Get Out of The Oil Patch Part 3 :Goldman Sachs : How Oil Projects Are Stranded

Photographer: Mark Ralston/AFP via Getty Images

Please see our first Get Out of The Oil Patch dated Nov.30 for our 2015 forecast – here is a portion of that article:

- quote  Oil/ Energy I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL – unquote

Our advice beat several Wall Street Gurus: 

Oil’s drop has punished Icahn, Paulson • 10:37 AM

Carl Surran, SA News Editor
  • Even some of Wall Street’s big boys are taking a beating in the oil sector: Carl Icahn’s holdings of Talisman Energy (NYSE:TLM) have tumbled $230M since late August, and John Paulson’s firm had one of its largest losses of the year on a bet that big oil companies would buy smaller ones.
  • Before TLM agreed to be bought by Repsol, which boosted TLM shares, Icahn’s losses stood at more than $540M as recently as Dec. 11, and he still will have lost ~$290M at the deal price; Icahn also holds stakes in hard-hit Chesapeake Energy (NYSE:CHK) and Transocean (NYSE:RIG).
  • Paulson was the biggest shareholder in Whiting Petroleum (NYSE:WLL) and Oasis Petroleum (NYSE:OAS) at the end of Q3, but his strategy could yet pay off, as many analysts expect consolidation in the energy sector as lower oil prices pressure smaller firms.
  • Also caught flat-footed by the oil price pullback was Prosperity Capital’s Mattias Westman, a longtime investor in Russia whose firm has lost more than $1B this year, in part on stakes in Russian energy companies Gazprom (OTCPK:OGZPY) and Lukoil (OTCPK:LUKOY, OTC:LUKOF)

There are zombies in the oil fields.

After crude prices dropped 49 percent in six months, oil projects planned for next year are the undead — still standing upright, but with little hope of a productive future. These zombie projects proliferate in expensive Arctic oil, deepwater-drilling regions and tar sands from Canada to Venezuela.

In a stunning analysis this week, Goldman Sachs found almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world’s largest new oil and gas fields — excluding U.S. shale — and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the U.S., the shale-oil party isn’t over yet, but zombies are beginning to crash it.

The chart below shows the break-even points for the top 400 new fields and how much future oil production they represent. Less than a third of projects are still profitable with oil at $70. If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8 percent of current global demand.

How Profitable Is $70 Oil?

Source: Goldman Sachs Global Investment Research. Annotated by Tom Randall/Bloomberg

Source: Goldman Sachs Global Investment Research. Annotated by Tom Randall/Bloomberg

Making matters worse, Brent prices this week dipped further, below $60 a barrel for the first time in more than five years. Why? The U.S. shale-oil boom has flooded the market with new supply, global demand led by China has softened, and the Saudis have so far refused to curb production to prop up prices.

It’s not clear yet how far OPEC is willing to let prices slide. The U.A.E.’s energy minister said on Dec. 14 that OPEC wouldn’t trim production even if prices fall to $40 a barrel. An all-out price war could take up to 18 months to play out, said Kevin Book, managing director at ClearView Energy Partners LLC, a financial research group in Washington.

If cheap oil continues, it could be a major setback for the U.S. oil boom. In the chart below, ClearView shows projected oil production at four major U.S. shale formations: Bakken, Eagle Ford, Permian and Niobrara. The dark blue line shows where oil production levels were headed before the price drop. The light blue line shows a new reality, with production growth dropping 40 percent.

Even $75 Oil Crashes the Shale-Oil Party

Source: ClearView Energy Partners LLC

Source: ClearView Energy Partners LLC

The Goldman tally takes the long view of project finance as it plays out over the next decade or more. But the initial impact of low prices may be swift. Next year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion, said Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy. If the price of oil averages $70 in 2015, he wrote in an email, $150 billion will be pulled from oil and gas exploration around the world.

An oil price of $65 dollars a barrel next year would trigger the biggest drop in project finance in decades, according to a Sanford C. Bernstein analysis last week.

A pause in exploration and development may sound like good news for investors concerned about climate change. A vocal minority have been warning for years that potentially trillions of dollars of untapped assets may become stranded due to climate policies and improved energy efficiency. The challenges faced by oil developers today may provide a small sense of what’s to come.

However, these glut-driven prices can’t stay low forever. Oil production hasn’t slowed yet, but as zombie projects go unfunded, it will. This is how the boom-bust-boom of the oil market goes: prices fall, then production follows, pushing prices higher again. The longer this standoff goes, the more zombies will languish and the sharper the rebounding price spike may be.

Tax website http://www.youroffshoremoney.com

Stay Out of The Oil Patch Part 2 This Time It Ain’t Different

The U.S. stock market is showing signs of fatigue

iShares S&P/TSX Energy (XEG : TSX : $12.25), Net Change: -0.18, % Change: -1.45%
Canadian Natural Resources* (CNQ : TSX : $33.17), Net Change: -1.07, % Change: -3.13%
Suncor Energy* (SU : TSX : $32.13), Net Change: -0.43, % Change: -1.32%

Another week, another drop in the price of oil, oil sector stocks - As We Forecast , the C$ and Canadian equities.

