Peak Oil is You
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Page added on November 7, 2015
Oil company defaults are coming
Oil companies of all hues loaded up on massive amounts of debt to fund rigs and fancy new drilling equipment.
The problem is the companies were banking on oil prices closer to $100 oil when they took on the debt. Now oil is around $45 and no one is expecting prices to hit $100 any time soon.
What that means is the likelihood of unpaid debt has gone up for many companies.
“Energy has been really treacherous. There are going to be a lot of defaults,” R. Matthew Freund, chief investment officer of USAA Investments, told CNNMoney.
It’s a dramatic change from just a few years ago. The roaring junk bond market and low interest rates broadly helped fuel the U.S. energy boom. Cheap credit allowed companies to invest in new technologies like hydraulic fracking that makes it easier to drill oil in difficult to reach places.
Back then many companies with “limited operating history” and business models that “made no rational sense” were able to tap the bond markets for funding, said Freund.
But lately, there’s been a spike in credit costs for risky oil companies despite the fact that crude prices have stopped tumbling and have somewhat stabilized in the $40-$50 range.
“That’s a warning signal. Something bad is happening,” billionaire investor Jeffrey Gundlach, founder of elite fixed-income firm DoubleLine Capital, said on Thursday at ETF.com’s Fixed Income Conference.
Related: Wall Street firms that bankrolled oil boom are hurting
Gundlach said that levels of domestic crude oil inventories remain elevated despite a slowdown in U.S. production. It suggests the supply glut that caused prices to crash hasn’t been fixed yet.
Gundlach said he is steering clear of energy junk bonds, a previously-booming area of the fixed-income market. In fact, he’s telling clients to avoid the high-yield bond space altogether.
“Junk bonds should be sold on strength,” he said.
Even those who believe oil prices are going up sound negative about the energy sector.
Oil would go up because “you have crazy people in control of that market,” said Tim Gramatovich, co-founder of Peritus Asset Management. He indicated he was referring to Vladimir Putin and Russia’s role as one of the world’s largest energy producers.
But Gramatovich believes there are “tons of value traps” in shale oil projects right now.
“Stay away from tight oil and some of these Bakken areas where you have distressed prices. You’re going to end up with dry rocks in North Dakota. It’s not a good asset,” he said.
73 Comments on "Oil company defaults are coming"
GregT on Sun, 8th Nov 2015 4:14 pm
“53 days until fucktard day when Boat pulls the plug. ”
Boat’s already pulled the plug marmi, and he’s taking on water fast. He believes that now is a good time to lose his money in the markets, instead of paying off his debt. Not sure where the 53 days comes in though. He could lose his shirt at any time, or it could drag out for months. He’s almost as clueless as you are, as impossible as it may seem to be.
marmico on Sun, 8th Nov 2015 4:21 pm
first-difference R^2 of 0.934
Spurious. There is a correlation coefficient of 0.92 (0.93) between political action committees (death caused by amputations) and deaths falling out of wheel chairs.
BC on Sun, 8th Nov 2015 4:45 pm
marmico, I’ll do you a favor and go bye bye now. The fact is that I need to travel as part of year-end professional and personal obligations.
So, don’t stop the clock without me. Perhaps I’ll check in during the holidays or early next year when you can pull the plug then.
Be seeing you . . .
shortonoil on Sun, 8th Nov 2015 4:46 pm
@BC
“QEternity and ZIRP have enabled a larger share of future consumption to be brought forward than would have otherwise occurred, implying that growth of future consumption will be that much slower, if any per capita.”
What we may be seeing here is simply a bookkeeping entry. US energy consumption has fallen from a peak in 2005 of 100.28 quad BTU to 97.47 quad by 2012. Without consuming energy it is not possible for there to be any real economic activity occurring. This is not more WalMart, Big Macs or Cat front end loaders. It is currency creation in a bank’s computer. Virtual growth appears to be what is happening. Don’t forget to take your red pill.
marmico on Sun, 8th Nov 2015 6:11 pm
Be seeing you . .
Go fuck yourself you underemployed systems engineer who moonlights as an investment manager.
