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My Boots Don’t Believe In This “Bubble” Talk

The Daily Reckoning - 28 January 2015 - 10:10am

This post My Boots Don’t Believe In This “Bubble” Talk appeared first on Daily Reckoning.

The “Bubble” folks keep coming out of the woodwork!

Today I’m back to set the record straight America’s oil and gas industry. I’ve muddied my boots in the oil patch for an up close look at what’s happening around the country. With the price of oil still pressured under $50/barrel the naysayers are out in full force.

Today we’re going to do some good old bubble-bashing.

The bubble folks are crying wolf on a shale industry that’s got a lot more meat to it than they’d like to admit.

They say we’re headed for bankruptcies and defaults.  I say they’re wrong.

For instance, in yesterday’s edition of the DR, Addison posted a table from ZeroHedge. The table highlighted 68 companies that had exceptionally high debt to earnings ratios. Sounds like an old fashioned list of companies ready to implode!

However, If you’re looking for a table that thwarts America’s shale boom and proves that our domestic production was nothing more than a debt-fueled sham….this, my friend, is NOT it.

Out of the 68 companies highlighted almost all of them are infrastructure plays, normally noted by the “L.P.” for limited partnership. These companies are NOT shale drillers. Instead, they’re pipeline plays, midstream plays, refiners and processors.

Most of the companies on that list have a higher debt to earnings ratio because they’re in the process of building out much-needed infrastructure.

Just think about it. We never expected to have oil flowing from South of San Antonio TX, Williston ND, Denver CO – or natural gas flowing from Pittsburgh PA.

But less than 10 years ago, with the advent of new technology, America’s oil and gas pioneers unlocked a massive bounty of energy.  A century’s worth of natural gas and enough crude oil nearly double domestic production.

This kind of real wealth boom needs infrastructure. Gathering systems to transport oil and gas from the well-head. Storage tanks to hold crude oil. Processing facilities to break down “raw” natural gas into useable commodities like butane, propane, ethane and dry natural gas. Pipelines to take oil from the outskirts of America to major refineries and cities. And specialized processing for the newfound light sweet crude oil.

Here’s a stickier example (because I’ve got a picture from the Roughrider State.) Below you’ll see Enbridge storage facilities in Williston, ND.

“4.7x Total Debt/EBITDA” Buys These Storage Tanks!

With little pipeline infrastructure in Williston, ND, storage facilities like this are necessary to store the massive amounts of crude coming out of the ground.

Enbridge is part of that list of 68, #39 to be exact, with a “4.7x” total debt to earnings ratio. The company raised debt to but storage facilities, pipelines, processing, etc.  But is this a black plague of debt? Or a natural progression for a budding industry?

Looking ahead, Enbridge will get decades of use out of these storage facilities, pipelines and facilities. That’s what the debt is paying for – not willy-nilly shale drilling. This isn’t smoke and mirrors. Or as my friend and colleague Byron King would say, “no vaporware here!”

The storage tanks above and the rest of America’s oil and gas infrastructure build-out are the perfect case against the folks crying wolf and positing a bubble in shale.

Point being, that list of 68 isn’t what it’s made out to be. It’s made out to be a list of cardboard shale companies that are set to implode. Instead, it’s a list of companies that own vital assets for America’s newfound oil and gas industry. And yes, those assets were bought with long-term debt – debt that will be paid off over the life of the assets.

Now, that gets to the next important question:  “But Matt, if oil companies can’t make money with low oil prices, won’t America’s shale patch dry up?… Thus, there won’t be a need for these storage tanks?”

Hey, good question! We’re finally getting to the important part of this discussion.

Indeed, the economics of America’s shale patch have changed. Companies that thought they could sell their oil for $85-100/barrel instead are getting closer to $50. That’s rough.

The drop in cash flow will have a profound effect on American shale plays. Like I’ve said before, if Apple Inc. had to sell its beloved (and ungodly expensive) iPads at cost, you can bet Apple’s business would take a hit.

Indeed, America’s oil and gas industry is taking its licks. But at $50/barrel – and likely higher in 2015 – the industry won’t collapse. Well-run producers in shale sweetspots are going to continue to produce oil for decades. America’s oil boom is much more economic than the naysayers would have you believe.

Heck, maybe even decades from now we’ll still hear the same folks crying wolf.

