Look Out Below :Oil prices hit 11-year low as global supply balloons ( Reuters plus Bloomberg charts) )

LONDON (Reuters) – Brent crude oil prices hit their lowest in more than 11 years on Monday, driven down by a relentless rise in global supply that looks set to outpace demand again next year.

Oil production is running close to record highs and, with more barrels poised to enter the market from nations such as Iran, the United States and Libya, the price of crude is set for its largest monthly percentage decline in seven years.

Brent futures (LCOc1) fell by as much as 2 percent to a low of $36.05 a barrel on Monday, their weakest since July 2004, and were down 49 cents at $36.39 by 1332 GMT.

While consumers have enjoyed lower fuel prices, the world’s richest oil exporters have been forced to revalue their currencies, sell off assets and even issue debt for the first time in years as they struggle to repair their finances.

OPEC, led by Saudi Arabia, will stick with its year-old policy of compensating for lower prices with higher production, and shows no signs of wavering, even though lower prices are painful to its poorer members.

The price of oil has halved over the past year, dealing a blow to economies of oil producers such as Nigeria, which faces its worst crisis in years, and Venezuela, which has been plunged into deep recession.

Even wealthy Gulf Arab states have been hit. Last week Saudi Arabia, Kuwait and Bahrain raised interest rates as they scrambled to protect their currencies.

NO LIGHT AT THE END OF THE TUNNEL

“With OPEC not in any mood to cut production … it does mean you are not going to get any rebalancing any time soon,” Energy Aspects chief oil analyst Amrita Sen said.

“Having said that, long term of course, the lower prices are today, the rebalancing will become even stronger and steeper, because of the capex (oil groups’ capital expenditure) cutbacks … but you’re not going to see that until end-2016.”

Reflecting the determination among the biggest producers to woo buyers at any cost, Russia now pumps oil at a post-Soviet high of more than 10 million barrels per day (bpd), while OPEC output is close to record levels above 31.5 million bpd.

Oil market liquidity usually evaporates ahead of the holiday period, meaning that intra-day price moves can become exaggerated.

On average, in the last 15 years, December is the month with least trading volume, which tends to be just 85 percent of that in May, the month which sees most volume change hands.

Brent crude prices have dropped by nearly 19 percent this month, their steepest fall since the collapse of failed U.S. bank Lehman Brothers in October 2008.

U.S. crude futures (CLc1) were down 26 cents at $34.47 a barrel, their lowest since 2009.

“Really, I wouldn’t like to be in the shoes of an oil exporter getting into 2016. It’s not exactly looking as if there is light at the end of the tunnel any time soon,” Saxo Bank senior manager Ole Hansen said.

Investment bank Goldman Sachs (GS.N) believes it could take a drop to as little as $20 a barrel for supply to adjust to demand.

Thanks to the shale revolution, the U.S. has been pumping a lot of oil on the cheap, helping to drive down prices to six-year lows and to fill up storage tanks. Indeed, we’re running out of places to put it.

LOOK OUT BELOW

The U.S. has 490 million barrels of oil in storage, enough to keep the country running smoothly for nearly a month, without any added oil production or imports. That inventory doesn’t include the government’s own Strategic Petroleum Reserve, to be used in the now highly unlikely event of an oil shortage. Nor does it include oil waiting at sea for higher prices. The lower 48 states also boast about 4 trillion cubic feet of natural gas in storage — a far bigger cushion than Americans have needed so far during a very warm winter.

For their part, OECD countries (including the U.S.) have nearly 3 billion barrels of oil in storage — or enough to keep factories lit and houses heated in those countries for two months, cumulatively, without added production or imports.

The glut is going to continue worldwide unless some major producers stop pumping. OPEC announced recently that it was abandoning output limits.

So what happens when there’s too much oil to store? Producers will try to rid themselves of it by cutting prices. In that scenario, the price would plummet so far that some producers would shutter their wells altogether — which is, perhaps, the only way that the oil glut will ease.

