Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg I'm
Speaker 1: really pleased to say that here in New York will
Speaker 1: joined now by Brian Levitt, Oppenheimer Fund senior investment strategist
Speaker 1: brancod Morning to you, sir, and I guess we're gonna
Speaker 1: get used to this permanent layer of uncertainty. We're just
Speaker 1: gonna do this every single month for the next few
Speaker 1: months and maybe the foreseeable future as well well. I
Speaker 1: guess time will tell I suspect we might. I mean,
Speaker 1: I still view this, Jonathan as a as a very
Speaker 1: uh political move from the from the president. He ran
Speaker 1: on a protectionist sentiment nationalism, and so he brings these
Speaker 1: things out and then we slowly walk them back. The
Speaker 1: reason why I view it is still largely political rather
Speaker 1: than more of a of a of a bigger move
Speaker 1: is because you know, this is done to appease the
Speaker 1: base in the mid term elections and and set up
Speaker 1: twenty twenty. But if you go forward in an integrated
Speaker 1: global marketplace with uncertainty around trade or or greater protectionist measures,
Speaker 1: you're going to see an economy in a market that
Speaker 1: perhaps doesn't look so good. By the midterms are into
Speaker 1: the elections, so the president and the administration need to
Speaker 1: navigate that. So it's a state to negotiate better deals.
Speaker 1: UM in the meantime, and you kind of touched on it,
Speaker 1: and I want you to elaborate. Do you see any
Speaker 1: damage being done to the economy as this administration chooses
Speaker 1: to use this negotiating tactic. Well, for the time being,
Speaker 1: business sentiment looks quite good. So we're we're coming at
Speaker 1: this in a place where businesses are keeping more of
Speaker 1: what they earn. UM. Confidence is high. But yeah, you
Speaker 1: could see some erosion and sentiment if uncertainty continues over
Speaker 1: where we're going with regards to trade. I mean businesses.
Speaker 1: You know, it's the old saying, the old adage that
Speaker 1: the toothpastes out of the tube on globalization and for
Speaker 1: a lot of big companies, UM, you could see stranded
Speaker 1: capital if we go down a more protectionist path. You
Speaker 1: guys are in the theme and definitely the theme of
Speaker 1: the president United States delegation heading to China to begin
Speaker 1: talks on the massive trade deficit that has been created
Speaker 1: with our country. Very much like North Korea. This should
Speaker 1: have been fixed years ago, not now. Same with other
Speaker 1: countries and NAFTA dot dot dot, But it will all
Speaker 1: get done. Great potential for the USA exclamation point the
Speaker 1: President John Farroll three minutes ago. Yeah, and the trade
Speaker 1: says they should have been dealt with years ago. Previous
Speaker 1: administrations should have tackled the issue that is China head on,
Speaker 1: and they haven't. And you just wonder whether we can
Speaker 1: actually get some results. So you hopeful, Brian, that we
Speaker 1: could get some positive results here when this delegation just
Speaker 1: head out of to China. Well, what I would like
Speaker 1: to see is, you know, greater protection for US technological companies,
Speaker 1: greater protection for intellectual property, but to do so in
Speaker 1: a manner that is not disruptive of the goods market.
Speaker 1: If anything, um, you could see some uh you know,
Speaker 1: some impetus for greater reform in China if there, if there,
Speaker 1: if we do go down a path of greater disruption
Speaker 1: in the goods market, there could be opportunity for China
Speaker 1: to transition more quickly um to and more consumer based
Speaker 1: economy and a more service based economy. But again we
Speaker 1: have to remember that the numbers that we're talking about
Speaker 1: with regards to trade and the tariffs that were concerned
Speaker 1: about is still small from a from A A U. S.