Regards,

Matt Insley
for The Daily Reckoning

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The post My Boots Don’t Believe In This “Bubble” Talk appeared first on Daily Reckoning.

Categories: Economics

An Indicator from An Advisor to Oil Trading’s “God”

The Daily Reckoning - 28 January 2015 - 8:27am

This post An Indicator from An Advisor to Oil Trading’s “God” appeared first on Daily Reckoning.

Last week, I came across by far the most bullish chart for 2015 oil prices that I have seen since the bottom fell out of the market. Interestingly, the chart came from one of the more credible voices in the business, Steven Kopits of Princeton Energy Advisors.

What makes me think that Kopits is credible? The track record of oil traders who use him for advice, the most notable being Andrew Hall.

Have you heard of Hall?

If you are close follower of the oil markets, you likely have.

Among oil traders, he is referred to as “God.” They don’t call him that because he is just “OK” at what he does.

Let me tell you a little bit about him.

Hall started trading in oil back in 1982. That gives him over 30 years of experience studying these markets. He has made his living by predicting where oil prices are going. More accurately, he has gotten stinking rich predicting where oil prices are going.

Among oil traders, [Hall] is referred to as “God.”

His most highly publicized accomplishment was predicting both the oil spike of 2008 and the subsequent crash. He personally made $100 million in each of 2007, 2008 and 2009 because of those calls. He had to take his 2009 profits in the form of an increased ownership stake in the firm he runs because President Obama wouldn’t allow his employer, Citigroup (which had accepted a huge taxpayer bailout), to cut him a check.

Those three years of success were no fluke; they were a continuation of a long run of outstanding performance.

From 1997-2009, when Phibro (the trading unit that Hall ran) was sold by Citigroup to Occidental Petroleum, the business unit generated $4.4 billion in profits. Perhaps even more impressive, Phibro was profitable in 80% of the quarterly periods over that time. That shows incredible consistency and the ability to call changes in the oil market in both directions.

Since 2009 Hall has been managing Astenbeck Capital, which is 20% owned by Occidental and 80% owned by Hall himself. Recently, he has again been able to successfully navigate big turns in the oil market as he sold off his long oil bets in September of this year and instead went long the U.S. dollar (which has been skyrocketing), allowing him to post a profit while oil has been cut in half.

As I mentioned, Hall uses Steven Kopits as an adviser.

Being an adviser to “God” doesn’t necessarily mean that Kopits is infallible, but I do believe that it makes listening to his opinion worthwhile.

Last week, Kopits posted this graph:

The graph illustrates the daily difference between global oil demand and supply. A positive number means daily oil supply exceeds demand. A negative number means daily oil demand exceeds supply.

Obviously, a positive figure (supply surplus) is bearish for oil prices, while a negative figure (supply excess) is bullish.

The four lines on the chart represent the data from the three organizations that observe the oil market and from Kopits’ firm (Prienga). Just for clarity, the three main organizations that observe the oil market and are included in the graph are the International Energy Agency, OPEC and the Energy Information Agency.

Looking backward, all four lines show an oversupplied oil market dating back to March 2014. Looking forward, the IEA, OPEC and the EIA all believe that oversupply will continue through the end of 2015 to various degrees.

As you can clearly tell from the graph, Prienga has a very different view.

The forward-looking numbers from Kopits show the market moving dramatically into a supply shortage of over 2 million barrels per day by June 2015 and getting larger as the year goes on. To say this view is different from the consensus view would be an understatement, and not a mild one. If accurate, the data above suggest that oil prices are going to come roaring back in the second half of 2015.

I was able to get in touch with Kopits via his website/blog to try and get some additional color on the assumptions that went into his graph. Here’s what he told me…

The first thing that he pointed to is the big demand response that we have already seen in the United States to lower oil prices, and the fact that the IEA, EIA and OPEC have some very pessimistic 2015 demand assumptions.

In December, Kopits notes, that U.S. oil consumption rose 4.4% year on year. That equates to an increase of 800,000 barrels per day.

To put that in perspective, consider that the December increase in the United States alone is equal to the IEA’s full-year 2015 forecast for global oil demand. If U.S. demand were to stay at December levels, IEA’s demand forecast would be almost a million barrels too low.

For his graph, Kopits modeled the OECD demand growth that was experienced in 1986 subsequent to the 1985 oil price collapse.

