National Oilwell Varco 2Q17 Earnings Call Notes

Clay C. Williams – National Oilwell Varco, Inc.

Seeing a resumption of demand in pressure pumping

“The good thing for us is that over 900 rigs running in North America – or in the U.S. right now are consuming a lot of that at a much higher rate than the 350 or so that we bottomed out at last year. And so the rate of consumption has stepped up and that means they have less opportunities to cannibalize inventories and consumables of off idled rigs and have burned through inventories. And so we’re starting to see a resumption of demand.”

Glimmers of hope in international markets

“. We saw some glimmers of hope in the international markets. As two-and-a-half plus years of this downturn have gone on, the stuff that we’ve had out in the marketplace is slowly getting consumed. Those inventories are diminished and depleted and folks have to step back to the table and start ordering more of our products, even at very low activity rates. So we’re seeing some positive signs that give us some optimism in some sustainability of those businesses even in a flattening rig count environment.”

National Oilwell Varco 1Q17 Earnings Call Notes

Clay C. Williams – National Oilwell Varco, Inc.

Customers are putting rigs back to work at an astonishing rate

“depleting production through the other 80-plus-million barrels a day of supply and another year of growing demand, the industry’s 159th, will inevitably lead to tightening. In the meantime, our North American customers are demonstrating that their economics work even at current oil prices in many North American basins by putting rigs back to work at an astonishing rate.”

Seeing scarcity return to sectors of the oilfield

“After a couple of very, very rough years, we’re seeing scarcity return to certain sectors of the oilfield, sectors where NOV plays an important supply role. Strategically, we have positioned NOV within the sectors we see as most likely to face scarcity as the upcycle emerges, including horizontal drilling that is growing rapidly in unconventional basins today.”

New rig building is still a ways out

“Yeah. On the land rig newbuild outlook, we are continuing to pursue those tenders in the Middle East. And there’s been I think some – there’s been a lot of public discussion about those. And just so you’re aware, lots of the NOCs in the Gulf States and in The Kingdom are discussing putting more land rigs to work. It’ll be a combination of existing rigs and newbuilds. And those various tenders are moving at different rates, but it’s a meaningful number of rigs.

And then in the quarter, we did see demand blossoming in a couple of other regions. In our conversations with North American drilling contractors, I do think new rig building is still a ways out. But the good news for all of them and us is that dayrates are continuing to march up and we’re currently selling into that trend in terms of upgrading the torque and pressure capabilities of rigs. So adding a third mud pump, adding a fourth genset, adding hightop torque drives, top drives to those rigs.

But I think once dayrates get up into the mid-$20,000 range a day, I think that’s really where you see meaningful demand for new rigs across the North American market. And as Jose just said just a moment ago, past cycles are a guide. They all seem to phone us at once seeking to put those rigs to work”

National Oilwell Varco

Clay C. Williams

This downturn has been unusually grim and painful

“Frankly, I’m glad 2016 is behind us. In the fourth quarter, we benefited from rising momentum in North American shale plays in particular, which we expect to accelerate. Our international markets still face headwinds for a quarter or two and offshore markets continue to trend down, so we still have challenges ahead. Nevertheless, $50 oil has been a welcome relief. I attribute my gray hair to the many previous downturns I’ve been through, 1986, 1991, 1999, 2002, and 2009. They all required difficult decisions and cost reductions, but this one has been unusually grim and painful. E&P customers cut spending two years in a row and current CapEx is just half the level seen just two years ago. Last year, global exploration discoveries were the lowest they have been since 1947. And in May of last year, the U.S land rig count dropped to the lowest number ever recorded. The industry responded as we always do. Teams have gotten smaller and facilities have been shuttered as purchase orders evaporated.”

Great companies use downturns to innovate

“There’s no better team in oilfield services, and I’m grateful for each and every one of you every day. Like me, they recognize that as hard as they are, downturns are an opportunity to become better. Great companies like NOV use downturns to reexamine how we do things and then take action to drive better efficiencies, actions like taking costs out of manufacturing processes, actions like streamlining supply chains and collapsing cycle times, so that we can deliver NOV’s technologies to our customers when they need it. Great companies like NOV use downturns to innovate”

Drilling much different today than the 80s

“In a low oil price world, accomplishing lower cost per barrel becomes a necessity for our customers. At great companies like NOV, invention follows. I started in an industry very different than today’s. In the early 1980s, almost all drilling was done vertically with mechanical rigs or occasionally DC electric rigs, using a kelly to turn roller-cone bits. Wells took months to drill. U.S. production was declining following its peak more than a decade earlier. A generation later, we drill horizontal wells with PDC bits turned by downhole drilling motors and drill pipe turned by top drives, and we’re doing it with fit-for-purpose AC rigs and massive frac spreads to execute dozens of stages.”