Speaker 1: China trade perspectives. Think it's still about sentiment and confidence
Speaker 1: at this point. Brian Lovett with us with Oppenheimer Funds
Speaker 1: that we must say John Pim and I that we
Speaker 1: thank you for your supporter of Bloomberg Surveillance. Absolutely Funds
Speaker 1: is we appreciate your global and coast to coast support
Speaker 1: for all that we do. Christian Mormoney was in the
Speaker 1: other day. Let me ask you the same question. Do
Speaker 1: I buy US multinational rolls to express an international view
Speaker 1: or do I still have to go out there and
Speaker 1: get international companies. Well, we believe you still have to
Speaker 1: go out there and get international companies. I mean, there's
Speaker 1: a lot of great companies around the world that are
Speaker 1: taking advantage of significant growth trends all around the world.
Speaker 1: Most American investors are not significantly exposed. We don't have
Speaker 1: the research capability, right, I mean, but you know, Tom,
Speaker 1: we we deal with these products on a daily basis.
Speaker 1: I mean, for most of us, we get up in
Speaker 1: the morning and turn off the Japanese alarm clock and
Speaker 1: put on the Korean television. But this is important. In
Speaker 1: the old days, it was simple. You about telephone, is
Speaker 1: Mexico about te Max? And you bought a concrete company
Speaker 1: in Southeast Asia and you call it yourself investor give
Speaker 1: us I'm serious. You think you know there's like six
Speaker 1: textbooks for the CFA you read on this great, what
Speaker 1: do you guys actually do in Malaysia? Well, um, you know,
Speaker 1: I would just say, you know, turning it to the
Speaker 1: global economy, to the global markets as a whole. I mean,
Speaker 1: if I were to go home on Mother's Day with,
Speaker 1: you know, a US made luxury product, my wife might
Speaker 1: look at me and say, where's the Louis Vuitton product,
Speaker 1: where's the Burbery products? Exactly? Um, you know, you look
Speaker 1: at what's going on in China, with what's going on
Speaker 1: in e commerce or gaming or social media. I mean
Speaker 1: the we're not buying concrete companies, We're buying companies that
Speaker 1: are that are part of this big growth trend over there.
Speaker 1: Can you buy MidCap internationally? Is there? Like is it
Speaker 1: all blue? Chip or can you like, is there a
Speaker 1: lot of MidCap companies? There's there's a lot of MidCap
Speaker 1: companies to research. In fact um, if you look at
Speaker 1: our performance of our international small mid, our emerging market
Speaker 1: small mid, we've we've generated very strong performance in those
Speaker 1: parts of the market and they you know, they tend
Speaker 1: to be less covered. Great, great opportunity for active managers
Speaker 1: take advantage. Can we get to the elephant in the
Speaker 1: room just quickly? And I think for financial markets the
Speaker 1: elephant in the room cross asset over the last couple
Speaker 1: of weeks has been this Research and West dollar and
Speaker 1: it certainly managed to the trick discussion too. And we
Speaker 1: see it on the screen again, the dollar bid coming
Speaker 1: back into the market, right. What do you make of that?
Speaker 1: Because so many people eager to fade this, They just
Speaker 1: don't believe that this is going to continue. It's just
Speaker 1: a relief rally, bit of covering. We'll be back on
Speaker 1: trend shortly. What are your thoughts right now? Well, the
Speaker 1: first thing is, if you pull it up on the
Speaker 1: Bloomberg terminal and you zoom in, it does look like
Speaker 1: a pretty good move. If you zoom out just a
Speaker 1: few months or or a year, it doesn't look like
Speaker 1: much of a move at all. So the trend, the
Speaker 1: weaker trend, still remains intact. What's happening is the money
Speaker 1: your capital is going to flow to where there's growth
Speaker 1: in the United States. Um. Although you know the first
Speaker 1: quarter wasn't as it was big as people some may
Speaker 1: have expected, it's still above trend. In the second half
Speaker 1: of the year is likely to look pretty good given
Speaker 1: the amount of stimulus coming to the US economy, So
Speaker 1: some money comes in. UM. I think over time we
Speaker 1: are likely to be in a stable or week or
Speaker 1: dollar environment. I'm gonna put two charts out. Can we
Speaker 1: do this for Bloomberg Radio? Or we're gonna do two
Speaker 1: standard deviation trading envelope zooming in as Mr Levitt says,
Speaker 1: And then I'm going to take the weekly chart John,
Speaker 1: which borders on teacher college course excellence of where we're
Speaker 1: just mid range is. Mr Levitt suggests, a weekly chart
Speaker 1: gives you a dollar that's migrated stronger. Yeah, back to
Speaker 1: the mid range. And I think whether I'm worries is
Speaker 1: if this continues to several trades that sit on top
Speaker 1: of this week a dollar theme and the big one
Speaker 1: for me at least that I observe, is this consensus.
