Tag Archives: Midland

West Texas Bust – “We Never Expected The Good Times To End”

The residents of West Texas are accustomed to a life dependent on hydrocarbons. As Bloomberg reports, the small communities built into the flat West Texas desert are dotted with oil pumps and rigs, and the chemical smell of an oil field hangs in the air.

Here the economy rises and falls on drilling.

When the drilling is good, everyone in the town benefits. When it’s bad, most of West Texas feels the pinch.

Oil prices have plunged as much as 75 percent since June 2014. That drop has dismal consequences for residents, and not just the ones working in oil fields. Bloomberg spoke with some of the people trying to endure the historic dip in oil prices. This video tells some of their stories….

In sharp contrast, click the following to enjoy this bitter sweet October, 2013 oil boom report by (CNN Money) titled ‘Moving in droves’ to Midland, Texas

Junk-Rated Oil & Gas Companies in a “Liquidity Death Spiral”

by Wolf Richter

https://ashwinikumar007.files.wordpress.com/2011/06/blackmoney.jpg

On the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however.

Behind the facade of stability, the re-balancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations.

So said the International Energy Agency in its Oil Market Report on Friday. West Texas Intermediate plunged over 4% to $45 a barrel.

The boom in US oil production will continue “to defy expectations” and wreak havoc on the price of oil until the power behind the boom dries up: money borrowed from yield-chasing investors driven to near insanity by the Fed’s interest rate repression. But that money isn’t drying up yet – except at the margins.

Companies have raked in 14% more money from high-grade bond sales so far this year than over the same period in 2014, according to LCD. And in 2014 at this time, they were 27% ahead of the same period in 2013. You get the idea.

Even energy companies got to top off their money reservoirs. Among high-grade issuers over just the last few days were BP Capital, Valero Energy, Sempra Energy, Noble, and Helmerich & Payne. They’re all furiously bringing in liquidity before it gets more expensive.

In the junk-bond market, bond-fund managers are chasing yield with gusto. Last week alone, pro-forma junk bond issuance “ballooned to $16.48 billion, the largest weekly tally in two years,” the LCD HY Weekly reported. Year-to-date, $79.2 billion in junk bonds have been sold, 36% more than in the same period last year.

But despite this drunken investor enthusiasm, the bottom of the energy sector – junk-rated smaller companies – is falling out.

Standard & Poor’s rates 170 bond issuers that are engaged in oil and gas exploration & production, oil field services, and contract drilling. Of them, 81% are junk rated – many of them deep junk. The oil bust is now picking off the smaller junk-rated companies, one after the other, three of them so far in March.

On March 3, offshore oil-and-gas contractor CalDive that in 2013 still had 1,550 employees filed for bankruptcy. It’s focused on maintaining offshore production platforms. But some projects were suspended last year, and lenders shut off the spigot.

On March 8, Dune Energy filed for bankruptcy in Austin, TX, after its merger with Eos Petro collapsed. It listed $144 million in debt. Dune said that it received $10 million Debtor in Possession financing, on the condition that the company puts itself up for auction.

On March 9, BPZ Resources traipsed to the courthouse in Houston to file for bankruptcy, four days after I’d written about its travails; it had skipped a $60 million payment to its bondholders [read… “Default Monday”: Oil & Gas Companies Face Their Creditors].

And more companies are “in the pipeline to be restructured,” LCD reported. They all face the same issues: low oil and gas prices, newly skittish bond investors, and banks that have their eyes riveted on the revolving lines of credit with which these companies fund their capital expenditures. Being forever cash-flow negative, these companies periodically issue bonds and use the proceeds to pay down their revolver when it approaches the limit. In many cases, the bank uses the value of the company’s oil and gas reserves to determine that limit.

If the prices of oil and gas are high, those reserves have a high value. It those prices plunge, the borrowing base for their revolving lines of credit plunges. S&P Capital IQ explained it this way in its report, “Waiting for the Spring… Will it Recoil”:

Typically, banks do their credit facility redeterminations in April and November with one random redetermination if needed. With oil prices plummeting, we expect banks to lower their price decks, which will then lead to lower reserves and thus, reduced borrowing-base availability.

April is coming up soon. These companies would then have to issue bonds to pay down their credit lines. But with bond fund managers losing their appetite for junk-rated oil & gas bonds, and with shares nearly worthless, these companies are blocked from the capital markets and can neither pay back the banks nor fund their cash-flow negative operations. For many companies, according to S&P Capital IQ, these redeterminations of their credit facilities could lead to a “liquidity death spiral.”

Alan Holtz, Managing Director in AlixPartners’ Turnaround and Restructuring group told LCD in an interview:

We are already starting to see companies that on the one hand are trying to work out their operational problems and are looking for financing or a way out through the capital markets, while on the other hand are preparing for the events of contingency planning or bankruptcy.

Look at BPZ Resources. It wasn’t able to raise more money and ended up filing for bankruptcy. “I think that is going to be a pattern for many other companies out there as well,” Holtz said.

When it trickled out on Tuesday that Hercules Offshore, which I last wrote about on March 3, had retained Lazard to explore options for its capital structure, its bonds plunged as low as 28 cents on the dollar. By Friday, its stock closed at $0.41 a share.

When Midstates Petroleum announced that it had hired an interim CEO and put a restructuring specialist on its board of directors, its bonds got knocked down, and its shares plummeted 33% during the week, closing at $0.77 a share on Friday.

When news emerged that Walter Energy hired legal counsel Paul Weiss to explore restructuring options, its first-lien notes – whose investors thought they’d see a reasonable recovery in case of bankruptcy – dropped to 64.5 cents on the dollar by Thursday. Its stock plunged 63% during the week to close at $0.33 a share on Friday.

Numerous other oil and gas companies are heading down that path as the oil bust is working its way from smaller more vulnerable companies to larger ones. In the process, stockholders get wiped out. Bondholders get to fight with other creditors over the scraps. But restructuring firms are licking their chops, after a Fed-induced dry spell that had lasted for years.

Investors Crushed as US Natural Gas Drillers Blow Up

by Wolf Richter

The Fed speaks, the dollar crashes. The dollar was ripe. The entire world had been bullish on it. Down nearly 3% against the euro, before recovering some. The biggest drop since March 2009. Everything else jumped. Stocks, Treasuries, gold, even oil.

West Texas Intermediate had been experiencing its biggest weekly plunge since January, trading at just above $42 a barrel, a new low in the current oil bust. When the Fed released its magic words, WTI soared to $45.34 a barrel before re-sagging some. Even natural gas rose 1.8%. Energy related bonds had been drowning in red ink; they too rose when oil roared higher. It was one heck of a party.

But it was too late for some players mired in the oil and gas bust where the series of Chapter 11 bankruptcy filings continues. Next in line was Quicksilver Resources.

It had focused on producing natural gas. Natural gas was where the fracking boom got started. Fracking has a special characteristic. After a well is fracked, it produces a terrific surge of hydrocarbons during first few months, and particularly on the first day. Many drillers used the first-day production numbers, which some of them enhanced in various ways, in their investor materials. Investors drooled and threw more money at these companies that then drilled this money into the ground.

But the impressive initial production soon declines sharply. Two years later, only a fraction is coming out of the ground. So these companies had to drill more just to cover up the decline rates, and in order to drill more, they needed to borrow more money, and it triggered a junk-rated energy boom on Wall Street.

At the time, the price of natural gas was soaring. It hit $13 per million Btu at the Henry Hub in June 2008. About 1,600 rigs were drilling for gas. It was the game in town. And Wall Street firms were greasing it with other people’s money. Production soared. And the US became the largest gas producer in the world.

https://martinhladyniuk.files.wordpress.com/2015/03/be197-deathspiral2.jpg

But then the price began to plunge. It recovered a little after the Financial Crisis but re-plunged during the gas “glut.” By April 2012, natural gas had crashed 85% from June 2008, to $1.92/mmBtu. With the exception of a few short periods, it has remained below $4/mmBtu – trading at $2.91/mmBtu today.

Throughout, gas drillers had to go back to Wall Street to borrow more money to feed the fracking orgy. They were cash-flow negative. They lost money on wells that produced mostly dry gas. Yet they kept up the charade. They aced investor presentations with fancy charts. They raved about new technologies that were performing miracles and bringing down costs. The theme was that they would make their investors rich at these gas prices.

The saving grace was that oil and natural-gas liquids, which were selling for much higher prices, also occur in many shale plays along with dry gas. So drillers began to emphasize that they were drilling for liquids, not dry gas, and they tried to switch production to liquids-rich plays. In that vein, Quicksilver ventured into the oil-rich Permian Basin in Texas. But it was too little, too late for the amount of borrowed money it had already burned through over the years by fracking for gas below cost.

During the terrible years of 2011 and 2012, drillers began reclassifying gas rigs as rigs drilling for oil. It was a judgement call, since most wells produce both. The gas rig count plummeted further, and the oil rig count skyrocketed by about the same amount. But gas production has continued to rise since, even as the gas rig count has continued to drop. On Friday, the rig count was down to 257 gas rigs, the lowest since March 1993, down 84% from its peak in 2008.

US-rig-count_1988_2015-03-13=gas

Quicksilver’s bankruptcy is a consequence of this fracking environment. It listed $2.35 billion in debts. That’s what is left from its borrowing binge that covered its negative cash flows. It listed only $1.21 billion in assets. The rest has gone up in smoke.

Its shares are worthless. Stockholders got wiped out. Creditors get to fight over the scraps.

Its leveraged loan was holding up better: the $625 million covenant-lite second-lien term loan traded at 56 cents on the dollar this morning, according to S&P Capital IQ LCD. But its junk bonds have gotten eviscerated over time. Its 9.125% senior notes due 2019 traded at 17.6 cents on the dollar; its 7.125% subordinated notes due 2016 traded at around 2 cents on the dollar.

Among its creditors, according to the Star Telegram: the Wilmington Trust National Association ($361.6 million), Delaware Trust Co. ($332.6 million), US Bank National Association ($312.7 million), and several pipeline companies, including Oasis Pipeline and Energy Transfer Fuel.

Last year, it hired restructuring advisers. On February 17, it announced that it would not make a $13.6 million interest payment on its senior notes and invoked the possibility of filing for Chapter 11. It said it would use its 30-day grace period to haggle with its creditors over the “company’s options.”

Now, those 30 days are up. But there were no other “viable options,” the company said in the statement. Its Canadian subsidiary was not included in the bankruptcy filing; it reached a forbearance agreement with its first lien secured lenders and has some breathing room until June 16.

Quicksilver isn’t alone in its travails. Samson Resources and other natural gas drillers are stuck neck-deep in the same frack mud.

A group of private equity firms, led by KKR, had acquired Samson in 2011 for $7.2 billion. Since then, Samson has lost $3 billion. It too hired restructuring advisers to deal with its $3.75 billion in debt. On March 2, Moody’s downgraded Samson to Caa3, pointing at “chronically low natural gas prices,” “suddenly weaker crude oil prices,” the “stressed liquidity position,” and delays in asset sales. It invoked the possibility of “a debt restructuring” and “a high risk of default.”

But maybe not just yet. The New York Post reported today that, according to sources, a JPMorgan-led group, which holds a $1 billion revolving line of credit, is granting Samson a waiver for an expected covenant breach. This would avert default for the moment. Under the deal, the group will reduce the size of the revolver. Last year, the same JPMorgan-led group already reduced the credit line from $1.8 billion to $1 billion and waived a covenant breach.

By curtailing access to funding, they’re driving Samson deeper into what S&P Capital IQ called the “liquidity death spiral.” According to the New York Post’s sources, in August the company has to make an interest payment to its more junior creditors, “and may run out of money later this year.”

Industry soothsayers claimed vociferously over the years that natural gas drillers can make money at these prices due to new technologies and efficiencies. They said this to attract more money. But Quicksilver along with Samson Resources and others are proof that these drillers had been drilling below the cost of production for years. And they’d been bleeding every step along the way. A business model that lasts only as long as new investors are willing to bail out old investors.

But it was the crash in the price of “liquids” that made investors finally squeamish, and they began to look beyond the hype. In doing so, they’re triggering the very bloodletting amongst each other that ever more new money had delayed for years. Only now, it’s a lot more expensive for them than it would have been three years ago. While the companies will get through it in restructured form, investors get crushed.


Oil Production Falling In Three Big Shale Plays, EIA Says

HOUSTON – It’s official: The shale oil boom is starting to waver.

And, in a way, it may have souped-up rigs and more efficient drilling technologies to thank for that.

Crude production at three major U.S. shale oil fields is projected to fall this month for the first time in six years, the U.S. Energy Information Administration said Tuesday.

It’s one of the first signs that idling hundreds of drilling rigs and billions of dollars in corporate cutbacks are starting to crimp the nation’s surging oil patch.

But it also shows that drilling technology and techniques have advanced to the point that productivity gains may be negligible in some shale plays where horizontal drilling and hydraulic fracturing have been used together for the past several years.

Because some plays are already full of souped-up horizontal rigs, oil companies don’t have as many options to become more efficient and stem production losses, as they did in the 2008-2009 downturn, the EIA said.

The EIA’s monthly drilling productivity report indicates that rapid production declines from older wells in three shale plays are starting to overtake new output, as oil companies drill fewer wells.

In the recession six years ago, the falling rig count didn’t lead to declining production because new technologies boosted how fast rigs could drill wells.

But now that oil firms have figured out how to drill much more efficiently, “it is not clear that productivity gains will offset rig count declines to the same degree as in 2008-09,” the EIA said.

Energy Information Agency

Overall, U.S. oil production is set to increase slightly from March to April to 5.6 million barrels a day in six major fields, according to the EIA.

But output is falling in the Eagle Ford Shale in South Texas, North Dakota’s Bakken Shale and the Niobrara Shale in Colorado, Wyoming, Nebraska and Kansas.

In those three fields, net production is expected to drop by a combined 24,000 barrels a day.

The losses were masked by production gains in the Permian Basin in West Texas and other regions.

Efficiency improvements are still emerging in the Permian, faster than in other oil fields because the region was largely a vertical-drilling zone as recently as December 2013, the EIA said.

Net crude output in the Bakken is expected to decline by 8,000 barrels a day from March to April. In the Eagle Ford, it’s slated to fall by 10,000 barrels a day. And in the Niobrara, production will dip by roughly 5,000 barrels a day.

But daily crude output jumped by 21,000 barrels in the Permian and by 3,000 barrels in the Utica Shale in Ohio and Pennsylvania.

Read more at MRT.com

Texas Home Buyers Are Better Off Than National Average

by Rye Durzin

Texas homebuyers

The March 2015 Texas Home buyers and Sellers Report from the Texas Association of Realtors shows that between July 2013 and June 2014 median household income for Texas home buyers increased 5.9 percent year-over-year compared with a national increase of only 1.4 percent.

Home buyers in Texas are older, more likely to be married and make more money than the national averages, according to the March 2015 Texas Home buyers and Sellers Report from the Texas Association of Realtors.

The study shows that between July 2013 and June 2014 median household income for Texas home buyers increased 5.9 percent year-over-year compared with a national increase of only 1.4 percent. However, the percentage of first-time home buyers in Texas fell 4 points to 29 percent, compared to a 5 percent decline nationally to 33 percent.

Home buyers in Texas are also two years older compared to the previous period, edging up to 45 years of age, and 72 percent of home buyers are married, compared to 65 percent nationally.

Texans are also buying larger and newer homes than other buyers across the U.S. In Texas, the typical three-bedroom, two-bathroom home had 2,100 square feet and was built in 2002, compared to the typical national home built in 1993 with 1,870 square feet.

Forty-seven percent of first-time home buyers in Texas said that finding the right property was the most difficult step in buying a home, as did 48 percent of repeat home buyers.

For Texans selling homes, 21 percent said that the reason for selling was because of job relocation, followed by 16 percent who said that their home was too small. The median household income for a Texas home seller was $120,800, compared with a national media income of $96,700 among home sellers.

Texas home buyers (overall): July 2013 – June 2014

  • Median household income: +5.9% to $97,500
  • Percent of homes bought that were new: 28% (-1% from July 2012 – June
  • 2013)
  • Percentage of first-time home buyers: 29% (-4% from July 2012 – June
  • 2013)
  • Age of typical home buyer: 45 years old (+2 years from July 2012 – June 2013)
  • Average age of first-time home buyer: 32 years old (+1 year from July
  • 2012 – June 2013)
  • Average age of repeat home buyer: 50 years old (unchanged from July 2012 – June 2013)
  • Median household income for first-time home buyers: +5.8% to $72,000 (compared to July 2012 – June 2013)
  • Median household income for repeat home buyers: -8.9% to $97,500 (compared to July 2012 – June 2013)
  • Percent of married home buyers: 72% (+1% from July 2012 – June 2013)
  • New homes purchased: 28% (-2% from July 2012 – June 2013)
  • Median household income for home sellers: $120,800
  • Age of average home seller: 49 years

National home buyers (overall): June 2013 – July 2014

  • Median household income: +1.4% to $84,500
  • Percent of homes bought that were new: 16% (constant from July 2012 – June 2013)
  • Percentage of first-time home buyers: 33% (-5% from July 2012 – June 2013)
  • Age of typical home buyer: 44 years old (+2 years from July 2012 – June
  • 2013)
  • Average age of first-time home buyer: 31 years old (unchanged from July
  • 2012 – June 2013)
  • Average age of repeat home buyer: 53 years old (+1 year from July 2012 – June 2013)
  • Median household income for first-time home buyers: +2.3% to $68,300 (compared to July 2012 – June 2013)
  • Median household income for repeat home buyers: -1% to $95,000 (compared to July 2012 – June 2013)
  • Percent of married home buyers: 65% (-1% from July 2012 – June 2013)
  • New homes purchased: 16% (unchanged from July 2012 – June 2013)
  • Median household income for home sellers: $96,700
  • Age of average home seller: 54 years

Increasing Rent Costs Present a Challenge to Aspiring Homeowners

https://i0.wp.com/dsnews.com/wp-content/uploads/sites/25/2013/12/rising-arrows-two.jpgby Tory Barringer

Fast-rising rents have made it difficult for many Americans to save up a down payment for a home purchase—and experts say that problem is unlikely to go away any time soon.