GregT on Sun, 8th Nov 2015 6:24 pm
You’re a real nasty piece of work marmico. You paint the picture of a short, smelly, balding old man, with really bad teeth and acne.
marmico on Sun, 8th Nov 2015 6:34 pm
Without consuming energy…
What a fucktard. It is possible for real economic energy to occur without any increase in energy. 2015 U.S. energy consumption (quads) is flat relative to 2000 U.S. energy consumption. U.S. GDP is higher in 2015 than in 2000.
Do the simple bookkeeping entry instead of being a bloviating, blathering blowhard.
Since you are such a simple mind, I’ll indulge you:
100—>100 (quads)
12.6—–>16.3 ($trillion)
Energy consumption rises 0%, GDP rises 30%.
apneaman on Sun, 8th Nov 2015 6:34 pm
marmi, it falls apart.
GregT on Sun, 8th Nov 2015 6:38 pm
No energy = no work = no economy.
It doesn’t get any simpler marmico.
marmico on Sun, 8th Nov 2015 6:54 pm
Poor GreggyT could not hack it in a super-city and spends the rest of his short, smelly, balding old man life, with really bad teeth and acne dreaming about what could have been.
apneaman on Sun, 8th Nov 2015 7:01 pm
marmi, do you count the ever increasing and destructive climate disasters in your magic calculations?
“The potential exposure home insurers in South Carolina face from the early October storm that flooded the state is estimated to be over $18 billion, according to catastrophe modeling firm CoreLogic.”
http://www.insurancejournal.com/magazines/features/2015/11/02/386418.htm
antaris on Sun, 8th Nov 2015 7:17 pm
We learn more about Marm every day unfortunately. Now she shows herself to be Peladophobic.
Boat on Sun, 8th Nov 2015 8:05 pm
Energy efficiency has been called “the fifth fuel” (after coal, petroleum, nuclear power, and renewables); it is seen as a cost-free tool for accelerating the transition to a green-energy economy. In 2007, the United Nations Foundation said that efficiency improvements constituted “the largest, the most evenly geographically distributed, and least expensive energy resource.”
The World Economic Forum, in a report called “Towards a More Energy Efficient World,” observed that “the average refrigerator sold in the United States today uses three-quarters less energy than the 1975 average, even though it is 20% larger and costs 60% less”—an improvement that Chu cited in his conversation with me.
This is where the doomers jump auto to their Jevons paradox ignoring that that topic is population overshoot, not energy efficiency.
When I buy products I take into account the price and the energy they consume. Good for me and good for the planet. My computer is energy starred 🙂
If the world aggressively pursued energy efficiency the planet would be much cleaner.
BC on Sun, 8th Nov 2015 9:58 pm
@marmico: Go fuck yourself you underemployed systems engineer who moonlights as an investment manager.
Jeez, marmico, dude! I was trying to inform and enlighten not engender a psychotic break. You’re scaring me, dude/dudette.
For the record, I haven’t been underemployed as a systems engineer for ~20 years because I have been “not employed” in that kind of work at all during the period. 🙂
Given the hours that I willingly and enthusiastically work in economic and financial markets research, analysis, and advisory, I guess one could say that my late-night hours are a form of moonlighting. But I’m a short sleeper, so it works for me.
Peace, marmi bro. Happy Holidays and New Year to you, too. 😀
BC on Sun, 8th Nov 2015 10:05 pm
@short: What we may be seeing here is simply a bookkeeping entry. US energy consumption has fallen from a peak in 2005 of 100.28 quad BTU to 97.47 quad by 2012. Without consuming energy it is not possible for there to be any real economic activity occurring. This is not more WalMart, Big Macs or Cat front end loaders. It is currency creation in a bank’s computer. Virtual growth appears to be what is happening.
Yes, short. It’s a kind of financial and exergetic claim in today’s debt-money terms on less future consumption per capita.
Creating more financial claims today against declining net energy per capita means higher future claims against even less investment, production, and consumption per capita in the future, i.e., Peak Oil and LTG.
