Chevron's Hefty Hess Handshake, GM's Guidance Gone, Subprime Slide Surges

October 24, 2023
Happy Tuesday to our automotive community as we unpack GM's financial turbulence amidst the UAW strikes. We also dive into the alarming rise in subprime car loan delinquencies as well as Chevron's big move in acquiring Hess Corp.
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Show Notes with links:

GM has pulled back its 2023 profit and EV production projections. The ongoing UAW strikes are costing the automaker a hefty $200 million each week this October.

  • GM's Q3 net income dropped by 7.3%, standing at $3.06 billion, though revenues rose by 5.4% to reach $44.1 billion.
  • UAW strikes have cost GM $800 million combined for Q3 and Q4 thus far.
  • Amidst the cautious market environment, GM is reevaluating its EV strategy, prioritizing profit margins over strict sales volume targets.
  • GM is stepping away from its aim to produce 400,000 EVs from 2022 to mid-2024. The new primary focus is to reach 1 million EVs by the end of 2025.
  • GM's plea to the Biden administration: reconsider ambitious emissions and fuel economy standards pushing for EVs to dominate two-thirds of the U.S. vehicle market by 2032.
  • Paul Jacobson, GM Chief Financial Officer, stated, "We're just not going to be talking about the interim production goals. We want to make sure we're balancing that against what we see out there. The real focus is getting to 1 million EVs of production by the end of 2025 alongside hitting our margin targets."

Subprime borrowers are increasingly defaulting on auto loans, marking the highest delinquency rates in nearly 30 years. Economic challenges, including interest rate hikes and an uncertain job market, have made newer loans more burdensome for many, signaling distress in consumer spending patterns.

  • September's delinquency rate for subprime auto loans hit 6.11%, the highest since 1994, as per Fitch Ratings.
  • Factors like higher car prices, elevated borrowing costs, and Federal Reserve's stance on rates contribute to the issue.
  • Repo rates are on the rise, with Cox Automotive projecting 1.5 million vehicle seizures this year.
  • Borrowers face high interest rates based on credit scores, with some rates reaching 21.38% for used cars.
  • Economic pressures have also led to challenges in the job market, with many struggling to meet auto loan payments.
  • Margaret Rowe, Senior Director with the asset-backed securities group at Fitch, commented, “The subprime borrower is getting squeezed. They can often be a first line of where we start to see the negative effects of macroeconomic headwinds.”

US oil producer Hess Corp, originally founded by Leon Hess, has been acquired by Chevron Corp in a deal spearheaded by Leon's son, John Hess. The all-stock transaction values Hess at $171 per share. Post-acquisition, John Hess, the longstanding CEO of Hess Corp, is slated to join Chevron's board and has expressed intentions to retain the family's stake in the company.

  • Hess Corp's inception traces back to Leon Hess's buying a secondhand truck during the depression and delivering fuel oil during the depression. The company's current sale to Chevron values the Hess family's stake at approximately $5 billion.
  • Once the deal is closed, John Hess, Leon Hess’s son, who has held the CEO position at Hess since 1995, is expected to join the Chevron Board 
  • John Hess, alongside family trusts and members, holds 29.2 million shares in Hess Corp. A considerable portion of these shares, over 25 million, are associated with trusts, the Hess Foundation, and other entities, suggesting that the family might not directly own a significant part of these shares.
  • Dividends for Hess shareholders will see a jump from the current $1.75 to $6.50 a share next year.
  • “We still get to participate in the upside,” John Hess, CEO of Hess Corp, commented. “This value accretion will go to Chevron shareholders of which I and my family are going to be one, and intend on holding the stock for a long time.”

Paul Daly: 0:31What's going on? It's, it's a Tuesday. It's Wednesday. It's Tuesday, October 24. It's actually my wife's birthday. Remember this day today we're talking about Chevron's hefty handshake GMs guidance has gone and subprime, sliding. Sliding and surging,

Kyle Mountsier: 0:49

no need to repeat. Urgent slide surges

Paul Daly: 0:53

kind of slide surge.

Kyle Mountsier: 0:54

I think like surge. It sounds like that's like a name of a 90s. Punk Rock Band slides. Really is right this.

