Morningstar boss Kunal Kapoor: ‘We want a bigger presence in Saudi Arabia’

Updated 08 December 2018
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Morningstar boss Kunal Kapoor: ‘We want a bigger presence in Saudi Arabia’

  • Entrepreneurs should take the long view of opportunities in the Middle East, argues investment boss
  • That means ignoring the political ‘short-term noise,’ says long-serving executive

DUBAI: When Joe Mansueto, one of the most successful investors in the US, looked around for his successor as CEO of Morningstar, he had little hesitation: Kunal Kapoor, the Indian-born executive who worked his way up to the post of president in a 20-year career with the Chicago company, was the obvious man.
Mansueto and Kapoor share a similar investment philosophy that made the 43-year-old a natural choice to lead the financial giant to the next stage. Both believe in the intrinsic value of taking a long-term approach to investment. “It is always important to distinguish between the short term and the long term. We always want to be part of something that will unfold positively in the long term,” said Kapoor on a recent visit to the firm’s Middle East headquarters in the Dubai International Financial Center (DIFC).
Morningstar’s history bears out the attractions of long-term thinking. Founded by Mansueto in his one-bedroom apartment in Chicago in 1982 after he saw an opportunity for a new kind of mutual fund organization, the firm grew steadily to become one of the biggest investors in the US.
In 1999, it took a significant step via an investment alliance with SoftBank, the Japanese financial giant run by the legendary Masayoshi Son. Both survived the dotcom bust and the global financial crisis. Son is now an influential investment partner of Saudi Arabia’s Public Investment Fund.
Along the way, Mansueto earned a considerable personal fortune, and joined the “super investor” club in 2010 when he joined Bill Gates and Warren Buffet in the Giving Pledge, promising to give away half his wealth to philanthropic causes. That is the essence of long-term thinking, and it permeates Morningstar and Kapoor’s strategic outlook.
“We like to focus on the long-term opportunity. The geopolitics is all short-term noise,” he said.

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BORN 

1975, India

EDUCATION 

• Kodaikanal International High School • Monmouth College, Illinois, US 

• University of Chicago, Booth School of Business 

CAREER 

At Morningstar since 1997, becoming CEO in 2017 

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The geopolitics of the Middle East and its issues of security, commodity dependency and economic volatility have always been a challenge to international investors looking to exploit the region’s undoubted opportunities.
“Maybe there is short-term volatility, but we encourage investors to be long term. The investing culture has to develop further in the region, and people should realize that volatility can be a non-event if you’re thinking long term,” Kapoor said.
There is no doubt the Middle East, as part of the wider investment world, has short-term challenges. Volatility in the price of oil — still the region’s most important economic indicator regardless of long-term strategies of economic diversification — means that asset valuations and capital markets are stubbornly reliant on the price of a barrel of crude.
At the same time, regional tensions — in Iran, Qatar and Yemen — are also impediments to attracting the big money flows from global investing institutions.
Kapoor thinks these challenges should not deter like-minded, long-term strategists. From the DIFC hub, Morningstar is looking at a careful expansion in the Middle East. It already serves the UAE capital Abu Dhabi from there, and has had some success in the Kuwaiti market, he said. But the opportunities of Saudi Arabia are looming large for the firm.
“Saudi Arabia is such a large presence in the region, such a large piece of the overall pie … We’re thinking of how we partner in Saudi Arabia and how we have a bigger presence there. The effect of Vision 2030 on people and the investing community is something that would help the markets mature there, and we are in support of that, for sure,” he said.
Global investors have been blowing hot and cold on the Saudi market for much of the year. While the main stock market index, the Tadawul, was among the best-performing in the world in the first half, it has lost some of that shine since, mainly as a result of uncertainties in the oil price and other concerns.
But it is still ahead on the year, proving the positive benefits of inclusion in the emerging markets category of investment rankings by several of the leading index compilers. Kapoor believes that is the way global investment trends are going.
“I think there are only a handful of stocks in the world that are really what you would call five star, and increasingly we’re beginning to look away from the US toward emerging markets for these kind of stocks. On a relative basis we are tilting toward a non-US focus. Other markets are more attractive and this means the emerging markets in particular,” he said.
But, regardless of the attractions of the fast-growing emerging markets of the East, if there was a global downturn in asset prices, the whole world, including the Middle East, would suffer. Some experts believe global stock markets are near the end of a 10-year record of growth, and predict a “bear” market ahead.
Recent weaknesses in the highly valued technology sector, worries about the increasing cost of capital and rising interest rates, and fears over the state of the world economy, especially the effects of a trade war between the two biggest economies, the US and China, have spooked many global investors.
So, is the world on the brink of a bear market?
“I wish I had a crystal ball. We think about prospects through the lens of future valuation. Markets have been strong over the past decade and it is a rational assumption that the returns of the past 10 years will not be replicated over the next,” Kapoor said.
He does not believe macroeconomic considerations are necessarily the most important factors in deciding investment priorities.
“Macro and valuations are separate things from my perspective. It is very difficult to successfully predict macro factors and most investors are best served by not trying to let those determine how they invest. As for valuations, they are certainly better than they were a month ago, but from a historical perspective, also not among the lowest. This would suggest a lower return environment going forward,” he said.
Apart from falling valuations, Kapoor sees several other risks to global markets — inflated investor expectations, rising interest rates, and the absence next year of the one-off boost to markets from President Trump’s tax cuts, which boosted American and world markets for the first half of 2018.
The state of the debt markets is another concern. “When the financial markets make debt easily available, that is a sign that the bull run is long in the tooth,” he said.
Investment assets tend to find their own level of equilibrium over the long term, and after a long period of using indices, many investment analysts believe the world will be a tougher place in the next few years.
Kapoor appears to agree. “Markets tend to always revert to the mean, and I would not be surprised if we were near that happening now,” he said, adding that this does not necessarily mean a market collapse. “It does not have to be a crash. Markets can just stay where there are for a prolonged period.”
But it is unlikely a period of market ambivalence would distract Kapoor and Morningstar from their mission, and could even present investment opportunities. “We are trying to help investors earn good returns over the long term — helping them to build their portfolios for the long term, rather than getting distracted by the noise,” he said.
And he takes inspiration from another master of the long view, the legendary founder of US investment giant Berkshire Hathaway. “I often think of the words of Warren Buffett — that you have to be fearful when others are greedy and greedy when others are fearful,” he said.