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Braggin’ Rights : Oil Continues To Curse ( your) Portfolio Results

 

My rant – the  curse of Cassandra :

Cassandra, daughter of the king and queen, in the temple of Apollo, exhausted from practising, is said to have fallen asleep – when Apollo wished to embrace her, she did not afford the opportunity of her body. On account of which thing :

when she prophesied true things, she was not believed.

I have written :

GET YOUR PORTFOLIO THE HELL OUT OF ENERGY : PRAYER ISN’T AN INVESTMENT STRATEGY  Dec.17,2015

Managed Accounts Year End Review and Forecast

in part

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, which dropped another 8% following Wednesday’s 23% plunge..

OIL Sector Update Dec. 20,2015

  • Official data show Saudis shipped more crude amid global glut
  • Saudi output exceeded 10 million barrels a day for ninth month

 

Saudi Crude Exports Rose in October to Most in Four Months

Saudi Arabia boosted crude exports in October to the highest level in four months, as the world’s biggest oil exporter added barrels to a worldwide supply glut that has contributed to a slump in prices.

Saudi shipments rose to 7.364 million barrels a day in the month from 7.111 million in September, according to the latest figures from the Joint Organisations Data Initiative. The monthly exports were the most since June and 7 percent higher than in October 2014, the data released on Sunday showed. JODI is an industry group supervised by the Riyadh-based International Energy Forum.

Saudi Arabia produced 10.28 million barrels a day in October, up from 10.23 million in September, the JODI figures showed.

Saudi Arabia led OPEC to decide on Dec. 4 to abandon the group’s limits on output amid efforts to squeeze higher-cost producers such as Russia and U.S. shale drillers out of the market. The Organization of Petroleum Exporting Countries had set a production target almost without interruption since 1982, though member countries often ignored and pumped well above it. The oversupply has pushed the price of benchmark Brent crude to almost a seven-year low and triggered the worst slump in the energy industry since the 2008 global financial crisis.

Brent for February settlement dropped 18 cents, or 0.5 percent, on Friday to $36.88 a barrel on the London-based ICE Futures Europe exchange. The crude grade has tumbled 36 percent this year.

Saudi Arabia pumped 10.33 million barrels a day in November, exceeding 10 million barrels in daily output for the ninth consecutive month, according to data compiled by Bloomberg. The Saudis have stuck to their one-year-old view that any output cuts won’t succeed in supporting prices unless big producers outside OPEC, including Russia and Mexico, also participate.

Crude exports fell in October from Iraq and Kuwait, OPEC’s second- and fourth-biggest producers, respectively, according to JODI. Iraq shipped 2.708 million barrels a day, down from 3.052 million barrels a day in September for the country’s fourth consecutive monthly decline, the data showed. Kuwait’s exports dropped to 1.905 million barrels a day in October from 2.008 million in the previous month, JODI said.

Iran, the fifth-biggest supplier in OPEC, exported 1.395 million barrels a day of crude in October, a marginal increase from 1.39 million in September, JODI figures showed

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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.

 

GET YOUR PORTFOLIO THE HELL OUT OF ENERGY : PRAYER ISN’T AN INVESTMENT STRATEGY

Natural Gas Price Dips on Low Demand for Heating

 

The U.S. Energy Information Administration (EIA) reported Thursday morning that U.S. natural gas stocks decreased by 34 billion cubic feet for the week ending December 11. Analysts were expecting a storage withdrawal of around 68 billion cubic feet. The five-year average for the week is a withdrawal of around 79 billion cubic feet, and last year’s withdrawal for the week totaled 76 billion cubic feet.

Natural gas futures for January delivery traded up about 2% in advance of the EIA’s report, at around $1.83 per million BTUs, and traded around $1.79 after the data release, the same as Wednesday’s closing price. Last Thursday, natural gas closed at $2.02 per million BTUs, and over the past five trading days that was the posted high for natural gas futures. A new 52-week low of $1.78 was set Wednesday. The 52-week range for natural gas is $1.78 to $3.95. One year ago the price for a million BTUs was around $3.91.

