U.S. Shale Patch Is No Longer A Growth Market

at Bloomberg dot com. Reporting earnings today better than expected, shares up nearly two per cent, But interestingly, it said it's showing strength everywhere in providing oil field services except for in the United States. Joining us on a discuss Simon Casey covering all things energy for us as a team leader for energy team in America. UH, broadly North

and South and Middle UM. So I want to get your sense, Simon, of how significant this is that Schlumberge, the biggest business of its kind, said that it's seeing less demand in North America. What it's the sign of the times. Uh. The US is the world's largest old producer. It wasn't the world's largest oil producer if you go back a few years. It's had tremendous growth, but the shale patch is it's under tremendous strain producers, they're are

failing to come through with returns for investors. Capital markets are dried up for shells, for shell producers, for frackers, so they've had to go on a real campaign of cutting costs. They've been cutting jobs. The pace of drilling in places like the Permian Basin down in the West Texas has slow dramatically. That hurts companies like Slumberge. Now this is not entirely new slum slumber said last year it booked huge right downs for the third quarter thirteen billion.

A lot a lot of that was to do with what's going on in North America. They are scrapping equipment. They're not just idling it, mothballing it, they're sending it to the scrapyard because they say they're never going to use all of this stuff. Again, we've kind of hit a sort of a peak in shale activity, and it's yeah, when when we're not likely to see that the extent of drilling we were seeing in recent years ever again,

ever again. So it seems like where the shell business in the US, given work, global demand is this is it. So if you're a Slumberge, you cannot look to the US as a growth market anymore. That's pretty clear from the from what they've been saying this morning. Yes. And the flip side of this, of course, is the international business is continuing to rebound. You're seeing a lot of activities in places like, for example, off the coast of Guyana, Sur and m South America, Brazil as well, that's a

real hot spot at the moment. There's a lot of activity there. It's coming back in Asia, in in in parts of Africa as well. So there's a lot of their international businesses looking really positive. But they they are Slumberge as well. It's it's based in the US, along with Halibursa and Baker Hughes. It's one of the big

three names in this space. It's much more exposed to markets outside of the US, unlike Haliburton, which is reporting next week in fact, so it's going to be interesting to see how what Haliburton says, because lumberj has kind of managed to turn the corner a lot quicker. If you like, it's still cutting jobs, it's saying it's still rationalizing. I think the phrase these this morning was shrink to fit what is going on in shale, but it's it's still tough out there, and for for some of the

smaller names in this space, UM, it's very bad. Indeed, it's very very difficult because their business is fundamentally shrinking and it will continue to this year. So there's this theme of peak shale. We've seen peak shale in a reary window. Correct, Well, let's let's just sort of try and define what I mean by it's peak acts drilling activity. Production is still on an upward curve. We've seen very literally one or two people have come out and said

production is going to peak this year. It's more likely it's going to peak beyond. It's definitely the growth is definitely slowing. There's a huge debate within the your market and now the pace that that growth will will continue out this year, and that will ultimately determine the balance of global supply because most global supply growth this year is coming from the US, which is a dramatic turnaround considering where we were several years ago when US wasn't

the biggest producer, it was still a net importer. The US is now a net exporter. So this is this whole thing, this whole what we're talking about here schlumber It goes beyond the company, it goes beyond the old services. It's about the balance of supply and demand in the global market. So, Simon, you mentioned some of the smaller players in the oil patch suffering, which we've certainly heard

and read about. Does that suggest more consolidation is likely to occur there and we might see slumbers in Haliburton as net buyers. Maybe well, then maybe some consolidation among some of the smaller, smaller names domestic players. Companies are based almost wholly down in Texas, Texas, New Mexico. They would not expect Haliburton or Slumberge to be picking up assets. I mean they might pick up some sort of small

assets as Bolton acquisitions. These companies that are looking fundamentally to upgrade their technology to knowledge as a mantra in so many industries these days, and oil is no different, or services is no difference. These guys are looking to keep headcount under control, but where they can upgrade the application of particularly of data management and and use cloud computing to crunch vast amounts of data and figure out what's going on underground and ultimately do the drilling and

