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Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.

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Speaker 1: Along with my co host Lisa Bramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether you're at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg P M L

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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. So,

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Speaker 1: now that companies are earning so much money and the

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Speaker 1: cash that they have is slashing around their balance sheets,

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Speaker 1: how much are they paying down that debt that they

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Speaker 1: have been borrowing, the trillions of dollars of debt that

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Speaker 1: they've been incurring over the past eight years. Here to

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Speaker 1: answer that question, Joel Levington, see your credit analyst for

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Speaker 1: Bloomberg Intelligence. He writes amazing reports. He joined us here

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Speaker 1: in our eleven three oh studios. Joel, you did a

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Speaker 1: study looking at lover ratios among companies. Basically, this is

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Speaker 1: the amount of death that they have relative to the

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Speaker 1: income that they have. How do things look right now? Uh? Well,

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Speaker 1: I'll tell you, Lisa, not that great. It's um uh.

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Speaker 1: You know, metrics continue to remain elevated. We've done nine

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Speaker 1: studies over the last five years, and we're right or

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Speaker 1: at the highest point for all the major reading classes

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Speaker 1: except for the junkiest class, the single B T here,

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Speaker 1: which has slightly improved. Okay, to be clear. In other words,

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Speaker 1: corporate leverage has increased to the highest levels in data

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Speaker 1: going back four years. Right, that's right, uh, and it

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Speaker 1: has steadily increased even though the cash flows have increased

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Speaker 1: profits have increased. That has not offset the rapid Uh,

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Speaker 1: the rapid selling of debt. That's exactly right. And earnings

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Speaker 1: are are robust and healthy. However, tables have turned towards

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Speaker 1: capital allocation plans where it's share repurchases, dividends and acquisitions,

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Speaker 1: and the can that's being used for those three items

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Speaker 1: are at least exceeding cash that is being generated, and

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Speaker 1: therefore leverage can't improve. Alright, So let's dig into here

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Speaker 1: a little bit. I mean, you're starting to see investors

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Speaker 1: express concern at all about leverage increasing or are they

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Speaker 1: still pretty much in a free for all? Take my money,

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Speaker 1: you care. It's a great question. The beyond just the

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Speaker 1: individual company specific items, where I hear at the most

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Speaker 1: is in the triple B category, which has increased a

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Speaker 1: lot over the last few years. Uh, and what I

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Speaker 1: find it's very bifurcated. You could look at subsectors and

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Speaker 1: I would say it. My thirty second takeaway on it

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Speaker 1: is that insectors that the reading agencies view as stable,

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Speaker 1: like consumer cyclical excuse me, consumer stables, as well as healthcare.

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Speaker 1: The reading agencies have allowed the companies to level up

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Speaker 1: much more than you would traditionally find, sometimes to even

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Speaker 1: six times leverage, with the hope that a deal will

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Speaker 1: pan out well and that cash flow will pay down

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Speaker 1: debt over the next couple of years. Having been around

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Speaker 1: the business for a long time, that never really happens

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Speaker 1: exactly the way people plan. This is such an important

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Speaker 1: conversation because everyone talks about how much earnings are increasing,

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Speaker 1: but the other side of the balance sheet is also inflating,

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Speaker 1: and frankly inflating at a faster pace. And I feel

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Speaker 1: like this is a really important thing to realize. I

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Speaker 1: want to shift gears a little bit because you highlighted

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Speaker 1: another research piece that you put out that auto bonds

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Speaker 1: have been among the worst performers of the year, and

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Speaker 1: given what you've seen, you don't necessarily think that will change.

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Speaker 1: That's right, you know, statistically, auto demand hinges on about

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Speaker 1: three factors. It's the price of the vehicle that you're buying,

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Speaker 1: It's the loan rate uh that that you have, and

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Speaker 1: uh it's gas prices. As they rise, it makes it

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Speaker 1: tougher to bank that payment. And then so when you

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Speaker 1: look at those three things, they're all working again to us.

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Speaker 1: If you're a car company, right, prices are already at

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Speaker 1: the highest on record. That's a mixed change of people

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Speaker 1: moving out of auto passenger cars and into cuvs and SUVs,

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Speaker 1: So the prices working against you. Loan rates are already

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Speaker 1: at their highs for the last five years, and of

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Speaker 1: course you are expecting another like three hikes going forward.

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Speaker 1: Can you give us a sense of which specific companies

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Speaker 1: have been the worst performers in the bond world? Well,

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Speaker 1: forward in investment grade has been very very poor. UM.