Warmer than normal temperatures are expected to prevail for the rest of this week, but a cold snap is expected in the eastern part of the United States through the weekend. Beginning next week, temperatures in the east are expected to warm up while the west and the northern tier are touted to be cooler than normal. Overall, natural gas demand should be higher through the middle of next week.

Stockpiles are about 16% above their levels of a year ago and about 9.1% above the five-year average.

The EIA reported that U.S. working stocks of natural gas totaled about 3.846 trillion cubic feet, around 322 billion cubic feet above the five-year average of 3.524 trillion cubic feet and 541 billion cubic feet above last year’s total for the same period. Working gas in storage totaled 3.305 trillion cubic feet for the same period a year ago.

 Here’s how share prices of the largest U.S. natural gas producers reacting to this latest report:

Exxon Mobil Corp. (NYSE: XOM), the country’s largest producer of natural gas, traded down less than 0.1%, at $79.11 in a 52-week range of $66.55 to $95.18.

Chesapeake Energy Corp. (NYSE: CHK) traded down about 2.7% to $3.80. The stock’s 52-week range is $3.57 to $21.49.

EOG Resources Inc. (NYSE: EOG) traded down about 2.3% to $74.07. The 52-week range is $68.15 to $101.36.

In addition, the United States Natural Gas ETF (NYSEMKT: UNG) traded down about 2.0%, at $7.02 in a 52-week range of $6.95 to $19.38.

Chicago, IL – December 16, 2015 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Chevron Corp. (CVX), Royal Dutch Shell plc(RDS.A), Kinder Morgan Inc. (KMI),ConocoPhillips (COP) and Encana Corp. ( ECA).

Today, Zacks is promoting its ”Buy” stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Tuesday’s Analyst Blog:

Oil & Gas Stock Roundup

It was a week where oil prices dropped to levels not seen since Feb 2009 and natural gas futures settled below the $2 level for the first time in over 3 years.

On the news front, Chevron Corp. (CVX) set its investment budget for 2016 at $26.6 billion, down 24% from this year.

Overall, it was a pretty bad week for the sector. West Texas Intermediate (WTI) crude futures dived 10.9% to close at $35.62 per barrel, while natural gas prices plunged 9% to $1.990 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: Devon Bets on Crude Even as OPEC Inaction Sinks the Commodity .)

Oil prices encountered the year’s largest weekly drop in reaction to bearish comments from International Energy Agency (IEA) that sees global oil glut to worsen next year in the face of slowing demand growth. Oil was also undone by OPEC’s latest monthly report that showed the oil cartel’s November production rising to a 3-year high.

Related Quotes

Natural gas also fared badly despite a bullish inventory report that showed a larger-than-expected withdrawal. The heating fuel was weighed down by predictions of tepid early-December demand for the heating fuel due to mild weather spurred by the El Niño phenomenon.

Recap of the Week’s Most Important Stories

1. U.S. energy behemoth Chevron Corp. offered a glimpse of its 2016 capital spending plans. The integrated major has pegged its next year’s capital budget at $26.6 billion, down 24% from the $35 billion it expects to invest by the end of 2015. Of the total, roughly 90% will go toward oil and gas exploration projects worldwide, and 8% for downstream businesses.

In a separate press release, Chevron announced the commencement of production from the Moho Bilondo Phase 1b project, located off Republic of Congo’s coast at a water depth of 2,400 to 4,000 feet. Total production from the prospect – in which Chevron holds a 31.5% working interest – will likely be 40,000 barrels of oil every day.

2. Europe’s largest oil company Royal Dutch Shell plc (RDS.A) has received the unconditional clearance from China to proceed with its $70 billion acquisition of BG Group plc − a leading upstream energy player in the UK. The permission clears the final regulatory obstacle that was in the path of Shell’s BG buyout.

Following the green signal from China, the only thing that is left is the approval of shareholders after which the deal will likely be closed by early 2016. However, after getting the Chinese authorization, Shell added its intention to reduce global headcount by 2,800 from the merged entity.

