OPEC's Decision Hurts Energy Helps Airlines

                It’s been a great Thanksgiving for everyone, with more and more people feeling better about the economy and with the stock market moving along, for all those who have a car things have become even better with gas prices falling to levels not seen since 2009. There is also more good news for driver’s gas prices are likely to fall even lower. On the surface this seems like great news, in reality however the fall in oil prices could actually be harmful for the United States economy.

                There are many factors that have contributed to the fall of oil from over $100 a barrel to under $70, chief amongst which is the sheer amount being produced. At this moment in time OPEC (the organization of oil exporting countries) produces about 30 million barrels of oil a day, both Russia and the U.S each produce another 10 million barrels each, add in production from Nigeria, Canada, and Venezuela you get more oil than the world needs.

                Oversupply is one reason why oil prices have tumbled so far this year but Friday, November 28, 2014, while consumers were enjoying black Friday, oil prices fell over 10% to settle at 4 year lows. This dramatic drop in the price of oil sent the energy sector into a tailspin. Solid blue chips like Exxon and Chevron saw their shares fall 4% and 5% respectfully. Other oil companies and energy companies did not get off that lightly, shares of oil service companies which include Baker Hughes and Halliburton fell nearly 9% and 10%. Shares in off shore drillers also got slammed with Transocean and Ensco both seeing drops of over 9%. Along with oil, shares in renewable energy companies like First Solar also tumbled as investors see low oil prices threatening solar and other renewable energy industries.

                The catalyst for Friday’s massive energy sell off was OPEC’s surprising decision not to cut oil production, as they have done in the past when oil prices fell off. It seems that OPEC is shooting itself in the foot, since low oil prices would seem to hurt the economies of OPEC members such as Saudi Arabia, Kuwait, Iraq and the United Arab Emirates. The truth is quite the opposite, OPEC’s decision not to cut oil prices is a shrewd way to destroy competitors exploiting shale oil in the U.S and oil in Russia.

                Basically OPEC is betting on the fact that it withstand lower oil prices longer than any other competing nation in the world. This does seem to be true, Saudi Arabia, Kuwait and the U.A.E (United Arab Emirates) have a combined savings of over $2.5 trillion. Giving them some cushion against falling oil prices, meanwhile compare that to Russia who is losing over $140 billion to sanctions and the same falling prices and the U.S whose oil production depends on shale oil, which is becoming less commercially viable by the second as prices decline. OPEC is willing to sacrifice short term profit if it means destroying its competitors in U.S shale and Russia. So with oil prices set to go even lower which industries stand to profit and which ones are the most exposed.   

                One industry that is the most exposed to falling prices is offshore oil. This industry includes companies such as Baker Hughes, Halliburton, Ensco, Transocean, and Diamond Offshore, these companies and their subsidiaries derive most of their income through building and leasing offshore oilrigs. The industry historically is undervalued and while oil prices are high offshore oil is an attractive investment, the main problem is that offshore oil is expensive and setting up drills costs oil companies a fortune. As prices sit, offshore drilling is not commercially viable and many companies have already have begun to scrap several expensive offshore projects in the face of falling oil prices. Offshore drilling companies have seen their stocks collapse this year and many sit at 52 week lows.

                On the other end of the spectrum are the airlines that have enjoyed a nice rally as prices of jet fuel fall alongside oil. Airline stocks have seen a resurgence in the last 2 years, as consolidation has allowed airlines to raise airfare and fees, all of which has added to their bottom lines. Southwest Airlines is the top performing stock in the S&P 500 this year, with shares nearly doubling. Other airlines like Delta and American have also enjoyed solid 50-60% gains, and with oil prices continuing their free fall airline stocks are set to go even higher, especially since airline stocks still trade at evaluations that are a bargain when compared to the broader market.  

                Airlines are not the only industry that is benefitting from lower oil prices; retailers are also getting a lift as more people spend their savings from lower gas on gifts for the holidays. With that being said, with the exception of retail and to a greater extent to airlines if oil prices continue to plunge the economy and the stock market might get rocky. The logic behind this is that with the shale oil boom in the U.S many states and local economies have become more and more dependent on the energy industry to survive. U.S oil companies have already begun to slash costs and projects in certain areas, mostly in the Gulf, but if prices continue to fall those cuts might and will spread to the shale oil deposits and drilling operations in the Continental U.S. This will hit the economies of the northern mid-western states hard, states like North Dakota might be facing financial problems in that scenario.  

If falling oil prices destabilize the energy sector then this will spread to other industries and might send the U.S into a bear market. With that being said the economy as a whole is improving so any future economic crisis is not likely, but this does not mean that the stock market will not receive a larger hit as energy drags it down. Personally I feel that these falling oil prices are an opportunity to buy into industries like Airlines and retail, which will only go up as oil goes down.