The S&P/TSX lost another 5% last week and erased nearly all its gains for the year.

To make things worse, the U.S. stock market is showing signs of fatigue, and macro risk indicators that
s are all flashing red. With oil prices becoming a gauge of investors’ risk appetite, it seems that only a bottom in prices could halt the slide in global equities.

But with WTI breaking below the key resistance of US$60/bbl, investors are bracing for the worst. There are not many historical parallels of supply-driven oil shocks. Past periods of price weakness have been demand-driven. That said, the current experience shows :
similarities to the 1986 oil shock, when OPEC boosted production to gain market share. Last week, OPEC cut its 2015 customer
demand forecast by 300,000 barrels per day (b/d) to 28.9 million b/d – that’s the lowest level in 12 years. The downward
revision reflects the upward adjustment of non-OPEC supply as well as the downward revision in global demand. In 2015, nonOPEC
oil supply is forecast to grow at by 1.36 million barrels a day to 57.31 million a day. Growth is seen coming mainly from
the U.S., Canada, and Brazil, while declines are expected in Mexico, Russia, and Kazakhstan.

Separately on Friday:
International Energy Agency (IEA) released its oil market report for December. The IEA cut its outlook for 2015 global oil demand growth by 230,000 b/d to 900,000 b/d on lower expectations for Russia and other oil‐exporting countries.
This is the second consecutive year of growth below 1 million b/d. The IEA believes, “barring a disorderly production response, it may well take some time for supply and demand to respond to the price rout.” The IEA adds, “As for demand, oil price drops are sometimes described as a ‘tax cut’ and a boon for the economy, but this time round their stimulus effect may be modest…The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt. Continued price declines would for some countries and companies make an already difficult situation even worse.”

REDUCING CAPEX IS THE NEW NORMAL.

Bankers Petroleum* (BNK : TSX : $2.59), Net Change: 0.09, % Change: 3.60%, Volume: 1,717,990
Bankers Petroleum has reduced its 2015 capital guidance to a maintenance level in order to average 21,000-22,000 b/d, in line with its 2014 average.

The company will spend approximately $218 million in 2015, which is within its cash flow and debt utilization means in a $60/bbl realized Brent price environment.

The company intends to reduce its rig count from six to three rigs by early 2015 but remains positioned to respond quickly when oil prices recover by potentially reinstating drilling rigs.

The three focus areas of the company will be: 1) execution of its horizontal drilling program;

2) acceleration of its secondary recovery program; and

3) targeting capital for operational improvements that will result in reduced costs (with projected cost savings of $2-3/bbl in the next two years).

The company remains well positioned for low commodity prices in 2015 with a reported September 30, 2014, cash balance of $88 million and only $104 million drawn on its $224 million line of credit. With the budget, Bankers continues a theme of fiscal responsibility, cash preservation and maintenance of 2014 production levels. In the interim, the company has the
ability to operate within its means while maintaining current production levels. Bankers plans to release its Q4/14 operational
update Tuesday, January 6, 2015.

the dramatic plunge in oil prices has made some shale projects unprofitable. Investors are waking up to the realization that not all shale oil is created equally.

Drilling for oil is extremely capital intensive. Companies often borrow money to fund the exploration and drilling. Now that oil is sitting at just $55, it’s likely to get much more difficult for shale players to get the financing they need after years of low interest and bond rates.

Investors are betting that at least some of these more speculative shale companies won’t survive if oil prices stay low for a prolonged period.

Don’t take our word for it. Just look at the junk bond market, which has been rattled by the energy turmoil. High-yield energy bonds have tumbled almost 10% this month alone, according to S&P Dow Jones Indices.

“It becomes a vicious spiral. If bonds stay where they are, it’s going to be very difficult for these companies to raise new capital to continue to live,” said Spencer Cutter, a credit analyst at Bloomberg Intelligence.

high yield debt
High-yield U.S. corporate energy bonds have tumbled in recent weeks amid the oil price meltdown.

Cash flow negative: Huge energy companies like ExxonMobil (XOM) and Chevron (CVX)have plenty of financial flexibility to weather low oil prices, but that’s not the case for many smaller, highly-leveraged players.

Some of them are cash flow negative, meaning they aren’t generating enough revenue to offset the heavy investments they are making. Up until now, they’ve plugged those holes by selling stock or raising equity.

But $55 oil has changed that equation. Few investors are willing to provide affordable financing.

For example, the bonds of SandRidge Energy (SD), Midstates Petroleum (MPO) andResolute Energy (REN) are trading at distressed levels of just 50 cents or 60 cents on the dollar, according to FactSet.

“It’s hard to go from cash flow negative to cash flow positive on the turn of a dime when the commodity you’re selling falls by 45%,” said Cutter.

 

Defaults ahead:

The cash crunch is likely to be exacerbated by pressure from the banks, which may start reeling in credit revolvers currently cushioning shale companies’ balance sheets.

“Banks are not notoriously friendly in these down cycles. The lack of financing alternatives could speed up the demise” of some companies, said Tim Gramatovich, chief investment officer and co-founder of Peritus Asset Management.

