-- Published: Tuesday, 17 March 2015 | Print | Disqus
By Henry Bonner
"PumpjacksFull" by Arne Hückelheim
Weak revenues in the shale sector could put debt-laden companies at risk; a lot of these companies still own assets, but their cash flows have dropped off. They may begin to sell off these assets in order to cover their debts.
Who’s going to buy those assets? It could be companies with stronger balance sheets -- and those that want to get into the North American shale sector.
Frank Curzio has accumulated a broad following to his regular podcast Wall Street Unplugged. He’s been rated ‘most listened-to’ on the itunes store for a financial show.
In his 10 years spent doing interviews and regular shows he’s also been able to speak with many Wall Street analysts and forecasters.
I spoke with Frank recently about the oil plunge.
Frank believes this is an opportunity for some of the majors to gain a significant foothold in the shale industry. So far, oil giants like Exxon or Chevron have only small exposures to shale oil relative to their sizes. But they have the cash to enter the Bakken, the Permian Basin, or the Eagle Ford and purchase properties, especially if we see fire-sale prices.
Major oil companies tend to endure oil price declines better, because their revenues are less sensitive to the price of oil. Their ‘downstream’ divisions include marketing, distribution, and refining, which can actually benefit when prices drop.
These big companies might take assets off the books of some of the smaller producers who get hurt by cheap oil.
Many smaller oil companies are still protected against low oil prices because they’ve ‘hedged’ their production for 2015. While the oil price is around $50-$60, many are still making $70-$100 per barrel.
But as Frank pointed out, it’s dangerous to put your faith in these hedges. Typically, they are twelve-month contracts which means they will end in 2015.
Frank warns that some companies are being presented as ‘cheap’ by analysts without regard for the inherent expiration date on the hedges that are buoying their cash flows. “When those hedges come off, they’re going to be selling their oil for a lot less,” he said.
Frank explained that a lot of these experts are on media outlets because they’re making a bold call – that oil and oil stocks will go up or down.
As Frank revealed: “CNBC and Fox News have had me on. If I say now ‘You know what? I think oil is going to $10 a barrel,’ they will put me on tomorrow.”
But where were the experts saying that oil would go to $40, back when it was over $90 per barrel? It took most investors and analysts completely by surprise.
In fact, he’s worried by how much support he got on a recent article where he presented a positive take on oil, because the consensus tends to be wrong: “I wrote an interesting article […] saying production cuts could lead to $100 oil prices. Exxon e-mailed me, and other guys from all over the place. Hundreds of e-mails have come in to say, ‘Frank, I agree with you […] oil is going to $100.’ This makes me think one thing –oil is probably going lower.”
Of course, oil prices may recover, helping companies stave off the need to sell assets.
For instance, we could still see a surprise move by Saudi Arabia to cut production or a sudden rebound in demand. But the longer the rout lasts, the fewer companies will be able to hang around for the potential turn.
Is this oil price ‘too cheap’ to stay low for long?
Maybe, but wasn’t it ‘too expensive’ for years before? Frank reminds:
“If you look at $75 being the benchmark, oil prices traded irrationally high for four years. They were over $90 per barrel. So why can’t they trade irrationally low for four years?”
Major oil companies with strong balance sheets could begin to buy properties off distressed ‘junior’ producers when it’s time to re-evaluate reserve valuations and outstanding loans in May and June (Rick Rule has explained why this could be interesting). Hedges will also begin to come off in 2015, possibly re-setting the revenues of many companies to substantially lower levels.
Frank cautions against getting into companies that may look solid based on current revenues:
“Most of these shale producers can’t really produce oil right now and make money on it. It’s kind of a mirage [because of hedges]. Just be careful buying oil companies.”
Be cautious. Low revenues and high debts could force some shale players to sell off assets at discounted prices to more robust oil majors.
Reading In Case You Missed It: Jason Mayer on Oil Sector Budgets. Mishka Vom Dorp on Saudi Arabia’s Game Plan.
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-- Published: Tuesday, 17 March 2015 | E-Mail | Print | Source: GoldSeek.com