levered and more exposed to 301 00:16:05,520 --> 00:16:09,360 Speaker 2: crack spreads. So it's these smaller companies that are that 302 00:16:09,400 --> 00:16:11,880 Speaker 2: are that are getting the most out of this versus 303 00:16:12,080 --> 00:16:16,120 Speaker 2: a double B Permian Resources. Again, a high yield name 304 00:16:17,120 --> 00:16:19,720 Speaker 2: didn't really you know, move the needle as much, whereas 305 00:16:19,800 --> 00:16:23,640 Speaker 2: W and T Offshore, much smaller single B credit. Yeah, 306 00:16:23,640 --> 00:16:26,120 Speaker 2: they were the best performing bond in the in the 307 00:16:26,240 --> 00:16:26,880 Speaker 2: in the index. 308 00:16:27,200 --> 00:16:28,880 Speaker 1: Are there names that really stand out though, that you 309 00:16:28,960 --> 00:16:31,280 Speaker 1: think have a potential to do something big with that 310 00:16:31,400 --> 00:16:33,000 Speaker 1: bounce sheet from a windfall like this? 311 00:16:33,160 --> 00:16:36,840 Speaker 2: Oh well, I think so. Sm Energy just merged with 312 00:16:36,960 --> 00:16:43,120 Speaker 2: Civitas that bumped up their leverage ratio and they have 313 00:16:43,240 --> 00:16:45,920 Speaker 2: said that we are gonna, you know, try to de 314 00:16:46,120 --> 00:16:50,160 Speaker 2: lever from this, you know, post merger higher leverage ratio 315 00:16:51,160 --> 00:16:56,280 Speaker 2: position again sort of W and T Offshore was one 316 00:16:56,680 --> 00:17:00,000 Speaker 2: national Northern Oil and Gas where's something the other sadder 317 00:17:00,000 --> 00:17:02,320 Speaker 2: and oil and Gas some of these smaller companies that 318 00:17:02,360 --> 00:17:04,600 Speaker 2: I'm guessing a lot of people may not have heard of, 319 00:17:05,400 --> 00:17:08,320 Speaker 2: but they're out there and they have bonds outstanding, and 320 00:17:08,800 --> 00:17:13,520 Speaker 2: they've got leverage ratios that are two three four times 321 00:17:13,600 --> 00:17:16,119 Speaker 2: and not four times, but you know, two to three times, 322 00:17:16,119 --> 00:17:20,520 Speaker 2: which for a small, small, independent oil and gas producer 323 00:17:20,920 --> 00:17:23,560 Speaker 2: is Yeah, not the most comfortable place to be. 324 00:17:23,960 --> 00:17:26,119 Speaker 1: And as you mentioned, energy really is out performing. It 325 00:17:26,160 --> 00:17:29,639 Speaker 1: has done for the last few days, but you know, 326 00:17:29,800 --> 00:17:32,080 Speaker 1: it has become less of a component. I mean, I'm 327 00:17:32,080 --> 00:17:34,720 Speaker 1: looking at maybe around eleven percent of the entire US 328 00:17:34,880 --> 00:17:38,200 Speaker 1: junk bond market, mostly oil and gas. But it's only 329 00:17:38,200 --> 00:17:41,000 Speaker 1: around seven percent of investment grade and just two percent 330 00:17:41,040 --> 00:17:43,920 Speaker 1: of the leverage loans. So it's not really going to 331 00:17:43,960 --> 00:17:44,879 Speaker 1: save us, is it. No? 332 00:17:45,080 --> 00:17:47,359 Speaker 2: But I think it's worth mentioning. Since we've talked a 333 00:17:47,359 --> 00:17:49,600 Speaker 2: little bit about the history of the last few years 334 00:17:49,680 --> 00:17:52,280 Speaker 2: of energy getting their balance sheets in shape. One of 335 00:17:52,280 --> 00:17:55,840 Speaker 2: the reasons that the high yield market is smaller. The 336 00:17:56,000 --> 00:17:58,520 Speaker 2: energy component of the high old market is smaller today 337 00:17:58,560 --> 00:18:01,439 Speaker 2: than it was, is right stars. I mean, you had 338 00:18:01,480 --> 00:18:03,120 Speaker 2: a lot of companies that were in the high eield 339 00:18:03,160 --> 00:18:08,119 Speaker 2: index five years ago, six seven years ago, and now 340 00:18:08,160 --> 00:18:11,440 Speaker 2: they're investment great because they've been totally focused on paying 341 00:18:11,520 --> 00:18:13,880 Speaker 2: down debt. They've been doing all stock mergers to get 342 00:18:13,920 --> 00:18:17,080 Speaker 2: bigger bulking up, but not raising their debt levels. So 343 00:18:18,560 --> 00:18:20,320 Speaker 2: that's one of the reasons, at least within the high 344 00:18:20,359 --> 00:18:23,399 Speaker 2: yield market, it's less of a factor than it was 345 00:18:23,440 --> 00:18:26,520 Speaker 2: it used to be. You know, fifteen eighteen percent high 346 00:18:26,520 --> 00:18:31,199 Speaker 2: teen's