Money Dries Up for Oil and Gas, Layoffs Spread, Write-Offs Start

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street

When money was growing on trees even for junk-rated companies, and when Wall Street still performed miracles for a fee, thanks to the greatest credit bubble in US history, oil and gas drillers grabbed this money channeled to them from investors and refilled the ever deeper holes fracking was drilling into their balance sheets.

But the prices for crude oil, US natural gas, and natural gas liquids have all plunged. Revenues from unhedged production are down 40% or 50%, or more from just seven months ago. And when the hedges expire, the problem will get worse. The industry has been through this before. It knows what to do.

Layoffs are cascading through the oil and gas sector. On Tuesday, the Dallas Fed projected that in Texas alone, 140,000 jobs could be eliminated. Halliburton said that it was axing an undisclosed number of people in Houston. Suncor Energy, Canada’s largest oil producer, will dump 1,000 workers in its tar-sands projects. Helmerich & Payne is idling rigs and cutting jobs. Smaller companies are slashing projects and jobs at an even faster pace. And now Slumberger, the world’s biggest oilfield-services company, will cut 9,000 jobs.

It had had an earnings debacle. It announced that Q4 EPS grew by 11% year-over-year to $1.50, “excluding charges and credits.” In reality, its net income plunged 81% to $302 million, after $1.8 billion in write-offs that included its production assets in Texas.

To prop up its shares, it announced that it would increase its dividend by 25%. And yes, it blew $1.1 billion in the quarter and $4.7 billion in the year, on share buybacks, a program that would continue, it said. Financial engineering works. On Thursday, its shares were down 35% since June. But on Friday, after the announcement, they jumped 6%.

All these companies had gone on hiring binges over the last few years. Those binges are now being unwound. “We want to live within our means,” is how Suncor CFO Alister Cowan explained the phenomenon.

Because now, they have to.

Larger drillers outspent their cash flows from production by 112% and smaller to midsize drillers by a breathtaking 157%, Barclays estimated. But no problem. Wall Street was eager to supply the remaining juice, and the piles of debt on these companies’ balance sheets ballooned. Oil-field services companies, suppliers, steel companies, accommodation providers… they all benefited.

Now the music has stopped. Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under.

California Resources, for example. This oil-and-gas production company operating exclusively in oil-state California, was spun off from Occidental Petroleum November 2014 to inflate Oxy’s share price. As part of the financial engineering that went into the spinoff, California Resources was loaded up with debt to pay Oxy $6 billion. Shares started trading on December 1. Bank of America explained at the time that the company was undervalued and rated it a buy with a $14-a-share outlook. Those hapless souls who believed the Wall Street hype and bought these misbegotten shares have watched them drop to $4.33 by today, losing 57% of their investment in seven weeks.

Its junk bonds – 6% notes due 2024 – were trading at 79 cents on the dollar today, down another 3 points from last week, according to S&P Capital IQ LCD.

Others weren’t so lucky.

Samson Resources is barely hanging on. It was acquired for $7.2 billion in 2011 by a group of private-equity firms led by KKR. They loaded it up with $3.6 billion in new debt and saddled it with “management fees.” Since its acquisition, it lost over $3 billion, the Wall Street Journal reported. This is the inevitable result of fracking for natural gas whose price has been below the cost of production for years – though the industry has vigorously denied this at every twist and turn to attract the new money it needed to fill the holes.

Having burned through most of its available credit, Samson is getting rid of workers and selling off a chunk of its oil-and-gas fields. According to S&P Capital IQ LCD, its junk bonds – 9.75% notes due 2020 – traded at 26.5 cents on the dollar today, down about 10 points this week alone.

Halcón Resources, which cut its 2015 budget by 55% to 60% just to survive somehow, saw its shares plunge 10% today to $1.20, down 85% since June, and down 25% since January 12 when I wrote about it last. Its junk bonds slid six points this week to 72 cents on the dollar.

Hercules Offshore, when I last wrote about it on October 15, was trading for $1.47 a share, down 81% since July. This rock-bottom price might have induced some folks to jump in and follow the Wall-Street hype-advice to “buy the most hated stocks.” Today, it’s trading for $0.82 a share, down another 44%. In mid-October, its 8.75% notes due 2022 traded at 66 cent on the dollar. Yesterday they traded at 45.

Despite what Wall-Street hype mongers want us to believe: bottom-fishing in the early stages of an oil bust can be one of the most expensive things to do.