Paul Daly: 1:02

Anytime I feel like rock rock, like slight surge,

Kyle Mountsier: 1:05

yeah, anytime you put two words that seem like they're the antithesis of each other, that have a strong meaning. That's like a 90s, punk rock band.

Paul Daly: 1:14

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Paul Daly: 2:11

There you go. We also made a I would say a seismic announcement yesterday, the end of the day. Yeah, I It's funny because I didn't fully know if we were like talking about tomorrow night or not. And it just I started getting texts and emails. But we have decided to move asoto Khan from September where it's been the last two years to May, because we've got a lot of feedback. You know, it's really busy now. In September, so may 14 through 17th 2024. Like open your calendar app right now highlight the week and be like a soda calm. We're gonna have more details coming soon. Tickets are going live in probably what couple weeks, two weeks.

Kyle Mountsier: 2:51

I think like we little over a week, like end of end of the first week in November tickets should be live ready to go.

Paul Daly: 2:57

We got so much great feedback about the venue. People loved it. And we had to convince people like it was one of those things because Baltimore doesn't sound like the place where people want to go and just kind of like unwind and relax. This event. The Maryland Live casino and hotel is actually BWI Airport, south of Baltimore. And then you drive about another five to 10 minutes south and you get to the venue. You get to the venue in no time at all. You stay there. They have great food. They have great entertainment. The venue's right there, the hotels right there, and everyone loved it. And the staff was on point,

Kyle Mountsier: 3:26

by the way, oh, the staff, like that was part of the experience. You never know what you're going to expect when trying to vet it. An event with a venue, right? You kind of get to know the leadership there at the venue. But then then you get to know the staff and it's like, oh, wow, I mean, even just the bell staff was legit, you know, like, oh,

Paul Daly: 3:45

yeah, cart was it Ricardo from Argentina, he just wooed everybody, everyone was talking about him the whole week. So if you're also a sponsor and you didn't weren't able to budget for it properly or you weren't able to make the time because it was too late to announce this is your chance everyone is doing their budgeting now may we want to make sure that you can allocate what you want, get the placement that you want, and participate in the way that you want. We don't have the sponsor prospectus out now but if you reach out to was the best place to reach out if you're interested stay at a a MJA so you can get on the list so you'll be the first to get it when it comes out. You can pick all the best stuff actually it's all the best stuff because we really lean in to bring in the value to the sponsors and boy we're gonna blow the roof off this place this year. Okay, all right. Cipher some news let's do it all right, we got some news on you Aw, Update All right, by the way, as we just had momentum there I am. I keep waiting for the morning when I like open the internet and I like click on go to like auto news in the morning and it's going to be like the strike deal reached deal reached like every morning I'm like an all the people rejoiced right now. Are we actually Jordan Cox you're listening right now. You need to come up with the trigger pad we're going to use the celebration trigger pad that we're going to click the moment a deal is reached, okay, and we hopefully we get the press at three times or maybe it'll just be once in the law reach at the same time. But for now, it's the you a W update, that is Jordan Cox's voice by the way, GM has pulled back it's 2023 profit and Evie production projections. The the ongoing strikes are costing the automaker get this a hefty$200 million a week in October, so much money in one week. That was one of the 200 million there's another 200 million, so their q3 net income dropped by 7.3%. Standing at about 3.0 6 billion, though revenues rose by 5.4% to reach 44 point 1 billion. That's q3, right? The strike didn't come into effect until the end of q3. So we're gonna see, we're gonna see a thing in q4, maybe. So they've cost GM 800 million combined for q3 and q4. So far, almost to that billion dollar mark, my friend one more week, and we're at a billion. So in this environment, GM dreamed about reevaluating its Eevee strategy, they're probably doing that anyway, prioritizing profit margin over sales volume targets, this actually is a great Get Out of Jail Free card for them. So they're stepping away from their aim to produce 400,000 EVs from 2022 to 2024. With the new primary focus to reach 1 million EVs by the end of 2025. You know, so they actually made a plea to the Biden administration saying reconsider your ambitious emissions and fuel economy standards. Fair enough. And then Paul Jacobson, the CFO said, quote, we're not going we're not we're just not going to be talking about the interim production goals, we want to make sure we're balancing that against what we see out there, the real focus is getting to 1 million EVs by the end of 2025. Alongside hitting our margin targets.