On the supply side, Kopits reminded me that the only source of oil production growth last year was North America, and that all of the three main observatory bodies were still predicting significant growth again in 2015. Kopits is highly skeptical of that and believes that it is far more likely we see U.S. oil production declining by the second half of 2015.

My take on all of this is a couple things.

First, Andrew Hall is exponentially smarter than I am about the oil markets (and everything else, I suspect), and he thinks enough of Steven Kopits to turn to him for advice. While Kopits’ observations may seem a bit extreme, they are worth listening to.

Second, I have no doubt that the IEA, the EIA and OPEC will be both ratcheting down their supply growth estimates and ratcheting up their demand growth estimates in the coming months.

The plummeting number of rigs drilling in North America will have a direct impact on supply, and to think there will be no demand response to a 50% decline in oil prices is silly.

It is important to remember that just a 1% increase in global oil demand equates to a 1 million-barrel-per-day increase in consumption. Surely a 1% increase in demand is not a far-fetched response to a 50% decrease in prices.

Are the projections put forth by Kopits going to be proven accurate? I don’t know about that, but I bet they are a lot closer to the eventual truth than most people would expect.

This shale production boom was built on an ever-increasing availability of cheap credit and an ever-increasing number of rigs drilling. Both of those are now are being reversed in short order, and the steep early-year decline rates that characterize shale oil production will reveal themselves as the brakes are applied to the rate of drilling.

The oil price is going to rise. It has to. At current prices, there are very few oil plays where a profitable well can be drilled today. If oil wells aren’t being drilled, global oil production is going to decline. And remember, global oil demand is still growing as well.

The short-term could be tough for investors with exposure to energy stocks, but six-12 months from now, things are going to look a whole lot brighter.

Regards,

Jody Chudley
for The Daily Reckoning

The post An Indicator from An Advisor to Oil Trading’s “God” appeared first on Daily Reckoning.

Categories: Economics

The Market Ticker - HERE IT COMES! (Greece)

The Market Ticker - 28 January 2015 - 5:51am

Here you go folks....

Paraphrased: You cannot get out of an inability to pay borrowed money by borrowing more.

Go about halfway through the interview -- and listen closely.  Heh heh heh.....

Categories: Economics

Time To Take That European Vacation You’ve Been Waiting For…

The Daily Reckoning - 28 January 2015 - 5:04am

This post Time To Take That European Vacation You’ve Been Waiting For… appeared first on Daily Reckoning.

Those crepes outside of the Eiffel Tower just got cheaper…

Flakey, delicious German pastries and chocolates? Those are on sale, too.

And don’t even get me started on a nice dish of authentic Italian pasta – prices just took a haircut!

Add it all up and there’s a storewide sale going on right now in the Eurozone. Everything that you’ve wished for on your dream vacation to Italy, Spain, Greece, Germany, France (to name a few) is 20% off.

20% off is nothing to sniff at – considering just eight months ago you’d be paying full price.

Best of all, there’s no sale at the local travel agency with a few crusty plane tickets left over from last year. Nope! You can take advantage of this sale at your own agent or your favorite travel website (like that weird Trivago dude you see on the commercials.)

That said, I won’t begrudge you if you stop reading right now and go make some travel plans – after all, the sale is on.

But if you’re wondering about the bigger story surrounding this 20% off sale, please read on…

Currency Wars Create Cheap Travel…And Unsettled Investors

If you haven’t guessed what I’m talking about with this European travel sale – I’m talking about the rapid, precipitous fall in the euro currency.

Just eight months ago in May 2014 the euro was “steady as she goes” around 139 basis points. That’s when the wheels started to fall off across the pond. Failing to recover from the 2008 meltdown, the Eurozone economy was struggling. Some countries were worse than others, but overall energy prices were high and so was unemployment. Add it all up and the economy was sick with a capital “S”.

Thus, back in May 2014, the head of the European Central Bank (ECB) took action and said the ECB could take action with a stimulus plan.

That was the beginning of a precipitous fall in the euro. Days ago the euro index hit 1.11 – that’s a stunning 20% drop in just eight months. Put another way, if you’re an American going on a European vacation the exchange rate just toppled in your favor to the tune of 20%. Cheaper pastries, crepes, hotels, tours, pasta and more!

