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Creditworthiness? The O&G Canary!

Wall Street is scrambling away from oil; banks and investors fled months ago anticipating Iran opening their flood gates of supplies. Then recently, fracking gave us a surprise: oil rig counts increased, adding credence to a world glut scenario, which drove prices further down and another round of investor selling ensued.

Last Wednesday, the EIA released reports showing the highest levels of U.S. crude inventory in 80 years! Again, more investors moved away from oil and gas. Here is the EIA weekly report: Then a bit of news caused a pause in free falling prices: U.S. production fell. Could fracked well production be starting to drop off from older wells? Check out EIA weekly reports for updates.

To add insult to injury, major oil CEO’s started declaring gloom and doom for years to come, as they prepared investors for dividend and capital cuts. CEO, Bob Dudley, spent most of his report announcing how BP is cutting costs and selling more assets.

All that said, it is ironic that in the first quarter with a fall in prices, the canaries were still singing, declaring this sector wasn’t dead. They sang so well, that financial groups restructured debt and in some cases extended more. Now, sector analysts are declaring that the songbird is choking!

In many cases, lenders just prolonged the inevitable. Quite a few companies were over extended with debt when prices were in the $70’s. Once lenders saw that companies could sustain lower oil prices with lower production costs, they restructured debt. But now, we may see some companies forced closed by lenders, who stop providing more funds or do loan calls to cut losses. The lenders’ exposure limits may necessitate throwing in the towel, as companies again run out of cash. Bankruptcies could increase resulting in further asset liquidations, lease sales, and cutbacks. Right now, it is all about staying power.

If you are a supplier, now is a season for closely watching the credit worthiness of your customers. Many suppliers have moved away from extending credit altogether due to the volatility of oil prices turning companies upside down. A good website for checking for bankruptcy filings is

Remember when oil prices first fell below $100/barrel? Wall Street quickly declared the sky was falling and shale would shut down at $70 to $80. But, it didn’t.

Then we went into the $60 to $70 range and once again, Wall Street declared an end to U.S. fracking. But, it wasn’t.

Production even increased! Why? Because oil and gas proved that it is sustainable in the $60 to $70 range.

Now, prices have fallen again. We are almost back to 2009’s low. So, the next round of investors is running from oil, driving prices down further. And guess what? We are about to find out how much fracking is still sustainable in the high 40’s to $50’s range.

Don’t laugh! Every time prices go down, costs have gone down too. In the last downturn, we saw discounted rail prices and further drops in sand prices. One miner was offered rebates on rail cars. And, have you checked out the guar rates in India lately? They are the lowest in years.

We may not have hit a bottom with fracking costs or oil prices for that matter. Small savings on commodities, fuel costs for trucking, rail and barging, labor, and equipment add up. Last week, we received a quote for the lowest price ever on Northern White sand delivered into Texas.

Analysts always start declaring a bottom when there has been a sharp price drop. Several are already suggesting that a time to buy may be setting up. But why? Isn’t there too much oil in the market? Yes, but cashflow issues are not limited to U.S. drillers.

Consider this excerpt from a Wealth Daily article: This Doesn’t Add Up by Briton Ryle | Monday, August 3rd, 2015:

“Bloomberg reported that OPEC revenues will be below $1 trillion for the first time since 2010. Saudi Arabia’s revenue losses will be over $100B. Saudi Arabia will likely run a budget deficit of ~$165B this year. Also, the Saudis have announced a $4B bond sale to raise cash — the first since 2007.

This makes absolutely no sense, when you have the means to satisfy your budget needs completely at your command……….Saudi Arabia was China’s biggest oil supplier in 2014. But in May, Russia sold more oil to China than the Saudis. In fact, so did Angola. Part of the reason Russia and Angola were able to boost their sales to China is that they accept payment in Chinese renminbis. Saudi Arabia only accepts dollars.

Bloomberg reports that Saudi crude exports fell from 7.74 Mbpd in April to 6.94 Mbpd in May….. China’s economic growth is slowing. Another reason is that Saudi Arabia has reversed its discounting to China. Saudi prices for China hit a 10-month high in May…so no wonder China looked elsewhere for oil. That’s probably why Saudi Arabia recently said it would cut production in September. The cut is expected to be around 200,000 to 300,000 B/D. That’s a start, and don’t be surprised if the cuts are bigger. Keeping oil prices this low just doesn’t make sense. All it does is costs the Saudis billions of dollars in lost revenue……I can’t tell you it’s time to run out and buy oil stocks. But, that time is coming in the not-so-distant future…”

Briton Ryle – @BritonRyle on Twitter You can visit this form to request the full version of the article:

If OPEC can’t find buyers, they may not have any choice but to cut production. Eventually, storage could be an issue too. It is highly unlikely that price volatility is over. As peak season demand winds down and supplies rise, OPEC and other major producers may be hitting a production wall. A drop off of production, will clear the playing field. As supplies go down and prices begin to lift, we will quickly find out who is left to get back in the game and who can get there the fastest.

In the meantime, our desk is active with commodity inquiries from independent drillers. And, our suppliers are still lowering prices. Companies without the burden of too much debt will likely sustain with better profits than the last time oil prices were this low. Others will have to start pumping something, even at minimum profit margins in order to keep the doors open. Those wells waiting for completion may see some activity from companies that need to at the very least, displace lost revenues from fracked wells dropping off in production. Oil prices may be down but so are production costs.

We still hear some canaries singing!

Have a great week!


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