Monthly Archives: September 2016

Chesapeake Energy – 9/30/16

Billionaire investor Carl Icahn has cut his stake in shale driller Chesapeake Energy Corp. by more than half to 4.6% citing “tax-planning reasons”. After the cut, Icahn is no longer the Oklahoma City-based explorer’s biggest holder though he has publicly stated he still has confidence in the company’s management team.

Icahn began amassing significant amounts of Chesapeake stock during the second quarter of 2012, when the shares traded between about $12.60 and $22.40. Chesapeake shares traded at roughly $6.96 Tuesday as a heavy debt load, weak energy prices, and controversy weighed on the second-largest U.S. natural gas producer.

Chesapeake has taken $16 billion in impairments on its gas and oil fields since the beginning of 2015, according to data compiled by Bloomberg. As the data from the EIA shows, the price of natural gas has fallen substantially since 2014 which has meant significant losses for the company on investments paid for with debt during the shale boom. Chesapeake has lost money for six consecutive quarters since the natural gas glut began to weigh on the industry.

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Chesapeake Energy Corp. is also currently facing U.S. Justice Department scrutiny. Chesapeake has been at the center of antitrust probes of gas-lease auctions and government investigations into how it pays royalties to landowners and accounts for its assets.

A recently received subpoena from the Justice Department sought “information on our accounting methodology for the acquisition and classification of oil and gas properties and related matters,” according to a regulatory filing by the company on Thursday.

Icahn Enterprises LP, the billionaire’s publicly traded holding company, has declined almost 30% in the past 12 months, hurt in part by energy investments including Chesapeake and natural gas exporter Cheniere Energy Inc.

Tesla and SolarCity – 9/29/16

Tesla Motors Inc.‘s proposed merger with SolarCity Corp. is facing resistance from some shareholders, though it looks as if that won’t stop the deal.

Two individuals and two pension funds each allege that Tesla’s board failed to assess proposed merger as was their duty and that the deal will disproportionately benefit certain stakeholders like SolarCity Chairman and Tesla executive Elon Musk, who owns about 20% of the shares in both companies.

The plaintiffs include the Arkansas Teacher Retirement System, City of Riviera Beach Police Pension Fund, Ellen Prasinos and  P. Evan Stephens, none of which are among the major owners of Tesla.

The controversial plan to combine the car maker and the struggling solar firm comes at an odd time. With Tesla promising more sales of its new Model 3 car by 2018 than the total sales of all Tesla models, the last thing the company needs is an internal struggle to distract from getting the capital needed to ramp up production.

For its part, Tesla declared the cases are without merit and is sticking to the belief that there are synergies to be gained from integrating SolarCity’s business into Tesla products, like the Powerwall battery.

Neither company has turned a profit yet, but Tesla is expected to have a major victory in its mass-market Model 3 that will be available late next year. SolarCity has no similar winner coming up and its shares have plummeted by two-thirds this year on concerns about slowing sales.

And yet, many predict the deal will go through. And understandably so, since the two companies have many of the same big stakeholders, who are being offered roughly $5 more a share than their SolarCity stock is worth now. Goodwill towards Musk from his previous successes may also play a role as might faith in the long position of the companies if they believe the future of electric cars and solar power is bright enough to outweigh short-term troubles.

Rooftop Solar: Challenges for 2017 – 9/28/16

Rooftop solar installations, which surged more than 1,000% since 2010, will barely grow at all in 2017, according to data collected by Bloomberg.

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Compared to a 21% this year, residential installations in 2017 are expected to increase by less than 1% even as the EIA expects utility-scale renewable energy to grow substantially.

World energy consumption

There are many possible sources of the disconnect: utilities are pushing back against mandates to buy the electricity, low electricity rates are reducing the economic benefit of installing rooftop solar systems, and unexpected shifts in tax policies are influencing demand, to name a few.