Speaker 1: O wait until we am both on the equity on
Speaker 1: the debt side that's been built up over the last year,
Speaker 1: build up on the back of a week of dollar Bryant.
Speaker 1: That's right, and look at this point in the cycle,
Speaker 1: I would be far more concerned with a significantly weaker
Speaker 1: dollar that was inflationary in the US would bring forward
Speaker 1: Fed tightening and you know, would see something along the
Speaker 1: lines of the Taper tantrum that we saw um the
Speaker 1: last time. That But if you look at them markets
Speaker 1: right now, inflation is down, real yields are are attractive.
Speaker 1: Growth looks strong, um. So the currencies have sold off some,
Speaker 1: as you know, US growth looks like it's going to
Speaker 1: pick up in the second half of the year. But
Speaker 1: to me, this is not the disruptive environment that we
Speaker 1: saw in the past. I would be much more concerned
Speaker 1: with a significantly weaker dollar and more aggressive FED tightening. UM.
Speaker 1: Some some modest improvements on in the US dollar or
Speaker 1: some modest strength in the US dollar on the back
Speaker 1: of good growth should be good for the global economy
Speaker 1: and emerging markets. Catch help me this morning, o'llpen on
Speaker 1: a fun senior investment strategist if you're in the bond market.
Speaker 1: This is the interview of the day Priam Ezrae with
Speaker 1: TV Security. She's brilliant not only in full faith and credit,
Speaker 1: but taking it out to less or credits as well. PreO,
Speaker 1: what's the tip point looking at full faith and credit
Speaker 1: tenure yield? Do you have in your head a point
Speaker 1: with the two year yield? It's not a linear function,
Speaker 1: it's quadratic, it's dynamic. At what point do we really
Speaker 1: sit up and watch the nominal tenure yield? That's a
Speaker 1: great question. I think for a lot of people in
Speaker 1: the market it's three percent, So that was the psychological level.
Speaker 1: I don't believe, right, what is it? I would say
Speaker 1: for the two year to watch anything close to three
Speaker 1: I would get a lot more nervous about because I
Speaker 1: think that is indicating that the FED is going above neutral.
Speaker 1: I think neutral rate is somewhere in the two and
Speaker 1: a half range, which is exactly where we are right now.
Speaker 1: So we've got to go up half a percentage point
Speaker 1: and the two year yield? Right? Is that a function
Speaker 1: of GDP growth or is that a function of FED movement?
Speaker 1: It's a function of real long term GDP growth. I
Speaker 1: think inflation, there are secular forces that keep inflation, you know,
Speaker 1: pretty well contained in the two percent range. It's really
Speaker 1: long term real rate of interest, you know, is that
Speaker 1: moving higher. We're not really seeing any evidence that that's
Speaker 1: moving up. Productivities stays pretty is staying pretty low. Labor
Speaker 1: force participation is only going to keep heading lower as
Speaker 1: we're an aging population. So if the Fed actually takes
Speaker 1: real interest rates, you know, close to that one or
Speaker 1: higher percent level, I do worry about then, is the
Speaker 1: economy's ability to handle these high real rates. I'm not
Speaker 1: sure we're there yet. We don't really have any real
Speaker 1: rates from the FED reserve yet on a on a
Speaker 1: real basis, um, we're still incredibly accommodative prayer. I think
Speaker 1: something a lot of people exploring right now, including common
Speaker 1: SAX and yourself, is whether they Fed interest rate picks
Speaker 1: above where the market sees the interest right Pakingum, where
Speaker 1: are those two respective things right now? As far as
Speaker 1: you're concerned, Yeah, I think the FED has been suggesting
Speaker 1: now for a while because the UH, the the SEP
Speaker 1: or or essentially the dot plot has been suggesting that
Speaker 1: the fair in twenty mainteen is going to go above neutral.
