AuthorTopic: The Crash of 2015: Day 22  (Read 1131 times)

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The Crash of 2015: Day 22
« on: January 26, 2015, 03:42:11 AM »

From the keyboard of Thomas Lewis

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Hold on a second, we’ve changed our minds. Can you just hold it right there, please? We’ve decided we like it the way it is…..

Hold on a second, we’ve changed our minds. Can you just hold it right there, please? We’ve decided we like it the way it is…..






First published at The Daily Impact  January 21, 2015


The economy of the United States and the world is on fire, and with the flames and smoke visible in any direction one cared to look, the President of the United States declared last night that the worst is over, “the shadow of crisis has passed,” and happy days are here again. In reality (a state that presidents and candidates for president never seem to visit) 2015 is shaping up to be one of the worst any of us have ever seen.


It’s a potent mix of flammable situations, from an unhinged stock market to a drought-ravaged West to the fiscal convulsions of China, Russia and Europe. But for us in America, the collapse of the bogus New American Oil Revolution is the fire that’s burning hottest and spreading fastest. This is how it’s likely to go:


 First, drill rigs are being shut down and workers laid off, especially in the fracking plays; as unemployment rises and income declines, production will start to fall; as fracking-company stock prices tank, their junk bonds will become worthless and their leveraged loans will go into default, their money sources will dry up and fracking production will virtually halt; as similar problems beset the legacy oil business world wide, the entire edifice of energy junk bonds, derivatives, hedges, credit default swaps and rabbits’ feet will collapse and the stock market will crash. Welcome to The Great Recession: the Sequel.


 So, how are the frackers doing on Day 21?


 1. Laying down rigs, shedding people.



 2. Production Reduction


 Those who are pumping oil have to keep pumping oil as long as they can. Simply stopping production and waiting for prices to rise is not an option because they are deeply in debt and mired in contract obligations. They may be only running in place, but if they stop running they vanish. So we won’t be seeing actual drops in production for a few months. But here’s how we know they’re coming.


 The Bakken play in North Dakota is about 40% of the “new American oil revolution.” Its production has gone from 500 barrels per day in 2008 to just over a million barrels a day. They had to drill 6,000 wells to do that. The Achilles Heel of the fracking revolution is the hideous decline rate of fracked wells: production declines by about 90% in just three years. So if they drilled another 6,000 wells in the next three years (at an average cost per well of $8-$10 million) all they would do is keep production at a million barrels a day. And that’s assuming they found as many “sweet spots” in the next four years as they did in the last. And you can’t assume that. It’s also assuming they can find the cheap money — the junk bonds and junk stock and junk loans — that financed the first 6,000. And you can’t assume that.


To put it another way, if no new wells were drilled in the Bakken in 2015, by the end of the year its production would be about 550,000 barrels a day, or one half its current production.


3. To follow the money, you have to find it.


 It was possible to satisfy the enormous appetite of the fracking industry for cash (see “decline rate”) as long as oil prices were high, money was cheap, and the Masters of the Universe were delirious about America achieving “energy independence” and becoming “number one in oil” again. The Masters are still delirious, but nothing else is true.


 In the past, the oil companies either sold stock, issued bonds, or took out loans to stay on the drilling treadmill. How’s that working out for them? The Bloomberg index of North American oil producers finds that since last June, their value has declined by over half and their debt has increased by 85% — hardly a sustainable trajectory. Going public, up until last year a sure-fire way to cash in big and finance whatever the hell you wanted to do, is simply not an option in 2015. Not for anybody in the fracking oil business.


 As for debt, interest rates on junk-rated energy bonds are over 10%, double what they were last June. Previously issued bonds are trading on the secondary market for dimes on the dollar. And more than 20 US exploration and production companies have used 60 per cent of their credit lines,according to Bloomberg.


 A financial situation for frackers that could best be described as sour now will turn completely rancid in April (at the latest). That is the month that lenders conduct one of two annual reviews of the collateral they are holding for their lines of credit. Typically, the frackers turn to lenders only after exhausting the possibilities of issuing stock and junk bonds, so by the time they get to banks they need what are politely referred to as leveraged loans, or loans to a company that has all its assets locked up and is hemorrhaging cash. When the bankers review the cinders of the assets they accepted as “security,” there are going to be some cardiac arrests.


