[americandream]

Oil companies will face a significant quandry when PO is eventually acknowledged...pre-empting a run on capitalisation. Will be interesting to see what strategies they adopt.

[ROCKMAN]

Sorry Pops...misread. An excellent analogy.

[ROCKMAN]

Vt - Some valid points. But corporate debt is at an all time high. Even with current very low interest rates the oil patch already spends a big percentage of it's revenue to over debt. This is how the scenario usually works out: if a company's cash flow drops (including from the unlikely event of voluntarily shutting in wells) it greatly reduces drilling activity since it's debt burden is a fixed cost and can't be reduced. There is one constant rule in the oil patch: the banker always gets his money. Go into default, get liquidated and the shareholders end up with far less than from a corporate takeover. Less drilling leads to lower reserve replacement which leads to Wall Street reducing stock value. Which leads to shareholder discount which leads to the almost inevitable acquisition by another pubco...the scenario that a company that ExxonMobil lives for. Trust me: upper management of Big Oil is constantly evaluating the M&A market for their next big reserve boost. I've personally experienced this drama a number of times in my career. Both as the predator and the prey. And low cash flow (not low profitability) has always been the root cause. Cutting production might leave reserves in the ground to be sold for a higher price later. But they'll be sold at that time by the new owner...not the company that cuts it's production back voluntarily.

[vtsnowedin]

$this->bbcode_second_pass_quote('ROCKMAN', 'V')t - Some valid points. But corporate debt is at an all time high. Even with current very low interest rates the oil patch already spends a big percentage of it's revenue to over debt. This is how the scenario usually works out: if a company's cash flow drops (including from the unlikely event of voluntarily shutting in wells) it greatly reduces drilling activity since it's debt burden is a fixed cost and can't be reduced. There is one constant rule in the oil patch: the banker always gets his money. Go into default, get liquidated and the shareholders end up with far less than from a corporate takeover. Less drilling leads to lower reserve replacement which leads to Wall Street reducing stock value. Which leads to shareholder discount which leads to the almost inevitable acquisition by another pubco...the scenario that a company that ExxonMobil lives for. Trust me: upper management of Big Oil is constantly evaluating the M&A market for their next big reserve boost. I've personally experienced this drama a number of times in my career. Both as the predator and the prey. And low cash flow (not low profitability) has always been the root cause. Cutting production might leave reserves in the ground to be sold for a higher price later. But they'll be sold at that time by the new owner...not the company that cuts it's production back voluntarily.

[ROCKMAN]

Vt - So if I follow you would be willing to invest your hard earned savings into a company unable to pay it's debt interest and subject to either a hostile operate takeover (with you losing a significant portion of your investment) or bankruptcy ( losing all of your investment)? I get the point you're trying to make but I think you greatly overestimate how much control an oil pubco has in these situations. As I pointed out this isn't a new paradigm. It's been happening periodically from nearly the beginning of the oil age. I wasn't kidding: I've helped strip the meat of the dying bodies of cash flow crippled companies and have had it done by others to three of my companies. And one of them was Mobil Oil that was devoured by Exxon. Yes...investors do flock to the scene of the cash flow disasters. But rarely are the White Knights coming to save them. More commonly Black Knights coming to scavenge. Last time I was personally involved was when Karl Icahn (search that name if you want to learn about a world class Black Knight) mounted a successful hostile takeover of my small company. He eventually stripped the company of asset value, pushed it into bankruptcy and it disappeared forever. And yes those reserves might have been sold for more by the successor owners. But they weren't: prices actual fell further for the next few years. And guess what became of those reserves? They were sold at even lower prices as the successors tried to survive...which they didn't.

I realize it's tempting to play the what-if angle. But the assumptions you want to make have rarely ever been seen in the past and are even more unlikely in the future IMHO. Inside the oil patch the players have been preparing for the "Great Consolidation" for some time. Big Oil has been warehousing 100's of billions in anticipation. Which is why the cash flow weakened companies will sell every bbl of oil and every mcf of NG they can at what price they can. If they can't fend off potential acquisition companies management losses their big salaries and their stock options turn into toilet paper. Perhaps that's the point I failed to make: corporate management and the board of directors are focused on their self-interest and not the companies long term future. Consider my story about Icahn coming after my company. How did my management respond? They did a $100 million bond offering (@ 11% interest) and paid off $70 million in bank debt (@ 8% interest) with it. And how did our grateful banker respond? Immediately withdrew my company's complete credit line with his bank. Yes...he knew exactly what the plan was. Of course cash flow couldn't payoff the bond debt and support new drilling, Icahn got control of the company, the bond value turned to crap and Icahn bought it for $0.55 on the dollar. And as the company slowly liquidated itself we sent Icahn $11 million per year which allowed him to recover his purchase price. Of course in the end the company couldn't pay $1 dollar of the bond principal. At that point Icahn used the $100 million paper loss to offset his taxes on his other profits. IOW he got a $100 million write down at zero net cost to him. Which explains why he's one of he richest men in he country.