market share for that index. So is it going 347 00:18:31,280 --> 00:18:34,400 Speaker 2: to save the overall market? No, But you know, if 348 00:18:34,400 --> 00:18:38,360 Speaker 2: you want to try to outperform, maybe overweight the smaller, 349 00:18:38,760 --> 00:18:41,720 Speaker 2: the smaller independent producers, if to the extent you have 350 00:18:41,760 --> 00:18:43,160 Speaker 2: the opportunity to do that. 351 00:18:43,359 --> 00:18:45,119 Speaker 1: I do want to go back to the consumer because 352 00:18:45,119 --> 00:18:49,520 Speaker 1: I'm more worried than Jody sounds about that. And maybe 353 00:18:49,560 --> 00:18:52,600 Speaker 1: you have other questions Spencer, but you know you mentioned 354 00:18:52,640 --> 00:18:55,600 Speaker 1: the KSHAP. Obviously we know about the consumers that have 355 00:18:55,720 --> 00:18:57,879 Speaker 1: a lot of money and they don't really care, but 356 00:18:57,920 --> 00:19:00,560 Speaker 1: there's a lot of others that, you know, the they're 357 00:19:00,640 --> 00:19:05,400 Speaker 1: quite worried, and they are very sensitive to rising prices, 358 00:19:05,440 --> 00:19:08,199 Speaker 1: and they are very sensitive to how much it costs 359 00:19:08,280 --> 00:19:12,680 Speaker 1: to fill up the tank of their car. This can't 360 00:19:12,720 --> 00:19:15,040 Speaker 1: be good for them. And and I'm worried about the 361 00:19:15,080 --> 00:19:19,160 Speaker 1: discretionary spending part of the market. I know we talked 362 00:19:19,160 --> 00:19:22,000 Speaker 1: about cruise lines and they seem to be very resilient, 363 00:19:22,040 --> 00:19:25,800 Speaker 1: but you know what about all the other leisure places, 364 00:19:25,840 --> 00:19:28,959 Speaker 1: you know, the other companies that very much you know, 365 00:19:29,000 --> 00:19:31,960 Speaker 1: if I don't have excess cash, I'm probably not going 366 00:19:32,040 --> 00:19:32,639 Speaker 1: to use them. 367 00:19:32,720 --> 00:19:36,320 Speaker 3: Right, James. So something that's interesting, and we've been sort 368 00:19:36,359 --> 00:19:39,560 Speaker 3: of mowing in our head back and forth, is on 369 00:19:39,600 --> 00:19:41,200 Speaker 3: the one hand, you can make an argument that if 370 00:19:41,240 --> 00:19:45,160 Speaker 3: people aren't necessarily spending on vacations, that maybe they would 371 00:19:45,200 --> 00:19:48,520 Speaker 3: be doing shorter term trips to theme parks, and I 372 00:19:48,560 --> 00:19:51,320 Speaker 3: would probably argue that that wouldn't necessarily be the case 373 00:19:51,359 --> 00:19:55,120 Speaker 3: in this scenario. The reason being is, and we've done 374 00:19:55,320 --> 00:19:59,040 Speaker 3: this analysis a few times with our travel survey data, 375 00:19:59,160 --> 00:20:04,520 Speaker 3: that the average consumer who is planning on a theme 376 00:20:04,560 --> 00:20:10,399 Speaker 3: park vacation has a lower median income than the median 377 00:20:10,440 --> 00:20:15,040 Speaker 3: income of the US population, and so that speaks to 378 00:20:15,080 --> 00:20:18,439 Speaker 3: the fact that regional theme parks in particular like to 379 00:20:18,520 --> 00:20:22,240 Speaker 3: attract those lower income consumers. And if you marry that, 380 00:20:22,800 --> 00:20:27,720 Speaker 3: marry that with the destination theme parks in Florida that 381 00:20:27,920 --> 00:20:30,560 Speaker 3: do have a portion that are international that haven't returned 382 00:20:30,560 --> 00:20:33,240 Speaker 3: since the pandemic, you could say to yourself that attendance 383 00:20:33,320 --> 00:20:36,479 Speaker 3: volumes are still going to be lower this year, and 384 00:20:36,520 --> 00:20:38,760 Speaker 3: that for as much as someone like six Flags, who 385 00:20:38,840 --> 00:20:41,160 Speaker 3: has been trying to get their balance sheet in order 386 00:20:41,160 --> 00:20:43,600 Speaker 3: has taken tremendous steps in the short term to do so, 387 00:20:44,080 --> 00:20:46,840 Speaker 3: but still has much of a way to go, I'm 388 00:20:46,840 --> 00:20:51,240 Speaker 3: not necessarily seeing twenty twenty six as a great year 389 00:20:51,320 --> 00:20:53,879 Speaker 3: for them in that respect. I think they still have 390 00:20:53,880 --> 00:20:55,800 Speaker 3: a lot of work cut out for them, and not 391 00:20:55,880 --> 00:20:59,320 Speaker 3: necessarily as much support as they'd hope. I think the 