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Mr. Cain Thaler

Stock advice in actual English.

Prepare For BAS Bankruptcy

BAS beat earnings estimates last night, as they have done for 2 quarters in a row now. And they are still losing money.

Tucked into the earnings release was a little bit about the company looking to negotiate with creditors and retained the law firm Weil, Gotshal, & Mangers. This is an early due diligence announcement that Chapter 11 is on the table, executive style. Shareholder equity also probably just went negative.

Unfortunately, lads, this is a no win situation. The environment is just too bad, their competitors are all going bankrupt (ironically giving them a competitive edge) and the oil markets will not recover quickly enough. We are turning a corner but it’s not coming fast enough.

If CJES is any guide, creditors will be taking ~95% of these companies in restructuring. I am severely disappointed.

I never thought this would go as far as it did. Even after actively taking steps to lower my exposure in mid 2014, I held a position in BAS and HCLP because I thought it could be saved. Mostly because I thought this despair was obvious to everyone, and that the key players (namely OPEC and the Saudis) would make smart people moves to avoid it.

Well, I am here to tell you, Saudi Arabia is not staffed by smart people. They are staffed by lucky sperm cells surrounded by lunatics. And the oil space bankruptcies are just getting started.

The funny thing here is that these bankruptcies are going to make the US shale market stronger and have the exact opposite effect the Saudi’s were banking on. Congratulations, Saudi Arabia: your budget is in tatters and now US oil will have a cost extraction basis $10 lower from swapping credit for equity and desperation driving sector operating costs down.

Suffice to say, Saudi Arabia are real dipshits.

But I am a victim nonetheless. Now, I am not going to sell out of BAS…because I have 95% losses baked in. Seriously, I could take the CJES 6% equity swap, have the stock rally back to $10, and still be where I’m at today. The damage is done.

But I held this position from 2011. This was an investment and the difference between 93% losses or 97% losses is immaterial.

If you’re a recent buyer, or just have money on the table you can’t afford to lose, get out. The company is filing later this year, I would guess. Probably even if oil prices and drilling recover.

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Oil Market In Balance

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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Pound Sterling’s Ultimate Destination is HIGHER

Yes you heard me. The British pound is going HIGHER.

Let’s ignore the initial push lower, which is as much a product of pro-EU campaigns convincing fools that the Brexit can somehow be “bad for Britain” without also being “endgame for the EU”.

By signaling that they are exiting the EU, the UK is now closest comparable to the country of – wait for it – Switzerland. The UK has relative low debt loads, a free currency, and close proximity to the other countries.

With just minimal agreements put in place, the UK will quickly match the relationship that Switzerland has with the EU. Accordingly, they are the best reference for what the UK will look like in 10 years.

What is the real threat of the UK Brexit? Obviously, if it were just the UK leaving, which is already free from the euro, this would not be that big of a deal. What people are really worried about are OTHER nations who suddenly begin to hold referendums.

This would be a disaster for the euro; but more importantly for euro denominated financial instruments. This is the real threat here and why the rest of Europe is so pissed off.

But if the euro comes under pressure from a series of referendums, there will be a major flight to safety. And who is now the closest non-euro country with relatively cheap currency and financial assets?

The UK, geniuses.

When market players stop wetting the bed, they are going to eventually work this out. GBP will be high by Christmas.

In the meantime, the doomsayers (particularly businesses) who assured everyone they would not last a fortnight if the UK left the EU…assuming, I would imagine, that it wasn’t going to happen…are now backpedalling furiously. Apparently, with a gun against their heads, they are quite capable of making this work.

Go figure.

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What Happened, Boys?

For months the world was prepped for the Brexit vote, and for months the odds makers and money makers assured us that Remain would have it. Europe is the future, nation-states with their racist blood legacies the past, blah blah blah… Economists ran through the streets of London, crying the wrath and doom of the UK should it leave. EU funding flooded public airwaves with warnings and indeed thinly veiled threats.