It’s not a stretch to say the seeds of this boom are a result of the 80s downturn

“The downturn of the 1980s was also particularly severe. E&P operators faced the very same challenges they always do when oil prices plummet, how to improve cost per barrel, again, a necessity to survive and again invention followed. I credit the downturn of the 1980s with the inventions of measurement-while-drilling [MWD] systems, logging-while-drilling systems, top drives, rotary steerables, horizontal drilling technology, and PDC bits technologies that frankly enabled the shale revolution. It’s not a stretch to say that the seeds of this amazing new source of oil and gas from shale are a direct result of the downturn of the 1980s. NOV helped lead the way. In 1982 we introduced the top drive, and since then our NOV brand name has become synonymous with a technology used on most rigs worldwide.”

Shale is incredibly consumptive of equipment

“The big picture here is that shale technologies are extremely consumptive of even the most reliably built equipment. Shale is insatiable. It wears out rigs and frac iron. It consumes drill pipe bits, drilling motors, frac spreads, treating iron, and a whole host of expendables like valves, seats, coil tubing, and shaker screens. It’s like feeding a Labrador. As the worldwide leader in the manufacture of all of these, I like NOV’s competitive position.”

The outlook for 2017 is getting brighter

“net-net, we are benefiting from reactivations of land rigs going back to work in West Texas. And I believe – we’ve been saying for the last two years our customers are great at cannibalizing their existing stocks of spare parts, and that’s certainly been going on in earnest. At some point, they’re going to run out of opportunities to cannibalize, and so perhaps we’re seeing some of that turn around as well. So on the whole, I think the outlook for 2017 is getting brighter.”

Next gen rig takes data from sensors downhole

“But a lot of our prepared comments were what we think is the next-generation rig even beyond that, which is you take that rig and then you wire that drill pipe and you let downhole sensors drive a control system at the surface that operates customer apps that they can write to control the rig. That’s the rig that learned, the rig the future as we see it…This is a whole new area, James. The industry has not used high-speed data transmission from the bit to operate the rig machinery in the past, and that’s really what this offers. So this is a whole new breakthrough in terms of technical capabilities. So we’ve got, as I mentioned, 57,000 bits per second coming up with vibration torque, weight on bit, stick slip information, all that stuff. And then the software takes that data stream – high-speed data stream and it adjusts the machines in real time. We actually have algorithms, heuristic algorithms that are altitude seeking that adjust the rig, weight on bit, strokes, et cetera to achieve the maximum ROP [Rate of Penetration] formation by formation. And so the machine learns effectively how to drill the stratigraphic section that it’s drilling in, and we think that’s the next big thing in drilling. So we’re very, very excited about this.”

National Oilwell Varco 3Q16 Earnings Call Notes

National Oilwell Varco (NOV) Q3 2016 Results
Clay C. Williams

OPEC producing near maximum levels

“The 2.2 million barrel per day decline in non-OPEC production since 2014 has been fully offset by rising OPEC production which achieved record levels this summer along with Russian production which achieved record levels in September. Overall, we believe OPEC to be producing at near maximum levels with little remaining excess capacity cushion which has delayed the inevitable rebalancing of the world oil markets.”

OPEC faces rising challenges to grow production further

“Nevertheless, time is on our side as OPEC faces rising challenges to grow production further and as dwindling oil field expenditures accelerate production declines through the rest of the world. Faced with extraordinary revenue declines and significant price discounting in all areas of our business, we’ve aggressively reduced costs and improved efficiency, enabling NOV to manage EBITDA decremental leverage to only 28% since the end of 2014.”

Seeing a shift in mix away from offshore but more optimism in onshore

“we are seeing a shift in our mix away from offshore, which really dominated our order book for the last decade plus, to land in 2017, 2018. And as we mention in our remarks, I think cause for some optimism there. Conversations are beginning. Tenders for land equipment are starting to be let. And it’s very early days, but that’s certainly a good and welcome relief. And that showed up in our orders in the third quarter, which grew off of some pretty low levels of orders in the preceding quarter.”

International headwinds offsetting US

‘Well, we expect U.S. to grow. What I would tell you, though, is we are continuing to suffer from international headwinds in certain markets. So international will partly offset U.S. growth. But the big move sequentially is going to be drillpipe sales and then the coating of drillpipe within our Tuboscope unit.”

Plenty of inventory, scarcest resource in an upturn is people

“With regards to your inventory comment, what I would tell you is that, frankly, our inventory is – we still have too much. And so we have ample inventory, I think to respond to our customers’ needs. And so that’s not really the issue. What the upturn will look like, the scarcest resource in every upturn pretty quickly becomes people. ”

National Oilwell Varco (NOV) Q2 2016 Earnings Call

National Oilwell Varco (NOV) CEO Clay Williams said their customers remained even more cautious as oil pulled back to $26 in February

“In the second quarter of 2016, National Oilwell Varco did post revenues of $1.7 billion, down 21% from the first quarter and down 56% from the second quarter of 2015. Revenues declined more than expected, due mostly to offshore drilling contractors further delaying acceptance of new builds. The $26 crude oil prices we saw in February inflicted new agony on the oil field, sending second quarter expenditures further downward and driving U.S. rig counts to record lows going back seven decades.”

