ConocoPhillips Slashes Dividend, Warns Of "Lower Prices For Longer"; Weatherford Fires 15% Of All WorkersSubmitted by Tyler Durden on 02/04/2016 08:30 -0500
Another day, and another round of increasingly uglier news from the global energy sector.
Just 10 days after "Moody's Put Over Half A Trillion Dollars In Energy Debt On Downgrade Review", moments ago S&P decided it wanted to be first out of the gate with a wholesale downgarde of the US energy companies, and announced that it was taking rating actions on 20 investment-grade companies, including 10 downgrades as follows: Chevron Corp.; EOG Resources; Apache Corp; Devon Energy Corp; Hess Corp; Marathon Oil Corp; Murphy Oil Corp; Continental Resources; Hunt Oil; Southwestern Energy.
Without energy, the U.S. economy would grind to a halt. All the trillions of Dollars in financial assets mean nothing without oil, natural gas or coal. Energy drives the economy and finance steers it; and the financial industry is driving us over the cliff. The U.S. Empire is in serious trouble as the collapse of its domestic shale gas production has begun.
In an otherwise dreary manufacturing recession landscape, one in which even the services sector is getting increasingly more troubled by the day, and where nothing the Fed says or does can keep animal spirits inflated, there was one ray of light: the one company that benefits from over a billion people posting pictures of their dogs or stalking their significant other's best friend: Facebook.
For the 13th month in a row, The Dallas Fed Manufacturing Outlook was contractionary with a stunning -34.6 print following December's already disastrous collapse back to -20.1, post-crisis lows. With "hope" having plunged back into negative territory (-2.2) in December, January saw a complete collapse to -24.0 as one respondent exclaimed, "we expect the continued depression in the oil and gas industry to negatively impact our customer base and result in significant demand reduction."
The problem of reaching limits in a finite world manifests itself in an unexpected way: slowing wage growth for non-elite workers. Lower wages mean that these workers become less able to afford the output of the system. These problems first lead to commodity oversupply and very low commodity prices. Eventually these problems lead to falling asset prices and widespread debt defaults. These problems are the opposite of what many expect, namely oil shortages and high prices. This strange situation exists because the economy is a networked system. Feedback loops in a networked system don’t necessarily work in the way people expect.
The one thing executives should have learned in 2015 is that Wall Street can for long periods of time remain disconnected from fundamentals and can swing to extremes. Another lesson from 2015 is that OPEC can no longer be relied upon to set prices. Thus, the debt fueled financing boom in the shale space will most likely never return. This is especially true now that there are clear signs that the U.S. economy is weakening while the Fed chose to raise the federal interest rates in December. As we move through 2016, expect a rash of bankruptcies tied to this transition to lower leverage, and towards the latter half of 2016 there will likely be a steep fall off of production.
"On one occasion, he told shareholders worried about the prospects of a gas well that they needed only to 'Trust Jim Bob'"...
My overriding theme and the central drama for the coming year is that unexpected events can take on greater importance as the Federal Reserve ends its near-decade-long Zero Interest Rate Policy. Consensus premises and forecasts will likely fall flat, in a rather spectacular manner. The low-conviction and directionless market that we saw in 2015 could become a no-conviction and very-much-directed market (i.e. one that's directed lower) in 2016. There will be no peace on earth in 2016, and our markets could lose a cushion of protection as valuations contract. (Just as "malinvestment" represented a key theme this year, we expect a compression of price-to-earnings ratios to serve as a big market driver in 2016.) In other words, we don't think 2016 will be fun.
After a Q1 collapse, the Dallas Fed Manufacturing Outlook managed a bounce for a few months (though never got back above zero). It appears, Dallas Fed's aptly-named 'Dick' Fischer was entirely wrong when he progonosticated that "on net, low oil prices are good for Texas." December's Dallas Fed print crashed to -20.1 (from -4.9) massively missing expectations of -7.0 and back at the lows not seen since June 2009.
"Oil and gas sector bankruptcies have reached quarterly levels last seen in the Great Recession. At least nine U.S. oil and gas companies, accounting for more than $2 billion in debt, have filed for bankruptcy so far in the fourth quarter."
“To the intelligent man or woman, life appears infinitely mysterious, but the stupid have an answer for everything.” ~Edward Abbey
Canada will be in an extremely horrible shape from next year on...
It's a bad time to be in the commodities business. Crude is in a veritable tailspin as an increasingly disjointed OPEC ramps production to three-year highs and thanks to a worldwide deflationary supply glut, the Bloomberg commodities index is sitting near its lowest levels of the 21st century portending doom and gloom for prices across the entire commodities complex. On Thursday, we get the latest round of desperate cost saving measures as oil major ConocoPhillips slashes capex by some 25% and looks to raise $2.3 billion from asset sales.
FCX announced today that its Board has suspended its annual common stock dividend of $0.20 per share. This action will provide cash savings of approximately $240 million per annum and further enhance FCX’s liquidity during this period of weak market conditions. FCX’s Board will review its financial policy on an ongoing basis and authorize cash returns to shareholders as market conditions improve.