Permian shale output closes gap with Saudi Arabia as rig count doubles, confirming US’ powerhouse status

Updated 21 March 2019
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Permian shale output closes gap with Saudi Arabia as rig count doubles, confirming US’ powerhouse status

  • Exxon’s 1.6 million acres in the Permian means it can approach the field as a “megaproject”
  • The majors’ Permian investments position the field to compete with Saudi Arabia as the world’s top oil-producing region

NEW MEXICO: In New Mexico’s Chihuahuan Desert, Exxon Mobil Corp. is building a massive shale oil project that its executives boast will allow it to ride out the industry’s notorious boom-and-bust cycles.
Workers at its Remuda lease near Carlsbad — part of a staff of 5,000 spread across New Mexico and Texas — are drilling wells, operating fleets of hydraulic pumps and digging trenches for pipelines.
The sprawling site reflects the massive commitment to the Permian Basin by oil majors, who have spent an estimated $10 billion buying acreage in the top US shale field since the beginning of 2017, according to research firm Drillinginfo Inc.
The rising investment also reflects a recognition that Exxon, Chevron, Royal Dutch Shell and BP Plc largely missed out on the first phase of the Permian shale bonanza, while more nimble independent producers, who pioneered shale drilling technology, leased Permian acreage on the cheap.
Now that the field has made the US the world’s top oil producer, Exxon and other majors are moving aggressively to dominate the Permian and use the oil to feed their sprawling pipeline, trading, logistics, refining and chemicals businesses. The majors have 75 drilling rigs here this month, up from 31 in 2017, according to Drillinginfo. Exxon operates 48 of those rigs and plans to add seven more this year.
The majors’ expansion comes as smaller independent producers, who profit only from selling the oil, are slowing exploration, and cutting staff and budgets amid investor pressure to control spending and boost returns.
Exxon CEO Darren Woods said on March 6 that Exxon would change “the way that game is played” in shale. Its size and businesses could allow Exxon to earn double-digit percentage returns in the Permian Basin even if oil prices — now above $58 per barrel — crashed to below $35, added Senior Vice President Neil Chapman.
Exxon’s 1.6 million acres in the Permian means it can approach the field as a “megaproject,” said Staale Gjervik, head of shale subsidiary XTO Resources, whose headquarters was recently relocated to share space with its logistics and refining businesses. The firm also recently outlined plans to nearly double the capacity of a Gulf Coast refinery to process shale oil.
“It sets us up to take a longer-term view,” Gjervik said.
The majors’ Permian investments position the field to compete with Saudi Arabia as the world’s top oil-producing region and solidifies the US as a powerhouse in global oil markets, said Daniel Yergin, an oil historian and vice chairman of consultancy IHS Markit.
“A decade ago, capital investment was leaving the US,” he said. “Now it’s coming home in a very big way.”
The Permian is expected to generate 5.4 million barrels per day (bpd) by 2023 — more than any single member of the Organization of the Petroleum Exporting Countries (OPEC) other than Saudi Arabia, according to IHS Markit. Production this month, at about 4 million bpd, will about double that of two years ago.
Exxon, Chevron, Shell and BP now hold about 4.5 million acres in the Permian Basin, according to Drillinginfo. Chevron and Exxon are poised to become the biggest producers in the field, leapfrogging independent producers such as Pioneer Natural Resources.
Pioneer recently dropped a pledge to hit 1 million bpd by 2026 amid pressure from investors to boost returns. It shifted its emphasis to generating cash flow and replaced its CEO after posting a fourth-quarter profit that missed Wall Street earnings targets by 36 cents a share.