Gramatovich predicted a “considerable” amount of defaults among high-yield energy bonds due to the looming cash crunch.

It is human nature to look for bargains - and destroy your portfolio as you gather losers into what used to be a ” nest” egg.

Look at Seeking Alpha and count the ” analysts” saying Dryships ( DRYS) is going to turn – how none forecast the sub dollar level it now enjoys.

What To Do ?

Here is our recent letter:

Managed Accounts Year End Review and Forecast

November 2014 – 40 % cash position
Gold and Precious MetalsThe largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.
Shipping Sector / Bulk ShippersYou can review our stock market letter athttp://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ EnergyI am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…

Have you avoided these sectors – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

Alternate Guaranteed Income Payments

Private client funds Minimum $10,000 Maximum Loan $500,000

Our client is seeking funds to expand their tanker fleet .

Interest 12 % compounded – paid 1% per month

Floating charge of the full $500,000 against the fleet – valued at  more than $ 1 M

 

Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email

jackabass@gmail.com OR

info@jackbassteam.com  OR

Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

Tax website  Http://www.youroffshoremoney.com

 

Lor Loewen's photo.

Get Out Of The Oil Patch, Get Out of Dry Bulk Shipping – New Paradigm Update

It is human nature to look for bargains - and destroy your portfolio as you gather losers into what used to be a ” nest” egg.

Look at Seeking Alpha and count the ” analysts” saying Dryships ( DRYS) is going to turn – how none forecast the sub dollar level it now enjoys.

“We could definitely see $55 next week,” said Tariq Zahir, a New York-based commodity fund manager at Tyche Capital Advisors. “We are probably going to see some violent trading.”

‘Drifting Down’

Skip York, a Houston-based vice president of energy research at Wood Mackenzie Ltd., said the next price target is $45.

“The market hasn’t seen the response they’re looking for on the supply side yet,” York said. “We’re now in this environment where I think prices are going to keep drifting down until the market is convinced, until the signal that production growth needs to slow has been received and acted on by operators.”

Are you still a client of a portfolio manager urging you to ” stay the course” – or worse, telling you to add to losing positions and losing sectors?

small- and mid-capitalization stocks, both E&P and Oil Service, are trading ~60% below their recent peaks, on average.

  • A growing number of stocks are priced at less than one-quarter of their peak prices achieved less than six months ago.

This is what is happening to oil TODAY ( Friday Dec. 12)

U.S. oil drillers, facing prices that have fallen below $60 a barrel and escalating competition from suppliers abroad, idled the most rigs in almost two years.

Rigs targeting oil dropped by 29 this week to 1,546, the lowest level since June and the biggest decline since December 2012, Baker Hughes Inc. (BHI) said on its website today. Those drilling for natural gas increased by two to 346, the Houston-based field services company said. The total count fell 27 to 1,893, the fewest since August.

As OPEC resists calls to cut output, U.S. producers from ConocoPhillips (COP) to Oasis Petroleum Inc. (OAS) have curbed spending. Chevron Corp. (CVX) put its annual capital spending plan on hold until next year. The number of rigs targeting U.S. oil is sliding from a record 1,609 following a $50-a-barrel drop in global prices, threatening to slow the shale-drilling boom that’s propelled domestic production to the highest level in three decades.

“It’s starting,” Robert Mackenzie, oil-field services analyst at Iberia Capital Partners LLC, said by telephone from New Orleans today. “We knew this day was going to come. It was only a matter of time before the rig count was going to respond. The holiday is upon us and oil prices are falling through the floor.”

ConocoPhillips said Dec. 8 that the Houston-based company would cut its spending next year by about 20 percent, deferring investment in North American plays including the Permian Basin of Texasand New Mexico and the Niobrara formation in Colorado. Oasis, an independent exploration and production company based in Houston, said Dec. 10 that it’s cutting 2015 spending 44 percent to focus on its core area in North Dakota.

What To Do ?

Here is our recent letter:

Managed Accounts Year End Review and Forecast

November 2014 – 40 % cash position
Gold and Precious MetalsThe largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.
Shipping Sector / Bulk ShippersYou can review our stock market letter at http://www.amp2012.com to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ EnergyI am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…

Have you avoided these sectors – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

Alternate Guaranteed Income Payments

Private client funds Minimum $10,000 Maximum Loan $500,000

Our client is seeking funds to expand their tanker fleet .

Interest 12 % compounded – paid 1% per month

Floating charge of the full $500,000 against the fleet – valued at  more than $ 1 M

 

Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email

jackabass@gmail.com OR

info@jackbassteam.com  OR

Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

Tax website  Http://www.youroffshoremoney.com

 

Lor Loewen's photo.
Like · ·

Canada Heavy Oil Nearing $40 Threatens New Oil Sands Projects : Bloomberg

Canadian heavy crude fell to near $40 a barrel, threatening projects under construction as producers boosted output and space on a pipeline was rationed.