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Speaker 1: I mean, do you think that investors might be pricing

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Speaker 1: in a pretty substantial downgrade for Ford, because there's their

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Speaker 1: stocks have been down substantially as well, they've had turnover. Uh,

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Speaker 1: they've really struggled to increase the profits. I don't think so.

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Speaker 1: I think if you look at the forward bonds or

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Speaker 1: g M bonds, uh, they trade as uh wide to

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Speaker 1: their peers in consumer discretionary. But you can find a

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Speaker 1: lot of retailers in that area too that have the

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Speaker 1: wherewithal to down debt and may have less leverage and

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Speaker 1: maybe more cash flow. So I'm not sure that they've

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Speaker 1: priced in a severe downturn or decline. I think what

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Speaker 1: they see is that maybe they were priced too tight

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Speaker 1: to begin with and are trying to reset valuation. You know,

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Speaker 1: one thing I'm struck by is you're talking about the

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Speaker 1: pressures on automakers and it includes higher costs for this

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Speaker 1: the goods that they purchase. And I'm wondering, especially as

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Speaker 1: we just finished that eventful G seven meeting, and that

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Speaker 1: it seems like tariffs are going to be an ongoing theme.

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Speaker 1: You know, are they going to be the prime losers

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Speaker 1: from this because their input costs are gonna increase? And

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Speaker 1: what other sectors are people not thinking about that also

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Speaker 1: could be big losers. Well, I think you're totally right, Li.

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Speaker 1: So when you think of raw material inflation, the auto

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Speaker 1: market is so competitive, it's very very hard to pass

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Speaker 1: these costs on. And when you think of rising rates

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Speaker 1: and they have huge finance companies, many of them, Uh,

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Speaker 1: you can't really pass that cost onto the consumer. You

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Speaker 1: have rising steel inflation. We were just talk about it earlier,

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Speaker 1: how addie auto suppliers down about sixteen seventent today because

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Speaker 1: they can pass UH raw material inflation through. So I

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Speaker 1: think these are the kinds of events that you could

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Speaker 1: start seeing pop up more frequently, and clearly that will

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Speaker 1: not have a great impact on credit risk or bonds.

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Speaker 1: Is there another Is there another UH industry that could

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Speaker 1: also see UH sort of declines or pressure as a

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Speaker 1: result of these increasing commodity prices. Well, in the industrial world,

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Speaker 1: you do have a lot of use of oil and energy,

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Speaker 1: so as those prices rise, I think you could see

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Speaker 1: maybe in the machinery space where steel uses is also

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Speaker 1: quite high, so I could see margin compression happen over there,

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Speaker 1: and maybe not the amount of expansion and that people

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Speaker 1: are expecting, and so that might be a place where

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Speaker 1: you could see some problemats. Joel Livington, thank you so

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Speaker 1: much for spending the time here. Joel Livington, senior credit

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Speaker 1: analyst for Bloomberg Intelligence, joining us here in our eleven

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Speaker 1: three oh studios. This study that they did on leverage

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Speaker 1: trends really fascinating, showing just how much people have been

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Speaker 1: borrowing despite the increases in their earnings. Well, the market

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Speaker 1: is pretty much flat, despite the fact that we've had

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Speaker 1: quite a few pretty sensational headlines coming out over the

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Speaker 1: weekend and we expect more throughout the week. Why our

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Speaker 1: investors not responding at all to the escalating trade tensions

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Speaker 1: to the possible accord in Korea. Let's get some thoughts

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Speaker 1: on that from James Paulson, chief investment strategist at the

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Speaker 1: Louth Whole Group in Minneapolis, Minnesota, and he joins us

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Speaker 1: now by phone. James, thank you so much for being

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Speaker 1: with us. I'd love to get your sense, just to

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Speaker 1: get this out of the way. You know, it feels

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Speaker 1: a little bit like the world is up in uh

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Speaker 1: in a in a roar of potential trade tensions and

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Speaker 1: people battling each other in with words and markets shrug

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Speaker 1: they do not care why. Well, it might be uh,

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Speaker 1: disrespectful tweet fatigue. I don't know, disrespectful tweet fatigue? Is that?

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Speaker 1: Is that like going to be a thing? D TF?

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Speaker 1: It's just t ts. I just think you know that

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Speaker 1: we've we've seen this story quite a bit in the

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Speaker 1: last almost two years now. A lot of rhetoric, a

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Speaker 1: lot of tough rhetoric even among countries now, but little

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Speaker 1: really happens. And so that there has been market moves

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Speaker 1: in the past has been fairly significant on news like

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Speaker 1: we've had lately, and to no avail, and if you

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Speaker 1: sold out, you lost out because the markets sort of recovered.

