Oil and Gas Industry

Today I will summarize all the analysis on the oil and gas industry that I read in Finimize Premium. Finimize, along with Quartz,  are the best newsletter on business updates and analysis/strategy right now to me

Overall, The industry has experienced some of the biggest changes in its entire history over the past decade: “peak oil demand” due to 2 recent trends

• The shale revolution in the US unlock a massive amount of oil that experts previously thought was too expensive to extract
• The cost of renewable energy plummeted thanks to greater innovation and scale, helping reduce the world’s reliance on traditional fossil fuels to meet its energy needs

The four key parts of energy value chain

• Upstream: Companies look for reserves and extracts oil and gas once they’ve found. Key factors determining profits: production volume, prices and operational efficiency
• Downstream: Companies convert those above products into usable products such as fuel, plastic and petrochemicals. Key factors determining profits: market output and input price, utilization rate
• Midstream: The ones who link the two Upstream and Downstream together, storing and transporting oil and gas across networks of pipelines, railroads, trucks,.. It also transports finished products to end users. Key factors determining profits: volume
• Oilfield services: Companies provide equipment and services that help upstream companies explore for and extract oil and gas

The shift in Supplies

From 1859 to present, the most prominent and conventional way to drill oil is using a steam engine to drill into an oil reservoir and pumping its contents up to the surface. This method is divided into 2 types

• Onshore: production on land
• Offshore: production beneath the seabed

It’s simple, then it’s the cheapest way  to produce oil. However, there is a new way emerging and changing the supply landscape: natural gas. It is produced virtually  the same way as oil, but less environmental-damage. An example of its is shale production in the US

The changes in demand

Overall, it’s likely that it will decline deeply in the future. 

• Oil: Two most important outputs of refined oil are gasoline and diesel, which are principally transport fuels, then transportation is the single most important factor in the demand equation (>50% world demand). It is facing an emerging threat from EVs
• Gas: The single largest use of natural gas is electricity generation and heating in residential and commercial buildings (>⅔ world demand). The use is mainly driven  by the power sector with a fast transitioning towards renewables. 

The factors that influence the price

• Long-term: it’s the sorts of supply & demand as oil and gas are commodities
• Short-term: (1) Seasonal trends; (2) Inventory; (3) Speculators and (4)Geopolitics

1. #tech MUFG pumped $700M investment into Grab (Dealstreetasia)

What’s up?

Mitsubishi UFJ Financial Group Inc. is investing more than $700 million in Southeast Asian ride-hailing giant Grab. It’s a three-way deal in which everyone gets what they currently lack.

Why should I know?

• For Grab: 1) Pick up an only-online banking license in Singapore which requires $1.15B and (2) Get access to the wide regional network (Indonesia, Thailand, Philippines)  of the deep-pocketed MUFG
• For MUFG: Get out of the local pressure as negative interest rate bites at home. Backing Grabs will help MUFG to market a wide range of its financial services from loans to insurance to Grab’s users
• For Softbank: A sigh of relief all around as its core start-up in Vision Fund portfolio will not need cash-feeding any more. That’s one less mouth to feed in the wake of disastrous bets like WeWork

2. #fooddelivery Analysis of Luckin’s advantages and disadvantages in the CoVid-19 epidemic (Dealstreetasia)

What’s up?

A writer in Dealstreetasia pointed out the position of Luckin in the severe acute respiratory syndrome outbreak

Zooming out

• Advantages: (1) The delivery model that proves more resilient than other competitors like Starbucks- who positions itself as selling not only coffee, but experience. (2) The strong financial position after additional share sales and convertible bond offering.
• Disadvantages: (1) Travel restriction; (2) Manufacturer halts output and (3) Extended holiday

3. #SaSS The war between Microsoft & Slack, and a turning point of software enterprise (Protocol)

What’s up?

Microsoft Team reported 20M DAU at the end of 2019, far from the number 12M of Slack. Also, Slack’s stock has languished over the last eight months. It signifies what Team’s CEO said “When you start to commoditize features, best of integration will outdo best-of-bread”

Why should I know?

