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Old 03-10-2020, 01:37 PM
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Can Putin take out Shale?


I've seen some articles saying that Putin wants to kill the American shale production industry by lowering prices to below their operation rate for long enough that they can't run, and go bankrupt.

I'm somewhat skeptical of this since, as I understand it, the oil industry is pretty used to the boom and bust cycle and builds their facilities to be perfectly fine to chill for a few decades and then be turned right back on and resume production again with a little bit of WD40. And even if the current owners were to all go bust, the facilities would still exist and eventually fall into the hands of someone who could resume production when the oil prices came back up again.

You can't really escape shale production. Trying to do so just means that you're making less profit while trying to accomplish an impossible task.

Am I missing something?

Last edited by Sage Rat; 03-10-2020 at 01:37 PM.
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Old 03-10-2020, 02:24 PM
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Nah. Some companies may fold. Some may consolidate but some will remain.

Quote:
The White House is strongly considering pushing federal assistance for oil and natural gas producers hit by plummeting oil prices amid the coronavirus outbreak, as industry officials close to the administration clamor for help, according to four people familiar with internal deliberations.

SOURCE: White House likely to pursue federal aid for shale companies hit by oil shock, coronavirus downturn
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Old 03-10-2020, 02:41 PM
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And the wells owned by the bankrupt companies get quickly bought up by others.
This seems more of a fight with the Saudis to me.
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Old 03-10-2020, 03:28 PM
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Oil is a boom-and-bust commodity in any case. Prices go up, speculators rush in; prices go down, speculators go bust. However, the next group of speculators know exactly where to look/drill/frak, and production ramps up fairly quickly.
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Old 03-10-2020, 03:35 PM
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Broke: Let's coordinate a drop in oil prices to destroy Russia.

Woke: Let's coordinate a drop in oil prices to destroy Texas.

Not too sure why this is being blamed on Putin when it's obvious that both RU and SA have the same strategy - to take out the American shale producer.

And this... purposely flooding the oil market to take out weak companies... has been done before, many times. My God, this idea was old when Standard Oil was young.
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Old 03-10-2020, 03:44 PM
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Putin has the greatest fear mongering machine in the world.
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Old 03-10-2020, 03:45 PM
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A lot of the smart oil companies have the production hedged too but this unexpected production will be at market price. Oasis petroleum (to use an example I just check on yesterday) had 85% of its production hedged through the end of 2020 at $54/bbl even at $20 oil they will be selling at $48.9 average per barrel while the SA and Russian new production will be selling at $20. Russia and SA will have to keep up the extra production for a year before they really start hammering companies.
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Old 03-10-2020, 03:49 PM
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As a general rule, your majors should be safe. It's all the smaller producers, especially those with large amounts of debt, which will go belly up, and soon. It won't take a year, or even a few months, for those guys.
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Old 03-10-2020, 04:00 PM
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Quote:
I've seen some articles saying that Putin wants to kill the American shale production industry by lowering prices to below their operation rate for long enough that they can't run, and go bankrupt.
Leaving aside whether Putin wants to kill the US shale oil industry (why?), this really has nothing to do with why Putin is breaking with OPEC concerning production. The short answer is Putin and Russia need money, while OPEC (or at least Saudi) want to pump up the price per barrel by limiting production. These two things aren't compatible (and not just with respect to Russia...there are several other countries who basically need the sell oil, even if they can't get the price point they want, because otherwise they are completely fucked).

Quote:
I'm somewhat skeptical of this since, as I understand it, the oil industry is pretty used to the boom and bust cycle and builds their facilities to be perfectly fine to chill for a few decades and then be turned right back on and resume production again with a little bit of WD40. And even if the current owners were to all go bust, the facilities would still exist and eventually fall into the hands of someone who could resume production when the oil prices came back up again.
You aren't going to kill US shale production in this manner. Even if OPEC was fully on board with ramping up production to drive the price further down, which clearly they aren't (again 'they' meaning SA), it isn't going to kill off the entire industry. It might, probably will drive some companies out of business, and hurt the US a touch wrt jobs in this vertical sector, but it won't kill it. The best you could do is have it mothballed until prices go back down.

The only way to REALLY kill US shale oil production is to render oil itself moot or at least of lower need, permanently driving the price down because the demand is permanently lowered. Something like a paradigm shift wrt battery or other alternative that means the need for huge constant quantities of oil no longer exists. THAT, I think, we are on the path towards. But nothing Putin does is going to kill US shale, and I seriously doubt it's even on his top ten for reasons why he's doing what he's doing wrt production and the pissing contest with the Saudi's.
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Old 03-10-2020, 04:07 PM
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Yeah, your Tier 1 players will be fine. It's the Tier 2 people... especially all those small companies with 1-10 wells, especially those with a ton of debt, who are in trouble.