On the utility front, the industry is taking another look at net-metering policies, where consumers sell excess power back on the grid, and rethinking the costs and benefits of the relationship. As solar gets more popular and eats into their revenues, utilities in multiple states are starting to see the benefits of needing less new capacity and infrastructure getting outweighed by the number of people offsetting what they pay at night with what they make in the daylight.

Another factor figuring into the economics of installing solar panels is declining retail prices for electricity in some markets due to the natural gas glut. The shale oil and gas boom produced enough cheap fuel that it effectively put a cap on electricity prices in 2015 and 2016, according to the EIA.

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Perhaps most significantly, Congress unexpectedly extended a major tax credit for solar power developers. Initially set to expire at the end of 2016, the tax credit gave many developers and customers a significant incentive to move their projects to this year to qualify. Now that the credit has been extended to at least 2021, there is no driving force to prompt installations. In fact, the initial rush to make the 2016 deadline will probably result in more revenue that would have otherwise come in 2017 or 2018 into 2016 income statements.

So despite the continued fall of solar panels prices and an extension of a favorable tax credit, rooftop solar companies will now likely have to explain  to stockholders why growth in 2017 pales in comparison to 2016.

Tesla and the Awkward Legal Situation – 9/27/16

Tesla Motor’s business model breaks with other car makers’ in a lot of ways, but its direct sell approach that cuts out the middle-man of independent dealership franchises is becoming an issue in some states. States likes Texas and Michigan have already instituted bans on manufacturers direct selling and the fight over the legality of such measure is looking a be a long one.

Just recently, officials in Michigan rejected Tesla’s request to open a company-owned dealership, reflecting the company’s difficulties operating in the home state of Ford and GM. Franchise automobile dealerships and auto makers, which are understandably hostile to what they see as an existential threat and an unfair advantage respectively, have been successful in bringing the state lawmakers to their side on the issue.

Michigan passed an amendment in 2014 in its law regulating motor vehicle manufacturers, distributors, wholesalers and dealers, but Tesla argues that electric cars are best sold to consumers directly from the manufacturer. It bases its argument on the fact that consumers need more information on the new technology. Another issue Tesla is likely looking to address is how owners in Michigan currently have to travel to Ohio to get their vehicles serviced due to the ban on opening up Tesla operated shops.

Still, Tesla is far from done fighting. The electric car maker filed its first federal lawsuit over the case, suing the state of Michigan to overturn its ban on direct sales by auto manufacturers, almost immediately after the rejection. The move comes as a break from a state-by-state challenge of such bans. This case will go before a federal court ruling over the constitutionality of the ban setting the tone for all future cases. The move comes only a year before the release of Tesla’s much anticipated Model 3, its first electric sedan aimed at being affordable enough for mass market appeal.

Arguing successfully that the law violates the constitution with the illegal restriction on the free flow of commerce would allow Tesla to stop the enforcement of the law.

The lawsuit is Tesla Motors Inc. V. Johnson, 16-cv-01158, U.S. District Court, Western District of Michigan (Grand Rapids).

Electric Cars: Charging Ahead – 9/26/16

Plug-in electric cars are coming. If you need proof look at all the charging outlets being built.

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The U.S. Department of Energy says there are now 14,349 electric vehicle (EV) charging stations nationwide, comprising almost 36,000 outlets. Not included in the tally, the home outlets where most EV owners do their charging.

Having more places to charge up will help mitigate drivers’ fears of getting stranded with a dead battery but, so far, the increase in car-charging ports hasn’t been matched with rising purchases of EV’s from dealers. In the first six months of the year, Americans bought about 65,000 cars that required charging. Ford alone sold that many pickups, on average, every month.

Of course, it is a lot cheaper to install an electrical outlet than it is to buy a new car so this may be a case of smoke coming before the fire, especially with most major car-makers prepping electric models to roll out before 2020.

