This page has been archived and commenting is disabled.
First Oil, now US Natural Gas Plunges off the Chart, “Negative Igniter” for New Debt Crisis
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
Friday, natural gas futures plunged 6%. Monday morning, when folks were thinking about the beautiful Santa Rally, NG futures plunged nearly 10% to $3.12 per million Btu, the lowest since January 10, 2013. But the crazy day had just begun. NG bounced off and jumped nearly 4%, only to give up much of it later. Tuesday morning, as I’m finishing this up, NG continues to decline, now at $3.11/mmBtu. Down 30% from a month ago.
NG demand peaks when the heating season starts. It’s a bet on the weather. Our gurus forecast warmer than normal temperatures across the country, so prices plunged. Or shorts piled into the pre-holiday session with exaggerated effect to make a quick buck.
Here is what this 30-day, 30% plunge looks like (each bar = 5 hours):
Whatever the cause, NG has traded below the cost of production of many wells for years. That lofty $4.40/mmBtu on the left side in the chart above is still below the cost of production for many wells. The price simply fell from bad to terrible.
To make the equation work, drillers have shifted from shale formations that produce mostly “dry” natural gas to formations that also produce a lot of liquids, such as oil, natural gasoline, propane, butane, or ethane that were fetching a much higher price. Thus, they’d be immune to the low price of NG. They pitched this strategy to investors to attract ever more money and keep the fracking treadmill going.
Much of this new money was in form of junk debt. Now energy companies account for over 15% of the Barclays U.S. Corporate High-Yield Bond Index – up from less than 5% in 2005.
But there is no respite for the American oil patch. The price of oil has plunged 50% since June, the price of propane is down 50% since its recent high in mid-September, and natural gasoline is down 32% since recent high in mid-November. None of the fancy charts natural gas drillers have shown to investors work at these prices.
It’s showing up everywhere. Take Samson Resources. As is typical in that space, there is a Wall Street angle to it. One of the largest closely-held exploration and production companies, Samson was acquired for $7.2 billion in 2011 by private-equity firms KKR, Itochu Corp., Crestview Partners, and NGP Energy Capital Management. They ponied up $4.1 billion. For the rest of the acquisition costs, they loaded up the company with $3.6 billion in new debt. In addition to the interest expense on this debt, Samson is paying “management fees” to these PE firms, starting at $20 million per year and increasing by 5% every year.
KKR is famous for leading the largest LBO in history in 2007 at the cusp of the Financial Crisis. The buyout of a Texas utility, now called Energy Future Holdings Corp., was a bet that NG prices would rise forevermore, thus giving the coal-focused utility a leg up. But NG prices soon collapsed. And in April 2014, the company filed for bankruptcy.
Now KKR is stuck with Samson. Being focused on NG, the company is another bet that NG prices would rise forevermore. But in 2011, they went on to collapse further. In 2014 through September, the company lost $471 million, the Wall Street Journal reported, bringing the total loss since acquisition to over $3 billion. This is what happens when the cost of production exceeds the price of NG for years.
Samson has used up almost all of its available credit. In order to stay afloat a while longer, it is selling off a good part of its oil-and-gas fields in Oklahoma, North Dakota, Wyoming, and Colorado. It’s shedding workers. Production will decline with the asset sales – the reverse of what investors in its bonds had been promised.
Samson’s junk bonds have been eviscerated. In early August, the $2.25 billion of 9.75% bonds due in 2020 still traded at 103.5 cents on the dollar. By December 1, they were down to 56 cents on the dollar. Now they trade for 43.5 cents on the dollar. They’d plunged 58% in four months.
The collapse of oil and gas prices hasn’t rubbed off on the enthusiasm that PE firms portray in order to attract new money from pension funds and the like. “We see this as a real opportunity,” explained KKR co-founder Henry Kravis at a conference in November.
KKR, Apollo Global Management, Carlyle, Warburg Pincus, Blackstone and many other PE firms traipsed all over the oil patch, buying or investing in E&P companies, stripping out whatever equity was in them, and loading them up with piles of what was not long ago very cheap junk bonds and even more toxic leveraged loans.This is how Wall Street fired up the fracking boom.
