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What’s For Sale?

I hope you all had a great Thanksgiving. We are all so blessed in many ways. DHT was closed for the week, so we are attempting to get caught up.

Recently, we started receiving an increased number of offerings and requests, from companies that are either trying to locate resources that are becoming scarce, selling items, or securing bargains.

Today, we are doing a quick review of what we see trending in the market. It is pretty competitive on the world front. Russia and Saudi Arabia are discounting oil to Europe to compete for market share. It’s hard to say who is winning at this point. Russia never has played well with others regarding production quotas, so it is unlikely to participate with OPEC on production quotas. OPEC members, particularly Saudi Arabia, refuse to back down production. There is so much mistrust between the members that no one is confident that the others will abide by quotas.

However, on Friday there is an OPEC meeting in Vienna and numerous members, including Iran, are requesting that the group at least honor the 30Mbpd quota agreed upon. Few analysts in the market seem to be anticipating much in results from the meeting. I agree but see the motivations behind their decisions possibly changing.

I can’t help but wonder that Saudi Arabia has their eye on a bigger prize. I am not so sure that they are all about market share in the near term. I’m also not so confident that their primary objective is to eliminate U.S. or non-OPEC fracking production. Nope, they may be going for something much bigger. I think it is possible that they have figured out that even at the expense of their pretty big piggy bank, which is estimated to be enough to support them for another four years, they could eliminate many of their OPEC bedfellows, cripple Russia, shut down frackers, and eliminate significant amounts of the deep water and bigger new production on the drawing boards. And guess what? If they are successful, $100/barrel oil will look like a bargain.

In reality, they haven’t seen the results they had hoped for in reducing fracking production. But, they have seen countries move to the edge of the bankruptcy cliff, deep water rigs and new production capital dry up, and even their so called buddies in OPEC are crying, “Uncle.” I am starting to wonder if they are full out committed to go for over production for as long as they can possibly finance it or until there isn’t another tanker or storage place to fill. We shall see!

On the home front, public companies continue to make announcements about cutting significant amounts of new development. And independents that can’t complete at these low prices are going away. However, don’t underestimate our guys. Drilling is still taking place, especially in West Texas. And, companies continue to reduce costs. I spoke to a fracker yesterday in West Texas, whose cost is at $20/barrel. He is fine with current prices and looking for investors and leases to engage his methods of operating.

Prior to an oil price fall out, the oilfield motto was drill anything and everything as fast as you can. Heck ya! At over $100 per barrel, there was plenty profits to capture.

Now, lower prices demand more production for less cost and it is making the methods of fracking go through a metamorphosis that will forever change the industry. The longer OPEC and other major producers over supply the market and oppress oil prices the better some of the key players are becoming in reducing costs, improving efficiencies, and improving returns.

The market is undergoing an aggressive retraction in some areas but in others growth is pretty good. One interesting aspect of this contraction is that consolidation isn’t aggressive. Consolidation involves acquisition and mergers as companies increase assets and expand their core business. However, in this long term oppressed oil price window, the market is flooded with low costs assets. Buyers are few in number due to companies focusing on preserving cash. There are many assets sitting idle or abandoned. Some oil rigs have greater value as scrap metal. We have several buyers of oil rigs, if you have any you would like to sell.

Indicators in the market of fall out are not reduced rig counts or production numbers. Indicators are bankruptcies and public companies cutting dividends. However, don’t be fooled by analyst reports suggesting the demise of companies just because they are cutting dividends. It is fairly common that once a company suspends dividends, they end up in some form of reorganization. However, this market is different. This may actually be an indicator of a great opportunity for buying stocks and holding them for a while. It is important to do your homework.

When the oil prices started dropping off companies had to start making choices in managing their cash. Many immediately cut spending. Then, depending on leadership philosophy, they boosted revenues with minimal cash outlay, sold off assets, and/or eventually cut investor payouts or dividends.

But, why hold off on cutting dividends? If a publicly traded company has block investors holding their stock, those investors value dividend returns to provide some protection or cushion against their investment in the event of losses in stock price. Block buyers hung in there for a while. But, eventually they abandoned oil & gas stocks as they saw the potential for a comeback fading away. Once large block buyers sold out, stock prices dropped further in value. The incentive to try to keep those investors happy with dividends was gone. Now, companies hitting the lowest values they have seen in years, have nothing to gain by preserving dividends. Preserving cash to sustain for a long term is the priority.

Bankruptcy filings are flooding the market with low cost assets, that are actually diminishing the value of acquisitions. Since numerous companies are trying to preserve cash for the long term, there is less competition buying opportunities the equipment and resources now on the market. Why buy a company in the open market when there is potential to buy assets, customer lists, and hire their employees after they file for bankruptcy?

DownHoleTrader is receiving inquiries from companies and private investors outside of this industry sector. They recognize that this downturn isn’t forever and we are now moving into a prime time for those with cash to buy companies, equipment and other resources at bargain prices. Interestingly enough, we have had a number of people in the coal industry checking out opportunities in oil & gas.

We may start seeing some movement in the next months of money flowing into the sector to transact bargains with an attempt to position for a comeback. And, whether it is in 2016 or 2017, we are inevitably setting up for the “perfect storm” in oil prices. World demand is growing and production capacity potential is contracting.

Have a great week.


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