Speaker 1: I think the rates market is really going to struggle
Speaker 1: to price that in because you know, a year from
Speaker 1: now growth could be slowing down. Um you know, we
Speaker 1: could have interest rates rising as the Treasury issues significant
Speaker 1: amount of supply. So I think the market struggles to
Speaker 1: price that in. I also worry about risk assets if
Speaker 1: the Fed moves away from the narrative of normalization. To know,
Speaker 1: we're tightening and we're going significantly above what everyone believes
Speaker 1: as neutral rates, how to risk as its react in
Speaker 1: that environment. This is exactly the conversation I had yesterday
Speaker 1: with JP Morgan and Bob michael on the asset management side,
Speaker 1: that it's not the ten year. He's looking at the
Speaker 1: two years. And at the moment, quite clearly, you're not
Speaker 1: really incentivized to take duration risk because the spreads like
Speaker 1: fifty basis points tends over twos and even less if
Speaker 1: thirties over tens um credit risk and the incentive to
Speaker 1: take credit risk it's really going to be hit if
Speaker 1: you get that to your note up to three pc?
Speaker 1: Is that your base case prayer that we do get
Speaker 1: that to your note up to three So I guess
Speaker 1: it depends on if the economist to me thinks yes,
Speaker 1: the strategist in me, because you know historically the FED
Speaker 1: does go above neutral. The strategist in me worries about
Speaker 1: how financial conditions tighten and the fact that we have
Speaker 1: for this time in the cycle a significant amount of
Speaker 1: treasury supply than the market has to take down at
Speaker 1: the same time when global interest rates might be rising.
Speaker 1: So I do worry about the fedsibility to get two
Speaker 1: more hikes this year. I think is doable. When we
Speaker 1: talk about next year, as we're talking about going above
Speaker 1: neutral in an environment where interest rates are rising, I
Speaker 1: think find out the tightening financial conditions will probably prevent
Speaker 1: the FED to take interest rates that high. Do any
Speaker 1: of our listeners get a real wage increase? Priamiser rates up,
Speaker 1: inflation up. I don't buy for a moment that anybody
Speaker 1: is supposed to get a real wage increase. Yeah. Well,
Speaker 1: what we're seeing in the labor market is a very
Speaker 1: bifurcated labor market. So you will see high wage increases
Speaker 1: if you're in the group of people where there is
Speaker 1: a significant skills mismatch. For a lot of US I
Speaker 1: think technology, um, you know, I think all of that
Speaker 1: keeps wage real wage growth very low at at pretty
Speaker 1: low levels, prettymis with Thank you so much the TV
Speaker 1: Securities Walter Pisk working with Rich Greens on the bt
Speaker 1: I G has just been absolutely brilliant on staying with
Speaker 1: the Apple story once again through thick and thin. Oh right, now,
Speaker 1: as you mentioned Walter, the hand ringing going on. Is
Speaker 1: the legitimate worry over iPhone legitimate or is it just
Speaker 1: another bout of worry. It's worry we're talking about this quarter.
Speaker 1: Every quarter there seems to be a different worry. And
Speaker 1: you know antenna gate and there are well all the
Speaker 1: different types of gates that are out there, right, so
Speaker 1: the but you know, going, the concern in guidance is
Speaker 1: the new one. Last quarter, the going in the guidance
Speaker 1: consensus was sixty billion UM. That was obviously too high.