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Baker Hughes and Halliburton Merger Problems

                It’s been a great few weeks for those of you lucky to be invested in the stock market; indexes continue to hit all new highs, oil prices continue to decline along with gas prices, giving people the freedom to actually drive somewhere without paying out half your paycheck for gas. And merger and spinoffs are in the air, Hasbro’s talk of taking over DreamWorks, Halliburton attempting to take over Baker Hughes, throw in the successful IPO of Virgin America and everything seems to be great. But as someone who has investments in the oil services industry the takeover talk about Halliburton and Baker Hughes has fascinated me.

                First of all Halliburton (the company behind numerous conspiracy theories and supposedly the beneficiary of Dick Cheney’s policies) is one of the largest companies in the world with a market cap of over $46 billion. The company is the 2^nd largest oil services company by revenue being placed just behind Schlumberger. The company is reported to be in talks with competitor Baker Hughes (a remnant of the once proud Hughes empire, owned by reclusive billionaire Howard Hughes), the 3^rd largest oil services company, Baker Hughes, is considerably smaller than Halliburton, with a market cap of $25.9 billion.

                Baker Hughes reported though that talk between the two oil service giants had stalled and that Halliburton was seeking to replace the entire board of Baker Hughes at the next shareholders meeting in April. Since Baker Hughes puts its directors up for reelection every year this provides an opportunity for Halliburton to take control in one swoop. With that said there are a considerable number of factors to consider before you could cheer a possible merger or buyout.

                First, you have to consider government anti-trust laws. A combined Halliburton and Baker Hughes would be the largest company in the industry with a market cap of over $70 billion, the combined company would control some 25% of the market for oil services and use this power to squeeze smaller competitors out of business, or at least that is what regulators will likely say. Also if Halliburton does turn to a hostile takeover, as it appears it has, it would be harder to convince regulators to agree to the deal. I will not make any prediction on the likelihood of a deal occurring or not, my objective is to determine whether or not a combined Halliburton and Baker Hughes would make a good investment.

                To find that out it is necessary to consider the oil services industry as a whole. First of all oil services is an industry that helps out oil companies such as Exxon and Chevron explore for oil and natural gas and provides equipment to do so, rigs are a good example of a service oil service companies such as Baker Hughes and Halliburton provide. The industry has been on an upswing these last few years as the shale oil boom has benefited the energy sector. Companies like Halliburton have made billions providing the tools in this new energy boom, and the increase in there stock reflects that (in 2012 Halliburton stock increased almost 40%). In recent months though as oil prices have plummeted from $100 a barrel to under $75 a barrel shares in oil service companies have fallen sharply, in the last 3 months Halliburton stock has fallen some 20%.

                The falling stock prices at Halliburton and some of its competitors may present an opportunity, since they would naturally go up when oil prices rebound. This is probably the reason Halliburton is making a bid for Baker Hughes, to take advantage of the lowered market price. With that said, investors who see value in the oil services industry should beware, many divisions and companies in this sector are in danger of surviving into the future. A perfect example is ocean rigs; these are rigs that search and drill for oil in the oceans. This process was great when oil prices where high since the process is quite expensive but recently as oil prices have plunged ocean drilling has fallen out of favor, this has caused stocks in ocean drillers such as Transocean and Ensco to collapse. Baker Hughes and Halliburton both have ocean drilling divisions which will suffer without a doubt if oil prices remain low, but investors who are determined that oil is bound to rebound buying into large oil service companies might be an attractive preposition.

                The oil service industry is also under threat from new advances from drilling which allow companies to extract more oil from fewer drills. Another possible problem is that with the energy boom many newcomers have joined the space, including some other large corporations; this increase in competition will eventually hurt the big names like Halliburton.

                    As for Baker Hughes and its proxy battle with Halliburton there is a possibility that the 3^rd largest oil service company will actually see its stock go higher (even higher than it already has gone, the stock rallied 15% on Thursday as the Halliburton buyout was announced). The reason for this enthusiasm is that other companies might make a bid for Baker Hughes since many see potential in the energy boom and see depressed oil prices as a potential buying opportunity. So if you are one of those oil bulls, oil service companies and specifically Baker Hughes might be a good buy for you. 

IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPORTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES

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Are Chrysler and other U.S Car Companies Undervalued?