Tesla Motors Inc. has long promised an era of long-range affordable cars is coming soon. Presumably, Tesla had hoped its Model 3 would serve as the vanguard for the new generation of EVs; however, it will probably be fighting General Motors Co. like never before in the next few years. The GM 2017 Chevy Bolt with its 238 mile range and $37,500 sticker price is not quite “affordable” for the average American buyer, but represents significant progress for EVs and a potential competitor for the Model 3.

The chart below breaks down the race for cheap battery range and the source of some concerns.

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GM, Volkswagen, Ford, and others are each investing billions of dollars in electric-car development. And, as battery prices are fall, EVs may be cheaper than the average gasoline car within the next five years, according to analysis Bloomberg conducted in February.

Yet, GM’s approach and Tesla’s differ in a key way that favors Tesla in the long-term. At the moment, the world supply of large Li-ion batteries used in electric cars is not large enough to equip a global fleet. Tesla has accounted for this fact, GM has not.

While Tesla has been learning the ins and outs of manufacturing cars as it goes, it’s also been constructing the world’s biggest battery factory, which is set to double the world’s lithium-ion battery supply. GM on the otherhand outsourced battery production entirely to the LG Chem chemical company. Though the company has done demonstrably good job bringing down costs, it has nowhere near the production capacity that Tesla’s new Gigafactory is projecting for 2018. As a result, GM will face severe constraints on how many cars it can actually deliver relative to Tesla.

Though it can easily best Tesla in scale when it comes to making most of a car, GM will not make truly affordable mass-market EV in the 2017 Bolt so long as it doesn’t have the battery output to back it up. Still, this is only the beginning of the race to electrify automobiles and a promising one at that.

Computer Take the Wheel – 9/23/16

For all the good self-driving vehicles are likely to do, they might only be able to reach their full potential if no humans are allowed behind the wheel.

Proponents of the technology, one of which is the Federal government, see it dramatically reducing the 1.25 million roadway fatalities a year globally. They base this on the fact human error is the cause of 94% of such deaths thus it should be removed. Since robot drivers never get drunk, sleepy or distracted and have “superhuman intelligence” that allows them to see around corners and avoid crashes, the line of reasoning seems solid.

Google’s self-driving car project is developing cars without steering wheels and gas or brake pedals specifically because testing showed how poorly human-computer mixes do relative to the computer acting alone. In 2012, Google let employees test a partially autonomous system for automated highway driving only to find that human drivers were incapable of reacting quickly and safely when they assumed the car was in control. The testing led the company to pursue full autonomy, even if it took longer.

Ford agreed with that sentiment during an announcement that the company would begin selling self-driving taxis with no steering wheel or pedals in 2021.

Of course, not everyone is comfortable with the idea of turning over control. According to a July survey of 2,500 consumers by Altman Vilandrie & Co., a Boston-based consultant, almost two-thirds of U.S. consumers believe self-driving cars are dangerous with more than half of those surveyed saying they would refuse to ride in a self-driving car.

That opposition may soften as more drivers become more familiar with semi-autonomous features, such as automatic braking and advanced cruise control systems, or try out a self-driving Lyft taxi, the majority of which are expected to be autonomous within five years, according to the company’s co-founder and president, John Zimmer.

In the end, governments may give financial incentives or insurance companies could charge a higher premium for manually operating a car, but it remains challenging goal to convince hundreds of millions of human drivers that they’d be better off with a computer at the wheel.

Racing Towards Autonomous Vehicles – 9/22/16

In spite of years of more experience, Google has yet to launch an autonomous vehicle service to match the practical, less-ambitious programs of rivals like Uber.

Google’s project started in 2009, the same year Uber Technologies Inc. was founded, but it is Uber that recently let users hail autonomous Volvo SUVs in Pittsburgh. Many companies are also offering partially autonomous features in their vehicles like the “auto-pilot” Tesla puts in some of its electric cars.

