Despite personal presidential requests and all of the headlines surrounding Western sanctions in Russia, Western oil companies are pushing ahead with deals in Russia. Exxon Mobil, in particular, is expanding its exploration and drilling in the Russian arctic in partnership with Rosneft’s Igor Sechin, who is personally under sanction by the US government. Shell, BP, Total, and Norway’s Statoil are also in deals with Russia to expand their production there. Late last year Russia officially ended Gazprom’s stranglehold on the domestic oil market and allowed international firms to be brought in to help extract the country’s vast resources, which has spurred the international interest. Analysts say the oil companies will keep strengthening ties until the US government overtly tells them to stop, as they cannot miss out on the benefits of production in the world’s largest energy-exporting country, Russia.
FINSUM: This may end up going badly wrong for the oil companies as just last week the US laid out its plans to impose much broader sanctions within the next month.
Big Wall Street banks are locked in an elaborate cat and mouse game with US regulators as they seek to find loopholes in the government’s new laws on leveraged loans. New legislation has made loans that would create debt burdens of 6 times a company’s cash flow illegal, but banks are seeking alternative structures which would allow them to continue to issue such debt. Leveraged loans, or loans to highly indebted companies, are a very profitable and growing area, with issuance up 10% versus last year. J.P. Morgan, Bank of America, and Credit Suisse all have particularly large leveraged loan business, and the credit is important to private equity firms like KKR & Co., who use the financing to boost returns in buyouts. Recent deals have been fueled by the market’s desire for yields, which has meant banks have catered to hunger for new bonds and provided new structures like Payment in Kind notes (PIK), which fulfill interest payments with added principal rather than continuous cash flow.
FINSUM: Leveraged loans have proved way too profitable a segment for banks to let them to go down without a fight. With interest rates so low, there is no end in sight to the demand.
In order to meet the US government’s ambitious new goal of achieving an average of 45 mpg fuel economy by 2025, auto makers are being forced to switch into manufacturing with lighter materials. The practice, called “lightweighting”, is at the heart of the industry’s push towards a greener future, and is actually a much larger component of development that electric-powered or renewable energy cars. In order to make cars lighter, companies are swapping glass and steel for carbon fiber, plastic and aluminum, and parts like brakes, windshields, hoods, and seats are all shedding pounds. Somewhat surprisingly, crash tests are proving that lighter does not mean less safe, as the new lighter vehicles are performing very well in safety tests. So far, companies like Ford have been successful in shaving 700-800 pounds off stock models through modifications, but the new prototypes are still far from production as costs are prohibitively high. Analysts estimate that by cutting 110 lbs from every car on earth, $40 billion would be saved in annual fuel bills.
FINSUM: This is a major development in the auto industry and seems likely to give a boost to domestic suppliers as development of high tech materials with requires close collaboration between multiple companies.
One of the world’s premier investment banks, Morgan Stanley, has announced that it is selling off its petroleum distributor TransMontaigne to a fast-growing energy partnership. The sale ends the bank’s involvement in physical oil infrastructure, and is part of Wall Street’s growing push to shed itself of any involvement in the commodities space following pressure from regulators. Morgan Stanley has also agreed to sell its commodities trading division to Russia’s Rosneft. The New York-based bank has long been the most active Wall Street player in the physical commodities space, but under CEO James Gorman’s leadership, and following J.P. Morgan and Barclays, Morgan Stanley has decided to move out of the business. The Federal Reserve has warned that a bank’s involvement in commodities could put its whole enterprise at risk should there be an environmental catastrophe in the substance it is trading.
FINSUM: It is indescribable how large a market opportunity the small group of physical oil trading houses now have. Glencore, Trafigura, Vitol and the like, have essentially been handed billions of dollars worth of business by regulators as they have forced Wall Street out of the physical commodities space.
Last year, Walmart pledged to spend an extra $250 bn on US-made goods over the next decade, and it seemed a strong boost to the nascent revival of American manufacturing. However, as it happens, Walmart is having difficulty fulfilling the pledge because of the hurdles American manufacturers are having in repatriating production at home. Producers say much of the native expertise has been lost, as those who used to work in manufacturing jobs have either retired or died, and many are having to train staff from scratch. Further, many say the US lacks a diversified group of component suppliers, making sourcing local parts difficult. The problem is so pronounced that Walmart is hosting a two-day summit to address the issue and lure more manufacturing back to the US. US companies are currently repatriating manufacturing for a number of reasons, including lower domestic energy costs, increasingly competitive wage rates, and a growing appreciation of the flexibility that nearby manufacturing offers. Many critics blame Walmart for forcing manufacturing offshore because of its formerly relentless push to lower costs over the last two decades.
FINSUM: This is a fascinating story for understanding the nuts and bolts of America’s manufacturing revival. It seems the industry is experiencing growing pains because of its long-term absence.