Loews 2Q16 Earnings Call Notes

Loews (L) James S. Tisch on Q2 2016 Results

One silver lining of the oil downturn is that lack of activity will speed recovery

“Diamond’s innovative strategies, along with its financial strength and conservative capital management should enable the company to emerge from this turbulent market cycle stronger than any of its competitors. As I’ve said before, if there is a silver lining to this oil price downturn, it’s that the lack of drilling activity today will only help speed the recovery of oil prices tomorrow. The effects of the current underinvestment in oil drilling are already starting to be evident, and will play out in the coming years. Demand for oil is still growing and remains quite healthy.”

We did not anticipate that the decline in offshore would be as bad as it has been

” When we bought back the shares of Diamond, I think that, we did not anticipate that the decline in offshore drilling would be as bad as it has been. We didn’t anticipate that oil prices would go into the $20s, we didn’t anticipate that oil companies would cut back their capital budget so dramatically. And we certainly didn’t anticipate that utilization today of drilling rigs would be at the levels that they’re at. So, I think we were surprised and I daresay that the rest of the market was surprised by what’s happened in the offshore drilling industry. But now, I think, we recognized very clearly exactly where we are in that business.”

My primary job is as capital allocator

“when I think about what I do, the primary – I think my primary job is that of capital allocator. We allocate capital to Loews share repurchases to purchases of subsidiary shares. We allocate capital from time-to-time to our subsidiaries to the extent that they might need capital from Loews and it represents a good return to Loews. And then, we also allocate capital to – less often, but in bigger amounts to repurchase – to purchase, sorry, new businesses. So, these are just the types of capital allocation issues that we have the competition for our capital. And from my perspective and the Loews Corporation perspective, we are constantly making judgments every day, what is the best place for our capital, and the times when we bought CNA shares and the times when we bought Diamond shares, at those points in time, without the benefit of rearview mirror today, we decided to purchase those shares.”

Oil companies are dramatically underinvesting. Oil prices will be significantly higher in 2018 than my previous forecasts

” I think oil companies in the world in general are dramatically under-investing in oil production capacity, I think that – I think, I believe, I know that depletion is real that oil wells do not continue producing forever, some of them decline at 70% a year, some of them decline at 5% a year, but all of them decline. And to the extent that the world is not reinvesting in new productive capacity, those declines in production will be felt in the coming years. Combined with that even though some say that oil demand growth is sluggish, oil demand is still continuing to increase every year generally on the order by about 1 million barrels a day or about 1%. So, as you add a few years together of underinvestment, combined with continued demand growth, I think you can see that in a few years time, prices will have to go up in order to provide the investment returns needed by oil companies in order to make the investment in more productive capacity. And I think that in two years’ time, that will certainly happen. I recall – I – in prior calls, I’ve said that $65 was my fearless forecast, for year-end 2018 oil, I think there is a good chance that oil will be significantly higher than that on the order of, say, $10 a barrel.”