392 00:20:59,440 --> 00:21:02,359 Speaker 3: other case where it could be problematic is if you're 393 00:21:02,400 --> 00:21:09,840 Speaker 3: looking at destinations like Las Vegas where people go there 394 00:21:09,960 --> 00:21:13,720 Speaker 3: to binge and spend, that could be hampered. You could 395 00:21:13,760 --> 00:21:17,360 Speaker 3: see regional casinos being a bit hampered, although usually those 396 00:21:17,359 --> 00:21:23,080 Speaker 3: are countercyclical, but in this case, with the prevalence of 397 00:21:23,560 --> 00:21:29,239 Speaker 3: prediction markets and online gaming, perhaps this go around, as 398 00:21:29,280 --> 00:21:33,439 Speaker 3: Spencer said earlier, could be different because you might not 399 00:21:33,520 --> 00:21:36,440 Speaker 3: necessarily have the same need for that quote unquote fix 400 00:21:36,520 --> 00:21:39,199 Speaker 3: for regional casinos. And so I think it's it's going 401 00:21:39,240 --> 00:21:41,480 Speaker 3: to be in these sort of secondary and tertiary ways 402 00:21:41,480 --> 00:21:43,880 Speaker 3: that we're going to see echo effects on the consumer 403 00:21:44,240 --> 00:21:47,639 Speaker 3: and they're spending habits changing. I don't think it's necessarily 404 00:21:47,680 --> 00:21:52,560 Speaker 3: holistically going to be Okay, one hundred dollars a barrel 405 00:21:50,920 --> 00:21:58,040 Speaker 3: for oil there for it's more expensive to pump up. 406 00:21:58,400 --> 00:22:01,399 Speaker 3: Therefore I'm not going to be traveling. It's going to say, okay, 407 00:22:01,520 --> 00:22:04,640 Speaker 3: let me reevaluate all the ways in which I travel 408 00:22:04,880 --> 00:22:07,680 Speaker 3: or all the ways in which I consume and think 409 00:22:07,680 --> 00:22:10,840 Speaker 3: about what's most important to me at this time. And 410 00:22:10,880 --> 00:22:13,879 Speaker 3: I do think there is a component that isn't necessarily 411 00:22:13,880 --> 00:22:17,880 Speaker 3: talked about so much where some consumers who have binged 412 00:22:17,920 --> 00:22:20,480 Speaker 3: over the last few years with the revenge travel and 413 00:22:20,560 --> 00:22:24,440 Speaker 3: with the continued feeling of life being so short lived 414 00:22:24,440 --> 00:22:27,560 Speaker 3: and needing to spend on experiences, they might get they 415 00:22:27,640 --> 00:22:30,960 Speaker 3: might be tired of spending on experiences. You know. I 416 00:22:31,320 --> 00:22:33,480 Speaker 3: don't know about you, but I've definitely gotten a component 417 00:22:33,480 --> 00:22:36,959 Speaker 3: of fatigue when it comes to living large and saying, Okay, 418 00:22:37,119 --> 00:22:39,080 Speaker 3: do I really need to be so lavish? I don't 419 00:22:39,119 --> 00:22:42,240 Speaker 3: think so. I mean, grapes are just way more expensive 420 00:22:42,280 --> 00:22:45,159 Speaker 3: these days. Berries, I mean I spend there's the berry 421 00:22:45,200 --> 00:22:47,680 Speaker 3: tax for anybody who has young kids. And it's very, 422 00:22:47,760 --> 00:22:50,840 Speaker 3: very true you spend so much on berries that you're like, 423 00:22:50,960 --> 00:22:53,040 Speaker 3: what do I have to spend on? Am I really 424 00:22:53,080 --> 00:22:54,439 Speaker 3: going to go to chuck e cheese? I don't know. 425 00:22:54,640 --> 00:22:57,040 Speaker 2: I got sort of a follow up questions a couple 426 00:22:57,080 --> 00:22:59,359 Speaker 2: of things you mentioned. See you mentioned the berry tax, 427 00:22:59,480 --> 00:23:03,760 Speaker 2: which my kids love blueberries and raspberry, so I'm feeling 428 00:23:03,800 --> 00:23:08,440 Speaker 2: that one my daughter loves grapes. And then also this 429 00:23:08,600 --> 00:23:11,960 Speaker 2: is the general fatigue around the luxury spending, of the 430 00:23:12,000 --> 00:23:14,280 Speaker 2: travel and experiences spending that's kind of been weighing on 431 00:23:14,320 --> 00:23:17,960 Speaker 2: the market. So you've got a combination of prices going 432 00:23:18,080 --> 00:23:23,119 Speaker 2: up in general already and maybe some of this fatigue 433 00:23:23,359 --> 00:23:26,880 Speaker 2: and you know, wages are flat. What does it take 434 00:23:26,920 --> 00:23:30,440 Speaker 2: within the energy sector for oil prices and gas prices 435 00:23:30,440 --> 00:23:33,520 Speaker 2: at the pump to sort of really impact the consumer 436 00:23:33,600 --> 00:23:35,159 Speaker 2: to the say, okay, you know what, I'm putting my 437 00:23:35,200 --> 00:23:39,439 Speaker 2: wallet away, I'm gonna stop spending on all sorts of 438 00:23:39,480 --> 00:23:42,680 Speaker 2: other stuff to the point that then maybe the overall 439 00:23:42,680 --> 00:23:46,040 Speaker 2: economy just starts to soften and really just has an impact. 