 

Meanwhile, Shell is considering a multibillion-dollar deal to buy independent producer Endeavor Energy Resources, according to people familiar with the talks. Shell declined to comment and Endeavor did not respond to a request.
Chevron said it would produce 900,000 bpd by 2023, while Exxon forecast pumping 1 million barrels per day by about 2024. That would give the two companies one-third of Permian production within five years.
At first, the rise of the Permian was driven largely by nimble explorers that pioneered new technology for hydraulic fracturing, or fracking, and horizontal drilling to unlock oil from shale rock, slashing production costs. The advances by smaller companies initially left the majors behind. Now, those technologies are easily copied and widely available from service firms.
Surging Permian production has overwhelmed pipelines and forced producers to sell crude at a deep discount, sapping cash and profits of independents who, unlike the majors, don’t own their own pipeline networks.
Even as the majors have ramped up operations, the total number of drilling rigs at work in the Permian has dropped to 464, from 493 in November, as independent producers have slowed production, according to oilfield services provider Baker Hughes.
Shell, by contrast, plans to keep expanding even if prices fall further, said Amir Gerges, Shell’s Permian general manager.
“We have a bit more resilience” than the independents,” he said.
In west Texas, the firm drills four to six wells at a time next to one another, a process called cube development that targets multiple layers of shale as deep as 8,000 feet.
Cube development is expensive and can take months, making it an option only for the majors and the largest independent producers. Shell has used the tactic to double production in two years, to 145,000 bpd.
The largest oil firms can also take advantage of their volume-buying power even if service companies raise prices for supplies or drilling and fracking crews, said Andrew Dittmar, a Drillinginfo analyst.
“It’s like buying at Costco versus a neighborhood market,” he said.
The majors’ rush into the market means smaller companies are going to struggle to compete for service contracts and pay higher prices, said Roy Martin, analyst with energy consultancy Wood Mackenzie.
“When you’re sitting across the negotiating table from the majors, the chips are stacked on their side,” he said.
The revival of interest in the Permian marks a reversal from the late 1990s, when production had been falling for two decades.
“All the majors and all the companies with names you’ve heard left with their employees,” said Karr Ingham, an oil and gas economist. “Conventional wisdom was this place was going to dry up.”
Chevron was the only major that stayed in the Permian. It holds 2.3 million acres and owns most of its mineral rights, too, but until recently left drilling to others.
But this month, CEO Mike Wirth called the Permian its best bet for delivering profits “north of 30 percent at low oil prices.”
“There is nothing we can invest in that delivers higher rates of return,” Wirth said this month at its annual investor meeting in New York.
Matt Gallagher, CEO of Parsley Energy Inc, calls the majors’ investments “the best form of flattery” for independents operating here.
Parsley holds 192,000 Permian acres — most of which was snatched up on the cheap during oil busts — and sees its smaller size as an advantage in shale.
“We’re not finished yet,” Gallagher said. “We can move very quickly.”
The majors have greater infrastructure, but independents continue to innovate and design better wells, said Allen Gilmer, a co-founder of Drillinginfo.
“Nothing is a bigger motivator than, ‘Am I going to be alive tomorrow?’” Gilmer said.
“Hunger and fear is something that every independent oil-and-gas person knows — and that something no major oil-and-gas person has ever felt in their career.”

FACTOID

5.4 million

The Permian Basin is expected to generate 5.4 million barrels of oil per day by 2023, more than any single OPEC member other than Saudi Arabia.