But while things are peachy keen in the travel scene, there’s an ominous dark cloud circling the globe — a dark cloud of currency manipulation (and devaluation) that’s been kicking up storms for the past few years. Every now and then lightning strikes, central bankers manipulate and currencies go wild.

So while today’s news is good for anyone looking to take that European vacation, for investors, it’s storm season and things are getting ugly.

The big fireworks in 2015 started when the Swiss National Bank made a surprise move to unpeg the Swiss Franc from the euro last week. That single, unexpected move caused massive financial downfall. As you’ve likely heard, brokerages have gone out of business, investors that were basing trades on the peg got hammered and some weird fallout that you may have heard from Jim Rickard’s, like Eurozone mortgage payments that were based in Swiss currency suddenly went up 20-30%, overnight.

That’s scary stuff – and it’s just the beginning.

The move we’ve seen in the euro was much more telegraphed. For months we’ve known it was coming, but yet for months the euro continued to fall. Surprising most everyone on Wall Street.

The biggest outcome of this whole euro drop is the “weird new normal.” In short, a dropping euro INSTANTLY and DIRECTLY makes the U.S. Dollar stronger. For example, since May 2014, the U.S. dollar index is up over 18% — it recently hit 95 basis points, up from 80 in May.

Simply put, here in the U.S. we’ve gotten used to the U.S. dollar dropping in value to other currencies. But today we’re seeing the direct opposite. The greenback is appreciating and there’s no end in sight.

The Folks That Said The Dollar Can’t Go Higher Are Wrong

A word to the wise, the dollar can keep going higher. It can also stay right where it is (strong), for a long time.

Indeed the folks along the way that said the U.S. dollar couldn’t go higher are wrong. A quick look back to September there were warning signs that the dollar still had room to run. Here’s what we said…

“How high can it go? Well, it doesn’t take much of a head turn to look back to late 2008 and see the dollar index near 90 basis points — a 7% premium to today’s price. Loosen up your neck a little more and look at the long-term chart to see the dollar index near 120 as recently as 2002 — a 42% premium to today’s price.”

Today’s dollar index is near 95 points. So there’s still room to run if we’re going to eclipse those 2002 highs.

However, there’s another side to the coin, of course. Here’s what I said back in September…

“So you see, Janet Yellen may be dancing around taper talk and continuing to overwhelm the market with stimulus and continued low interest rates, BUT if Mario Draghi and the European Central Bank can outdo Janet’s moves, the dollar index can continue to skyrocket.”

That’s the crux of the argument, dear reader.

The only thing that’s going to put the U.S. dollar back on its path to eventual destruction is a big move by the U.S. Fed. Right now Mario Draghi and the ECB are opening the floodgates of stimulus. Meanwhile, Janet Yellen and the U.S. Fed are closing the spigot.

If nothing gives here we’re in store for a strong dollar for as far as the eye can see.

However, in the currency world something’s got to give. I don’t think it’ll be long before the U.S. Fed whips out its magic wand and joins the global race to the bottom in currencies.

The U.S. dollar is strong today – a little too strong if you’re the head of the U.S. Fed. It won’t be long before the U.S. joins the race to the bottom – which means another round of stimulus here in the U.S. may be just around the corner. That’ll be the next big round of fireworks we see in 2015.

While we wait for the show, now’s the time to look at picking up some safe-haven gold. While the world’s currencies F-L-U-S-H themselves into the toilet, the time tested power of precious metals with outlast them all.

Oh, and… go ahead and book that European vacation.

Keep your boots muddy,

Matt Insley

P.S. Don’t expect this sale to last long. It’s only a matter of time before the U.S. “fires back” and depreciates the greenback.  When that happens, make sure you stay up to date with a free subscription to Daily Resource Hunter.  Click here now to sign up.

The post Time To Take That European Vacation You’ve Been Waiting For… appeared first on Daily Reckoning.

Categories: Economics

The Market Ticker - They Always Buy The Top (Confidence)

The Market Ticker - 28 January 2015 - 3:05am

I have to laugh.

Consumer confidence came in at 102.9; over 100 is net-positive.

Highest figure since..... mid 2007.

Of course we know what came next, right?

This is truly amusing; yes, gas prices are down.  But as I've pointed out the actual impact on consumer spending is likely to be very small for two reasons: 1) It's not that big of a percentage of total spending and 2) fuel economy improvements mean the declines are a lower percentage of spending as a whole.

