How Russia Might Be Taking Over Your Local Gas Station
United Airlines (NYSE: UAL)was blowing up in the headlines last week, with reports of the forcible law-enforcement removal of a passenger from an overbooked flight.
In this week's episode of Industry Focus: Energy, Motley Fool energy analysts Sean O'Reilly and Taylor Muckerman explain the context that led to that point, why so many airlines overbook so many of their flights, a few ways that United might have responded better to that situation, and where United can go from here.
Also, the hosts talk about oil news from Russia and Venezuela, how current oil prices per barrel are affecting what companies are profitable, and more.
A full transcript follows the video.
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This video was recorded on April 13, 2017.
Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today isThursday, April 13, so we're talking about energy, materials, and industrials. I am your host, Sean O'Reilly, and joining me today in studio is the man, the myth, the legend, Mr. Taylor Muckerman. How are you today?
Taylor Muckerman: I'm good! What's up?
O'Reilly: Spring has arrived in D.C., getting out, seeing tourists now.
Muckerman: A little bit. It's spring break around here.
O'Reilly: I was joking with my buddy, like, the first day of spring, and this is the city where you start seeing everyone with their backpacks, asking how to get to the Washington Monument.
Muckerman: And the bright neon "I Love Washington, D.C." sweatshirts.
O'Reilly: And we love them. We love tourists. I'm more than happy to direct them as to which Metro station to use. So, we have a bunch of stuff to cover today, folks, including,[laughs] this is a good one, how Russia might be trying to take over your local gas station. That'll be fun. Oil producer profitability, trouble over atAmerican Airlines, but first, we have to mention a tweet we received on theTMFTwitterhandle about a company we failed to mention last week when we were discussing offshore drillers.I felt really guilty about this. It was on the tip of my tongue, though.
Muckerman: Well, there's just so many of them.
O'Reilly: There's fewer than there were a few years ago.[laughs]
Muckerman: That was actually a discussion that, if you were an investor, you would not want to hear their name mentioned, because it was a discussion of offshore oil companies that announced bankruptcy or restructuring.
O'Reilly: Our Twitter handle, @TMFEnergy, Levi Waddell, @Levi_Waddell said, "@IamSOReilly@t_Muckermanyou didn't mentionAtwood [Oceanics]in your offshore conversation the other day... thoughts on this one??" What are your thoughts, Taylor?
Muckerman: I'll make it as brief as a tweet.
O'Reilly: 140 characters?
Muckerman: I do -- in the offshore oil industry,this is a company that investors could definitely look at. It's asmaller company compared to anEnsco--
O'Reilly: Theyonly have a fleet of 12, 13, 14 rigs? But they're all newer,as I understand it.
Muckerman: I don't have the exact rig count, but yeah. We talk about going down to Houston quite often, but a couple years ago I went down there and met withRob Saltiel, their CEO --
O'Reilly: Yourcharacter count is over.
Muckerman: [laughs] Yeah, sorry. I met with Rob Saltiel, their CEO,and a couple of members of management. He's good pedigree; he came fromTransocean; he said he's always out therevisiting these rigs.
O'Reilly: Youwant that in a leader.
Muckerman: Well,he doesn't have as many rigs asTransocean; it might be a little harder for the CEO of Transocean to get out there and visit every rig in theseremote parts of the world. But yeah, newer rigs, smaller rig count. Right now, no dividend,so you don't have to worry about the shares selling off due to a dividend cut like you've seen withSeadrillandTransocean. So, decent company. Market cap of around $700 million right now. If you believe in offshore oil,this is definitely a company that you should look at. It'spart of the peer group thatI believe you should consider.
O'Reilly: Nice.
Muckerman: Tweet us, anybody: @TMFEnergy!
O'Reilly: Yeah, and we'llgive you a shout-out on air in 140 characters or more. Last night,Taylor, you sent me a really cool article about Russia, not about ourgovernment --
Muckerman: Yeah,not about government ties.
O'Reilly: -- not aboutanything going on in the world. But, they'retrying to take over my local gas station. Whatgoing on here? That's not cool.
Muckerman: Youmight have heard ofCitgo Petroleum, one of the top 10petroleum refiners in the United States.
O'Reilly: They'reactually owned by Venezuela.
Muckerman: Yes,they are owned by Venezuela.
O'Reilly: Or,we should say, state run.
Muckerman: What is it,PDVSA? The state-owned oil company down there. Unfortunately for them, they'renot doing so well because of oil prices --
O'Reilly: Which wereall connected by the circle of life, you'llremember that Venezuela was one of the countries begging OPEC to cutproduction, like, "We need higher oil prices, we're bleeding money!"
Muckerman: So they're close todefaulting on some debt that Russia owns. And as a condition of that loan, they can take over PDVSA's stake in Citgo Petroleum.