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Speaker 1: And so I do think that the marketplace is becoming

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Speaker 1: a little less sensitive to that, reducing their eat it

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Speaker 1: to that type of flow of news. Now, if something

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Speaker 1: really happened fundamentally, um, certainly there'd be a different response.

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Speaker 1: But but just tough talk. It's kind of we're getting

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Speaker 1: used to tough talk. That's been the modus opera for

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Speaker 1: for the last couple years, even leading up to the election.

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Speaker 1: I think we're we're sort of adjusting how much we

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Speaker 1: move markets on the basis of that. And then the

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Speaker 1: other thing least, there's just such a good fundamental story

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Speaker 1: under this right now, you know, with with just strong

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Speaker 1: economy here in the United States and high confident, strong

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Speaker 1: earnings UM, and I think there's also a growing abolishness

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Speaker 1: out there optimism about markets breaking out to the upside.

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Speaker 1: So all those I think are factors keeping this market, uh,

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Speaker 1: pretty healthy. In the face of some pretty striking headline news.

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Speaker 1: One thing that I've foundishesting is that big tech has

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Speaker 1: continued to lead the rally. And I'm looking at the NASDAC,

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Speaker 1: which is just off a record high and has continued

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Speaker 1: to climb to about the year, out performing the other indiceason.

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Speaker 1: I'm just wondering, you know, given some of the concerns

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Speaker 1: around Facebook, given the incredible amount of debt that Netflix

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Speaker 1: is incurring to finance the entire business model, I mean,

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Speaker 1: do you think that this has gone too far? Do

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Speaker 1: you think that this is just the beginning? Well, that's

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Speaker 1: a good question. I uh throde a piece a little

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Speaker 1: bit called dot com deja vu uh here late last week. Uh.

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Speaker 1: There's certainly some you know, evidence that the movement of

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Speaker 1: tech stocks relatively overall market is is a little bit

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Speaker 1: uh like dot com here in the late ninety nines.

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Speaker 1: Over the last five years UM, for example, UH, technology

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Speaker 1: stocks within the SP five hundred of outperformed UM the

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Speaker 1: overall market by more than two to one UM at

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Speaker 1: the x Tech SMP five. If you look at the

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Speaker 1: last two or three years, tech stocks have outperformed the

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Speaker 1: x Tech SMP five hundred more by more than three

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Speaker 1: to one, and the last year UH text docs ab

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Speaker 1: outperformed the S and B X tech by more than

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Speaker 1: four to one. Uh and even year to date roughly

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Speaker 1: tech stocks are up around the FO and X tech

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Speaker 1: is roughly flat. So UM there's a quite a dominance

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Speaker 1: here of of tech stocks being the only game in

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Speaker 1: town that's leading. Much like the five years the let

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Speaker 1: up to two thousand. On a relative basis, Lisa S

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Speaker 1: and P five x technology to the overall SP has

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Speaker 1: fallen about half as much on a relative basis in

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Speaker 1: the last five years than it did during the dot

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Speaker 1: com So you could argue on a performance basis that

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Speaker 1: we've been experiencing almost a half a dot com type

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Speaker 1: of environment. I do think it's uh, it's a warning

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Speaker 1: sign of of concentration in a in a few popular names,

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Speaker 1: that all the flows are going into UM and ignoring

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Speaker 1: some of the potential risk that come with that. But

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Speaker 1: who knows how long that can continue. We we've you

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Speaker 1: could see that in and it continued to go on

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Speaker 1: as well. But I do think it's a growing risk. Well,

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Speaker 1: can we just dig in a little bit as to

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Speaker 1: how that risk could play out? Is the risk that

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Speaker 1: There could be, say, a big regulatory push with Facebook

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Speaker 1: and all of a sudden that brings down the entire

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Speaker 1: market just because they've become so dominant. Or is it

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Speaker 1: you know, the whole uh smartphone supercycle and then to

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Speaker 1: decline there? I mean that the kind of kind of

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Speaker 1: thing that could trigger this or would it be sort

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Speaker 1: of more wholesale Well, um, there could be a number

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Speaker 1: of things. I think what the risk suggests is just

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Speaker 1: the vulnerability is increasing, and if it increases enough, oftentimes

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Speaker 1: it could be any one of a number of different catalysts,

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Speaker 1: each of each of which individually might not even be

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Speaker 1: that important. But if you've got a vulnerable enough market,

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Speaker 1: it could be the straw that breaks the camel's back.

