Transcript: Nightly Business Report – February 24, 2016

NBR-ThumANNOUNCER:  This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR:  In lockstep.  Stocks rise and fall with oil’s every move.  What it will take to break the tightest correlation in years.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR:  And energy industry first.  With all the turmoil, the sector did something today it’s never done before.

MATHISEN:  And Apple’s CEO speaks for the first time since that court order was handed down and he’s offering a vigorous defense in his fight with the FBI over privacy.

All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, February 24th.

HERERA:  Good evening, everyone.  Welcome.

It was a day like many we’ve seen this year.  Oil started lower.  So did stocks.  Oil reversed course.  Stocks followed.

Today, the move was sharp.  Domestic crude went from a loss of nearly 4 percent, to a slight gain.  The reason for the turn, a smaller than expected build in crude inventories last week and strong demand for gasoline.  And by the closing bell, the Dow Jones Industrial Average gained 53 points to 16,484.  It had been down more than 260 points.  The NASDAQ rose 39.  The S&P 500 added 8.

As Brian Sullivan reports from the energy summit in Houston, industry executives are navigating their way through what maybe a new normal.

(BEGIN VIDEOTAPE)

BRIAN SULLIVAN, NIGHTLY BUSINESS REPORT CORRESPONDENT:  If you want to understand the mood of the oil and gas business right now, investor Charlie Leykum sums it up this way.

CHARLIE LEYKUM, CSL CAPITAL MANAGEMENT:  This is unquestionably, I think, one of the most, you know, devastating periods in the industry.  This will be the first time since the mid-1980s where you’ve had two successive declines in most commodity prices as well as activity.

SULLIVAN:  That pretty much sums it up, as the mood in major oil and gas conference here in Houston remains tough, is the reality for longer oil prices sets in.  But CEOs aren’t paid to complain.  They’re paid to manage through difficult situations.

And the CEO of Pioneer Natural Resources (NYSE:PXD) says the industry is going to use this time to try to get smarter.

SCOTT SHEFFIELD, PIONEER NATURAL RESOURCES CHAIRMAN & CEO:  Industry always does best in the downturns.  We draw our better prospects.  We have our best people working on them.  We cut expenses.  Service costs are down 35 percent, 40 percent.

And eventually we all know the oil price is going to go back up.  That’s when the best time to be drilling is during a downturn.  So, you get your best return on equity.  You get your best return.

SULLIVAN:  That may be cold comfort, though, for many investors w lost money invest in oil and gas companies recently.  But for those investors, there may be good news on the horizon.  Longtime former CEO of BP, Lord John Browne, surprised us by saying this.

JOHN BROWNE, L1 ENERGY EXECUTIVE CHAIRMAN:  During the long downturn of oil prices, the returns on capital were higher for the large companies than during the boom years.

SULLIVAN:  And that’s the view we haven’t heard before.  That as painful as the past year has been for many oil and gas companies and their investors, the industry might come out of this a little bit smarter and a little more profitable.

For NIGHTLY BUSINESS REPORT in Houston, Texas, I’m Brian Sullivan.

(END VIDEOTAPE)

MATHISEN:  With the once booming oil business in deep financial trouble now and fallout from low oil prices being felt, which energy companies will likely survive and who will not in a potential wave of consolidation?  Maybe even bankruptcies?

The CEO of Pioneer Resources doesn’t see major oil companies buying up distressed companied just yet.

(BEGIN VIDEO CLIP)

SHEFFIELD:  Majors don’t want to buy these companies that are distressed because their debt, they got to pay 101, the debt will be put to them and they got to pay top dollar for the debt.

(END VIDEO CLIP)

MATHISEN:  Joining us to talk about the oil and stock market, John Kilduff, founding partner with Again Capital, and Kenny Polcari, director of O’Neil Securities.

Gentlemen, welcome to both of you.

John, let me start with you.  You heard what the CEO of Pioneer just said.  He clearly was broadcasting the probability at a certain point in time of major, a large number of bankruptcies in the oil business.  How many of today’s players do you think are likely to go into distress maybe even bankruptcy within the next year to two?

