TheChek News Flow

Saudi Arabia favors curb of up to 1 million barrels a day, while other members oppose downgrading quotas

OPEC and its Russia-led allies are considering new oil production cuts of as much as 1 million barrels a day, delegates said Wednesday, despite tensions in oil markets amid the conflict in the Middle East.

The move, which would likely send oil prices higher, could be announced Thursday at a virtual meeting of the cartel. The meeting, originally scheduled for last week, was postponed over disagreements about production.

A deal for further cuts isn’t assured, and the prospect is facing significant resistance within the Organization of the Petroleum Exporting Countries. A rollover of most existing output curbs is the most likely scenario, the delegates said, but talks are continuing.

Saudi Arabia in June cut production by 1 million barrels, in a unilateral move as part of a deal with the other members of the Vienna-based group. Any cuts announced Thursday would be in addition to those announced in June.

Saudi Arabia, the world’s biggest oil producer, is in favor of the new cuts, the delegates said.

Oil prices climbed after The Wall Street Journal reported talks of the possible cuts. Brent, the most widely traded contract, climbed about 1.5% to more than $82 a barrel.

Analysts said the potential curbs were greater than most forecasts.

“I was expecting half a million; 1 million is quite bullish, and we can see that in oil prices popping up,” said Bjarne Schieldrop, chief commodities analyst at SEB. A cut of 1 million “wont necessarily drive it to $90 a barrel and above but it will prevent it from falling below $80.”

Nigeria and Angola, the two biggest African oil producers, have been resisting a downgrade of their individual quotas, which OPEC-commissioned reports say overstate their production capacity, the delegates said. The United Arab Emirates is also reluctant to cut output, they said.

Any extra cuts, if approved, would likely draw a rebuke from the U.S., which slammed 13-strong OPEC and its 10 Russia-led allies for agreeing to a cut of 2 million barrels a day last year. The White House called the decision by the so-called OPEC+ alliance shortsighted and suggested the group was actively supporting Russia’s invasion of Ukraine.

Arab nations such as Saudi Arabia have been critical of an offensive in Gaza by Israel, where thousands have died and large neighborhoods have been reduced to rubble. The operation was launched in response to Palestinian militant attacks on Oct. 7 on Israel, which the U.S. has backed militarily.

The delegates said the Middle East conflict hadn’t been brought up in the OPEC conversations.

Geopolitical tensions have spiraled beyond Israel and the Palestinian territories. An Israeli-connected ship was recently seized by Yemeni rebels acting in solidarity with the Palestinians. Militias in Iraq—OPEC’s second-largest producer—have exchanged fire with U.S. Army bases.

The OPEC talks also come as global industry and political leaders arrive in Dubai for the United Nations climate summit, where the role of major oil-producing countries in reducing emissions will again be a major topic of discussion.

Saudi Arabia, which has embarked on an ambitious program of projects, including a giant new city in the desert, needs a fiscal break-even oil price of as much as $88 a barrel, according to Goldman Sachs.

A Saudi government representative didn’t return a request for comment.

Robert Yawger, executive director of energy futures at Mizuho Securities USA, predicted Brent prices would rise back to about $90 a barrel and benchmark U.S. crude prices to about $85 a barrel if OPEC+ followed through on the extra cuts.

He added, though, that Saudi Arabia would find it difficult to persuade other members both to sign up to extra cuts and follow through on them given the deep existing curbs. “An old-school, really reliable, month-by-month count the barrels kind of cut: I don’t see that happening,” Yawger said.

FT : Golden Goose: polished valuation aims to capitalise on derelict chic

Narrowly focused fashion brands have a mixed history with public markets

Christmas is coming and the goose is getting fat. For Permira, the bird in question is Golden Goose. The UK private equity group hopes to list the Italian footwear brand in Milan early next year at a reported valuation of €3bn.

Fast-growing and highly profitable, Golden Goose appears to live up to its name. But narrowly focused fashion brands have a mixed history with public markets. Investors should be cautious.

Fashion is at best cyclical and at worst ephemeral. Turmoil at Gucci shows that even famous names get it wrong. Golden Goose, in contrast, is a challenger. Its distressed-look trainers cost about $500 a pair, reminding cynics of “Derelicte”, a spoof brand purveying the look of vagrants in the movie Zoolander.

It is hard to imagine Golden Goose enjoying the enduring appeal of Birkenstocks. The sandal brand helpfully tested the market last month when it listed shares in New York. Shares disappointed on debut but have made up losses since. 

That precedent invites comparisons between the two businesses. Golden Goose and Birkenstock should both increase sales by about one-fifth this year. Both companies have ebitda margins in the low 30s.