Part of Uber’s success can be attributed to having more data. Since its service is tied to the smartphones, it has access to significantly more of the driving data used to guide self-driving vehicles. Google could do something similar to commercialize its software by providing it to existing manufacturers or a ride-sharing service. So far, it has not. It struck a deal in May with Fiat Chrysler, but that only to put its software in 100 minivans and talks with other car companies have yet to produce high-volume agreements.

Tech giants, car-makers, and autoparts suppliers are all in the race to develop the hardware and software of tomorrow’s self-driving vehicle.

Many car-makers are pursuing their own self-driving strategies. For example, General Motors Co. has bought out a self-driving software startup and invested $500 million in ride-sharing service Lyft Inc., in hopes of creating its own autonomous vehicle service. In 2017 Volvo, already coordinating with Uber, will test self-driving cars with ordinary motorists as volunteers. And Ford has said it would launch a fully-autonomous car, without steering wheel or pedals, for car-sharing schemes by 2021. Unfortunately for parts-makers, such deals often cut them out of the equation as car-makers invest in in-house production.

Yet, the biggest profits are likely to come from the “operating system” that integrates software and the mechanical parts of the car. And in this area, tech giants like Google still have huge advantages. Uber may be getting more data from its ride sharing fleet, but Google is ahead in machine-learning, the key component in ensuring a car wouldn’t need a driver.

Still, despite having the most experience and most advanced technology, Google’s reluctance tackle early opportunities for application may be giving other companies the chance to take the inside lane on commercializing the technology.

New Guidelines for Self-Driving Cars – 9/21/16

The Obama administration has revealed the guidelines for self-driving cars that tech and auto industry leaders have been waiting for.

The Transportation Department has already allowed exemptions to some rules for the purpose of testing of autonomous vehicles, such as, the case of considering Google’s AI system to be a driver. The new guidelines go a step further in order to address contradictory regulations at the state level.

The guidelines were left intentionally vague compared to the safety requirements imposed on standard human-driven vehicles to allow flexibility, according to the National Highway Traffic Safety Administration (NHTSA). Though they give NHTSA oversight of the software technology used in driverless cars, states would continue to regulate driver’s licenses, car registrations, traffic laws, insurance and legal liabilities.

The policy gives suggestions rather than a hard legal framework. Still, the recommendations give auto makers and technology companies a firmer sense of regulators’ expectations since they amount to an official endorsement of automated car technology. Mark Rosekind, NHTSA’s administrator, has said self-driving cars are crucial to addressing human error, which the agency estimates is a factor in 94% of fatal car crashes and responsible for almost 35,000 deaths in the U.S. last year.

Now regulators will need to balance optimism and the commercial interests of developers with concerns over public safety. To accomplish that much, the new guidelines targeted four main areas: a 15-point safety standard for the design and development covering safety features, privacy, digital security, communication between cars and drivers, and more; a call for states to come up with uniform policies; clarification on current regulations; and openness for new regulations. The Department of Transportation also reiterated its authority to recall any vehicles found to be unsafe.

Overall, the government’s endorsement is expected to speed up the rollout of fully-autonomous cars. Uber is already testing driverless cars in Pittsburgh, while General Motors Co. and Uber rival Lyft have discussed running a fleet of self-driving Chevrolet Bolt electric taxis. Tesla and other car makers are also working with the technology though they have so far kept to more conservative semi-autonomous features.

All this puts pressure on urban planners and insurers. Only about 6% of cities have considered the effect of driverless cars in their long-term planning, according to a survey last year by the National League of Cities. Meanwhile, auto insurers are trying to figure out what impact autonomous vehicles will have on their business models. KPMG actuaries, for example, estimated an 80% drop in the U.S. accident-frequency rate by 2040.

Regardless of who wins in November, the guidelines will likely be kept in place to provide at least a little stability and support for a promising technology.