              It has been a roller coaster on the market these last few weeks, with concerns over the spread of Ebola and falling oil prices has had investors dumping their stocks and running for the hills. It does not help that China’s slowdown is starting to become very apparent and Europe’s strongest economy, Germany, is sliding in recession. But this week investors have decided that the sell-off has been overdone and stocks have bounced back accordingly, most industries have been enjoying the rebound, including airlines that have benefited from lower oil prices and large tech companies like Apple and Microsoft have also enjoyed nice rebounds. Other companies like Netflix and Amazon have not fared as well but in this week’s blog I want to focus on one industry in particular, the American auto industry.

                Yes I’m talking about General Motors (GM), Ford (F) and a newly traded Fiat Chrysler (FCAU). Yes I know, investing in the U.S auto industry brings back some bad memories. I am sure people still remember the days when the big three car manufacturers flew to Washington and begged for a bailout. GM went bankrupt and was rescued by Congress and Chrysler was sold off to Fiat, Ford managed to stave off bankruptcy but to had its reputation scarred by the crisis. Since those dark days though Auto stocks have bounced back, Ford is currently up 700% from its recession lows and GM was up almost 40% last year. But 2014 is looking bleak for U.S auto companies, the first 6 months were hell on earth for GM as the company was forced to recall over 20 million vehicles, and as a result did not show a penny in profit in the first half of the year. Ford has also not performed to well this year with its stock down over 20% year to date. But what about Chrysler and what is the future of the car industry?

                  To begin Chrysler is actually Fiat Chrysler and currently trades under the ticker symbol (FCAU), the newly minted car company’s IPO in the U.S is all part C.E.O Sergio Marchionne plan to turn Fiat Chrysler into a global auto company, capable to compete with the top companies in the industry, Toyota, General Motors, Volkswagen, and Ford. Currently Fiat Chrysler is the 7^th largest auto company in the world, but it also trails behind its competitors in terms of market share, but Marchionne has sworn to change that, he plans to turn Fiat Chrysler into one of the largest automakers by 2018. His master plan though requires cash, almost $62 billion worth of cash to be exact, that is how much it will take to reinvent the company, hence forth the American IPO which was intended to open the company to new sources of cash and funding.

                For investors this opens up a unique opportunity to buy into one of the fastest growing companies in the industry. This might sounds overly optimistic but Chrysler’s 2^nd quarter earnings certainly show a bright picture, Chrysler’s net income grew 22% to $619 million, and September U.S auto sales increased 19%, marking 54 months of continuous growth. Considering that the U.S is the number one car market in the world that is a good sign. There are negatives to buying into the Chrysler turnaround story, one of which is the amount of debt that Fiat Chrysler will be carrying going into the future, and its debt is currently at junk status. Also little information is actually available about Fiat Chrysler since the company only recently made its market debut in the U.S. Investor will have to wait until November 5^th to get a more accurate window into the finances of Chrysler. With that said both GM and Ford announced earnings this week and there reports show mixed reviews of the auto market.

                General Motor’s Quarterly report on Wednesday actually showed life returning to the largest U.S car maker. GM posted a profit of $1.47 billion on revenue of $39.26 billion, although this is higher from a year ago when GM earned revenue of $38.98 billion profits are down year over year (GM made a profit of $1.72 billion during the 3^rd quarter of 2013).The good news for the auto industry is that GM was helped by strong U.S car sales and increased operating margins in North America (margins rose to 9.5% from 9.2% last year). Unfortunately North America seems to be the only bright spot, a slowdown in Russia and South America have hit auto sales in those regions. In the 3^rd quarter GM’s European division lost $387 million, while its South American unit has lost $32 million. Thankfully these losses abroad are offset by an increase in sales here at home, GM’s rival, Ford, shows a bleaker picture of the auto industry.

                Ford reported earnings on Friday and they were less then exiting. The company said that its profit dropped 34% this quarter, and C.E.O Mark Fields blamed a variety of one time charges and a slowdown in the emerging markets. A slowdown in Russia and eastern Europe were supposedly the reason why Ford’s European Division lost $439 million during the quarter, also Asia including China (the world’s 2^nd largest auto market) showed a slow down with Ford’s Asian assets losing some $44 million. Apart from international sales Ford also showed a decrease in the key North American market where earnings fell to $1.41 billion from $2.29 billion last year. Granted Ford’s 3^rd quarter results were skewed due to a number of factors, the largest of which was the shutting down of one of its largest truck factories, which was producing Ford’s flagship product the F-150 pickup. The plant was shut down in order to be remodeled to produce a new aluminum version of the f-150, which is supposed to be more fuel efficient and guarantee Ford’s dominance in the field of pickup trucks. Shutting down the plant cost Ford $700 million which could explain why earnings were week.