Paragon Offshore is another perfect example of Wall Street engineering in the oil and gas sector. The offshore driller was spun off from Noble in early August 2014 with the goal of goosing Noble’s stock price and loading up the new company with debt. As part of the spinoff, the company sold $580 million in junk bonds at 100 cents on the dollar. When its shares started trading, they immediately plunged. By the time I wrote about the company on October 15, they’d dropped 68% to $5.60. And the 6.75% notes due 2022 were trading at 77 cents on the dollar. Then in November, Paragon had the temerity to take on more debt to acquire Prospector Drilling Offshore.

Two days ago, Moody’s downgraded the outfit to Ba3, with negative outlook, citing the “rapid and significant deterioration in offshore rig-market fundamentals,” “the high likelihood” its older rigs might “not find new contracts,” and the “mostly debt-funded acquisition” of Prospector Drilling. The downgrade affects about $1.64 billion in debt.

Today, Paragon’s shares trade for $2.18, down another 61% since October 15. Its junk bonds are now down to 58 cents on the dollar.

Swift Energy – whose stock, now at $2.37, has been declining for years and is down 84% from a year ago – saw its junk bonds shrivel another eight points over the week to 36 cents on the dollar.

“Such movement demonstrates the challenging market conditions for oil-spill credits, with spotty trades and often large price gaps lower,” S&P Capital IQ LCD reported.

It boils down to this: these companies are locked out of the capital markets for all practical purposes: at these share prices, they can’t raise equity capital without wiping out existing stockholders; and they can’t issue new debt at affordable rates. For them, the junk-bond music has stopped. And their banks are getting nervous too.

Their hope rests on cutting operating costs and capital expenditures, and coddling every dollar they get, while pushing production to maximize cash flow, which ironically will contribute to the oil glut and pressure prices further. They’re hoping to hang on until the next miracle arrives.

“We are not panicking,” is how a bank CEO responded to the fact that loans to energy companies made up 20% of the bank’s loan portfolio. Read…  How Wall Street Drove the Oil & Gas Drilling Boom That’s Turning into a Disaster

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33 comments

  1. cnchal

    Two days ago, on this post, Jef made a comment that is still rattling around in my head.

    . . . you can not redistribute what does not exist. It is widely talked about here and elsewhere about how there are perhaps 10 times maybe more claims on real resources (aka. wealth) than actually exists.

    Yesterday, in the Toronto Globe and Mail business section in an article written by Barrie McKenna, was this, referring to Canada.

    Oil extraction represents a relatively small percentage of the economy – just 3 per cent. But it’s a much larger share of investments (roughly one – third) and exports (14 per cent)

    There is that 10 to 1 ratio, roughly, 3 per cent of the real economy, and 33% of “investments” in Canada’s financial markets. I agree with Jef. It’s a Ponzi scheme

    Samson Resources is barely hanging on. It was acquired for $7.2 billion in 2011 by a group of private-equity firms led by KKR.

    Will Samson bring KKR’s house down? Probably not. They have pension funds to distribute this dreck to.

    .

    1. Larry

      I don’t think the math is right on this argument. It’s not a 10 to 1 ratio because you’re talking percentages and not total amounts. That can obscure actual ratios. Now, it is troubling that so much investment is going into energy because those investments will represent real losses for a good deal of people.

      And the McKenna article does a good job of noting the Canadian resource miracle is over. The folding of Target Canada and a housing price correction that starts in Alberta and sweeps east is also mentioned. Canadian home prices have remained strong and seemingly in bubble territory.

      Here’s the link to the McKenna article for those that are interested:

      http://www.theglobeandmail.com/report-on-business/a-boost-to-us-economy-from-low-oil-will-be-canadas-saving-grace/article22473238/

    2. Christopher D. Rogers

      cnchal,

      The problem you and JEF seem to have with regards wealth re-distribution, is perhaps the one that the “Masters of the Universe” also have, and that is adequately describing what constitutes “wealth” in the beginning. There actually is real wealth, that which is tangible, and then is neoliberal wealth that is absolutely detached from any form of reality, apart from one’s imagination and a set of 1’s and 0’s floating around the ether, or space or what ever you desire to call it. A tree in a well husbanded forest constitutes wealth, it can be cut down and made into something – that is real. So when we think of wealth, perhaps its best to think of people and the wealth stored is said people, the things they can do for real, rather than swiping at keyboards and scripting algorithms to multiply non-existent digital wealth, which as we all know currently is based on debt and more debt than all the productive capacity of the “real” world could ever repay back. So, wealth redistribution would entail a return to a “real” world scenario rather than a dystopian version of The Matrix, which as we are aware from the movie was an artificial construct – essentially we talking about a return of the “commons”, the return to state and municipal ownership of all essentials in life and probably an end of compound interest.