440 00:23:46,000 --> 00:23:49,560 Speaker 2: Where's is it a duration that this has to last 441 00:23:49,560 --> 00:23:52,960 Speaker 2: for six months, or is it gas has to go 442 00:23:53,000 --> 00:23:55,600 Speaker 2: to five bucks a gallon at the pump? What does 443 00:23:55,600 --> 00:23:57,560 Speaker 2: it take or what does this consumer really just say 444 00:23:57,560 --> 00:23:58,480 Speaker 2: all right, I'm done. 445 00:23:58,680 --> 00:24:01,280 Speaker 3: I think we can sort of think up a couple 446 00:24:01,280 --> 00:24:06,720 Speaker 3: of different cases where you would see an echo effect 447 00:24:06,760 --> 00:24:09,000 Speaker 3: to the consumer. But I do think Spencer a good 448 00:24:09,000 --> 00:24:12,680 Speaker 3: portion of it has to do with the duration of it, 449 00:24:13,160 --> 00:24:15,920 Speaker 3: because if this is a short lived situation, We've seen 450 00:24:15,920 --> 00:24:19,040 Speaker 3: these short lived scenarios and the consumer bounces back pretty quickly. 451 00:24:19,800 --> 00:24:23,760 Speaker 3: If this is a longer term situation, and also we're 452 00:24:23,800 --> 00:24:29,040 Speaker 3: marrying with surprising nonfirm paerial data, if that is something 453 00:24:29,080 --> 00:24:32,200 Speaker 3: that's not necessarily unique to February, but it is something 454 00:24:32,240 --> 00:24:35,280 Speaker 3: that's more long term of an issue. If it's not 455 00:24:35,320 --> 00:24:39,160 Speaker 3: just consumer sentiment, but it's actual consumer data around the 456 00:24:39,200 --> 00:24:42,520 Speaker 3: health of the economy, I think that's where you would 457 00:24:42,520 --> 00:24:48,000 Speaker 3: see this situation. Thinking back to when energy prices were higher, 458 00:24:48,880 --> 00:24:51,840 Speaker 3: one thing we did was we looked at Carnival. The 459 00:24:51,920 --> 00:24:55,120 Speaker 3: reason why we looked at Carnival particularly is only because 460 00:24:55,160 --> 00:24:59,200 Speaker 3: we know that they have predominantly been been unheedged since 461 00:24:59,240 --> 00:25:01,359 Speaker 3: two thousand. You know, we looked at document search and 462 00:25:01,400 --> 00:25:03,959 Speaker 3: we used a s B and we to verify and 463 00:25:04,040 --> 00:25:05,880 Speaker 3: just make sure there were a couple of points where 464 00:25:05,880 --> 00:25:08,679 Speaker 3: they were hedged, but really very minimally. So as a 465 00:25:08,800 --> 00:25:13,360 Speaker 3: good sort of proxy for companies that are very heavily discretionary, 466 00:25:13,760 --> 00:25:18,879 Speaker 3: you say, okay, in all these instances, Carnivals IBDA margin 467 00:25:20,960 --> 00:25:24,600 Speaker 3: dropped a bit in all these times of energy prices 468 00:25:24,600 --> 00:25:27,960 Speaker 3: going higher, which makes sense, right because fuel is going 469 00:25:27,960 --> 00:25:31,080 Speaker 3: to be more expensive and these ships run on a 470 00:25:31,080 --> 00:25:35,879 Speaker 3: lot of fuel. So what we did see though, is 471 00:25:35,920 --> 00:25:40,320 Speaker 3: we saw that for as much as margins compressed a bit, 472 00:25:41,040 --> 00:25:46,280 Speaker 3: they didn't really meaningfully compress until the point where energy 473 00:25:46,320 --> 00:25:49,359 Speaker 3: prices had been higher for so much longer. And I 474 00:25:49,359 --> 00:25:53,439 Speaker 3: think that's also a function of it's not just energy 475 00:25:53,480 --> 00:25:55,920 Speaker 3: prices being higher so the companies can't absorb it or 476 00:25:55,920 --> 00:25:58,679 Speaker 3: pass it on to consumer, It's that the consumer starts 477 00:25:58,720 --> 00:26:02,800 Speaker 3: to change their pattern of behavior because something like onboard 478 00:26:02,840 --> 00:26:06,879 Speaker 3: spending is something that consumers choose to do. Right. You 479 00:26:07,000 --> 00:26:09,280 Speaker 3: choose to do the scuba diving activity, you choose to 480 00:26:09,280 --> 00:26:11,280 Speaker 3: do the drink package, you choose to do all these 481 00:26:11,280 --> 00:26:15,000 Speaker 3: sort of excursions and extras. And if you can say, 482 00:26:15,040 --> 00:26:17,280 Speaker 3: all right, I'm still going to vacation, I'm still going 483 00:26:17,320 --> 00:26:19,720 Speaker 3: to promise my kids that Disney cruise or what have you. 484 00:26:20,359 --> 00:26:23,399 Speaker 3: But when we go on the cruise, we'll just do 485 00:26:23,440 --> 00:26:25,360 Speaker 3: the bare minimum. We'll do all the free stuff, we'll 486 00:26:25,400 --> 00:26:27,680 Speaker 3: do the free shows, we'll do this that the other. 