Interview with Valuentum’s Callum Turcan
publication date: Jul 6, 2020
author/source: Callum Turcan
Callum Turcan helps head up Valuentum’s research product and is co-editor of the company’s newsletters. We sat down with Callum to get his thoughts on new developments in the market and economy. Let’s kick things off with his thoughts on the recent Berkshire/Dominion deal.
Callum: Interesting deal with Dominion (D) and one that likely fits in with Berkshire Hathaway's (BRK.A/BRK.B) long-term utility/infrastructure strategy in North America. Berkshire has steadily grown its wind power generation business over the past decade, but until battery storage technology progresses further (with an eye towards the need for serious cost reductions), natural gas will continue to be used to meet electricity demand when wind turbines are operating at reduced capacity (and in general, as new combined-cycle natural gas power plants are baseload power generators).
Additionally, natural gas heating has become more popular in certain parts of the US as domestic natural gas prices catered over the past decade (due to fracking) and low prices spurred the expansion of certain natural gas-hungry industries in the US as well (new petrochemical plants, enlarged refineries), which further supports the outlook for domestic natural gas demand. Rising US natural gas exports (via LNG facilities and pipelines to Mexico) only represent part of this story, in my view, Mr. Buffett is betting on domestic natural gas demand holding up relatively well over the coming decades.
Question: The Oracle is stepping into infrastructure plays while the midstream energy space is facing some pressure. Chesapeake Energy (CHK), for example, has asked to cancel over $300 million of its pipeline contracts.
Callum: Many onshore US upstream companies have long considered how to get out of (arguably onerous) minimum volume commitments ('MVCs'), many of which were signed during a different era. These agreements played a key role in decimating the shale industry by encouraging uneconomic production to stay online (the economic cost of not drilling was worse than the economic cost of drilling in a low raw energy resources pricing environment given the MVC-related fees and penalties). However, the US court system has generally preferred to keep those agreements in place even during and after bankruptcy (though the pricing of such contracts could be negotiated as all contracts can be during the Chapter 11 process). We will see what happens in 2020 and beyond as Chesapeake's Chapter 11 process makes its way through the system, but we remain cautious on the midstream space (AMLP).
Question: We’re hearing that Wells Fargo (WFC) expects to cut its dividend in the third quarter in response to the Fed’s recent stress tests. What are your thoughts on what investors might expect across the banking sector?
Callum: We noted that Wells Fargo’s dividend was at risk in our most recent note, “Wells Fargo Faces Regulatory Pressure Amid an Enormous Bad Debt Cycle,” April 16, so the news from Wells wasn’t unexpected. We’re not huge fans of the banking sector, as financials have underperformed terribly during the COVID-19 sell-off and failed to participate meaningfully in the rebound.
JPMorgan (JPM) expects to maintain its quarterly payout in the third quarter, but CEO Jamie Dimon just recently warned that the bank might have to cut its dividend if there is "significant deterioration" in JPM’s outlook. For Bank of America (BAC) and JPM, it does not seem like a dividend cut is imminent (meaning within the coming weeks). We should caution that many market participants are likely assuming more will be done on the fiscal side of things in the US to prop up the economy and wages past July 2020 (considering enhanced unemployment benefits end in July, the stimulus payments were a one-time deal, and Payroll Protection Program loans/grants will go cover so much).
If there is not additional fiscal stimulus (emergency funding really) in the US, the economic outlook is not great heading into third quarter given rising confirmed COVID-19 cases and the potential for various lockdowns to continue for longer than previously expected. Ultimately, it depends on how federal authorities respond, given the banking sector's dependence on the strength of the broader economy. That said, the stock market is not the economy, and we remain bullish on the markets as the longer-duration components of enterprise valuation swell.
Question: What are your thoughts on the potential for a COVID-19 vaccine sooner than later. We heard from the NIH Director Francis Collins that he is optimistic on a COVID-19 vaccine by year end.
Callum: Key clinical trials are starting up for Moderna (MRNA), AstraZeneca (AZN), and Johnson & Johnson (JNJ). Moderna may have to delay its Phase 3 trial by a few weeks (which was slated to begin this month), but things are moving quickly in the race for a vaccine. The number of shots on goal for a COVID-19 vaccine are tremendous, “Excited By COVID-19 Vaccine Candidates,” May 18, and we remain very optimistic that we may soon have COVID-19 on the run.
Question: We’ve been hearing a lot about ESG (Environment, Social, Governance) investing. What are some of your thoughts on this trend?
Callum: The record net inflows last year into ESG funds highlights the growing popularity of this investing strategy. The rise of ESG investing strategies goes far beyond financial media headlines as it's becoming increasingly apparent investors are really warming up to the idea and allocating funds towards the space (a dynamic that's likely creating demand for ESG investment research from RIAs and other institutional investors, along with retail investors as well). With ~$200 billion in AUM across all ESG funds (including the ~$20 billion in net inflows seen last year), this space is no longer a niche.
Thank you for your thoughts Callum!
Related ESG ETFs: SUSL, DSI, USSG, SUSA
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Callum Turcan does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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