the production much cheaper and much more efficiently. Is the theory that we're going to see peak shale in a couple of years at least? Is the theory behind that driven by a lack of shale supply underground, or is it driven by just the sort of math behind how much it costs to drill versus what what some of these companies are getting. It's the math. There's plenty of oil. There is no longer any kind of idea of a shortage out there. The shale revolution funding fundamentally means that

there's almost a limitless amount to intents and purposes. But it's it's the economics that are in focus here. American shail producers have been fantastic and getting huge amounts of sail out of the ground and getting them on the markets and indeed getting to the export markets as well. They've generally been with some exceptions, they've been terrible at turning it into a sustainable, profitable business that generates free

cash flow and returns that cash flow to investors. If you look last year, it was one of the laggards of the stock market. There was barely any sort of price appreciation for the sector. Over all. The returns to

investors were allousy essentially burning. They're burning cash, they're burning through cash, and basically, as what I said earlier, than the equity markets shut to them, debt equit markets are largely shut to these companies as well, and that's forcingments of turning woods and realized they've got a real problem in many cases, and that's why they're furiously cutting back on capex. They're doing a lot of meditation and looking into their navors and whither of my should we keep

burning it? Simon Casey, thank you so much for being with us. Simon Casey is the team leader for Energy America's for Bloomberg News. At stock market setting new highs every day, it seems we've got the consumer remaining quite confident in the economy. For questions, how's that being felt within the c suite? Charlie Weinstein, chief executive officer of Eisener Emperor based in New York City, joining us here in our Bloomberg Interactive Broker Studio, has some thoughts in

the Charlie, thanks so much for joining us. I know you guys do a survey of C suite business leaders. What did that survey tell you? Morning Paul, good morning, listen. Great to be here. Uh, this was very interesting survey. And so we we host the summit series across all our offices across the country, and as part of that

summit series we host, UH, we host the survey. And that survey said to US seventies six percent of the C suite and significant investors think that their companies will be more profitable or at least as profitable as they were in two thousand nineteen. So they see two thousand twenty as a great year. But so the other side of the survey very interesting, showed that our business is going to be great. That was the common refrain. There are problems out there won't affect us, but there might

be an economic downturn. Okay, So how much is this just CFO is being prudent and how much is this genuine concern about a global recession or a localized recession. There is a there is a concern. So we have Brexit, we have uncertainty over trade and tariffs, we have the

elections coming up this year. But this this is all like small print that's been there for a while, right, I mean, yes, it has so, I mean, but is it's still really like dominant, and they're thinking not for their own business, and so for their own business, they are really bullish. Um I met the other day with U an executive who runs a construction company, and they're building out. They're branching out into managing real estate for hospitals,

and so business business leaders are looking for opportunities. They're looking to uh deploy the profits that they've had, and they're highly optimistic. One of the economic underpinnings of this economy has been the strong consumer and that has driven in large part by the fact that most Americans have a job. Most Americans are seeing wage increases me been as much as they like. But on the flip side, C suite executives say one of the biggest challenges is

finding people and keeping them. Is that what did your survey work kind of show you. Their survey had two results and they go right along with what you're suggesting. One is that they see fifty eight percent of the executives see an increase a significant increase in wages for next year for their businesses, and so getting talent is very difficult, and they see the need to increase compensation.

Quite frankly, the nice thing about that is, the consumer drives our economy, and if that comes to pass and wages really do start to see an increase, that's going to fuel our economy even more. This is really important. Fifty percent see materially higher salaries, materially higher wages next year. Exactly. Okay, this is actually really important because right now, if you look at inflation expectations built into the market, they're more abound.