487 00:26:27,920 --> 00:26:29,480 Speaker 3: And I think that's where we're starting to see a 488 00:26:29,480 --> 00:26:32,120 Speaker 3: little bit. We've seen that with our travel survey data, 489 00:26:32,200 --> 00:26:37,919 Speaker 3: even before Roan, even before Venezuela, we saw that consumers, 490 00:26:38,119 --> 00:26:42,520 Speaker 3: when they feel like their costs exceed their budget, they're 491 00:26:42,520 --> 00:26:45,920 Speaker 3: more willing to cost to cut costs on experiences, more 492 00:26:45,960 --> 00:26:49,840 Speaker 3: willing to cut costs on premium travel options, and more 493 00:26:49,880 --> 00:26:52,640 Speaker 3: willing to cut costs on premium hotel options. 494 00:26:52,880 --> 00:26:55,639 Speaker 1: Which companies are you most worried about? Some jody in 495 00:26:55,680 --> 00:26:56,359 Speaker 1: this context. 496 00:26:56,520 --> 00:26:58,960 Speaker 3: In this context, it's interesting, though, the companies I'm most 497 00:26:58,960 --> 00:27:01,640 Speaker 3: worried about aren't the company that you would think would 498 00:27:01,640 --> 00:27:06,159 Speaker 3: be the obvious choices. It's not so much the you know, 499 00:27:06,200 --> 00:27:08,159 Speaker 3: Carnival is one that I mentioned. It's only in a 500 00:27:08,160 --> 00:27:11,440 Speaker 3: prolonged scenario that I'm really concerned, or one in which 501 00:27:11,600 --> 00:27:13,680 Speaker 3: it has to fully shut down because they can't get 502 00:27:13,680 --> 00:27:16,479 Speaker 3: access to fuel. In that sort of extreme scenario, then 503 00:27:16,520 --> 00:27:19,920 Speaker 3: that's a different story. But assuming it can still access fuel, 504 00:27:19,920 --> 00:27:24,840 Speaker 3: assuming there's no ban on travel activities, I would say 505 00:27:24,840 --> 00:27:26,600 Speaker 3: the ones that I'm most concerned about are the ones 506 00:27:26,600 --> 00:27:29,840 Speaker 3: that already are a little bit beaker positioned going into this, 507 00:27:30,000 --> 00:27:33,679 Speaker 3: such as hurts such as six Flags. Those are the 508 00:27:33,760 --> 00:27:37,639 Speaker 3: companies that already have had issues with revenue and with 509 00:27:37,760 --> 00:27:40,640 Speaker 3: costs and haven't been able to sort of get their 510 00:27:40,720 --> 00:27:44,440 Speaker 3: basic operations in order. And those are the ones that 511 00:27:44,760 --> 00:27:46,960 Speaker 3: any sort of hiccup in their plan to get back 512 00:27:47,000 --> 00:27:49,440 Speaker 3: on TRAP is going to be problematic. And they've already 513 00:27:49,480 --> 00:27:54,760 Speaker 3: started using a lot of the arrows that they have, 514 00:27:55,240 --> 00:27:59,360 Speaker 3: you know, and so I'm not quite sure how much 515 00:27:59,400 --> 00:28:02,239 Speaker 3: more they have left. From that Amos standpoint. 516 00:28:02,040 --> 00:28:05,960 Speaker 2: It sounds like the the companies you're concerned about match 517 00:28:06,040 --> 00:28:07,960 Speaker 2: the same profile as the companies I think are going 518 00:28:08,040 --> 00:28:11,000 Speaker 2: to do well in energy sector. It's the smaller companies 519 00:28:11,080 --> 00:28:14,560 Speaker 2: that have the weaker balance sheets. If you're if you're 520 00:28:14,600 --> 00:28:16,920 Speaker 2: producing oil, it's great for you. If you if you're 521 00:28:17,000 --> 00:28:20,240 Speaker 2: buying oil, you know, it's the other side of the coin. 522 00:28:20,640 --> 00:28:23,600 Speaker 2: So yeah, true, but it does it seems like for 523 00:28:23,680 --> 00:28:26,840 Speaker 2: everybody to steal a bond term it all comes down 524 00:28:26,880 --> 00:28:30,640 Speaker 2: to duration. I mean, everybody's expecting this is a short 525 00:28:30,720 --> 00:28:34,240 Speaker 2: duration event right now. I'm not sure what the off 526 00:28:34,320 --> 00:28:36,560 Speaker 2: ramp is, but you know, everybody thinks it's a short 527 00:28:36,640 --> 00:28:39,720 Speaker 2: duration event. If that. The more and more that looks 528 00:28:39,800 --> 00:28:42,520 Speaker 2: like that may not be the case, the more you're 529 00:28:42,520 --> 00:28:44,040 Speaker 2: going to see a lot of things shifting around. 