      Obviously you cannot redistribute imaginary bullshite, but via the distribution of real bullshite things actually grow because it’s a fertiliser – 0’s and 1’s are not fertiliser, although even they have legitimate uses if utilised correctly.

  2. McMike

    There’s a nice case study right there:

    Shares started trading on December 1. Bank of America explained at the time that the company was undervalued and rated it a buy with a $14-a-share outlook. Those hapless souls who believed the Wall Street hype and bought these misbegotten shares have watched them drop to $4.33 by today, losing 57% of their investment in seven weeks.

    Will there be any consequences to BoA for being so completely, horribly incorrect, right out of the gate (while certainly still raking in fees, protecting their key clients, and probably betting against the stock at the same time)? Nothing. No one will lose their job. No change in BoA stature. No suspension of subsidies. No punishing lawsuits. No loss of clients. No short sale attacks. No congressional investigations. No prosecutions.

    Here’s people allegedly in the business of giving advice about value, and when they are horribly wrong – even in this thoroughly rigged system – nothing happens.

    Right now, the hedge funds are killing their energy companies, slashing jobs, cannibalizing the companies they own, crippling our energy infrastructure in an industry deemed critical to national economy and security (purchased with cheap Fed money and tax breaks), yet the one thing they won’t do is slash their own fees and compensation, or take a haircut on the debt they hold. The supposedly essential company will be stripped down and left a bankrupt shell, jobs gone, ability to produce energy gone, while every last penny goes to wall street.

    This is a thoroughly corrupt and broken business that serves no purpose except rent extraction.

    The only interesting thing about what comes next is how – while the balloon plummets back to earth – is how Wall Street will be (as I write) ripping the face off of clients, shuttling their losses over to the taxpayers, betting against their own products, and contradicting their own advice.

    1. beene

      For an understanding how the game works goggle Simmons article in NYT’s of a few years ago.

      You first buy controlling interest in company, then sell any assets, then borrow on the value of said company and let it go broke, then file as bankrupt and move on looking for another company with assets. Nothing complicated if profit is the only motive.

    2. Paul Niemi

      Was the frenzied oil drilling and fracking in the US a massive pump and dump scheme, that by 2014 had evolved into a ponzi? For goodness sake, drilling rigs showed up, as if by magic, in people’s back yards in Pennsylvania, and few people even batted an eyelash. In 2008 the price of oil hit $146 and people shrugged. Now we start to learn who is left holding the bag, after the most recent crash in oil prices. Apparently just about everybody, who had any money to invest, had part of their investments in oil. I have looked, and so far no one has bothered to add up the full cost to consumers of paying pumped-up prices for oil products over a period of years that essentially starts when oil was at an historic mean of $40 in the early part of the 00s. The malinvestment is obvious, in hindsight, because there was no money left over for alternative investments to create permanent jobs for the general economy and raise economic prospects for the long term. What a way to run a country.

    3. fresno dan

      “Will there be any consequences to BoA for being so completely, horribly incorrect, right out of the gate (while certainly still raking in fees, protecting their key clients, and probably betting against the stock at the same time)? ”

      Hmmm….the extremely rich will get richer….the mediocrely rich will break even….and everybody else will continue the long slide downward…
      It seems we went through this about 1,000,000,000 X more….in the housing bubble. Apparently, money was lost, but the banks got filled up with new money…loaned, or printed, or something into existence because doing things the way we were doing them, and keeping the extremely rich who did things that way, rich, was the most important thing the US government could think to do.
      The people who lived in the houses, well, they’re either living with mom, or under bridges, in their car, or on a park bench.

      If the government gives you 10$ for a sandwich, that’s called welfare. If the government gives you 10 billion $, that’s called high finance….

    1. James

      Waiting for the science to be in on fracking is akin to waiting for it to be in on AGW: by the time it is generally accepted and no longer controversial it will be a moot point. That’s the beauty of the deniers’ strategy. Fortunately, at least in the case of fracking, it appears that the financing is the weakest link. Small comfort for those already irreparably harmed, though.

      1. James

        But yes, the evidence so far is quite compelling, at least to my mind, that fracking contributes to local seismic activity and certainly poses considerable risks to local water tables, industry propaganda notwithstanding.