There's this idea that it will never take off. But are you saying that there is a ce change in the sentiment that is different from what we've seen over the past decade that is going to lead to a potentially very different dynamic come next year. I see that there's a possible that you will see wages really increase, and but companies are not increasing prices, and so there's that dichonomy that inflation may be driven by increase in

prices the margin pressure. Okay, but bottom But but this sort of goes to the key debate, right that the stock market is not the underlying economy, right, and the underlying economy lags the stock market. And so if the stock market starts to see a little bit of weakness because of margin pressure, but you have the actual consumer continuing to do better and better because they're actually getting paid more. You know, where does that leave the FED?

Where does that leave markets? You know, it could mean a stock sell off, but it could mean continued strength for the U S. I'm just saying, I'm just I'm just extrapolating out what this could actually mean. You've gotta pay attention in this studio pretty quick. How at tech technology and Lisa and I we talked to executives across

the whole swath of industries. They're all investing in technology, and I'm wondering if your respondents feel like technologies a real opportunity for them or is it a risk to their business. We always say invest in human intelligence before you invest in UH technology. And so you need the people to make value to create value out of the technology, and so technology will only take you so far. UM,

you also need to be investing in people. Which sectors were the most optimistic and on the on the reverse side pessimistic. So our clients and professional services UM delivering services are technology clients by far the most optimistic. Manufacturing and distribution. It's interesting, even though we've had some trade uncertainty over the last six months, year, two years um our clients are are not finding difficulty in sourcing products,

and so they're optimistic. They're really optimistic about the potential for who is pessimistic? Who's pessimistic? So real estate might be a little pessimists like that. He's like whispering. While we have so many clients in the real estate business. It's a secret, but they're they're feeling a little more pessimistic.

They are feeling a little more pessimistic. And though, uh, the way people use space now and the way remote working and all the trends in real estate is just something for real estate clients to keep an eye on. Charlie Weinste, thank you so much for being here. This

is really terrific. Jelie West is chief executive officer of Eisener Emper in New York and really paying close attention to earnings this quarter because we think about the performance in the market last year, you know, a thirty rise in S and P really pretty much all multiple expansion,

not much earnings growth last year. So we have to have, arguably, if you think this market is going to go higher in twenty twenty, earnings growth coming this year To get a sense of kind of what's driving the market here as we get into Michael team in chief executive officer, team and advisers think about twenty one billion dollars under management.

Michael joins us in our Bloomberg Interactor Brooker studio. So again Michael, the SMP earnings people and also looking for about ten percent growth that would suggest this market maybe can go higher. How comfortable or confident are you in that earnings number. A lot of what's driving the ten percent projection are the cyclicals, So you will have to see or general growth pick up in the US, and we we don't think there's a lot of room for

error in these projections. That's that's our primary concern, in addition to the fact that that's largely being priced in or has been priced in over these past few months. So right now, when you talk to clients, are they optimistic? They feel like this rally has has legs and they should just shift some of their allocation to bonds into equities and take their cash out aloud into real estate not bonds. So the framework of this market has been set by the central bank for a decade, in really

global central banks for a decade. So they've set the interest rate environment, the corporate credit rate environment, and then it enables the pe to expand like last year, so you saw the ten year ago from a three yield to one point eight yield, and that enabled p s to expand as they did. Um are clients comfortable? They are discomfited by what they're seeing politically globally, They're they're discomforted by a lot of the headline news that comes

across their desk. But I think everyone understands that the economy in the US is on solid footing. So basically, we make them unhappy, Paul. Basically, that's the bottom line, is that we're driving any sense of discovers. Otherwise people are people are feeling great exactly So, Michael, I mean, as we think about asset allocation, given what we saw in twenty nineteen, how are your suggesting your clients allocate

their capital. I mean, you know, we're hearing more and more about maybe emerging markets, maybe a little bit more out on the risk to maybe even think about some alternative investments. How are you kind of thinking about it? We are at the midpoint in our risk So if you had spoken to us in December of eighteen when everyone's concerned about a recession. We didn't see one coming and we were actually building our equity risk at that point.