At that point the Crash of 2015, if it hasn’t already, will metastasize.


[UPDATE: DAY 22]


According to a story in Bloomberg News, which is not exactly one of your fringe Doomer news sources, not only oilfield service providers but oil drilling companies themselves are going to “begin to die” in the second quarter of 2015 as bigger and bigger dominoes fall toward a crash. The January 22 story begins:


Oil drillers will begin collapsing under the weight of lower crude prices during the second quarter and energy explorers who employ them will shortly follow, according to Conway Mackenzie Inc., the largest U.S. restructuring firm.


Read it and weep, here.



 


***



 


Thomas Lewis is a nationally recognized and reviewed author of six books, a broadcaster, public speaker and advocate of sustainable living. He also is Editor of The Daily Impact website, and former artist-in-residence at Frostburg State University. He has written several books about collapse issues, including Brace for Impact and Tribulation. Learn more about them here.


 


 




Offline MKing

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Re: The Crash of 2015: Day 22
« Reply #1 on: January 26, 2015, 07:08:37 AM »
According to a story in Bloomberg News, which is not exactly one of your fringe Doomer news sources, not only oilfield service providers but oil drilling companies themselves are going to “begin to die” in the second quarter of 2015 as bigger and bigger dominoes fall toward a crash. The January 22 story begins:Oil drillers will begin collapsing under the weight of lower crude prices during the second quarter and energy explorers who employ them will shortly follow, according to Conway Mackenzie Inc., the largest U.S. restructuring firm.

Interesting take on the topic from the folks we pay to watch these issues for us.

The sharp decline in oil prices over the last quarter of 2014, which has continued in January, is already having a significant effect on drilling activity in the United States, as shown by the 16% decline in the number of active onshore drilling rigs in the Lower 48 states between the weeks ending on October 31, 2014 and January 23, 2015, according to data from Baker-Hughes.

Moving from what has happened to forecasting the future is challenging, in part because market expectations of uncertainty in the price outlook have increased as reflected in the current values of futures and options contracts. When the latest edition of EIA's monthly Short-Term Energy Outlook (STEO) was issued on January 13, the 95% confidence interval for market expectations for prices in December 2015 was extremely wide, with upper and lower limits of $28/barrel (bbl) and $112/bbl, respectively. The growing uncertainty surrounding oil prices presents a major challenge to all price forecasts. EIA's January STEO forecasts Brent crude oil prices averaging $58/bbl in 2015 and $75/bbl in 2016, with annual average West Texas Intermediate (WTI) prices expected to be $3/bbl to $4/bbl lower.
Should its price forecast be realized, EIA projects that the number of operating rigs will decrease by approximately 24% from January to October 2015 before beginning to rebound in November 2015. However, the outlook for Lower 48 production reflects more than just the rig count. Other key factors include the efficiency of drilling, which EIA tracks in its Drilling Productivity Report, the rate of decline in production from existing wells, and changes in the amount of time between the start of drilling (called spudding) and the completion of the well.

http://www.eia.gov/todayinenergy/detail.cfm?id=19711
Sometimes one creates a dynamic impression by saying something, and sometimes one creates as significant an impression by remaining silent.
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Offline Palloy

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Re: The Crash of 2015: Day 22
« Reply #2 on: January 26, 2015, 04:27:26 PM »
In 2011 NYT published a massive archive of industry documents showing that the gas fracking industry was well aware of the weaknesses in their business models.
http://www.nytimes.com/interactive/us/natural-gas-drilling-down-documents-4-intro.html  (Well worth a trawl through)
Exactly the same problems apply to the oil fracking industry.

So why did they decide to go ahead anyway, and why did banks and brokers set them up with financing, when they certainly know how to read business plans?  The only explanation that makes any sense is that they were all given the quiet nod of approval by USG and the Fed.

It's just more "kicking the can down the road", financed with fiat money printing.  It was sure to create well-paid jobs, which always looks good. And it has the additional benefit that it postpones the day when Peak Oil is so obvious that it has to be admitted to, and the oil corps' futures start to look grim, and the future of industrial civilisation is in doubt.
The State is a body of armed men

 

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