Speaker 1: People were too excited about the sp mix and that
Speaker 1: number came all the way down to sixty billion in
Speaker 1: the stock um still performing well, outperforming the market. So
Speaker 1: here we are again worried about what the guidance is
Speaker 1: going to be for the June quarter. Now, in terms
Speaker 1: of the iPhone UM ten, I think the concerns are
Speaker 1: just way too high. Like some of the data that
Speaker 1: we're getting from the operators is that you know, people
Speaker 1: are buying this product and actually the market share may
Speaker 1: have increased from month to month. Certainly the eight is
Speaker 1: the thing that's selling more, but not the ten. Is
Speaker 1: this horrible phone that no one wants to buy. The
Speaker 1: bigger issue is you had analyst at the end of
Speaker 1: last year, you know, talking about superside. This is the
Speaker 1: next supercycle from the iPhone six and like augmented reality
Speaker 1: is going to drive these masses phone sails, and that's
Speaker 1: just that's not the case. Like Apple is not that
Speaker 1: human bust cycle that it was before. It's it's all
Speaker 1: coming down to how old your phone and are these
Speaker 1: replacement cycle is going to stop elongating? Are the upgrade
Speaker 1: rates of the operator is going to start going up?
Speaker 1: That's the issue. Well, this is great function on the
Speaker 1: Bloomberg and I'm sure you've used it before. It's e
Speaker 1: r N and you can get the earning surprises for
Speaker 1: any given security on any given equity across most of
Speaker 1: the planet. The last time that Apple actually missed earnings
Speaker 1: estimates on any given quarter, you've got to go back,
Speaker 1: I think all the way back to Q two sixteen.
Speaker 1: Q two sixteen is all the way back to QT sixteen,
Speaker 1: and before then you've got to go all the way
Speaker 1: back to Q four. It is just really rare for
Speaker 1: Apple to miss earnings estimates. Why do we do this
Speaker 1: every quarter? Walter? I mean, there is a huge company,
Speaker 1: right everyone, It's broadly owned, so there's obviously a tremendous
Speaker 1: amount of focus on it. But ironically, the work that's
Speaker 1: done to try and figure out where that guidance is
Speaker 1: going to be probably is a bit lacking in some cases,
Speaker 1: and there's a lot of data points that people react to.
Speaker 1: I mean, you get a number of different suppliers that
Speaker 1: may or may not be losing market share with Apple
Speaker 1: or coming out with with estimates that have been revised
Speaker 1: on a weekly or or a monthly basis, and then
Speaker 1: you have analysts reacting to it. I mean, the approach
Speaker 1: that we try to take is looking more on the
Speaker 1: demand side. Where are the end users right now in
Speaker 1: terms of how old are the phones that they currently own,
Speaker 1: and what are the operators telling us in terms of
Speaker 1: those upgrade rates? And and there's reason to be more
Speaker 1: optimistic now than we have in the past, meaning that
Speaker 1: it sounds like those upgrade rates are not going to
Speaker 1: continue to decline, you know, as we progressed through and
Speaker 1: there was already some evidence of that in the A
Speaker 1: T in the Verizon numbers. That are the companies that
Speaker 1: reported last week in terms of those upgrade rates. So
Speaker 1: well to the suite, that could be the capital term
Speaker 1: program as well. What's your base case for what we
Speaker 1: get from Apple on on buy banks and boosted dividends
Speaker 1: and the like after the tax county. I mean, I've
Speaker 1: always looked at this in terms of they're tremendous, They're
Speaker 1: they're they're generating a tremendous amount of free cash left,
Speaker 1: so forget about the cash that's already on the balance sheet,
Speaker 1: and and they can spend ten billion a quarter on
Speaker 1: sherry purchase. Now, if you said everyone's talking about this
Speaker 1: net cash here, I mean that you take your hundred
Speaker 1: sixty billion of net cash and you bought a bunch
Speaker 1: of stock back. If they bought at the stock price today,
Speaker 1: you'd eliminate the share account, right, So you'd add about
Speaker 1: three dollars in earnings um just from that. You know,
Speaker 1: that type of significant event in terms of sherry purchase.