Microsoft, apart from Team, has a long list of other prominent software in the business world: Office 365 and Azure Cloud Services. What about Slack? Just itself. This difference led to the growth gap in the last year, and the shift in power from standing-alone start-ups like Slack to tech giants like Microsoft and Salesforce

Salesforce acquired Tableau last year to give customers of its other sales and marketing tools a fresh option for making sense of their data, also acquired Vlocity last Tuesday to add marketing-oriented no-code tools to its arsenal. Workday acquired procurement software startup Scout for $540 million to bulk up its product lineup. VMware bought Carbon Black for $2.1 billion to add security services to its growing portfolio of cloud assets.

This could be the start of a new wave of consolidation in this space.

1. #ridehailing (old news) Gojek announces tie-up with Singapore biggest cap operator (channelnewasia)

What’s up?

Gojek’s partnership with TransCap will help Gojek’s customers access to TransCap’s fleet of 2954 taxis, increasing the availability of their services.

Why should I know?

• In Singapore, a country with limited market size for ride hailing services, this is a wise step of Gojek to acquire new users more quickly, then they can move to other profitable markets such as food delivery or financial services.
• This news shows us how different the start-up environment is between Singapore and Vietnam. The battle between ride-hailing start-ups and local taxis companies are still on-going for the last few years in our country.

2. #fooddelivery How players are ramping up in India (many source)

What’s up?

I am always wondering how India’s food delivery players can come to profitability in a extremely price-sensitive market (Uber’s got out to curb more cost), and here are what I’ve found

Zooming out

• Amazon offered its service as a part of Amazon Prime
• Swiggy bets a big on cloud kitchen and…everything-delivery
• Zomato (who’ve buy UberEats) delivers food by drone, run cloud kitchen,  installed Zomato gold (Deep discount program for new restaurants, and will manage procurement

!!!My thoughts: I still don’t see the future of this business in India, those solutions do not cut costs that much. And even if they want to jump into financial services such as Grab and Gojek in SEA, the future is still gloomy as financial inclusion in India is in the bottom of the world

3. #tech Gojek and Grab is in merger talk (Dealstreetasia)

What’s up?

Gojek and Grab are reported to hold an exploratory talk to merge with each other last week. Some even said they have kept bi-annual meetings on merging for the last few years.

Why should I know

• Why Gojek declined the rumors and Gojek has not responded yet, it’s still a worth-looking-for news as it’s a track to profitability for those two, and it will lead to a huge change in services that two dedacorns are pridving
•  There are still obstacles if they merge: (1) Complex investors management and (2) It’s illegal if they want to raise price immediately

Predictions for 2020 by HBS Professors (podcast link)

1. Political

• There will be a large gap between electoral and popular votes that strikes public concerns.
• President Trump will do a re-election as the economic benchmarks are strong
• Prince William will be the last king, leading to the dismantling of British Royal Family.

2. Society

• Unemployment will continue to rise, along with the salary rate.
• Many states will approve sport bets

3. Technology

• Alphabet will mark a significant change in capital allocation strategy: a very large acquisition, a large special dividend or a large buy-back program.
• Hearables will blossom: not only work for music listening but also collecting  health data. Apple will invest in it to create an edge for the popular AirPod.
• Huawei will be the no.1 smartphone manufacturing  in the world till the end of 2020 with more stable growth & more astonishing updates than Samsung.
• China will be the leading AI center due to cheap labour cost. 
• There will be prominent deep- fake scandals
• Face-recognition will be put in many more applications, which leads to security concerns?

4. Retail

• Walmart will make a big push into healthcare, after opening a  primary care center
• Amazon will double down on brick-and-mortar store buy acquiring one player (ex: Target) as 2020 will be the first year E-commerce grow less than 10%

5. EVs: Electric cars will hit the tipping point when everyone can earn one: mass-price & easier access to charging station

6. Travel Industry: There will be some large mergers here. Ex: Google buy some OTAs

7. Entertainment

• Apple TV+ will not bring impressive growth. 
• (Looking back why Apple did not buy Netflix) Maybe the reason lied in regulatory obstacles

8. Climate change: Governments over the world will pay more attention towards climate change, after Australia’s incidents

In the middle of the merging rumor of GoJek and Grab, I want to come back to an old article related to their business model: progrssive pricing by BCG

Why Progressive Pricing 

Is Becoming a Competitive Necessity

Progressive pricing is a competitive necessity because of its added values to both customers and firms. Leading tech companies should carefully implement four imperatives to fuel this inevitable technology growth.