So now here we are. Leave has won, and why wouldn’t it have?

What the economists and odds makers and editorialists haven’t worked out yet is that what the UK was voting against was them. The sheer oppression that “experts” have subjected the planet to has fostered deep resentments that are now on a full boil.

London lost big tonight, because nobody gives a fuck about London. Other equally sheltered places should take note.

Just as an aside, the US elections are equally questionable. Clinton is poster child of what one might call “establishment”. As terrible of a candidate as Trump is (and idiotic that a New York City billionaire has claimed the mantle of the little guy), for all we know a half-eaten, rotten banana could beat Hillary Clinton this election. If Trump comes at her like he did this week, all bets are off.

The big names in politics, news and finance all missed the Brexit call because seeing the Leave vote winning would have meant coming to terms with something they very deeply do not want to think about – how much regular citizens hate them.

2009 is still unfolding. The 2010 US election midterms are still unfolding. The Greek referendum is still unfolding. And these places will be burned down over and over again (in the Greek’s case, quite literally) until we get something new.

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Oops! Shale Industry Starts Missing Interest Payments

In other news, overleveraged oil companies are now facing the days of reckoning, with $2.1 Billion in interest payments coming due this quarter. And already, the missed payments have begun.

The U.S. shale industry must come up with $1.2 billion in interest payments by the end of March as $30-a-barrel oil makes it harder for companies to scrape up the cash needed to stay current on their debts.

Almost half of the interest is owed by companies with junk-rated credit, according to data compiled by Bloomberg on 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. Energy XXI Ltd. said in a filing Tuesday that it missed an $8.8 million interest payment. The following day, SandRidge Energy Inc. announced that it didn’t make a $21.7 million interest payment.

“You’ve seen two of these happen in two days, and I wouldn’t be surprised to see more in the next month as these payments come due,” said Jason Wangler, an energy analyst at Wunderlich Securities Inc. in Houston.

Grab your popcorn bags.

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BAS Has A Terrible End To 2015, But Clinches A Financing Agreement

As predicted, 2015 ended in as bad a manner as imaginable for the oil industry. Patterson had been calling for this since September or October, warning investors ahead of time that the entire oil patch was going to “take a little break.” 2015 numbers are abhorrent.

So what’s next? Well, we can expect a mild reprieve to occur when first quarter 2016 numbers come in. But competition is still bloody and someone isn’t making it out of this alive.

On that note, BAS earnings contained a little glimmer of hope. Yesterday, apparently, BAS was given a life line of $165 million in term financing. They are going to use this to escape the atrocities awaiting anyone stuck in revolving credit facilities with asset value provisions attached to them.

Term Loan Financing

On February 17, 2016, Basic entered into a Term Loan Credit Agreement with a syndicate of lenders and U.S. Bank National Association, as administrative agent for the lenders. This agreement provides for borrowings of an aggregate principal amount of $165.0 million on the closing date, and delayed draw term loan borrowings in an aggregate principal amount not to exceed $15.0 million. The obligations under the Term Loan Agreement will be secured by substantially all assets of Basic. Basic expects to borrow the initial borrowings of $165.0 million under the Term Loan Credit Agreement on February 26, 2016, subject to the satisfaction of closing conditions.

The term loan will bear interest at 13.5%. In addition, Basic will be responsible for the applicable lenders’ fees, including a closing payment equal to 7.0% of the aggregate principal amount of the commitments.

In conjunction with this financing, Basic intends to amend its existing revolving credit agreement, reducing the aggregate commitment from $250.0 million to $100.0 million.

Pro forma liquidity as of March 31, 2016, including this term loan would be approximately $220.3 million, including $23.1 million of availability under Basic’s amended $100 million revolving credit facility.

Unfortunately, BAS also burned $10 million in the fourth quarter. And I’m guessing this time Patterson wasn’t making an eccentric corporate buyout.

Your move, other companies. Let’s see who dies first.

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