Speaker 1: I don't mind if they do it on a regular basis,
Speaker 1: so they increase the dividend. I mean, this is a
Speaker 1: way that that you take what is more normal and
Speaker 1: recurring lower revenue growth and leverage the into higher higher
Speaker 1: earnings growth to our basis, good base our base case,
Speaker 1: our base cases again is ten billion a quarter. But
Speaker 1: if they want to do something extraordinary above and beyond that,
Speaker 1: then obviously doesn't have a huge impact to earnings. So
Speaker 1: here's the question I've never asked, because once again we're
Speaker 1: handering and if you're just joining us Walter Price with
Speaker 1: A with B T I G. The world's gonna end
Speaker 1: as we know it. But we never talk. And this
Speaker 1: is if a one to three about the malleability of
Speaker 1: a given company's income statement, which is that the margins
Speaker 1: are there, and there's dynamics Walter within those margins that
Speaker 1: can be S G and A can be manufacturing processes
Speaker 1: and the rest of it. How malleable, flexible, adjustable is
Speaker 1: their income statement? My answer is it's got to be
Speaker 1: more valuable than anyone's out there. Well, there is some malleability,
Speaker 1: but I think on the R and D line is
Speaker 1: an example. UM as far as please you know what
Speaker 1: they're investing in future. I mean, that's that number has
Speaker 1: been outpacing revenue growth. Right. They're spending more and more
Speaker 1: on R and D every year, and I think what
Speaker 1: investments are hoping for that is that that will at
Speaker 1: some point, you know, yield a new product that will
Speaker 1: help us. Okay, stop there, this is too important. Why
Speaker 1: do they need a new product? I mean, I think
Speaker 1: people look at the iPhone business and if you're bullish
Speaker 1: on the company, say, look, it's it's it's um. We
Speaker 1: might not have these growth years again, but you've got
Speaker 1: a base that's going to come back to you every
Speaker 1: couple of years and continue to buy the phone. So
Speaker 1: if we'd rather not have three or four percent growth
Speaker 1: and we'd rather have double digit growth, you know, we
Speaker 1: have services out there as a as a business that
Speaker 1: a lot of people talk about. But new products are
Speaker 1: other ways that you can accelerate growth. But Tom the
Speaker 1: other thing on margins that that's interesting in terms of
Speaker 1: the malleability of an income statement. If you remember a
Speaker 1: decade ago or maybe even longer, you know, when Motorola
Speaker 1: and Nokia were the top dogs in this space in
Speaker 1: terms of devices, they would struggle to maybe get to
Speaker 1: ten percent operating margins. We are so far above what
Speaker 1: the perception of the appropriate margin is for phones relative
Speaker 1: to consumer electronic business or even other you know, path
Speaker 1: leaders in this space that whether it's up or down
Speaker 1: twenty or thirty basis point is the is missing the
Speaker 1: bigger picture in terms of how high these margins are.
Speaker 1: And why is that? Because people come back to these
Speaker 1: products every you know, every couple of years, and they're
Speaker 1: very loyal to the brand. Well, so I want to
Speaker 1: finish up by talking about the multiple and talking about
Speaker 1: the services business that you just briefly mentioned. And I
Speaker 1: don't think many people outside the analystic community that you
Speaker 1: lead um quite aware that it's now the second biggest
Speaker 1: source of revenue for Apple. It's coming from the services
Speaker 1: side of the business. What does that mean for how
Speaker 1: this company evolves over the common years and your mind, Walter,
Speaker 1: and what does that ultimately mean for how we value
Speaker 1: this company? So, so what it really means is you
Speaker 1: have this It goes back to this concept of a
Speaker 1: loyal customer base. I could pitch the fact that their
Speaker 1: their phone business is a recurring revenue business that you're
Speaker 1: not going to go to Android when you're ready to
Speaker 1: replace your phone. So you say, okay, I've got this
Speaker 1: loyal base, Now what else what other types of revenue
Speaker 1: can I extract from them? And services becomes that, So
Speaker 1: it's going to ultimately turn into a more of a
Speaker 1: recurring revenue business. Like we look at wireless operators where
Speaker 1: there's a hey, I've got x number of users, let's
Speaker 1: call it a billion users, and they're paying me X
Speaker 1: dollars a month on their different service is that we're offering,
Speaker 1: and we're hoping that we can take that r POO
Speaker 1: higher or lower and and that we grow our overall base.