JOHN KILDUFF, AGAIN CAPITAL:  Well, I’m going to piggyback on a report from Deloitte just recently, this week, that said 75 percent of the E&P companies could go — willing to be distressed, default on their debt —

MATHISEN:  Exploration and production companies.

KILDUFF:  Yes, 75 percent, bankruptcy, restructuring of debt at the least, or that winds up at the worst.

MATHISEN:  Are they at that pain point just yet or is there an oil price at which the pain becomes too great to endure and their debt then becomes unmanageable?

KILDUFF:  If I could use a football analogy, we’re in the red zone, OK, and we’re about to go over the goal line here for that actual pain play.  No doubt about it.

HERERA:  Let me go to Kenny and find out when he agrees with that because there are some, Kenny, that think that maybe we’re starting to form a little bit of a base in oil and then there are others like John who thinks we’re going lower.  Where do you stand on that?

KENNY POLCARI, O’NEIL SECURITIES:  Well, I actually think that oil is trying to build a base right in here.  That being said, that doesn’t mean you’re not going to have these bankruptcies because, listen, a lot o companies can’t operate at this level and I think he’s absolutely right.  You’re getting to that point.  And that’s going to be the silver lining, because once they start to restructure, once they go into bankruptcy, that’s going to be the opportunity for some of these bigger companies.

One way or the other, it feels to me right in between $28, $32, oil is trying to build a base right in here.  I think it’s going to end up doing that.

MATHISEN:  You know, John, I think we can guess who some of the buyers might be at that point of distress.  They’ll be the big majors, the ExxonMobils, maybe some of the Chinese oil companies, maybe the gentleman’s pioneer company might be one of them.  Who will the sellers be?  Who will be the — who will be the road kill in this?

KILDUFF:  Well, I think the road kill, for sure, first of all, the rich are going to get richer as a result of this.  The family of companies you just enumerated, for sure, but companies like Chesapeake, unfortunately, I think, is among the road kill.  Goodrich (NYSE:GR) Petroleum, Linn Energy (NASDAQ:LINE) are names to watch out for.

In terms of the sellers, I could have put these either in the road kill or seller category, and probably one of the biggest activist investor tragedies of the year is Hess (NYSE:HES) is going to be one of those in my view, as well as Newfield Exploration (NYSE:NFX).  And I still think BP becomes the supermajor that gets bought up or merged in some way.

(CROSSTALK)

MATHISEN:  Whoa.  Go ahead.

HERERA:  Before I go to Kenny and ask about the correlations in the markets, do you still stand by your earlier projection that you made right here on NIGHTLY BUSINESS REPORT, that we may test 18 on oil?

KILDUFF:  One hundred percent.  One hundred percent.

We’re definitely going there.  This has been a prelude, the Saudi stance this week from al-Naimi reiterated that.  And now, you’re starting to see the refineries go to maintenance, they’re operating below 85 percent of capacity.  Oil is going to back up big-time in the system here.

HERERA:  Wow.

So, Kenny, first of all comment on that.  And then, what does that mean for stocks because they’ve been so correlated to the price of oil?

POLCARI:  Well, listen, analysts, investment banks married this story, right?  They’ve married this supposed weakness in oil to the global economy, to global growth, and then what’s that mean for global stock markets and U.S. stock markets.

In fact, I actually think the problem is not lack of demand.  I think it’s huge oversupply and the Saudis have said it.

Listen, they’re willing to sell oil at next to nothing as long as they wipe everybody else out.  Now, listen, if oil goes to $18 a barrel, it’s going to get really tough.

I’m not sure that I’m in that camp, but I do think that, you know, the Saudis are not going to put up with it unless people start — unless some of these countries start to freeze or pull back on production, then they’ll just keep producing until they wipe everybody out.  At that point, then, I think, you know, that is when the market will disconnect.

MATHISEN:  So, Kenny, what I’m hearing you say is there’s a narrative that has been woven by the investment banks, by the media, that oil and stocks are joined at the hip.

POLCARI:  Right.

MATHISEN:  At some point, something breaks that narrative, right?