Imperial Oil Ltd. (IMO) is increasing output at its Kearl oil sands project to 110,000 barrels a day after a shutdown last month, Pius Rolheiser, a Calgary-based spokesman said by phone yesterday. Enbridge Inc. apportioned space on the Spearhead pipeline, which carries Canadian crude south to Cushing, Oklahoma, after demand to ship on the line exceeded capacity, according to a company statement.

Heavy West Canadian Select dropped $3.73, or 8.1 percent, to $42.19 a barrel yesterday, the lowest since April 2009, data compiled by Bloomberg showed. Crude has fallen into a bear market as U.S. output surges to the highest in more than three decades. Companies including Calgary-basedCanadian Natural Resources Inc. (CNQ) have said they may scale back investment plans if oil prices remain near current levels.

Any production that’s currently under construction is at risk, absolutely,” Dinara Millington, the vice president of research at Canadian Energy Research Institute in Calgary, said by phone. “Any production that’s currently existing can produce at $40 to $50.”

West Texas Intermediate futures added 20 cents to $61.14 a barrel at 4:04 p.m. Singapore time in electronic trading on the New York Mercantile Exchange. Yesterday the contract closed at the lowest level since July 2009.

Expensive Crude

WCS trades at a discount to WTI due to higher production costs and a shortage of pipelines to move supplies to refineries. Some of the oil from Alberta’s oil sands must be dug out of the ground and upgraded into a lighter synthetic crude before it can be processed by refineries, increasing costs.

The lowest-cost oil sands producers use steam to loosen and pull bitumen from the ground and extract the fuel for about $51 a barrel, a July report by the Canadian Energy Research Institute showed.

Last week, Baker Hughes Inc. reported Canadian drillers cut the number of rigs used to the least for this time of year since 2009 as margins were cut by the price fall.

The last time WCS traded below $50 a barrel was in December 2012.

“We saw prices a couple of years ago that were similar to this,” Jackie Forrest, a vice president at ARC Financial Corp. in Calgary, said by phone. “For existing operations, you need to cover your operating costs. We’re still above those thresholds.”

OPEC Is Finished Oil Crash Will Continue : Bank of America

Warning from Bank of America

 The Telegraph | December 10, 2014 8:41 AM ET

An engineer walks in the Barjisiya oil fields in Iraq. Bank of America says the OPEC cartel is dead and free markets now control the global cost of oil.

Getty ImagesAn engineer walks in the Barjisiya oil fields in Iraq. Bank of America says the OPEC cartel is dead and free markets now control the global cost of oil.

The OPEC oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over coming months as market forces shake out the weakest producers, Bank of America has warned.

FP1211_Oil_Continues_fall_620_AB

Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a much cheaper source for Europe’s gas needs.

Francisco Blanch, the bank’s commodity chief, said OPEC is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,” he added.

The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only Middle East petro-states with the deepest pockets, such as Saudi Arabia.

BoA said in its year-end report that at least 15 per cent of US shale producers are losing money at current prices, and more than half will be under water if US crude falls below $55. The high-cost producers in the Permian basin will be the first to “feel the pain” and may have to cut back on production soon.

The claims pit BoA against its arch-rival Citigroup, which claims the US shale industry is far more resilient than widely supposed, with marginal costs for existing rigs nearer $40, and much of its output hedged on the futures markets.

BoA said the current slump will choke off shale projects in Argentina and Mexico, and force retrenchment in Canadian oil sands and some of Russia’s remote fields. The major oil companies will have to cut back on projects with a break-even cost below $80 for Brent crude.

It will take six months or so to whittle away the 1 million barrels a day of excess oil on the market — with Brent falling below $60 and US crude reaching $50 — given that supply and demand are both “inelastic” in the short-run. That will create the start of the next shortage.

“We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s energy expert.

We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year

oil-chart

Ms. Schels said the global market for LNG will “change drastically” in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.

If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs but has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LNG has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas within a couple of years.

BoA said the oil price crash is worth $1-trillion of stimulus for the global economy, equal to a $730-billion “tax cut” in 2015. Yet the effects are complex, with winners and losers and diminishing benefits the further it falls. Academic studies suggest that oil crashes can turn negative if they trigger systemic financial crises in commodity states.

Barnaby Martin, BoA’s European credit chief, said world asset markets may face a rough patch as the U.S. Federal Reserve starts to tighten afters year of largesse.

He flagged warnings by William Dudley, head of the New York Fed, that US authorities tightened too gently in 2004 and might do better to adopt the strategy of 1994, when they raised rates fast and hard, sending tremors through global bond markets.

BoA said quantitative easing in Europe and Japan will cover just 35 per cent of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot be expected to be rescued every time there is a squall.

What is clear is that the world has become addicted to central bank stimulus. BoA said 56 per cent of global GDP is supported by zero interest rates, and so are 83 per cent of the free-floating equities on global bourses. Half of all government bonds in the world yield less than 1 per cent. Roughly 1.4 billion people are experiencing negative rates in one form or another.

These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries break out of the stimulus trap, including Fed officials themselves.

Tax website  http://www.youroffshoremoney.com

Canadian Oil Sector Dividends Threatened at $70 Crude – Bloomberg / Sprott

Canadian oil producers’ ability to lure investors with generous dividends is being tested as cash flow is squeezed by crude trading near five-year lows.