                Ford and GM showed mixed earnings this week, and there stocks closed down during a week where the market rebounded. Fiat Chrysler stock ended the week up but still remain more or less flat since the IPO, personally I feel that the auto market is very edgy, with the instability of international markets at the moment and slim profit margins it is an industry that I would stay away from. With that said, Fiat Chrysler in particular provides more growth potential then any of its competitors including GM and Ford so this stock might have a place in your portfolio.  

IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPORTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES

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Is Atlantic City Doomed to Fail?

               The new season of HBO’s hit prohibition era show Boardwalk Empire has just begun its last season. The show portrays Atlantic City under the control of Political boss turned gangster Enoch “Nucky” Thompson.  As I was watching the show showing Atlantic City at its height my mind turned to the modern day plight of Nucky’s old town.

               It is no secret that Atlantic City is dying; its once booming casinos and boardwalk have decayed to the point of almost no return. This year has been especially tough as the once thriving resort town suffers through the closing of a quarter of its casinos and the downgrading of debts to junk status. The question now becomes whether or not the old Domain of Nucky Johnson (the real life political boss of Atlantic on whom the fictional character Nucky Thompson is based on) could be revitalized and survive into the next decade.

               Atlantic City has always been a playground, throughout the 20’s the beach resort and boardwalk attracted tourists all over the North East and beyond but by the late 70’s the city had fallen on hard times so legalized casino gambling was adopted in 1978 and new life was given to the town. From 1978 to 2006 the gambling industry in A.C (Atlantic City) flourished even surpassing Las Vegas for a brief point in the 80’s and early 90’s. In 2006 annual gambling revenue in A.C reached a peak of $5.2 billion, since then though revenues have been falling in 2013 gambling revenues were at $2.86 billion. What is causing Atlantic City’s decline and could the town be resurrected?

               Well the answer to those questions lies in the finances of Atlantic City’s suffering 12 casinos, of which three, the brand new Revel, Trump Plaza (owned by the now bankrupt Trump Entertainment Resorts) and the Showboat Hotel & Casino (owned by Caesar’s Palace), are closing their doors. Not to mention since the recent bankruptcy of Trump Entertainment those 3 casinos might be joined by another Trump casino, the Taj Mahal which will close its doors in November if labor negotiations fail.

               Clearly the closings and bankruptcies do not paint a pretty picture but just to make you understand just how much Atlantic City depends on its casinos here are some not so fun facts about A.C. Of its 44,000 person population 30-32,000 people work in or for business related to the gambling industry (that is 75% of the population). 65% of the city revenue comes from casino property tax and with the closing of the three casinos the city will lose $30 million annually in lost tax revenue which is equivalent to 15% of the city budget. Oh I almost forgot another not so fun fact, with the three casinos closing 6-8,000 people will find themselves without a job.

               Dealing with the loss of 15% of your city revenue is clearly a terrible thing that requires drastic action, what do you think Atlantic City’s Mayor, Dan Guardian, is proposing to raise more revenue? The esteemed Mayor has proposed raising property taxes 29% on homeowners. Just to let you know how absurd that really is, Atlantic City has an unemployment rate of 13% (double that of the nations) and with the casinos bleeding cash it likely that number will rise, the mayor is saying that the town should tax these very people more in order for the town to stay afloat. Obviously the unemployed and the soon to be unemployed have little to give the town in terms of taxes.

               Atlantic City needs a new plan if it wants to survive. New Jersey Governor Chris Christie has said that his administration has a 5 year plan for the city, which includes building a new convention center. For the short term that might be a decent idea since it will provide construction jobs and additional tax revenue, it is certainly better than the Mayor’s plan for raising property taxes. But this is only a short term solution, the new convention center will need to attract people to the city and not just a few a lot of people if it wants to generate even a fraction of the business the casinos used to.

With the casinos going out of business left and right it is hard to see if Atlantic City could resurrect itself, but hold on their Atlantic City’s casinos might not be totally doomed. Although that is what Christie said 2 years ago when the Revel Hotel & Casino was opened. The 1,600 room Revel was called a game changer when it was first opened in 2012; it was widely believed that with an opening of a hotel and casino as grand as the Revel was it meant that surely Atlantic City was recovering and that it would regain its lost glory. Well it turns out that those so called promises of recovery were merely false promises, the Revel proved to be a disaster. Hurt by increased competition in Pennsylvania, Maryland and Delaware the hotel & casino lost $185 million in 2013 and declared bankruptcy twice in as many years. Now the owners of the Revel have slated that the once so promising resort will close its doors for good, an act which will cost 3,000 people there jobs.

