Dovish Fed Policies: Effects on Energy and Industrial Sectors

Impact on Commodity Prices

Sustained lower commodity prices, influenced by dovish Fed policies, could lead to asset impairments, reduced operating expenses, and capital expenditures (CVX). Companies like XOM use flexible strategies like share repurchases to manage financial performance during price cycles. Increased refining capacity (XOM) helps mitigate price pressures, while takeaway capacity impacts gas prices (CVX).

"sustained lower commodity prices could result in the impairment or write-off of specific assets in future periods and cause the company to adjust operating expenses, including employee reductions, and capital expenditures, along with other measures intended to improve financial performance." --- (CVX, sec filing, 2024/Q1)

"During the higher points of the commodity price cycle, we are careful not to set dividends at levels that can't be sustained during the lows. Instead, we use share repurchases as a more flexible and tax efficient way to return capital." --- (XOM, event transcript, 2024/05/29)

"During extended periods of low prices for crude oil and natural gas and narrow margins for refined products and commodity chemicals, the company has the flexibility to modify capital spending plans, discontinue or curtail the stock repurchase program, sell assets, and increase borrowings to continue paying the common stock dividend. The company remains committed to retaining high-quality debt ratings." --- (CVX, sec filing, 2024/Q1)

"And we completed the last largest refinery expansion in the U. S. Since 2012, adding 250,000 barrels per day of refining capacity in Beaumont, Texas in early 2023. This growth in supply helps reduce rising price pressure, easing the impact on consumers and businesses." --- (XOM, event transcript, 2024/05/29)

"Last thing I might mention, which might be implied in your question, you see some talk about the takeaway capacity out of the basin and are people constrained, is that impacting particularly gas prices more than the other commodities." --- (CVX, earning call, 2024/Q1)

Changes in Borrowing Costs

Borrowing costs in the industrial sector have risen due to higher average borrowing rates and increased external borrowings, as seen in companies like Caterpillar and Deere & Company. Additionally, firms like Honeywell are leveraging various debt instruments to manage these costs, while 3M's working capital changes reflect short-term borrowings and long-term debt adjustments.

"Lower credit ratings generally result in higher borrowing costs, including costs of derivative transactions, and reduced access to debt capital markets." --- (DE, sec filing, 2024/Q2)

"The increase was due to higher average borrowing rates. ▪ Other income (expense) in the first quarter of 2024 was income of $156 million, compared with income of $32 million in the first quarter of 2023." --- (CAT, sec filing, 2024/Q1)

"BORROWINGS We leverage a variety of debt instruments to manage our overall borrowing costs." --- (HON, sec filing, 2024/Q1)

"Balance changes in current liabilities increased working capital by $1.0 billion, primarily due to short-term borrowings and current portions of long-term debt partially offset by increases in current liabilities relating to other environment liabilities and the CAE Settlement (discussed in Note 17)." --- (MMM, sec filing, 2024/Q2)

"Borrowings. Total external borrowings increased by $2,226 in the first six months of 2024 and increased $7,538 compared to a year ago, generally corresponding with the level of the receivable and lease portfolios, as well as other working capital requirements." --- (DE, sec filing, 2024/Q2)

Effects on Capital Expenditure

Dovish Fed policies have led to varied capital expenditure strategies across the energy and industrial sectors. Halliburton and Schlumberger focus on maintaining or reducing capital expenditures through efficiency and capital-light strategies. Conversely, Boeing and Northrop Grumman anticipate higher capital expenditures, with Lockheed Martin allocating funds to support new and existing programs.

"- Capital efficiency : Maintain our capital expenditures at approximately 6% of revenue while focusing on technological advancements and process changes that reduce our manufacturing and maintenance costs and improve how we move equipment and respond to market opportunities." --- (HAL, sec filing, 2024/Q2)

"We continue to expect capital expenditures in 2024 to be higher than in 2023." --- (BA, sec filing, 2024/Q2)

"The majority of our capital expenditures are for equipment and facilities infrastructure that generally are incurred to support new and existing programs across all of our business segments." --- (LMT, sec filing, 2024/Q2)

"We continue to target $1.8 billion in capital expenditures this year, which is around 4.5% of revenue and well above the industry average." --- (NOC, earning call, 2024/Q2)

"1st, 1st, these acquisitions will expand SAB's presence in the less cyclical and growing production and recovery space in a way that is closely aligned with our returns focused capital light strategy. The majority of Champagne's revenue is driven by OpEx, which will become an increasing part of overall upstream exploration and pollution spend." --- (SLB, event transcript, 2024/04/02)

Demand for Energy and Industrial Products

Demand for energy and industrial products remains robust, with high demand for petroleum products (XOM), energy storage solutions (TSLA), and various forms of energy (CVX). Additionally, there is significant demand for low carbon primary steel and aluminum (GM), and the automotive sector is carefully balancing production with demand (F).