Companies will have to choose between reducing capital spending or payments to shareholders, said Sprott Asset Management LP’s Eric Nuttall.

“The true sustainability of the dividend model at current oil prices in Canada is highly challenged,” said Nuttall, who oversees C$120 million ($106 million) at Sprott in Toronto. He predicted capital spending will fall 15 percent next year and dividend reductions may follow if prices stay low. “The current oil price does not work for the industry.”

Canadian energy companies such as Baytex Energy Corp. (BTE) with average dividend levels higher than their U.S. peers are grappling with tough choices after oil fell as much as 40 percent from its high in June. The plunge accelerated last week after OPEC committed to maintaining its current output target amid a supply glut and a global battle for market share.

Canadian producers in the Standard & Poor’s/TSX energy index have a dividend yield of 3.67 percent, 35 percent more than the average of the U.S. companies in the S&P 500 Energy Index today, according to data compiled by Bloomberg. The yield, which measures annual per-share dividends relative to a company’s share price, is rising for many producers as their stocks fall.

‘Strong Signal’

Dividend yields approaching 10 percent are a “strong signal that the market fears their sustainability,” said Robert Mark, director of research at MacDougall, MacDougall & MacTier Inc. in Toronto, which manages about C$6 billion.

At yesterday’s close, Calgary-based Baytex was yielding 12.8 percent, Canadian Oil Sands Ltd. (COS) was at 10.5 percent, Penn West Petroleum Ltd. (PWT) yielded 14.9 percent and Crescent Point Energy Corp. (CPG) was at 9.4 percent.

Baytex plunged 54 percent through yesterday’s close from oil’s June 20 high, compared with the 24 percent decline in the S&P/TSX energy index. In that time, Penn West slumped 65 percent, while Canadian Oil Sands fell 45 percent and Crescent Point dropped 39 percent.

The S&P 500 Energy Index fell 19 percent over the same period.

Nuttall said the pain should ease for producers if West Texas Intermediate, the U.S. benchmark, rises above $75 a barrel next year, as he expects.

Locked In

Some companies are also partially shielded from oil’s slide after locking in future prices with hedging. Crescent Point had 37 percent of its 2015 output secured at prices above C$93 a barrel as of Oct. 28, the company said in its third-quarter earnings statement.

“This is a great investment opportunity for people to collect a pretty high yield on a low-risk company,” which has never lowered its dividend through six downturns in the price of oil, Crescent Point Chief Executive Officer Scott Saxberg said today in a phone interview. “Our hedging program keeps our cash flow strong and allows us to maintain our dividend, maintain our capital program and battle through this.”

Penn West will maintain its dividend if it’s pressured by persistent low oil prices by reducing its 2015 capital spending, Greg Moffatt, a spokesman, said in an e-mail.

“Depending on the extent and duration of commodity price weakness in 2015, we can adjust our capital plan as required in the second half of the year,” Moffatt said.

‘Later Stages’

“Cutting a dividend tends to be in the later stages of what you do,” Craig Bethune, a fund manager at Manulife Asset Management Ltd. who focuses on energy and natural resources investments, said in an interview at Bloomberg’s Toronto office today. “Some will continue to fund their dividends through the tough times, choosing to make asset dispositions, really anything but cut the dividend.”

Reducing the dividend yield would free up extra cash for development at Baytex, Mark Friesen, an analyst at RBC Dominion Securities Inc. in Calgary, said yesterday in a note.

“We believe balance sheet preservation is paramount and that it will be important to see evidence of this in the company’s 2015 capital guidance,” Friesen said.

Canadian Oil Sands, the largest owner of the Syncrude Canada Ltd. mining project, is seeing its dividend challenged because it gets all its production from oil and doesn’t use hedging, Michael Kay, an analyst at Bloomberg Intelligence, wrote in a Dec. 1 note. A $10 change in the price of oil results in a C$240 million change in cash flow, according to an Oct. 30 company document.

The prospect of lowering dividends is particularly likely for some Canadian producers, Mark said.

“The risks of dividend cuts skew toward the juniors, the oil-heavy and the debt-laden,” he said.

Oil Sector – It Will Be Ugly : Protect your Assets

OPEC Gusher to Hit Weakest Players, From Wildcatters to Iran

The refusal of Saudi Arabia and its OPEC allies to curb crude oil output in the face of plummeting prices has set the energy world on a painful course that will leave the weakest behind, from governments to U.S. wildcatters.

A grand experiment has begun, one in which the cartel of producing nations — sometimes called the central bank of oil — is leaving the market to decide who is strongest and how to cut as much as 2 million barrels a day of surplus supply.

Oil patch executives including billionaire Harold Hamm have vowed to drill on, asserting they can profit well below $70 a barrel, with output unlikely to fall for at least a year. Marginal producers in less profitable U.S. shale areas, as well as countries from Iran to Russia and operations from Canada to Norway will see the knife sooner, according to analyses by Wells Fargo & Co., IHS Inc. and ITG Investment Research.