Speaker 1: And if you start looking at the company in terms
Speaker 1: of that a recurring revenue stream, investors are typically willing
Speaker 1: to assign a much higher evaluation on the company. And
Speaker 1: you know, up to this point from evaluation standpoint, Apple
Speaker 1: is traditionally traded at discount to the market. But recurring
Speaker 1: revenue stream type companies should get a premium to the
Speaker 1: market evaluation, and that would be the ultimate goal. Please,
Speaker 1: we're a one, I believe, and again that's that's not
Speaker 1: even assuming that they can they can get a premium
Speaker 1: to the market. We're just talking at market type multiple walters.
Speaker 1: Thank you, so much love to get you and Rich
Speaker 1: Greenfield on together again. We did that, I believe a
Speaker 1: year ago. That was just lights up. It was great.
Speaker 1: We're gonna do a tangent here and talk about a
Speaker 1: company that I'm sure many of you have looked at before,
Speaker 1: some have owned it, some of not. Christian Melick with
Speaker 1: us with JP Morgan Casanova in London and Christian it is.
Speaker 1: It is a company that defines for me the word enigma,
Speaker 1: and it is British Petroleum. For the last ten years
Speaker 1: the total return is under five For the last twenty years,
Speaker 1: the total return is under five percent. How did they
Speaker 1: get away with this? That's great, Christians tent and thanks
Speaker 1: for inviting me on the show. And uh, you know
Speaker 1: you you use a very British term enigma to describe BP,
Speaker 1: and I think you know, we're sort of zoom out
Speaker 1: on BP and look at the history and look at
Speaker 1: what happened on Kondo. You could argue that BP has
Speaker 1: gone through several inflection points, and in fact, you probably
Speaker 1: they want to use the word inflection to too strongly,
Speaker 1: given they've had to through several both in the context
Speaker 1: of having to sort of get through the condo restructure
Speaker 1: of the business in order to be able to source
Speaker 1: the funds for paying the condo, but equally through a
Speaker 1: through a down cycle and having to sort of restructure
Speaker 1: again in terms of recalibrating under lower oil. And I
Speaker 1: think what's interesting is just seeing, you know, b piece
Speaker 1: to come out of this in terms of these two
Speaker 1: tracks and Macondo track and the the sort of the
Speaker 1: the industrial track around around the down cycle, and and
Speaker 1: the way it's coming out is I think there's quarters
Speaker 1: in some ways symbolizes for them this inflection around the
Speaker 1: condo finally being behind them and also being able to
Speaker 1: deliver a significant cash uplifts through not just restructuring under
Speaker 1: lower oil, but all the projects that they put through
Speaker 1: and what it means for free cash flow. It's finally
Speaker 1: coming together for them. Um. And this is where I'd
Speaker 1: come back to you and say five percent is probably
Speaker 1: the right way to think about it. Give them the
Speaker 1: value destruction through both will happened in the though and
Speaker 1: then the down cycle, but that as still as their
Speaker 1: cross to therefore generate a lot more value game forward
Speaker 1: having learned their lessons. I just want to know where
Speaker 1: they're going to maintain the dividend. Yeah, that's a very
Speaker 1: fair question. In some ways, that's the way we pivot
Speaker 1: our bike case on BP. It's all of our cash
Speaker 1: break evens. What price can you do? What price can
Speaker 1: all price? Can you pay your full cash dividend? This
Speaker 1: is the first quarter where we've seen a total shooting
Speaker 1: of the lives for BP. They've they've basically come out
Speaker 1: with a cash break even in the mid thirties I
Speaker 1: thirty five dollars to pay their fore cash dividend. UM.