3. The plunge in crude price – from over $100 per barrel in June last year to the recent $35 per barrel mark – has led several firms in the oil industry to take drastic measures to remain afloat. Treading on the same lines, energy infrastructure company Kinder Morgan Inc. ( KMI) announced a cut in its dividend payout beginning with the fourth quarter of 2015. The Houston, TX-based firm plans to lower its quarterly dividend to 12.5 cents, a 75% nosedive from the earlier payout of 51 cents.

Kinder Morgan plans to utilize the funds from the cutback in dividend to fund the equity portion of its expansion capital requirements. This would eliminate the need to tap into external sources for funds to a large extent. Management expects the cut to also translate into a sustained solid investment grade credit rating. The company expects to continue this practice of funding its capital expenditure plans through internal sources in 2017–18 also. (See More: Kinder Morgan Slashes Dividend by 75%, Hits 52-Week Low .)

4. Houston-based energy major ConocoPhillips (COP) released its capital spending budget and operating plan for 2016. The company’s 2016 capital budget of $7.7 billion is 25% below the expected 2015 capital spending and 55% lower than that of 2014. Of the total budget, about $1.2 billion or 16% is apportioned for base maintenance and corporate expenditures, $3.0 billion or 39% has been allocated for development drilling programs, $2.1 billion or 27% has been set aside for major projects. The remaining $1.4 billion or 18% is to be used for exploration and appraisal.

The majority of capital will be used for the development of U.S. oil fields, mainly shale formations in Texas and North Dakota, as well as for the Gulf of Mexico and Alaska. ConocoPhillips also intends to allot drilling capital to Malaysia, China, the North Sea and Canada. (See More: ConocoPhillips Updates 2016 Capex and Operational Plans .)

5. Encana Corp. (ECA) has decided to slash its 2016 capital spending budget by 25% from this year. The Calgary, Alberta-based oil and gas explorer also announced plans to lower its 2016 annual dividend by more than 78%. The announcements were not unforeseen as the company has been hit hard by the persistent weakness in oil price. Following the announcement, Encana fell more than 8% on the NYSE.

The company’s projected 2016 capital budget is in the range of $1.5 billion and $1.7 billion. Most importantly, the majority of the amount will be allocated toward four key oil and natural gas properties that comprise the Montney and Duvernay shale fields in Canada and the Eagle Ford and Permian shale resources in the U.S.

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The key is to give yourself options. They may not love any of the scenarios, but providing choices usually leads clients to eventually embrace one.

Despite solid advice, some clients just spend too much. Others, like the married couple we’ll call Matthew and Elizabeth, diligently save but still run into retirement-planning problems.

Matthew and Elizabeth became clients of Jack A. Bass Managed Accounts a few years back, looking to manage their portfolio and put a retirement game plan in place. At 66, Matthew was considering retiring. Elizabeth could finally travel now that she was no longer the primary caregiver of her mother, who had passed the year prior. Together, we looked at their joint financial picture and analyzed the situation.

Then came some bad news: They wouldn’t be able to confidently cover living expenses if Matthew stopped working. They were shocked, because they’d done so much correctly—worked hard, lived within their means and consistently saved for retirement, putting away $2.3 million between retirement and non-qualified investments. Matthew even ran some preliminary retirement numbers online over the years to make sure they were on track.

Part of the problem was that Matthew’s planning assumptions were too rosy. He didn’t assume he’d have any variability on his portfolio returns, he didn’t assume he’d have health-care costs once Medicare kicked in, and he didn’t assume that retirement could last more than 20 years.

We projected that if Matthew retired at 66, the couple would only have about a 70 percent chance of being able to cover lifestyle expenses without having to make adjustments to spending over time; if either of them experienced a modest long-term care event that ate into their resources, they would achieve only a 65 percent success rate.

Their miscalculations aside, the other part of Matthew’s and Elizabeth’s retirement problem was that they, like many other people, put others’ needs before their own, in traditional “sandwich generation” style.