GregT on Mon, 9th Nov 2015 12:12 am
“Poor GreggyT could not hack it in a super-city and spends the rest of his short, smelly, balding old man life, with really bad teeth and acne dreaming about what could have been.”
Without a doubt the best move my wife and myself have ever made marmi. Couldn’t be happier. I’m dreading the day that I have to go back to visit the insane asylum. I feel especially sorry for all of the people that don’t know any better. Idiots like yourself, deserve everything that you have coming to you. I don’t relish in other people suffering, but for fucktards like yourself, I’m more than willing to look the other way. Loser.
GregT on Mon, 9th Nov 2015 12:18 am
“When I buy products I take into account the price and the energy they consume. Good for me and good for the planet. My computer is energy starred.”
In all seriousness Boat, are you honestly as much of an idiot that you continue to make yourself out to be, or are you just fucking with everyone here?
onlooker on Mon, 9th Nov 2015 3:11 am
“This is where the doomers jump auto to their Jevons paradox ignoring that that topic is population overshoot, not energy efficiency.” Nope. You cite your greater energy efficiency Boat, that is what Jevon is about, your energy efficiency allows yourself or others to then consume more. Witness the profligate and rapacious consumption patterns of people in rich countries. Now for certain key resources overpopulation is obviously also a factor in increased consumption of those resources.
Davy on Mon, 9th Nov 2015 6:47 am
“Finacial and exergetic claim in today’s debt money terms on less future consumption per capita.” We can’t be sure on either less consumption and or per capita levels. We just don’t know how long population will grow. I feel we can say there will be less consumption because of limits of growth and diminishing returns of our complex actions of finance, production, and development. We are simply becoming less wealthy at the level of our human system and the ecosystem this human system develops in.
Our climate and our resource base is in decay. This resource base is both our modern industrial system inputs but even more importantly our earth ecosystem that provides us with food and water. We know our foundational commodity oil is under an economic compression. Our economic system is under compression from debt growth and unmet consumption pressures.
Debt pressure includes bad debt. We have made serious errors in our long term planning in regards to vital investments. Our civilization is built upon an unsustainable social, political, and economic organizations based upon complexity and energy intensity. This has allowed an order of magnitude overshoot in population. This debt based system gives each and every delocalized local confidence to trade with other delocalized locals. We have created malinvestment and overcapacity that threatens the validity of this system threatening liquidity that keeps it all functioning.
This bad debt and malinvestment in itself at the scale it has occurred has destroyed vital resources in the form of soil, water, and biodiversity. At the level of our physical goods trading and exchange of debt based currencies has created huge incongruities between valuations. We have a system that has chosen to extend and pretend the damaging effects of this malinvestment, overcapacity, and financial bad debt.
We have a finite physical wealth within our earth system. We have our human wealth that is both soft and hard. That soft wealth is the abstract wealth we find in our financial system and social fabric. It is this wealth that is increasingly unrepresentative of the reality of the wealth the global system really has. If this goes on long enough without proper adjustments we get a system that is in disequilibrium and could suffer a Minsky Moment of paralysis from loss of confidence at a global scale. All locals are delocalized and dependent on this system. If is stops there will be mass starvation.
We as a global people are continuing to making poor decisions at global levels and on multiple levels hard and soft. We are creating uneconomic bubbles. We are producing unneeded production and development that is not vital. This unneeded production and development is using up finite resources just as population continues to explode and the earth system degrades. This is happening as the climate destabilizes. My thoughts are our population will begin to rebalance sooner than anyone projects just as our climate is adjusting quicker than the models predict.
It will be decay in the economy, oil complex, and climate that reduce our food chain productivity. Just as an economy must have energy for activity our food chain requires all three. We must have a healthy economy to produce, physically trade, and exchange debt based currencies in confidence. Our economy must be able to preserve this globally traded food resources within a complex social system that requires among other things millions of refrigerators run by a complex grid. We then have billions of people prepare and dispose of food. Oil lubricates this process at every level and is a significant part of the input process. The climate is a given we need moderate weather with adequate rains. This is whole process is under compression. This compression is at every level. Our population cannot grow without our food resources growing. We know the oceans are dying. We see the mega droughts. Our economy is not healthy. Oil is depleting in quantity of quality.