We've paired some of that back in these recent months, and currently at the end of the month, we're going to begin to buy some equity protection. So we have huge embedded gains. Anyone who's owned the equity markets for the last five ten years is enormous embedded gains. And rather than take them, we own quality risk assis quality corporations. We'd much rather buy hedges too, sort of diminish any of them if there are any sense is a growing

sense of caution, valuation, evaluation. Okay, so what's your sense of what's going to cause some sort of sell off, some sort of decline that would encourage you to start buying protection. Well, we try to do it in the contrarian So if you think about the direction of markets, we generally will spend money when markets have done very well, we will monetize those in periods of weakness. So we do it sort of as a contrarian way to build

in protection, embedded protection. In this there's not actually a call in markets. It's we're not trying to time markets now, are there sectors here, given given where we are in the economic cycle, given what performance we saw in twenty nine, are there some sectors that you're more bullish on versus

less bullish on. We in terms of value, if you were looking at an industry, the energy infrastructure industry is still quite cheap, and I think that's garnering some focus among strategies mid cap in general, and so as you go down market cap you see some inefficiencies and so, and that's actually a place where active managers and great stock selectors can add a lot of value. Large camp of excuse me, large crab growth maintains itself as an

expensive sector. We would have said that three years ago, two years ago, way, so it just has had a momentum that is unending. But so those are the those are the extremes within the u s of its So when you came in here, Michael, you said that a lot of the evaluation and the equity markets is predicated on the idea of that interest rates are going to remain low for a very long time, right, And I was thinking, well, what if inflation expectations are too low?

What if the economy does solidify and we do start to see wage pressure, and we actually see bond yields rise even just you know, twenty five basis points, fifty basis points. How much does that affect equity valuations? Well, the only metric that the SMP does not look in the ninety plus percentile expensive in is relative to the tenure treasury. So that's the one, you know, are of

justification for the current multiples. The we see that as a plausible outcome that rates As the global economy recovers, there is pressure un rates and they begin to slowly normalize, and that will just not enable anyone to justify multiple expansion. So then it will really come down to earnings growth. If earnings growth don't, doesn't you know, reach ten percent, and we think there's a chance it couldn't. That's five percent I think of it. There's a leverage of five

percent revenue growth broadly across every corporation. In's you know, sort of a two to one general rule of thumb that they're just the combination of those two's. Really we see as a not overly exciting equity forward looking equity market. I know you did spend some time with emerging markets early in your career, it did any opportunities there that jump out at you. Yeah, so emerging, So the consumer and emerging markets has been and remains a great story.

And I'll highlight country that I lived in, which was Brazil. The base rates have been falling in Brazil for several years as inflation fell, and what that enables is the knock on effect for the consumer, someone buying a TV, a car, just the financing abilities that just was never really was never there in the twenty five years since I lived there. So there are valuations combined with structural

changes that are very meaningful. There's a huge amount of money in Brazil that has been reinvested in overnight rates for years. Portfolios were just there. Was it compounded at that is now three two and a half three In real terms it's even less so um when you look at those markets. There are big structural changes, but you also have political issues in many of these countries. In

regions as well as countries. Valuations are attractive, but we create a threshold above SMP five hundred that a country has to be at a discount of substantial discount in order for us to really allocate CAPPITL there. We do have exposure there, so we we are we think that it's at that point, but it's not screaming is inexpensive currently. Michael Tetaman, thank you so much for being with us.

Always great to get your thoughts on the market. Here, chief executive officer of TITAM and Advisors, overseeing where the twenty billion dollars, Joining us here in our interactive broker studios. Well, technology continues to lead, this market, continues to be a topic of M and A activity, I p O activity, lots of big themes driving technology. For to get a taste of kind of what we can think about for beyond.