When their kids asked for help with down payments on houses, they obliged. When Elizabeth’s mom needed in-home help for a few years prior to her moving in with them, they covered it. Consequently, these unforeseen events ultimately put their retirement in jeopardy.

Working toward a solution

Matthew and Elizabeth weren’t happy to hear they weren’t on track to retire, but they appreciated having a framework from which to choose their solution.

Ultimately, Matthew chose to work 30 hours per week so that his company could continue to pick up their health-care costs (saving them about $1,000 a month in Medicare-related costs). The part-time work allowed him to take off every Friday, and that gave him the added benefit of “test driving” retirement.

He and Elizabeth also decided to downsize their home and buy long-term care coverage. The LTC insurance assured that their children wouldn’t be faced with the possibility of someday having to assist them financially.

As with all best-laid plans and good intentions, sometimes things go awry with retirement planning. However, by exploring alternative saving tactics, you can still achieve your goal.

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The main intention of our website is to provide objective and independent information that will help the potential investor to make his own decisions in an informed manner. To this effect we try to explain in a simple language the different processes and the most important figures involved in offshore business and to show the different alternatives that exist, evaluating their pros and cons.

On the other hand we intend – in terms of  offshore finance, bringing these products to the average citizen.

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A final word of advice – information without action will produce nothing in the way of improved investment returns.

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Encana -OIl and Natural Gas – Prayer Is Not A Strategy : Get Out

Too little , too late

The company will outspend cash flow next year, with its cash flow of $1 billion to $1.2 billion reflecting a cash shortfall of $550 million, based on U.S. crude prices of US$50 per barrel and US$2.75 natural gas prices.

Our position: Analysts and the company executives are sleep walking past the graveyard.

Encana Corp slashes dividend and cuts capital spending

  • from Tuesday Financial Post

Encana Corp. is planning to “reset” its dividend next year as it adjusts to a protracted downturn that has seen oil prices decline to a six year-low.

The Calgary-based company said it is cutting its dividend by 79 per cent to six cents from 28 cents. The company’s stock tumbled more than eight per cent on the Toronto Stock Exchange on Monday.

“This reset better aligns our dividend with our cash flow or balance sheet and recognizes the very high quality investment options in our portfolio,” CEO Doug Suttles told analysts during a conference call outlining the company’s 2016 capital program.

Canada’s oil and gas sector is in the middle of an austerity drive, as one of the world’s highest-cost jurisdictions comes to terms with prices that have dipped below US$35 per barrel and have lost more than 50 per cent of their value in the space of a year.

The industry has lost 35,000 jobs since OPEC members started driving down prices by raising output in a bid to squeeze out high cost-producers in November 2014.

Canadian companies have responded by reducing headcounts, shelving projects, reining in capital expenditure and cutting dividends to protect their balance sheets — and there may be little respite in the new year.

Encana plans to cut its capital spending by 27 per cent next year to between US$1.5 billion to US$1.7 billion, with half the budget allocated to its Permian basin straddling Texas and New Mexico.

Indeed, the company plans to raise investment in its Permian operations to around $800 million from $700 million a year earlier, but will throttle back in Eagle Ford, and in the Canadian shale plays of the Duvernay and Montney, as it focuses on the most cost-effective play in its portfolio.

While the capital budget was in line with expectations, both total production and liquids production fell short of expectations, which will likely see our cash flow estimates come down with leverage increasing further,” wrote Kyle Preston, an analyst with National Bank Financial Inc. The analyst sees the company’s announcement as “negative,” and cut its price target to US$8 from US$10.

The company will outspend cash flow next year, with its cash flow of $1 billion to $1.2 billion reflecting a cash shortfall of $550 million, based on U.S. crude prices of US$50 per barrel and US$2.75 natural gas prices.

“While we do not see any near-term risk of breaching any debt covenants, we believe the budget may have to be revised down again if commodity prices remain at or near current levels for an extended period,” Preston said.