With progressive pricing, which was already embedded in the sharing economy, firms do differentiate their products and services by individual customers and differentiate their prices accordingly. The system comes from the idea that optimizing continuum of prices is better than optimizing a number of price points. From that, it can create a win-win opportunity for both companies (more innovation and more profitability) and customer (expanding-value surplus).

Four differences between progressive pricing and traditional fixed-price approach

• Market expansion. Every customer has an opportunity to use the product or service, with price and value carefully and consciously adjusted to the customer’s current situation
• More consumer Surplus. Customers as a whole retain more value (reduced waiting time)
• More Profit. The firm earns more money
• A renewed sense of fairness. customers pay a price proportional to the value they receive

Two trends are changing day-to-day reality

• The independence of innovation from costly physical product improvements. 
• The omnipresence of mobile technology enables companies and customers to forgo unprecedented links with each other.

Four imperatives that firms need to execute to read profitabilty

• Invest to innovate with data, software and artificial intelligence. 
• Reinforce the bond of trust with their customer by providing added-value incremental
• Make customer values more explicit, transparent and personal. 
• Redefine and communicate the fair principles behind the algorithms to emphasize that values are shared among customers rather than extracted from them.

Today I will summarize all the analysis on Apple that I read in Finimize Premium. Finimize and Quartz are the best newsletters on business updates and analysis/strategy to me.

The State of Play

1. iPhone performance 

• More than 900 million active users today.
• Gross margin (excluding corporate costs) is 40% – very high.
• “Still” bread-and-butter. However, sales are declining. Apple compensates by increasing price.

2. The reasons for falling sales

• Saturation. Penetration reaches 70% in most developed countries. 
• Longer life cycle due to plateauing innovation and improved battery life.
• Heightened competition from Samsung, Huawei, Xiaomi,…

Apple’s Services scenario

1. Why is this segment potential? 

• Apple has a captive market: 1.4 billion devices in active use worldwide which it can sell to.
• Apple is doing well on Services: $46B revenue in 2019 is even bigger than total revenue of Oracle, one of the largest software companies in the world

2. How can Services save Apple?

• Its revenue may offset iPhone declining sales
• It may bring a higher valuation multiple:

(1) Hardware sales can be seasonal and cyclical, why software sales (esp subscription services) are consistent and predictable

(2) It is usually costlier to make and sell hardware

(3) Global supply chains are at risks of disruption: US-China trade war & Coronavirus

• Higher profit margins: Services ’s gross margin is 64% compared to ~34% in Hardware        

3. How can Apple grow its services enough?

      To be a “software” company, >50% of its profit need to stems from Services, which is:

• $5.50 average revenue per user/month (current: $2.75)
• $46B revenue added
• $18B profit added (margin after tax, interests,.. is assumed to be 40%)   
• Value $450B in 5 years (valuation multiple 25x of software companies)
• $280N discounted to today (10% discount rate)

It seems a “fair” estimation as Apple has a diverse Services portfolio: Apple Music, Apple TV+, Apple Arcade,… What about bundling all of them in one package, like Amazon Prime?

But, what will change the world again?

Most products go through a life cycle made up of four stages: introduction, growth, maturity and decline. Apple introduced the iPhone when the IPod was in its mature stage. Now IPhone is on its decline, what will be the successor? Maybe NOTHING

Apple has made a couple of endeavors already:

1. Current bets

• Apple Watch: Introduced in 2015, IPhone’s peak. For the last 4 years, Apple sold 20-25m annually, far from 200m IPhone
• Virtual-assistant market: HomePod, failed to compete with Alexa
• Airpod: successful, but low price lead to low revenue compared to IPhone

These streams only accounts for a minuscule fraction of Apple

2. Future products

• Project Titan (EVs): Apple acquired Drive.ai, working with Volkswagen, and hired formed Tesla chief engineer to work on this hidden project
• VR and AR. Apple is reportedly working on both and will launch Apple Glasses in 2022 pr 2024

Rough estimations for these projects: Valuation = Revenue * Revenue multiple

• EVs:  500,000 cars (10% of 2025 market) * $50,000 each= $25B Revenue *2.5 (Tesla multiple)= $63B in five years’ time
• AR/VR: 20% market share (same with IPhone now) *$80B total market (estimated by GS in 2025)= $16B *4.5x (industry multiple)= $72B in five years’ time

=> Total: $135B in five years -> $84B in 2019 (10% discount rate)

While this is still a very optimistic view for Apple in still-fledgling markets, it’s still far cry from the market valuation of $1.2B today.