We welcome our good friend Ted Smith, co founder and president of Union Square Advisors based in New York City, joining us here in our Bloomberg Interactive broker studio. So, Ted, I know you guys came out with outlook report. What are some of the key takeaways that you guys are out talking about. Well, first of all, thanks for having me,

Paul and Lisa. Great to be here again. Um, we're talking a lot right now just about the incredible amount of capital that's still available in the market for technology companies today, whether it be private equity firms who continue to raise capital and deploy significant amounts of capital, as well as strategic buyers who are out there with large

balance sheets looking to do really interesting transactions. From an M and A perspective, So despite the fact that the markets continue to reward technology companies with valuations that are um perhaps unsustainable, but certainly are stratospheric and have been for some time, we think that deal making is going to continue. Deal making on the M and A front, right, And I'm wondering whether you think it's going to be specifically within the tech space or whether it's going to

be broad based. Is there a place where you're seeing a growing amount of interest. We certainly we focus as a firm on the technology arena. So that's where where we're coming at this, uh, this set of opportunities. More broadly, yes, we still see deals happening in related spaces healthcare, energy, other places where technology is leveraged to the benefit of sort of the core investors or the core buyers. And how much is this being paid for by debt versus

equity buyouts? And how is it how is it being financed? Uh, there's first of all, the again these large private equity firms obviously primarily right equity checks themselves, but they use leverage as part of the overall buyout scheme. In tech, we've seen a significant uptick in the use of debt by these buyout firms and by the companies themselves that

operate in technology. They're simply more debt available for these companies, and explosion in the private credit markets and the availability of debt capital to companies and to UH into private equity firms. So a significant amount of debt being used today. So said, you know, private companies, the historic exit for private equity is an I p O or sale UM I p O s. In twenty nineteen, we think about the Ubers, the Lives and some others weren't that successful

at all. Understatement, do you think we'll see more M and A as an exit vehicle versus I p O. I think we've moved into an environment where, at least within the technology space, it's going to be fairly muted

from an I p O perspective. One of the interesting stats about nineteen and the I p O class versusen in tech is we had exactly the same number of Tech I p O s that were thirty eight UM and yet the amount of capital that was raised by the I pos greater than what was raised in So what we're seeing is we're seeing narrowing of the I

p O window for larger and larger deals. And then to your point, Paul, what we're seeing on our side is a greater and greater focus on the likely exit for these companies being an M, an M and A event. Although we talk about last year's activities, it was also marked by some serious potholes here. In particular, we work stands.

I'm not calling that a tech company, so you can hold hate now, um, but I am curious how much that incident and some others that just didn't perform that well has sort of colored the valuations or at least uh provide a little bit more skeptical, injected a little more skepticism into markets about how high to value companies that they're buying. I mean, is that is that something you're seeing? I think there's a there's an element of that,

but I think it's important. It's probably a slightly oversimplified view if you look at the class of I p O s, but if you separate them into more enterprise oriented technology companies versus more consumer oriented technology companies. The enterprise tech companies did actually quite well. When you think about companies like Zoom Communications and others that that had great they made money, they make money, they didn't actually

burn cash. They these companies do make money or or have a path to being able to make money in the fairly short term. I think the challenges around we Work and some of the other I p os that actually did happen last year were in part around these business models where it feels like you you could just continue to light a pile of cash on fire with respect to your lack of profitability, but also a repudiation of these founder dominated government structures where the market finally

came out and said, enough is enough. We're not going to allow you to have both of those things. You can't have a business model that appears to be not profitable for the foreseeable future and invest so much power and it's ingle founder or single team. We have to have some ability to control the direction of this company as public market investors, because that's what the government structure are supposed to be there for, which is to protect us,

not the founders. Is Airbnb going to go public in I believe they will and that's going to be a big deal, right, should be a very big deal. We'll perform. I think it'll perform better than some of the worst performers last year, and I'm not trying to damn them with fame praise. I think it's a different company with a different long term business model. They've obviously got some challenges they need to sort out with respect to protecting both the folks who put their properties for listing on

there as well as folks who rent through Airbnb. But I think long term, that's a much better business model than some of those who suffered in twenty nine. Really interesting. Thank you for being here. Thanks for having me Ted Smith, co founder and president of Union Square Advisors, joining us here in our interactive broker studios. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform

you prefer. Paul Sweeney, I'm on Twitter at pt Sweeney, I'm Lisa bram Woyd's I'm on twee at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.