  3. Jim A.

    It is a sign of the oversupply of investment money on Wall Street just how many companies make up for their lack of actual profitability through borrowing. The petrol companies are cut off, but what about Amazon and other companies with valuations based not on dividends or profits but rather on speculation and the ability to borrow based on share price? We still haven’t seen sanity on Wall Street.

    1. LifelongLib

      “oversupply of investment money on Wall Street”

      Meanwhile we have an undersupply of wages/jobs/benefits/opportunities for the rest of us…

    2. James

      We still haven’t seen sanity on Wall Street.

      Perfectly sane from their point of view. The 99.9% continue to harbor the illusion that we’re all in this together. The .01% and probably a few percentage points more no better. And they’re quite rationally capitalizing on that fact.

  4. cnchal

    Here’s people allegedly in the business of giving advice about value, and when they are horribly wrong – even in this thoroughly rigged system – nothing happens.

    A financial scam seller will always lie to you. Value is meaningless other than what is possible to extract from a transaction.

    From a reality standpoint, the whole financial system is bizarre.

    The amount of different currencies exchanged each day is 60 times greater than needed for actual goods trading.

    Central bank lending finding it’s way into the stock market, goosing it’s “value”, and an average holding time for shares measured in seconds.

    How many $ quadrillion of derivatives are there? One? Two? Each one a potential stick of financial dynamite, with primer chord connections to each other. Will this drop in oil prices be the spark?

    I will quote Jef again.

    . . . you can not redistribute what does not exist. It is widely talked about here and elsewhere about how there are perhaps 10 times maybe more claims on real resources (aka. wealth) than actually exists.

    You are right about the hedge funds and the other finance parasites. They are rigging the system so as to get as much real resources as possible for themselves, and sell their worthless paper and destroyed companies to someone else.

    1. James

      Why the quandary? This is nothing more than late stage capitalism at work. And working very well at that!

  5. susan the other

    What would the alternative look like? For starters there would have to be a reality base on which to build a future of viable businesses. How are we gonna do that when the biggest reality facing us is something everyone has refused to acknowledge? Even tho’ the energy industry is in its last days, everybody wanted to wildcat their way to a windfall fortune. Most especially the banks. There is no other business model for them. So the Fed just winks and nods. Scary. They know how to steal everybody’s money and get away with it but the thing they cannot do is put their ill-gotten capital to productive uses. That’s the tragedy of it all. That money is as dead as oil. Talk about stranded assets. It does seem that if we are going to reconfigure this world and eliminate our toxic use of fossil fuels, we will have to simultaneously reconfigure the entire world financial system. I want to know what that will look like.

    1. James

      Smaller, more local, less energy intensive, and thus much less financial capital intensive. A whole lot more human capital intensive though, which should be mostly a good thing.

      A personal aside: One thing a lot of the doomer prophets discount is the amount of increased human energy will be required in a prospective human powered world of the future. Nothing comes for free in the energy world, and human labor will be no exception, although granted, we Americans certainly have a lot of stored energy to spare/burn off in the interim. But of course, most Americans, young and old alike – simply won’t be able to make the transition to such a world in the first place, having long since flushed our personal physical fitness to survive in a world once again dominated by actual physical labor. Sadly, once again, current financial status likely won’t be much of an indicator, as western rich and poor alike of all classes have for the most part long since flushed both their physical ability and mental willingness to perform such menial tasks.

      Personally, I find it rather encouraging that the coming bottleneck from which future human survivors will emerge seems to promote a rather random and eclectic bunch of “miscreants,” if for no other reason than any and all who are lucky enough to pass through that transition will have relearned the basic lesson that we are all in this mortal existence together and our very existence depends on it.

  6. James Levy

    In an earlier time it would have meant putting credible people like the ones who ran the WWII economy or the Apollo Program in positions to distribute capital rationally and equitably to boost employment and reach certain targeted goals like replacing carbon fuels with renewables and reducing greenhouse emissions and getting the rail system back on its feet and connecting it to a system of electric tram lines. However, 1) we no longer have even a glimmer of a consensus as to what our priorities are, and 2) such civic-minded individuals are really tough to find, certainly with the “right” credentials. So my money is on systemic collapse.

    1. George Hier

      people like the ones who ran the WWII economy or the Apollo Program

      (*Dryly*) Shame we ran out of Keynesians and Nazis. I guess we could draft Krugman and borrow a couple of Nazis from Ukraine, but its just not the same, is it?