“We’re in a very nerve-wracking environment right now and will be for probably the next couple of years,” Jamie Webster, senior director for global crude markets at IHS said today in a phone interview. “This is a different game. This isn’t just about additional barrels, this is about barrels that are going to keep coming and keep coming.”
Investors punished oil producers, as Hamm’s Continental Resources Inc. fell 20 percent, the most in six years, amid a swift fall in crude to below $70 for the first time since 2010. Exxon Mobil Corp. fell 4.2 percent to close at $90.54 in New York. Talisman Energy Inc., based in Calgary, was down 1.8 percent at 3:00 p.m. in Toronto after dropping 14 percent yesterday.

U.S. Supplies

A production cut by the 12-member Organization of Petroleum Exporting Countries would have been the quickest way to tighten the world’s oil supplies and boost prices. In the U.S., supply is expected either to remain flat or rise by almost 1 million barrels a day next year, according to the Paris-based International Energy Agency and ITG.

That’s because only about 4 percent of shale production needs $80 or more to be profitable. Most drilling in the Bakken formation, one of the main drivers of shale oil output, returns cash at or below $42 a barrel, the IEA estimates.

Many expect reductions to U.S. output to occur slowly because of a backlog of wells that have already been drilled and aren’t yet producing, and financial cushioning from the practice of hedging, in which producers locked in higher prices to protect against market volatility, according to an Oct. 20 analysis by Citigroup Inc.

Production Slowdown

With a sustained price drop to $60 a barrel, shale drilling would face significant challenges, according to Citigroup and ITG, especially in emerging fields in Ohio and Louisiana, where producers have less practice. ITG estimates it will take six months before lower prices slow production growth from U.S. shale, which is responsible for propelling the country’s production to the highest in more than three decades.

“It’s going to be very producer-specific,” said Judith Dwarkin, chief energy economist at ITG in Calgary. “Companies have to revise their budgets, then you see the laying down of rigs, then you see the fewer wells being drilled, then you see the natural decline rates starting to have more of an effect.”

Drilling in Western Canada may drop by 15 percent in 2015, according to a report today by Patricia Mohr, an economist at Bank of Nova Scotia in Toronto.

Different Strokes

The market pressure will hit shale companies in different ways. Many have spent years honing their operations to pull the most oil out of every well at the lowest cost, a process that can be as much art as science at the nexus of geology, engineering and infrastructure. That experience means some producers, such as EOG Resources Inc. and ConocoPhillips, can turn a profit at $50 a barrel.

Those companies will now capitalize on that expertise to keep drilling wells, and so far have even promised to boost production.

The idea that lower prices will pressure shale producers to produce less oil is “a fundamental error,” said Paul Stevens, a distinguished fellow at Chatham House in London. Such thinking has focused on how much it costs to drill new wells in new fields, ’’ he said. “But what really matters is the price at which it is no longer economic to produce from existing fields, and that is very much lower.”

Worst Pain

Some companies won’t be as fortunate, especially smaller operators that rely heavily on debt and are focused on new areas, where the most efficient production techniques are in the early stages of being understood. Such producers have for years outspent cash flow to develop properties that could pay off big in the future.

Goodrich Petroleum Corp. is one example. With a market capitalization of just $269 million, the upstart producer is developing a prospect in Louisiana and Mississippi that one rival called possibly one of the last great opportunities in North America. But drillers in the Tuscaloosa Marine Shale need oil prices at about $79.52 a barrel, according to Bloomberg New Energy Finance. Goodrich fell 34 percent to 6.05, the most ever.

Wells drilled by Hess Corp. in Ohio’s Utica formation, which has yet to produce significant volumes and is held in high esteem by many in the industry, also require nearly $80 a barrel for profitability, according to Citigroup.

Offshore, Too

The punishment wasn’t limited to shale. The day’s worst performing oil producer was offshore specialist Energy XXI Ltd., which has its principal office in Houston. It lost a record 37 percent of its value, falling to $4.01.

With cash flow shrinking from lower prices, the company may not be able to reduce debt until the market rebounds, Iberia Capital Partners analyst David Amoss, based in New Orleans, wrote today in a note cutting his rating to hold from buy. As of Sept. 30, Energy XXI reported net debt of $3.7 billion.

Plunging oil markets already have begun to pressure governments that rely on higher prices to finance their budgets, fuel subsidies to citizens and expand drilling. Venezuela’s oil income has fallen by 35 percent, President Nicolas Maduro said on state television Nov. 19.

Nigeria increased interest rates for the first time in three years on Nov. 26 and devalued its currency. The government is planning to cut spending by 6 percent next year, Finance Minister Ngozi Okonjo-Iweala said Nov. 16. Both Nigeria and Venezuela are part of OPEC.

‘Real Victims’

Saudi Arabia has enough cash stockpiled to finance its budget for more than 20 years at an oil price of $80 a barrel, according to an Oct. 16 analysis from CIBC World Markets Corp. Russia has about six years of financial reserves at that price, but Iraq, Nigeria and Iran all have less than two years. Venezuela has less than six months, based on the analysis.