530 00:28:44,040 --> 00:28:46,000 Speaker 1: It looks like a lot of these companies did borrow 531 00:28:46,000 --> 00:28:50,880 Speaker 1: a lot during the pandemic. Now those loans and bonds 532 00:28:50,920 --> 00:28:52,760 Speaker 1: are coming due. Is there a maturity rule that we 533 00:28:52,800 --> 00:28:53,480 Speaker 1: should worry about? 534 00:28:53,800 --> 00:28:57,280 Speaker 3: I think something that that I'm interested to watch and 535 00:28:57,320 --> 00:28:58,960 Speaker 3: something that I remember I used to watch when I 536 00:28:59,000 --> 00:29:02,440 Speaker 3: was more of a generalist. Old chop is the borrowing. 537 00:29:03,880 --> 00:29:05,240 Speaker 2: The act of. 538 00:29:05,200 --> 00:29:07,280 Speaker 3: Borrowing that companies are doing, and by that I mean 539 00:29:07,680 --> 00:29:10,040 Speaker 3: is during right at the beginning of the pandemic, we 540 00:29:10,120 --> 00:29:14,160 Speaker 3: had these large operators like Mariotte, Hilton Hyatt fully tap 541 00:29:14,240 --> 00:29:16,560 Speaker 3: the revolver. They didn't need to at the time because 542 00:29:16,560 --> 00:29:18,800 Speaker 3: they had more than enough cash, but they fully tapped 543 00:29:18,840 --> 00:29:23,440 Speaker 3: it out immediately and that allowed them additional time to 544 00:29:23,560 --> 00:29:25,760 Speaker 3: sort of get through the pandemic and not lever up 545 00:29:25,760 --> 00:29:28,080 Speaker 3: as much. And we've seen that time and again with 546 00:29:28,240 --> 00:29:32,360 Speaker 3: companies in stressful situation. I mean, I think Spencers can 547 00:29:32,400 --> 00:29:34,680 Speaker 3: sort of time in on some of the energy companies 548 00:29:34,720 --> 00:29:40,120 Speaker 3: in fourteen fifteen sixteen. But that's what I'm watching more 549 00:29:40,160 --> 00:29:42,560 Speaker 3: than anything, because if we're in a situation, I mean, 550 00:29:42,600 --> 00:29:44,600 Speaker 3: I know a lot of companies at least short term 551 00:29:44,640 --> 00:29:47,840 Speaker 3: right now at this moment can't necessarily borrow, can't tap 552 00:29:47,880 --> 00:29:51,840 Speaker 3: the debt markets because of the volatility of Iran. But 553 00:29:52,440 --> 00:29:56,600 Speaker 3: more than that, it's that proactive step that these larger, 554 00:29:57,520 --> 00:30:01,400 Speaker 3: better position from a cash perspective company are doing. That's 555 00:30:01,440 --> 00:30:04,280 Speaker 3: when we have the signal that maybe maybe they're getting 556 00:30:04,280 --> 00:30:06,160 Speaker 3: indication that this is a little bit of a longer 557 00:30:06,240 --> 00:30:09,560 Speaker 3: term issue and not necessarily something that's fly by night. 558 00:30:09,880 --> 00:30:12,400 Speaker 1: So when the company starts drawing down on their revolver. 559 00:30:12,560 --> 00:30:13,520 Speaker 1: That's a big tel view. 560 00:30:13,920 --> 00:30:16,400 Speaker 3: That is exactly when companies that don't necessarily need to 561 00:30:16,480 --> 00:30:18,680 Speaker 3: draw down on the revolver. You know, if you're talking 562 00:30:18,680 --> 00:30:20,840 Speaker 3: about Mariott, I mean, they have a very sizable revolver. 563 00:30:21,000 --> 00:30:22,920 Speaker 3: They have a decent amount of cash, they've good cash flow, 564 00:30:23,200 --> 00:30:26,000 Speaker 3: and they borrow in the commercial paper market and they 565 00:30:26,000 --> 00:30:28,600 Speaker 3: tap the debt markets earlier this year. But if they 566 00:30:28,640 --> 00:30:30,280 Speaker 3: were to say, Okay, you know what, we're going to 567 00:30:30,320 --> 00:30:33,640 Speaker 3: tap our whole revolver right now, I'd sort of scratch 568 00:30:33,680 --> 00:30:35,880 Speaker 3: my set head and say, Okay, what are you doing? 569 00:30:35,960 --> 00:30:37,320 Speaker 3: Why are we doing this right now? 570 00:30:37,520 --> 00:30:39,120 Speaker 1: And if it does drag on, do you expect more 571 00:30:39,160 --> 00:30:43,320 Speaker 1: defaults and more downgrades and a lot of travel across 572 00:30:43,320 --> 00:30:44,800 Speaker 1: the board and consumer. 