Another impact will be on royalty payments, and that is going to hit a lot of Eagle Ford landowners hard, when they see their $40,000/month payments drop to $4,000/month, or even $0.
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Old 03-10-2020, 04:39 PM
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Originally Posted by JohnT View Post
Broke: Let's coordinate a drop in oil prices to destroy Russia.

Woke: Let's coordinate a drop in oil prices to destroy Texas.

Not too sure why this is being blamed on Putin when it's obvious that both RU and SA have the same strategy - to take out the American shale producer.
I'm not sure it's obvious at all that's the major motivation of either of them or that they necessarily have a well thought out motivation. Since it does also hurt Russia and Saudi Arabia. As other posts have noted, under the relatively streamlined corporate bankruptcy system in the US all you do in the short run by forcing companies into Chapter 11 is hand over their assets from their equity holders to their bondholders. That doesn't affect the industry's ability to bounce back in the same time frame it takes for those companies to go belly up. It's certainly bad if you're one of the stockholders and your interest gets wiped out, or bondholders who now get full ownership of something worse less than the face value of the bonds. And it hurts economic activity overall in those parts of the country, and offsets the benefit of lower oil prices for US economy as a whole (whereas the net benefit was bigger when the US was a large net importer).

But 'killing the industry' you can only do if you hold prices down for long enough for the assets, especially expertise of the workforce, to actually permanently lose effectiveness and value. Particularly, the key employee expertise getting stale, moving to other lines of work, not replaced when people retire etc. That takes awhile.

Secondarily though if oil prices constantly seesaw over a wider range (than normally, as other mentioned large price swings are not exactly new in the oil business) then there could be uncertainty premium investors demand from relatively high cost oil (like most new US oil) that they don't demand as much of to invest in expanding lower cost oil production (which applies to Saudi Arabia particularly, Russian production costs are much higher than SA's on avg but still typically lower than US shale producers on avg).

But all in all I question constant media articles that Russian or Saudi Arabian inability to agree on production limits is to 'destroy the US shale industry' (last time around said to be SA's motivation, now either Russia's, SA's or both) as if they think 'we can destroy it with $35 oil for awhile, then we'll get $70-80-100 once it's destroyed!'. I'm not sure they think that's realistic. Unlike John D Rockefeller they aren't actually buying up and thereafter controlling competitors they force into bankruptcy.

Last edited by Corry El; 03-10-2020 at 04:41 PM.
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Old 03-10-2020, 04:41 PM
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Guys, it might not be their #1 strategy, but if you don't think that $20/bbl prices are going to hit the independent American shale producer hard, I got some leases to sell you in Uvalde County.
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Old 03-10-2020, 04:46 PM
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And there's this:

https://www.forbes.com/sites/timtrea.../#cc65bdb4d480

Quote:
In the past, Saudi Arabia’s preferred solution to a falling oil price has been to impose production cuts on itself and other OPEC members, a tactic which trims oil supply and boosts the price.

This time it was different: with Russian delegates to what is called OPEC+ arguing that the biggest beneficiary of past price-boosting production cuts had been U.S. oil producers, especially those extracting oil from high-cost deposits in shale and other tight rocks which require artificial stimulation to release their oil and gas.

Saudi demands over the weekend for a fresh round of production cuts were opposed by Russia, largely on the grounds that they only aided the U.S.
It's not like Sage and I are pulling the idea that "the US shale industry is the true target" out of the ether.

https://www.marketwatch.com/story/wh...war-2020-03-09

Quote:
The rapid growth of the U.S. shale industry is at the heart of a Russia-versus-Saudi Arabia crude-oil price war that threatens to upend a global economy already under threat from the spread of the coronavirus, experts said Monday.

“Russia has made no secret of the fact that it is concerned about the growth of the U.S. shale industry and of its view that repeated output cuts by OPEC were effectively handing market share to U.S. producers,” said Caroline Bain, chief commodities economist at Capital Economics, in a Monday note.