Think about it folks -- if your car gets 30mpg now and 5 years ago got 20mpg, the decrease in gas prices means you consumed 100 gallons to go 2,000 miles; now to go 2,000 miles you consumed 66 gallons, or a third less.

So if you spent $100 before on gas, now you spent only.......

(Click link to read more)

Categories: Economics

How to Make 20% from the Resurrection Car Manufacturers

The Daily Reckoning - 28 January 2015 - 2:52am

This post How to Make 20% from the Resurrection Car Manufacturers appeared first on Daily Reckoning.

Today we’re getting back on the beam with a story cruising beneath just about everyone’s radar. And it involves a classic American industry…

We’re betting on car makers.

Before you try to have my butt hauled off to Bellevue, hear me out for a sec…

Auto makers are coming back. It’s true. They’re seeing the light at the end of the tunnel after years of slumping sales. And their stock is turning the corner, too. In fact, you could net quick, double-digit gains if you turn the key now. Don’t believe me?

Then take a look at the numbers…

According to TrueCar, a leading automotive pricing and information website, annualized auto sales for January are projected to increase 13% over last year. That’s no fluke, my friend. And even though most analysts have been asleep at the wheel when it comes to this trend, the industry actually grew in 2014. Meanwhile, sales volume is increasing, and rising average car prices are telling us that demand is picking up…

“With solid economic expansion under way and consumer-friendly gasoline prices, the auto industry remains a high-growth sector,” said TrueCar’s Eric Lyman.

High growth sectors? Cars? When’s the last time you heard those two things mentioned together? But the numbers don’t lie. Oh yeah, then there are gas prices. The national average gas price is flirting with $2—lowest since 2009. Do you think folks are sweating their fuel economy now? Hell no…

There’s no doubt lower gas prices are partially driving this story. It’s almost impossible to avoid the cheap oil theme these days. And there’s no need to fight it, either. Just fire up that good ‘ole 454 Big-Block V8 and enjoy the ride, man…

We’re looking at the best January in eight years for the auto industry—and that’s without any performance-increasing fuel injection from our friend Uncle Sam. Nope, they’re doing it all themselves.

The future looks bright for the auto makers. Hop onboard this developing trend today…

Regards,

Greg Guenthner

for The Daily Reckoning

P.S. We have the chance to get into a trade that’s not overextended. You don’t have to chase this stock higher–the trade is coming to you. If you want to cash in on the biggest profits this market has to offer, sign up for my Rude Awakening e-letter, for FREE, right here. Stop missing out. Click here now to sign up for FREE.

The post How to Make 20% from the Resurrection Car Manufacturers appeared first on Daily Reckoning.

Categories: Economics

Climate Change Mitigation's Best-Kept Secret

Energy Bulletin - 28 January 2015 - 2:01am

Methane is a potent greenhouse gas — but there’s a lot we can do about it.

Categories: Peak oil news

The Market Ticker - Numbers on Greece

The Market Ticker - 28 January 2015 - 1:53am

With the Dow futures down 241 points overnight (and more than an hour before the open), erasing all of yesterday's gains and then some, I thought I'd point out a few things that nobody seems to want to discuss in the so-called "media."

First, while the media is making a big thing about "not having to pay any interest on EFSF loans" the fact remains that the debt is roughly 200% of GDP.  The bond principal still has to be paid as it comes due, but even without that interest payments are ~11% of government revenue.

Let's make it real simple for you: The Greek government, were they to erect the finger on all of the debt, would effectively add.......

(Click link to read more)

Categories: Economics

The Market Ticker - Here It Comes! (Durables)

The Market Ticker - 28 January 2015 - 1:39am

So about that victory lap Obama....

New orders for manufactured durable goods in December decreased $8.1 billion or 3.4 percent to $230.5 billion, the U.S. Census Bureau announced today. This decrease, down four of the last five months, followed a 2.1 percent November decrease. Excluding transportation, new orders decreased 0.8 percent. Excluding defense, new orders decreased 3.2 percent.

Transportation equipment, also down four of the last five months, led the decrease, $6.8 billion or 9.2 percent to $66.7 billion.

Oops.