1. #could CEO AWS in talks with Goldman Sachs CEO David Solomon  (GS)

What’s up?

Andy Jassy – CEO of AWS discussed how AI and cloud (my key takeaways) will shape our future and and his perspective to manage information security

What’s special about clouds?

Andy elaborated on two benefits of cloud to enterprises

• More flexible cost structure. With cloud, enterprises can turn the capital expense that laying out for servers and data centers into a variable expense (pay-as- you- go model). If they run on their own, their utilization rate is only 20%, a huge loss, right?
• Agility and speed to solve problems. This is the first-and-foremost reason that enterprises and government agencies switch to cloud service for their businesses. 

2. #insurance Prudentials has a new directions (Finimize)

What’s up?

Activist hedge fund Third Point has bought an almost-$2 billion stake in Prudential – and plans to use its newfound power to split up the insurer’s Asian and US businesses.

Why should I know?

Third Point -the hedge fund wants the insurer to separate its fast-growing Asian business from its small US business. It’s also pushing Prudential to move its costly head office away from the UK – a change that could save the business $260 million a year.

• Goal: Two more valuable separate insurers than one Prudential. Currently, Prudential has a lower valuation multiple than some of its Asian rivals
• Obstacles: There will be resistance elsewhere. The company has a large number of British investors who currently enjoy the London-listed stock’s hefty dividend.

3. #F&B Reviving the center aisle: An interview with Kellogg’s chief growth officer (McKinsey)

What’s up?

Monica McGurk, former McKinsey partner – Kellogg’s CGO since early 2019 revealed what drives plant-based protein market, the reason why big food manufacturer invests directly in it without acquiring star-ups and how retail landscape is evolving to accommodate the increasing demand.

Zooming out

• The market drivers: religious and cultural drivers, concerns about health, concerns about sustainability, government regulations, and so on.
• Reason why incumbents go after the opportunity organically: (1) They can be flexible with blended products and (2) The end-to-end value chain is really important to get right
• The movement of retail landscape: They are expanding the space they allocate to plant-based products, starting in the frozen case and now encroaching into the fresh-meat case.

1. #finance Morgan Stanley decided to diversify its business (Finimize)

What’s going on?

The company announced one $13B step of buying the online brokerage E*TRADE.

What does this mean?

• After the 2008 crisis, some of the riskier aspects of IB lost their lusters, lots of banks have diversified their businesses in search of stable revenues. Goldman Sachs- consumer banks, JP Morgan – payment and now Morgan Stanley – wealth management
• There is more for E*TRADE than just an eye-catching wealth management service: (1) It will reach 4,000 corporate customers from a business that Morgan Stanley’s already owned and (2) The deal will put E*TRADE’ investors in relief after the last turmoil. 

2. #banking HSBC is downsizing (Finimize)

What’s going on?

The global bank announced its plan to cut off 15% of its workforce (35,000 employees) in one of its biggest overhauls since the financial crisis.

Why should I know?

• HSBC is struggling. Its performance in Europe and America was poor, so this step will free the bank up to focus more on its Asia business (>50% revenue). However, it will need to confront with the ongoing protest and Coronavirus in this continent.
• So do other European banks. They are facing weak economic growth lately, not to mention ultra-low interest rates that have reduced their loan income. Some slashed jobs like HSBC, others go through mergers to curb their costs.

3. #tech How TikTok conquered Indian social media (Quartz)

What is it?

Three reasons why TikTok thrived in the  country that hosts the world’s second largest and fastest-growing internet user base: Great timing, great product and great image building strategy.

Zooming out?

• Great  timing. TikTok entered India in 2017, at the same time as Jio telecom company, who put “data charge” down aggressively, making it accessible for every Indian to go online.
• Great product. TikTok’s user interface is simple with (mostly) images and videos . It cleared the language barrier that other players like Facebook and Twitter have.
• Great image building strategy: (1) Run campaigns promoting education & equality, (2) Support public services and (3) Promote its commitment on data privacy.

