Copyright © Daniel Cullinane CPA.
British airline EasyJet wants to reduce its carbon footprint. It says one way is to use electric engines. The plan may sound implausible, but it may happen not terribly far in the future.
According to the International Council on Clean Transportation, commercial aviation makes up 2.4% of global CO2 emissions from fossil fuel engines each year. The figure is for 2018 and is up 32% in the past five years. Predictions say that will worsen. As is true with cars, only electric engines can decrease this figure radically.
Airbus (one of the two largest commercial aircraft makers in the world), Rolls-Royce (which makes jet engines) and Siemens (among the world’s largest conglomerates) believe they can test an electric jet engine as early as next year. If they reach this goal, their managements believe, the engines could go into commercial operation by 2025. Airbus has jumped ahead of Boeing in sales and recently sold 300 planes to India’s IndiGo Airlines.
The engine project of the three companies is called E-Fan X. If it works, Airbus management says, it will be “a giant leap towards achieving zero-emission flight over the next 20 years.” It may become one of the ways that technology has changed the world in the past couple of decades.
The primary question about the goal is whether it is reasonable, since it would be a huge change in the way jet engines work. One hopeful sign is the rise in technology and sales of electric cars. However, a Tesla S weighs 5,000 pounds and has a range of between 250 and 300 miles, but a Boeing 777 weighs 150 tons and can travel over 9,000 miles. The stretch from electric engines for cars to those for large aircraft is nearly unimaginable. However, the jump from propeller engines to jets was hard to imagine before that changeover.
If electric jet engines work, air travelers could be flying on commercial aircraft powered by them by 2040. In the history of commercial air travel, that is not far off. And it would substantially change the air pollution created from those engines used today.
DECEMBER NEWSLETTER 1
STOCK IS UP
Last week, the U.S. Energy Information Administration (EIA) reported that U.S. exports of crude oil and petroleum products exceeded U.S. imports for the first time since the agency began keeping monthly records in 1973. Just 10 years ago, U.S. imports exceeded exports by 10 million barrels a day. In September, net petroleum exports exceeded imports by 89,000 barrels a day.
The largest piece of the shift in the relationship between petroleum exports and imports resulted from the Obama administration’s December 2015 lifting of the ban on U.S. crude oil exports. Crude oil exports rose from around 591,000 barrels a day in 2016 to 2.8 million barrels a day in the first nine months of this year. The largest factor in that increase has been crude oil production in the Permian Basin of Texas.
In January of 2016, the Permian was pumping more than 1.93 million barrels a day, and that total had risen to 4.61 million barrels a day by this past October, according to EIA data. The agency forecasts that by the end of this month, the Permian will produce about 4.73 million barrels a day.
Is Permian Basin production approaching its peak? Will production fall off over the next several years? If so, how fast will production decline? Is the boom about to bust?
Analysts at research firm IHS Markit on Thursday said that producers will have to drill “substantially more [Permian] wells just to maintain current production levels and even more to grow production.” The reason is the explosive growth in Permian production since the export ban was lifted. That growth has been speeding up “inherent production decline because newer, younger wells decline much faster than older wells.”
IHS Markit calls the phenomenon the “base decline” rate, which the firm defines as the difference between the actual or forecast flows of all producing wells at the beginning of a year and their flows at the end of that year. Raoul LeBlanc, the firm’s vice-president of unconventional oil and gas, commented:
Base decline is the volume that oil and gas producers need to add from new wells just to stay where they are—it is the speed of the treadmill. Because of the large increases of recent years, the base decline production rate for the Permian Basin has increased dramatically, and we expect those declines to continue to accelerate. As a result, it is going to be challenging, especially for some companies with cash constraints, just to keep production flat.
LeBlanc points to the difference between the base decline rate in 2010 and the expected base decline rate for this year. Permian crude oil production at the beginning of 2010 totaled around 880,000 barrels a day, virtually all from conventional (vertical) wells. At the end of the year, production from those wells had fallen 13% to around 776,000 barrels a day.
Permian wells were producing 3.8 million barrels a day at the beginning of this year, mostly from horizontal, fracked wells. IHS Markit expects production from those same wells to tumble by 40% to around 1.5 million barrels a day by the end of this month.
There are a number of thorny issues involved in these rapidly accelerating declines. LeBlanc notes that new, individual wells decline at a much faster rate than older wells. Production can fall by 65% to 85% in one year for a new well compared to a decline of around 20% or less for older wells. The new wells produce more but give up their riches more quickly.