The average price for Birkenstocks is about a tenth of Golden Goose sneakers at €50. But the top dog in clogs has a bigger market and merits a premium. An enterprise value of 20 times forward ebitda for Birkenstock beats the 15 times trailed for Golden Goose. 

Dr Martens, like Golden Goose, is a niche footwear company backed by Permira. The maker of rock ‘n’ roll boots listed in London in early 2021.

The valuation back then was rich at more than 20 times ebitda. That has dwindled to less than 6 times today. The sole has peeled off sales growth. The story is similar at Tod’s of Italy, which trades on 7 times.

Bankers may well pull Golden Goose up by its bootstraps for a rating of 15 times at flotation. But longer term, the business will have its work cut out to convince investors it is worth a gander.

Work shows power of AI to improve real-world technology in fields from renewable energy to advanced computation

Google DeepMind researchers have discovered 2.2mn crystal structures that open potential progress in fields from renewable energy to advanced computation, and show the power of artificial intelligence to discover novel materials.

The trove of theoretically stable but experimentally unrealised combinations identified using an AI tool known as GNoME is more than 45 times larger than the number of such substances unearthed in the history of science, according to a paper published in Nature on Wednesday.

The researchers plan to make 381,000 of the most promising structures available to fellow scientists to make and test their viability in fields from solar cells to superconductors. The venture underscores how harnessing AI can shortcut years of experimental graft — and potentially deliver improved products and processes.

“Materials science to me is basically where abstract thought meets the physical universe,” said Ekin Dogus Cubuk, a co-author of the paper. “It’s hard to imagine any technology that wouldn’t improve with better materials in them.”

The researchers set out to uncover new crystals to add to the 48,000 they calculated as having previously been identified. The known substances range from those known for millennia, such as bronze and iron, to much more recent discoveries.

The DeepMind team identified novel materials by using machine learning to first generate candidate structures and then gauge their likely stability. The number of substances found is equivalent to almost 800 years of previous experimentally acquired knowledge, DeepMind estimated, based on 28,000 stable materials being discovered during the past decade.

“From microchips to batteries and photovoltaics, discovery of inorganic crystals has been bottlenecked by expensive trial-and-error approaches,” the Nature paper says. “Our work represents an order-of-magnitude expansion in stable materials known to humanity.”

Two potential applications of the new compounds include inventing versatile layered materials and developing neuromorphic computing, which uses chips to mirror the workings of the human brain, Cubuk said.

Researchers from the University of California, Berkeley and the Lawrence Berkeley National Laboratory have already used the findings as part of experimental efforts to create new materials, according to another paper published in Nature on Wednesday.

The team deployed computation, historical data and machine learning to guide an autonomous laboratory, known as the A-lab, to create 41 novel compounds from a target list of 58 — a success rate of more than 70 per cent.

The high success ratio was surprising and could be improved even further, said Gerbrand Ceder, co-author of the paper and a professor at the university. The key to the improvements was how AI techniques were combined with existing sources such as a large data set of past synthesis reactions, he added.

“While the robotics of the A-lab is cool, the real innovation is the integration of various sources of knowledge and data with A-lab in order to intelligently drive synthesis,” he said.

The techniques outlined in the two Nature papers would enable new materials to be identified “with the speeds necessary to address the grand challenges of the world”, said Bilge Yildiz, a Massachusetts Institute of Technology professor who was not involved in either piece of research.

“This expansive database of inorganic crystals ought to be filled with ‘gems’ to be uncovered, to advance solutions to clean energy and environmental challenges,” said Yildiz, who works in MIT’s departments of materials science and engineering, and nuclear science and engineering.

The papers represented a further “very exciting advance” in the quest to “obtain materials at speeds far surpassing traditional empirical synthesis approaches”, she added.

KKR takes full control of Global Atlantic as it rearranges its finances

Private equity group says it wants shareholders to better understand its growth

US private equity group KKR is buying the remaining 37 per cent stake in Global Atlantic, the life insurer it took control of in 2021, for $2.7bn as it takes full ownership of a fast-growing business whose overall value has soared in recent years.

KKR said on Wednesday that it was purchasing the outstanding stake at an over-$7bn valuation: far more than the price it paid when buying a majority stake in Global Atlantic at a $4.4bn valuation in February 2021. The rising price of the life insurer comes as its overall assets have more than doubled to $158bn since 2020, causing its book value to rise.

During Global Atlantic’s initial sale to KKR, minority shareholders — predominantly wealthy clients at Goldman Sachs — had the option to hold on to their investment and be bought out by KKR at a later date.

Scott Nuttall, co-chief executive of KKR, in an interview with the Financial Times rejected the notion that the group was forced to buy its remaining stake in Global Atlantic as its value has crept higher.

