Analysis: APC SLB

The U.S. equity markets are surging higher on Tuesday on the news of a tentative deal in Washington that will fund the government and avoid another shutdown. Now that the market's attention has moved past the ramifications of another government shutdown, the focus is now squarely back on trade with China, where an uncertain "Deal or No Deal" situation has unfolded.

On Monday, midlevel trade officials got the ball rolling by kicking off discussions in China. But those talks are just an appetizer to the real discussion which begins on Thursday when a U.S. delegation led by Trade Representative Robert Lighthizer (a China hawk) and Treasury Secretary Steven Mnuchin (a free-trader) meet with Chinese Vice Premier Liu He and his team. With roughly two weeks remaining before the Saturday, March 2 deadline, the time when the 10% tariff rate on $200 billion worth of Chinese goods is increased to 25% if no deal or extension is made, this has now become a race against the clock. On either outcome, we like how we have repositioned the portfolio and we will continue to stay close to the developments on trade.

In the energy markets, oil prices climbed on Tuesday as the market digested the output cuts from several OPEC nations as well as improved expectations for economic growth following the possible avoidance of a U.S. government shutdown. Regarding OPEC, its monthly oil market report showed that it removed 797,000 barrels per day from the market in January, slightly below its goal of reducing output by 812,000 barrels per day. This put total production for the month of January at just over 30.8 million barrels per day, below December's mark of 31.6 million. OPEC's commitment to cutting output has offset rising production from the United States Permian Basin, and in turn, has helped support market prices above the $50 level. Today's gains put WTI crude about halfway through the $53 handle, or about $1 higher from Monday.

Earlier today, BP Plc CEO Bob Dudley commented on the current oil market with CNBC at an energy forum in Cairo, Egypt. There, Dudley expressed his view of how the current market "feels tight" and reiterated the company's internal forecast of between $50 to $65 per barrel this year. Of our three energy positions, BP remains our preferred name in the space thanks to its growing production levels at decreasing break-even prices and its healthy ~5.80% dividend yield.

Although we remain disappointed with Anadarko's (APC) recent earnings miss, we've been averse to selling the stock down here because like we said last week in our Daily Rundown video  the assets are too good for where the stock is. That view was reiterated this morning by analysts at JPMorgan, who titled a note "On the Cusp of Righting the Ship; Valuation Work Highlights Extreme Disconnect; Reiterate OW." Based on JPMorgan's estimates, Anadarko's embedded E&P valuation (after some adjustments) is the lowest in the firm's peer group despite forward estimates that were mostly unchanged after the poor earnings release. Remember, even though the company reported tough fourth quarter results, management still backed its full year 2019 outlook. This suggests the shortcomings were transitory. Shares have briefly disconnected from the pack, but we think Anadarko's valuation will converge back towards its peers as the market reestablishes favor in its oily production mix, robust cash flow generation, and shareholder friendly philosophy.

Lastly, Schlumberger (SLB) recently spoke at a Credit Suisse Energy Summit held in Veil. There, CEO Paal Kibsgaard discussed his plan to transition out of the CEO role and groom current COO Olivier Le Peuch as his successor. Credit Suisse anticipates a transition time of about 1 year and does not expect any material change to the company's strategy based on Peuch's long tenure. At the conference, Credit Suisse noted how Schlumberger management continues to expect the SPM business to turn slightly cash flow positive in 2019 and with cash flow becoming "noticeable at the corporate level" in 2020 onward. Should this deliver, it will only improve the company's ability to generate cash and support its healthy dividend, the key reason behind our recent upgrade  .