O'Reilly: Thisfeels like Chapter 11, but on an international scale.I didn't know that was how it works.
Muckerman: Rosneft, notRussia the country, but Rosneft, which has close ties to the government -- we'renot going to get into that -- but they pledged a 49.9% stake inthe company if theydefaulted, as their collateral. So it's not a majority stake, but it's darn near close.
O'Reilly: Plus, it's Putin.
Muckerman: It'sclose enough. CEO Igor Sechin, has long beenconsidered Putin's right-hand man. So, aninteresting little tidbit.Still waters run deep in the oil industry.
O'Reilly: OK. Moving on to more pleasant things: I wanted to get your thoughts, Taylor,I was reading an article the other day and I poppedover to our friends at S&P Global Market Intelligenceto see the earnings estimates of some of these more efficient shale producers that we always mention, thePioneersand theEOGs (NYSE: EOG). Really quick, just wanted to rap aboutthe prospects of, can oil companiestheoretically make earnings, like, their actual earnings, verydecent profits,even if oil doesn't return to $80-$100? Because,that is, of course, whateverybody that produces oil wants. But if you're making $X per share five years ago when oil was at $100, you and I have both seen the cost cuts that these guys are talking up. Is it possible that you could make the same amount per share in profits --
Muckerman: I mean, I'm sure it's possible.
O'Reilly: But do you think it'll happen?
Muckerman: Oh. For some companies, sure. Like you said, share prices of companies like Pioneer and EOGweren't necessarilyhurt as bad ascompanies that couldn't produce for under $60 a barrel. So, there was a flight to safety, a flight to quality there. It just goes to showyou're going to have greater reward if youinvest in these companies that are, "Drill, baby, drill" without the cost advantage. But that'sincreased risk. EOG and Pioneer have low-cost positions, they have low-cost technology, EOG is more vertically integrated and owns some of its own sand mines and rail lines --
O'Reilly: Plus, they're just there in Texas.
Muckerman: Yeah,they have the acreage. So, sure,it's possible, but not for everybody, for sure.
O'Reilly: This,of course, also leads to somethingwe were talking about a week or two ago, which is, the rig operators are going to want their cut now, too. They've beengenerous the last couple years, which makes these guys' costs look good.
Muckerman: The rigoperators kept their customers and business.Halliburtoneven went so far --I can't speak for everyone,I'm just a shareholder inHalliburton. MaybeSchlumbergerorBaker Hughesdid this too, but I know Halliburton waseven going as far asproviding financing to some of their customers.
Acting as a lender. Not only are we giving it to you at a lower price than we used to, but we'llalso lend you some money to pay us with.
O'Reilly: Wow. It's asymbiotic kind of thing.
Muckerman: Yeah.I don't think that's going on anymore, but it was, in the deepest, darkest depths of the oil price collapse.
O'Reilly: So Pioneer is at $180 a share. This is entirelydependent on commodity prices; this is a joke.
Muckerman: It's not a joke; it's very serious.
O'Reilly: It's very serious, but what if oil collapses? Expects to earn about $2 a share this year, $4.60 a share in 2018, $8 a share in 2019, 2020: $13, and 2021: $20.92. This is from analysts polled on -- I think there was four guys they polled. Anyway,that looks good, $20 a share in five years on a $180 stock.
Muckerman: Yeah, butis that because they're buying back more shares? Because they'reactually selling more oil? Because they're cutting costs? Because the banks are paid to sell them?
O'Reilly: That'swhat I'm saying, this seems less predictable thanCoca-Cola'searnings.
Muckerman: Well...
O'Reilly: Really? We're going to get into that?
Muckerman: [laughs] We're not; that's consumer goods.
O'Reilly: Where's Vincent Shen when we need him?[laughs] Same deal at EOG, yeah, I don't know.
Muckerman: It'sabsolutely possible, but not for everybody --
O'Reilly: You seem lessenthusiastic on this idea.
Muckerman: Of returning to previous earnings per share?
O'Reilly: Yeah, at not-as-high of an oil price.
Muckerman: Yeah,because, as we've seen,traditionally, unless technology dramatically changeslike it has with shale, oil tends to be more expensive to produce over time, because generally, you're going to produce the cheapest oil first.
O'Reilly: Oh. Trouble.
Muckerman: Which is why, before shale happened, we thought offshore was the next big thing,but it was going to be more expensive for these companies,so they had to plow billions of dollars into it, and that's why oil was so high. But then shale happened.
O'Reilly: And then those guys happened.
Muckerman: They found $50 barrel oil versus $80 barrel of Canadian oil sands and offshore oil. And they were able to drill, baby, drill.O'Reilly: All right. Boy, this is dark today. We're talking about Russia taking over my gas station, oilprofitability, and now United Airlines.
Muckerman: Oh. They caught a bad rep, I think.
O'Reilly: Actually,we have math to prove it.