Russia’s rejection last week of a Saudi push for additional production cuts prompted Saudi Arabia over the weekend to slash prices on crude exports in a move analysts said was aimed at taking market share from Russia. But it was Russia’s longstanding frustration with rapidly growing U.S. shale industry that prompted Moscow to resist the push for additional production curbs.
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Old 03-10-2020, 04:56 PM
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Guys, it might not be their #1 strategy, but if you don't think that $20/bbl prices are going to hit the independent American shale producer hard, I got some leases to sell you in Uvalde County.
The whole question is what it does for Russia/SA, not whether it hurts the economic interest of people who own US oil stocks*, own their bonds or loans, work for them, live in those areas, etc. That's obvious. The non-obvious part is the net benefit to Putin or SA of lowering their own revenue drastically to, in the short run, just trigger financial transactions in the US where companies turn debt free by wiping out stockholders and turning over the company to the lenders and bondholders, now ready to make net cashflow at lower oil prices than before (courtesy of the investors who lost out, yes, bad for them, obviously). To permanently reduce the capacity of that industry you have to lower prices long enough for companies to actually liquidate and lots of people who work in the business get out of it permanently. How much money do Russia and SA lose by then?

I just think the media treatment of this tends to be shallow. It could be Russia and/or Saudi Arabia thinks it can raise oil prices enough in the future by lowering them now to achieve a positive net present value by the effect on US oil producers. Maybe that's true. But it seems like a lot of media accounts are based on the misconception that the human and physical assets in the US capable of producing a lot of oil, albeit at pretty high break even price, just disappear somehow if companies go into Chapter 11. It seems to tend to confuse the interest of current stockholders in those companies with the existence of the industry, two quite different things. And Russia/SA have no reason to care about the former, only the latter.

*even a diversified holding like the XLE energy sector ETF was absolutely clobbered yesterday, down 20%, that's really something for a whole sector ETF.

Last edited by Corry El; 03-10-2020 at 05:01 PM.
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Old 03-11-2020, 09:16 AM
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A lot of the smart oil companies have the production hedged too but this unexpected production will be at market price. Oasis petroleum (to use an example I just check on yesterday) had 85% of its production hedged through the end of 2020 at $54/bbl even at $20 oil they will be selling at $48.9 average per barrel while the SA and Russian new production will be selling at $20. Russia and SA will have to keep up the extra production for a year before they really start hammering companies.
The impact of hedges is overrated.

These hedges are short term, but most of the companies have debt that they need creditors to roll over. These creditors have horizons far longer than the duration of producers' hedges.
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Old 03-11-2020, 09:38 AM
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To mine and F-P's point, Guggenheim Investments has announced that up to a trillion dollars of investment-grade corporate bonds are headed to junk status, which will have massive ripple effects as these new ratings will trigger covenants which will put further pressure on these bonds as hedge funds, etc, move to get them off their books.

Quote:
Who could predict the exact chain of events set off by the coronavirus that leads us to the circumstances that we face today? Besides the public health and economic crisis, would anyone have considered that this would also turn into a geopolitical crisis? Russia is attempting to use this critical moment to its own advantage, and the collapse of the Russian-OPEC alliance—precipitated by Russia’s goal of killing off the U.S. shale industry—has turned into an all-out price war that is causing chaos in the energy markets.

Now the financial contagion is spreading rapidly into the credit markets where not only energy bonds are plunging but other sectors like airlines, lodging, and retail are sure to follow suit.

Then there is the knock-on effect to corporate earnings and cash flows across a broad swath of industries once the world enters a global recession which now appears to be inevitable.

We arrive at this moment with the overleveraged corporate sector about to face the prospect that new-issue bond markets may seize up, as they did last week, and that even seemingly sound companies will find credit expensive or difficult to obtain.
...

(and for the "Holy shit!" moment of this piece, they conclude...)

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What next? I hate to admit this, but our proprietary models indicate that fair value on the 10-year Treasury note will reach -50 basis points before year end and the possibility that rates could overshoot to -2 percent.

Credit spreads have a long way to expand. BBB bonds could easily reach a spread of 400 basis points over Treasurys while high yield would follow suit with BB bonds at 750 basis points over and single B bonds at 1100 basis points over. The risk is that it could be worse.

Last edited by JohnT; 03-11-2020 at 09:40 AM.
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Old 03-11-2020, 11:39 AM
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The impact of hedges is overrated.

These hedges are short term, but most of the companies have debt that they need creditors to roll over. These creditors have horizons far longer than the duration of producers' hedges.
Obviously the hedges are short term. I even wrote the horizon for the hedges as the end of this year. Some of next years production is hedged as well but a much lower percentage. The real question is if SA and Russia can maintain this low price point for longer then the hedges will last. No one is winning at $30 bbl oil. If oil stays at this price for even 6 months we'll start seeing companies going under.

Personally, I don't think the decrease in demand will last 6 months so we'll see a resurgence as travel picks back up once we're used to whatever the new state of affairs will be. That should bring prices up closer to $40. I also think that SA is trying to prove to russia that backing out of OPEC+ and the cuts will hurt every one so its better to bite the bullet. It won't surprise me to see both pull back from this level of production in the next 12 months either and we'll go back to the old equalibrium.