Significantly reduced the size of their workforce 

“First on cost, our team is resolute in our commitment to improve efficiencies, reduce capacity, and generate higher profitability. During the second quarter, we detailed additional cost reduction steps that totaled over $400 million in annualized savings that will flow in over the next few quarters. Plans developed and actions taken during the second quarter are on top of considerable work performed already, having reduced our annual personnel cost well over $2 billion from peak levels.”

Some domestic customer equipment orders have bounced back here just in the last few weeks

“We are encouraged that the North American rig counts have begun to increase. We have seen demand rise in recent weeks for certain products and services for North America: rod guides for artificial lift, solids control jobs in West Texas, drilling motor rentals, and other items.”

We haven’t hit the bottom yet in their opinion, which contrasts with the management teams of Schlumberger and Haliburton who said we have already passed the bottom

“At or near the bottom of the cycle, we see considerable crosscurrents, price pressure, and shifting mix within our business. And, frankly, we’re not ready to call bottom yet.”

Not a single new rig order during the quarter

“For the third straight quarter, we received no new rig orders. Near-term demand for offshore remains almost nonexistent outside of replacement equipment. Discussions continue regarding midterm opportunities, which include one-off specialized 20-K drill ships and speculative mid-water semi-submersibles. However, we do not anticipate these orders materializing in 2016.”

Using remote analytics and big data to detect problems in drilling equipment before they happen

“Today, our customers cannot afford extra downtime and need to be optimally positioned to capitalize on any new opportunities. As previously noted, we are seeing strong demand for our condition-based monitoring solutions, which allow contractors to predict failures and address problems before they occur.”

They are more interested in doing acquisitions of small companies rather than a large strategic merger or acquisition 

“But, just to state it more bluntly, I think we are mostly interested today, as we look out across a big and growing portfolio of potential M&A opportunities, in pursuing a lot of smaller critical technologies, bolt-on sort of adds that we really think are going to create the most shareholder value for our shareholders in the upturn. And again, I can’t stress this enough. This is sort of how we really did build the business over the last 20-plus years, and having now moved into much more of a buyer’s market, that sort of roll up your sleeves and get out there in a lot of conversations and look for opportunities to add on smaller acquisitions, I think, is the best application of capital. Conversely, to go out there and to make one larger bet on one larger transaction and sort of say, well, that’s it, it’s just far less appealing.”

National Oilwell Varco 1Q16 Earnings Call Notes

Clay C. Williams – Chairman, President & Chief Executive Officer

The internet of things is coming to the oilfield

“We believe that condition-based remote monitoring of oilfield equipment and predictive data analytics will grow in importance in the next upturn as the industry increasingly employs more sophisticated equipment in more demanding environments. The Internet of Things is coming to the oilfield and NOV will continue to lead the way, and will benefit from the largest installed base of drilling equipment and drilling control systems in the world. Hydraulic fracture simulation is another enabling technology with proven value to the industry.”

Some customers are beginning to think about a potential upturn

“While we are not planning for a recovery in 2016, we are encouraged by reports from some customers that they are beginning to think about a potential upturn in the second half of the year as oil production has finally begun to rollover and demand continues to march upward.”

Business is now down to a subsistence level

“What I would tell you is, although orders are very, very slow now, business is obviously down to sort of subsistence levels, looking out in coming quarters we expect to see a resumption of land rig projects. We have a number of conversations underway around the globe. We expect to see drilling contractors continuing to upgrade their equipment and make their rigs more competitive in a market that’s a little tougher on them.”

M&A has become more of a buyers market

We do think it’s steadily become more of a buyer’s market, frankly, through the past year and half, and so we’re trying to be very selective, very disciplined in our application of capital, and so we’re looking at opportunities but nothing to report yet.”

We have plenty of capacity but you’ll need to see prices rise and stay there for customers to increase activity

“we have an abundance of capacity, so as soon as a purchase order comes in, I think we can respond pretty quickly. From a macro perspective though, I do think commodity prices have to go up and they have to stay there a while before you really see activity and purchasing follow that as customers repair balance sheets and basically get comfortable that commodity prices are going to stay high for a while and so kind of the activity recovery will lag the commodity price recovery, I believe. But when the activity recovery comes though, we are very encouraged and anxious to move forward with a lot of the new ideas that we outlined in the call.”

