Skip to main content

The energy complex

A few weeks ago I said that it was possible that oil had finally found its floor, well the market made a fool out of me, from $30 it fell all the way down to $26 (its back around $29 now).  But it remains that the oil and gas sector are having a difficult time -- really it's bad!

The US non-conventionals have been using the debt high yield market to finance their operations, it was for a long time much cheaper than the equity markets, in fact 2012/14 saw massive issuance in the high yield market -- somewhere between 20% and 30% of all HY instruments are related to the energy sector.

Rumours a few weeks ago emerged that the Feds were encouraging banks to play nice with the borrowers -- as they say that was then, this is now, and now is looking distressed.  M&A bankers buddies have told me that the restructuring of the E&P sector was was long though to go via sale of business has moved to debt reorg.  The equity has been wiped out, and  good chunk of the debt too (watch out pension funds).

There is no doubt that in the 26/30 range most producers are underwater for their fixed costs, but now it appears that even their variable costs are no longer covered, because the WTI is light and sweet and the stuff out of non-conventional is not light and sweet, there are issues with storage and the price for the non-con production is apparently closer to $15 (someone told me near $12...) that around $30.  That's because there is such a glut of crude in the system, pricing is difficult.

So lenders (who played the game) and FI book that "spiked their yield" with some good old fashion HY debt instruments are finding their books in trouble.  On top of everything, these HY instruments were covenant lite, so that there was no way for lenders to take action until interest payments are delinquent.

So debt write down are about to start (maybe already started), and borrowers are looking at Chapter 11 or maybe even chapter 7 liquidation... the road is going to be difficult.  Now not to add to all these problems but now even China is starting to get unconventional with its bad debt.  Rumours of Chinese NPL entering the US distressed market have emerged in the past few weeks...


Popular posts from this blog

Trucker shortage? No a plan to allow driverless rigs

There are still articles on how America is running out of truckers -- and that its a huge problem, except its not a problem, if it was a problem salaries would rise to so that demand would clear. Trucking is one of those industry where the vast majority of participants are owner/operators and therefore free agents.

Salaries and cost are extremely well know, "industry" complains that there are not enough truckers, yet wages continue to fall... Therefore there are still too many truckers around, for if there was a shortage of supply prices would rise, and they don't.

What there is though is something different; there is a push to allow automatic rigs to "operate across the US", so to encourage the various authorities to allow self driving rigs you talk shortage and hope that politicians decided that "Well if people don't want to work, lets get robots to do the work" or words to that effect.

This has nothing to do with shortage of drivers, but every…

Every punter says oil prices are on the rise: Oil hits $48/bbl -- lowest since September 2016

What the hell?

How could this be, punters, advisors, investment bankers all agreed commodity prices  in general and oil prices in particular are on the rise...its a brave new era for producers and exporters -- finally the world is back and demand is going through the roof, except not so much!

What happened?  Well energy is complicated, the world operates in a balance -- 30 days of physical reserves is about all we've got (seriously) this is a just in time business.  So the long term trend always gets hit by short term variations.

Global production over the past 12 months has risen by somewhat less than 1.5% per annum.  As the world market changes production becomes less energy intensive (maybe), but the reality is that the world is growing more slowly -- America Q4 GDP growth was around 1.9% (annualized) Europe is going nowhere fast (the GDP growth in Germany is overshadowed by the lack of growth in France, Italy, Spain (lets say 27 Euro members generated a total GDP growth of 1.2…

Paying for research

This morning I was reading that CLSA -- since 2013 proudly owned by CITIC -- was shutting down its American equity research department -- 90 people will be affected!

Now the value of a lot of research is limited, that is not to say that all research is bad. In fact, I remember that GS's Asia Aerospace research was considered the bible for the sector.  Granted, there was little you could do with the research since the "buy" was for Chinese airlines...that were state owned.  Still it was a vey valuable tool in understanding the local dynamics.  It seems that the US has introduced new legislation that forces brokers to "sell" their research services!  Figures of $10,000 an hour have been mentioned...

Now, research can be sold many times; if GS has 5000/6000 clients they may sell the same research 300x or 400x (I exaggerate) but this is the key -- Those who buy the research are, I presume, prohibited from giving it away or selling it, at the same time the same rese…