That means the operator needs to drill more wells just to keep production levels flat. High-flyers that have produced the most oil in recent years also have the sharpest base decline rates. They need to drill more, but that costs money that has to come either from bank loans or investors willing to forego returns on the money they’ve already invested. Neither source of cash appears likely to ride to the rescue.
Analysts at Rystad Energy have forecast 2020 capital spending on oil exploration and production at slightly above the $75 billion allocated this year. Of estimated capital spending totaling an estimated $225 billion next year, offshore projects will receive more than $100 billion and onshore liquefied natural gas (LNG) projects are likely to get about $50 billion.
Rystad Energy also offers some relatively good news:
As the world transitions to a less carbon intensive future, Rystad Energy forecasts that the global inventory of already discovered oil fields with a breakeven oil price of below $60 Brent (real) is sufficient to meet demand growth and offset declines from maturing fields until around 2027. From that point on, however, additional volumes from not-yet-discovered fields will be needed in order to meet total liquids demand.
The other piece of good news, at least from a consumer’s point of view, is that the U.S. Geological Survey (USGS) in November of last year released a new estimate for the Permian’s Delaware basin indicating that there are 46.3 billion barrels of oil resources in just a portion of the Permian Basin. The USGS estimate should be read this way: The agency guarantees that there are no more than 46 billion barrels in the Delaware basin formations. Not all of the resource can or will be recovered, but if Brent crude prices remain solidly above $60 a barrel, production companies should break even or, perhaps, make a profit.
Brent traded near $65 a barrel just before noon Friday in a 52-week range of $50.36 to $75.60. Since mid-June, the price has fallen below $60 a barrel only for brief periods and never by more than about $4 a barrel.
At a hearing Wednesday before the House Transportation and Infrastructure Committee, Federal Aviation Administration (FAA) chief Steve Dickson said that FAA recertification of Boeing Co. (NYSE: BA) 737 Max is fully under the agency’s control and that the FAA “is not delegating anything to Boeing.” As a result, recertification of the company’s best-selling passenger jet will slip into next year.
In an interview with CNBC, Dickson elaborated a bit, “If you just do the math, [recertification is] going to extend into 2020.” In his prepared statement for the House hearing, Dickson said, “The FAA will retain authority to issue airworthiness certificates and export certificates of airworthiness for all new 737 MAX airplanes manufactured since the grounding. When the 737 MAX is returned to service, it will be because the safety issues have been addressed and pilots have received all of the training they need to safely operate the aircraft. ”
The 737 Max was grounded in mid-March following a second crash in five months. The first crash, in October 2018, killed 189 passengers and crew aboard a Lion Air flight that had just taken off from Djakarta, Indonesia. The second, in early March, killed 157 passengers and crew on an Ethiopian Airlines flight just minutes after takeoff near Addis Ababa.
Among a long list of actions that must take place before the FAA lifts its grounding order on the 737 Max are an evaluation of pilot training needs, an FAA review of the final design documents and publication of a final airworthiness directive “advising operators of required corrective actions.” Dickson, a former Air Force and commercial pilot, reiterated his promise to fly the plane himself. He said he would not sign off on the aircraft until he is “satisfied that I would put my own family on it without a second thought.”
According to a report at Leeham News, Dickson had no answer when asked by committee chair Peter DeFazio why the plane wasn’t grounded following the Lion Air crash and before the Ethiopian Airlines crash. DeFazio said an FAA analysis done before the Ethiopian crash concluded that there would be “as many as 15 future fatal crashes over the life of the fleet” if a design flaw in the plane’s Maneuvering Characteristics Augmentation System, or MCAS, was not fixed. The MCAS sent erroneous information to the pilots who lacked training in how to override the information and retake manual control of the plane.
According to a projection from Cowen published by The Wall Street Journal, by the end of this month, Boeing will have built 416 737 Max jets that it cannot deliver until the FAA lifts its grounding order. An additional 383 planes that already had been delivered to customers remain grounded. Boeing is projected to have built another 31 undeliverable planes by the end of January before deliveries begin in February. The projections, drawn up at the end of November, appear to be optimistic given Dickson’s testimony.
As the noon hour drew to a close Wednesday, Boeing’s stock traded down about 0.8%, at $345.12 in a 52-week range of $292.47 to $446.01. The 12-month consensus price target on the stock is $375.15
Ahead of the November 2016 that put Donald Trump in the White House, condominiums available for sale in Trump buildings outside New York City commanded a premium of 28% to condos of comparable luxury in the same city. Three years after that election, the premium on a Trump condo has dropped to 20%.