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Speaker 1: It could be something, as you say, direct, some new

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Speaker 1: is item directly related to the technology space itself. I

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Speaker 1: have noted earlier this year that there's a big difference

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Speaker 1: if you took the Fang plus index New York stage

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Speaker 1: fang plus index has about ten of those stocks most popular,

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Speaker 1: and you divide them up to those that are regulated

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Speaker 1: versus those that they're not. And I don't mean they

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Speaker 1: are regulated, but that those that rely more on social

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Speaker 1: uh reselling customer information for advertising purposes versus those of

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Speaker 1: selling actual product. Um, you already see quite a divergence.

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Speaker 1: The non regulated quote unquote are doing far better than

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Speaker 1: the regulated fangs, so the markets already discounting that risk.

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Speaker 1: If there was something official that came out, that certainly

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Speaker 1: could be a tipping point for tech leadership, but it

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Speaker 1: might also just happen because the tenure yield reaches a

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Speaker 1: point that starts to scare people, or inflation picks up,

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Speaker 1: and since everyone's in those areas, if if they do

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Speaker 1: start to sell, they're going to see the most selling

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Speaker 1: pressure as well. Just before I let you go, what

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Speaker 1: is the highest conviction trade you have right now? You know? Uh, Lisa,

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Speaker 1: I would I would add a little cash and maybe

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Speaker 1: a commod of the E T f uh in my

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Speaker 1: equity portfolio that stay in equities, but I'd sort of

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Speaker 1: change up how I'm writing them. Maybe have a little

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Speaker 1: cash if we do hit an air pocket, you can

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Speaker 1: go back in. And I like the commod of the

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Speaker 1: E T f UH. Commodities I think are going to

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Speaker 1: continue to go up. So those would be two things

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Speaker 1: I throw out as a possibility. Not have everything in

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Speaker 1: in in the current momentum of technology right now, and

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Speaker 1: just real quick, what would you sell in order to

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Speaker 1: raise more cash and invest I'd sell some of those

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Speaker 1: popular tech names right now. I pat myself in the

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Speaker 1: back for owning them. Well happen and shure that I

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Speaker 1: made a great decision and I give some of that

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Speaker 1: away to somebody that wants them real bad right now.

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Speaker 1: And Paulson, thank you so much for being with us.

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Speaker 1: Always a pleasure speaking with you. Jim Paulson is chief

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Speaker 1: investment strategist at the louth Hole Group. Coming to us

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Speaker 1: from Minneapolis, Minnesota, with its beautiful lakes. There's a lot

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Speaker 1: of focus on where people are putting their money, on

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Speaker 1: whether it is responsible UH. And our next guest wants

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Speaker 1: to responsibly build UH. He builds homes offices using containers,

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Speaker 1: the containers, shipping containers that are no longer being circulated.

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Speaker 1: I want to welcome Paul Galavin, Chairman and chief executive

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Speaker 1: officer of SG Blocks. Paul, your company is fastenating. Can

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Speaker 1: you just give us a rundown? What does it do so?

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Speaker 1: S G Blocks is a premier provider of modular construction

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Speaker 1: premised on the repurposing of shipping containers into internationally approved

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Speaker 1: instruments of construction. The value proposition is a safer building

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Speaker 1: in half the time at a better price. And so

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Speaker 1: are they pretty? Though? There's they're pretty? I mean, do

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Speaker 1: you have to keep the shape of the container? No,

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Speaker 1: there's design flexibility, there's cladding flexibility. You can go anywhere

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Speaker 1: from a kind of a high end clad it finish

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Speaker 1: with limestone or brown stone or hardy board, and all

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Speaker 1: the way to celebrating the raw container as an urban

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Speaker 1: look and feel, which a lot of millennials and developers

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Speaker 1: and cities like. So what's the sort of value proposition

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Speaker 1: from your perspective? Given the fact that I imagine there

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Speaker 1: was a glut of containers at one point, the shipping

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Speaker 1: industry took a pretty big hit. You know, how how

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Speaker 1: much were they discounted for you? Our pricing is arranged

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Speaker 1: on a sort of permanent basis with a partner we've

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Speaker 1: had since inception conglobal industries who have fifteen locations and

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Speaker 1: manage the overwhelming domestic inventory. So pricing is not normally

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Speaker 1: an issue for US. Even now with the tariffs and

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Speaker 1: the increase in steel prices, etcetera. Know that we don't

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Speaker 1: anticipate that being a problem for US. Conglobal has an

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Speaker 1: enormous inventory in the States already. Okay, so you don't

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Speaker 1: think that that's going to increase the demand for UH

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Speaker 1: for even used metal products, and no, we're not anticipating

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Speaker 1: that at that moment. All right. Um, And you guys

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Speaker 1: went public last year, right correct? About a year ago?