Late last year, real estate firm Zillow reported that renters living in the United States paid a cumulative $441 billion in rents throughout 2014, a nearly 5 percent annual increase spurred by rising numbers of renters and climbing prices. Last month, the company said that its own Rent Index increased 3.3 percent year-over-year, accelerating from 2013 even as home price growth slows down.

Results from a more recent survey conducted by Zillow and Pulsenomics suggest that rent prices will continue to be a problem for the aspiring homeowner for years to come.

Out of more than 100 real estate experts surveyed, 51 percent said they expect rental affordability won’t improve for at least another two years, Zillow reported Friday. Another 33 percent were a little more optimistic, calling for a deceleration in rental price increases sometime in the next one to two years.

Only five percent said they expect affordability conditions to improve for renters within the next year.

Despite the challenge that rising rents presents to home ownership throughout the country, more than half—52 percent of respondents—said the market should be allowed to correct the problem on its own, without government intervention.

“Solving the rental affordability crisis in this country will require a lot of innovative thinking and hard work, and that has to start at the local level, not the federal level,” said Zillow’s chief economist, Stan Humphries. “Housing markets in general and rental dynamics in particular are uniquely local and demand local, market-driven policies. Uncle Sam can certainly do a lot, but I worry we’ve become too accustomed to automatically seeking federal assistance for housing issues big and small, instead of trusting markets to correct themselves and without waiting to see the impact of decisions made at a broader local level.”

On the topic of government involvement in housing matters: The survey also asked respondents about last month’s reduction in annual mortgage insurance premiums for loans backed by the Federal Housing Administration (FHA). The Obama administration has projected that the cuts will help as many as 250,000 new homeowners make their first purchase.

The panelists were lukewarm on the change: While two-thirds of those with an opinion said they think the changes could be “somewhat effective in making homeownership more accessible and affordable,” just less than half said the new initiatives are unwise and potentially risky to taxpayers.

Finally, the survey polled panelists on their predictions for U.S. home values this year. As a whole, the group predicted values will rise 4.4 percent in 2015 to a median value of $187,040, with projections ranging from a low of 3.1 percent to a high of 5.5 percent.

“During the past year, expectations for annual home value appreciation over the long run have remained flat, despite lower mortgage rates,” said Terry Loebs, founder of Pulsenomics. “Regarding the near-term outlook, there is a clear consensus among the experts that the positive momentum in U.S. home prices will continue to slow this year.”

On average, panelists said they expect median home values will pass their precession peak ($196,400) by May 2017.

OPEC Can’t Kill American Shale

https://i0.wp.com/static3.businessinsider.com/image/542c5b786da8118e288b4570/morgan-stanley-here-are-the-16-best-stocks-for-playing-the-american-shale-boom.jpgby Shareholdersunite

Summary

  • OPEC is supposedly out to beat, or at least curtail the growth of American shale oil production.
  • For a host of reasons, especially the much shorter capex cycle for shale, they will not succeed unless they are willing to accept permanent low oil prices.
  • But, permanent low oil prices will do too much damage to OPEC economies for this to be a credible threat.

We’re sure by now you are familiar with the main narrative behind the oil price crash. First, while oil production outside of North America is basically stagnant since 2005.

The shale revolution has dramatically increased supply in America.

(click to enlarge)

The resulting oversupply has threatened OPEC and the de-facto leader Saudi Arabia has chosen a confrontational strategy not to make way for the new kid on the block, but instead trying to crush, or at least contain it. Can they achieve this aim, provided it indeed is their aim?

Breakeven price
At first, one is inclined to say yes, for the simple reason that Saudi (and most OPEC) oil is significantly cheaper to get out of the ground.

(click to enlarge)

This suggests that all OPEC has to do is to keep output high and sooner or later the oversupply will work itself off the market, and expensive oil is more likely to see cutbacks than cheaper oil, although this critically depends on incentives facing individual producers.

Capex decline
It is therefore no wonder that we’ve seen significant declines in rig counts and numerous companies have announced considerable capex declines. While this needs time to work out into supply cutbacks, these will eventually come.

For instance BP (NYSE:BP) cutting capex from $22.9B in 2014 to $20B in 2015, or Conoco (NYSE:COP) reducing expenditures by more than 30% to $11.5B this year on drilling projects from Colorado to Indonesia. There are even companies, like SandRidge (NYSE:SD), that are shutting 75% of their rigs.

Leverage
It is often argued that the significant leverage of many American shale companies could accelerate the decline, although it doesn’t necessarily have to be like that.

While many leveraged companies will make sharp cutbacks in spending, which has a relatively rapid effect on production (see below), others have strong incentives to generate as much income as possible, so they might keep producing.

Even the companies that go belly up under a weight of leverage will be forced to relinquish their licenses or sell them off at pennies to the dollar, significantly lowering the fixed cost for new producers to take their place.

Hedging
Many shale companies have actually hedged much of their production, so they are shielded from much of the downside (at a cost) at least for some time. And they keep doing this:

Rather than wait for their price insurance to run out, many companies are racing to revamp their policies, cashing in well-placed hedges to increase the number of future barrels hedged, according to industry consultants, bankers and analysts familiar with the deals. [Reuters]

Economics
Being expensive is not necessarily a sufficient reason for being first in line for production cuts. For instance, we know that oil from the Canadian tar sands is at the high end of cost, but simple economics can explain why production cuts are unlikely for quite some time to come.

The tar sands involve a much higher fraction as fixed cost:

Oil-sands projects are multibillion-dollar investments made upfront to allow many years of output, unlike competing U.S. shale wells that require constant injections of capital. It’s future expansion that’s at risk. “Once you start a project it’s like a freight train: you can’t stop it,” said Laura Lau, a Toronto-based portfolio manager at Brompton Funds. Current oil prices will have producers considering “whether they want to sanction a new one.” [Worldoil]

So, once these up-front costs are made, these are basically sunk, and production will only decline if price falls below marginal cost. As long as the oil price stays above that, companies can still recoup part of their fixed (sunk) cost and they have no incentive to cut back production.

But, of course, you have tar sand companies that have not yet invested all required up-front capital and new capex expenditures will be discouraged with low oil prices. So, there is still the usual economic upward sloping supply curve operative here.

Swing producer
The funny thing is American shale oil is at the opposite end of this fixed (and sunk) cost universe, apart from acquiring the licenses. As wells have steep decline curves, production needs constant injection of capital for developing new wells.

Production can therefore be wound down pretty quickly should the economics require, and it can also be wound back up relatively quickly, which we think is enough reason why American shale is becoming the new (passive) swing producer. This has very important implications:

  • The relevant oil price to look at isn’t necessarily the spot price, but the 12-24 months future price, the time frame between capex and production.
  • OPEC will not only need to produce a low oil price today, that price needs to be low for a prolonged period of time in order to see cutbacks in production of American shale oil. Basically, OPEC needs the present oil price to continue indefinitely, as soon as it allows the price to rise again, shale oil capex will rebound and production will increase fairly soon afterwards.

So basically, shale is the proverbial toy duck which OPEC needs to submerge in the bathtub, but as soon as it releases the pressure, the duck will emerge again.

Declining cost curves
The shale revolution caught many by surprise, especially the speed of the increase in production. While technology and learning curves are still improving, witness how production cost curves have been pushed out in the last years:

There is little reason this advancement will come to a sudden halt, even if capex is winding down. In fact, some observers are arguing that producers shift production from marginal fields to fields with better production economics, and the relatively steep production decline curves allow them to make this shift pretty rapidly.

Others point out that even the rapid decline in rig count will not have an immediate impact on production, as the proportion of horizontal wells and platforms where multiple wells are drilled from the same location are increasing, all of which is increasing output per rig.

Another shift that is going on is to re-frack existing wells, instead of new wells. The first is significantly cheaper:

Beset by falling prices, the oil industry is looking at about 50,000 existing wells in the U.S. that may be candidates for a second wave of fracking, using techniques that didn’t exist when they were first drilled. New wells can cost as much as $8 million, while re-fracking costs about $2 million, significant savings when the price of crude is hovering close to $50 a barrel, according to Halliburton Co., the world’s biggest provider of hydraulic fracturing services. [Bloomberg]

Production cuts will take time
The hedging and shift to fields with better economics is only a few of the reasons why so far there has been little in the way of actual production cuts in American shale production, the overall oil market still remains close to record oversupply. The International Energy Agency (IEA) argues:

It is not unusual in a market correction for such a gap to emerge between market expectations and current trends. Such is the cyclical nature of the oil market that the full physical impact of demand and supply responses can take months, if not years, to be felt [CNBC].

In fact, the IEA also has explicit expectations for American shale oil itself:

The United States will remain the world’s top source of oil supply growth up to 2020, even after the recent collapse in prices, the International Energy Agency said, defying expectations of a more dramatic slowdown in shale growth [Yahoo].

OPEC vulnerable itself
Basically, the picture we’re painting above is that American shale will be remarkably resilient. Yes, individual companies will struggle, sharp cutbacks in capex are already underway, and some companies will go under, but the basic fact is that as quick as capex and production can fall, they can rise as quickly again when the oil price recovers.

How much of OPEC can the storm of the oil price crash, very much remains to be seen. There is pain all around, which isn’t surprising as one considers that most OPEC countries have budgeted for much higher oil prices for their public finances.

(click to enlarge)
You’ll notice that these prices are all significantly, sometimes dramatically, higher than what’s needed to balance their budgets. Now, many of these countries also have very generous energy subsidies on domestic oil use, supposedly to share the benefits of their resource wealth (and/or provide industry with a cost advantage).

So, there is a buffer as these subsidies can be wound down relatively painless. Some of these countries also have other buffers, like sovereign wealth funds or foreign currency reserves. And there is often no immediate reason for public budgets to be balanced.

But to suggest, as this article is doing, that OPEC is winning the war is short-sighted.

Conclusion
While doing damage to individual American shale oil producers and limiting its expansion, the simple reality is that for a host of reasons discussed above, OPEC can’t beat American shale oil production unless it is willing to accept $40 oil indefinitely. While some OPEC countries might still produce profitably at these levels, the damage to all OPEC economies will be immense, so, we can’t really see this as a realistic scenario in any way.

Oil Glut Gets Worse – Production, Inventories Soar to Record

https://i1.wp.com/bloximages.newyork1.vip.townnews.com/oaoa.com/content/tncms/assets/v3/editorial/9/14/914424e8-aaf0-11e4-ac1c-b74346c3e35b/54cf9855658eb.image.jpgby Wolf Richter

February 4th, 2015: Crude oil had rallied 20% in three days, with West Texas Intermediate jumping $9 a barrel since Friday morning, from $44.51 a barrel to $53.56 at its peak on Tuesday. “Bull market” was what we read Tuesday night. The trigger had been the Baker Hughes report of active rigs drilling for oil in the US, which had plummeted by the most ever during the latest week. It caused a bout of short covering that accelerated the gains. It was a truly phenomenal rally!

But the weekly rig count hasn’t dropped nearly enough to make a dent into production. It’s down 24% from its peak in October. During the last oil bust, it had dropped 60%. It’s way too soon to tell what impact it will have because for now, production of oil is still rising.

And that phenomenal three-day 20% rally imploded today when it came in contact with another reality: rising production, slack demand, and soaring crude oil inventories in the US.

The Energy Information Administration reported that these inventories (excluding the Strategic Petroleum Reserve) rose by another 6.3 million barrels last week to 413.1 million barrels – the highest level in the weekly data going back to 1982. Note the increasingly scary upward trajectory that is making a mockery of the 5-year range and seasonal fluctuations:

US-crude-oil-stocks-2015-02-04
And there is still no respite in sight.

Oil production in the US is still increasing and now runs at a multi-decade high of 9.2 million barrels a day. But demand for petroleum products, such as gasoline, dropped last week, according to the EIA, and so gasoline inventories jumped by 2.3 million barrels. Disappointed analysts, who’d hoped for a drop of 300,000 barrels, blamed the winter weather in the East that had kept people from driving (though in California, the weather has been gorgeous). And inventories of distillate, such as heating oil and diesel, rose by 1.8 million barrels. Analysts had hoped for a drop of 2.2 million barrels.

In response to this ugly data, WTI plunged $4.50 per barrel, or 8.5%, to $48.54 as I’m writing this. It gave up half of the phenomenal three-day rally in a single day.

Macquarie Research explained it this way:

In our experience, oil markets rarely exhibit V-shaped recoveries and we would be surprised if an oversupply situation as severe as the current one was resolved this soon. In fact, our balances indicate the absolute oversupply is set to become more severe heading into 2Q15.

Those hoping for a quick end to the oil glut in the US, and elsewhere in the world, may be disappointed because there is another principle at work – and that principle has already kicked in.

As the price has crashed, oil companies aren’t going to just exit the industry. Producing oil is what they do, and they’re not going to switch to selling diapers online. They’re going to continue to produce oil, and in order to survive in this brutal pricing environment, they have to adjust in a myriad ways.

“Efficiency and innovation, when price falls, it accelerates, because necessity is the mother of invention,” Michael Masters, CEO of Masters Capital Management, explained to FT Alphaville on Monday, in the middle of the three-day rally. “Even if the investment only spits out quarters, or even nickels, you don’t turn it off.”

Crude has been overvalued for over five years, he said. “Whenever the return on capital is in the high double digits, that’s not sustainable in nature.” And the industry has gotten fat during those years.

Now, the fat is getting trimmed off. To survive, companies are cutting operating costs and capital expenditures, and they’re shifting the remaining funds to the most productive plays, and they’re pushing 20% or even 30% price concessions on their suppliers, and the damage spreads in all directions, but they’ll keep producing oil, maybe more of it than before, but more efficiently.

This is where American firms excel: using ingenuity to survive. The exploration and production sector has been through this before. And those whose debts overwhelm them – and there will be a slew of them – will default and restructure, wiping out stockholders and perhaps junior debt holders, and those who hold the senior debt will own the company, minus much of the debt. The groundwork is already being done, as private equity firms and hedge funds offer credit to teetering oil companies at exorbitant rates, with an eye on the assets in case of default.

And these restructured companies will continue to produce oil, even if the price drops further.

So Masters said that, “in our view, production will not decrease but increase,” and that increased production “will be around a lot longer than people are forecasting right now.”

After the industry goes through its adjustment process, focused on running highly efficient operations, it can still scrape by with oil at $45 a barrel, he estimated, which would keep production flowing and the glut intact. And the market has to appreciate that possibility.


Rigs Down By 21% Since Start Of 2015
Permian Basin loses 37 rigs first week in February

by Trevor Hawes

The number of rigs exploring for oil and natural gas in the Permian Basin fell 37 this week to 417, according to the weekly rotary rig count released Friday by Houston-based oilfield service company Baker Hughes.

This week’s count marked the ninth-consecutive decrease for the Permian Basin. The last time Baker Hughes reported a positive rig-count change was Dec. 5, when 568 rigs were reported. Since then, the Permian Basin has shed 151 rigs, a decrease of 26.58 percent.

For the year, the Permian Basin has shed 113 rigs, or 21.32 percent.

In District 8, which includes Midland and Ector counties, the rig count fell 19 this week to 256. District 8 has shed 58 rigs, 18.47 percent, this year.

Texas lost 41 rigs this week for a statewide total of 654. The Lone Star State has 186 fewer rigs since the beginning of the year, a decrease of 22.14 percent.

In other major Texas basins, there were 168 rigs in the Eagle Ford, down 10; 43 in the Haynesville, unchanged; 39 in the Granite Wash, down one; and 19 in the Barnett, unchanged.

The Haynesville shale is the only major play in Texas to have added rigs this year. The East Texas play started 2015 with 40 rigs.

At this time last year, there were 483 rigs in the Permian Basin and 845 in Texas.

In the U.S., there were 1,456 rigs this week, a decrease of 87. There were 1,140 oil rigs, down 83; 314 natural gas rigs, down five; and two rigs listed as miscellaneous, up one.

By trajectory, there were 233 vertical drilling rigs, down two; 1,088 horizontal drilling rigs, down 80; and 135 directional drilling rigs, down five.

The top five states by rig count this week were Texas; Oklahoma with 176, down seven; North Dakota with 132, down 11; Louisiana with 107, down one; and New Mexico with 78, down nine.

The top five basins were the Permian; the Eagle Ford; the Williston with 137, down 11; the Marcellus with 71, down four; and the Mississippian with 53, down one.

In the U.S., there were 1,397 rigs on land, down 85; nine in inland waters, down three; and 50 offshore, up one. There were 48 rigs in the Gulf of Mexico, up one.

Canada’s rig count fell 13 this week to 381. There were 184 oil rigs, down 16; 197 natural gas rigs, up three; and zero rigs listed as miscellaneous, unchanged. Canada had 621 rigs a year ago this week, a difference of 240 rigs compared to this week’s count.

The number of rigs exploring for oil and natural gas in the North America region, which includes the U.S. and Canada, fell 100 this week to 1,837. There were 2,392 rigs in North America last year.

Rigs worldwide

On Friday, Baker Hughes released its monthly international rig count for January. The worldwide total was 3,309 rigs. The U.S. ended January with 1,683 rigs, just more than half of all rigs worldwide.