Today I dedicate time to know more about the “recent” most valuable U.S. carmaker ever: Tesla

1. The history of Tesla in 5 minutes (Visual Capitalist)

2004: Elon Musk joined Tesla as an early investor, then brought simple but genius strategies:

• Focused on Li-on battery instead of “lead Acid” like the market leader: GM. 
• Started with high-margin sport cars, used the revenue to fund a more affordable car
• Achieved economy of scale, aimed for other applications of green electric

2008: Tesla nearly went bankrupt, Elon Musk became CEO and made drastic changes: fired labor, recalled on-sale cars and raised more money from public and government.

2010: Tesla went IPO, started to build gigafactories (2013) to reduce production cost of lithium-ion batteries, then it was able to build an electric car for the masses (2016)

Tesla is executing its mission: “accelerate the world’s transition to sustainable energy” by two fundamental goals:

• Create automatic factories, then boost economies of scale, produce more products like pick-up trucks and even public transports
• Change the energy paradigm: let homeowners use green energy for not only their cars but also other appliances 

2.  The York Times updates

What’s going on?

Tesla stock is going up 36% in two days. The article reviews what happened to Tesla since the beginning of 2020, then the contradict ideas on this growth

Zooming out

• What happened? Tesla’s shares closed at $887 on Tuesday, 36 percent growth compared to 2 days ago. Since the start of 2020, the price has more than doubled.
• Why enthusiastics? (1) Numbers is speaking: cost declined, sales increases, 

(2) Promising global expansion plan and (3) They have a lock on EV’s battery

• What are critics? (1) The company is having real problems producing cars on time, (2) Tesla does well when it enters new markets, often benefiting from customer tax incentives, but then struggles to keep sales growing at a fast rate, and (3) Lack of quality control.

However, these critics are driving up Tesla’s stock price with “short-squeeze” effect

3. Why Tesla’s expected to have lowest battery costs for years

In the first article, one reason that makes investors so enthusiastics on Tesla is “they have a lock on EV’s battery”. That’s right. Current average battery pack costs Tesla ~$156/kWh, which is $45-$50 cheaper than any other EV makers. Also, with constant investment and initiatives in electric battery research and development, this area will be Tesla’s competitive advantage in the far future.

1. #fashion Under Armour shares tanks as it is confronting many challenges a head (CNBC)

What’s going on?

Under Armour’s 2019 revenue fell short of investors expectation, then the company also announced the slower predicted 2020 sales. What is happening?

Zooming out

3 biggest challenges for Under Armour at this time:

• Growing competition from Nike, Lululemon and Adidas, which have created more fashionable workout gear to reach younger consumers
• Retailer’s problem: UA relies on retailers more than any other players. Retailers ’ve had to slash prices to better compete with Amazon’s rock-bottom prices. Then when shoppers get used to finding Under Armour on the discount racks, they’re far less likely to pay the full price
• The Coronavirus outbreak that dragged the revenue stream from international tourists

2. #tech How business apps help Chinese work from home (SCMP)

What’s going on?

In the midst of the Coronavirus outbreak, the majority of Chinese have to work from home. This lead to an upsurge demand for video conferencing platforms.

Why do I need to know?

• Dingtalk (owned by Alibaba): (1) Offered free use of its work-from-home features and (2) Added beauty filtesr to save users the trouble of putting on makeup to look good while working from home.
• WeChat Work (an offshoot of Tencent WeChat): (1) Increased the maximum number of attendants in video conferencing, (2) Added telemedicine feature for hospitals and (3) Added free online training for schools

3. #tech Samsung released S20 yesterday, then this is the summary of all the things you need to know (Forbes)

What’s going on?

“After a couple of years of other Android phone makers nipping at Samsung’s heels, the S20 lineup is the company’s statement for 2020 that it can still make the best Android phones” (TheVerge)

Zooming out

• Models and Pricing: S20 comes in three flavors: S20, S20+ and S20 Ultra
• Design: not much different from S10, except from Apple-like camera
• Photography and Video: This is the area in which Samsung raised the bar: ‘Pro-Grade’ camera configuration: a wide-angle, telephoto and ultra-wide-angle three camera configuration with an upgraded digital camera pipeline featuring new, larger sensors
• Connectivity: 5G is coming, then with T-mobile and Sprint merger, yeh it rocks
• Storage, Memory and Battery: The second mobile phone in the world with 12GB and even 16GB RAM in S20 Ultra (industry first)