Now look, no one likes to be wrong.
But it’s part of life. I’m wrong about the direction of asset prices all the time. Fortunately, I’m almost always right about what drives asset prices over the medium- to long-term which means that when it’s all said and done, I usually come out ahead.
Last week’s collapse in crude prices is a great example. I’ve said repeatedly that US operators are effectively walking up the down escalator. I’m not going to rehash the whole argument here but basically, if your business model relies on tapping capital markets to plug funding gaps and compensate for a deeply ingrained propensity to outspend, you are not running a viable business.
When prices collapse for what you produce, it makes the situation that much worse.
Thankfully for US operators, the central bank-inspired hunt for yield has kept debt and equity markets open to otherwise insolvent companies, allowing the US shale complex to survive a two-year collapse in oil prices. But the issue is, when these companies started producing again thanks to the rise in oil prices occasioned by the production cut agreement, they sowed the seeds of their own demise by creating a new glut that I said would, sooner or later, lead to another plunge in oil prices.
Well, “sooner or later” was last week.
But don’t take my word for it when it comes to crude dynamics. Here’s how Wells Fargo put it last month:
Operators seem to have short memories when it comes to capital discipline which is why it’s no surprise to us that we’re already starting to see signs of a meaningful ramp in spending emerge. Poor capital discipline has consequences as enterprise values are expanded through either net debt or equity increases. In all cases, existing common stockholders’ share of total EV is diluted, all else equal. Therefore, production and cash flow forecasts are less impactful than headline figures suggest after making an adjustment for associated dilution.
And here’s a bit of follow up color from a previous post that drives the point home:
[Wells Fargo’s point] is so readily apparent to anyone who understands corporate finance that I’m not sure why anyone is still confused. But people are – still confused that is. Here’s proof:
And you know what? Nothing said here will matter because they’ll be someone (probably a few someones) who will say that in fact it’s Heisenberg that doesn’t understand things.
I guess the most direct way I can challenge that (since common sense seems to be inadequate) is to quote Ali al-Naimi who, as it turns out, knows a thing or two about oil markets.
Here’s the advice he had for US shale last year:
- “Lower costs, borrow cash or liquidate.”
Assuming US shale has reached a near-term limit in terms of exploring option number one, and assuming option number two is only viable until capital markets get sick of funding this ridiculous charade, then option three is probably where this is headed. And ironically, the more US operators produce, the quicker they’ll get there.
Well, as noted, “they’ll be someone who will say that in fact it’s Heisenberg that doesn’t understand things.”
Someone is “Steve”, who decided on Monday that enough was enough, goddamn it.
Steve was going to (not so patiently) explain to everyone here at HR how there’s absolutely no way that Saudi Arabia will ever put US shale out of business. Here’s Steve:
For Saudi Aramco to have “killed shale,” they would have had to have bought out at least 4 MLPs (enbridge, plains, energy transfer partners, energy transfer equity), several frackers (Devon, whiting, concho, continental, Cabot, EQT) and several gas midstremers (Cheniere and Golar); they didn’t and now even if they combined SAMA assets with those of Brunei, and their GCC Arab buddies, they don’t have the available cash they had 2012-13 to buy them and gain the equivalent of 6.5mbd. Saudi Arabia is finished, its a country that’s as dead as deep fried monkfish. You can do all the wishthinking that you want, but you’ll be much happier dealing with the mathematical reality that lifting costs from existing wells in the us are $11.20 now, with well completion from $23-33. The psychotic, saudi sand people are finished and it was American Geophysicsts who did it. Deal with reality pal.
Well Steve, why don’t you tell us what you really think.
But let’s take Steve seriously because he obviously does. The “reality” is this: if the Saudis didn’t matter, then why did prices rise when they cut production? If the cartel was finished, then what they do or don’t do shouldn’t matter.
At the end of the day though, the most amusing thing about that e-mail is how openly racist it is.
Both towards “sand people” and, strangely, towards monkfish.
— Walter White (@heisenbergrpt) March 13, 2017