Muckerman: Theiremployee did not rip that guy out of his seat.
O'Reilly: You think?
Muckerman: I know. Those were law enforcement that ripped him out of his seat. They just told him he had to get up, and when he wouldn't, the law stepped in and threw him into the next row and knocked him unconscious.
O'Reilly: The flight was overbooked.
Muckerman: Purposefully.
O'Reilly: Right. Which isactually the cool math I have for everybody.
Muckerman: Oh, lay it on us. You and your maths.
O'Reilly: I understand there's a reasonthe world freaked out when Warren Buffett and hiscompany,Berkshire Hathaway, bought stakes in American andSouthwest, andthat's because he has ripped on the airline industry for 40 years. It's because it'scapital intensive, low margin, you'reat the mercy of the weather, people --
Muckerman: Butit's becoming more monopolistic,just like the railroads he dearly loves, just like the global cellphone market when he bought intoApple.
O'Reilly: If only myteacher from high school were here,he would say it's duopolistic, sir. Or, anoligopoly.
Muckerman: Oligopolistic. We'll go with that,oligopolistic.
O'Reilly: But they're stilloverbooking, and the reason is,think about it this way. United Airlines has over 4,000 flights every single day.
Muckerman: That'sa lot of flights.
O'Reilly: And that's just them. And I have long said,I complain about the lines at the airport, and I complain about missing a flight or the flightbeing delayed or whatever. But at the end of the day, if you step back, what airlines are doing is amazing, every single day. Not one of these crashes out of the sky.
Muckerman: It's anamazing feat of logistics, yes.
O'Reilly: I amtraversing across an entirecontinent,something that used to take months.
Muckerman: A few hundred other people on your plane only,and all your belongings.
O'Reilly: Technically,if you step back,it's actually very impressive what all these airlines do.
Muckerman: People get soft; they just expect it. They don't think about everything that goes into it, all the guys and gals driving the baggage trucks,getting your ticket handled on time. Just because you got offloaded, sorry.
O'Reilly: Deep. Taylor. Hard, God. By the way,during the Gold Rush,do you know how most people got to California? It was not on land.
Muckerman: Dysentery.
O'Reilly: No, they would get on a ship, and you would go around South America, basically. It took a month and a half.
Muckerman: And they had, probably, lesspersonal space than they do on an airplane.
O'Reilly: That'sreally hard to believe, but I believe you.
Muckerman: I'm reading a book about Vasco de Gama; these people were on shipsfor weeks coming from Europe to the United States and South America, and theyliterally couldn't even do a snow angel on the floor of these ships.
O'Reilly: And then you would get off and they wouldimmediatelycheck you for lice.
Muckerman: You think thepretzels on those planes are bad; try eating the rat-infested --
O'Reilly: I'm a Southwest man and I have love for theirpretzels. I made a ticker symbol joke there. Anyway, point being, even if, let's pretend all of these fights have one missing seat. Andyou and I both know this is a very good rate, butlet's pretend this seatcould have been sold for $100, the ticket. That's a good deal. Four thousand flights a day, $100 for that one missing seat, that's $400,000 in missed revenue per day. You want these flights full. Every single one of them.
Muckerman: Yeah,makes it easier to estimate fueling, makes it easier to estimate staffing, stocking food and drinks.
O'Reilly: Itdoesn't matter how big of a company you are; $400,000 per day is something.
Muckerman: More than people make in a year.
O'Reilly: This actually gets even better. Apparently --and I'm sure all the airlines do this -- they,of course, have a super algorithm, like the thing that runsGoogle, they have this to figure out if they should overbook a plane. It evencalculateswhich flights to bookbased upon the data that they have for all the people on the flight. If you miss a bunch of flights,historically,if you have missed a bunch of flights, they are more likely to overbook that flight that you're on. That's ...
Muckerman: So you're saying they're rooting out the problem.
O'Reilly: They're trying.
Muckerman: They need to put a scarlet letter on those people's tickets so that when they do show up, someone can stand up and say, "Boo, this man!"
O'Reilly: Theticket should have a little sad cat like, "I'm really sorry," like the meme.
Muckerman: Youautomatically get stuck in the middle seat of the exit row and you can't recline, if you actually show up.
O'Reilly: Oh, man! So mean!
Muckerman: Or the jump seat.
O'Reilly: That's like, passenger ratings, like Uber driver ratings.
Muckerman: Exactly. Start it up, United. Start it up.
O'Reilly: So the video surfaced recently,it was not pleasant to watch.
Muckerman: It was graphic.
O'Reilly: The CEO,rightly, feels horrified and said it can never happen again. But I did happen to look up, this is a rarity. United Airlines, not even the airline industry, but United, bumped less than 0.1% of passengers last year. The last thing I had to say, and this is what I was thinking, but I heard they said, "We're offering a $200 flight voucher," and theyratcheted it up three times. I think the final value was $800 to get off the plane. If, in my opinion, the algorithm failed and they can't get customers to get off the plane, they ratchet it up three times, I think Econ 101 says they justneed to keep going. There is a price that somebody would have gotten off that plane for.