NONSENSE_ look where prices are – don’t base analysis on dreams:

Crude Oil & Natural Gas

INDEX UNITS PRICE CHANGE %CHANGE CONTRACT TIME ET 2 DAY
USD/bbl. 35.71 -1.64 -4.39% JAN 16 11:25:36
USD/bbl. 37.14 -1.31 -3.41% JAN 16 11:24:40
JPY/kl 28,540.00 -870.00 -2.96% MAY 16 11:26:00
USD/MMBtu 1.79 -0.03 -1.70% JAN 16 11:25:41

Read More on The Sector Sea Change at http://www.youroffshoremoney.com

 

Christine Till's photo.
UPDATE:

Data from the U.S. Energy Information Administration showed a growing glut, with crude inventories up 4.8 million barrels last week. Analysts in a Reuters poll had forecast a decrease of 1.4 million barrels.

“Only the staunchest contrarian could derive anything bullish out of that report,” said Peter Donovan, broker at Liquidity Energy in New York.

“The actual numbers were more bearish than all expectations, as well as more bearish than the API report released last night,” he said.

OPEC Says Crude Production Rose to Three-Year High in November $ 100 Never Again

  • iraq led output gains, countering pullback in Saudi Arabia
  • Non-OPEC supply seen falling by 380,000 barrels a day in 2016

OPEC raised crude output to the highest in more than three years as it pressed on with a strategy to protect market share and pressure competing producers.

Output from the Organization of Petroleum Exporting Countries rose by 230,100 barrels a day in November to 31.695 million a day, the highest since April 2012, as surging Iraqi volumes more than offset a slight pullback in Saudi Arabia. The organization is pumping about 900,000 barrels a day more than it anticipates will be needed next year.

Benchmark Brent crude dropped to a six-year low in London this week after OPEC effectively scrapped its output ceiling at a Dec. 4 meeting as de facto leader Saudi Arabia stuck to a policy of squeezing out rival producers. Members can pump as much as they please, despite a global surplus, Iran’s Oil Minister Bijan Namdar Zanganeh said after the conference. Brent futures traded near $40 a barrel in London on Thursday.

Non-OPEC supply will fall by 380,000 barrels a day next year, averaging 57.14 million a day, with an expected contraction in the U.S. accounting for roughly half the drop, the organization said Thursday in its monthly report. It increased estimates for non-OPEC supply in 2015 by 280,000 barrels a day.

The group maintained projections for the amount of crude it will need to pump next year at 30.8 million barrels a day.

Iraqi Volumes

Iraqi production increased by 247,500 barrels a day to 4.3 million a day last month, according to external sources cited by the report, which didn’t give a reason for the gain.

Iraq has pushed output to record levels this year as international companies develop fields in the south, while the semi-autonomous Kurdish region increases independent sales in the north, according to the International Energy Agency. Production had dipped in October as storms delayed southern loadings and as flows through the northern pipeline were disrupted, according to Iraq’s Oil Ministry.

Production in Saudi Arabia slipped by 25,200 barrels a day to 10.13 million a day in November, OPEC’s report showed.

The report didn’t make any reference to how OPEC’s data will re-incorporate output from Indonesia, which rejoined the organization on Dec. 4 after an absence of seven years.

$100 never again; there’s a new normal for oil

“Oil prices could fall lower in 2016,” Gheit said. “I’m talking $2 to $3 dollars per barrel. I don’t see it dropping below $30 per barrel.”

The decline in crude has had a big impact on major oil companies. Shares of ExxonMobil (XOM), ConocoPhillips (COP), and Chevron (CVX) have crashed as the pain from lower prices spreads.

“Producers have already seen a collapse in earnings, and we expect weakness to continue into next year,” Gheit said. “Most independent oil and gas producers in the U.S. are in the red. They’re losing money.”

But it’s not all bad news. A drop in crude means lower gas prices, so Americans are not digging as deep into their wallets at the pump.

“This is a big break for the taxpayer,” Gheit said. “The average American family will save between $700 to $800 per year as a result of a drop in oil prices.”