National Oilwell Varco 4Q15 Earnings Call Notes

National Oilwell Varco (NOV) Clay C. Williams on Q4 2015 Results

Present level of activity is insufficient to supply longer term demand

“We believe the present level of activity is insufficient to supply the longer-term demand for oil. And note that unlike the three most recent downturns through the past 20 years, OPEC has not curtailed production to defend pricing. This has made the present downturn far more severe, but will perhaps lead to a sharper eventual recovery.”

The relentless march of depletion will bring supply and demand into balance

“With producers pumping furiously to maximize their cash flow, the relentless march of depletion, the deferral of 68 projects representing 3 million barrels of oil per day of planned future production, and the unfolding of severe capital austerity will help bring supply and demand into balance.’

As the downturn lengthens everybody is becoming more realistic

“we’re actively pursuing several targets now. It has been challenging and sometimes frustrating to reach agreement with potential sellers. But as the downturn lengthens, everybody in this space is becoming a lot more realistic. We remain patient and disciplined on values and realistic in our outlook, as the option value of our capital flexibility steadily rises.”

Flexing up and down sharply is a requisite skill in oil services

“one of the really necessary skill sets in oilfield services for those of us that have been in it a while is the ability to flex up sharply when called upon and flex down sharply when called upon.”

Nobody is really maintaining their fleet very well

“I can tell you the day or wrap numbers around this. But I would tell you anecdotally, nobody is really maintaining their fleets very well. And in fact as I said I think in my comments, there’s a lot of equipment auctions under way where you can pick up fleets at pennies on the dollar. And that becomes a source of spare parts. And that’s how it affects our business. Rather than buying consumables, fluid ends, things from us, those are being purchased at auction.’

We are enthusiastic about what we see out there (M&A)

“We are enthusiastic about what we’re starting to see out there. And again great to have a lot of balance sheet flexibility and capacity. And I think there’s a lot of optionality right now embedded in NOV.”

It’s hard to get the bid and ask to converge on the way down

“I would tell you on the – on down – in down cycles, having been through a few, it’s really hard to get the bid and the ask to converge on the way down.”

Jose A. Bayardo – Chief Financial Officer & Senior Vice President

National Oilwell Varco 3Q15 Earnings Call Notes

We see further reductions in activity

“A second major decline in oil prices from the high $50 range back into the low to mid $40 range since June has increased financial stress and led to a second round of rig activity reductions, sending the U.S. rig count down by almost 60% since late 2014 peaks. We expect to see further activity reductions and pricing pressures continuing into the fourth quarter. Visibility is limited, but we believe most producers will further reduce their 2016 CapEx plans after cutting spending significantly in 2015. The industry has not seen two years of declining CapEx since the 1980s, signaling the severity of the downturn we find ourselves in.”

Producers are producing fields close to maximum levels

“We believe many, if not most, North American producers and OPEC countries are producing existing fields close to maximum levels, trying to offset lower revenues due to oil price declines with higher volumes while sharply reducing drilling activity. OPEC and non-OPEC production are up year-over-year. This is not sustainable. Production will begin to decline naturally, as it has begun to in the United States. And therein lies the seeds for our recovery.”

We don’t expect recovery any time soon

“However, with swollen inventories, moderating demand growth with economic weakness in Asia and elsewhere around the globe and an uncertain trajectory for incremental oil exports from Iran, we don’t expect recovery any time soon. Nevertheless, it will come.”

As the downturn lengthens company prices will come down

“As the downturn has lengthened, we believe values of potential target companies will become more and more compelling. Thus far, it has been challenging to bring the bid and the ask on potential acquisitions into alignment, but we remain patient and disciplined in these discussions.”

Sellers will likely reduce their expectations

“As we move into 2016, we believe sellers are likely to reduce their expectations and better capital returns on M&A will follow. Consequently, our capital deployment strategy is shifting from share buybacks to an external focus on potential acquisitions”

NOV is a portfolio of market leaders

“NOV represents a portfolio of market leaders with the deepest experience and the most expertise. Within these businesses, we have assembled discrete packages of equipment and services to drive higher efficiency in ways that our customers really want and in ways that really improve their businesses.”

Look for enterprises where we can be a better owner

“Our acquisitions are of enterprises where NOV can be a better owner, to accelerate growth, drive efficiency and fully unlock their potential to create value for our customers and our shareholders”

Grateful to our business leaders

“I’m extraordinarily grateful to these business leaders who are skillfully reducing our capacity, managing costs and leading our core team through this challenging time. They’re providing their teams with a vision of better days ahead to make sure that our folks see the prosperity that will follow for NOV. ”

Difficult conditions will persist

“Difficult market conditions will persist for the foreseeable future. We supply a highly capital intensive industry and have benefited from decade-plus period of retooling with improved levels of technology and automation. But the industrial transformation is far from over. Our view is that we are currently in a cyclical pause.”