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Speaker 1: About a year ago? And what was that experience like?

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Speaker 1: It was an extremely invigorating, enthusiastic, exhausting experience. The I

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Speaker 1: p O itself was conducted over about twenty eight days

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Speaker 1: and we met with well over a hundred good investors,

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Speaker 1: qualified investors. And every time you speak with the investment community,

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Speaker 1: you hopefully make them smarter, they hopefully make you smarter,

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Speaker 1: and the dialogue can continue. So what did you learn?

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Speaker 1: What's the number one thing that you thought was the

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Speaker 1: biggest a half moment for you? Um, the consistent experience

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Speaker 1: from investors that they do not want to invest in

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Speaker 1: small cap companies and then get diluted further down the

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Speaker 1: road by other rounds of capital, which is why s

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Speaker 1: G Blocks has a negative working capital. With our clients,

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Speaker 1: we take deposits and complete on percentage of completion, so

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Speaker 1: that while our backlog, which is enormous, is starting to

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Speaker 1: unfold into bigger increments of revenue. We don't need to

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Speaker 1: raise money to finance those orders, and our company itself

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Speaker 1: operates very efficiently. That's really interesting. I hadn't thought about that.

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Speaker 1: I thought that there was so much interest in small

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Speaker 1: caps right now because they've been outperforming, uh, that you know,

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Speaker 1: people wouldn't necessarily ask many questions. Well, for some investors,

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Speaker 1: they looked at a company like ours with a market

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Speaker 1: cap of about twenty million dollars, and we have i

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Speaker 1: P and exclusive inventory and an enormous pipeline of opportunities,

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Speaker 1: and for some people it looks like in a six

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Speaker 1: trillion dollar vertical, how could things not grow exponentially? For

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Speaker 1: other people, investors are on the sideline. They'd like to

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Speaker 1: see some more of our backlog unfold into revenue and

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Speaker 1: some more of our pipeline into the backlog. We have

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Speaker 1: in almost uncountable number of leads and inquiries on a

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Speaker 1: daily basis from people from single containers two hundred containers

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Speaker 1: trying to unlock the value of their real estate. And

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Speaker 1: so we provide them with a cost efficient, time efficient, sustainable,

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Speaker 1: better alternative than traditional construction. How much do you pay

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Speaker 1: for each container? That varies between the age of use

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Speaker 1: and condition. It can range from two thousand to for

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Speaker 1: a new one. Do you feel like when there are

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Speaker 1: more containers on the market that represents something broader about

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Speaker 1: the economy, Because I know people look at the shipping

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Speaker 1: the dry bulk index for example, sort of you know,

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Speaker 1: the harbinger of doom if it drops too much. And

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Speaker 1: I'm just wondering, you know, if you shipping companies start

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Speaker 1: to try to sell their containers, does that have a

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Speaker 1: similar kind of residence. No, it's a good strategy for

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Speaker 1: the shipping companies to monetize assets that have been depreciated,

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Speaker 1: in other words, when they don't need them anymore. Yeah, well,

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Speaker 1: when the value of the net income isn't as valuable

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Speaker 1: to them, and they could sell the commodity and see

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Speaker 1: it repurposed in the economy and get a strike price

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Speaker 1: for that. From our perspective, the containers are building up

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Speaker 1: on our side of the pond because we're not manufacturing

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Speaker 1: what we need to. So at s G Blocks, we

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Speaker 1: take that container, which is a symbol of our failed

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Speaker 1: manufacturing sector, and we use that as a manufactured product

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Speaker 1: and We use that for apartments and hotels and stores

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Speaker 1: and offices. And at this time we're finishing up a

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Speaker 1: school building in the heart of Los Angeles on Wilshire Boulevard,

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Speaker 1: and we're working very hard to educate the investor base

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Speaker 1: and the consuming base that construction doesn't have to be

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Speaker 1: so slow and expensive. S G Blocks modular construction is

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Speaker 1: a better way to build. Paul Galvin, thank you so

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Speaker 1: much for being with us. Paul Galvin, Chairman and chief

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Speaker 1: executive of SG Blocks talking about taking shipping containers and

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Speaker 1: making them into buildings and the US has become a

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Speaker 1: major player in global oil markets, but there is a

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Speaker 1: problem for the nation in its pursuit of dominance in

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Speaker 1: the crew industry, and that is the infrastructure. UH is,

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Speaker 1: let's say, behind the times when it comes to shipping

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Speaker 1: around moving around the oil within the United States. To

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Speaker 1: join us and speak about this issue that's caused the

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Speaker 1: gap between say Brent and w t I to gap

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Speaker 1: out ten dollars or Brent in West Texas to eighteen

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Speaker 1: dollars is Tyler Rosenlicht. He's Cod and Steers Senior vice

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Speaker 1: president and portfolio manager of Midstream Energy that's focusing on

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Speaker 1: MLPs and other energy portfolios as well as nick kotsoft Us.