Kinder Morgan : Update – Dividend Slashed

RealMoney

What’s next for Kinder Morgan (KMI) now that it has slashed its dividend? Investors are likely hoping that the company doesn’t follow in Boardwalk Pipeline’s (BWP) footsteps.

Late Tuesday, Kinder Morgan announced that it was going to cut its dividend by 75% to $0.12 per share from $0.51. The move mirrors Boardwalk Pipeline’s own distribution cut from 2014 in which investors were paid $0.10 instead of $0.53. Shares of Boardwalk Pipeline’s stock were nearly halved overnight on the news and the company is still trading around $11.50 instead of in the mid-$20 range it was trading at prior to the cut.

Investors are surely hoping Kinder Morgan won’t repeat Boardwalk Pipeline’s fate. In after-hours trading, shares of Kinder Morgan are down about 6%, which is certainly nothing an investor wants to see, but it is no worse than declines the stock has seen in recent days.

“The way the stock is reacting it’s almost as though KMI already cut its dividend,” Shneur Gershuni of UBS Securities wrote in a note Friday. “Our experience suggests there could be some initial downside should Kinder Morgan cut its dividend.” As of Friday, Gershuni had a Buy rating on Kinder Morgan and a price target of $21.

Gershuni’s note was in response to a press release Kinder Morgan posted Friday in which it said it would be revising its financing plans and dividend policy with the goal of maintaining its investment grade rating. At the time, the company stressed that it had sufficient cash flows to support dividend growth in the range of 6% to 10%. Optimistic investors hoped that the outcome of Kinder Morgan’s board deliberations would be a cut to its dividend growth guidance. Instead, shareholders will be getting an actual cut to their dividend.

Sounding an optimistic note, Gershuni wrote that after the dust settles, Kinder Morgan could find itself as “the fastest growing C-corp with a much improved balance sheet.” Furthermore, if Kinder Morgan’s plans resulted in maintaining its investment-grade weighting and no longer having a Negative outlook by Moody’s, Gershuni sees additional upside to Kinder Morgan’s price target.

With respect to Kinder Morgan’s credit, Larry McDonald of Societe Generale said on CNBC’s “Fast Money” that the price Kinder Morgan’s bonds could get a nice bounce on the news. The upward tick in bond pricing could be what investors noticed yesterday.

In these situations, creditors will often lobby the CFO to cut the dividend, McDonald said, but he added that it is not clear if those conversations were happening at Kinder Morgan.

Either way, Kinder Morgan is due for a hectic day at tomorrow’s open.

The US Energy Sector on the Verge of a Cataclysmic Default

 

The U.S. E&P sector could be on the cusp of massive defaults and bankruptcies so staggering they pose a serious threat to the U.S. economy, according to Paul Merolli, a senior editor and correspondent for Energy Intelligence, an energy sector news and analysis aggregator. Merolli’s report calls out the over-leveraged, under-hedged U.S. E&P sector, which has been trying to keep up appearances over the past 12 months by slashing operating costs and capex to keep production costs lower than oil prices.

But experts believe that lower costs and improving efficiency won’t be enough for the sector as it grapples with some $200 billion-plus in high-yield debt, which the U.S. E&P sector used to finance the shale oil boom. According to Standard and Poor’s, there have already been 19 U.S. energy sector defaults so far in 2015, while another 15 companies have filed for bankruptcy. The default category also includes companies that have entered into “distressed exchanges” with their creditors.

Moreover, a Nov. 24 report from S&P Capital IQ titled “A Cautionary Climate” shows that the total assets and liabilities of U.S. energy companies filing for bankruptcy protection have grown in each quarter of 2015, and the third quarter was no exception with assets totaling more than $6.2 billion and liabilities totaling more than $8.9 billion. Each quarter of 2015 was larger than the total for all U.S. energy bankruptcies in 2014.