Several countries within OPEC such as Iran, Iraq, Nigeria and Venezuela, as well as non-OPEC states such as Russia, Canada and Norway, “will end up being the real victims of lower oil prices in 2015 and beyond,” Roger Read, an analyst at Wells Fargo, said today in a note to investors. The countries “are unlikely to be able to maintain their production trends in the face of today’s oil price declines.”

“It’s pretty clear to me that the Saudis are no longer interested in being the world’s central banker for oil,” said John Stephenson, who manages C$50 million ($44 million) at Toronto-based Stephenson & Co. as chief executive officer. “It’s going to be ugly.”

I am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.

On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge:

Company                                   (Ticker)                        Price Change
Energy Transfer Partners LP (NYSE:ETP)             $ 65.17 -4.13%
Exxon Mobil Corporation (NYSE:XOM)                $ 90.54 -4.17%
Chevron Corporation (NYSE:CVX)                       $108.87 -5.42%
ConocoPhillips (NYSE:COP   )                                 $ 66.07 -6.72%
Vanguard Natural Resources, LLC (NASDAQ:VNR) $ 23.22 -6.86%
Seadrill Ltd. (SDRL)                                                  $ 14.66 -8.32%

Have you avoided this sector – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

 

YEAR END UPDATE AND FORECAST

NEW go to  http://youroffshoremoney.com/

November 2014 – 40 % cash position

Year End Review and Forecast

Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email info@jackbassteam.com or

Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

A decade of increasing productive capacity has fattened supplies of commodities just as the world economy grows less commodity-intensive and investment demand wanes with traditional equity and bond markets performing well.

The idea that commodities were even a proper investment asset class for long-term investors was never fully demonstrated. Commodity prices tend to be mean reverting through successive cycles rather than instruments that produce cash income or build economic value.

Yet many in the financial industry promoted the idea of a “supercycle” fed by global industrialization and “peak oil” supply constraints. For sure, commodities look quite oversold in the short term and sentiment has turned severely against them, supporting the chances for a trading bounce or pause in the declines.

Yet even if the lows are in for oil or gold, the big picture is now looking decidedly less “super” for long-term commodity bulls. In one representative example of flagging investor interest in commodities, assets in the bellwether Pimco Commodity Real Return Strategy fund (PCRIX) have fallen below $13 billion – down by more than a third in two years.

 

Oil Enters Bear Market

Brent Falls to Lowest Since 2010 After IEA Cuts Forecast

Brent crude fell to the lowest level in almost four years after the International Energy Agency said oil demand will expand this year at the slowest pace since 2009. West Texas Intermediate slipped for the fifth time in six days.

Futures dropped as much as 3.1 percent in London and 2.1 percent in New York. Oil consumption will rise by about 650,000 barrels a day this year, 250,000 fewer than the prior estimate, the Paris-based agency said in its monthly market report. U.S. crude supplies probably grew by 2.5 million barrels last week, according to a Bloomberg survey of analysts before a report from the Energy Information Administration on Oct. 16.

Oil futures have collapsed into bear markets as shale supplies boost U.S. output to the most in almost 30 years and global demand weakens. The biggest producers in the Organization of Petroleum Exporting Countries are responding by cutting prices, sparking speculation that they will compete for market share rather than trim output. Saudi Arabia won’t alter its supplies much between now and the end of the year, a person familiar with its oil policy said on Oct. 3.

“The IEA report is killing Brent,” Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York, said by phone. “This is the fourth month in a row where they’ve cut their demand forecast. There’s tremendous downside risk for the market.”

Fourth Month

Brent for November settlement declined $2.54, or 2.9 percent, to $86.35 a barrel on the London-based ICE Futures Europe exchange at 10:24 a.m. in New York. It slipped to $86.17, the lowest intraday price since Dec. 1, 2010. The volume of all futures traded was 68 percent above the 100-day average for the time of day. Prices have decreased 22 percent this year.

WTI for November delivery dropped $1.71, or 2 percent, to $84.03 a barrel on the New York Mercantile Exchange. The contract settled at $85.74 yesterday, the lowest close since December 2012. Volume was 72 percent higher than the 100-day average. The U.S. benchmark grade traded at a $1.96 discount to Brent, down from $3.15 at yesterday’s close.

The IEA reduced its estimate for demand growth this year for the fourth month in a row, meaning oil consumption will expand by about half the rate of 1.3 million barrels a day anticipated in June. The IEA cut its 2015 demand growth forecast by 100,000 barrels a day to 1.1 million. About 200,000 barrels a day less crude will be needed from OPEC this year and next than estimated previously, the agency said.

Market Share

OPEC, which supplies about 40 percent of the world’s crude, is raising output as its members compete for market share while seeking to meet increased domestic demand. The group pumped 30.935 million barrels a day in September, the most since August 2013, according to a Bloomberg survey. The gain was led by Libya, where output climbed by 280,000 barrels a day to 780,000, the fifth straight increase.

“The recovery in Libyan oil production has pushed up total OPEC output at a time when demand growth is slowing,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone. “OPEC has a serious problem.”