POLCARI:  And so I think what breaks it I think is when you find oil stabilizing.  Now, I tend to be I guess more optimistic.  I think it’s going to stabilize in here, and if it does, and then the macro data starts to get better, then I think you’ll see the natural separation between how the market is operating versus how oil is operating.

But, right now, they’re so connected because they’ve married the story so much that everybody watches every little tick, whatever oil does, oh my God, what’s the stocks going to do?  It’s ridiculous.

MATHISEN:  The last word and last hand gestures go to Kenny Polcari with O’Neil.  John Kilduff with Again Capital — thanks, guys.  Appreciate it always.

POLCARI:  Thanks.

HERERA:  All right.  Well, John mentioned Chesapeake.  Well, oil and natural gas producer Chesapeake Energy (NYSE:CHK) lost more than $14 billion last year on the downturn in commodity prices.  The number two U.S. natural gas producer more than halved its annual capital budget and said it would sell more assets this year to help pay off debt.

Chesapeake also warned that production could fall by as much as 5 percent this year because of those asset sales.  But those cash-conserving steps eased investors’ concerns a bit and the stock actually rallied more than 20 percent.

MATHISEN:  Well, Sue, the shale gas revolution created a lot of supply and changed the global gas market as we know it.  There’s been a big push to build the infrastructure so that excess can be exported which could benefit the economy and the labor market.  But getting it from here to there and converting it into liquefied form to transport it more efficiently has been a challenge until now.

Jackie DeAngelis reports on the energy market milestone set today in Cameron, Louisiana.

(BEGIN VIDEOTAPE)

JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT:  One of the advantages of fracking, unlocking more natural gas than we know what to do with here in the United States.  And now, for the first time in history, Cheniere Energy exporting the first shipment of commercial LNG out of the lower 48 U.S. states.

NEAL SHEAR, CHENIERE ENERGY CEO:  It’s a very important event for Cheniere, something we’ve been waiting for, obviously been under construction for a number of years.  Our investors are obviously very excited to see the first cargo, first commissioning cargo go out.

DEANGELIS:  This ship will carry 3.6 trillion BTU of liquid natural gas to Brazil.  South America is a big market for U.S. natural gas, but so is Europe and also the Far East.

Not only is this a massive undertaking for the company, but a groundbreaking initiative for the industry.  A shift from building import terminals in the past when it was believed that we would need product, to the shale boom now where we’ve unlocked product and need export terminals to move it out.

DOUG SHANDA, CHENIERE ENERGY VP SABINE PASS OPERATIONS:  We’re really changing how the market looks.  There will be a more liquid market going forward in LNG because we don’t have destination clauses.  This LNG could be traded or taken anywhere in the world.

DEANGELIS:  One of the concerns when exporting commodities is what it will do to prices at home.  Cheniere says studies have shown natural gas is so great over the next 20 years, prices should not be impacted much.

Cheniere is about two years ahead of the competition, companies like Dominion, Cameron and Freeport.  First mover advantage in the space is likely to position it well as the energy revolution fuels forward.

For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis in Cameron, Louisiana.

(END VIDEOTAPE)

HERERA:  The Federal Reserve’s vice chair Stanley Fischer said the decline in oil and commodity prices suggests that inflation will remain lower for longer than previously expected, and as those low oil prices weigh on overseas economies, Fischer said it is too early to tell whether the global volatility will impact the U.S.

(BEGIN VIDEO CLIP)

STANLEY FISCHER, FEDERAL RESERVE VICE CHAIR:  If the recent financial market developments lead to sustained tightening of financial conditions, they could signal a slowing in the global economy that could effect growth and inflation in the United States.  But we have seen similar periods of volatility in recent years, including in the second half of 2011, that have left very little visible imprint on the economy, and it’s still early to judge the ramifications of the increased market volatility.

(END VIDEO CLIP)

HERERA:  His colleague, Jeffrey Lacker, the president the Richmond Fed, says he sees no evidence of a recession on the horizon and the case can be made for raising interest rates further.  The central bank next meets in three weeks.

Still ahead, Madison Valleywood, the national security project that Silicon Valley, Hollywood, and the Justice Department are working on.