The following are January’s rig counts by region, with the top three nations in each region in parentheses:

Africa: 132 (Algeria: 97; Nigeria: 19; Angola: 14)

Asia-Pacific: 232 (India: 108; Indonesia: 36; China offshore: 33)

Europe: 128 (Turkey: 37; United Kingdom offshore: 15; Norway: 13)

Latin America: 351 (Argentina: 106; Mexico: 69; Venezuela: 64)

Middle East: 415 (Saudi Arabia: 119; Oman: 61; Iraq: 60)

Odessa migrant worker 1937

Migrant oil worker and wife near Odessa, Texas 1937

Photographer: Dorothea Lange Created: May 1937 Location: OdessaTexas

Call Number: LC-USF34-016932 Source: MRT.com

Millennials Are Finally Entering The Home Buying Market

First-time buyers Kellen and Ben Goldsmith are shown in their new town home, which they purchased for $620,000 in Seattle’s Eastlake neighborhood. (Ken Lambert / Tribune News Service.  Authored by Kenneth R. Harney

Call them the prodigal millennials: Statistical measures and anecdotal reports suggest that young couples and singles in their late 20s and early 30s have begun making a belated entry into the home-buying market, pushed by mortgage rates in the mid-3% range, government efforts to ease credit requirements and deep frustrations at having to pay rising rents without creating equity.

Listen to Kathleen Hart, who just bought a condo unit with her husband, Devin Wall, that looks out on the Columbia River in Wenatchee, Wash.: “We were just tired of renting, tired of sharing with roommates and not having a place of our own. Finally the numbers added up.”

Erin Beasley and her fiance closed on a condo in the Capitol Hill area of Washington, D.C., in January. “With the way rents kept on going,” she said, “we realized it was time” after five years as tenants. “With renting, at some point you get really tired of it — you want to own, be able to make changes” that suit you, not some landlord.

Hart and Beasley are part of the leading edge of the massive millennial demographic bulge that has been missing in action on home buying since the end of the Great Recession. Instead of representing the 38% to 40% of purchases that real estate industry economists say would have been expected for first-timers, they’ve lagged behind in market share, sometimes by as much as 10 percentage points. But new signs are emerging that hint that maybe the conditions finally are right for them to shop and buy:

• Redfin, a national real estate brokerage, said that first-time buyers accounted for 57% of home tours conducted by its agents mid-month — the highest rate in recent years. Home-purchase education class requests, typically dominated by first-timers, jumped 27% in January over a year earlier. “I think it is significant,” Redfin chief economist Nela Richardson said. “They are sticking a toe in the water.”

• The Campbell/Inside Mortgage Finance HousingPulse Tracking Survey, which monthly polls 2,000 realty agents nationwide, reported that first-time buyer activity has started to increase much earlier than is typical seasonally. First-timers accounted for 36.3% of home purchases in December, according to the survey.

• Anecdotal reports from realty brokers around the country also point to exceptional activity in the last few weeks. Gary Kassan, an agent with Pinnacle Estate Properties in the Los Angeles area, says nearly half of his current clients are first-time buyers. Martha Floyd, an agent with McEnearney Associates Inc. Realtors in McLean, Va., said she is working with “an unusually high” number of young, first-time buyers. “I think there are green shoots here,” she said, especially in contrast with a year ago.

Assuming these early impressions could point to a trend, what’s driving the action? The decline in interest rates, high rents and sheer pent-up demand play major roles.

But there are other factors that could be at work. In the last few weeks, key sources of financing for entry-level buyers — the Federal Housing Administration and giant investors Fannie Mae and Freddie Mac — have announced consumer-friendly improvements to their rules. The FHA cut its punitively high upfront mortgage insurance premiums and Fannie and Freddie reduced minimum down payments to 3% from 5%.

Price increases on homes also have moderated in many areas, improving affordability. Plus many younger buyers have discovered the wide spectrum of special financing assistance programs open to them through state and local housing agencies.

Hart and her husband made use of one of the Washington State Housing Finance Commission’s buyer assistance programs, which provides second-mortgage loans with zero interest rates to help with down payments and closing costs. Dozens of state agencies across the country offer help for first-timers, often with generous qualifying income limits.

Bottom line: Nobody knows yet whether or how long the uptick in first-time buyer activity will last, but there’s no question that market conditions are encouraging. It just might be the right time.

kenharney@earthlink.net Distributed by Washington Post Writers Group. Copyright © 2015, LA Times

Why The Energy Selloff Is So Dangerous To The US Economy

https://i1.wp.com/www.topnews.in/files/job_losses.jpg
By Pam and Russ Martens:

Summary:

  • The global economy is producing far to much supply of most things, chasing to-little-demand from cash strapped consumers.
  • Prices of other industrial commodities are in steep decline.
  • Billions of dollars in investment capital are “risk off”.
  • An untold number of jobs spread across America are at risk.

Television pundits and business writers who are relentlessly pounding the table on how cheaper home heating oil and gas at the pump is going to provide a consumer windfall and ramp up economic activity have a simplistic view of how things work.

Oil-related companies in the U.S. now account for between 35 to 40 percent of all capital spending. Announcements of sharp cutbacks in capital spending and job reductions by these companies create big ripples, forcing related companies to trim their own budgets, revenue assumptions, and payrolls accordingly.

The announcements coming out of the oil patch are picking up steam and it’s not a pretty picture. Last week Schlumberger said it would eliminate 9,000 jobs, approximately 7 percent of its workforce, and trim capital spending by about $1 billion. Yesterday, Baker Hughes, the oilfield services company, announced 7,000 in job cuts, roughly 11 percent of its workforce, and expects the cuts to all come in the first quarter. Baker Hughes also announced a 20 percent reduction in capital spending. This morning, the BBC is reporting that BHP Billiton will cut 40 percent of its U.S. shale operations, reducing its number of rigs from 26 to 16 by the end of June.

When Big Oil cuts capital spending, we’re not talking about millions of dollars or even hundreds of millions of dollars; we’re talking billions. Last month, ConocoPhillips announced it had set its capital budget for 2015 at $13.5 billion, a reduction of 20 percent. Smaller players are also announcing serious cutbacks. Yesterday Bonanza Creek Energy said it would cut its capital spending by 36 to 38 percent.

Other big industrial companies in the U.S. are also impacted by the sharp slump in oil, which has shaved almost 60 percent off the price of crude in just six months. As the oil majors scale back, it reduces the need for steel pipes. U.S. Steel has announced that it will lay off approximately 750 workers at two of its pipe plants.

On January 15, the Federal Reserve Bank of Kansas City released a dire survey of what’s ahead in its “Fourth Quarter Energy Survey.” The survey found: “The future capital spending index fell sharply, from 40 to -59, as contacts expected oil prices to keep falling. Access to credit also weakened compared to the third quarter and a year ago.  Credit availability was expected to tighten further in the first half of 2015.” About half of the survey respondents said they were planning to cut spending by more than 20 percent while about one quarter of respondents expect cuts of 10 to 20 percent.

The impact of all of this retrenchment is not going unnoticed by sophisticated stock investors, as reflected in the major U.S. stock indices. On days when there is a notable plunge in the price of crude, the markets are following in lockstep during intraday trading. Yes, the broader stock averages continued to set new highs during the early months of the crude oil price decline in 2014 but that was likely due to the happy talk coming out of the Fed. It is also useful to recall that the Dow Jones Industrial Average traveled from 12,000 to 13,000 between March and May 2008 before entering a plunge that would take it into the 6500 range by March 2009.

Both the Federal Open Market Committee (FOMC) and Fed Chair Janet Yellen have assessed the plunge in oil prices as not of long duration. The December 17, 2014 statement from the FOMC and Yellen in her press conference the same day, characterized the collapse in energy prices as “transitory.” The FOMC statement said: “The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

If oil were the only industrial commodity collapsing in price, the Fed’s view might be more credible. Iron ore slumped 47 percent in 2014; copper has slumped to prices last seen during the height of the financial crisis in 2009. Other industrial commodities are also in decline.

A slowdown in both U.S. and global economic activity is also consistent with global interest rates on sovereign debt hitting historic lows as deflation takes root in a growing number of our trading partners. Despite the persistent chatter from the Fed that it plans to hike rates at some point this year, the yield on the U.S. 10-year Treasury note, a closely watched indicator of future economic activity, has been falling instead of rising. The 10-year Treasury has moved from a yield of 3 percent in January of last year to a yield of 1.79 percent this morning.

All of these indicators point to a global economy with far too much supply and too little demand from cash-strapped consumers. These are conditions completely consistent with a report out this week from Oxfam, which found the following:

“In 2014, the richest 1% of people in the world owned 48% of global wealth, leaving just 52% to be shared between the other 99% of adults on the planet. Almost all of that 52% is owned by those included in the richest 20%, leaving just 5.5% for the remaining 80% of people in the world. If this trend continues of an increasing wealth share to the richest, the top 1% will have more wealth than the remaining 99% of people in just two years.”

Crude Oil (WTI) Trading Versus the Dow Jones Industrial Average, December 1, 2014 Through January 12, 2015

Midland Texas, Hunkering Down For The Oil Bust

 Oilfield worker on a rigOilfield worker on a rig
Active pumping rig located on Highway 385 south of Odessa, photographed Tuesday, Sept. 24, 2014. James Durbin/Reporter-Telegram.  Source: MRT.com 

MIDLAND — With oil prices plummeting by more than 50 percent since June, the gleeful mood of recent years has turned glum here in West Texas as the frenzy of shale oil drilling has come to a screeching halt.

Every day, oil companies are decommissioning rigs and announcing layoffs. Small firms that lease equipment have fallen behind in their payments.

In response, businesses and workers are getting ready for the worst. A Mexican restaurant has started a Sunday brunch to expand its revenues beyond dinner. A Mercedes dealer, anticipating reduced demand, is prepared to emphasize repairs and sales of used cars. And people are cutting back at home, rethinking their vacation plans and cutting the hours of their housemaids and gardeners.

Dexter Allred, the general manager of a local oil field service company, began farming alfalfa hay on the side some years ago in the event that oil prices declined and work dried up. He was taking a cue from his grandfather, Homer Alf Swinson, an oil field mechanic, who opened a coin-operated carwash in 1968 — just in case.

“We all have backup plans,” Allfred said with a laugh. “You can be sure oil will go up and down, the only question is when.”

Indeed, to residents here in the heart of the oil patch, booms and busts go with the territory.

“This is Midland and it’s just a way of life,” said David Cristiani, owner of a downtown jewelry store, who keeps a graph charting oil prices since the late 1990s on his desk to remind him that the good times do not last forever. “We are always prepared for slowdowns. We just hunker down. They wrote off the Permian Basin in 1984, but the oil will always be here.”

It is at times like these that Midland residents recall the wild swings of the 1980s, a decade that began with parties where people drank Dom Pérignon out of their cowboy boots. Rolls-Royce opened a dealership, and the local airport had trouble finding space to park all the private jets.

By the end of the decade, the Rolls-Royce dealership was shut and replaced by a tortilla factory, and three banks had failed.

There has been nothing like that kind of excess over the past five years, despite the frenzy of drilling across the Permian Basin, the granddaddy of U.S. oil fields. Set in a forsaken desert where tumbleweed drifts through long-forgotten towns, the region has undergone a renaissance in the last four years, with horizontal drilling and fracking reaching through multiple layers of shale stacked one over the other like a birthday cake.

But since the Permian Basin rig count peaked at around 570 last September, it has fallen to below 490, and local oil executives say the count will probably go down to as low as 300 by April unless prices rebound.

The last time the rig count declined as rapidly was in late 2008 and early 2009, when the price of oil fell from more than $140 to under $40 a barrel because of the financial crisis.

Unlike traditional oil wells, which cannot be turned on and off so easily, shale production can be cut back quickly, and so the field’s output should slow considerably by the end of the year.

The Dallas Federal Reserve recently estimated that the falling oil prices and other factors will reduce job growth in Texas overall from 3.6 percent in 2014 to as low as 2 percent this year, or a reduction of about 149,000 jobs created.

Midland’s recent good fortune is plain to see. The city has grown in population from 108,000 in 2010 to 140,000 today, and there has been an explosion of hotel and apartment construction. Companies like Chevron and Occidental are building new local headquarters. Real estate values have roughly doubled during the past five years, according to Mayor Jerry Morales.

The city has built a new fire station and recruited new police officers with the infusion of new tax receipts, which increased by 19 percent from 2013 to 2014 alone. A new $14 million court building is scheduled to break ground next month.

But the city has also put away $39 million in a rainy-day fund for the inevitable oil bust.

“This is just a cooling-off period,” Morales said. “We will prevail again.”

Expensive restaurants are still full and traffic around the city can be brutal. Still, everyone seems to sense that the pain is coming, and they are preparing for it.

“We are responding to survive, so that we may once again thrive when we come out the other side,” said Steven H. Pruett, president and chief executive of Elevation Resources, a Midland-based oil exploration and production company. “Six months ago there was a swagger in Midland and now that swagger is gone.”

Pruett’s company had six rigs running in early December but now has only three. It will go down to one by the end of the month, even though he must continue to pay a service company for two of the rigs because of a long-term contract.

The other day Pruett drove to a rig outside of Odessa he feels compelled to park to save cash, and he expressed concern that as many as 50 service workers could eventually lose their jobs.

But the workers themselves seemed stoic about their fortunes, if not upbeat.

“It’s always in the back of your mind — being laid off and not having the security of a regular job,” said Randy Perry, a tool-pusher who makes $115,000 a year, plus bonuses, managing the rig crews. But Perry said he always has a backup plan because layoffs are so common — even inevitable.

Since graduating from high school a decade ago, he has bought several houses in East Texas and fixed them up, doing the plumbing and electrical work himself. At age 29 with a wife and three children, he currently has three houses, and if he is let go, he says he could sell one for a profit he estimates at $50,000 to $100,000.

Just a few weeks ago, he and other employees received a note from Trent Latshaw, the head of his company, Latshaw Drilling, saying that layoffs may be necessary this year.

“The people of the older generation tell the young guys to save and invest the money you make and have cash flow just in case,” Perry said during a work break. “I feel like everything is going to be OK. This is not going to last forever.”

The most nervous people in Midland seem to be the oil executives who say busts may be inevitable, but how long they last is anybody’s guess.

Over a lavish buffet lunch recently at the Petroleum Club of Midland, the talk was woeful and full of conspiracy theories about how the Saudis were refusing to cut supplies to vanquish the surging U.S. oil industry.

“At $45 a barrel, it shuts down nearly every project,” Steve J. McCoy, Latshaw Drilling’s director of business development, told Pruett and his guests. “The Saudis understand and they are killing us.”

Pruett nodded in agreement, adding, “They are trash-talking the price of oil down.”

“Everyone has been saying ‘Happy New Year,’” Pruett continued. “Yeah, some happy new year.”

Midland Texas Posts Largest Percentage Gain In Employment Again

Down town Midland TX, financial center of the Permian Basin.  Article Source: Midland Reporter – Telegram

For the second straight month, Midland showed the nation’s largest over-the-year percentage gain in employment, according to figures released last week by the Bureau of Labor Statistics.

Midland reported a 6.2 percent increase in employment during the month of November. The number of employed increased from 95,200 to 96,000. Odessa (a drilling town next door to Midland) was second in the nation with a growth rate of 4.7 percent.

Midland also bettered its position among the metropolitan statistical areas with the lowest unemployment rates. In October, Midland was tied for fifth with a 2.5 percent jobless rate. In November, with the rate dropping to 2.3 percent, Midland was ranked fourth. Lincoln, Nebraska, took home the top spot with a 2.1 percent rate. Makato, Minnesota, and Fargo, North Dakota, tied for second at 2.2 percent.

There were 14 MSAs with unemployment rates at or below 3 percent during the month of November, including Odessa at 2.8 percent. There were 34 MSAs at 3.5 percent or below.

The following are the lowest unemployment rates in the nation during the month of November, according to the Bureau of Labor Statistics:

  • Lincoln, Nebraska, 2.1
  • Mankato, Minnesota, 2.2
  • Fargo, North Dakota, 2.2
  • Midland 2.3
  • Bismarck, North Dakota, 2.5
  • Ames, Iowa, 2.5
  • Logan, Utah, 2.5
  • Iowa City, Iowa, 2.6
  • Rochester, Minnesota, 2.6
  • Grand Forks, North Dakota, 2.7
  • Sioux Falls, South Dakota, 2.7
  • Odessa 2.8
  • Minneapolis, St. Paul, 3.0
  • Omaha, Nebraska, 3.0

Lowest rates from October:

Bismarck, North Dakota, 2.0; Fargo, North Dakota, 2.2; Lincoln, Nebraska, 2.3. Also: Midland 2.5

Lowest rates from September:

Bismarck, North Dakota 2.1; Fargo, North Dakota 2.3; Midland 2.6

Lowest rates from August:

Bismarck, North Dakota 2.2, Fargo North Dakota 2.4; Midland 2.8.

Lowest rates from July:

Bismarck, North Dakota, 2.4; Sioux Falls, South Dakota, 2.7; Fargo, North Dakota, 2.8; Midland 2.9.

Lowest rates from June:

Bismarck, North Dakota, 2.6, Midland 2.9, Fargo, North Dakota, 3.0.

Lowest rates from May:

Bismarck, North Dakota, 2.2, Fargo, North Dakota, 2.5, Logan, Utah, 2.5, Midland 2.6.

Lowest rates from April:

Midland 2.3, Logan, Utah 2.5, Bismarck, North Dakota 2.6, Ames, Iowa 2.7.