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Speaker 1: He is a senior vice president and portfolio manager of

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Speaker 1: Commodities Trading, Commodity Futures, etcetera. Tyler, I want to start

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Speaker 1: with you and just talk a little bit about the

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Speaker 1: problem that has caused this divergence between the Brent price

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Speaker 1: on one hand and w t I on the other.

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Speaker 1: Why is this such a problem right now? Yeah, So,

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Speaker 1: you know, one of the things that I think the

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Speaker 1: market has been surprised by is how robust and quickly

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Speaker 1: North American energy production has grown. And when you think

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Speaker 1: about the disconnect between getting it to market, having pipelines

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Speaker 1: and other infrastructure you need actually get it to where

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Speaker 1: it needs to go, versus the production profile. You can

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Speaker 1: have these periods in time where you know, maybe it's

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Speaker 1: coming out of the ground at a really fast rate,

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Speaker 1: but you can't actually fit it on a pipeline, so

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Speaker 1: you need to move it by rail or by truck

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Speaker 1: or by some other means. That's going to be a

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Speaker 1: lot more expensive. So what we're seeing today, you know,

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Speaker 1: particularly all the way out in West Texas, is a

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Speaker 1: lot of energy production, but we don't have the pipeline

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Speaker 1: infrastructure that you need to actually move it to Cushing

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Speaker 1: or to the Gulf coast, and so what you see

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Speaker 1: is truckers coming in and actually moving that oil by truck,

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Speaker 1: and that's a much more expensive way to transport energy commodities. Um.

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Speaker 1: You know, our view is it's gonna persist for a

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Speaker 1: little while. You know, it takes a while for these

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Speaker 1: new pipeline projects to actually be completed, and there's a

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Speaker 1: few that we think will stage in sort of second

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Speaker 1: half of nineteen early two thousand twenty, So expect to

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Speaker 1: see these wide differentials for a while. But midstream businesses

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Speaker 1: do have a good history of building infrastructure when these

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Speaker 1: sort of arbitrage opportunities exist, and there's a lot of

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Speaker 1: projects being worked on. You know, Nick, I'm struck by

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Speaker 1: the concept that people are talking about building again in

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Speaker 1: the oil patch right now as oil prices surge this year,

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Speaker 1: not today but just generally over the past few months.

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Speaker 1: But two years ago, three years ago, it was a

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Speaker 1: very different setting. Me. How much do these product projects

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Speaker 1: to create the pipeline's hinge on just the price of oil?

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Speaker 1: I think, Um, there is certainly part of it does

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Speaker 1: rely on the on the on the price of oil.

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Speaker 1: But given the long lee times that you have for

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Speaker 1: these infrastructure projects, it's important to you know, be able

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Speaker 1: to plan multiple years out into the future. Um So,

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Speaker 1: I think when whether it's an e MP company producing

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Speaker 1: new projects or pipeline company building new pipe, you take

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Speaker 1: maybe a three to five year view, and that view

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Speaker 1: of the long term price is going to be somewhat

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Speaker 1: lower than where current oil prices are now. So you'll

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Speaker 1: say we're gonna base our investments on fifty to fifty

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Speaker 1: five dollar oil. Where oil now you know it's trading well,

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Speaker 1: I mean, I guess that. Another way to ask this

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Speaker 1: is does the volatility, particularly the volatility that we've seen

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Speaker 1: over the past three years of oil prices make it

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Speaker 1: difficult to raise capital for these projects at economic levels? Yeah,

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Speaker 1: So maybe I can start with that because I think

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Speaker 1: you might ask why do we have the wide differentials today?

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Speaker 1: You know, why didn't we just build the pipelines a

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Speaker 1: few years ago when we saw a line of sight

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Speaker 1: into the Permian production increasing? And I think one of

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Speaker 1: the issues was oil volatility was really high. And when

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Speaker 1: you think about building a new pipeline project, most midstream

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Speaker 1: businesses aren't going to pursue that unless they get long

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Speaker 1: term contracts that sort of fix at least a minimal

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Speaker 1: acceptable return. And we expected some of these projects to

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Speaker 1: be announced last year, even in two thousands sixteen, and

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00:25:45,240 --> 00:25:47,080
Speaker 1: they weren't. And part of that was because a lot

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Speaker 1: of E m P s were concerned oils really volatile.