(MUSIC)

MATHISEN:  Apple (NASDAQ:AAPL) CEO Tim Cook in his first interview since the court order came down last week to unlock the iPhone used by one of the San Bernardino shooters said complying with the order would be bad for America.  In an interview with ABC News, Cook said it would set a legal precedent that would offend many Americans.

(BEGIN VIDEO CLIP)

TIM COOK, APPLE CEO:  I think safety of the public is incredibly important, safety of our kids, safety of our families very important.  The protection of people’s data is incredibly important.  And so, the tradeoff here is, we know that doing this could expose people to incredible vulnerabilities.  This is not something that we would create.

INTERVIEWER:  In your quiet moments, do you have any concern that you might be able to prevent a terrorist attack by breaking into that phone?

COOK:  David, some things are hard and some things are right and some things are both.  This is one of those things.

(END VIDEO CLIP)

MATHISEN:  Apple (NASDAQ:AAPL) has until Friday to respond to the court order which it says it will fight.

HERERA:  Weakness in printers and PC sales pressured HP’s results.  The company met Wall Street expectations of 36 cents a share in the first quarter.  Revenue fell about 12 percent, though it came in just slightly better than estimates.  The company did reaffirm guidance for the current year, sending shares slightly higher initially in after-hours trading.

But given the softness in PC and printer demand, why invest in an old time business?

Josh Lipton outlines the reasons for and against.

(BEGIN VIDEOTAPE)

JOSH LIPTON, NIGHTLY BUSINESS REPORT CORRESPONDENT:  HP Inc. is cheap and boasts a 5 percent dividend yield.  That’s the good news according to analysts, the challenge, the shrinking PC market.

PCs are about 60 percent of the company’s revenues and that’s a market that continues to make headlines for all the wrong reasons.  Research firm IDC says PC shipments dropped nearly 11 percent last year.  That was the worst year over year decline in history as the PC market remains pressured by competition from mobile phones and tablets.  In addition, printing contributes 40 percent of the company’s sales and about 75 percent of its profits.  That’s a market that’s also declining.

ANGELO ZINO, S&P GLOBAL MARKET INTELLIGENCE:  Well, there’s just less and less consumers buying ink jet printers these days as consumers kind of continue to migrate towards mobile devices and rely I’d say less so on , you know, households.

LIPTON:  Despite these challenges, about half of the people who cover the company rate the stock a buy.  They point to attractive valuation, the company’s commitment to capital return, and a bet that the pressures in the PC and printer markets will moderate.

ZINO:  When you got an aging PC infrastructure, you should just see just better comparables on the year over year basis, following the magnifying declines we’ve seen in recent years.  I think, you know, some of the headwinds we’ve seen on the forex side here over the last 12 months, that will start to dissipate as we head into the second half of the year.

LIPTON:  Zino also highlights the risk to his column (ph), including more competition from rivals such as Lenovo and Dell (NASDAQ:DELL).  For now, though, he rates HP Inc. a buy.

For NIGHTLY BUSINESS REPORT, I’m Josh Lipton in San Francisco.

(END VIDEOTAPE)

MATHISEN:  Targets results reaffirm its turnaround that it is taking hold.  The retailer’s quarterly sales top analysts’ estimates.  Its online sales are robust and it expects its full year profit to be better than expected.  That’s pretty good.  And it sent years about 4 percent higher today.

As Jane Wells reports, Target’s read on the consumer maybe right in the bull’s eye.

(BEGIN VIDEOTAPE)

JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Consumer confidence may be down.  The stock market is volatile and retail giant Walmart pretty much expects no growth this year.  But people are still buying stuff.  And some retailers are doing a better job of figuring out what stuff at what price.

OLIVER CHEN, COWEN & CO. SR. RETAIL ANALYST:  We think the middle income consumer and the lower income consumer are in a slightly better place given lower gas prices, lower unemployment, as well as rising minimum wage.

WELLS:  Over the holiday target saw sales grow nearly 2 percent at stores which have been opened at least a year.  Online sales accounted for most of that growth, rocketing up 34 percent from last holiday.  But free shipping and steep discounts brought in sales and profit figures below Wall Street expectations.