573 00:30:44,560 --> 00:30:46,800 Speaker 3: I think we'll definitely see a bunch of companies that 574 00:30:46,800 --> 00:30:50,440 Speaker 3: have been holding on finally shakeout. There are some companies 575 00:30:50,520 --> 00:30:56,040 Speaker 3: that are the more obvious examples that will go through 576 00:30:56,080 --> 00:31:01,320 Speaker 3: some kind of restructuring or creative refinancing of and then 577 00:31:01,360 --> 00:31:04,200 Speaker 3: there's going to be those that are maybe a little 578 00:31:04,360 --> 00:31:07,320 Speaker 3: less terrible, you know, the single bee area, that have 579 00:31:07,480 --> 00:31:11,360 Speaker 3: been weaker but not necessarily to the point of concern. 580 00:31:11,960 --> 00:31:14,400 Speaker 3: And I think that's the companies we'll see maybe some 581 00:31:14,440 --> 00:31:18,080 Speaker 3: of the smaller casino companies, the ones that are much 582 00:31:18,160 --> 00:31:21,920 Speaker 3: more prone to a weaker consumer environment. 583 00:31:22,160 --> 00:31:24,360 Speaker 2: Yeah, I just wanted to add on to what Jody 584 00:31:24,400 --> 00:31:27,560 Speaker 2: was saying about companies borrowing on their revolvers when they 585 00:31:27,560 --> 00:31:31,480 Speaker 2: didn't necessarily need the cash. You did see a lot 586 00:31:31,520 --> 00:31:33,760 Speaker 2: of that in the only Gas space back in twenty 587 00:31:33,840 --> 00:31:37,760 Speaker 2: fifteen and sixteen, and for me, it's a major red flag. 588 00:31:37,960 --> 00:31:40,360 Speaker 2: A lot of those companies. You know, part of the 589 00:31:40,400 --> 00:31:41,960 Speaker 2: logic is, well, I'm going to get the cash while 590 00:31:41,960 --> 00:31:45,800 Speaker 2: I can, because if there's some different credit lines of 591 00:31:45,800 --> 00:31:48,120 Speaker 2: different clauses, and some might prevent you from being able 592 00:31:48,120 --> 00:31:51,000 Speaker 2: to borrow if there's been an adverse change. A lot 593 00:31:51,040 --> 00:31:54,080 Speaker 2: of them though, it was like, hey, this is this 594 00:31:54,120 --> 00:31:58,120 Speaker 2: is cheap dip financing. If I borrow my full credit line, 595 00:31:58,160 --> 00:31:59,880 Speaker 2: I've got a bunch of cash on the ballot sheet. 596 00:32:00,040 --> 00:32:03,520 Speaker 2: Don't need to go pay ten, twelve, fifteen percent or 597 00:32:03,520 --> 00:32:07,680 Speaker 2: whatever the rate is for bankruptcy financing or whatever bankruptcy 598 00:32:07,720 --> 00:32:09,680 Speaker 2: is financing I need. It'll be a lot smaller so 599 00:32:09,720 --> 00:32:12,680 Speaker 2: it's cheaper. But yeah, if I start seeing that, I mean, 600 00:32:12,680 --> 00:32:14,360 Speaker 2: maybe the cruise line is a little different. But if 601 00:32:14,360 --> 00:32:18,560 Speaker 2: I see that in my space throwing flags like something's 602 00:32:19,160 --> 00:32:19,960 Speaker 2: bad here. 603 00:32:20,080 --> 00:32:21,960 Speaker 1: It seems unlikely that an energy given the wind full 604 00:32:21,960 --> 00:32:23,920 Speaker 1: of cash bit But Jody, how likely do you think 605 00:32:24,000 --> 00:32:26,600 Speaker 1: this really is in your set? I mean, is it 606 00:32:27,080 --> 00:32:30,160 Speaker 1: because we're talking constantly about, you know, the lack of 607 00:32:30,480 --> 00:32:33,360 Speaker 1: any real panic or disorder in credit. It just seems 608 00:32:33,440 --> 00:32:36,520 Speaker 1: very very calm despite all of these multiple threats and 609 00:32:36,960 --> 00:32:41,880 Speaker 1: constant worries. But is drawing on a revolver something you 610 00:32:41,920 --> 00:32:43,640 Speaker 1: think is a high probability event right now? 611 00:32:43,920 --> 00:32:47,280 Speaker 3: I wouldntsarily say high probability, but I think there is 612 00:32:47,320 --> 00:32:49,760 Speaker 3: a potential for it. It's something that we are monitoring, 613 00:32:49,920 --> 00:32:53,240 Speaker 3: and it's more of as Spencer said, if it's something 614 00:32:53,280 --> 00:32:56,680 Speaker 3: that happens, then it's a red flag from the case 615 00:32:56,720 --> 00:32:59,760 Speaker 3: that this is a much more prolonged scenario. Or the 616 00:32:59,800 --> 00:33:02,920 Speaker 3: companies are starting to see data to indicate that the 617 00:33:02,960 --> 00:33:07,040 Speaker 3: consumer is really pulling back very, very significantly, and that 618 00:33:07,080 --> 