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Speaker 1: How can they have confidence in the next five or

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00:25:52,119 --> 00:25:55,440
Speaker 1: six years sufficient to underpin say a ten year takeaway

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00:25:55,440 --> 00:25:58,439
Speaker 1: agreement with a midstream company. So I think volatility and

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Speaker 1: the commodity price does really do a lot when you

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00:26:00,720 --> 00:26:03,800
Speaker 1: think about capital budgets and building infrastructure and green lighting

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00:26:03,840 --> 00:26:06,040
Speaker 1: new products and wells and that sort of thing. And

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00:26:06,080 --> 00:26:07,760
Speaker 1: even if we did go back only a couple of

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00:26:07,840 --> 00:26:12,080
Speaker 1: years ago, there was some level of of underestimating the

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00:26:12,160 --> 00:26:15,720
Speaker 1: amount of US supply. So you know, these companies, easy

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00:26:15,760 --> 00:26:18,680
Speaker 1: and P companies became a lot more efficient. We're using

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00:26:19,359 --> 00:26:23,480
Speaker 1: improvements and technology to increase the amount of supply coming

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00:26:23,520 --> 00:26:25,560
Speaker 1: out of the US, only to find ourselves in the

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00:26:25,600 --> 00:26:28,840
Speaker 1: situation where now where there's not enough pipe to get

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00:26:28,840 --> 00:26:31,640
Speaker 1: it to the to the refiner or to the international markets.

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Speaker 1: So I'm really glad you guys are here today. Earlier

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00:26:34,640 --> 00:26:37,080
Speaker 1: this morning, bloom Brooke News reported that black Rock is

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00:26:37,119 --> 00:26:41,680
Speaker 1: trying to get further invested in liquefied natural gas projects,

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00:26:41,720 --> 00:26:45,720
Speaker 1: in particular pipelines. Um. And this is interesting on a

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Speaker 1: number of different levels, but it sort of represents to

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00:26:48,680 --> 00:26:51,520
Speaker 1: me the trillions of dollars that have been raised for

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00:26:51,560 --> 00:26:55,199
Speaker 1: interest infrastructure funds around the world, and you know, the

456
00:26:55,280 --> 00:26:58,880
Speaker 1: question of where they're going to put it, and I'm wondering,

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00:26:59,280 --> 00:27:01,800
Speaker 1: you know, have you uh Tyler has seen a real

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00:27:01,920 --> 00:27:05,160
Speaker 1: increase just an the amount of money and interest in

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00:27:05,160 --> 00:27:08,840
Speaker 1: investing in some of these projects today versus say, three

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00:27:08,920 --> 00:27:12,200
Speaker 1: years ago. Absolutely, I think a few years ago, um,

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00:27:12,240 --> 00:27:14,160
Speaker 1: you're sort of staring into the abyss of a down

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00:27:14,200 --> 00:27:17,040
Speaker 1: cycle and energy and midstream energy, and these businesses traded

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00:27:17,080 --> 00:27:20,080
Speaker 1: at fairly high multiples. So on the publicly listed side,

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00:27:20,080 --> 00:27:24,040
Speaker 1: you've seen multiples contract a lot, and typically private equity

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00:27:24,080 --> 00:27:26,400
Speaker 1: was a capital source but wasn't really driving the ship.

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00:27:26,960 --> 00:27:29,440
Speaker 1: But that's really changed. So since kind of early two

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00:27:29,440 --> 00:27:32,200
Speaker 1: thousands seventeen and in accelerating over the last six months,

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00:27:32,480 --> 00:27:35,199
Speaker 1: we've seen a lot of private equity investors be at

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00:27:35,200 --> 00:27:37,320
Speaker 1: the big infrastructure funds or some of the more niche

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00:27:37,400 --> 00:27:41,400
Speaker 1: energy infrastructure businesses actually step in and either provide capital

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00:27:41,440 --> 00:27:46,520
Speaker 1: to publicly traded partnerships or acquired discrete assets, or build themselves. Um.