And the CEO told analysts that while the strategy helped Target (NYSE:TGT) take business from competitors, how low can prices go?

BRIAN CORNELL, TARGET CHAIRMAN & CEO:  We’re always stepping back and analyzing promotional effectiveness, looking back at our playbook and as we plan for next year, we’ll continue to enhance and refine and make sure that we have very broad, very simple, and very effective offers that continue to drive traffic and promptly grow our sales.

WELLS:  Then there’s the earnings report from TJX which owns chains like T.J.Maxx and Marshalls.  Unlike Target (NYSE:TGT), TJX has very little online business.  The vast majority of sales come from people going into the stores.

And they did just that over the holiday.  Traffic was up so much that even though individual customers spent less on average, total sales and profits handily beat expectations.

CHEN:  People really love the inventory turns at TJX.  So, when you come to the store you’re seeing something new, fresh and different every time.

WELLS:  But TJX gave earnings guidance for this year, which was very conservative.  It was lower than what Wall Street expected and it blamed a lot on higher wages.  Meantime, Target’s forecast for this year was better than estimates and it said low gas prices are, quote, “always good”.  Both companies think they have the consumer figured out, at least mostly.  As Target’s CFO said, the consumer is consistently inconsistent.

For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.

(END VIDEOTAPE)

HERERA:  Well, a warm start to the winter helped sales at Lowe’s.  And that’s where we begin tonight’s “Market Focus”.

Revenue was better than expected in the home improvement company’s later quarter as consumers purchased more outdoor items.  Much like rival Home Depot (NYSE:HD), Lowe’s was helped by customer spending on renovations and profits fell in line with analyst expectations and the company issued an upbeat outlook for this year, saying it expects revenue to rise 6 percent.  Shares were up 1 percent to $68.62.

A Missouri court has ordered Johnson & Johnson (NYSE:JNJ) to pay $72 million in damages to the family of a deceased woman who sued the company after alleging baby powder with talc caused her ovarian cancer.  A Johnson & Johnson (NYSE:JNJ) spokeswoman says the company stands by its belief that talc is safe to use in products and J&J will be evaluating its legal options.  Despite the news, shares were up 1 percent to $104.96.

And Honeywell is looking for a buyer for its building solutions business.  The deal could be worth between $3 billion and $4 billion.  The news comes after Honeywell said yesterday it had held talks with United Technologies (NYSE:UTX) over the past year regarding a potential merger.  Shares of Honeywell fell fractionally to $103.30.

MATHISEN:  Shares of Avis fell the most in more than seven years after last night’s earnings missed estimates on both the top and bottom lines in the latest quarter.  The car rental company also gave a downbeat outlook for the full year, citing expected impact from currency ranks investments intended to better the business.  Shares crushed down more than 26 percent.  That’s more than a dented fender, at $22.04.
The cloud computing company Salesforce beat the street’s revenue estimates.  It was in line with profit targets.  The company said it expects earnings for this year to top expectations and what happened?  Shares popped initially in after-hours trading, but the company did close the regular session down more than a half percent at $62.52.

HERERA:  Hollywood and Silicon Valley are signing up to help the White House fight ISIS.  Together they want to develop strategies to beat back ISIS messaging online and in its media.  It’s being called the Madison Valleywood project.

Eamon Javers is following that story from Washington.

Good to see you, Eamon.

So, who was at the Justice Department today?

EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT:  Yes, hi, Sue.

That nickname they came up for this project Madison Valleywood tells you exactly who was there.  It’s Madison Avenue, Silicon Valley and Hollywood executives at the Department of Justice today, meeting for three hours to go over strategies to combat ISIS recruiting on the Internet and also in the media generally.

The idea is they’re going to come up with brainstorms to push back on what ISIS has been doing.  Already, we’ve seen companies like Twitter cracking down on is accounts.  Earlier this month, Twitter eliminated 125,000 accounts on that service that they said were linked to ISIS, Sue.

MATHISEN:  How long have they been working on this?

JAVERS:  They’ve been working on this for a few months.  Earlier in February, we saw Secretary of State John Kerry go out to Hollywood and meet with some of the top studio executives out there in a one-on-one session sort of around the table, again brainstorming ideas.