Muckerman: Oh, for sure. But the thing is, I was thinking, if it was a Saturday or Sunday the next day, absolutely that ticket goes for $800, people get off, they spend another day in Chicago or wherever they were, but it was a Monday. I'm not saying everyone has Saturday and Sunday off, but a lot of people have work at 8 or 9 a.m. on a Monday morning. This particular guy said he was a doctor and had patients to tend to.
O'Reilly: My point is this --if the algorithm fails, which,you guys created it, you guys made the algorithm,I don't think anybody else made that for you,if your algorithm fails,you should probably be paying to fix the problem. And, given what happened to the stock price this week...this is crazy, but, $5,000, some crazy number, to fix youralgorithm not working or breaking. Plus,you need to move your employees,you want to keep them happy. Itjust seems like, once you start talking about $1,000 tostay in the city an extra day --
Muckerman: I don't think their algorithm was broken. I think the data you spoke of earlier, they'redoing pretty darn well with it,the fact that this is the first time this has happened and it made the news cycle.
O'Reilly: So it works 99.9% of the time; why would you not pay $5,000 at that point?
Muckerman: OK. United Airlines: 120 voluntarydenials of boarding per 100,000 boardings, 120. That'speople who get up for the moneyor the hotel stay. Involuntary, like this gentleman,denials of boarding, Twelve out of 100,000.
O'Reilly: It's a lot of people.
Muckerman: They're ahead ofSouthwest andAlaska AirlinesandAmerican andDelta, butthe worst offenders,SkyWestandExpressJetat 180 voluntary denials per 100,000 and 16 involuntary for SkyWest per 100,000, and 20 per 100,000 for ExpressJet.
O'Reilly: So, 50% and 70% more. Actually 80%.
Muckerman: Yeah.I didn't do the math in my head just now. But, for 100,000, they'reonly telling 12 people that don't agree to the terms that they still have to get off.
O'Reilly: Right. It just seems likeif your system is breaking down, andthis is where the human heart comes in, this is where you're like...it's like Amazon. I remember this one timeAmazon.com(NASDAQ: AMZN)had a customer problem,and one of their mid-level managers did all theseanalyses if they should pay the guy off or not, and they went to theupper management and they had all these spreadsheets, and they were like, "No,just give them the refund, we don't care. The customer is... "
Muckerman: Going to spend more money with you.
O'Reilly: Yeah,the customer just needs to be happy.
Muckerman: Their market cap dropped a lot more than $1,000 because of this.
O'Reilly: That's my point. There's a point whereI will spend an extra day wherever for $1,000.
Muckerman: Yeah,even if it's a flight credit, that should inspire them to give even more money,because it's just coming right back to you. They'regoing to fly on your plane,they might buy a mini-bottle of Crown Royal, they'regoing to pay an extra bag fee, come on. And thenyour market cap doesn't drop by a few million.
O'Reilly: Yeah, when I was like, justkeep raising the price,this is what makes a market, kids, come on. Anyway. All right, I guess we're done. Anything else? That's all she wrote?
Muckerman: No.I have to give itup to The Economist for that data I was talking about, denials per 100,000. Their graphic for that was "Mistakes on a Plane." It's low-hanging fruit, I know, but it made me chuckle.
O'Reilly: Oh, man. All right. Thanks for your thoughts, as always, Mr. Muckerman. Can't wait until...
Muckerman: Next Thursday.
O'Reilly: I don't want to fight with you because you'll fight back.
Muckerman: Aren't we doing some deep dive, no news, next week,unless something crazy happens?
O'Reilly: We havesomething special in store. We're going to dive into something fun. It's going to be cool; minds will be blown.
Muckerman: I hope so.
O'Reilly: That's it for us, folks.I want to remind our listeners that Fool HQ is closed tomorrow, and as such,we will not be posting a Techedition of Industry Focus this week. Tune in next week for Dylan Lewis' thoughts next Friday. If you're a loyal listenerand have questions or comments,we would love to hear from you, just email us at industryfocus@fool.com. As always,people on this program may have interestsin the stocks that they talk about,and The Motley Fool may have formal recommendationsfor or against those stocks,so don't buy or sell anything basedsolely on what you hear on this program. For Taylor Muckerman,I am Sean O'Reilly. Thanks for listening, and Fool on!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Alphabet (C shares), Amazon, Ensco, Halliburton, and Twitter. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Apple, Atwood Oceanics, Berkshire Hathaway (B shares), and Twitter. The Motley Fool owns shares of EOG Resources. The Motley Fool has a disclosure policy.