The data was reported Friday by online real-estate firm Redfin based on luxury condos listed for sale in 10 Zip codes outside New York City, which was excluded because multiple listing data was not available for transactions at Trump properties. The analysis includes sales of Trump-branded condos and other luxury units in cities with Trump properties including Hollywood Beach, Florida; Sunny Isles Beach, Florida; Honolulu; Chicago; Jersey City, New Jersey; Stamford, Connecticut; Las Vegas; New Rochelle, New York; Shrub Oak, New York; and White Plains, New York.
Redfin also noted that 81% of online listings in 2015 mentioned Trump’s name, while just 65% of condo listings today mention the president’s name.
Redfin chief economist Daryl Fairweather explained, “It’s not surprising that sellers and their agents are less likely to identify a home with Trump now that he’s president, as that could limit their buyer pool. Marketing to just one side of the aisle—even if it’s just mentioning a politician’s name—could mean half as many potential buyers see a home.
Redfin compiled the data on the comparison between Trump and comparable luxury condos into a tidy chart.
Pre-election (Jan. 2014 – Oct. 2016) Post-election (Nov. 2016 – Nov. 2019)
Median sale price of Trump condos $868,750 $729,000
Median sale price of comparable luxury condos $760,000 $680,000
Average price premium (%) for Trump condos 28.10% 20.40%
Median price per square foot for Trump condos $713 $606
Average price-per-square-foot premium (%) for Trump condos 18.60% 8.00%
Median days on market for Trump condos 95 (versus 67 for non-Trump condos) 86 (versus 57 for non-Trump condos)
Total Trump condos sold 532 542
Apple Inc. (NASDAQ: AAPL) stock is up and extraordinary 71.62% this year, far outpacing the Dow Jones industrial average or any of its other components. The surge puts Apple’s shares at $270.71.
The Dow is up about 20% to 28,015.06 over the same period. No other Dow stock has risen even 50%.
The most recent catalyst for Apple’s share increase was the anticipation that sales of its primary products, the iPhone, Mac and AirPods, will be extraordinary. The holiday quarter is almost always Apple’s strongest.
The company’s latest earnings statement blew skeptics away. Apple recently posted earnings of $3.05 per share, up from $2.94 last year. Forecasts for the coming holiday quarter were strong. The iPhone 11 was only available for part of last quarter, so its sales results should improve in the current one. Sales also have improved in China, the world’s largest wireless market. Some experts believe that Apple TV+ will do well in the streaming wars as it adds new, original content.
Apple’s stock increase has ridden the back of two developments for most of the year. The new iPhone 11 has done better than expected, although the numbers are speculation by experts and not data provided by Apple. The other is that Apple’s bet on “services” as an alternative to difficult hardware sales has produced good results. Apple’s services business numbers crushed expectations for the latest quarter. Its revenue set a record at $12.5 billion, against total company revenue of $63 billion. Services as a percentage of total revenue are expected to continue to rise.
The release of the iPhone 11 in September was the tonic the stock needed. Shares sold down sharply in mid-summer after Apple announced its earnings for a quarter ago. The mainstay of revenue had continued to weaken as the iPhone X series did poorly, particularly in the world’s largest wireless market, China. The trade war between China and the United States also dragged on the stock, as anxiety about Apple supply chain interruptions grew. Apple sources many parts of the iPhone from companies in China. iPhone 11 sales were enough to alleviate any worry along these lines.
The launch of Apple TV+ is critical to the new strategy. Apple already has a huge music store. Its app store is by far the largest in the industry. By some estimates, apps downloaded since the store began total more than 130 billion. Many experts believe that app sales cannot continue to grow at rates they have over the past decade. So video streaming becomes an essential part of the growth in this multimedia business.
All this means that Apple’s bet on TV is absolutely critical. At $4.99 for the first month, after a seven-day free trial, the service is aggressively priced compared to industry leaders Amazon and Netflix, which have price points of $12.99 a month. Apple’s management has gambled that, although its library of content is limited compared to the leaders, the low price, the Apple brand and the hundreds of millions of iPhones, iPads and Macs in the world are a huge base to which it can market its streaming service. A JPMorgan analyst recently said Apple TV+ and Apple’s ad business would add $25 billion in revenue in 2025.
Confidence has grown that Apple’s new iPhone 11 and services strategy is the right formula. Its market cap is back above a trillion, up to nearly $1.2 trillion. And it recently was named the most valuable brand in the world again.
Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778
2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778