Our customers are in a Darwinian quest to preserve cash

“During such a cyclical pause, our biggest competitor becomes the overhang of products and consumables and equipment that our customers cannibalize extremely effectively in their Darwinian quest to preserve cash.”

We came from PE roots

“both National Oilwell and Varco came out of private equity roots. And through the years, between our two organizations, we came together about 10 years ago, we’ve done probably in excess of 300 transactions. So this is becoming a buyer’s market and we’re pretty excited about that.”

Try to move more manufacturing in house in a slowdown to keep teams busy

“we do have sort of an outsourcing model. Basically we recognized all of the things that we manufacture serve cyclical industries, so demand rises and falls. So we’re trying to avoid scaling up to internally manage peak demand. And over the past few years, a number of our business units have done more outsourcing. So as you go with the other way and things sort of cycle down, we really try to bring more in house, keep our core teams busy.”

2016 is going to remain challenging

“I think the first part of 2016 is going to continue to be really challenging and, as I said in my prepared remarks, our expectation is activity is going to trend lower. I think like everybody in this industry that we remain hopeful we’ll get a little bit of commodity price help and relief and then maybe in the second half of the year we start to see maybe some activity pick up a little bit. But I don’t have a lot of data to point to this as to why that would happen.”

Producers want to get back to drilling as soon as they can

“producers come under a lot of pressure when they start facing production declines. And so I think there’ll be an impetus, at least across North America, to get back to drilling as soon as they can”

A little uptick in activity will require a lot of work from NOV in spare parts

“A lot of the equipment that’s out there has been depleted of spare parts and cannibalized. And so a little bit of uptick in activity is going to take a lot of work from NOV, so we’re looking forward to that time.”

Customers have been more aggressive about repositioning equipment to preserve cash

“We’re seeing customers be far more aggressive I think in this downturn with regards to cannibalizing their equipment, about repositioning it. If they have a particular piece of equipment in a different region, there’s a cost to repositioning that; there’s freight, there’s – they have to invest in that just to move it and maybe to get it back to working order. And we’re seeing customers go to more extraordinary lengths I think in this downturn than we have in the preceding couple of downturns with regards to cannibalization”

Customers still want to upgrade their rig fleets to AC technology

“I’m probably more optimistic about in terms of demand in Rig is we know a number of drilling contractors in North America and around the globe who are completely bought into the idea and the need to upgrade their fleets to AC technology. This is clearly where the market is going and so I think in terms of recovery, that’s where we would see it next.”

National Oilwell Varco 2Q15 Earnings Call Notes

Most NA business units reporting stabilizing pricing

“Generally, we still see some pricing pressures in certain products, mostly in international markets, but most North American business units are reporting that pricing is stabilizing at new lower levels as the rig count flattens. Consolidated revenues for the U.S. declined 29% sequentially.”

As companies run their fleets, they will eventually have to restock

“As oilfield service companies gradually destock, they will eventually run out of opportunities to cannibalize their existing fleets and we expect orders to begin to flow again to NOV, given that oil and gas remains a highly capital intensive undertaking and that NOV is one of its largest capital manufacturers and suppliers of technology.”

Customers are doing the bare minimum to keep their fleets running

“Customers are doing the absolute bare minimum in terms of maintenance and repair, only what’s necessary to keep their fleets running. ”

Pricing and rig count appears to have stabilized

Pricing appears to have stabilized across North American markets as the rig count has more or less stabilized and has ranged from low-single digits and on up. ‘

It’s a buyers’ market, but companies don’t want to sell at the bottom

“in a cyclical downturn, and this is one of many we’ve been through, our view is that it becomes much more of a buyer’s market. The risk, I think, in transactions tends to go down a little bit, but it can be a challenging market to get deals done because most companies don’t particularly want to sell at the bottom. And so it’s a challenge making bids and the asks come together and to reach a price that all parties view as fair and move forward.”

Land rig customers are more optimistic about recovering commodity prices

“There’s a lot of conversations underway around land rigs. And I think generally, our land rig customers are much more optimistic about recovering commodity prices driving higher levels of activity.”

“Hallibaker” obviously changes the strategic picture somewhat

“It’s obviously a large merger. It spans a number of different subsectors in oilfield services. And so there’s implications for specific spaces within the industry, specific marketplaces, specific geographies. And so, we’re watching very closely how that comes together. And so, I would tell you strategically, certainly it’s shaded our thinking and what we always try to do is think out three or four moves into the chess game.

So, what are the perhaps non-obvious implications of the Halliburton-Baker merger. So, yeah, it’s – the short answer is yes, it’s certainly shaded our strategic thinking. And we’re – but they’re both customers, we wish them well and we’ll see what happens.”

JS Notes: CHRW, MHFI, AET, L, SCTY, ICE, CHK, BUD, NOV, MKL

Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.