If population declines our debt based system will be compressed further by a human deflation. Here we are in a catch 22. We need to stop population growth but the system is geared to growth at all levels. Less human population creates economic issues in itself including unfunded liabilities of support, vital network support, and human skill resources. Death is expensive for a growth based system. This system is already suffering deflation from macro debt issues.
My question is can we manage with less wealth, a falling population, and a decaying earth ecosystem. When I say can we manage I mean can we have a long emergency instead of a catastrophic collapse. This is a global system we are talking about with billions of actions and millions of delocalized locals. At least in the beginning it will be a mixture of events across a broad spectrum. It is somewhat like the climate. We will likely see some winners and losers. Eventually as the convergence of so many failed locals accumulate even those locals who benefit from the decay will decay.
I feel we must have a crisis to adjust and mitigate to this fall. There are a few things we can change. There is a whole lot of things that we will have to endure. It is the degree and duration of a fall we have to be careful of especially when we all depend on each other. There is no decoupling form this descent. Everyone is in this together so some kind of coordination of good policy is a must or at least fewer poor decisions. I am not optimistic.
onlooker on Mon, 9th Nov 2015 7:08 am
Agreed Davy, all around the world, all people to some degree depend in some manner or other on the global system. A think a die-off is inevitable as food production cannot maintain the feeding of 7 billion and growing. Limits to Growth cannot be negated by either technology or a re-organization of financial/economic or social arrangements. What defeats any attempts to solve these multiple crisis is our vast population as well as many in the world accustomed to and desiring the consumption lifestyle. The leadership echelon shows no signs of wishing to slow down much less stop excessive consumption. What is more we cannot substitute or create certain key resources from Earth, mainly water, oil and fertile soil and thus food. At best we can only in a limited fashion supplement the food supply with certain synthetic edibles.
Also, climate seems poised to create havoc both with infrastructure and human,animal and plant health. I too am not optimistic.
shortonoil on Mon, 9th Nov 2015 7:51 am
“Since you are such a simple mind, I’ll indulge you:
100—>100 (quads)
12.6—–>16.3 ($trillion)
Energy consumption rises 0%, GDP rises 30%.”
Marm is doing God’s work; must be a Goldman Sachs employee? He can change the Laws of Physics! Sorry you dimwitted little turd, no increase in energy consumption, no increase in economic activity. Any that you see is just an hallucination in that pea sized brain of yours.
A few centuries ago they would have burned you alive at the stake for being a witch. In your case it’s a shame we don’t do that anymore. You are an evil, vile little creature with no regard for the rest of the world. Hope you fade into the darkness that you came from. Your kind are a pox on the face of humanity.
Unlike the concocted numbers spewed out by the BLS, and the FED, energy consumption informs us as to what is really happening. The protagonists in the centrally planned, centrally controlled story are losing their battle with reality. Forewarned is to be forearmed. The present system is like a snake eating its own tail; it works until it hits a vital organ!
onlooker on Mon, 9th Nov 2015 8:19 am
For our resident doubters and deniers:
http://www.theguardian.com/commentisfree/2015/oct/11/world-order-collapse-refugees-emerging-economies-china-slowdown-recession
“Yet there is a parallel collapse in the economic order that is less conspicuous: the hundreds of billions of dollars fleeing emerging economies, from Brazil to China, don’t come with images of women and children on capsizing boats. Nor do banks that have lent trillions that will never be repaid post gruesome videos. However, this collapse threatens our liberal universe as much as certain responses to the refugees. Capital flight and bank fragility are profound dysfunctions in the way the global economy is now organized that will surface as real-world economic dislocation.”
Robert Spoley on Mon, 9th Nov 2015 1:00 pm
The price of oil is not $40 or $45/bbl. In Oklahoma most leases go for 78% NRI followed by 0.072% for state severance tax. I use 0.03% for O&M on vertical wells, all of which takes $$40 oil to $28 oil to the WI. All this other money goes to someone besides the operator. Why won’t you guys use real numbers?