“We are not doing this because we have to, we are doing it because we want to and this has been a home-run investment,” said Nuttall. He pointed to synergies KKR could garner with full ownership, such as selling private equity funds it had designed for wealthy individuals to Global Atlantic’s existing clients.

As part of the deal, New York Stock Exchange-listed KKR is also rearranging its finances so that public stockholders can better understand operations that have become increasingly broad and complex.

The group will change the way it reports quarterly earnings to focus on how quickly it is compounding its overall earnings and assets, versus a dividend yield.

In the years after KKR went public in 2009, it has stood apart from competitors like Blackstone in retaining most of its profits, instead of paying them out in dividends to shareholders. The strategy has allowed KKR to reinvest its profits in acquisitions and build an increasingly large pool of investment assets on its balance sheet.

KKR’s pool of directly owned assets has grown from under $10bn a decade ago to over $26bn currently, and is expected to pay large dividends to KKR in coming years, according to Nuttall.

KKR will divide its operations into three business segments: fee-related earnings from its asset management operations, insurance earnings, and balance sheet assets called “strategic holdings”.

It will create a new profit metric called “total operating earnings” to highlight its more predictable earning streams, such as base management fees, spread-related profits from its insurance operations, and dividends earned from its balance sheet investments.

KKR will also modify its finances by lowering the pay dealmakers earn from base management fees and increasing their participation in performance-based fees, a move that is expected to boost KKR’s overall earnings.

Nuttall said with the new financial structure he hoped KKR would draw an increasing comparison to investment conglomerates such as Berkshire Hathaway and Danaher, where shareholders have focused on the compound growth of their earnings and market capitalisations over long stretches of time.

Supreme Court Weighs Whether SEC Violates Defendants’ Jury-Trial Rights

Ruling on agency’s in-house court system could clear way for attacks on similar executive-branch bodies

WASHINGTON—The Supreme Court on Wednesday will consider a case that could severely limit the Securities and Exchange Commission’s use of its special in-house courts to punish wrongdoers.

Critics have complained about the SEC’s special courts for years, saying they rob defendants, including those accused of fraud, of their right to a jury trial. Administrative law judges, who preside in the in-house courts, are supposed to be independent but are appointed by the same commissioners who authorize the enforcement cases that the judges hear.

The justices’ decision, expected sometime before July, could open the door to more legal attacks on administrative courts at other federal agencies, including the Federal Trade Commission, where an in-house bench considers complaints about anticompetitive mergers and consumer-protection violations. Other agencies, such as the Federal Energy Regulatory Commission and Federal Mine Safety and Health Review Commission, also have adjudicators who consider violations of federal rules or laws.

The SEC asked the high court to consider the case after an appeals court in New Orleans ruled last year that the administrative courts are unconstitutional. The forum violates defendants’ jury-trial rights and gives too much power to regulators, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit found in a 2-1 decision. SEC judges also enjoy protections from removal, an infringement on the president’s authority to appoint officers, the Fifth Circuit said.

The case, SEC v. Jarkesy, has generated interest among high-profile SEC critics and big-business groups, which have urged the justices to remove the agency’s freedom to file enforcement actions outside of federal court. Billionaires Elon Musk and Mark Cuban, who have both been sued by the SEC, told the high court in a brief that regulators began using the administrative courts more around 2015, after losing a string of insider-trading trials in federal court.

The SEC’s courts once heard only claims against stockbrokers and money managers—people who had submitted to the SEC’s oversight. But after the 2008 financial crisis, Congress passed the Dodd-Frank Act, named for its authors, that empowered the SEC to sue any defendant in administrative court, including people who didn’t work in finance but had, for instance, been accused of insider trading.

“Dodd-Frank really expanded the ability of the SEC to bring virtually any type of case in its administrative courts,” said Deborah Meshulam, a partner at DLA Piper who previously worked at the SEC. “It made these constitutional challenges much more ripe.”

The appeal before the high court involves hedge-fund manager George Jarkesy, whom the SEC accused of fraud in 2013. An administrative judge found that he “testified in an evasive manner” and told investors that the funds’ auditor was KPMG when it was a much smaller Houston-based accounting firm. The judge barred him from the securities industry and ordered penalties totaling $1.72 million.

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Jarkesy and other defendants say the SEC’s administrative courts don’t give defendants the same due-process rights as a federal court. The in-house courts limit, for instance, how much information defendants can get from the SEC to challenge the case against them.

The SEC has litigated far fewer enforcement cases in the administrative courts in recent years as defendants challenged aspects of their structure. The pullback began after the Supreme Court ruled in 2018 that SEC judges were hired in a way that violated the Constitution.