And thus the analogy of why you don't want to watch sausage being made: it kills your appetite to ever eat it again. That's what my experience with Icahn and my selfish management did to me and why I'm glad to be working for a privately owned company. What happened to my company isn't uncommon. But you and the general public will seldom see those bloody details on Bloomberg. But on the inside we all know the dynamics quite well. Which is why I belabor the point with you: I don't fault the logic of your argument. But the system is driven by its self-interest...not that logical view.

[alokin]

More from the consumer side: I have a deep mistrust in inflation adjusted dollars. Who adjusts them and how is inflation valued today? You see it is not something mathematical, more politics selling a number. It would be better to ask how much bread and meat can I buy for one barrel of oil? And how much in the future? How much in the 60s?

[vtsnowedin]

Nice post Rockman. I'll leave it the last word on it.

[Armageddon]

How much oil would ISIS have to disrupt in Iraq for the markets to see disruptions? Rappier doesn't think it would take much to see $150.00+ oil

[vtsnowedin]

$this->bbcode_second_pass_quote('Armageddon', 'H')ow much oil would ISIS have to disrupt in Iraq for the markets to see disruptions? Rappier doesn't think it would take much to see $150.00+ oil

[Pops]

My WAG is $150 is going to be hard to maintain for the simple reason we've seen it recently and folks will quickly cut back - of course that might be completely backwards. Since we're at least a little used to seeing $4+ unleaded we might figure we'll just bear with it for a few months.

[Subjectivist]

$this->bbcode_second_pass_quote('Pops', 'M')y WAG is $150 is going to be hard to maintain for the simple reason we've seen it recently and folks will quickly cut back - of course that might be completely backwards. Since we're at least a little used to seeing $4+ unleaded we might figure we'll just bear with it for a few months.

[Armageddon]

you think the last gasoline spike caused the last downturn in the economy?

[Subjectivist]

$this->bbcode_second_pass_quote('Armageddon', 'y')ou think the last gasoline spike caused the last downturn in the economy?

[Armageddon]

$this->bbcode_second_pass_quote('Subjectivist', '')$this->bbcode_second_pass_quote('Armageddon', 'y')ou think the last gasoline spike caused the last downturn in the economy?

[ralfy]

Related:

"Commentary: Interview with Steve Kopits"

$this->bbcode_second_pass_quote('', 'P')eak oil does not occur when we run out of oil. Peak oil occurs when the marginal consumer is no longer willing to pay the cost of extracting and processing the marginal barrel of oil. And we can actually calculate what the related numbers are.

[Pops]

$this->bbcode_second_pass_quote('Armageddon', '')$this->bbcode_second_pass_quote('Subjectivist', '')$this->bbcode_second_pass_quote('Armageddon', 'y')ou think the last gasoline spike caused the last downturn in the economy?

[Subjectivist]

$this->bbcode_second_pass_quote('Pops', '')$this->bbcode_second_pass_quote('Armageddon', '')$this->bbcode_second_pass_quote('Subjectivist', '')$this->bbcode_second_pass_quote('Armageddon', 'y')ou think the last gasoline spike caused the last downturn in the economy?

[ROCKMAN]

Sub - And that highlights the problem with trying to make such correlations: the time lag. It can take a year or more for those effects to completely filter thru. And while they do other factors contribute to the net effect. But logic argues that any increase in one component of a system will increase the cost of the system. Or reduce the output of the system. Or damage the system. Or any combination of these results.

[AgentR11]

I've posted this from time to time... its not that we just drove less, everything became less; what followed then was a restatement of the economy via QEx such that its absolute dollar numbers did not decline, even if almost everyone participating in the economy perceived a real decline in their standard of living. There is finally a nice trend of recovery, but if you project forward, and exclude any future trauma, full recovery is still DECADES away.



I like this chart specifically because it doesn't arbitrarily exclude or include in order to make 'terrible' look 'ok'. Then again, what would a real world power down look like, other than the above chart.....

sooo.. to the topic, any spike creates a stall&fall in the economy, a power down. This is a *GOOD* thing. Its a bit painful though. If we're going to use energy slaves like goopy ancient dead algae or whatever, ideally the few need to be seriously employed, a large swath needs to have some activity related to providing comfortable amenities for all, and the 'all', need to find ways of moving through the economy that doesn't burn up tons of energy for no particular gain. And that's exactly what the price spike, stall&fall does.

[Timo]

$this->bbcode_second_pass_quote('Armageddon', '')$this->bbcode_second_pass_quote('Subjectivist', '')$this->bbcode_second_pass_quote('Armageddon', 'y')ou think the last gasoline spike caused the last downturn in the economy?