Kyle Mountsier: 7:00

That's well spoken from the CFO. It's like, hey, we want to do this. But yeah, I still gotta make some money up there.

Paul Daly: 7:09

I look at every day call it a p&l.

Kyle Mountsier: 7:12

We got stockholders, the whole nine yards. Yeah, it's an interesting turn of tune. And just, you start to see what I don't know, I think we're day 41. On on this strike, how that impacts not just what current capacity is, but what future capacity because there's a whole bunch of catch up that needs to happen. The suppliers have had to lay people off, we're talking about suppliers being bankrupt, potentially. And so how do we recover from that and continue with some of the things like AV production that are kind of like sidelined at this point, or it's just kind of an aside that people aren't talking about. But this, this kind of points to the fact that, hey, there's a lot more impact, longer term that we can't even see with just our limited view right now. And you know, that the last point of, hey, we still gotta make money. I think that's the biggest question mark for a lot of these automakers,

Paul Daly: 8:05

you know, they say, Never waste a good crisis. And I really feel like if I'm putting my corporate strategy hat on, this is an amazing opportunity for them to do exactly what they're doing. And saying, like, you know, what, we should really scale back this EV thing, because they really weren't allowed to say it. Before. Think about it. They weren't allowed to say that's absolutely shareholders wouldn't let them say it, the market would let them say it, although I think they knew it. But now they're like, well, the strike district, it's the new COVID. It's the strike. It's the strike. Let's see what I don't even know where to go from there. Speaking of

Kyle Mountsier: 8:41

a bit of a crisis hit segue.

Paul Daly: 8:47

Subprime borrowers are increasingly defaulting on their auto loans mark the highest delinquency rates in 30 years. Man economic challenges, interest rate hikes uncertain job market, they've made newer loans more burdensome signaling, signaling distress in consumer spending patterns. So basically, September's delinquency rate is hit over 6%, which is the highest since 1994. I remember 1994. As per Fitch Ratings, factories, factors prices, borrowing costs, federal Federal Reserve's stance on rates, the issue repos are going up Cox automotive projecting 1.5 million vehicle seizures this year, that's a lot of cars coming back up but here's the deal. Some rates are reaching almost 22%. Now for subprime borrowers. I mean, I don't even know how you borrow on that. Or keep keep that going again, when price average price of used cars is like 20. Oh, man, it's just a it's just a compounding problem. Margaret rose, Senior Director with the asset backed securities group Fitch commented, the subprime borrower is getting squeezed. They can often be a first line of where we start to see the negative effects of macro economic headwinds. This is not a new conversation. I mean seems like

Kyle Mountsier: 10:00

a new conversation, but it highlights something that I think a lot of people looking at the market have not really been paying attention to. And I I'll never forget, last year, a little over a year ago now we're at name ad. And it was like the first time that I saw Jonathan smoke clearly articulate what a bifurcated market is where you had a portion of the market basically not experiencing anything of the macroeconomic headwinds, not experiencing any any of the affordability issues because of of their economic stance and how much they hadn't savings, and then a portion of, of the of society getting just obliterated by it like, No, there's no middle ground. And this is where like you, you think about the families and the people that are affected by potentially the inability to let to get lending to the inability to get a car, which then changes their ability to get jobs and get to places where we are actually talking. This was, again, at name add, we were talking to a young lady, that that is really hoping to change the game through essentially collision repair. And I can't wait if you haven't listened to, I think we're releasing her in the dirt episode with her. But she taught us about this issue where she's running into so many people that are so reliant now on public transportation, that have like public transportation transits of like 45 minutes to an hour. And it totally wrecks their livelihood resurrects their stress levels, wreck wrecks their ability to care for their kids well, because that this is how they have to get in into a vehicle because they are get transportation because they can't afford a vehicle. Like that's the stories that a lot of times we don't hear. And that's what this is highlighting 1.5 million vehicles seized 6.1% Auto Loan delinquency rate, those are big numbers for our market. That's,