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00:27:46,600 --> 00:27:49,359
Speaker 1: They're actually paying very high multiples to get access to

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00:27:49,440 --> 00:27:51,960
Speaker 1: these businesses and to these assets, which, um, when you

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00:27:52,000 --> 00:27:54,320
Speaker 1: think about it, there's a huge incentive for private to

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00:27:54,320 --> 00:27:57,040
Speaker 1: deploy their money. They've got a very low cost of capital,

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00:27:57,119 --> 00:28:00,280
Speaker 1: much lower than the many publicly traded MLPs today. These

477
00:28:00,320 --> 00:28:03,120
Speaker 1: are commercial businesses that can grow, that can typically pass

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00:28:03,160 --> 00:28:06,080
Speaker 1: things like inflation onto their customers. And so when you

479
00:28:06,119 --> 00:28:08,159
Speaker 1: think about sitting on this war chest of a trillion

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00:28:08,200 --> 00:28:11,199
Speaker 1: dollars or whatever for infrastructure, you know, we think this

481
00:28:11,240 --> 00:28:13,280
Speaker 1: is a really attractive place for for that capital to

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00:28:13,320 --> 00:28:15,800
Speaker 1: be spent. You know, I'm struck nick by the idea

483
00:28:16,119 --> 00:28:21,640
Speaker 1: that multiples are high. Basically they're buying expensive companies are investing. Uh,

484
00:28:22,280 --> 00:28:25,560
Speaker 1: They're they're making expensive bets. Right now, I'm wondering what

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00:28:25,800 --> 00:28:29,080
Speaker 1: is the sort of price of oil that a lot

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00:28:29,160 --> 00:28:33,520
Speaker 1: of these projects hinge on to be profitable. I think

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00:28:33,640 --> 00:28:37,000
Speaker 1: most planning is probably done in the fifty to fifty

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00:28:37,040 --> 00:28:39,080
Speaker 1: five dollar range. And I say that because if you

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00:28:39,120 --> 00:28:41,600
Speaker 1: were to look at where companies are now hedging the

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00:28:41,640 --> 00:28:43,840
Speaker 1: price of oil, A majority of the hedges are being

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00:28:44,080 --> 00:28:47,080
Speaker 1: put on at around fifties to fifty five. As long

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00:28:47,120 --> 00:28:50,240
Speaker 1: as companies are getting an economic return, you know, that's

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00:28:50,320 --> 00:28:54,040
Speaker 1: really the balancing point for for crew prices right now.

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00:28:54,440 --> 00:28:56,680
Speaker 1: And it's interesting to note that when we talk about

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00:28:56,680 --> 00:28:59,760
Speaker 1: these differentials, that's actually what a lot of EMPs, for instance,

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00:28:59,760 --> 00:29:02,840
Speaker 1: are are getting at the at their sort of local

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00:29:02,880 --> 00:29:06,040
Speaker 1: pricing points today. So, yeah, Brent might be at seventy five,

498
00:29:06,160 --> 00:29:09,479
Speaker 1: but if there's an eighteen dollar differential between Midland and

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00:29:09,600 --> 00:29:12,560
Speaker 1: the Gulf Coast, um, someone that's actually producing energy in

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00:29:12,600 --> 00:29:15,080
Speaker 1: West Texas only going to get fifty seven dollars. And

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00:29:15,120 --> 00:29:16,760
Speaker 1: so I think it's important to note that, you know,

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00:29:16,800 --> 00:29:18,520
Speaker 1: just because that's what you sort of see as the

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00:29:18,520 --> 00:29:21,360
Speaker 1: headline price. Um, there's a lower price being received in

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00:29:21,480 --> 00:29:23,840
Speaker 1: these businesses are economic. Thank you so much for being

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00:29:23,880 --> 00:29:27,680
Speaker 1: with me a really important topic. Conan Steers Tyler rosen Licht.

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00:29:27,680 --> 00:29:30,920
Speaker 1: He's senior vice president and portfolio manager of Midstream Energy

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00:29:31,040 --> 00:29:34,520
Speaker 1: and Conan Steers. Nick Kutsoftis he is senior vice president

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00:29:34,520 --> 00:29:41,960
Speaker 1: and portfolio manager looking at the commodity space. Thanks for

509
00:29:42,040 --> 00:29:44,680
Speaker 1: listening to the Bloomberg P and L Podcast. You can

510
00:29:44,720 --> 00:29:48,520
Speaker 1: subscribe and listen to interviews at Apple Podcasts, SoundCloud, or

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00:29:48,560 --> 00:29:52,080
Speaker 1: whatever podcast platform you prefer. I'm pim Fox. I'm on

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00:29:52,120 --> 00:29:55,960
Speaker 1: Twitter at pim Fox. I'm on Twitter at Lisa Abramo.

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Speaker 1: It's one before the podcast. You can always catch us

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00:29:58,720 --> 00:30:00,280
Speaker 1: worldwide on Bloomberg Video