The Revel joins the Trump Casinos and the Showboat in the world of sunken Atlantic City casinos but as I have said before the future might not be as bleak as it seems for the A.C casino industry. The Revel although thoroughly bankrupt (the $2.4 billion property had less than $3.7 million in cash left when it declared that it will close its doors) has been put up for auction. At first it might seem as though nobody would want the sunken casino but apparently interested investors think they have spotted opportunity in the form of the closed casinos on Atlantic City’s boardwalk.     

Glenn Struab a Florida real estate developer, has offered a $90 million cash bid for the property, stating that with a large cash infusion he could reopen the property in 2 years. Alex Muruelo, owner of the California bases Muruelo Group (which has tried to break into the Atlantic City casino market before with a bid for the Trump Plaza) has also described an interest in the Revel. Another far more familiar name also seems to desire the Revel, activist investor Carl Icahn.  

You might know him as the man who intimidated Tim Cook and the largest company in the world (Apple) into buying back $100 billion of their own stock, or as the man who has been battling Bill Ackman over Herbalife but perhaps you did not know that Icahn also has his fingers in Atlantic City. Apparently Icahn owns the Tropicana Hotel & Casino, and since the bankruptcy of Trump Entertainment Resorts, the Taj Mahal is about to fall into the hands of the infamous activist investor.

Since the last time Trump Entertainment declared chapter 11 back in 2011 (it has declared bankruptcy 4 times since the company was created) Icahn has been the principle owner of the debt of the beleaguered casino company bearing the name of rival billionaire Donald Trump. He currently owns $285 million in secured debt of Trump Entertainment, giving him an opening to take control of the company and its two casinos.

Icahn has not made it clear whether or not he will close the casinos and funnel there customers to the Tropicana, but he has made it clear that the Trump Plaza will close its doors for certain, whether or not the Taj Mahal (the 5^th most profitable casino in A.C generating about $131 million in gambling revenue annually) is yet to be seen. By the way as a side not Donald Trump has little affiliation with Trump Entertainment Resorts he owns less than 5% of the stock and has been trying to strike his name from the company for years.

As for large casino companies with assets on the boardwalk the decline of Atlantic City has been detrimental to their bottom lines. Especially since AC used to be one of the top gambling destinations in the world many companies invested billions into developing resorts there. Caesars Palace owns 3 casinos there, MGM also has a presence as well as Boyd Gaming which owns the most profitable hotel & casino in AC, the Borgata which has a 95% occupancy rate every night.

To understand just how important AC is to these companies all one has to do is look at how much of a percentage of the company’s profits come from its Atlantic City properties. Caesars Palace makes 20% of its revenues from AC and Boyd gets 14% of its profits from the shrinking resort town as well. Clearly Atlantic City is an important asset to the casino companies of the U.S and obviously gambling is in demand so why is Atlantic City and its casino’s going under?

The answer is that the casinos in the area south of the Tri-state (which includes Southern New Jersey, Maryland, Delaware, and Pennsylvania) have been overbuilt. There are simply too many casinos and the supply has outstripped the demand. Atlantic City thrived when it was the only place on the East Coast to go gamble now a day though you could go anywhere and find a casino.

Atlantic City has lost its monopoly and is now going down the drains, the good news is that gamblers are still flocking to AC and to the out of state casinos in Pennsylvania and Maryland which means there is still a large demand. With the closing of the three casinos and the possible closing of a 4th the other casinos in AC might be saved as they eat up the customers from there failed competitors.

Regardless skeptics believe that in 5 years gambling revenues in AC will have dropped to a mere $1.5 billion and that half of the casinos still afloat will go under. Personally I doubt that things will get so bad, I believe that AC’s problems stem from the over saturation of the casino market and that the means to it survival lie in closing as many of its casinos as possible. With that said AC can no longer rely on gambling to sustain it instead the resort town has to invest in a new industry which should be its beaches and boardwalk much like its neighbors to the North in Longbranch and Asbury Park. AC has traditionally neglected its beaches I believe its time for that to change, unfortunately to renovate these things requires cash and AC has none. But it is necessary, Atlantic City is not a lost cause and could be resurrected it just needs new blood and an infusion of money.

As for the companies operating out of Ac I believe investing in them is a terrible idea, in fact investing in any casino company that derives most of its revenue from the continental U.S is a bad idea. There is simply too much competition in the U.S gambling market. Atlantic City is merely a victim, a symptom of this disease. This disease which is called oversaturation, it’s the thing that destroyed the railroads, and the banks it will do the same with gambling. The best time to buy into U.S based gambling companies will be in 5-10 years from now when the majority of them declare bankruptcy and shut their doors.  

IN THE NEXT FEW MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY STOCK TIPS AND POTENTIAL OPPURTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES

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