WASHINGTON, January 13, 2015 – Pundits, financial journalists (largely an oxymoron) and CNBC blow-dries are spouting off day after day, opining on what direction stocks will take in 2015. Their latest bromides claim that, due to the seemingly endless sinking spell of oil prices, we are all doomed, doomed I tell you.
In spite of the fact that, at least for America’s beleaguered and largely forgotten middle class, every trip to the gasoline pump lately has been the cause for a happy dance, since this is about the only place in this country where anyone other than the 1% can experience something akin to a real pay raise.
Indeed, the matter of cratering oil prices, particularly at their current rate of speed, is cause for concern in at least some sectors, notably “upstream” oil companies themselves.
Before we proceed further, a brief Wall Street Jargon primer:
- An upstream oil and/or gas company is an entity involved in exploring for, drilling for, and extracting oil and/or natural gas.
- A midstream oil and/or gas company is generally responsible for transporting already-extracted but unrefined fossil fuels to refineries and related facilities that process these products.
- A downstream oil and/or gas company is generally known as a refinery, i.e., a facility or facilities that process the raw fossil fuel product into various refined products such as gasoline, fuel oil, diesel fuel, propane, lubricants and so forth—products that can actually put to use as fuel by the companies and consumers that need it. In addition, downstream companies can provide various flavors of refined products to chemical companies such as Dow (DOW) that can process these products further to create additional useful products like plastics that are usually not associated with fuel products.
These distinctions are important in the current fuel debates. The Saudi-led OPEC price war games, recently commenced, will and indeed are causing the most damage, short-term, to upstream companies, particularly those involved in unconventional methods of extracting raw energy products. I.e., frackers (mostly in the U.S.) and tar sand extraction (mostly in Canada). Big price drops hit these “unconventional” upstream companies hardest and quickest.
With the exception of a mega-major like Exxon-Mobil (XOM) that’s literally got a hand in nearly everything having to do with oil and gas from cradle to grave, many unconventional oil and gas companies are smaller, leveraged to the hilt, and may now be risking default on the expensive loans they took out to enable them to extract materials from America’s unexpected black gold mines.
These smaller companies have been nailed first by the recent price swan-dive, as evidenced by the following info reported by Reuters but easily extracted from primary sources such as court filings and services like BankruptcyData.com:
- February 2014: Tuscany International Holdings seeks protection as liquidity constraints press the Canadian contract driller to cut its debt load and explore strategic alternatives. The driller said that revenue and rig utilization had fallen over on stiff competition in the oilfield services market, leading to cash shortages.
- February 2014: Lexico Resources International Corp, an oil and gas company based in Houston, files for bankruptcy with less than $150,000 in assets.
- March 2014: Houston-based Global Geophysical Services, which does seismic work for oil and gas exploration companies, files for bankruptcy.
- May 2014: Houston’s Buccaneer Energy Limited, an upstream oil and gas company, files for bankruptcy protection….
- October 2014: Marion Energy, a natural gas exploration and production company, files for bankruptcy.
- October 2014: Endeavour International Corp., an oil and gas exploration and production company focused on the North Sea and the United States, seeks creditor protection after saying it will stop making interest payments on its debts….
- November 2014: KiOR Inc., a company based in Houston that works on turning biomass into renewable crude oil that is processed into gasoline, diesel and fuel oil blendstocks, files for bankruptcy, listing $86 million in assets.
- January 2015: WBH Energy, one of many tiny shale oil and gas producers in Texas, files for bankruptcy protection, becoming what may be the first U.S. company of its kind to do so since crude prices started tumbling six months ago. It listed both assets and liabilities of between $10 million and $50 million in its filing in U.S. Bankruptcy Court for the Western District of Texas on Sunday.
As anyone can easily see, a few of these filings pre-date the beginning of the oil price plunge, circa June 2014, indicating that small companies that had taken on too much risk early in the game were functioning a bit like canaries in the coal mines, warning of trouble even before it began to unfold.
Again, though, we’re dealing with what’s primarily an upstream problem at this point. The increasingly alarmist writers functioning as “Tyler Durden” at ZeroHedge take things increasingly further, however. They correctly implicate at least one bank that may be in trouble for making too many loans to companies in the upstream oil patch. But, like many other analysts, are a bit too quick to predict gloom and doom for banks in general.
“Now that even the pundit brigade has confessed that crashing crude may not be the ‘unambiguously good’ event all of them had sworn as recently as a month ago it surely would be, and stocks are beginning to comprehend that plunging oil may well be rather ‘unambiguously bad’ because without EPS growth (energy is well over 10% of S&P EPS), without multiple expansion (rumor has it the Fed will hike this year), without a jump in stock buybacks (energy companies account for 30% of the buyback growth in 2015 according to Goldman) and without a boost to GDP (energy capex plans are imploding), the only way is down. But there was one key element missing from the ‘bad’ scenario: impaired banks. At least until now, because as Reuters reports, Asia-focused bank Standard Chartered is the first (of many) bank facing billions in losses resulting from the crude crash.
“The bank, which recently has been on a firing spree and even exited its entire equity business, will likely need $4.4 billion of extra provisions to cover losses from commodities loans, potentially forcing it to raise billions of dollars from investors, analysts said on Monday.”
Clearly there will be some associated damage if this massive oil price drop continues apace. West Texas Intermediate (WTI) crude is as low as $45.64 per barrel this morning and looks like it could easily swoon to $40 almost without notice.
With prices like these, even midstream companies—which essentially are equal opportunity rent-collectors, may see some supply dry up along with some revenue, though they will not go out of business. Even downstream companies, which would seem to benefit by being able to obtain cheaper raw product, create cheaper refined product, and then sell more of it given lower prices at the pump, might hurt a bit short-term if refinery expansion and maintenance capex (capital expenditure) spikes higher when profits are lower.
And yes, jobs will be lost for awhile as well. But that’s not exactly news in this incredibly lame “recovery” from the 2007-2009 debacle, given the Administration’s focus on socialistic spending programs rather than paying attention to getting Americans back to work that’s other than part time or minimum wage.
There are, of course, international issues as well, which would require a second column to explain.
But again, this current oil price decline—otherwise regarded by most Americans as The Miracle of the Gas Pump—may very well allow currently scarce dollars to get spent in other currently ailing areas of the economy which could lead to real growth which could lead to a more balanced economy in a year or two and increase real middle-class employment as well. That’s the real upside potential here.
But right now, one day (usually on a Monday or a Friday), the naysayers hold forth and wreck the market. Whereas on a day like today, with just one somewhat bellwether company (Alcoa [AA]) reporting nicely improved earnings (if you can parse its numbers), all’s well with the world, with the Dow currently up 220, the S&P 500 up a smart 22+ and the tech heavy NASDAQ up an impressive 74 as of around noon EST.
Which brings us back to our initial point. Until the 2015 trading game gets more clearly defined, the market will remain a trader’s delight and the best of all possible worlds for itchy fingers. Dive in and buy, buy, buy during the Friday and Monday swan dives; watch prices go up; then dump or short later in the week when the bears and HFTs clock the averages again as they predictably will.
This is a market that is no fun for a conservative investor. You just never know where it’s going. Thus, you’re never sure where to place your bets or even if you should.
Which means that once again today, we’ll skip trading tips here as we, like everyone else who’s still sane, looks for more reliable indicators and more stable places to park that capital where the 1% are not likely to find and devour it.