"Demand for -- on the energy side of the equation with petroleum products continues to be very high." --- (XOM, earning call, 2024/Q2)

"We continue to increase the production of our energy storage products to meet high levels of demand, including the construction of a new Megafactory in Shanghai and the ongoing ramp at our Megafactory in Lathrop, California." --- (TSLA, sec filing, 2024/Q2)

"We've got an integrated value chain that allows us to serve two competitive refineries and advantaged logistics that take us out into a market where we've got a very strong brand and where the demand for all forms of energy continues to grow, be it power, be it transportation fuels." --- (CVX, earning call, 2024/Q1)

"Our proposal also asks GM to address potential supply chain constraints associated with low carbon primary steel and aluminum. Today in the United States, not 1 ton of primary steel or aluminum is manufactured, even though the recent U. S. Department of Energy Awards to Cleveland Cliffs and Century Aluminum will help jumpstart production of low carbon metals, demand for these metals will likely far outstrip supply." --- (GM, event transcript, 2024/06/04)

"So far, the consumer has held up pretty well. Pricing has held up. But as you said, inventories, I think, are back to the point where we need to be very thoughtful as industry about the production versus demand and then the supply that's in the marketplace." --- (F, conference, 2024/06/11)

Sector Performance and Profitability

GE, Caterpillar, Deere, ExxonMobil, and Chevron all reported improved performance and profitability, driven by factors such as higher volumes, pricing, efficiency, and technological advancements. Despite some supply chain constraints and sales below expectations, these companies achieved higher profit margins and operational efficiencies, enhancing overall sector performance.

"This was partially offset by customer mix and price. Supply chain constraints impacted shipments across both narrowbody and widebody with LEAP down 29%. Profit was $1.7 billion, up 21%, with margins expanding 320 basis points, driven by improved performance in services from higher volume, pricing and mix, lower engine shipments and improving LEAP services profitability also supported profit and margin expansion." --- (GE, earning call, 2024/Q2)

"Beginning on Slide 8. Although sales and revenues were slightly below our expectations, we had strong operating performance in the quarter, including higher adjusted operating profit margin and record adjusted profit per share, both of which were stronger than we had anticipated." --- (CAT, earning call, 2024/Q2)

"And customers there see increased value given the multiple-crop harvest each year as well as the ability to improve efficiency, profitability and sustainability in their operations." --- (DE, earning call, 2024/Q2)

"And frankly, our focus has been on making sure they are running reliably, running safely, running efficiently, and these centralized organizations and our global operations and sustainability organization have been a huge enabler to helping each of these facilities and our chemical plants, our refineries, lubricant facilities, all improve their performance, run better, run more profitably, run safer, run more reliably." --- (XOM, earning call, 2024/Q1)

"For instance, the breakthroughs we’re seeing in data technology offer significant opportunities for both efficiency, asset productivity, improved safety and other performance." --- (CVX, earning call, 2024/Q2)

Investment Strategies and Decisions

Investment strategies in the energy and industrial sectors are increasingly focused on strategic partnerships, innovative co-investment opportunities, and transparency in energy supply financing. Asset managers are also considering alternative energy tax-oriented investments and infrastructure solutions, while balancing organic and inorganic growth to drive asset management revenues.

"And it goes beyond clients simply wanting to do more with BlackRock. They are looking for a partner that innovates and helps them grow. The world's largest asset owners want deep strategic partnerships, increased customization and innovation, approaching that might include a creative co-investment opportunities and co-development of strategies." --- (BLK, earning call, 2024/Q2)

"You've talked about the HPIs coming down, alt assets going up. Is -- how else should shareholders and prospective investors think about strategy around growing the Asset Management revenues and is inorganic growth at all part of the strategy and in terms of how management is thinking about things today?" --- (GS, earning call, 2024/Q1)

"This demonstrates the feasibility and the growing momentum for energy supply financing transparency.Given the constructive tenor of our initial discussions with management as we had with the other banks, we were disappointed that the Board decided to oppose the proposal." --- (BAC, event transcript, 2024/04/24)

"Effective January 1, 2024, as a result of adopting updates to the Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method guidance, the amortization of certain of the Firm's alternative energy tax-oriented investments that was previously recognized in other income is now being recognized in income tax expense, which aligns with the associated tax credits and other tax benefits." --- (JPM, sec filing, 2024/Q1)

"Continued demand for our infrastructure and private equity solutions were partially offset by successful realizations of about $4 billion, primarily from private equity strategies. Finally, cash management net inflows of $30 billion were driven by government and international prime funds." --- (BLK, earning call, 2024/Q2)

Regulatory and Policy Implications

Government policies are shaping infrastructure, logistics, and customer base development in the energy sector (XOM). The prioritization of renewable energy by governments, corporations, and consumers is driving regulatory changes (GE). However, uncertainty remains regarding the pace of the transition to a lower carbon future, influenced by policy advancements (CVX). Caterpillar advocates for a regulatory environment that supports long-term success (CAT).