Also see: Oil Patch Bankruptcies Total $13.1 Billion So Far This Year

U.S. E&P Sector: Junk rating

According to Energy Intelligence, Standard & Poor’s applies ratings to around 100 E&P firms. Of these, 77% now have high-yield or “junk” ratings of BB+ or lower, 63% are rated B+ or worse, and 31% or 51 companies are rated below B-. Companies rated B- or below are effectively on life support, while those rated C+ are “maybe looking at a year, year-and-a-half before they default or file for bankruptcy,” according to Thomas Watters, managing director of S&P’s oil and gas ratings, speaking to Energy Intelligence.

High-yield E&Ps are expected to see negative free cash flow of $10 billion during 2016, even after all the recent capex cuts and efficiency measures. Unfortunately, capital markets are closing rapidly to new E&P debt issues. Last year, the U.S. E&P sector raised $29 billion from 44 issuances of public debt in 2014, but this year only $13 billion has been raised across 23 issuances, almost all of which occurred during the first half of the year.

What’s more, the U.S. E&P sector is woefully under-hedged. Energy Intelligence’s data shows that small producers have 27% of their oil production hedged at an average price of $77/bbl, mid-sized firms have 26% hedged at $69, and large producers have just 4% hedged at $63.

U.S. E&P sector: a final lifeline

It is believed that the U.S. E&P sector will really start to cave in April when banks are due to start their next review of borrowing bases. Borrowing bases are redeterminedevery six months, and banks use market oil prices to calculate the value of company oil reserves, which companies are then able to borrow against.

Haynes and Boone’s Borrowing Base Survey is predicting an average cut of 39% to borrowing bases when the next round of revaluations take place. In September, The Financial Times reported on a research note from Bank of America which pointed out that only a fifth of “higher-quality” energy companies had used up more than half of their borrowing base capacity. For junk-rated companies, however, it’s a different picture. Citi points out that only 21% of the junk-rated energy companies it covers have any borrowing base capacity left at all.

So with borrowing bases set to fall at the beginning of next year and capital market access drying up, it looks as if many oil companies are going to find their liquidity deteriorating significantly going forward. Another source of concern for E&Ps and their lenders are price-related impairments and asset write-downs which have already amounted to $70.1 billion so far this year, compared to the $94.3 billion total for the previous 10-year period of 2005-14. And there could be further write-downs on the horizon:

“Year-to-date, there has been $70.1 billion in asset write-downs in 2015, approaching the $94.3 billion total for the previous 10-year period of 2005-14, according to Stuart Glickman, head of S&P Capital’s oil equities research. And he expects even more write-downs and impairments to emerge at year-end. “Companies are putting this off for a long as they can. You don’t want to be negotiating in capital markets with a weakened hand,”

“Chesapeake Energy, one of the largest US independent producers, shocked earlier this month by indicating a $13 billion reduction in the so-called PV-10, or “present value,” of its oil and gas reserves to $7 billion. Had Chesapeake used 12-month futures strip prices — instead of Securities and Exchange Commission-mandated trailing 12-month prices for PV values — the value would’ve fallen to $4 billion.” — Source: Energy Intelligence, “Is Debt Bomb About to Blow Up US Shale?

This conclusion is also supported by research from S&P Capital IQ:

“Using data from SNL Financial, we looked at natural gas-focused companies across the value chain to see whether there is a relationship between their level of revolver usage and their forward multiples. Within this subset of companies, exploration and production (E&P) companies have the greatest usage of their revolving credit facilities — 57% on average, excluding those with either no revolving credit or no usage on their revolving credit lines. As of late September 2015, this sub-industry also had a forward EBITDA multiple of about 6.2x.” — Source: S&P Capital IQ, “A Cautionary Climate.”

E&P sector waiting for a bailout

All in all, it looks as if the U.S. E&P sector has a rough year ahead of it, but for strong companies with investment-grade credit ratings, next year could become an “M&A playland” according to Energy Intelligence. The six-largest integrated majors together hold a war chest of some $500 billion, and there’s a further $100 billion in private equity sitting on the sidelines.

Whatever happens, it looks as if the U.S. E&P sector is about to undergo a period of significant change.

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