Lowest rates from March:

Midland 2.7, Houma-Bayou Cane-Thibodaux, La. 3.1, Bismarck, N.D. 3.1, Odessa 3.3, Fargo, N.D. 3.3, Ames, Iowa 3.3, Burlington, Vt. 3.3

Lowest rates from February:

Houma-Bayou Cane-Thibodaux, La. 2.8; Midland 3.0; Lafayette, La. 3.1

Lowest rates from January:

Midland 2.9; Logan, Utah 3.3; Bismarck, N.D. 3.4

Lowest rates from December:

Bismarck, N.D. 2.8; Logan, Utah 2.8; Midland 2.8

20 Stunning Facts About Energy Jobs In The US

https://i2.wp.com/www.paradinerecruiting.com/wp-content/uploads/2014/07/oil-jobs.jpgby Tyler Durden

For all those who think the upcoming carnage to the shale industry will be “contained” we refer to the following research report from the Manhattan Institute for Policy Research:

  • The United States is now the world’s largest and fastest-growing producer of hydrocarbons. It has surpassed Saudi Arabia in combined oil and natural gas liquids output and has now surpassed Russia, formerly the top producer, in natural gas. [ZH: that’s about to change]
  • The increased production of domestic hydrocarbons not only employs people directly but also radically reduces the drag on growth and job formation associated with America’s trade deficit.
  • As the White House Council of Economic Advisers noted this past summer: “Every barrel of oil or cubic foot of gas that we produce at home instead of importing abroad means more jobs, faster growth, and a lower trade deficit.” [the focus now is not on the oil produced at home, which is set to plunge, but the consumer “tax cut” from plunging oil prices]
  • Since 2003, more than 400,000 jobs have been created in the direct production of oil & gas and some 2 million more in indirect employment in industries such as transportation, construction, and information services associated with finding, transporting, and storing fuels from the new shale bounty.
  • All told, about 10 million Americans are employed directly and indirectly in a broad range of businesses associated with hydrocarbons.
  • There are 16 states with more than 150,000 people employed in hydrocarbon-related activities. Even New York, which continues to ban the production of shale oil & gas, is seeing job benefits in a range of support and service industries associated with shale development in adjacent Pennsylvania.

  • Direct employment in the oil & gas industry had been declining for 30 years but has recently reversed course, with the availability of new technologies to develop shale fields. Nearly 300,000 direct oil & gas jobs have been created following the 2003 nadir in that sector’s direct employment.
  • The five super-major oil companies—Exxon, BP, Chevron, Shell, Conoco—that operate in the U.S. account for only 10 percent of Americans working directly in the oil & gas business.
  • Meanwhile, more than 20,000 other firms are directly involved in the oil & gas industry, and they produce over 75 percent of America’s oil & gas output. The median independent oil & gas firm has fewer than 15 employees. (Note that these data exclude gasoline stations, which employ nearly 1 million people and are overwhelmingly owned by individuals or small businesses.)
  • As in the oil & gas industry, most Americans are employed by firms with fewer than 500 employees. Small businesses not only employ half of all American workers but also generate nearly half the nation’s economic output. Young firms tend to be small firms; and young firms tend to emerge disproportionately in areas of rapid growth or new opportunities—such as in and around America’s shale fields.

  • A broad array of small and midsize oil & gas companies are propelling record economic and jobs gains—not just in the oil fields but across the economy. The enormous expansion in employment, exports, and tax revenues from the domestic oil & gas revolution is largely attributable to a core and defining feature of America: small businesses.
  • The oil & gas sector boom creates “induced” and energy-related jobs. For every direct job, there are, on average, three jobs created in industries such as housing, retail, education, health care, food services, manufacturing, and construction.
  • In the 10 states at the epicenter of oil & gas growth, overall statewide employment gains have greatly outpaced the national average. There we see the ripple-out effect on overall (not just oil & gas) employment. The shale boom’s broad jobs benefits are most visible in North Dakota and Texas, of course, where overall state employment growth in all sectors has vastly outpaced U.S. job recovery. Similarly, in the other states that have experienced recent growth in hydrocarbon production—notably, Pennsylvania, Colorado, Louisiana, Oklahoma, Wyoming—statewide overall (again, not just oil & gas) employment growth has also outpaced the U.S. recovery.
  • In addition to the direct and induced jobs, America is beginning to see the economic and jobs impact of a renaissance in energy-intensive parts of the manufacturing sector, from plastics and chemicals to fertilizers. Examples include an Egyptian firm planning a $1 billion fertilizer plant in Iowa and a South Korean tire company with an $800 million plan for a Tennessee plant. Germany’s BASF recently announced expansion of its American investments, including production and research. BASF calculated that its German operations’ energy bill would be $700 million a year lower if it could pay American prices for energy
  • The Marcellus shale fields in Pennsylvania were responsible for enabling statewide double-digit job growth in 2010 and 2011 and now account for more than one-fifth of that state’s manufacturing jobs. For every $1 that the Marcellus industry spends in the state, $1.90 of total economic output is generated.
  • The typical wage effect of the oil & gas revolution is most clearly visible in Texas. In the 23 counties atop the Eagle Ford shale, average wages for all citizens have grown by 14.6 percent annually since 2005, compared with the 6.8 and 6.3 percent average for Texas and the U.S., respectively, over the same period. The top five counties in the Eagle Ford shale have experienced an average 63 percent annual rate of wage growth. These are the kinds of wage effects sought in every state and by every worker.

  • Given the persistent, slow job recovery from the Great Recession, there could not be a more important time in modern history to find ways to foster more small businesses of all kinds, given that they are not only the core engine for growth but also frequently grow rapidly.

Punchline #1:

  • The $300–$400 billion overall annual economic gain from the oil & gas boom has been greater than the average annual GDP growth of $200–$300 billion in recent years—in other words, the economy would have continued in recession if it were not for the unplanned expansion of the oil & gas sector.

Punchline #2:

  • Hydrocarbon jobs have provided a greater single boost to the U.S. economy than any other sector, without requiring any special taxpayer subsidies—instead generating tax receipts from individual incomes and business growth.

And the final punchline:

  • The National Association of Manufacturers estimated that the shale revolution will lead to 1 million manufacturing jobs over the coming decade. Manufacturing jobs pay nearly 30 percent more than the industrial average and generate $1.48 of economic activity for every $1 spent, making manufacturing the highest economic multiplier of all industrial sectors.

Sorry, not anymore.

Now, thanks to John Kerry’s “secret pact“, and America’s close “ally” in the middle-east, Saudi Arabia whose “mission” it no longer to bankrupt Russia but to crush America’s shale industry, the only question surround the only bright spot for America’s economy over the past 6 years is how long before most of the marginal producers file Chapter 11, or 7.

Texas: Recession In 2015?

https://i2.wp.com/i.imwx.com/web/news/2012/january/snow-txdrillrig-iwit-mlallison-440x297-010911.jpgby Josh Young

Summary

  • Texas is by far the largest producer of oil in the US.
  • Oil production represents a disproportionate portion of Texas’s economy.
  • With oil prices down 45%, oil’s share of Texas GDP may fall 50% or more.
  • Unlike Russia and other countries, Texas cannot depreciate its own currency, magnifying the economic effect.

Texas is the largest oil producer in the US. And oil prices are down almost 50% in the past 4 months. Yet nowhere in the news do we hear about the risk of Texas entering a recession. The facts and figures below should concern investors in securities with economic exposure to the Texas economy. The risk is real.

As seen in the below chart by the EIA, Texas is the largest oil producing state in the US, producing 3x as much oil as the next largest producing state.

In September, Texas produced 3.23 million barrels of oil per day. This compares to 1.1 million barrels of oil per day produced in the second largest oil producing state, North Dakota, and much smaller quantities by other traditional oil producing states such as Alaska, California, and Oklahoma. And by comparison, Russia produces 10.9 million barrels per day.

Quantifying the value of this production, at $100 oil, that would be $323 million worth of oil produced per day, or $118 billion of oil produced per year. With the current price of oil hovering around $55 per barrel, that same oil production is only worth $178 million per day, or $65 billion. This is a loss of $53 billion of oil sales revenue just in the state of Texas.

This $53 billion in lost revenues compares to Texas’s GDP of $1.4 trillion in 2013 – it would be 3.8% of the State’s GDP, which is now “missing” due to oil prices having fallen. This is only the direct loss to the state – the indirect loss is likely several times as much. Direct oilfield activity is slowing down dramatically, as oil producing companies cut their capital expenditure budgets for 2015. Oilfield services stocks (NYSEARCA:OIH) are already down 37% from their peak earlier this year in anticipation of an activity slowdown. And for every job lost on a rig or in an oil company’s office, there are several additional jobs that may be lost, from the gas station manager to the sales clerk at a store to the front desk worker at a hotel.

The oil industry is unusual in that both the upstream independent producers and the service companies tend to outspend their cash flow, typically on local (to Texas) goods and services, on everything from drill pipe to rig manufacturing to catering. This means that for every dollar of lost oil sales from the lower oil price, there may be several dollars less spent across the Texas economy. This could be devastating for the Texas economy, and has not yet been widely discussed in the financial media.

To see an extreme example of the impact of lower oil prices on an economy tied to oil production, we can look at Russia (NYSEARCA:RSX). The Russian economy is more oil dependent than Texas’s. Russia’s GDP was $2.1 trillion in 2013. This compares to Texas’s GDP of $1.4 trillion. So Russia produces 3.3x as much oil as Texas, but only has 1.5x the GDP. So on a direct basis, assuming “ceteris paribus” conditions, a $1 decline in the price of oil would have 2.2x the impact to the economy of Russia as to the economy of Texas.

So what is happening in Russia? Already, the ruble has dropped in value by 50% in the past year. And numerous sources are calling for a severe recession in 2015. This would be expected, considering the high portion of the GDP that is attributable to oil production.

However, Russia has an advantage that Texas does not have. It has its own currency. While a 50% drop in a currency may not sound great if you’re looking to spend that currency elsewhere, it is crucial if you are an exporter and your primary export just dropped in price by 45%. The ruble denominated impact of the drop in the price of oil is a mere 10%. Unfortunately, for Texas, the dollar denominated drop in oil is 45%. So despite the lower economic exposure to oil, Texas does not have the benefit of a falling currency to buffer the blow of lower oil prices.

It may get even worse. With less drilling activity, oil production growth in Texas may slow, and eventually may decline. Depending on the speed of this slowdown, Texas could even see production decline by the end of 2015. This is because most of the new production has been coming from fracking unconventional wells, which can decline in production by as much as 80% in the first year. Production growth has required an increasing number of wells drilled, and has been funded with 100% of oil company cash flow along with hundreds of billions of dollars of equity and debt over the past few years. With the recent crash in oil stock prices (NYSEARCA: XOP) and in oil company bonds (NYSEARCA: JNK), oil drillers may be forced to spend within cash flow, and that cash flow will be down at least 45% in 2015 if the oil price stays on the path projected in the futures market.

All of this means that in 2015, Texas oil wells could be producing less than the 3.23 million barrels of oil per day it was producing in September 2014, and their owners could be receiving 45% less revenue per barrel produced. Again applying an economic multiplier, the results could be devastating. And without the cushion of a weak currency that benefits countries like Russia, it is hard to see how Texas could avoid a recession in 2015 if the price of oil stays near its current low levels.

“Houston, You Have A Problem” – Texas Is Headed For A Recession Due To Oil Crash, JPM Warns

https://i1.wp.com/i.qkme.me/3rq0zl.jpg
by
Tyler Durden

It was back in August 2013, when there was nothing but clear skies ahead of the US shale industry that we asked “How Much Is Oil Supporting U.S. Employment Gains?” The answer we gave:

The American Petroleum Institute said last week the U.S. oil and natural gas sector was an engine driving job growth. Eight percent of the U.S. economy is supported by the energy sector, the industry’s lobbying group said, up from the 7.7 percent recorded the last time the API examined the issue. The employment assessment came as the Energy Department said oil and gas production continued to make gains across the board. With the right energy policies in place, API said the economy could grow even more. But with oil and gas production already at record levels, the narrative over the jobs prospects may be failing on its own accord…. The API’s report said each of the direct jobs in the oil and natural gas industry translated to 2.8 jobs in other sectors of the U.S. economy. That in turn translates to a total impact on U.S. gross domestic product of $1.2 trillion, the study found.

Two weeks ago we followed up with an article looking at “Jobs: Shale States vs Non-Shale States” in which we showed the following chart:

And added the following:

According to a new study, investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence.  The Perryman Group estimates that the industry as a whole generates an economic stimulus of almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs across the nation. 

The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

 

Another way of visualizing the impact of the shale industry on the US economy comes courtesy of this chart from the Manhattan Institute which really needs no commentary:

The Institute had this commentary to add:

The jobs recovery since the 2008 recession has been the slowest of any post recession recovery in the U.S. since World War II. The number of people employed has yet to return to the 2007 level. The country has suffered a deeper and longer-lasting period of job loss than has followed any of the ten other recessions since 1945.

There has, however, been one employment bright spot: jobs in America’s oil & gas sector and related industries. Since 2003, more than 400,000 jobs have been created in the direct production of oil & gas and some 2 million more in indirect employment in industries such as transportation, construction, and information services associated with finding, transporting, and storing fuels from the new shale bounty.

In addition, America is seeing revitalized growth and jobs in previously stagnant sectors of the economy, from chemicals production and manufacturing to steel and even textiles because of access to lower cost and reliable energy.

The surge in American oil & gas production has become reasonably well-known; far less appreciated are two key features, which are the focus of this paper: the widespread geographic dispersion of the jobs created; and the fact that the majority of the jobs have been created not in the ranks of the Big Oil companies but in small businesses, even more widely dispersed.

Fast forward to today when we are about to learn that Newton’s third law of Keynesian economics states that every boom, has an equal and opposite bust.

Which brings us to Texas, the one state that more than any other, has benefited over the past 5 years from the Shale miracle. And now with crude sinking by the day, it is time to unwind all those gains, and give back all those jobs. Did we mention: highly compensated, very well-paying jobs, not the restaurant, clerical, waiter, retail, part-time minimum-wage jobs the “recovery” has been flooded with.

Here is JPM’s Michael Feroli explaining why Houston suddenly has a very big problem.

  • In less than five years Texas’ share of US oil production has gone from around 25% to over 40%
  • By some measures, the oil intensity of the Texas economy looks similar to what it was in the mid-1980s
  • The 1986 collapse in oil prices led to a painful regional recession in Texas
  • While the rest of the country looks to benefit from cheap oil, Texas could be headed for recession

The collapse in oil prices will create winners and losers, both globally and here in the US. While we expect the country, overall, will be a net beneficiary from falling oil prices, two states look like they will bear the brunt of the pain: North Dakota and Texas. Given its much larger size, the prospect of a recession in Texas could have some broader reverberations. 

By now, most people are familiar with the growth of the fossil fuel industry in places like Pennsylvania and Ohio. However, that has primarily been a natural gas story. The renaissance of US crude oil production has been much more concentrated: over 90% of the growth in the past five years has been in North Dakota and Texas; with Texas alone accounting for 67% of the increase in the nation’s crude output over that period.

In the first half of 1986, crude oil prices fell just over 50%. At the end of 1985, the unemployment rate in Texas was equal to that in the nation as a whole; at the end of 1986 it was 2.6%- points higher than the national rate. There are some reasons to think that it may not be as bad this time around, but there are even better reasons not to be complacent about the risk of a regional recession in Texas.

Geography of a boom

The well-known energy renaissance in the US has occurred in both the oil and natural gas sectors. Some states that are huge natural gas producers have limited oil production: Pennsylvania is the second largest gas producing state but 19th largest oil producer. The converse is also true: North Dakota is the second largest crude producer but 14th largest gas producer. However, most of the economic data as it relates to the energy sector, employment, GDP, etc, often lump together the oil and gas extraction industries. Yet oil prices have collapsed while natural gas prices have held fairly steady. To understand who is vulnerable to the decline in oil prices  specifically we turn to the EIA’s state-level crude oil production data.

The first point, mentioned at the outset, is that Texas, already a giant, has become a behemoth crude producer in the past few years, and now accounts for over 40% of US production. However, there are a few states for which oil is a relatively larger sector (as measured by crude production relative to Gross State Product): North Dakota, Alaska, Wyoming, and New Mexico. For two other states, Oklahoma and Montana, crude production is important, though somewhat less so than for Texas. Note, however, that these are all pretty small states: the four states where oil is more important to the local economy than Texas have a combined GSP that is only 16% of the Texas GSP. Finally, there is one large oil producer, California, which is dwarfed by such a huge economy that its oil intensity is actually below the national average, and we would expect it, like the country as a whole, to benefit from lower oil prices.

Texas-sized challenges

As discussed above, Texas is unique in the country as a huge economy and a huge oil producer. When thinking about the challenges facing the Texas economy in 2015 it may be useful, as a starting point, to begin with the oil price collapse of 1986. Then, like now, crude oil prices collapsed around 50% in the space of a few short months. As noted in the introduction, the labor market response was severe and swift, with the Texas unemployment rate rising 2.0%-points in the first three months of 1986 alone. Following the hit to the labor market, the real estate market suffered a longer, slower, burn, and by the end of 1988 Texas house prices were down over 14% from their peak in early 1986 (over the same period national house prices were up just over 14%). The last act of this tragedy was a banking crisis, as several hundred Texas banks failed, with peak failures occurring in 1988 and 1989.

How appropriate is it to compare the challenges Texas faces today to the ones they faced in 1986? The natural place to begin is by getting a sense of the relative energy industry intensity of Texas today versus 1986. Unfortunately, the GSP-by-industry data have a definitional break in 1997, but splicing the data would suggest a similar share of the oil and gas sector in Texas GSP now and in 1985: around 11%. Employment in the mining and logging sector (which, in Texas, is overwhelmingly dominated by the oil and gas sector) was around 3.7% in 1985 and is 2.7% now. This is consistent with a point we have been making in the national context: the oil and gas sector is very capital-intensive, and increasingly so. Even so, as the 1986 episode demonstrated, there do seem to be sizable multiplier effects on non-energy employment. Finally, there does not exist capital spending by state data, but at the national level we can see the flip side of the increasing capital intensive nature of energy: oil and gas related cap-ex was 0.58% of GDP in 4Q85, and is 0.98% of GDP now.