Now the question is how many company are both exposed to spot price and highly leveraged. There are a bunch of little companies that meet that definition but I don't think that they account for much in terms of percentage of oil production and most of them are playing on the fringes of the bakken and the eagle ford. Hell even Oasis isn't a huge Bakken producer and they have the debt service more than covered for the next 9 months.
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Old 03-11-2020, 12:03 PM
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Obviously the hedges are short term. I even wrote the horizon for the hedges as the end of this year. Some of next years production is hedged as well but a much lower percentage. The real question is if SA and Russia can maintain this low price point for longer then the hedges will last. No one is winning at $30 bbl oil. If oil stays at this price for even 6 months we'll start seeing companies going under.
I'm not sure you appreciated my point, which was, again, that "most of the companies have debt that they need creditors to roll over. These creditors have horizons far longer than the duration of producers' hedges".

Let's say a given company has revolving debt of $2B coming due 1 month from now. This company doesn't have $2B of cash on hand, which is why they needed to take on the debt to begin with, and they're not likely to have $2B in cash available one year from now or two years from now either. So anyone lending them $2B is making a bet that at the time the debt comes due either they, the lenders, will be interested in rolling over the debt, or that other lenders will be willing to lend the company $2B. Of course, whether they or another lender will be willing to loan $2B when the debt comes due depends on what the borrowing company's prospects are at that time. So being willing to lend $2B now amounts to a bet that the company will not just survive until the loan is due but that its prospects at that time will be such that lenders would lend them $2B. (Alternatively they could sell assets, but that itself depends on the value of the assets, which is largely dependent on the same profitability calculations as the lenders are making.)

What this means is that in effect, a lender looks to be satisfied that the borrowing company appears to be on solid ground for the foreseeable future. This doesn't imply that they need to know that nothing will ever change - this is impossible to achieve - but just that they don't have any particular reason to think the wheels may be about to come off. In the case of a company which is reliant on hedges which are known to be rolling off in a few months, that will be very risky for the lending company now. If they lend the money or renew their loans, even for 6 months for example, they face the prospect that at renewal time the company will be in a situation where they have no means to pay the loan back since they won't have the cash and won't be able to get it from another lender either.

As a practical matter, this means that for companies who are relying on hedged 2020 production, it's not enough if the end result is that prices go back up in 2021. It means that - for those with debt coming due in 2020 - lenders have to be confident now that the prices will come back up in 2021, which could very well not be achieved.
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Old 03-11-2020, 01:25 PM
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As a practical matter, this means that for companies who are relying on hedged 2020 production, it's not enough if the end result is that prices go back up in 2021. It means that - for those with debt coming due in 2020 - lenders have to be confident now that the prices will come back up in 2021, which could very well not be achieved.
You are correct. If we get into a lending crisis then this could explode and take down the whole economy. It all depends on if lenders will prefer a default today vs in a year.
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Old 03-11-2020, 03:16 PM
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I thought the issue right now is that Russia basically fucked up the OPEC+ deal with their refusal to cut production (yes, because they didn't want us to benefit), the Saudis are pissed, and they are ramping up production right now (aiming for over 10M barrels/day) not to hurt us, but to severely hurt Russia (whose economy is only secure at oil prices higher than $40/barrel).

An aside, this is hurting the hell out of me, personally, because I work in the oil industry (survey side) and the oil companies are basically cutting all possible work right now until things stabilize.
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Old 03-11-2020, 09:25 PM
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Nah. Some companies may fold. Some may consolidate but some will remain.
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And the wells owned by the bankrupt companies get quickly bought up by others.
And guess who (and his friends) have a shitload of extra money? Hint: the name rhymes with Scootin'.
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Old 03-11-2020, 09:42 PM
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And guess who (and his friends) have a shitload of extra money? Hint: the name rhymes with Scootin'.
I'm sure he has billions to his name. But, based on the replies to the thread I would fall on the side that the goal here is for some extra cash in a hurry. Putin's personal finances are separate from the Russian government's and the Russian people's.

Economic stimulus whole trying to get a new Constitution that re-ups his position as the head of the country installed, without having to murder too many angry citizens, seems like the order of the day.
  #23  
Old 03-13-2020, 10:25 AM
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The fact that shale oil is on the ropes doesn't surprise me at all. It was doomed from the beginning. Shale oil extraction is simply uneconomical. It only worked as a financial stunt during the low interest lending orgy of the past decade. Shale is an industry that had spent the last decade demonstrating that it can't make a red cent in profit. The industry is drowning in debt. Sooner rather than later, the financing will dry up entirely.
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