      1. jkld

        Wow, talk about a straw man argument, James:

        “As a libertarian I believe only monopoly private magnates should/can do great things, so I taint the war effort as Keynesian (how is that bad?) and the moon program as my twin political cousin because it employed one former German rocket scientist?”

    2. James

      Good points. But realize, we no longer have cheap and abundant fossil fuel energy, which drives everything else. Pretty easy to be a “statesman” when your country and its economic model is ascendant and you’re lording it over everyone else as a virtual Superman among nations. Not so much when that energy source begins to be depleted, and with it, all the foolish ideas it spawned.

      1. James B

        Hi James,

        I agree with you that our affluence (and the statesmen that it created) were based on cheap fossil fuel. The problem is that when you net out the fall, it’s really, really depressing. If the Peak Oil/limited planet guys are right, it isn’t going to be fun in my daughter’s lifetime. So rather than focusing on the collapse (and that cli-fi novel I’ve been working on), I am starting to think about the Techno-Optimists. The idea that there is some breakthrough out there that will save us all — something on the scale of the Green Revolution that has held off large scale starvation for decades. Batteries, safe nuclear, fusion, carbon sequestration, or something else. It’s a lot more fun than looking at all of the collapse indicators. It makes for better dinner party conversation.

        So. James. What do yo think?

        1. James

          James B,

          All due to your daughter or whatever/whomever else you’ve got going on, the truth before us is the only thing that matters. And how could it possibly be otherwise?

          What I think is proper dinner party conversation is that we stop having dinner parties in the first place, since they’re a product of a dying way of life in the first place. What I think is proper conversation is that which is going on already among the people who don’t matter about subjects that actually do, totally oblivious to dinner parties and such. THAT, my friend, is where the action is!

          1. James B

            So, I should keep wring the collapse novel and reading Peak Oil blogs, and ignore The Breakthrough Institute, Bill Gates and Stanford?

  7. Chauncey Gardiner

    Besides the direct exposures and anticipated economic effects that Wolf summarized here, I too believe second and third derivative exposures are also of concern in this interconnected global financial system. These include an increasing likelihood of potential sovereign bond defaults, with the economic effects from the decline in Oil prices exacerbated by the effects of sanctions and currency fluctuations on debt and derivatives, as well as the possibility of increased political instability.

    As Warren Buffett famously said, we are seeing who has been swimming naked now that the tide has gone out.

    Btw, how construction of that Saudi wall to keep ISIL out coming along?… Ironic, no? At least the princess has her pure gold toilet. She might need it:

    http://www.citinewstv.com/2014/10/photos-saudi-billionaire-king-gives.html

    1. Greenbacker

      Nah, not seeing this at all. Oil is a investment, not financial based business. There is nothing to pass onto. Sounds like you really don’t get this at all. Speculators reach for yield which drove up prices and investment after 2009. That is due to weak money creation. Capital loves it because they can grow their balance sheets at a disinflated price and weaker nominal wages. Now that oil has dropped, doing business is even cheaper and real wages rise, making consumers happy.

      I would call it a “benign” deflation like seen in the 19th century. Reach for yield happened in the 19th century all the times during the booms. The problem comes when you can’t grow anymore through deflation and collapse comes vis boom/bust like in 1929 when a 250 year old system died. Until you have the boom, you can’t have the bust.

      1. James B

        This raises a question I have been meaning to ask.

        Between the end of the Civil War and 1929, the country went through a cycle of vicious boom/bust depressions, with the Great Depression being the culminating blow. As a result, we had Wall Street reforms, we dropped the gold standard, created FDIC, etc., and the busts stopped, and growth continued. That isn’t controversial.

        Forward to 2000. We had a a jobless recession/recovery in 2000, followed by a financial crisis in 2008 that the real economy has not recovered from. GDP growth since 2000 has been significantly lower than any other time since the end of WWII. The only thing that has gone up is the stock market, fueled by cheap credit, and not corporate profits.

        What I do not understand is that we have not made structural changes to the financial system to keep another crisis from occurring — the way we did in the aftermath of the Great Depression.

        Doesn’t this mean that we are still susceptible to another financial crisis?

        1. Vince in MN

          Crisis? What crisis? In the neoliberal world, “crisis” is just a synonym for the opportunity to steal (er, I mean accumulate) more of other folks stuff. The Masters of Chaos (.01%) are doing just fine. This is the program.

      2. Clever Username

        Your comments contradict theselves every other sentence, and your syntax is painful to read. Are you some kind of bot that’s stuck in the Uncanny Valley of the Turing test?

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