Thursday, June 30, 2016
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Oil Market In Balance

oil

Read this Reuters article that came out today.

(Reuters) – A string of unforeseen events have reduced oil supply, helping to rebalance the world oil market and push price forecasts higher over the last month, a Reuters poll showed on Thursday.

These events are only unforeseen if you didn’t bother to try. I myself laid out exactly this sequence of events in 2014, along with predicting the survival of the US oil and gas boom.

But the damage that was done exceeded my wildest fears. The maneuvers of OPEC over the past 24 months have been nothing less than amateur. The wreckage from this schlock judgment; pervasive.

That said, I am not sure there will be many more bankruptcies in the oil and gas sector. They are all teetering on the edge, but with prospects of oil turning higher here in a balanced market, revenues and projects should begin to return.

In December of 2015, I bet that we’d see the market bottom within 6 months. I now feel more confident of that than I did then.

The looming debt maturities for the oil & gas sector are daunting, but still wait a few years in the distance. If revenues return in the second half of this year, investors can reasonable expect that the debt will be rolled over.

Financiers have no reason to fight this process…bankruptcy is not usually much kinder to debtors than shareholders. Better to gamble on the future than lose on the present.

The worst is behind us, I believe. But the road forward is going to be long as the industry picks up the pieces.

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The Energy Services Are Now Picking Their Core…And The Losers

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Here’s a fun article. I expected this sometime last year, as it shows the largest oil sector firms understand what must be done.

In order to regain stability of the oil market, production needs to be brought in line with consumption. That is not rocket science. What is considerably more difficult is how that process is permitted to play out.

It’s the overpopulated island problem. Two men are stranded on an island with just enough food for one to survive. How many men survive?

No men survive. They both eat just enough food to ensure they both die, fighting each other the whole way. That’s just instincts.

Baker Hughes and Schlumberger are two of the biggest players in the services space. And they’re old and well connected and staffed by pretty smart people. I’m comforted that someone is finally forcing the weakest hands to wrap up their deaths, as in the long term this is going to minimize the damage to the US energy sector.

Hopefully the more stable services firms can come together, pick the US supply that needs to be idled, and shut it down. Waiting for these zombie oil companies to keel over themselves is growing tiresome.

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Saudi’s For The Save?

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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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The Drilling Hiatus Has Begun

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BAS just reported utilization numbers for October, and nestled in the release was this gem:

Drilling rig days for the month were 50 producing a rig utilization of 13%, compared to 27% and 88% in September 2015 and October 2014, respectively.

In the BAS earnings call, CEO Patterson gave advanced notice that this was happening. Basically, as companies hit their 2015 budgets in this awful environment, managers are just idling drilling fleets rather than bother asking for more. We should start to see drilling collapse to 0% over the last month and a half of the year.

This should be an almost industry wide phenomenon. Then, we wait and see if they come back online in January.

Of course oil prices are now screaming to $40, testing every nerve I possess. This is the most trying market I have ever had the bad luck of being caught in. Even in 2008 I had the good sense to get out while I still could.

Yet here I am, in the most milquetoast of economic situations, watching billion dollar companies being sliced into quarters for no reason other than some foreign devils decided they’d rather gamble away their very existence.

Good grief.

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Oil Production Slump Coming Soon

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Chevron posted extremely disappointing earnings today which included disclosure of a 1% slump in production. Exxon Mobile posted an earnings beat, but they also reported production cuts of a little over 1.5%. Both reported lower project spending going forward.

The market is trying to react to the oil price slump…mostly. There are assholes, sure, like Total, which brought another 10% of production online to try and cover their awful quarter. Or Occidental Petroleum (fuckers). But where there are not immediate production cuts, there are major project terminations coming along every day. People are abandoning plays left and right, trying to find their own sweet spots.

What needs to happen, in order for us to get prices back above $60 a barrel, is sort of two fold. The first thing we need to see is production to meet demand, which could happen in short order if the individual players can get their fucking acts together. OPEC coming in to save themselves from this little mess they started would be nice.

But I have this lurking suspicion that that might not be enough. We also have the threat of production coming back online strong at every possible uptick in the price of crude. And to put an end to that, we really need to see some of the most horrible names in the business fold like tacos at a fiesta.

Of course the best names to fold are ones you and I have never heard about. Private plays with private financing owned by private cocksuckers whose pending bankruptcy filings I couldn’t care less about.

In the past quarter, the difference between production and consumption has already narrowed to ~2% if the EIA is up to date. It was ~4% back in the beginning of the year. It must be remembered, demand for oil is not decreasing. We simply have a sputtering period of too much of it, as projects come online faster than needed.

I pray that as the overproduction narrows the market will simply reward us with higher price per barrel. But I do have this horrible lurking sensation that what the market really wants to see is blood.

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HCLP Misses On Earnings, Suspends Distribution

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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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