Iraq said on Oct. 12 that it will sell its Basrah Light crude to Asia at the biggest discount since January 2009, following cuts by Saudi Arabia and Iran. Middle East producers almost always follow the lead of Saudi Arabia, OPEC’s largest member when setting export prices. The Saudis need to deepen price cuts for Asia by between 70 cents and $1 a barrel to restore a competitive position against other Middle Eastern and West African suppliers, according to JPMorgan Chase & Co.

Divergent Views

Oil ministers from Kuwait and Algeria have dismissed possible output cuts as the price slump prompted Venezuela to call for an emergency OPEC meeting. The group is scheduled to gather on Nov. 27 in Vienna.

The EIA, the Energy Department’s statistical arm, will release its weekly petroleum inventory report on Oct. 16 at 11 a.m. in Washington, a day later than usual because of yesterday’s Columbus Day holiday. Crude supplies rose 5.02 million barrels to 361.7 million in the week ended Oct. 3, the biggest increase since April, EIA data showed.

“The market isn’t expected to get any relief from Thursday’s inventory numbers,” Yawger said. “We’re looking for it to show a substantial build in crude supplies, coming on top of a 5 million-barrel build the previous week. There’s plenty of crude on hand.”

The report will probably show that gasoline stockpiles dropped by 1.55 million barrels in the week ended Oct. 10, according to the median estimate in the Bloomberg survey of eight analysts. Inventories of distillate fuel, a category that includes diesel and heating oil, are projected to have slipped by 1.65 million barrels.

Fuel Prices

Suncor Energy

SU : TSX : C$42.60
SU : NYSE
BUY 
Target: C$50.00

Energy — Senior E&Ps/Integrateds
SCREAMING FOR VENGEANCE!
We believe there were four very important key takeaways from SU’s Q1
release and associated conference call:
1. Operational reliability for SU remains strong. The company reached an
SCO production record of 312 MBbl/d in Q1/14, which included a 21%
increase in sweet production compared to Q1/13. In addition, refinery
utilization has increased from 92% in 2011 to 96% this quarter. This
should help further re-rate shares, in our view.
2. SU is realizing the cash flow uptick from railing Western Canadian light
oil to its Montreal refinery. We believe this led the company to beat
market expectations; and will likely lead to increases in Sell Side
estimates. It also helped to demonstrate the free cash flow potential of
this company (SU generated about $1.4 billion in Q1 alone). Expect
more benefits once Line 9 reversal commences operations.
3. The company disclosed significant uptick to realized prices and
netbacks when selling dilbit blend in PADD III (USGC) as opposed to
PADD II. To that end, SU stated it realized an $8/Bbl net of
transportation uptick by selling in PADD III as opposed to PADD II. This
is a key confirmation of our heavy oil thesis. The best read-through on
this, in our view, is MEG Energy (MEG-T:$40.10|BUY )
4. Further confirmation around the willingness to export Canadian crudes
beyond the U.S. To that end, management stated on SU’s Q1 call that it
will look at opportunities to ship some volumes offshore that make their
way down the Keystone southern leg. As discussed in our April 21st
report “Q2 Global Energy Themes”, we believe a consortium is building
up in Canada to make the country a major exporter of oil beyond the
U.S.
Bottom line: The first two points are positives for SU; and reasons why we
reiterate our BUY rating and are raising our EPS/CFPS estimates and our
target by $1 to $50. The remaining two points are key to our bullish view on
Canada as we continue to believe they will lead to Canadian crudes being
linked to global prices; and thus resulting in a re-rating of the sector.

BlackPearl Resources Inc

PXX : TSX : C$2.64

BUY
Target: C$4.00

COMPANY DESCRIPTION:
BlackPearl (PXX : TSX) is a mid-capitalization exploration
and production company focused on large scale resource
plays: primarily conventional and thermal heavy oil and
bitumen opportunities in Canada.

All amounts in C$ unless otherwise noted. Investment recommendation
Closing of its bought deal equity financing. The update reinforced our positive view of the
stock; our conviction on the story has grown given its improved financial
outlook and growth profile. Given an attractive >50% forecast return to
target.

There are five primary reasons we have a high conviction on PXX:
1) The stock clearly fits our team’s positive view on heavy oil
fundamentals given a 98% heavy oil weighting.
2) A best in class management team with a history of value creation (it
sold BlackRock Ventures to Shell in 2006 for $2.4B).
3) An underappreciated growth profile through 2016 (forecast
production up 60% relative to 2014), with a fully financed plan in
place for development of its first thermal growth project at Onion
(without the need for any new term debt).
4) Two high quality thermal projects with its largest project at
Blackrod de-risked given positive pilot performance.
5) An extremely compelling valuation where investors are currently
paying for only its conventional assets and receive 850 million
barrels of thermal upside for free.
Valuation
We have maintained our BUY rating and target price of C$4.00 based on
an unchanged 1.0x multiple to NAV and a 13.2x 2014E EV/DACF
multiple. The stock trades at 0.7x CNAV, 9.0x EV/DACF, and
$94,200/BOEPD on our 2014 estimates which reduces to 5.4x EV/DACF,
and $61,400/BOEPD on our 2016 estimates with the contribution of
production from Onion Lake Phase 1.

 

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