Given this, what is the case for arguing that this time is different, and the impact will be smaller than in 1986? One is that now, unlike in 1986, natural gas prices haven’t moved down in sympathy with crude oil prices, and the Texas recession in 1986 may have owed in part also to the decline in gas prices. Another is that, as noted above, the employment share is somewhat lower, and thus the income hit will be felt more by capital-holders – i.e. investors around the country and the world. Finally, unlike 1986, the energy industry is experiencing rapid technological gains, pushing down the energy extraction cost curve.

While these are all valid, they are not so strong as to signal smooth sailing for the Texas economy. Financially, oil is a fair bit more important than gas for Texas, both now and in 1986, with a dollar value two to three times as large. Moreover, while energy employment may be somewhat smaller now, we are not talking about night and day. The current share is about 3/4ths what it was in 1986. (Given the higher capital intensity, there are some reasons to think employment may be greater now in sectors outside the traditional oil and gas sectors, such as pipeline and heavy engineering construction).

As we weigh the evidence, we think Texas will, at the least, have a rough 2015 ahead, and is at risk of slipping into a regional recession. Such an outcome could bring with it the usual collateral damage that occurs in a slowdown. Housing markets have been hot in Texas. Although affordability in Texas looks good compared to the national average, it always does; compared to its own history, housing in some major Texas metro areas looks quite dear, suggesting a risk of a pull-back in the real estate market.

The national economy performed quite well in 1986, in spite of the Texas recession. We expect the US economy will perform well next year too , though some  regions – most notably Texas – could significantly under perform the national average.

* * *
So perhaps it is finally time to add that footnote to the “unambiguously good” qualified when pundits describe the oil crash: it may be good for everyone… except Texas which is about to enter a recession. And then Pennsylvania. And then North Dakota. And then Colorado. And then West Virginia. And then Alaska. And then Wyoming. And then Oklahoma. And then Montana, and so on, until finally we find just where the new equilibrium is following the exodus of hundreds of thousands of the best-paying jobs created during the “recovery” offset by minimum-wage waiters, bartenders, retail workers and temps.

BofA Analyst Credits Falling Oil Prices for Lower Mortgage Rates

https://i2.wp.com/www.syntheticoilchangeprice.com/wp-content/gallery/cheap-oil-change/cheap_oil_change_hero.jpgby Phil Hall

The precipitous drop in global oil prices has created a domino effect that led to a new decline in lower mortgage rates, according to a report by Chris Flanagan, a mortgage rate specialist at Bank of America Merrill Lynch.

“The oil collapse of 2014 appears to have been a key driver [in declining mortgage rates],” stated Flanagan in his report, which was obtained by CBS Moneywatch. “Further oil price declines could lead the way to sub-3.5 percent mortgage rates.”

Flanagan applauded this development, noting that the reversal of mortgage rates might propel housing to a stronger recovery.

“We have maintained the view that 4 percent mortgage rates are too high to allow for sustainable recovery in housing,” he wrote. Flanagan also theorized that if rates fell into 3.25 percent to 3.5 percent range, it would boost “supply from both refinancing and purchase mortgage channels.”

Flanagan’s report echoes the sentiments expressed by Frank Nothaft, Freddie Mac’s chief economist, who earlier this week identified the link between oil prices and housing.

“The recent drop in oil prices has been an unexpected boon for consumers’ pocketbooks and most businesses,” Nothaft stated. “Economic growth has picked up over the final nine months of 2014 and lower energy costs are expected to support growth of about 3 percent for the U.S. in 2015. Therefore we expect the housing market to continue to strengthen with home sales rising to their best sales pace in eight years, national house price indexes up, and rental markets continuing to display low vacancy rates and the highest level of new apartment completions in 25 years.”

But not everyone is expected to benefit from this development. A report issued last week by the Houston Association of Realtors forecast a 10 percent to 12 percent drop in home sales over the next year, owing to a potential slowdown in job growth for the Houston market’s energy industry if oil prices continue to plummet.

Oil & Gas Stocks: ‘Stability At The Bottom’ May Be A Positive Sign

https://i0.wp.com/www.avidtrader.com/wordpress/wp-content/uploads/2012/10/oil_and_gas.jpgby Richard Zeits

Summary:

  • The article provides “correction scorecards” by stock and by group versus commodities.
  • In the past two weeks, oil & gas stocks firmed up, despite the continued slide in the price of oil.
  • Small- and mid-capitalization oil-focused E&Ps were the strongest winners.
  • Emerging markets Oil Majors and Upstream MLPs were the worst performers.

During the two weeks since my previous update, stocks in the Oil & Gas sector demonstrated what an optimist might interpret as “stability at the bottom.” The net effect of another sequence of high-amplitude intraday moves was a slight recovery from the two weeks ago levels across the vast majority of segments and stock groups, as shown on the chart below. It should be no surprise that those groups that had declined the most were also the biggest gainers in the past two weeks.

Most notable is the fact that the descend trend in the Oil & Gas stocks was interrupted (and even marginally reversed) in spite of the new lows posted by the price of oil. One could try to interpret this performance as an indication that the current price levels already discount the market’s fear that the oil price paradigm has shifted. This stability may also indicate that the wave of forced liquidations by hedge funds and in individual margin accounts has run its course and the worst part of this correction may be already behind us.

Even though this recent stock price “stability” is a welcome development, it provides little consolation to investors in the Oil & Gas sector who still see their positions trading far below the peak levels achieved last summer. The correction scorecard graph below summarizes average “peak-to-current” performance by individual stocks that are grouped together by sector and size. Individual stock performance is provided in full detail in the spreadsheets at the end of this note.

Mid- and small-capitalization stocks, in both Upstream and Oil Service segments, remain the worst performing groups, now trading at an average discount to each individual stock’s recent peak price of over 40%, a staggering decline. Large-capitalization E&P independents and large-capitalization oil service stocks are trading at a 20%-24% average discount.

Emerging Markets Oil Majors Post A Strong Decline:

Emerging markets Oil Majors were one of the worst performing categories during the past two weeks:

Petrobras (NYSE:PBR) continued to slide down, moving 12% down since my previous update. Petrobras stands out as one of the most disappointing Oil Majors in terms of stock performance in the past five years, having lost a staggering three-quarters of its value during that period. The company’s market capitalization currently stands at only $62 billion.

· Lukoil (OTCPK:LUKOY) and Petrochina (NYSE:PTR) are other examples of strong declines in the past two weeks, with the stocks losing 8% and 7%, respectively. Lukoil’s performance may in fact be interpreted as “solid,” given the continued deterioration of Russia’s political and credit risk.

A strong contrast is the performance of the three oil super-majors – Exxon (NYSE:XOM), Chevron (NYSE:CVX) and Shell (NYSE:RDS.A) – that gained ~2% during the past two weeks and remain the best performing group in the Oil & Gas sector. I have argued in my earlier notes that, given the combined $0.9 trillion market capitalization of these three stocks, the resilient performance by the Super-majors has effectively isolated the correction in the Oil & Gas sector from the broader markets. From a fundamental perspective, the Super-majors are characterized by very low financial leverage, high proportion of counter-cyclical production sharing contracts (“PSAs”) and the effective hedge from downstream assets, which limits their exposure to the oil price decline.

Small-Capitalization E&P Stocks Bounce Back:

After a dramatic underperformance, small- and mid-capitalization E&P stocks posted meaningful gains in the past two weeks. However, in most cases the recovery is “a drop in the bucket,” given that high-percentage moves are measured off price levels that sometimes are a fraction of recent peak prices. The sector remains a menu of bargains for those investors who believe in a recovery in oil prices.

  • Enerplus (NYSE:ERF): +20%
  • Northern Oil & Gas (NYSEMKT:NOG): +17%
  • Concho Resources (NYSE:CXO): +15%
  • Approach Resources (NASDAQ:AREX): +48%
  • Goodrich Petroleum (NYSE:GDP): +24%
  • Synergy Resources (NYSEMKT:SYRG): +15%
  • Penn Virginia (NYSE:PVA): +17%
  • Comstock Resources (NYSE:CRK): +25%

E&P MLPs Retreat:

Upstream MLPs were one of the exceptions in the E&P sector, declining by an average of 4% in the past two weeks. The largest Upstream MLP, Linn Energy (NASDAQ:LINE) and its sister entity LinnCo(NASDAQ:LNCO), are again trading close to their lows, after having enjoyed a strong bounce a month ago. The previously very wide gap in relative performance between Upstream MLPs and other Upstream equities has contracted substantially which, arguably, makes sense given that both categories of companies participate in the same business, irrespective of the corporate envelope.

Oil & Gas Sector Correction Scorecards:




The Next Housing Crisis May Be Sooner Than You Think

How we could fall into another housing crisis before we’ve fully pulled out of the 2008 one.

https://i0.wp.com/cdn.citylab.com/media/img/citylab/2014/11/RTR2LDPC/lead_large.jpgby Richard Florida

When it comes to housing, sometimes it seems we never learn. Just when America appeared to be recovering from the last housing crisis—the trigger, in many ways, for 2008’s grand financial meltdown and the beginning of a three-year recession—another one may be looming on the horizon.

There are at several big red flags.

For one, the housing market never truly recovered from the recession. Trulia Chief Economist Jed Kolko points out that, while the third quarter of 2014 saw improvement in a number of housing key barometers, none have returned to normal, pre-recession levels. Existing home sales are now 80 percent of the way back to normal, while home prices are stuck at 75 percent back, remaining undervalued by 3.4 percent. More troubling, new construction is less than halfway (49 percent) back to normal. Kolko also notes that the fundamental building blocks of the economy, including employment levels, income and household formation, have also been slow to improve. “In this recovery, jobs and housing can’t get what they need from each other,” he writes.

Americans are spending more than 33 percent of their income on housing.

Second, Americans continue to overspend on housing. Even as the economy drags itself out of its recession, a spate of reports show that families are having a harder and harder time paying for housing. Part of the problem is that Americans continue to want more space in bigger homes, and not just in the suburbs but in urban areas, as well. Americans more than 33 percent of their income on housing in 2013, up nearly 13 percent from two decades ago, according to newly released data from the Bureau of Labor Statistics (BLS). The graph below plots the trend by age.

Over-spending on housing is far worse in some places than others; the housing market and its recovery remain highly uneven. Another BLS report released last month showed that households in Washington, D.C., spent nearly twice as much on housing ($17,603) as those in Cleveland, Ohio ($9,061). The chart below, from the BLS report, shows average annual expenses on housing related items:

(Bureau of Labor Statistics)

The result, of course, is that more and more American households, especially middle- and working-class people, are having a harder time affording housing. This is particularly the case in reviving urban centers, as more affluent, highly educated and creative-class workers snap up the best spaces, particularly those along convenient transit, pushing the service and working class further out.

Last but certainly not least, the rate of home ownership continues to fall, and dramatically. Home ownership has reached its lowest level in two decades—64.4 percent (as of the third quarter of 2014). Here’s the data, from the U.S. Census Bureau:

(Data from U.S. Census Bureau)

Home ownership currently hovers from the mid-50 to low-60 percent range in some of the most highly productive and innovative metros in this country—places like San Francisco, New York, and Los Angeles. This range seems “to provide the flexibility of rental and ownership options required for a fast-paced, rapidly changing knowledge economy. Widespread home ownership is no longer the key to a thriving economy,” I’ve written.

What we are going through is much more than a generational shift or simple lifestyle change. It’s a deep economic shift—I’ve called it the Great Reset. It entails a shift away from the economic system, population patterns and geographic layout of the old suburban growth model, which was deeply connected to old industrial economy, toward a new kind of denser, more urban growth more in line with today’s knowledge economy. We remain in the early stages of this reset. If history is any guide, the complete shift will take a generation or so.

It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.

The upshot, as the Nobel Prize winner Edmund Phelps has written, is that it is time for Americans to get over their house passion. The new knowledge economy requires we spend less on housing and cars, and more on education, human capital and innovation—exactly those inputs that fuel the new economic and social system.

But we’re not moving in that direction; in fact, we appear to be going the other way. This past weekend, Peter J. Wallison pointed out in a New York Times op-ed that federal regulators moved back off tougher mortgage-underwriting standards brought on by 2010’s Dodd-Frank Act and instead relaxed them. Regulators are hoping to encourage more home ownership, but they’re essentially recreating the conditions that led to 2008’s crash.

Wallison notes that this amounts to “underwriting the next housing crisis.” He’s right: It’s time to impose stricter underwriting standards and encourage the dense, mixed-use, more flexible housing options that the knowledge economy requires.

During the depression and after World War II, this country’s leaders pioneered a series of purposeful and ultimately game-changing polices that set in motion the old suburban growth model, helping propel the industrial economy and creating a middle class of workers and owners. Now that our economy has changed again, we need to do the same for the denser urban growth model, creating more flexible housing system that can help bolster today’s economy.

https://i2.wp.com/www.thefifthestate.com.au/wp-content/uploads/2012/10/High_Density_Housing_____20120101_800x600.jpg
Dream housing for new economy workers
?

BLS: Midland Texas Again Posts Third Lowest Jobless Rate In Nation

https://i1.wp.com/www.eaglefordshalephotos.com/wp-content/uploads/2012/07/night-photo-pumpjack-and-power-lines-1024x653.jpg

Midland Reporter-Telegram

For the second straight month, Midland posted the third lowest unemployment rate in the nation, according to figures released Wednesday by the Bureau of Labor Statistics.

Bismarck, North Dakota, topped the list for the fourth straight month with a jobless rate of 2.1 percent. Fargo, North Dakota, was second at 2.3. Midland and Logan, Utah, tied for third at 2.6.

 

A total of 10 metropolitan statistical areas around the nation posted unemployment rates of 3.0 percent or lower. Midland was the lone MSA in Texas at or below 3.0.

Midland again ranked near the top of the list of MSAs in the nation when it came to percentage gain in employment. Midland’s 6.4 percent growth ranked second to Muncie, Indiana (8.9 percent). In September, Midland showed a work force 100,100, an increase of nearly 5,000 from September 2013.

The following are the lowest unemployment rates in the nation during the month of September, according to the Bureau of Labor Statistics.

Bismarck, North Dakota 2.1

Fargo, North Dakota 2.3

Midland 2.6

Logan, Utah 2.6

Sioux Falls, South Dakota 2.7

Grand Forks, North Dakota 2.8

Lincoln, Nebraska 2.8

Mankato, Minnesota 2.9

Rapid City, South Dakota 2.9

Billings, Montana 3.0

Lowest rates from August

Bismarck, North Dakota 2.2, Fargo North Dakota 2.4; Midland 2.8. Also: Odessa 3.4

July

Bismarck, North Dakota, 2.4; Sioux Falls, South Dakota, 2.7; Fargo, North Dakota, 2.8; Midland 2.9. Also: Odessa 3.6

June

Bismarck, North Dakota, 2.6, Midland 2.9, Fargo, North Dakota, 3.0. Also: Odessa 3.6

May

Bismarck, North Dakota, 2.2, Fargo, North Dakota, 2.5, Logan, Utah, 2.5, Midland 2.6. Also: Odessa 3.2

April

Midland 2.3, Logan, Utah 2.5, Bismarck, North Dakota 2.6, Ames, Iowa 2.7. Also: Odessa 2.9

March

Midland 2.7, Houma-Bayou Cane-Thibodaux, La. 3.1, Bismarck, N.D. 3.1, Odessa 3.3, Fargo, N.D. 3.3, Ames, Iowa 3.3, Burlington, Vt. 3.3

February

Houma-Bayou Cane-Thibodaux, La. 2.8; Midland 3.0; Lafayette, La. 3.1

January

Midland 2.9; Logan, Utah 3.3; Bismarck, N.D. 3.4

December

Bismarck, N.D. 2.8; Logan, Utah 2.8; Midland 2.8

Assisted-Living Complexes for Young People

https://i1.wp.com/www.cenozoico.com/wp-content/uploads/2013/12/Balcony-Appartment-Outdoor-Living-Room-Ideas-1024x681.jpg

by Dionne Searcey

One of the most surprising developments in the aftermath of the housing crisis is the sharp rise in apartment building construction. Evidently post-recession Americans would rather rent apartments than buy new houses.

When I noticed this trend, I wanted to see what was behind the numbers.

Is it possible Americans are giving up on the idea of home ownership, the very staple of the American dream? Now that would be a good story.

What I found was less extreme but still interesting: The American dream appears merely to be on hold.

Economists told me that many potential home buyers can’t get a down payment together because the recession forced them to chip away at their savings. Others have credit stains from foreclosures that will keep them out of the mortgage market for several years.

More surprisingly, it turns out that the millennial generation is a driving force behind the rental boom. Young adults who would have been prime candidates for first-time home ownership are busy delaying everything that has to do with becoming a grown-up. Many even still live at home, but some data shows they are slowly beginning to branch out and find their own lodgings — in rental apartments.

A quick Internet search for new apartment complexes suggests that developers across the country are seizing on this trend and doing all they can to appeal to millennials. To get a better idea of what was happening, I arranged a tour of a new apartment complex in suburban Washington that is meant to cater to the generation.

What I found made me wish I was 25 again. Scented lobbies crammed with funky antiques that led to roof decks with outdoor theaters and fire pits. The complex I visited offered Zumba classes, wine tastings, virtual golf and celebrity chefs who stop by to offer cooking lessons.

“It’s like an assisted-living facility for young people,” the photographer accompanying me said.

Economists believe that the young people currently filling up high-amenity rental apartments will eventually buy homes, and every young person I spoke with confirmed that this, in fact, was the plan. So what happens to the modern complexes when the 20-somethings start to buy homes? It’s tempting to envision ghost towns of metal and pipe wood structures with tumbleweeds blowing through the lobbies. But I’m sure developers will rehabilitate them for a new demographic looking for a renter’s lifestyle.

FHA Is Set To Return To Anti-House-Flipping Restrictions


House flippers buy run-down properties, fix them up and resell them quickly at a higher price. Above, a home under renovation in Amsterdam, N.Y. (Mike Groll / Associated Press)

Can you still do a short-term house flip using federally insured, low-down payment mortgage money? That’s an important question for buyers, sellers, investors and realty agents who’ve taken part in a nationwide wave of renovations and quick resales using Federal Housing Administration-backed loans during the last four years.

The answer is yes: You can still flip and finance short term. But get your rehabs done soon. The federal agency whose policy change in 2010 made tens of thousands of quick flips possible — and helped large numbers of first-time and minority buyers with moderate incomes acquire a home — is about to shut down the program, FHA officials confirmed to me.

In an effort to stimulate repairs and sales in neighborhoods hard hit by the mortgage crisis and recession, the FHA waived its standard prohibition against financing short-term house flips. Before the policy change, if you were an investor or property rehab specialist, you had to own a house for at least 90 days before reselling — flipping it — to a new buyer at a higher price using FHA financing. Under the waiver of the rule, you could buy a house, fix it up and resell it as quickly as possible to a buyer using an FHA mortgage — provided that you followed guidelines designed to protect consumers from being ripped off with hyper-inflated prices and shoddy construction.

Since then, according to FHA estimates, about 102,000 homes have been renovated and resold using the waiver. The reason for the upcoming termination: The program has done its job, stimulated billions of dollars of investments, stabilized prices and provided homes for families who were often newcomers to ownership.

However, even though the waiver program has functioned well, officials say, inherent dangers exist when there are no minimum ownership periods for flippers. In the 1990s, the FHA witnessed this firsthand when teams of con artists began buying run-down houses, slapped a little paint on the exterior and resold them within days — using fraudulent appraisals — for hyper-inflated prices and profits. Their buyers, who obtained FHA-backed mortgages, often couldn’t afford the payments and defaulted. Sometimes the buyers were themselves part of the scam and never made any payments on their loans — leaving the FHA, a government-owned insurer, with steep losses.

For these reasons, officials say, it’s time to revert to the more restrictive anti-quick-flip rules that prevailed before the waiver: The 90-day standard will come back into effect after Dec. 31.

But not everybody thinks that’s a great idea. Clem Ziroli Jr., president of First Mortgage Corp., an FHA lender in Ontario, says reversion to the 90-day rule will hurt moderate-income buyers who found the program helpful in opening the door to home ownership.

“The sad part,” Ziroli said in an email, “is the majority of these properties were improved and [located] in underserved areas. Having a rehabilitated house available to these borrowers” helped them acquire houses that had been in poor physical shape but now were repaired, inspected and safe to occupy.

Paul Skeens, president of Colonial Mortgage in Waldorf, Md., and an active rehab investor in the suburbs outside Washington, D.C., said the upcoming policy change will cost him money and inevitably raise the prices of the homes he sells after completing repairs and improvements. Efficient renovators, Skeens told me in an interview, can substantially improve a house within 45 days, at which point the property is ready to list and resell. By extending the mandatory ownership period to 90 days, the FHA will increase Skeens’ holding costs — financing expenses, taxes, maintenance and utilities — all of which will need to be added onto the price to a new buyer.

Paul Wylie, a member of an investor group in the Los Angeles area, says he sees “more harm than good by not extending the waiver. There are protections built into the program that have served [the FHA] well,” he said in an email. If the government reimposes the 90-day requirement, “it will harm those [buyers] that FHA intends to help” with its 3.5% minimum-down-payment loans. “Investors will adapt and sell to non-FHA-financed buyers. Entry-level consumers will be harmed unnecessarily.”

Bottom line: Whether fix-up investors like it or not, the FHA seems dead set on reverting to its pre-bust flipping restrictions. Financing will still be available, but selling prices of the end product — rehabbed houses for moderate-income buyers — are almost certain to be more expensive.

kenharney@earthlink.net. Distributed by Washington Post Writers Group. Copyright © 2014, Los Angeles Times

8 Major Reasons Why The Current Low Oil Price Is Not Here To Stay

https://i1.wp.com/media-cache-ak0.pinimg.com/736x/6b/92/8f/6b928fc7417ebd67ee2f64b26be053af.jpg

by Nathan’s Bulletin

Summary:

  • The slump in the oil price is primarily a result of extreme short positioning, a headline-driven anxiety and overblown fears about the global economy.
  • This is a temporary dip and the oil markets will recover significantly by H1 2015.
  • Now is the time to pick the gold nuggets out of the ashes and wait to see them shine again.
  • Nevertheless, the sky is not blue for several energy companies and the drop of the oil price will spell serious trouble for the heavily indebted oil producers.

Introduction:

It has been a very tough market out there over the last weeks. And the energy stocks have been hit the hardest over the last five months, given that most of them have returned back to their H2 2013 levels while many have dropped even lower down to their H1 2013 levels.

But one of my favorite quotes is Napoleon’s definition of a military genius: “The man who can do the average thing when all those around him are going crazy.” To me, you don’t have to be a genius to do well in investing. You just have to not go crazy when everyone else is.

In my view, this slump of the energy stocks is a deja-vu situation, that reminded me of the natural gas frenzy back in early 2014, when some fellow newsletter editors and opinion makers with appearances on the media (i.e. CNBC, Bloomberg) were calling for $8 and $10 per MMbtu, trapping many investors on the wrong side of the trade. In contrast, I wrote a heavily bearish article on natural gas in February 2014, when it was at $6.2/MMbtu, presenting twelve reasons why that sky high price was a temporary anomaly and would plunge very soon. I also put my money where my mouth was and bought both bearish ETFs (NYSEARCA:DGAZ) and (NYSEARCA:KOLD), as shown in the disclosure of that bearish article. Thanks to these ETFs, my profits from shorting the natural gas were quick and significant.

This slump of the energy stocks also reminded me of those analysts and investors who were calling for $120/bbl and $150/bbl in H1 2014. Even T. Boone Pickens, founder of BP Capital Management, told CNBC in June 2014 that if Iraq’s oil supply goes offline, crude prices could hit $150-$200 a barrel.

But people often go to the extremes because this is the human nature. But shrewd investors must exploit this inherent weakness of human nature to make easy money, because factory work has never been easy.

Let The Charts And The Facts Speak For Themselves

The chart for the bullish ETF (NYSEARCA:BNO) that tracks Brent is illustrated below:

And the charts for the bullish ETFs (NYSEARCA:USO), (NYSEARCA:DBO) and (NYSEARCA:OIL) that track WTI are below:

and below:

and below:

For the risky investors, there is the leveraged bullish ETF (NYSEARCA:UCO), as illustrated below:

It is clear that these ETFs have returned back to their early 2011 levels amid fears for oversupply and global economy worries. Nevertheless, the recent growth data from the major global economies do not look bad at all.

In China, things look really good. The Chinese economy grew 7.3% in Q3 2014, which is way far from a hard-landing scenario that some analysts had predicted, and more importantly the Chinese authorities seem to be ready to step in with major stimulus measures such as interest rate cuts, if needed. Let’s see some more details about the Chinese economy:

1) Exports rose 15.3% in September from a year earlier, beating a median forecast in a Reuters poll for a rise of 11.8% and quickening from August’s 9.4% rise.

2) Imports rose 7% in terms of value, compared with a Reuters estimate for a 2.7% fall.

3) Iron ore imports rebounded to the second highest this year and monthly crude oil imports rose to the second highest on record.

4) China posted a trade surplus of $31.0 billion in September, down from $49.8 billion in August.

Beyond the encouraging growth data coming from China (the second largest oil consumer worldwide), the US economy grew at a surprising 4.6% rate in Q2 2014, which is the fastest pace in more than two years.

Meanwhile, the Indian economy picked up steam and rebounded to a 5.7% rate in Q2 2014 from 4.6% in Q1, led by a sharp recovery in industrial growth and gradual improvement in services. And after overtaking Japan as the world’s third-biggest crude oil importer in 2013, India will also become the world’s largest oil importer by 2020, according to the US Energy Information Administration (EIA).

The weakness in Europe remains, but this is nothing new over the last years. And there is a good chance Europe will announce new economic policies to boost the economy over the next months. For instance and based on the latest news, the European Central Bank is considering buying corporate bonds, which is seen as helping banks free up more of their balance sheets for lending.

All in all, and considering the recent growth data from the three biggest oil consumers worldwide, I get the impression that the global economy is in a better shape than it was in early 2011. On top of that, EIA forecasts that WTI and Brent will average $94.58 and $101.67 respectively in 2015, and obviously I do not have any substantial reasons to disagree with this estimate.

The Reasons To Be Bullish On Oil Now

When it comes to investing, timing matters. In other words, a lucrative investment results from a great entry price. And based on the current price, I am bullish on oil for the following reasons:

1) Expiration of the oil contracts: They expired last Thursday and the shorts closed their bearish positions and locked their profits.

2) Restrictions on US oil exports: Over the past three years, the average price of WTI oil has been $13 per barrel cheaper than the international benchmark, Brent crude. That gives large consumers of oil such as refiners and chemical companies a big cost advantage over foreign rivals and has helped the U.S. become the world’s top exporter of refined oil products.

Given that the restrictions on US oil exports do not seem to be lifted anytime soon, the shale oil produced in the US will not be exported to impact the international supply/demand and lower Brent price in the short-to-medium term.

3) The weakening of the U.S. dollar: The U.S. dollar rose significantly against the Euro over the last months because of a potential interest rate hike.

However, U.S. retail sales declined in September 2014 and prices paid by businesses also fell. Another report showed that both ISM indices weakened in September 2014, although the overall economic growth remained very strong in Q3 2014.

The ISM manufacturing survey showed that the reading fell back from 59.0 in August 2014 to 56.6 in September 2014. The composite non-manufacturing index dropped back as well, moving down from 59.6 in August 2014 to 58.6 in September 2014.

(click to enlarge)

Source: Pictet Bank website

These reports coupled with a weak growth in Europe and a potential slowdown in China could hurt U.S. exports, which could in turn put some pressure on the U.S. economy.

These are reasons for caution and will most likely deepen concerns at the U.S. Federal Reserve. A rate hike too soon could cause problems to the fragile U.S. economy which is gradually recovering. “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” the U.S. central bank’s vice chairman, Stanley Fischer, said.

That being said, the US Federal Reserve will most likely defer to hike the interest rate planned to begin in H1 2015. A delay in expected interest rate hikes will soften the dollar over the next months, which will lift pressure off the oil price and will push Brent higher.

4) OPEC’s decision to cut supply in November 2014: Many OPEC members need the price of oil to rise significantly from the current levels to keep their house in fiscal order. If Brent remains at $85-$90, these countries will either be forced to borrow more to cover the shortfall in oil tax revenues or cut their promises to their citizens. However, tapping bond markets for financing is very expensive for the vast majority of the OPEC members, given their high geopolitical risk. As such, a cut on promises and social welfare programs is not out of the question, which will likely result in protests, social unrest and a new “Arab Spring-like” revolution in some of these countries.

This is why both Iran and Venezuela are calling for an urgent OPEC meeting, given that Venezuela needs a price of $121/bbl, according to Deutsche Bank, making it one of the highest break-even prices in OPEC. Venezuela is suffering rampant inflation which is currently around 50%, and the government currency controls have created a booming black currency market, leading to severe shortages in the shops.

Bahrain, Oman and Nigeria have not called for an urgent OPEC meeting yet, although they need between $100/bbl and $136/bbl to meet their budgeted levels. Qatar and UAE also belong to this group, although hydrocarbon revenues in Qatar and UAE account for close to 60% of the total revenues of the countries, while in Kuwait, the figure is close to 93%.

The Gulf producers such as the UAE, Qatar and Kuwait are more resilient than Venezuela or Iran to the drop of the oil price because they have amassed considerable foreign currency reserves, which means that they could run deficits for a few years, if necessary. However, other OPEC members such as Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room to maneuver to fund their budgets.

And now let’s see what is going on with Saudi Arabia. Saudi Arabia is too reliant on oil, with oil accounting for 80% of export revenue and 90% of the country’s budget revenue. Obviously, Saudi Arabia is not a well-diversified economy to withstand low Brent prices for many months, although the country’s existing sovereign wealth fund, SAMA Foreign Holdings, run by the country’s central bank, consisting mainly of oil surpluses, is the world’s third-largest, with assets totaling 737.6 billion US dollars.

This is why Prince Alwaleed bin Talal, billionaire investor and chairman of Kingdom Holding, said back in 2013: “It’s dangerous that our income is 92% dependent on oil revenue alone. If the price of oil decline was to decline to $78 a barrel there will be a gap in our budget and we will either have to borrow or tap our reserves. Saudi Arabia has SAR2.5 trillion in external reserves and unfortunately the return on this is 1 to 1.5%. We are still a nation that depends on the oil and this is wrong and dangerous. Saudi Arabia’s economic dependence on oil and lack of a diverse revenue stream makes the country vulnerable to oil shocks.”

And here are some additional key factors that the oil investors need to know about Saudi Arabia to place their bets accordingly:

a) Saudi Arabia’s most high-profile billionaire and foreign investor, Prince Alwaleed bin Talal, has launched an extraordinary attack on the country’s oil minister for allowing prices to fall. In a recent letter in Arabic addressed to ministers and posted on his website, Prince Alwaleed described the idea of the kingdom tolerating lower prices below $100 per barrel as potentially “catastrophic” for the economy of the desert kingdom. The letter is a significant attack on Saudi’s highly respected 79-year-old oil minister Ali bin Ibrahim Al-Naimi who has the most powerful voice within the OPEC.

b) Back in June 2014, Saudi Arabia was preparing to launch its first sovereign wealth fund to manage budget surpluses from a rise in crude prices estimated at hundreds of billions of dollars. The fund would be tasked with investing state reserves to “assure the kingdom’s financial stability,” Shura Council financial affairs committee Saad Mareq told Saudi daily Asharq Al-Awsat back then. The newspaper said the fund would start with capital representing 30% of budgetary surpluses accumulated over the years in the kingdom. The thing is that Saudi Arabia is not going to have any surpluses if Brent remains below $90/bbl for months.

c) Saudi Arabia took immediate action in late 2011 and early 2012, under the fear of contagion and the destabilisation of Gulf monarchies. Saudi Arabia funded those emergency measures, thanks to Brent which was much higher than $100/bbl back then. It would be difficult for Saudi Arabia to fund these billion dollar initiatives if Brent remained at $85-$90 for long.

d) Saudi Arabia and the US currently have a common enemy which is called ISIS. Moreover, the American presence in the kingdom’s oil production has been dominant for decades, given that U.S. petroleum engineers and geologists developed the kingdom’s oil industry throughout the 1940s, 1950s and 1960s.

From a political perspective, the U.S. has had a discreet military presence since 1950s and the two countries were close allies throughout the Cold War in order to prevent the communists from expanding to the Middle East. The two countries were also allies throughout the Iran-Iraq war and the Gulf War.

5) Geopolitical Risk: Right now, Brent price carries a zero risk premium. Nevertheless, the geopolitical risk in the major OPEC exporters (i.e. Nigeria, Algeria, Libya, South Sudan, Iraq, Iran) is highly volatile, and several things can change overnight, leading to an elevated level of geopolitical risk anytime.

For instance, the Levant has a new bogeyman. ISIS, the Islamic State of Iraq, emerged from the chaos of the Syrian civil war and has swept across Iraq, making huge territorial gains. Abu Bakr al-Baghdadi, the group’s figurehead, has claimed that its goal is to establish a Caliphate across the whole of the Levant and that Jordan is next in line.

At least 435 people have been killed in Iraq in car and suicide bombings since the beginning of the month, with an uptick in the number of these attacks since the beginning of September 2014, according to Iraq Body Count, a monitoring group tracking civilian deaths. Most of those attacks occurred in Baghdad and are the work of Islamic State militants. According to the latest news, ISIS fighters are now encamped on the outskirts of Baghdad, and appear to be able to target important installations with relative ease.

Furthermore, Libya is on the brink of a new civil war and finding a peaceful solution to the ongoing Libyan crisis will not be easy. According to the latest news, Sudan and Egypt agreed to coordinate efforts to achieve stability in Libya through supporting state institutions, primarily the military who is fighting against Islamic militants. It remains to be see how effective these actions will be.

On top of that, the social unrest in Nigeria is going on. Nigeria’s army and Boko Haram militants have engaged in a fierce gun battle in the north-eastern Borno state, reportedly leaving scores dead on either side. Several thousand people have been killed since Boko Haram launched its insurgency in 2009, seeking to create an Islamic state in the mainly Muslim north of Nigeria.

6) Seasonality And Production Disruptions: Given that winter is coming in the Northern Hemisphere, the global oil demand will most likely rise effective November 2014.

Also, U.S. refineries enter planned seasonal maintenance from September to October every year as the federal government requires different mixtures in the summer and winter to minimize environmental damage. They transition to winter-grade fuel from summer-grade fuels. U.S. crude oil refinery inputs averaged 15.2 million bopd during the week ending October 17. Input levels were 113,000 bopd less than the previous week’s average. Actually, the week ending October 17 was the eighth week in a row of declines in crude oil runs, and these rates were the lowest since March 2014. After all and given that the refineries demand less crude during this period of the year, the price of WTI remains depressed.

On top of that, the production disruptions primarily in the North Sea and the Gulf of Mexico are not out of the question during the winter months. Even Saudi Arabia currently faces production disruptions. For instance, production was halted just a few days ago for environmental reasons at the Saudi-Kuwait Khafji oilfield, which has output of 280,000 to 300,000 bopd.

7) Sentiment: To me, the recent sell off in BNO is overdone and mostly speculative. To me, the recent sell-off is primarily a result of a headline-fueled anxiety and bearish sentiment.

8) Jobs versus Russia: According to Olga Kryshtanovskaya, a sociologist studying the country’s elite at the Russian Academy of Sciences in Moscow, top Kremlin officials said after the annexation of Crimea that they expected the U.S. to artificially push oil prices down in collaboration with Saudi Arabia in order to damage Russia.

And Russia is stuck with being a resource-based economy and the cheap oil chokes the Russian economy, putting pressure on Vladimir Putin’s regime, which is overwhelmingly reliant on energy, with oil and gas accounting for 70% of its revenues. This is an indisputable fact.

The current oil price is less than the $104/bbl on average written into the 2014 Russian budget. As linked above, the Russian budget will fall into deficit next year if Brent is less than $104/bbl, according to the Russian investment bank Sberbank CIB. At $90/bbl, Russia will have a shortfall of 1.2% of gross domestic product. Against a backdrop of falling revenue, finance minister Anton Siluanov warned last week that the country’s ambitious plans to raise defense spending had become unaffordable.

Meanwhile, a low oil price is also helping U.S. consumers in the short term. However, WTI has always been priced in relation to Brent, so the current low price of WTI is actually putting pressure on the US consumers in the midterm, given that the number one Job Creating industry in the US (shale oil) will collapse and many companies will lay off thousands of people over the next few months. The producers will cut back their growth plans significantly, and the explorers cannot fund the development of their discoveries. This is another indisputable fact too.

For instance, sliding global oil prices put projects under heavy pressure, executives at Chevron (NYSE:CVX) and Statoil (NYSE:STO) told an oil industry conference in Venezuela. Statoil Venezuela official Luisa Cipollitti said at the conference that mega-projects globally are under threat, and estimates that more than half the world’s biggest 163 oil projects require a $120 Brent price for crude.

Actually, even before the recent fall of the oil price, the oil companies had been cutting back on significant spending, in a move towards capital discipline. And they had been making changes that improve the economies of shale, like drilling multiple wells from a single pad and drilling longer horizontal wells, because the “fracking party” was very expensive. Therefore, the drop of the oil price just made things much worse, because:

a) Shale Oil: Back in July 2014, Goldman Sachs estimated that U.S. shale producers needed $85/bbl to break even.

b) Offshore Oil Discoveries: Aside Petr’s (NYSE: PBR) pre-salt discoveries in Brazil, Kosmos Energy’s (NYSE: KOS) Jubilee oilfield in Ghana and Jonas Sverdrup oilfield in Norway, there have not been any oil discoveries offshore that move the needle over the last decade, while depleting North Sea fields have resulted in rising costs and falling production.

The pre-salt hype offshore Namibia and offshore Angola has faded after multiple dry or sub-commercial wells in the area, while several major players have failed to unlock new big oil resources in the Arctic Ocean. For instance, Shell abandoned its plans in the offshore Alaskan Arctic, and Statoil is preparing to drill a final exploration well in the Barents Sea this year after disappointing results in its efforts to unlock Arctic resources.

Meanwhile, the average breakeven cost for the Top 400 offshore projects currently is approximately $80/bbl (Brent), as illustrated below:

(click to enlarge)

Source: Kosmos Energy website

c) Oil sands: The Canadian oil sands have an average breakeven cost that ranges between $65/bbl (old projects) and $100/bbl (new projects).

In fact, the Canadian Energy Research Institute forecasts that new mined bitumen projects requires US$100 per barrel to breakeven, whereas new SAGD projects need US$85 per barrel. And only one in four new Canadian oil projects could be vulnerable if oil prices fall below US$80 per barrel for an extended period of time, according to the International Energy Agency.

“Given that the low-bearing fruit have already been developed, the next wave of oil sands project are coming from areas where geology might not be as uniform,” said Dinara Millington, senior vice president at the Canadian Energy Research Institute.

So it is not surprising that Suncor Energy (NYSE:SU) announced a billion-dollar cut for the rest of the year even though the company raised its oil price forecast. Also, Suncor took a $718-million charge related to a decision to shelve the Joslyn oilsands mine, which would have been operated by the Canadian unit of France’s Total (NYSE:TOT). The partners decided the project would not be economically feasible in today’s environment.

As linked above, others such as Athabasca Oil (OTCPK: ATHOF), PennWest Exploration (NYSE: PWE), Talisman Energy (NYSE: TLM) and Sunshine Oil Sands (OTC: SUNYF) are also cutting back due to a mix of internal corporate issues and project uncertainty. Cenovus Energy (NYSE:CVE) is also facing cost pressures at its Foster Creek oil sands facility.

And as linked above: “Oil sands are economically challenging in terms of returns,” said Jeff Lyons, a partner at Deloitte Canada. “Cost escalation is causing oil sands participants to rethink the economics of projects. That’s why you’re not seeing a lot of new capital flowing into oil sands.”

After all, helping the US consumer spend more on cute clothes today does not make any sense, when he does not have a job tomorrow. Helping the US consumer drive down the street and spend more at a fancy restaurant today does not make any sense, if he is unemployed tomorrow.

Moreover, Putin managed to avoid mass unemployment during the 2008 financial crisis, when the price of oil dropped further and faster than currently. If Russia faces an extended slump now, Putin’s handling of the last crisis could serve as a template.

In short, I believe that the U.S. will not let everything collapse that easily just because the Saudis woke up one day and do not want to pump less. I believe that the U.S. economy has more things to lose (i.e. jobs) than to win (i.e. hurt Russia or help the US consumer in the short term), in case the current low WTI price remains for months.

My Takeaway

I am not saying that an investor can take the plunge lightly, given that the weaker oil prices squeeze profitability. Also, I am not saying that Brent will return back to $110/bbl overnight. I am just saying that the slump of the oil price is primarily a result from extreme short positioning and overblown fears about the global economy.

To me, this is a temporary dip and I believe that oil markets will recover significantly by the first half of 2015. This is why, I bought BNO at an average price of $33.15 last Thursday, and I will add if BNO drops down to $30. My investment horizon is 6-8 months.

Nevertheless, all fingers are not the same. All energy companies are not the same either. The rising tide lifted many of the leveraged duds over the last two years. Some will regain quickly their lost ground, some will keep falling and some will cover only half of the lost ground.

I am saying this because the drop of the oil price will spell serious trouble for a lot of oil producers, many of whom are laden with debt. I do believe that too much credit has been extended too fast amid America’s shale boom, and a wave of bankruptcy that spreads across the oil patch will not surprise me. On the debt front, here is some indicative data according to Bloomberg:

1) Speculative-grade bond deals from energy companies have made up at least 16% of total junk issuance in the U.S. the past two years as the firms piled on debt to fund exploration projects. Typically the average since 2002 has been 11%.

2) Junk bonds issued by energy companies, which have made up a record 17% of the $294 billion of high-yield debt sold in the U.S. this year, have on average lost more than 4% of their market value since issuance.

3) Hercules Offshore’s (NASDAQ:HERO) $300 million of 6.75% notes due in 2022 plunged to 57 cents a few days ago after being issued at par, with the yield climbing to 17.2%.

4) In July 2014, Aubrey McClendon’s American Energy Partners LP tapped the market for unsecured debt to fund exploration projects in the Permian Basin. Moody’s Investors Service graded the bonds Caa1, which is a level seven steps below investment-grade and indicative of “very high credit risk.” The yield on the company’s $650 million of 7.125% notes maturing in November 2020 reached 11.4% a couple of days ago, as the price plunged to 81.5 cents on the dollar, according to Trace, the Financial Industry Regulatory Authority’s bond-price reporting system.

Due to this debt pile, I have been very bearish on several energy companies like Halcon Resources (NYSE:HK), Goodrich Petroleum (NYSE:GDP), Vantage Drilling (NYSEMKT: VTG), Midstates Petroleum (NYSE: MPO), SandRidge Energy (NYSE:SD), Quicksilver Resources (NYSE: KWK) and Magnum Hunter Resources (NYSE:MHR). All these companies have returned back to their H1 2013 levels or even lower, as shown at their charts.

But thanks also to this correction of the market, a shrewd investor can separate the wheat from the chaff and pick only the winners. The shrewd investor currently has the unique opportunity to back up the truck on the best energy stocks in town. This is the time to pick the gold nuggets out of the ashes and wait to see them shine again. On that front, I recommended Petroamerica Oil (OTCPK: PTAXF) which currently is the cheapest oil-weighted producer worldwide with a pristine balance sheet.

Last but not least, I am watching closely the situation in Russia. With economic growth slipping close to zero, Russia is reeling from sanctions by the U.S. and the European Union. The sanctions are having an across-the-board impact, resulting in a worsening investment climate, rising capital flight and a slide in the ruble which is at a record low. And things in Russia have deteriorated lately due to the slump of the oil price.

Obviously, this is the perfect storm and the current situation in Russia reminds me of the situation in Egypt back in 2013. Those investors who bought the bullish ETF (NYSEARCA: EGPT) at approximately $40 in late 2013, have been rewarded handsomely over the last twelve months because EGPT currently lies at $66. Therefore, I will be watching closely both the fluctuations of the oil price and several other moving parts that I am not going to disclose now, in order to find the best entry price for the Russian ETFs (NYSEARCA: RSX) and (NYSEARCA:RUSL) over the next months.

https://i0.wp.com/www.notevena.com/artwork/GICLEE/tn_TwoHeadsAreBetterThanOne.jpg

Petroamerica Oil: Welcome To The Cheapest Oil Producer Worldwide (Part 1)

By Nathan’s Bulletin in Seeking Alpha

Summary

  • Petroamerica was a fantastic buying opportunity at C$0.39 in August 2014.
  • The stock trades less than 1 times its 2014 EBITDA at the current price of C$0.25.
  • An once-in-a-lifetime buying opportunity is an understatement, and I do pound the table on the value this stock currently represents.

Introduction

Petroamerica Oil (OTCPK:PTAXF) was an exploration company a few years ago that managed to become a well-established oil producer in Colombia. Petroamerica is the definition of a cash cow with a rock solid balance sheet and working capital surplus of US$74 million (see Q2 2014 report) that can withstand any short-term and mid-term volatility of the oil price, as mentioned in my “Top Idea” article in late August 2014.

Aside the consistent production growth on a YOY basis, the company also managed to diversify its asset base while increasing significantly its RLI (reserves life index) pro forma the recent transformative acquisition of Suroco Energy. But this deal coincided with the overall correction of the energy sector and the market did not pay attention to it. So Petroamerica remained a grossly undervalued company at C$0.39 per share in late August 2014.

But Albert Einstein has said: “Two things are infinite: the universe and human stupidity. But I’m not sure about the former”. Einstein could not describe better the reason why Petroamerica has dropped over the last weeks, despite the fact it was already a fantastic buying opportunity at C$0.39. The stock was beaten out primarily by the herd mentality, and the fools abandoned the ship, creating an once-in-a-lifetime buying opportunity.

And believe it or not, the phrase “once-in-a-lifetime buying opportunity” is a vast understatement, because Petroamerica trades below 1 times its 2014 EBITDA at the current price of C$0.25 per share.

As such, I decided to pound the table on the value this company currently represents. Given that I compared Petroamerica primarily to its Colombian, Peruvian, Chilean and Brazilian peers in my “Top Idea” article, this time I will compare Petroamerica to other junior oil-weighted competitors (production up to 10,000 boepd) with onshore production and properties in Argentina, Africa and Middle East.

In Part 1, the peers are from Argentina, Nigeria and Kurdistan. In Part 2, the peers will be from other countries which are equally high risk jurisdictions. All these regions carry much higher geopolitical risk than Colombia’s, while the energy companies there receive Brent pricing.

The Irrational Valuation Is Beyond Any Comprehension

As mentioned above, Argentina, Kurdistan and Nigeria carry much higher geopolitical risk than Colombia’s. And there is no question about this, given the continued headwinds all the energy companies have been facing in these three countries on a permanent basis.

The nationalization fears always linger over Argentina during the last years primarily due to YPF’s (NYSE:YPF) nationalization by the Argentinean Government. These fears coupled with a non-business friendly environment have made several big energy companies dump their Argentinean assets to the local producers and exit Argentina. For instance, both Apache (NYSE:APA) and Gran Tierra Energy (NYSEMKT:GTE) sold their Argentinean assets recently and decided to focus their resources to safer areas. The deal will allow Gran Tierra to further focus on Colombia, Peru and Brazil, Gran Tierra’s CEO Dana Coffield said.

Also, Repsol (OTCQX:REPYY) sold its remaining Argentinean assets in May 2014 and exited Argentina too.

Kurdistan has been in the center of violence in the Middle East over the last ten years, let alone now due to the existence of ISIS (Islamic State of Iraq).

Meanwhile, the piracy and the illegal bunkering coupled with the frequent shutdowns, field pipeline and export facility losses have been hampering for years the smooth execution of the business plans of the Nigerian oil producers. This is why, several major players have sold their assets and have left Nigeria during the last years. They went to greener pastures because they were not able to handle all these headwinds anymore.

In contrast, a huge land rush is happening in the energy sector in Colombia, which is undergoing an evolution over the last years. The number of majors coming in Colombia has been increasing, thanks to several reasons that were analyzed in my latest “Top Idea” article (i.e. improved political and security climate with the funding help of the US).

After all, let’s see now Petroamerica’s peers from Argentina, Nigeria and Kurdistan:

1) Mart Resources (OTCPK:MAUXF).

2) Oryx Petroleum (OTC:ORXPF).

3) Eland Oil and Gas (OTC:ELOGF).

4) Apco Oil and Gas (NASDAQ:APAGF).

5) Americas Petrogas (OTCPK:APEOF).

6) Andes Energia (OTCPK:ANEGY).

7) President Energy (OTC:PPCGF).

I am a strong believer that many investors have never heard about most of these companies. And I am also absolutely sure that Petroamerica’s sellers over the last days are definitely among the investors who see most of these companies for the first time in their life.

Well, this does not surprise me and the ignorance has always been one of the primary factors leading to market inefficiency. As such, some more information about Petroamerica’s competitors is more than necessary:

1) Oryx Petroleum’s single producing asset is in Kurdistan, as shown below:

(click to enlarge)

“Source: Oryx website”

Oryx also has non-producing assets in Nigeria, Senegal and Congo, as shown below:

“Source: Oryx website”

“Source: Oryx website”

“Source: Oryx website”

2) Mart’s single-producing asset is the Umusadege field situated in Nigeria, as shown below:

“Source: Mart website”

3) Eland’s producing properties are in Nigeria, as illustrated below:

4) Apco’s producing properties are in Argentina (Neuquen Basin, Northwest Basin, San Jorge Basin, Austral Basin) and Colombia, as illustrated below:

(click to enlarge)

“Source: Apco website”

5) Americas Petrogas’ producing properties are in Argentina, as illustrated below:

“Source: Americas Petrogas website”

6) Andes’ producing properties are in Argentina while the company also has non-producing assets in Colombia, Brazil and Paraguay, as illustrated below:

(click to enlarge)

“Source: Andes website:

7) President’s main producing properties are in Argentina, where the company gets most of its production, as illustrated below:

“Source: President website”

President has also a small producing asset in the US and non-producing assets in Paraguay, as illustrated below:

“Source: President website”

and below:

“Source: President website”

I must also point out that:

1) I took into account the working capital surplus or deficiency to calculate the Net Debt and thereby the Enterprise Value accurately ($1 = C$1.11, 1GBP=$1.61).

2) I excluded the EV/2P Reserves key ratio. I did this because this is a backward-looking ratio referring to the companies’ reserves as of December 2013, while we are already in Q4 2014 and the companies have completed a significant part of their drilling programs.

3) The EBITDA estimates are based on a $90/bbl (Brent) scenario by year end.

That being said, I will proceed with the calculations on these two key metrics:

1) Per EV/Production: Here is the table with the first key metric:

Company EV($ million) Q4 2014Production

(boepd) (*)

EV———

Q4 2014

Production (*)

($/boepd)

AndesEnergia 350 1,600(100% light oil) 218,750
PresidentEnergy 90 600(~80% light oil & NGLs) 150,000
OryxPetroleum 880 (**) 10,000(100% light oil) 88,000
AmericasPetrogas 95 1,100(100% light oil) 86,364
MartResources 460 5,500(100% light oil) 83,636
Eland Oiland Gas 210 3,000(100% light oil) 70,000
Apco Oiland Gas 420 7,300(56% light oil & NGLs) 57,534
PetroamericaOil 125 7,400+(97% light/medium oil & NGLs) 16,892

(*): Estimate, based on the latest corporate guidance.

(**): Pro forma the offering of July 2014.

2) Per EV/EBITDA: Let’s check out now the table below with the second key metric:

Company EV($ million) 2014 EBITDA($ million) (*) EV———

2014 EBITDA

AndesEnergia 350 10 35
OryxPetroleum 880 (**) 35 25.14
Eland Oiland Gas 210 10 21
PresidentEnergy 90 10 9
AmericasPetrogas 95 15 6.33
Apco Oiland Gas 420 75 5.6
MartResources 460 140 3.29
PetroamericaOil 125 130 0.96

(*): Estimate, based on the latest production guidance.

(**): Pro forma the offering of July 2014.

My Takeaway

Hamsters and gerbills have short-term memories lasting a few hours. I think that the average investor’s memory is better than hamster’s. Reptiles and amphibians have memories lasting few months. And I believe that often the average investor’s memory is hardly better than reptiles’. As such, he forgets quickly without learning from his previous mistakes, and is always ready to throw again and again the baby out with the bath water. This is the case with Petroamerica, since I recommended it at C$0.39 per share in late August 2014.

Since late August 2014, the stock has dropped due to a combination of these reasons:

1) A temporary production disruption in the Putumayo Basin, where Suroco Energy has its producing property (Suroriente Block). As a result of this temporary production restriction, the updated guidance of 7,460 boepd in Q4 2014 was below original 2014 expectations. Nevertheless, it must be pointed out:

a) This temporary disruption did not take place in the Llanos Basin, where Petroamerica has its core producing properties.

b) Suroco’s properties were producing less than 30% of the total Petroamerica’s production.

c) Petroamerica has clearly stated that the production has resumed and normal production operations along with oil evacuation were restored in the Putumayo properties as of October 1, 2014.

d) The YOY production growth is still here, given that Petroamerica was producing 4,390 boepd in Q1 2013 and 6,400 boepd in Q1 2014. Based on the updated guidance of 7,460 boepd, the YOY production growth between Q1 2014 and Q4 2014 is almost 20%.

2) The correction of the oil price and the energy stocks.

3) A dwindling amount of 20 cent warrants holders sold. According to the presentation of September 2013 (slide 29), there were 32.85 million warrants as of August 2013, and according to the latest presentation (slide 23), there were only 9.15 million warrants left as of August 2014.

These warrants were issued as a sweetener for the 2015 note offering, when Petroamerica was a start-up business a few years ago. Those warrant holders have been exercising and cashing out over the last years.

4) The weak hands, the ignorant investors and the short-term traders sold too, running for the hills, so the drop accelerated. Most of them bought on the “Top Idea” article about Petroamerica and were getting shaken out.

The thing is that none of the sellers has realized why he is selling Petroamerica and whether there is a better value out there. None of the sellers has realized the big picture associated with Petroamerica’s peers in Colombia, as described in my “Top Idea” article. None of the sellers has realized the big picture associated with Petroamerica’s peers in Argentina, Africa, and Kurdistan, as described above.

And I am determined to present again the big picture with the help of another article (Part 2) over the next days, because Petroamerica currently is the cheapest oil-weighted producer among all the publicly-traded energy companies in the international markets.

There is not another oil producer that currently trades below 1 times its 2014 EBITDA, while having a pristine balance sheet. And given that my database includes all the publicly-traded energy companies in the US, Canada, Europe, Asia and Australia, I challenge all to write an article about a cheaper energy company with a better balance sheet than Petroamerica’s.

Last but not least:

1) My articles about Petroamerica (Top Idea, Part 1) are based on a relative valuation analysis. In other words, if Brent drops and remains at $90/bbl for many months, it will affect all Petroamerica’s peers that receive Brent pricing. If Brent drops and remains below $90/bbl for many months, it will not affect only Petroamerica’s top and bottom lines.

Based on this easy to understand fact, the current mind-blowing valuation gap between Petroamerica and its peers (Latin American, African, Middle East) is completely unjustifiable, no matter what the Brent pricing is. It does not play one single role whether Brent is at $100/bbl or at $90/bbl.

Petroamerica’s peers currently trade between 4 and 35 times their 2014 EBITDA, while Petroamerica currently trades below 1 times its EBITDA, at the current price of C$0.25 per share. And to be fair, Petroamerica deserves a premium compared to many of its peers, given that many of its peers are leveraged with worse balance sheets and operations in highly risky juridictions, as shown in both my Petroamerica-related articles.

To say it differently, while Petroamerica’s peers have been dropping over the last couple of weeks, Petroamerica should have risen all these days to catch up with its peers’ valuation, closing the tremendous valuation gap.

2) All my previous five energy picks from Colombia (C&C Energia, Petrominerales, Parex, Canacol, Suroco Energy) have risen between 70% and 160% since I recommended them. And Petroamerica Oil at C$0.39 per share was fundamentally better and cheaper than these five companies, let alone now at C$0.25 per share.

3) Three of my previous Colombian picks (C&C Energia, Petrominerales, Suroco Energy) were acquired between 4 and 6 times their EBITDA.

4) Just a few days ago, privately held Pluspetrol Resources agreed to buy Apco Oil and Gas for $427 million, which is 5.6 times its 2014 EBITDA. Apco operates primarily in Argentina and also has some producing Blocks in Colombia, as shown in the previous paragraph.

Apparently, the blindingly obvious is not blindingly obvious for the average investor, and this is why he is always doomed to lose in the stock market. Thanks to the average investor, the smart money makes easy money.

Disclaimer: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Midland Home Prices On The Rise Again

By Rye Druzin

Midland’s real estate prices have risen again after a one-month drop, according to data released by the Real Estate Center at Texas A&M University.

Median home prices rose $2,400 year-over-year for August, from $246,800 in 2013 to $249,200 in 2014. The number of homes sold also rose by 29, and the overall dollar value of sold homes rose by over $6 million, an almost 13 percent increase from August of last year, according to the data.

While median home sale prices have continued to rise, the range of home prices has also changed dramatically in the last 10 years. In 2006, homes priced below $100,000 made up 33.1 percent of the real estate market. In 2013, the last full year that data is available, homes worth less than $100,000 made up only 5.4 percent of Midland’s real estate market, an 83.6 percent decrease in market availability over nine years for homes priced under $100,000, according to the data.

The decrease in the number of cheaper homes on the market has been coupled with a massive increase in homes on the market worth more than $200,000. Since 2004, property priced more than $200,000 has grown from 21.6 percent of the market to 59.6 percent in 2013. Homes between $100,000 and $199,000 saw their share drop 10.7 percent to just over one-third of the real estate market, according to the data.

The rapid growth in prices has been attributed to the booming oil industry, which has brought to Midland and the Permian Basin thousands of jobs and a skyrocketing demand for homes. The growth has led to a severe housing shortage in Midland and also has driven construction of housing and apartment developments throughout Midland, especially in the north and west parts of the city.

More than 1,300 residential lots have been platted, and more than 2,300 apartment units built since January 2013, according to the city.

On the heels of……………

Home Values Up, Rank First In State: Sales volume tops record-high 200 in June

Home values in Midland grew by more than 23 percent year-over-year in June, pushing the Tall City’s median price back to the No. 1 slot statewide for the second time this year.

The volume of homes sold is traditionally strongest during summer months, but the number of transactions in June surged beyond the average and to the highest level in Midland’s documented history.

More than $70.8 million was either financed or spent on real estate purchases last month, about 55 percent more than June 2013, according to the latest data from the Real Estate Center at Texas A&M University.

The median home price last month was $283,100, as 208 single-family homes, townhouses and condominiums were sold. The sales volume grew about 14.3 percent year-over-year, up from 182 transactions in June last year.

Previously, the highest number of homes sold in one particular month was 202, recorded in August 2011.

No other Texas city recorded a higher June median home price than Midland, which hasn’t happened since January. The Tall City also broke its own record for highest median home price.

The new record tops the previous milestone, $251,500, by $31,600.

Midland’s growth mirrors the statewide trend. There were 29,412 home sales completed in Texas last month, the most since June 2006 when 31,431 transactions took place, the data show.

Additionally, the median home value statewide increased by about 7.1 percent year-over-year, up to a new Texas record: $193,700. The total value of home sales throughout the Lone Star State topped $7.4 billion last month, setting yet another record.

It’s less common to see a West Texas city boast such high home values, the Real Estate Center’s data indicate. Counties surrounding Austin, Houston and Dallas typically record the highest median home prices.

Collin County, near Dallas, ranked No. 1 in May for its relatively steep home prices. The area was still strong in June, boasting the third-most expensive homes in Texas.

Home values in Odessa are also among the highest in West Texas, yet still fall well below the median price in Midland. Last month, the median value of an Odessa home was $176,500.

Highest June home values statewide:

1. Midland — $283,100

2. Fort Bend County — $280,800

3. Collin County — $272,700

4. Montgomery County — $251,400

5. Austin — $249,800

More Than 200 Homes In Store For West, North Midland

Home construction

By Ryan Durzin

The city of Midland’s Planning and Zoning Commission approved three new phases of projects that will add more than 250 new homes to Midland’s burgeoning housing market within the next year, according to the developers.

D.R. Horton gained approval for a final plat of its Adobe Meadows Addition in the north and a zone change for their Legacy Addition development in the west. Combined, the two developments had more than 200 homes approved by the planning and zoning session.

The homes are being built at a time when Midlanders are experiencing skyrocketing rents and home prices. The median home price in Midland for July was $247,900, a 7.1 percent increase year-over-year from July 2013. Since July 2009, when home prices slumped due to the Great Recession, home prices for July have increased by 48.2 percent.

“D.R. Horton wouldn’t be doing two developments at the same time if they didn’t think that this was a market they could be in and do well in,” said Eric West, a civil engineer for Parkhill, Smith & Cooper working with D.R. Horton. “Certainly, we think that both of these neighborhoods are going to be neighborhoods that will serve the community well.”

According to West, the Adobe Addition is already moving into the second stage of building, while the Legacy Addition broke ground on its infrastructure in the spring. West said house construction will begin in the next few months. He said he expects Legacy to be completed sometime in the next two years.

The other development approved Monday was a zone change for the second phase of Daybreak Estates. The zone change of a 24-acre plot of land to the east of phase one of Daybreak Estates will make way for a second phase of 60-70 homes, according to Andrew Mellen of Midland’s Maverick Engineering.

Mellen said that phase one laid out 167 lots, four of which have been built and more than 40 have been sold. In all the project has four stages and when it is completed will have more than 500 homes.

Mellen did not want to guess when the development would be completed, but he said the first phase broke ground in the summer of 2013 and that phase two won’t start until December or January.

Midland, Texas Workforce Soars To Record Levels

Did you notice that Midland’s civilian labor force has topped 100,000? Oil Editor Mella McEwen reported this most recently in Tuesday’s edition, and all we have to say is: wow.

Most people who keep up with this type of information expected this day to come, but we still believe topping six figures this summer is significant because it happened so quickly.

One decade ago, according to city of Midland numbers, the city’s total population was around 100,000. Oh, how things have changed. McEwen reports that since July 2004 the Midland metropolitan statistical area’s labor force gained an estimated 35,214 people, according to the Texas Workforce Commission. Evidence of a turbo-charged economy can be seen as the MSA gained more than 24,000 workers since July of 2009.

We wish we could tell you how many people are in Midland and its MSA at this time. We don’t know. Estimates range from 125,000 to 140,000. Anything, it seems, is possible. What we do know are the facts.

The MSA gained more than 1,600 workers from June to July and more than 4,500 workers from July 2013 to July 2014. The city expects nearly 8,000 single-family lots or apartment units were or will be developed between 2013 and 2014. In 2015, that number should be around 3,667, according to the city. A growth rate of 4.5 percent to 5 percent — not in population but available workers — will offer challenges in terms of housing.

It’s likely that some of these workers have families, causing the number of students at MISD to increase. On Wednesday, MISD reported an enrollment of 24,072 — which is more than 1,000 greater than the figure reported to the Texas Education Agency at the end of October 2013.

However, we also think a bright spot will emerge. We need more workers to come to this area. We need workers to man the jails, build housing and develop other infrastructure, work in the restaurants, drive the buses and offer help in our stores, schools, etc. We need to replace those who have made their way into the oilfield. This newspaper is not going to be down on the oil industry’s ability to attract workers. We want a strong industry for the long term. We want our community’s leaders to keep a sense of urgency to get us through the short term and plan for the long term.

We have confidence Midlanders will get this right.

Midland’s Median Home Prices Fall In July

The Tall City still boasts third most expensive homes in Texas  Source: MRT.com

https://i1.wp.com/kwes.images.worldnow.com/images/17204226_BG1.jpg

Midland home values failed to live up to record growth during the early summer months, falling 12 percent move-over-month in July.

Still, the Tall City’s median home price of $247,900 grew more than 7 percent from last year as 214 single-family homes, townhouses and condominiums were sold, according to recent data from the Real Estate Center at Texas A&M University.

In all, about $58.7 million was either financed or spent on real estate purchases last month — a 17 percent drop from June but 21 percent more than July of last year — the data show.

June’s record price of $283,100 topped the previous milestone of $251,500, set in January of this year, according to the data. But last month’s price fell 12 percent — about $35,200 — from June.

Midland’s declining month-over-month home values mirrors the statewide trend. While the number of home sales completed in Texas last month remained steady, July’s record median price of $191,500 dropped 12.6 percent from the previous month.

Counties around Austin, Houston and Dallas typically report the highest median home prices, according to the Real Estate Center’s data.

Collin County, near Dallas, bumped the Tall City out of the No. 1 slot with its $270,500 home values in July, while Fort Bend’s median home price of $266,400 came in second.

While still below Midland, the data shows Odessa’s home values are among the highest in the region at $178,000, a slight growth over June.

Median home prices: TOP 5

  • Collin County: $270, 500
  • Fort Bend: $266, 400
  • Midland: $247,900
  • Austin: $247,000
  • Montgomery County: $246,700

REGION

  • Midland: $247,900
  • Odessa: $178,000
  • San Angelo: $162,900
  • Abilene: $146,300
  • Lubbock: $137,300

Source: Real Estate Center at Texas A&M University

Midland Unemployment Remains Below 3%

City’s labor force passes 100,000 for first time.  By Mella McEwen

Midland Sunset
Stability continues to dominate Midland’s labor market as summer progresses.

 

Midland’s unemployment rate inched up to 2.9 percent in July from 2.8 percent in June but is well below the 3.6 percent reported last July, the Texas Workforce Commission said Friday. Midland continues to report the state’s lowest unemployment, followed by Odessa at 3.6 percent.

For the first time, Midland’s civilian labor force crossed the 100,000 mark, with the commission putting the labor force at 100,121, up from 98,462 in June.

Midland Mayor Jerry Morales said Midlanders need to understand the city’s population is growing at a 3.5 percent to 4 percent annual rate. Normal growth rate for communities Midland’s size is 1 percent to 1.5 percent, he said.

With more than 100,000 residents at work, “we really need to work on housing, road infrastructure and annexing more land,” he said.

He said he is excited to see so many people working in the community and pleased that Midland has plentiful jobs.

“All industries are looking for all kinds of workers,” he said.

Willie Taylor, chief executive officer of Workforce Solutions Permian Basin, said there is a demand for a wide variety of jobs, from teachers to medical workers to truck drivers. The Permian Basin is “definitely” a job-seeker’s market, he said.

He said he is amazed at the continued growth, given the intense competition for workers.

“Look at the pipeline of potential workforce and work with our schools, our colleges, retired residents returning to the workforce, those recruited from the military,” Taylor said. “There’s a lot of competition and for us to grow as we have is amazing.

“Our biggest concern is making sure we have an adequate workforce.”

Job creation in Midland grew significantly, with 900 jobs being added from June to July for a 1 percent growth rate. Midland’s dominant industrial sector — mining, logging and transportation — continued to dominate job growth, adding 600 jobs from June to July for a 2.2 percent growth rate. Trade, transportation and utilities, financial activities, professional and business services and other services added 100 jobs each. The only loss was 100 jobs in leisure and hospitality. The remaining industrial sectors were unchanged.

For the 12 months between July 2013 and July 2014, Midland added  5,300 new jobs for a growth rate of 6.2 percent. Mining, logging and construction added 3,400 new jobs for a 13.9 percent growth rate. Trade, transportation and utilities added 700 new jobs during that time, followed by leisure and hospitality with 500 new jobs. The only job losses were in education and health services, down 300 jobs, and information, down 100 jobs.

Statewide, the unemployment rate was 5.1 percent, unchanged for the third consecutive month. The state added 46,600 seasonally adjusted non-farm jobs, the commission reported.

“Texas employers continue to propel the Texas economy’s expansion by adding 396,200 jobs over the last year, a 3.5 percent annual growth rate,” said Andres Alcantar, TWC chairman. “The Texas economic engine is strong, with every major industry posting positive annual growth in July.”

All major industries in Texas expanded last month, with professional and business services leading the way by adding 10,600 jobs in July.

“The professional and business services industry is thriving, with opportunities that range from legal advice and representation to security guards to landscaping,” said Commissioner Ronny Congleton. “Industries across the board are hiring, and that is good news for job seekers in Texas.”

Private employers added 42,400 jobs in July, said Commissioner Hope Andrade.

“Mining and logging posted an annual growth rate of 7.8 percent in July, which marked the 51st consecutive month of positive annual growth and underscored the industry’s role in the state’s overall economic success,” Andrade said.

While Midland had the state’s lowest unemployment, the highest was in McAllen-Edinburg-Mission at 9.9 percent.

Just The Facts:
Preliminary local jobless rates for July with June numbers in parentheses:

Midland 2.9 (2.8)

Odessa 3.6 (3.5)

Amarillo 4.1 (4.0)

Abilene 4.5 (4.4)

San Angelo 4.5 (4.3)

Austin-Round Rock-San Marcos 4.6 (4.4)

Victoria 4.6 (4.5)

College Station-Bryan 4.7 (4.6)

Lubbock 4.7 (4.5)

Longview 4.9 (4.8)

San Antonio-New Braunfels 5.2 (5.1)

Corpus Christi 5.4 (5.3)

Fort Worth-Arlington 5.4 (5.3)

Sherman-Denison 5.4 (5.3)

Dallas-Plano-Irving 5.5 (5.4)

Houston-Sugar Land-Baytown 5.5 (5.4)

Tyler 5.5 (5.4)

Wichita Falls 5.6 (5.4)

Waco 5.8 (5.6)

Laredo 6.3 (6.2)

Killeen-Temple-Fort Hood 6.4 (6.2)

Texarkana 6.5 (6.3)

El Paso 7.7 (7.6)

Beaumont-Port Arthur 8.3 (7.8)

Brownsville-Harlingen 8.9 (8.8)

McAllen-Edinburg-Mission 9.9 (9.6)