China’s Coal: G-20, Weather, and Manipulation – 9/20/16

Though a perfect storm of events in China’s coal world has sent coal prices higher, the clouds will likely pass as quickly as they came.

China’s coal imports rose 52% in August from a year earlier, customs data showed. An apparent shortfall of coal output in the country has helped send thermal coal prices up 40% since 2016 began. Chinese leadership has been pushing reforms of an industrial sector bloated with overcapacity, but the shortfall was still surprising to many.

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Yet, many of the factors causing the rise in imports are temporary and/or artificial, having no permanent on supply.

Before the G-20 meetings in September, Beijing ordered temporary factory shutdowns to alleviate air pollution. Then you have the bad weather that caused heavy flooding earlier in the summer also disrupting supply chains for coal mines, which have already had their operating days reduced. And over in India, Coal India Ltd., the world’s biggest miner of the fuel, reported its lowest output in three years on the heavy rains and protests. None of these factors will have a lasting effect on the fundamental supply of coal.

The rising price of coal does not mean coal demand is making a lasting rebound either.

The temperate weather of Fall is right around the corner to cut into electricity demand, and alternative sources of power are growing much faster than coal on falling costs and rising government support. Now that China has committed to the Paris Agreement, its encouragement of low-carbon sources of energy will probably only increase.

More significant for the long-term price of coal, Chinese officials appear to be targeting a price range for thermal coal.

Regulators and miners agreed this week to coordinate production. The agreement shows officials are aiming for Bohai-Rim coal to rest between of 450 yuan to 500 yuan a ton. This week, the price was around 554 yuan, according to CCTD. The price range, maintained by cuts or increases in output by miners, is apparently meant to drive down overcapacity by forcing inefficient miners out of the market.

All in all, coal is still in rough spot. Regardless of political manipulations, cheap natural gas and concerns about climate change are beating down demand for the fuel and, unlike bad weather, those won’t just fade away.

Oil: Fracking and the New Normal – 9/19/16

The U.S. Energy Information Administration (EIA) has raised its domestic output forecast for 2016 from an average of $41.60 a barrel to $42.54 on the return of drilling rigs and continued increases in productivity from existing wells. The estimated average of $51.58 for 2017 was unchanged.

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Despite a rebound from the $30 a barrel prices that came with the worst of the supply glut, the resilience and scale of the U.S. shale boom is keeping prices depressed.

14 of 15 senior oil traders and executives interviewed by Bloomberg at the annual Asia-Pacific Petroleum Conference in Singapore expect crude to remain between $40 and $60 a barrel over the next 12 months. If they’re right, then the new normal in oil and gas prices could lower for longer.

So far, U.S. oil prices in their sixth month of trading roughly between $40 and $50 a barrel. The range reflects the deadlock facing the industry as shale-oil fields as their relative cheapness and quickness to start or stop production has keep prices lower for longer. Higher prices would prompt more output, any lower would force more spending cuts or even action by OPEC.

Many share skepticism on the efforts OPEC nations and Russia to cap output and shrink a global glut. Besides Russia’s history of cheating on agreements and the fact that Saudi Arabia and Russia are already pumping at record highs, tensions between Iran and Saudi Arabia have sabotaged recent efforts put an effectual output freeze in place.

The damage low prices have done to the oil and gas industry is staggering. More than 350,000 jobs in oil and gas have been cut since crude prices started to fall in 2014 from $100 a barrel levels. Dozens of companies focusing on shale have already declared bankruptcy, all companies with ties to the sector have seen their values drop, and the stock market as a whole has fluctuated wildly as a result. The effect of cheap natural gas has been especially devastating for coal as the market value of all coal companies has dropped to less than 1/10 of its value in 2014.

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For now, more traders are more focused on the re-balancing of supply and demand, as well as the steady decline of crude and crude product stockpiles, than any sort of political action. Fracking is here to stay, but the markets will need more time to find a new normal for oil and gas output and prices.

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