 

C.H. Robinson (CHRW) CEO John Wiehoff says the company played a critical role to helping customers ship their goods effectively and efficiently given the West Coast port shutdown 

“Unlike intermodal, we do believe that the port delays on the West Coast probably helped our global forwarding business a little bit. We do know that several of our customers had difficult opportunities that we were able to help them with, and in some cases where customers were unable to get direct access to ocean capacity, we were able to help them with our capacity. So we do know of examples and believe that our global forwarding results probably were helped somewhat by the West Coast port delays.”

C.H. Robinson (CHRW) CEO John Wiehoff says he would like to do an acquisition in the intermodal or contract logistics space, the firm remains disciplined on finding the right candidate

“With all of the services that we offer, our belief is that our long-term competitive advantage is in the quality of our service and the quality of our people. And when we look at the acquisition opportunities, we want to make certain that we’re not disrupting any of that service capability or continuity and that we have the time and focus to make sure that we improve our competitive position in the marketplace while doing it. So while we’ve been looking at opportunities in both intermodal and contract logistics, we haven’t found what we thought was the right blend of value and integration capabilities to really improve our competitive positioning in the marketplace.”

C.H. Robinson (CHRW) CEO John Wiehoff says he still believes firm’s “asset light” business model is a differentiator versus many of its competitors

“In the longer run, we have belief that our third-party model of separating the capacity ownership and the capital investment from the customer service and go-to-market strategies can be a very effective way and the most effective way to serve a large part of the marketplace.”

But he conceeds more competitors have entered the space in the last few years

“As others continue to invest in that business model and more of the marketplace gets served by a third-party or a logistics-type business model, we think that that just reflects some of the secular changes in how we’re all competing. So the market is more competitive, we’re adapting to how things are changing and with regards to the business model that each of our competitors pursues around a blend of capital and logistics type stuff, we’ll just have to factor that in to how we sell and how we grow in the marketplace.”

Their customer base continues to be diversified 

“From an enterprise standpoint, we have a lot of customers that are around the 1% net revenue, and we’ve shared before from an enterprise standpoint that our top 100 customers are around a third of the business and that our top 300 or 400 customers make up around half of the business.  That’s part of that customer diversification that we feel is the strength of our business model.”

 

 

 

 

McGraw Hill Financial (MHFI) CEO Doug Peterson says the firm’s bond rating unit has benefited from a large number of corporations refinancing before the oncoming Federal Reserve rate hike

“If we turn to issuance, the recent trends in US and European issuance did benefit our businesses. First-quarter issuance in the US was quite strong across all sectors. Investment grade increased 24%.  In the US the improvement in corporate issuance was largely due to a 45% increase in industrials issuance.  Large debt financed M&A transactions also contributed to the lift in issuance.  In addition, a continued thirst for yield has enabled corporate issuers across the rating spectrum to tap the capital market, extending maturities at beneficial pricing and terms. High yield increased 39%, public finance was up 61% over an unusually weak first-quarter in 2014.”

Additionally, the firm remains competitively positioned with its S&P ETF business

“If we turn to the key business drivers, the ETF industry experienced record first quarter inflows of $97 billion.  We believe that once investors place funds into passive investment, these funds tend to stay in passive investment and then they shift between various ETFs based on asset allocation models and decisions.  ETF AUMs associated with our indices increased 22% to $810 billion versus the end of first-quarter 2014 with approximately three quarters of this growth coming from inflows.”

The company’s Platts commodity business continued to grow revenue during the quarter even though client interest in commodity investments remains muted

“During the quarter, Platts continued to grow revenue despite low commodity prices. As we have seen in recent quarters the newer areas of metals and agriculture had the highest revenue growth rate.  Global trading services revenue increased primarily due to license revenue from the steel index derivative activity at the Singapore Exchange.”

The firm continues to benefit from some of the large U.S. banks shedding non-core assets

“We are also encouraged by the facts that banks are probably struggling after the LIBOR scandals with their ability to continue to manage benchmarks inside of their businesses. They might be non-core or they might not really be a business that it makes a lot of sense for them to be in.”

 

 

 

 

Aetna (AET) CEO Mark Bertolini says value based medical care reimbursement as opposed to quantity based reimbursement is now a substantial portion of the business

“Value based contracting now represents approximately 30% of Aetna’s medical spend with a goal to achieve 75% by the end of the decade.”

The firm benefitted from having lower medical insurance claims than expected

“Our commercial medical benefit ratio was 77.4% for the quarter, an excellent result that benefited from higher premiums, moderate cost trends and strong prior year’s reserve development.”

 

 

 

 

Loews (L) CEO Jim Tisch says the company is positioned opportunistically to deploy its large cash balance

“I want to start today by looking at Loews $5.5 billion of cash and investments.  As we have said before, money doesn’t burn a hole in our pockets. While we acknowledge that cash can be a drag on Loews short term returns, we feel that having the flexibility to be opportunistic and not rely on financing markets has served our shareholders very well over the long term.”