Computer new orders have collapsed; we now have a three-month run-rate that's negative on new orders, with last.......

(Click link to read more)

Categories: Economics

Homeless Garden Project: Cultivating Community Through Urban Farming

Energy Bulletin - 28 January 2015 - 12:45am

The Homeless Garden Project in Santa Cruz, California is one of the many community garden projects in the area, yet is unique in its mission and its everyday actions.

Categories: Peak oil news

The Precariat and the Basic Income: Part 2

Energy Bulletin - 27 January 2015 - 11:14pm

“The 20th century system of economic distribution lasted for 60 years and it’s gone. The 21st century is the century of economic rights.”

Categories: Peak oil news

Turning Waste into Wine: A Pilgrimage to the Composted Land

Energy Bulletin - 27 January 2015 - 11:00pm

It seems pretty obvious that recycling, reusing, and repurposing materials we no longer need makes a lot more sense than burning or burying them, not just from an environmental, but an economic perspective.

Categories: Peak oil news

A Year Without the Colorado River, as Seen by Economists

Energy Bulletin - 27 January 2015 - 10:59pm

Imagine if each tap that delivered water from the Colorado River – whether to a farm, a factory, or a home – suddenly went dry for a year. What would happen to the West’s economy?

Categories: Peak oil news

On Convening Faith Groups

Energy Bulletin - 27 January 2015 - 10:58pm

It behoves us as Transitioners to try to diffuse a message to invite people to consider how we’re moving towns and villages and hamlets towards resilience to create that space, because we bump up against so many different types of people here.

Categories: Peak oil news

Tight Oil Production Will Fade Quickly: The Truth About Rig Counts

Energy Bulletin - 27 January 2015 - 10:30pm
U.S tight oil production from shale plays will fall more quickly than most assume.  
Categories: Peak oil news

Low prices to delay 'peak oil demand' past 2030, says BofA - Reuters

Peak Oil - Google - 27 January 2015 - 9:41am

Low prices to delay 'peak oil demand' past 2030, says BofA
Reuters
(Reuters) - The recent rout in oil prices could delay the onset of "peak oil demand," or zero global demand growth, by around five years to beyond 2030, Bank of America Merrill Lynch (BofA) said. The bank had earlier expected that the continuation of ...

and more »

The Market Ticker - Interview On Stocks-N-Jocks

The Market Ticker - 27 January 2015 - 9:13am

Come and get it!

This is the MP3 archive of my 21 January interview on WCKG in Chicago -- enjoy!

Categories: Economics

The Irony of a Debt-Fueled Oil Boom

The Daily Reckoning - 27 January 2015 - 8:56am

This post The Irony of a Debt-Fueled Oil Boom appeared first on Daily Reckoning.

Layoff announcements have been ricocheting around the oil and gas sector, fleshed out with individual stories that percolate up to me. The entire sector is cutting operating costs and capital expenditures as fast as they can crunch the numbers. Revenues are plunging largely in sync with the collapsing prices of oil and natural gas.

Last Thursday, French oil giant Total’s CEO Patrick Pouyanne, while hobnobbing at the World Economic Forum in Davos, said that his company would “limit” its investments in US shale fields at least until prices come back up — “my instructions have been pretty clear,” he said.

Last Tuesday, Oilfield services provider Baker Hughes, which is being acquired by Halliburton for almost $35 billion in a masterful piece of Wall Street engineering, chimed in with its own job cuts; its customers in the oil patch are slashing their capital expenditures and what they will pay Baker Hughes as their revenues are plunging due to the collapsing price of oil. The chain reaction goes on. Baker Hughes is going to axe 7,000 employees, mostly in the first quarter. That’s about 11.5% of its headcount!

Acquirer Halliburton, which has already cut 1,000 people outside North America in the fourth quarter, out of the 80,000 it employs worldwide, would do some cutting of its own at home. “Headcount adjustments” was the term COO Jeffrey Miller used during the earnings call, without going into details. Both companies get about half of their revenues from North America, which they expect to get hit harder than the rest of the world.

That’s how the sector tries to overcome a glut: with soaring production!

Last Monday, oilfield services giant Schlumberger said it would cut 9,000 jobs. BP and ConocoPhillips already announced major budget cuts, as have dozens of smaller companies. Charge-offs are piling up. And it’s just the beginning.