00:33:09,600 Speaker 3: could be a function of the fact that air travel 619 00:33:09,680 --> 00:33:12,160 Speaker 3: isn't as easy to come by, or a function of 620 00:33:12,160 --> 00:33:15,080 Speaker 3: the fact that people don't want to fly by air, 621 00:33:15,240 --> 00:33:17,760 Speaker 3: but now they don't want to drive by car. We 622 00:33:17,840 --> 00:33:20,480 Speaker 3: saw a ton of that last year, where as much 623 00:33:20,520 --> 00:33:23,080 Speaker 3: as Canadians weren't coming to the US, US was going 624 00:33:23,120 --> 00:33:25,360 Speaker 3: to Canada quite a bit, and part of that was 625 00:33:25,440 --> 00:33:32,560 Speaker 3: because air travel wasn't conducive to easy and inexpensive travel options. 626 00:33:32,600 --> 00:33:39,440 Speaker 3: So you have a situation where I believe we're at 627 00:33:39,480 --> 00:33:42,600 Speaker 3: a point where it's not necessarily showing signs of changing 628 00:33:42,640 --> 00:33:46,080 Speaker 3: the consumer's behavior, at least from the standpoint that if 629 00:33:46,120 --> 00:33:48,920 Speaker 3: you look at the consumer in two buckets of lowest 630 00:33:48,920 --> 00:33:52,440 Speaker 3: income and highest income, or lower and higher income, it's 631 00:33:52,440 --> 00:33:55,440 Speaker 3: that middle level that once we start seeing that middle 632 00:33:55,560 --> 00:33:59,680 Speaker 3: level consumer really significantly pulling back, that I think will 633 00:33:59,720 --> 00:34:02,840 Speaker 3: be concerned. And for the hotels, we did see a 634 00:34:02,840 --> 00:34:05,080 Speaker 3: little bit of that towards the end of last year, 635 00:34:05,560 --> 00:34:10,080 Speaker 3: with RevPAR and occupancy levels for the lower end portions 636 00:34:10,120 --> 00:34:15,160 Speaker 3: of their portfolio not being positive. In fact, they were 637 00:34:15,160 --> 00:34:18,200 Speaker 3: negative for a third quarter and fourth quarter. And if 638 00:34:18,200 --> 00:34:26,040 Speaker 3: you marry that with higher level portfolio businesses or portfolio brands, 639 00:34:26,440 --> 00:34:28,279 Speaker 3: then I think that's that's where they you know, the 640 00:34:28,320 --> 00:34:31,520 Speaker 3: hotels would say, Okay, there's there's something else going on here, 641 00:34:31,960 --> 00:34:36,200 Speaker 3: especially if interest rates spike or if we need to 642 00:34:36,200 --> 00:34:39,240 Speaker 3: have that intervention, any of those could be an indication. 643 00:34:39,440 --> 00:34:42,719 Speaker 1: I'm going to leave listeners to pursue your research on 644 00:34:42,760 --> 00:34:45,080 Speaker 1: the terminal, which is great. I'm sure you'll be all 645 00:34:45,480 --> 00:34:50,600 Speaker 1: over these stories. It's fascinating stuff. Jody Leuri with Bloomberg Intelligence, 646 00:34:50,600 --> 00:34:51,239 Speaker 1: thank you so much. 647 00:34:51,480 --> 00:34:51,840 Speaker 3: Thank you. 648 00:34:51,960 --> 00:34:54,919 Speaker 1: James Spencer Cutzer as always, pleasure. 649 00:34:54,680 --> 00:34:56,840 Speaker 2: Thank you, thank you, pleasure. 650 00:34:57,280 --> 00:34:59,520 Speaker 1: Great to have you both on the Credit Edge. Thank 651 00:34:59,560 --> 00:35:01,920 Speaker 1: you for listening, and we will see you next time. 652 00:35:02,080 --> 00:35:04,879 Speaker 1: Bloomberg Intelligence is part of our research department, with five 653 00:35:04,960 --> 00:35:08,480 Speaker 1: hundred analysts and strategists working across all markets. Coverage includes 654 00:35:08,520 --> 00:35:11,160 Speaker 1: over two thousand equities and credits and outlooks on more 655 00:35:11,200 --> 00:35:15,719 Speaker 1: than ninety industries and one hundred market indices, currencies and commodities. 656 00:35:16,120 --> 00:35:18,640 Speaker 1: Please do subscribe to the Credit Edge wherever you get 657 00:35:18,680 --> 00:35:21,839 Speaker 1: your podcasts. We're on Apple, Spotify and all other good 658 00:35:22,040 --> 00:35:25,799 Speaker 1: podcast providers, including the Bloomberg Terminal at bpod Go. Give 659 00:35:25,880 --> 00:35:28,800 Speaker 1: us a review, tell your friends. We'll email me directly 660 00:35:28,840 --> 00:35:32,719 Speaker 1: at jcrombieight at Bloomberg dot net. I'm James Crombie. It's 661 00:35:32,719 --> 00:35:34,919 Speaker 1: been a pleasure having you join us again next time 662 00:35:34,960 --> 00:35:39,320 Speaker 1: on the Credit Edge.