Loews (L) CEO Jim Tisch says the market is priced for perfection and he is having a hard time finding undervalued assets

“I think that after all these years of low interest rates and quantitative easing, what we have is markets both fixed income and equity markets that are priced for perfection.  So, my guess is that for the time being businesses look like they’re priced too high for us.  Now one of the things that I always remember is that the world is cyclical. And it’s easy to lose sight of that because we’re now in – firmly in year six of an upcycle for equity prices.  But at some point in time something will happen, people will lose all the confidence that they have and my guess is that opportunities will present itself.  I’d rather be patient and get a good business at an attractive price rather than lose patience and buy a business at too higher price.”

Loews (L) CEO Jim Tisch says that one of it’s oil rig subsidiaries, Diamond Offshore, performed poorly during the quarter but still sees further downside for the industry ahead which he hopes will ultimately lead to a buying opportunity

“I think right now the conditions are bad enough for rig valuations to go down. The problem is they haven’t been bad enough for long enough.  In the next two, three or four quarters, I think we could see that some fifth and six generation rig assets become available for sale.

 

 

 

 

Solarcity (SCTY) Chief Technology Officer Peter Rive says solar installation costs are falling at a dramatic pace which is allowing solar energy distribution to be competitive to electric utilities

“On the residential side, our fully installed solar battery system costs are about one-third of what they were a year ago. We expect cost to decline further at manufacturing sales and over the next five to 10 years these costs reductions will make it feasible to deploy the battery by default with all of our solar power systems.”

Solarcity (SCTY) Chief Financial Officer Brad Buss says access to the capital markets for the solar capital markets is gaining momentum as investors becoming increasingly confident in the business model

“Every six months I only see our credit spread shrinking as we continue to perform as the paper continues to perform. So I am very happy where things are going from that perspective and then obviously on a cost spend of it. It is really is the cost of capital and the cost that’s really driving our success and where I think we will continue to outdistance and be cost efficient.”

 

 

 

 

 

Intercontinental Exchange (ICE) Chief Financial Officer Scott Hill says the company has seen increased volume in its oil contracts and is benefitting from increased volatility in the commodity sector

“This was enabled by an 11% increase in commodity revenues on the strength of our global oil markets.  Brent crude contact revenue  grew 51% year-to-year to a record $74 million. Brent continues to expand its lead as the global benchmark for pricing crude and refined oil products, with open interest up 15% from year-end to a record 4.4 million contracts. Notably, Brent open interest is up 49% from last March, with strong growth due to the ongoing shift of Brent in commodity indexes and longer-term secular trends.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher says he expects to see continued growth in their Asian products over the coming years

Similarly, Asia’s markets are expanding due to greater demand for the type of products we currently offer through our Western exchanges and clearinghouses.  Our work there is foundational, and we will launch ICE Futures Singapore and ICE Clear Singapore this year. We’re seeing a good deal of interest in our newly announced Asian market products and for the increased access to central clearing.  The other interesting thing is there’s also a lot of capital moving towards Asia.  You see it in the demand right now for the linkage between the Hong Kong Exchange and the Shanghai Stock Exchange in equities.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher is optimistic about taking over the LIBOR and gold price benchmark administration from what used to be a consortium of banks that set those price levels 

At ICE Benchmark Administration, in March, the ICE Swap Rate replaced the ISDAFIX, and we successfully launched the gold price with record-level participation. We’ve also undertaken market consultations for both LIBOR and the LBMA Gold Prices to evolve the best practices for determining these prices.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher says the New York Stock Exchange continues to be the global leader in IPO’s and capital raising

The New York Stock Exchange continued to lead in global capital raising, with $50 billion in total proceeds raised in the first quarter. This is more than the next 2 largest exchanges combined. And we continue to attract companies of all sectors and market capitalizations because of our unique market model, combined with our unparalleled visibility and service.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher focuses on profit per share of the company rather than market share

We have, in a very disciplined way, decided to not participate in options volume that does not earn a return for the company.  So the fact that we send uncompetitive business to our competitors is to not concern our shareholders.  And let’s let those competitors have the bragging rights if they have a lot of market share, but there isn’t a lot of income to go along with some of that business.”