Now BHP Billiton, the world’s biggest mining company, spelled out, perhaps unwittingly, why the great American oil bust will lead to a terrific bout of bloodletting before it’s over. In its Operational Review for the second half of 2014, the company explained that its total production — which includes copper, coal, iron, manganese, nickel, alumina, and oil and gas — increased by 9% during the second half of 2014, despite the swoon in commodity prices. And it bragged that it achieved production records “for eight operations and five commodities.”

It needs to brag to prop up its shares which have plummeted 37% on the NYSE since mid-2014. So it reiterated its guidance for total group production to rise 16% for the two years ending in December 2015.

BHP’s production of US dry natural gas, whose price has been below the cost of production for years, inched up 5% in the fourth quarter to 110.3 billion cubic feet (bcf). But production of US shale oil, condensate, and natural gas liquids reached 12.9 million barrels of oil equivalent (MMboe) in the fourth quarter, nearly doubling from a year earlier!

That’s how the sector tries to overcome a glut: with soaring production! Now CEO Andrew Mackenzie explained how BHP would deal with the low-price debacle it finds itself in:

“We are reducing costs and improving both operating and capital productivity across the Group faster than originally planned. These improvements will help mitigate some of the impact of lower commodity prices and we remain alert to opportunities to further increase free cash flow.”

It will decimate its US drilling rigs by 40% before the year is up. The least economical areas will be hit the hardest. Drilling in shale plays with large amounts of dry gas will be cut to one rig in the Haynesville shale. This one solitary rig will focus on “drilling and completions optimization,” rather than full field development. BHP will taper fracking for dry gas down to nothing.

And it’s still trying to dump its acreage in the Fayetteville shale, which it had first announced during the peak of the gas glut in October 2012. Since it will only agree to a deal “if full value can be realized, consistent with our long-term outlook for gas prices,” it has not yet found a buyer.

“Our ongoing shale investment program will remain focused on our liquids-rich Black Hawk acreage,” Mackenzie said. “However, we will keep this activity under review and make further changes if we believe deferring development will create more value than near-term production.”

So if the price continues to wobble lower, more capex cuts may be on the horizon even in its most productive plays. Yet:

“The reduction in drilling activity will not impact 2015 financial year production guidance, and we remain confident that shale liquids volumes will rise by approximately 50% in the period.”

Oil glut and collapsing prices be damned.

And that’s the secret sauce: gutting operating expenses and capital expenditures by laying off people, shutting down fracking operations, shuttering facilities, dumping whatever can be dumped, and with each additional swoon of the price of oil, tighten the screws some more. All in order to limit cash outflow.

But production from existing wells and from new projects that will come on line in the near future — projects conceived during the junk-bond and energy-IPO bubble when money grew on trees — will be pushed to new records to salvage what’s left of the plunging revenues.

The cash has already been drilled into the ground. Now it’s just a matter of getting the oil and gas out to service the debt. The more the price drops, the harder they have to try to increase production. This is the irony of a debt-fueled oil boom that turned into an oil bust: producers cannot back off regardless of how low the price may be because they have to generate the cash from lower and lower oil prices to service their mounting piles of debt.

Producers in the US are all doing it. State-controlled oil companies in Russia, Venezuela, Iran, Mexico… They’re all doing it too. They’re trying to make up with volume what they can’t achieve with price, while they still can, and the bloodletting this strategy inevitably leads to is going to be epic.

This is how years of wondrous Wall-Street engineering dissolve into reality.

Regards,

Wolf Richter
for The Daily Reckoning

The post The Irony of a Debt-Fueled Oil Boom appeared first on Daily Reckoning.

Categories: Economics

The Market Ticker - It's Called 'In Public' For A Reason

The Market Ticker - 27 January 2015 - 8:12am

Cry me a fucking river.

Sheriffs are campaigning to pressure Google Inc. to turn off a feature on its Wazetraffic software that warns drivers when police are nearby. They say one of the technology industry's most popular mobile apps could put officers' lives in danger from would-be police killers who can find where their targets are parked.

Tough shit.

The cops have cameras in their cars now that automatically scan license plates and, in some cases, driver faces.  There are more cameras all over the place that cities -- yes, the cops in cities -- monitor and again, use computers to play "facial recognition" games with.

There's a reason it's.......

(Click link to read more)

Categories: Economics
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