"Government policy is forming, while at the same time, you are trying to build the infrastructure to support that market, the logistics, the supply and then at the same time, develop a customer base." --- (XOM, earning call, 2024/Q2)

"Governments, corporations, and consumers are increasingly prioritizing renewable energy to reduce carbon emissions and mitigate the impacts of climate change." --- (GE, press release, 2024/06/06)

"Significant uncertainty remains as to the pace and extent to which the transition to a lower carbon future will progress, which is dependent, in part, on further advancements and changes in policy, technology, and customer and consumer preferences." --- (CVX, sec filing, 2024/Q1)

"The Diversity & Inclusion Report provides comprehensive information on Caterpillar's progress to continue building an inclusive culture, representation advancements and key initiatives from the past year. The Lobbying Report, The Purpose of Engagement, outlines how we advocate for a policy and regulatory environment that supports our long-term success and provides value to shareholders. Learn more and explore the reports at caterpillar.com/reports." --- (CAT, press release, 2024/05/07)

"Actual future results, including project plans, schedules, initial capacities, production rates, and resource recoveries could differ materially due to: changes in market conditions affecting the oil and gas industry or long-term oil and gas price levels; political or regulatory developments including obtaining necessary regulatory permits; reservoir performance; the outcome of future exploration efforts; timely completion of development and construction projects; technical or operating factors; and other factors cited under the caption 'Factors Affecting Future Results' on the Investors page of our website at exxonmobil.com and under Item 1A." --- (XOM, press release, 2024/04/12)

Technological Advancements and Innovations

Technological advancements in the energy and industrial sectors are being driven by partnerships and innovations in battery technology (TSLA), a focus on advanced technologies (HON), and GE's commitment to energy transition and industrial applications. Additionally, sustainable mining methods and electrification in air mobility are key areas of progress.

"They're great partners, and they've done great development work with us and a lot of the advancements in technologies and chemistry we found 4680, they're also putting into their cells." --- (TSLA, earning call, 2024/Q1)

"And then you have your 10%, which is really around advanced technologies. This is really pushing the envelope in terms of tech advancement in certain areas." --- (HON, conference, 2024/05/14)

"Now GE begins again, three industry leaders fit for purpose for the next century plus and ready to put their stamps on the world: GE HealthCare, GE Vernova and GE Aerospace, each carry forward GE's innovative spirit, customer focus and passion to build a world that works, fully focused on their respective missions to lead precision health, the energy transition and the future of flight." --- (GE, earning call, 2024/Q1)

"Supported by favorable government policies, investments in sustainable mining methods, and advancements in mining technologies, North America stands as a pivotal player in the growing nickel mining sector on the global stage." --- (TSLA, press release, 2024/06/27)

"So in terms of electrification and autonomy, I think one of the end market segments that's driving a substantial amount of technology advancement is what we call our Advanced Air Mobility Market segment, EV tolls as an example." --- (HON, conference, 2024/05/14)

Future Outlook Under Continued Dovish Policies

ExxonMobil's future plans for carbon capture, biofuels, hydrogen, and emission reduction are heavily reliant on market factors such as technological progress, policy support, and regulatory frameworks, which can be positively influenced by continued dovish Fed policies.

"Similarly, discussion of roadmaps or future plans related to carbon capture, transportation and storage, biofuel, hydrogen, direct air capture, and other future plans to reduce emissions and emission intensity of ExxonMobil, its affiliates, companies it is seeking to acquire and third parties are dependent on future market factors, such as continued technological progress, policy support and timely rule-making and permitting, and represent forward-looking statements." --- (XOM, sec filing, 2024/Q1)

"Similarly, discussion of future carbon capture, transportation and storage, as well as biofuels, hydrogen, direct air capture, and other plans to reduce emissions of ExxonMobil, its affiliates or companies it is seeking to acquire, are dependent on future market factors, such as continued technological progress, policy support and timely rule-making and permitting, and represent forward-looking statements." --- (XOM, press release, 2024/04/26)

"Similarly, discussion of roadmaps or future plans related to carbon capture, transportation and storage, biofuel, hydrogen, ammonia, direct air capture, and other future plans to reduce emissions and emission intensity of ExxonMobil, its affiliates, and third parties, are dependent on future market factors, such as continued technological progress, policy support and timely rule-making and permitting, and represent forward-looking statements." --- (XOM, sec filing, 2024/Q2)