The United States is very good at media, very good at technology.  But for some reason, ISIS has been better at social media than the United States in terms of its recruiting and getting its message out.  This is an effort to try to turn those tables.

HERERA:  All right.  Eamon, thank you very much.

JAVERS:  You bet.

HERERA:  Eamon Javers in Washington.

MATHISEN:  And coming up, as the ranks of the gig economy grow, there’s one benefits company that many are turning to.

(MUSIC)

MATHISEN:  More people are entering the so-called gig economy.  Recent study by the JPMorgan (NYSE:JPM) Chase Institute estimates more than 10 million Americans earned income through web-based companies like Uber and Airbnb.

As part of the economy grows, so does the need for access to benefits.  As Kate Rogers (NYSE:ROG) reports, there’s one company many are turning to when it comes to health care coverage.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT:  The battle over better working protections in the sharing economy space is as hot as ever.  Uber is facing a class-action lawsuit over the employment status of its drivers which are currently listed as independent contractors.

Rival startup Lyft recently settled a similar suit with several drivers.  And while its drivers weren’t reclassified as a result, better protections were put in place.  But there’s one company that Uber, Etsy, Postmates and more are turning to as these developments unfold — Stride Health.

The benefits platform launched in 2013 acts as a modern day insurance broker helping individuals find the right health insurance plans for their profile with a personal forecast via a proprietary algorithm.  Individuals not the startups cover the cost of benefits.

NOAH LANG, STRIDE HEALTH CEO & CO-FOUNDER:  We also look at quality and convenience and access to care, so we make sure you can keep using the doctors that you love and you want to keep, and we’ve got a team that supports you all year round.  So, if you ever have an issue you need to resolve with your insurance company, we take care of that on your behalf.

ROGERS:  The company has raised more than $50 million from investors including the Mayo Clinic and makes money by taking a commission from insurers on the plans, itself.  Stride Health is free for individuals and available in all 50 states with more than 230 insurance carriers on its platform including the big five — Aetna (NYSE:AET), UnitedHealth, Cigna, Humana (NYSE:HUM), and Anthem.

Competitors include ehealth.com and even healthcare.gov.

The sharing economy which has grown in popularity due in part to an uneven recovery post-recession allows Americans to work part time as freelancers, connecting them with available jobs.  TaskRabbit was among the first startups to partner with Stride for its taskers who complete jobs from hanging televisions to cleaning homes and food shopping on demand.  Their taskers are also listed as independent contractors.

STACY BROWN-PHILPOT, TASKRABBIT COO:  The number-one thing our taskers want is flexibility.  They want to work part-time.  They want to use TaskRabbit as a way to supplement their income and the current model of independent contractor is the model that really supports that.

We just want to add to it.  We want to enhance it.  We want to offer training.  We want to offer benefits.  We want to offer ways for them to increase and grow their skills.

ROGERS:  As the debate about better working protections rages on, it seems startups and workers can agree on the importance of flexibility and benefits.  It’s just a matter of who foots the bill for the latter.

For NIGHTLY BUSINESS REPORT, I’m Kate Rogers (NYSE:ROG).

(END VIDEOTAPE)

HERERA:  Beijing now has more billionaires than New York.  The Chinese capital added 32 to its ranks last year, bringing the total to 100.  Thanks to a number of new listings on the stock market.  New York City has 95 billionaires according to the latest report’s latest global rich list.  Moscow rounded up the top three with 66.

MATHISEN:  And finally tonight, a unit of the Google (NASDAQ:GOOG) parent company, Alphabet, has developed a humanlike robot.  The video shows the robot opening doors, picking up boxes, and taking a stroll in the woods.  It likes the outdoors.

It’s also resilient, able to get up when knocked down.  I’ve fallen and I can get up.  The humanoid robot is called — let’s watch this — it’s called Atlas.

HERERA:  He’s a little slow, though.  That’s OK.

That’s NIGHTLY BUSINESS REPORT.  I’m Sue Herera.  Thanks for watching.

MATHISEN:  And thanks from me as well.  I’m Tyler Mathisen.  See you tomorrow.

END

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