Wednesday, December 9, 2015
With not much on the data calendar, stocks are expected to start today’s session modestly in the red on continued weakness in the broader global commodity complex, particularly in the energy space.
Oil has pared earlier losses ahead of today’s session, but the commodity’s overall tone remains distressed. This is putting a spotlight on the sector’s financial wherewithal, particularly their ability to continue servicing debt and pay dividends as confirmed by this morning’s Kinder Morgan (KMI) announcement of a 75% dividend cut.
The Freeport-McMoRan (FCX) announcement suspending its dividend highlights the distress in the broader mining space. Kinder Morgan announcement is a likely a sign of things to come in the pipeline and energy infrastructure space, particularly oil and natural gas pipeline MLPs. Beyond the pipeline space, the financial distress question is likely the most relevant in the exploration and production industry, though the large-cap E&Ps as well as the so-called super majors like Exxon (XOM) and Chevron (CVX) are beyond these questions.
The near-term outlook for the commodity no doubt remains weak, with prices potentially going down into the low-30’s. But I find it hard to envision prices staying in those low levels for any extended period of time. However, if prices do go down to those low levels and stay there for a period beyond a couple of quarters, then many in the sector will be in genuine financial distress. But I seriously doubt that the super-majors will put their dividends on the table even such situations.
Beyond the oil patch, Yahoo’s (YHOO) decision to drop its plans to sell its Alibaba (BABA) stake due to tax considerations is being interpreted to mean that it is putting its core internet business up for sale. Media reports of a merger of equals between DuPont (DD) and Dow Chemicals (DOW) will result in a chemicals giant, though the merged company reportedly plans to split itself into three stand-alone operators.
Sheraz Mian
Director of Research
Note: In addition to this daily pre-open article about the market, economy, and the corporate earnings picture, Sheraz Mian also provides detailed earnings analysis in his weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz Mian publishes a new article, please click here.
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