Speaker 1: The trending on cash breaking user forul BP is best
Speaker 1: in class, from sixty dollars last year to fifty dollars
Speaker 1: this year, to fourteen next year and then below forty twenty.
Speaker 1: The average break even for the sector sits around UM
Speaker 1: fifty dollars over the next few years. So you're talking
Speaker 1: about it, sorry, just to break in Christians, just some
Speaker 1: people understand what you're saying. When you talk about break given,
Speaker 1: you're talking about the actual price of a barrel of oil. Yeah, exactly, Okay,
Speaker 1: Because it's all persons which BP can pay their dividend
Speaker 1: plus capex right now and right now the dividends five
Speaker 1: point so at these different price points, this is the
Speaker 1: ability of BP to maintain that five point three current
Speaker 1: dividends exactly, pay all your dividends and therefore understanding what
Speaker 1: all price. That is important because if they if for
Speaker 1: this fall price, they still can't pay their cash dividends,
Speaker 1: you've got a problem. When in reality they're really in
Speaker 1: the money so to speak, this quarters, all they need
Speaker 1: is thirty seven dollars a barrel there is for them
Speaker 1: to pay all their dividends and their capex. So that
Speaker 1: cash neutrality is a leading indicator for BP that you
Speaker 1: know what, having been on the back foot and behind
Speaker 1: the behind the piers in terms of the condo and
Speaker 1: calibrating on the lower oil, very strong refinding, fantastic result
Speaker 1: in the upstream which is no no coincidences, all these
Speaker 1: projects coming online on much better margins with also managing.
Speaker 1: Can you put that all together? All you needed thirty
Speaker 1: five dollars to pay the dividend, which is a testament
Speaker 1: of peace ability to recalibrate and in folks, you know,
Speaker 1: to be fair to the long term mediocrity off the
Speaker 1: mad of early two thousand and sixteen, they're up six
Speaker 1: pim twenty six per year. Right, Well, I've got to
Speaker 1: ask Christian how much of that is BP. How much
Speaker 1: of that is oil? And you've got to get us
Speaker 1: about a mission. Yeah. I mean, look, I mean i'd
Speaker 1: say two thirds of that soil, a third of THAT'SPEF.
Speaker 1: I don't want to be too cute around around the mix.
Speaker 1: And I think BP has underperformed, and that's mainly due
Speaker 1: to mcconda having been raised in terms of costs and
Speaker 1: also still being in a penalty box in terms of
Speaker 1: perception around being able to deliver a proper cash flow
Speaker 1: uplift on all the PLW projects. So this porter was
Speaker 1: crucial in terms of getting out the penalty works to
Speaker 1: prove that it's not just the your price. Underlying cash
Speaker 1: flow for BP is best in class. For disappears this
Speaker 1: quarter because you're going to go here, But just to
Speaker 1: be clear here, you're saying this is a new BP.
Speaker 1: Absolutely this we're entering into a new inflection for BP,
Speaker 1: which is the conda behind them, new projects coming online strong,
Speaker 1: refining the stars of LINING. But not just in this
Speaker 1: sort of two month three months. This is our long
Speaker 1: term trending where having been out the money in terms
Speaker 1: of paying the diffence and now massively in the money
Speaker 1: and moving into best in class. This has been one
Speaker 1: of the Christian Thank you so much, greatly appreciated. This
Speaker 1: morning with JP Morgan Kazanov, Christian Mayleck in London and
Speaker 1: we said good morning to Mr Dudley and the people
Speaker 1: at British Petroleum. Thanks for listening to the Bloomberg Surveillance podcast.
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Speaker 1: Keane before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio