Sunday, November 29, 2015
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Saudi’s For The Save?


This morning was all set to be a real shit show. The kind of day that makes ol’ Cain want to slit his wrists and watch the sun set. But then, just before the open, Saudi Arabia came out with some stern words for the oil markets, saving them from impending demise.

You see, Saudi Arabia just wants a fair deal; and to be recognized as SUPREME MASTERS OF THE OIL MARKETS. That’s not too much to ask for, is it? That a country representing less than 0.5% of the global population should have the absolute authority to dictate prices of a plentiful commodity found (thanks to advances in technology) pretty much everywhere.

Saudi Arabia wants to be the Federal Reserve, so to speak, of oil. They know in their hearts that they and they alone should have the capability to make wild eyed predictions and scribble down their own off the wall paranoia, and have those things be taken for the indelible fact for which they are.

That’s why Saudi Arabia felt the need, earlier last year, to utterly destroy the oil markets. Because it was their God given right to be in charge of those oil markets, and if they can’t be then no one will. Why should it matter that the good people of Saudi Arabia would have been inarguably better off if they had just accepted change and moved on? Sure, their finances wouldn’t be in complete shambles, but they would also be down one MASTER OF THE UNIVERSE hat. And as any gentleman knows, there is no price too high for a good hat.

Particularly when such hat says “MASTER OF THE UNIVERSE” written across the top of it.

So Saudi Arabia had to almost bankrupt half the planet’s oil and gas reserves, you see. Much like American Idol, if no one is watching, are you really a good singer? I mean, even if your singing is terrible and you’re like 10 years past needing to have the show cancelled and all the talented producers have already left, better to demand those camera’s keep on rolling, no?

So today, Saudi Arabia saved the oil markets; and will proceed to save the oil markets via jawboning every time they come under duress from now on. Why? Well because if they’re the ones talking when oil goes up, then they are obviously in charge still (even if we all know damn well they aren’t).

And isn’t that what really matters? Not technological innovation or stability of market pricing or running deficits one fifth of your national GDP…but love. Love, and of course the rights of a theocratic monarchy operating in the 21st century to destroy at least $500 billion of oil and gas debt and wipe out a couple trillion in market cap by operating against their own self interests?

But hey, at least the Saudi’s get to keep their fucking hat.

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Week Is Almost Done


Today was not the follow through I had hoped for. Following yesterday’s rally, in both stocks and commodities, I had wanted today to run but it was cut short. Oil retreated, reaffirming that markets are quite content to keep oil range bound in the mid $40’s so that the sector stays on a path of imminent destruction.

As the saying goes, “The beatings will continue until morale improves.”

Gasoline inventory numbers showed a big drawdown, which sparked yesterday’s rally. Stocks at Cushing also declined by 748,000 barrels, although overall stocks grew by 4.1 million barrels. I am expecting to see the US inventory growth slow dramatically going into the holidays, with word that companies who have hit their operating budget are going to take a recess for the last month of the year.

Big news out of China today that they are increasing their child “rations” to 2 per couple. This is such commie nonsense, it’s hard to take it seriously. Such rules are written by megalomaniacs; so much arrogance goes into trying and restrict population the way China has done. It is a blessing that the outcome has been so terrifying for China’s ruling party; their culture values boys, so they have way too few girls. A sea of 20 year old men without the main thing that keeps young men from dabbling in revolution – family.

You don’t just switch off and fix that problem over night.

Finally, American politics is as awful as ever. The GOP debate last night was a debacle for CNBC, which has managed to disgrace itself in two separate journalistic professions now.

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Uncle Sam, Pissing In The Wind

Canada-Oil Train Derailment

Even the government of the United States of America now openly plots against me. The announcement this morning that the Strategic Petroleum Reserve would be sold down – during the most obvious buying opportunity in a century – is nothing short of a flagrant insult.

If there were any doubt remaining, then let there be none more; the world is conspiring against me in unison.

There is no reason to sell off the STRATEGIC Petroleum Reserve to raise fucking money. This is all about spitting in my eye while I am at my worst.

So help me, spirits of the stock market. Grant me Revenge! Or if not, then TO HELL VITH YOU!

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HCLP Misses On Earnings, Suspends Distribution


She moves through the darkness, one leg in front of the other, silently across the floor. The cool air wafts around her legs as she begins to climb the stairs. One, two, three… the stone makes hardly a sound; the clattering of footsteps cannot be heard.

The wood does not creak as she steps onto the landing. A light at the end of the hall peaks out of a doorway. She passes through it.

The foot rests in front of her, beneath the desk. Softly, she passes next to it, at the last moment letting her body rest against the flesh, rubbing slowly.

She purrs – a deep loud sound – then soundlessly arrives in Cain’s lap, flexing her claws one of the next before letting his hand stroke her head and long body.

I pass my fingertips through her long hair, ending by twirling the lynx shaped tufts with my forefinger and thumb. Then I turn back to what I was reading.

4:26 pm Hi-Crush Partners misses by $0.04, reports revs in-line; announces temporary distribution suspension (HCLP) :

Reports Q3 (Sep) earnings of $0.15 per share, excluding non-recurring items, $0.04 worse than the Capital IQ Consensus of $0.19; revenues fell 20.3% year/year to $81.5 mln vs the $80.9 mln Capital IQ Consensus.
The Partnership reiterated the guidance for capital expenditures in the range of $50-$55 million for 2015 of which $48 million was spent in the first nine months of the year.
Capital expenditures for 2016 are expected to be in the range of $15-$25 million for the continued development of new terminal facilities.
Since August 1, 2015, Hi-Crush has reduced operational and administrative staffing levels by ~16%, including the most recent reductions at the Augusta facility.

Distribution Temporarily Suspended

The Partnership announced a temporary suspension of its quarterly distribution due to challenging market conditions.
Co paid distributions of $2.40 per unit on all common and subordinated units for 2014, $0.675 per unit for the first quarter 2015, and $0.475 per unit for the second quarter 2015.

I had expected something like this, particularly after EMES withdrew guidance. While I had hoped they would only reduce to a more normal percentage, suspending the entire distribution until fairer weather is perfectly acceptable. SLCA and EMES are going to do the same.

The most recent HCLP filing is out and it shows the story: accounts receivables have declined by 35% as business dries up. But the business is hardly over leveraged with Debt/Equity still holding below 2X. Cash levels increased by over 8% and now with the distribution halt, they are staking out the long winter.

HCLP has moved to shrink the business aggressively, cutting staff by 16%. Admittedly this is nothing like one of the services companies or some of the smaller oil drillers. But then again…they don’t have that kind of problem, now do they?

HCLP took a loss this quarter of ($0.49) a share, which was entirely driven by one time write downs. The company is in a similar (though less dire) process as other companies in this industry, cutting dead weight operations and consolidating around profit centers. They are also writing down and taking losses where applicable. In this case, HCLP wrote down some of their long term supply contracts (presumably because the customers aren’t going to live long enough to fill them).

Cash from HCLP’s operations only declined by about 11%. HCLP already spent about $48 million this year on investments in equipment and facilities, but they are looking to pair that back next year to $15-25 million.

Without the distribution and with the lower capital expenditures, HCLP will have expenses of inside $30 million per year. Cash flow is $67 million which even if we continue to impair, should more than cover the costs of doing business.

If HCLP was forced to go the BAS route and write off all goodwill and intangible asset value, they’d still have about $2 per share of equity to work with. That leaves another $69 million of equity as a buffer.

This line in the filing does concern me:

Under the terms of the Revolving Credit Agreement, our leverage ratio (total debt to trailing four quarter EBITDA) may not exceed 3.50. While our leverage ratio as of September 30, 2015, is below this threshold, if current market conditions persist, our leverage ratio will likely exceed this threshold during 2016, which could result in a breach of covenant event and an event of default under the Revolving Credit Agreement. If such a default were to occur, and resulted in a cross default of the Term Loan Credit Agreement, all of our outstanding debt obligations could be accelerated. The Partnership is currently in discussions with the lenders to amend the Revolving Credit Agreement to, among other things, waive the leverage and other compliance ratios. The Partnership makes no assurance that an amendment will be obtained.

So the question becomes, how willing are lenders to play ball? Promise of money is better than no money, no? It’s not as if bankers could run HCLP better than HCLP is. But these things always get messy.

In principle, there’s plenty of time here to ride out the storm. But we need oil markets to stabilize. BAS’ CEO Patterson says he sees signs of oil production going offline and was talking about operations idling after Thanksgiving. It sounds like companies have spent their budget this year and aren’t going to bother asking for more money.

Patterson also said he’s seen competition spike in his local markets, with thirty or more competitors entering to submit bids. In his anecdote, he said about twenty of them are left now.

Although it may not feel like it, the weak are being driven out. The industry is getting their cost to drop and they are learning to compete with the cheaper oil levels. This hurts but the survivors will probably be built to last. Provided, of course, that you are a survivor.

Budgets are being frozen in December. The oil producers are going to take a little recess. We’ll see what oil prices do in response.

Then things will get started again in January.

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Oil Reacts To Vicious 9 Million Barrel Build Rumor


I don’t know if oil inventory really built up by 9 million barrels, but it’s crazy if true. It goes without saying that the oil patch desperately needs a JP Morgan figure to emerge and start declaring losers – buying them out – and fast.

The oil spigots need to be turned off to appease the caprices of the markets. Players will not stop bleeding the oil space to death until they are given blood offering. You’d think Cain’s suffering would more than qualify, but it does not. Someone needs to lock these losses in and make their way to an early retirement; the Market Gods demand it.

In all reality, this 9 million number crawled out of the American Petroleum Institute, an organization that’s sole purpose in this world is to advance interests of oil and gas companies. The conspiracy theorist in me is saying that this is a bullshit hyperbolic number that’s been crafted just so the oil patch can easily crawl over it and surprise the Street.

Fine, I call. Let’s see if you can actually send my portfolio any lower, you dogs. I dare you to try.

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Market Update – 18 Months In Review

2014 began with an intense implosion of overpriced tech stocks that destabilized players and set us up for nasty knock off effects. Months afterwards, energy names began to turn downward and started an at first slow descent; a black omen for anyone looking for a forward indicator.

Saudi Arabia decided to play the world’s worst move (effectively maiming OPEC), spiked the oil markets when they could least handle it, and sent oil into the abyss touching off a second massive sector implosion in oil and gas names. But not just oil & gas, as the market became terrified of economic stagnation led by fears out of Europe and Asia, and the entire energy sector followed oil down the hole.

We are now experiencing what I view as the third wave of the same phenomenon that began in early 2014, more than a year later, as the entire stock market collapses 10% in a short span of time, led by China’s markets and the intensely poor decision making of a command/control economy trying to have their cake and eat it too.

That being said, I haven’t yet seen any indication that the real economy is retracting.

Job growth seems present and in my own local markets where I have a good ear to the ground concerning hiring and pay policies, I am actually hearing talk of wage hikes. The last five years, our local job market at least was terrified of the HR monsters that were federal regulations (chiefly PPACA), not to mention we are still reeling from 2009 in some respects. But I think as we clear away from the implementation of these federal regulations, especially with rigid conservatives now holding fast against, we are going to start to see some wage growth. Employees are actually demanding it now, voting with their feet when they can.

This should do wonders for the economy.

With regards to oil specifically (which is chiefest of my concerns) the EIA is suggesting that the current imbalance between consumption and production of oil is 2 million barrels per day. This is the cause of our stockpiling and the foremost reason oil has sunk so far. Saudi Arabia’s move to curtail US production has been a failure and so far the long feared wave of insolvencies has held to a slow drip, even from the most precarious of businesses.

A 2 million barrel imbalance is not all that bad and I believe that, barring some sort of real demand destruction, we’ll just float along at these levels until the market becomes more comfortable with oversupply. I don’t think oversupply necessarily will force pricing lower as it would take a very specific set of circumstances which include not having a merger & acquisition brokerage occur. Yet we see M&A activity is very healthy in this current time period and I have to believe that if oil goes much lower you would see US markets consolidate aggressively.

Besides this, the global imbalance is equivalent to about one major oil producer globally. And in this current environment, we also should be aware that civil unrest is a powerful destabilizer of oil production (via civil war) with positive likelihood.

Sources of new supply are questionable. New well development at these oil prices are unprofitable and only large state sponsored development is probable. Yet, economic weakness is harming state budgets and may make it difficult to attain approval for unprofitable ventures. The largest foreign state controlled sources of oil are also some of the most sensitive to this oil price shock.

Altogether, I continue to believe that the most likely outcome in oil markets is unknowable yet still predictable production locations going offline from internal unrest. Venezuela is pegged as the most likely location for such an event, do to the extreme nature of their current state of affairs, and because their leadership is proven incapable of handling the situation. But Venezuela is hardly the only candidate; just the best.

Outside of that, the economic uncertainty that hit everyone’s radar earlier this summer is now coming back under control. Bond yields continue to subside across all major foreign issuers, and I would not be surprised if the EU crisis in particular remains hidden from view for another full two years.

Domestically, I expect monetary policy to remain accommodating, but would not be surprised if Yellen raises interest rates some token amount, to try and claim some victory for the Federal Reserve. I cannot expect how the market will react to his, but believe the raise will be mostly symbolic anyway, so any effects should be temporary in nature.

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