Critics of the system say the in-house judges are executive-branch officers who enjoy too much protection from the president’s oversight. Congress provided them that independence through a law that says administrative law judges can be removed only for good cause.

If the justices decide administrative judges enjoy too much job protection—that a president should be able to dismiss them for whatever reason—the in-house judges would ironically become less independent than they are now, an association of administrative law judges wrote in a brief to the court.

The legal assault on in-house judges is part of a broader pattern of cases decided by the high court in recent years that question the growth of independent regulatory agencies such as the SEC. Such agencies have rule-making, prosecutorial and judicial functions, violating the Constitution’s separation of powers doctrine, according to groups such as the U.S. Chamber of Commerce.

The Fifth Circuit panel, in its 2022 decision siding with Jarkesy, said Congress delegated too much legislative power to the SEC by allowing regulators to pick and choose where to file enforcement actions.

Losing on that argument could “create a fertile new field” for challenging other commission actions, such as new regulations, based on the idea that commissioners wielded too much quasilegislative power, said David Zaring, a professor at the University of Pennsylvania’s Wharton School.

The Supreme Court has repeatedly ruled against the SEC in recent years. In April, the justices said people and businesses subjected to SEC administrative proceedings can seek to enjoin, or block, those proceedings by suing in a federal-district court and raising constitutional arguments there.

Administration is expected to decide Friday what will disqualify EVs from eligibility for $7,500 consumer subsidy

The Biden administration is expected to release tax-credit rules on Friday that could shape the American market for electric vehicles, people familiar with the matter said.

The U.S. last year revamped a $7,500 tax subsidy for people who buy new EVs. One of the changes says consumers won’t be able to claim the credit if they purchase cars containing battery materials from a “foreign entity of concern.” Lawmakers included the rule in the Inflation Reduction Act to push automakers to rely less on dominant Chinese suppliers.

Defining the vague phrase has emerged as a challenge for the Biden administration. How it addresses the term in the proposed rules, expected Friday, could help determine how much Americans will pay for many EVs in the coming years.

The White House hopes the new tax-credit rules will encourage the development of auto-supply chains in the U.S. and distance the industry from China, the most important source of clean-energy technology and a geopolitical rival. At the same time, disqualifying vehicle batteries with even minor contributions from Chinese firms could mean that few, if any, EVs would be eligible for the $7,500 credit, potentially slowing the transition away from gasoline-powered cars.

“A lot rides on how exactly the Treasury Department defines this rule insofar as it applies to the ability of car manufacturers to use parts from Chinese corporations in their supply chains,” analysts at Beacon Policy Advisors, a policy-research firm, wrote in a note.

A Treasury spokeswoman declined to comment.

The tax-credit rule comes as demand for electric vehicles has shown signs of cooling, prompting several automakers to adjust their plans for EV investment. While sales of EVs have still grown significantly, the rate of growth has slowed compared with last year.

The Biden administration’s guidance will likely block the subsidy for cars containing batteries, components or minerals made by state-owned Chinese companies. Officials have been weighing how to address companies based in the U.S. or in a third country that are partially owned by private Chinese firms. Whether batteries built with technology licensed from a Chinese company can qualify for the subsidy has been another area of debate.

The prohibition will come into effect in 2024 for manufactured battery components and in 2025 for the minerals that go into them. Regardless of how the Biden administration enforces the rule, auto industry experts expect the requirement will reduce the number of cars eligible for the credit in the near term.

Several automakers have waited for a more precise definition of “foreign entity of concern” before moving forward with investment or licensing deals to build EV batteries and acquire critical minerals, people familiar with the matter say.

Ford Motor took a risk on the rules this year, announcing that it was building a battery factory in Michigan that would license technology from Contemporary Amperex Technology, a Chinese company and the world’s largest battery maker. Ford’s deal with CATL became a political lightning rod, with lawmakers in Washington calling on the Biden administration to adopt a “foreign entity of concern” definition that would disqualify cars with batteries made at the plant from the subsidy.

General Motors, which doesn’t have such deals with Chinese companies, has lobbied the Biden administration to take a strict approach. That could set back Ford’s plans for building more electric vehicles. GM lobbyists have warned that other automakers will move forward with licensing Chinese technology unless the practice is discouraged through the subsidy rules.

Ford this fall paused construction of the plant. Last week, the automaker said it would still move forward with construction, though it downsized the amount of its investment.

Chinese companies have been striking deals with Korean and Moroccan companies in hopes those arrangements will be allowed under the subsidy rules. Some firms have made plans to adjust their ownership structures to comply with the “foreign entity of concern” provision if necessary, The Wall Street Journal has reported.