Paul Daly: 12:03

I think you just brought up a major point when you talked about, like, what it does on the derivative effects of not being like having to take public transportation having to change that lifestyle, especially if you are like accustomed to being able to drive like, it's hard to go back. Right. And like, what does that do downmarket, you know, there's there are people like Matt Lasher, the Western group and you know, his product streamline trying to fix or at least address these affordability issues. And he's been saying like this is coming for a long time. And that's why it's so important that we need to be better at helping, you know, obviously, we can't change macroeconomic situations. But as an industry, we can be more attentive and leverage technology and leverage good good sales process and practice to actually fix some of these problems. So, you know, this one's kind of been teetering for a while, but the fact that it's going over this way is is a major, major issue.

Kyle Mountsier: 12:57

And I don't have the answer here, like I don't know, as an auto dealership, how you can find, you know, the right banking relationships, the right price vehicles that aren't, you know, total loss vehicles or something like that, that that can get these can get people in lending situations where they don't have issues down the road. It is a, it's a hard task to take. So if it look, if anyone's solving for that, please hit us at Crewe at a because we would love to highlight the story of how you're caring for customers in that way. Because this is a massive part of the market that we need to be paying attention. I'm trying

Paul Daly: 13:34

let's so that means if you are buying a $20,000 car I just did a quick calculation$20,000 Car is approaching $600 a month at 22% Yeah, that is that's a tough swing. And how many $2,600 A month car for$20,000 car you know what a$20,000 car gets you these days. Right? Brian probably still going to have some repairs and all that other stuff. So really you are well, it's good to be aware could be empathetic and hopefully we can come up with some solutions and get some things going to help help out that sector. This is like I'm totally opposite. Like struggling in subprime loans and getting the horrors to like the opposite side. So speaking of the opposites,

Kyle Mountsier: 14:21

segue US oil producer Hess Corp. You've probably seen a couple of their trucks on the road out there, originally founded by Leon Hess has been acquired by Chevron Corp and a deal spearheaded by Leon son, John Hess. The all stock transaction values has at$171 per share. postdoc position John has the longtime standing CEO of Hess Corp is slated to join Chevron's board and is has intentions to stay in keep the family stake in the company has corpse they listen to this. This is a wild story. So it traces back to Leon Heston. was buying a secondhand truck during the depression and delivering fuel oil during the Depression. What's crazy is now the company's sale to Chevron values the family stake at approximately $5 billion.

Paul Daly: 15:16

Bad Grandpa,

Kyle Mountsier: 15:17

whoa na, na not bad that John has this alongside family trusts and members who was 29 point 2 million shares in Hess Corp. considerable portion of the stairs over 25 million are associated with the trust the Hess foundation and other entities suggesting that the family might not directly on a significant part of the shares. Yeah, dividends. This is this is another stat Wow. dividends for Hess shareholders if you are a shareholder, we'll see a jump from the current dollar 75 to$6.50 a share next year.

Paul Daly: 15:57

So there's the story in here is like an entrepreneurial story. Right? Why it's so good. That, you know, Grandpa saw an opportunity he saw a need, he made it happen, right, a used truck, probably probably not even wonder what his interest rate was. But either way, he bought this similar to what they were now what they are now, probably. And then he's his son runs. The company has been running the company since 95. And now it's time to migrate out. And it just reminded me so much of the industry when you were talking about this, the auto industry just like a family business, that leveraged hard work, leverage solving a need, and even made those little trucks that we used to get for Christmas. I wonder how that works into the deal, because no one wants a chevron truck. Right? Yeah, I mean, I wonder I wonder how actually, I wonder how that right. It's got accurate in like, is that a licensing deal? Probably with a toymaker. Oh, yeah. Without a doubt figure the these are the questions we really need.

Kyle Mountsier: 16:59

We should have gotten you the answer.

Paul Daly: 17:00

I know. We're sorry. We failed you this morning. Hey, just remember to sign up for that for eyes webinars. You can get the 60 days use of the platform. Kyle will be there tomorrow. Go to a Scroll down register. We'll spend a few minutes to put together tomorrow. Until then. Go have a Tuesday.

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