 

 

 

Chesapeake Energy (CHK) Executive VP Chris Doyle says the firm is using big data techniques to analyze how to drill the most effective well

“The Operational Support Center (OSC) is manned by 100 industry experts, drilling superintendents, geosteerers, geologists, engineers, lease operators and analysts. OSC is Chesapeake’s central command center. It’s like NORAD in Oklahoma City. But more than just monitoring and supporting, the OSC links our teams executing out in the field with real-time data analytics, industrial analytics and tactical performance-enhancing adjustments.  y identifying optimal drilling parameters based on historical drilling data, every single well had a well plan based on what it took to drill the fastest, best, most competitive well. And any and all trouble time was analyzed, evaluated, all events in the past and so the OSC was able to forewarn our drilling organization, including the drillers on the rig floor, when they were either outside the optimal drilling window or they were headed for a potential issue. The result was optimized drilling performance and elimination of downtime events. That’s how you reduce cycle times from 26 days to 12 days.”

Chesapeake Energy (CHK) Chief Financial Officer Domenic Dell’osso stated that the company has reduced it’s rig count dramatically which will likely hurt oil rig manufacturers

“We started 2015 with around 70 rigs running, including a few spud rig, and averaged 54 rigs during the first quarter. Today, we’re running 26 rigs in total and we’re forecasting to drop to 14 rigs during the third quarter.”

 

 

 

 

Anheuser Busch Inbev (BUD) CEO Carlos Brito said that the Bud Light brand continues to struggle in its attempt to resonate with the U.S. consumer

“We estimate the Bud Light brand was down approximately 20 bps in terms of total market share.  We have a long way to go in stabilizing the share of Budweiser.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito said the company continues to gain market share in China and its various brands now represent almost 1/5 of all beer consumed in China

“We estimate our market share in the quarter reached 18.5% when including our recent acquisitions.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito on how he thinks about the craft brewing movement in the U.S.

“We’re adopting the strategy very clearly of having more regional relevant brands. So that’s the case when we joined with Goose Island, Blue Point, 10 Barrel, Elysian, but also developing our own like Shock Top, and also trying to focus in a few that could be nationally expanded.  In other markets, what we’re trying to do is get the U.S. learnings over to other markets and try to be, of course, ahead of the curve, especially markets where we lead, like Brazil.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito on how they are incorporating social media into their marketing

Social media continues to grow within our mix of media spend between social and traditional. We are learning every day by connecting more with consumers and making our contents relevant. Of course, it’s a very fast paced type interaction with consumers, and we don’t intend to get everything right all the time.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito expects the company to compete effectively in the Vietnamese beer market

So in terms of Vietnam, yes, we’re building a brewery there. We expect to ship beer in May. So this month in Vietnam. We’re very excited about Vietnam. It’s a country, again, demographics, weather, beer culture, 90 million people, a very extensive or a very big high-end segment. And that’s where we want to play with Budweiser, Stella and Corona, also Hoegaarden. So very exciting market, we’re very committed to it, and learning from our experience in China to do a lot of what we did with Budweiser in China in Vietnam.”

 

 

 

 

National Oilwell Varco (NOV) CEO Clay Williams says the pace of the decline in the oil rig count is unprecedented in history

The rate of decline of active rigs, most acute across North America is breathtaking and unequaled in prior downturns. NOV saw activities and orders slow in just about all areas of our business and all of our units are experiencing pricing pressure.”

And the company is under serious pricing pressure to reduce their selling price to customers

“We are also under pricing pressure and requests to cancel work, which we are vigorously opposing. We are seeking to structure discounts around volume-related rebates tied to payments and expanded product purchases, in effect picking our points, to try and win greater share, defend volumes, and improve absorption in our plants. We don’t want our customers to get out of the habit of buying from us, to maximize our market position when the inevitable recovery comes.  We closed three facilities within the unit during the first quarter and continued to reduce costs within our supply chain. North America was hit hardest, but the Middle East and other international markets are more stable.”

 

 

 

 

Markel (MKL) CFO Anne Waleski says the firm remains disciplined on price and will not write insurance in which it cannot earn a reasonable rate of return

“Market conditions remain very competitive, consistent with our historical practices we will not rate business when we believe prevailing market rates will not support our underwriting profit targets.”

Marke (MKL) President Rich Crowley says the reinsurance sector remains ultra competitive with capital as a result of low interest rates

“In the reinsurance segment we saw pressure in terms and rates during the January 1 renewal process. As the year moves forward, while still extremely competitive it does appear that the decrease in rates and terms has slowed to some extent.  In summary and we stated it many times, we’re not going to chase premium when we feel the rates are inadequate. We continue to reinforce this message with our underwriting teams as is reflected in our first quarter’s gross premium numbers.”

Markel (MKL) Chief Investment Officer Tom Gaynor says even though they are earning very little on their short duration bond portfolio due to the low interest rate environment, they think today’s economic and financial climate warrants conservatism

“I’m sure that if we were really smart and clever we could find some alternative investment approach that would increase the yield on our short term portfolio from essentially nothing to something more than that. We’re not that clever or smart, so we won’t try to perform that sort of alchemy. We’ve seen enough of those experiments end badly to dissuade us from going down that path.”