☀️☕️ Chevron Bulks Up to Run for Cash

📝 Focus

• Chevron Bulks Up to Run for Cash

📊 In the Markets

• Nvidia Nside

• China Stock Slide Continues

📖 MoneyFitt Explains

🎓️ Free Cash Flow

📝 Focus

Chevron Bulks Up to Run for Cash

Oil Supermajor Chevron is buying oil independent Hess Corporation in a $53 billion all-stock deal, boosting its presence in oil-rich Guyana, a prominent oil producer through offshore projects from Exxon, Hess and China’s CNOOC.

Chevron's offer of $171 per share represents a 4.9% premium, which is even smaller than the 18% Exxon just paid for Pioneer (the long-term average is 25-30%.) Hess’ CEO and the founder’s son will join Chevron's board and the family trusts, worth $5bn, will be among the largest shareholders of Chevron once the deal closes in H1 2024, subject to regulatory approvals.

This giant acquisition follows Exxon Mobil's $59.5 billion purchase of Pioneer Natural Resources, underscoring US oil giants' confidence in fossil fuel demand even as the Biden administration pushes for renewable energy. The combined entity expects stronger production and cashflow growth. Chevron explicitly says it will raise dividends and hike share repurchases.

..... ▷ The trend of oil supermajors buying existing production capacity instead of investing in exploration and production (E&P) related capital expenditures (capex) shows that the industry is increasingly being “run for cash.” As a result, “Free Cash Flow”🎓 will shoot up.

The world's five leading integrated oil and gas companies, Supermajors ExxonMobil, Shell, Chevron, Total and BP have been reducing their historically massive levels of capital spending… much under cover of ESG and investing in renewables (“beyond petroleum” etc.)

By 2019, these companies were already spending nearly 50% less than the $165.9 billion they spent in 2013.

This declining capex may signal that the oil and gas (O&G) industry is mature and declining, with slower long term growth prospects (though current high energy prices will supercharge supermajors' earnings.)

..... ▷ Which reminds us of Big Tobacco. Big Tobacco faced similar challenges with regulatory hurdles, weaker future growth and (slowly?) declining demand.

Both industries cut capex and raise dividends and share buybacks in response.

Big Oil sees governments worldwide taking steps to address climate change, including carbon pricing, bans on fracking and restrictions on new O&G development as well as weaker growth in the coming decades.

Cutting capex leads to big oil companies boosting profitability and generating immense cash flows for their shareholders in the meantime, despite the challenges they face.

Big Tobacco has been facing increasingly high regulatory hurdles for many years, including bans on smoking in public places, restrictions on advertising and sometimes gruesome health warnings on cigarette packs. Future growth is expected to weaken with smoking rates declining in many countries.

Cutting capex leads to big tobacco companies boosting profitability and generating immense cash flows for their shareholders in the meantime, despite the challenges they face.

..... ▷ To labour the point further, here are the capex and total dividend payouts of Big Tobacco over the last 20 years (Philip Morris International was spun out from Altria in 2008.)

And how Altria (MO) has done over the last 20 years on a total return basis (reinvested dividends plus share price performance.) It’s up 2270%, while the SPDR S&P 500 ETF Trust (SPY) is up 496%.

What We’re Reading 📚

📊 In the Markets

Asia-Pacific markets saw a continued decline on Monday ahead of a week of inflation reports and South Korea's third-quarter GDP. Hong Kong's markets were closed for the Chung Yeung holiday (ninth day of the ninth lunar month), while China's CSI 300 index closed down 1.04% to hit its lowest close since February 2019. Pre-Pre-Covid! (See below.)

The S&P 500 slipped on Monday even as 10-year Treasury yields retreated from a 16-year high of over 5%, with Bill Ackman of Pershing Square profitably closing out his bond short announced in August.

The benchmark S&P 500 fell 0.2%, mainly due to a decline in energy stocks as oil prices slipped back with Brent crude, the international oil benchmark, falling 2.5% to $89.83 per barrel. Meanwhile, the tech-heavy Nasdaq Composite gained 0.3%, led by the "Magnificent Seven" tech stocks heading into their results along with reports that Nvidia, up 4%, is elbowing its way into Intel’s CPU homeground using Arm technology, sending Intel down 3% (see below.)

Chevron fell 3.7% after announcing a $53 billion deal to acquire Hess Corp (above), while Hess fell 1%. This is a bit unusual. After an all-stock acquisition is announced, the stock price of the target company typically rises, while the stock price of the acquiring company usually falls, largely due to the premium that the acquiring company often pays on the target’s shares. The premium, in this case, was just 4.9%, so the moves after the announcement more or less wipe that out. Either it shows accurate pricing on both sides or shareholder disappointment (or both.)

Online security and ID firm Okta slid for the second consecutive day, with shares dropping by 8% after an 11% drop on Friday.

Nvidia Nside

Nvidia, known for AI computing chips, is planning to challenge Intel in the PC market. Reuters reports that it has quietly begun designing central processing units (CPUs) that would run Microsoft’s Windows operating system using Arm technology.

This comes as part of Microsoft's push to create Arm-based processors for Windows PCs, partially in response to Apple's successful transition to in-house Arm-based chips for Macs. Apple has doubled its market share in the three years since the release of Macs using its proprietary Arm-based chips.

Microsoft aims to match Apple's performance and efficiency with its Arm-based chips. Arm’s underlying processor architecture has long been efficiently powering smartphones and their small batteries.

..... ▷ Nvidia and AMD could introduce PC chips by 2025 after Microsoft’s deal with Qualcomm expires. Qualcomm has been making chips for laptops based on Arm tech since 2016 and has an exclusivity arrangement to develop Windows-compatible chips until 2024.

..... ▷ Intel, which has long dominated the PC industry, is feeling pressure from Apple's energy-efficient chips, though transitioning software from x86 to Arm may take longer as code built for x86 will not automatically run on Arm-based designs.

..... ▷ Both Intel and Nvidia are incorporating AI features into their chips, recognising the growing importance of AI-enhanced software.

China stock slide continues

Chinese stocks have tumbled to their lowest point since the pre-Covid era as Beijing's efforts to stabilise the market failed to counter a sell-off driven by economic deceleration, a liquidity crisis in the property sector, and geopolitical tensions.

Government initiatives aimed at boosting investor confidence have been unable to halt the market's decline. The CSI 300 index, comprising Shanghai- and Shenzhen-listed stocks, fell 1.3% on Monday to its lowest level since 2019, marking a 15% decline in dollar terms this year.

China's Central Huijin Investment has continued buying exchange-traded funds to support the mainland stock markets amid recent declines and said it will boost its holdings in the future.

(Huijin started a round of support two weeks ago by increasing its stake in the Big Four state-owned banks.)

..... ▷ Chinese equities outperformed global markets at the end of last year and into the start of 2023, benefiting from the lifting of zero-Covid policies.

..... ▷ However, a growth slowdown and high-profile defaults on Chinese developer dollar debt triggered an exodus from Chinese stocks.

Worsening US-China relations have also unsettled global investors, as the US pressures asset managers over investments in Chinese firms listed in Shanghai and Shenzhen..

..... ▷ Over in Hong Kong, the benchmark Hang Seng Index (which includes Chinese names) reached an 11-month low, erasing gains after border reopening. The subsector Hang Seng Tech Index has dropped by 11.3% this year.

As of August 4, 2023, H-shares (China companies which are incorporated in China) and Red Chips (China companies not incorporated in China) account for approximately 55% of the Hang Seng Index by weighting and 21% by number of component listings.

(By index weighting, the highest concentrations are in the financials and IT sectors.)