PE firms gathered over $100 billion in their energy funds since 2011. The nine publicly traded E&P companies that represent the largest holdings have cost PE firms at least $12.7 billion, the Wall Street Journal figured. This doesn’t include their losses on the smaller holdings. Nor does it include losses from companies like Samson that are not publicly traded. And it doesn’t include losses pocketed by bondholders and leveraged loan holders or all the millions of stockholders out there.
Undeterred, Blackstone is raising its second energy-focused fund; it has a $4.5 billion target, Bloomberg reported. The plunge in oil and gas prices “has not created a lot of difficulties for us,” CEO Schwarzman explained at a conference on December 10. KKR’s Kravis said at the same conference that he welcomed the collapse as an opportunity. Carlyle co-CEO Rubenstein expected the next 5 to 10 years to be “one of the greatest times” to invest in the oil patch.
The problem?
“If you have an asset you already own, it’s probably going to go down in value,” Rubenstein admitted. But if you’ve got money to invest, in Carlyle’s case about $7 billion, “it’s a great time to buy.” They all agree: opportunities will be bountiful for those folks who refused to believe the hype about fracking over the past few years and who haven’t sunk their money into energy companies. Or those who got out in time.
Timing?
Not for a while, says Oaktree Capital, the world’s biggest distressed-debt investor. Co-chairman Howard Marks told clients in a December 18 letter, obtained by Bloomberg, that the plunge in oil and gas prices could trigger a new debt crisis.
“We knew great buying opportunities wouldn’t arrive until a negative ‘igniter’ caused the tide to go out, exposing the debt’s weaknesses,” he wrote. “The current oil crisis is an example of something with the potential to grow into that role.”
Last time that “negative igniter,” as Marks calls it, was housing. Once the effects began cascading to other sectors, it blew up the financial system. This time, the “negative igniter” could be the outgrowth of the shale revolution. And as was the case before the housing collapse, financial firms are already lining up to profit from it.
The Fed giveth, the Fed taketh away. What’s going to crash next? Read… Oil Price Crash Triggered by the Fed? Amazing Chart
- advertisements -



Credit booms cause mis-allocation of resources and overcapacity. Either the bust is allowed to clear out the junk, or bailouts keep unprofitable overcapacity operating, which floods the market and drives down prices. There is no free lunch.
Yup KKR Petraeus playing Krugman guns economics.. The guys a war criminal for training Iraq police prison state shaped on the 60k dead in El-Salvador http://www.kkr.com/our-firm/leadership/david-h-petraeus
Pure evil.. enough said
https://www.youtube.com/watch?v=_ca1HsC6MH0
"Here is what this 30-day, 30% plunge looks like"...
Look at the chart while standing on your head, it looks just like the last five days on the SPY.
If energy becomes a boom n bust business; we will see the world move faster to alternative renewable type energies.
Stability in energy is the key to a post industrial world.
The only question is how long will it take to get there?
The Sauds are now playing with fire; the fire that churns the wheels and humans of First world.
Since Prometheus we've got more and more hooked to it.
Think of it : Today, the key economic book of 2014 was written about the chasm of inequality that the crisis has dug in society. We talk about its implications all the time and the bubbles that are feeding it.
Once it bursts we will be back on our butts and having to plan the new paradigm.
And what will be more normal that to introduce some MORE equality in those petromonarchies whose ideology and structures have made the crisis an image of their society transposed in ours.
That their oil should be better distributed to their own needs. That way the monarchies would not be sitting on a stack of SURPLUS oil which they don't use for their own economies but for the 0.01 % Oligarchy that runs that world and indebts ours.
If we solve the Oil problem there by making it a TRUE energy usage economy for their own use, we would be moving much faster to a higher priced fossil plateau and thus to sustainable growth of efficient renewable investment that would change that energy-ecological paradigm so vital for future.
Its the oil export surplus profit lolly that has created this oligarchy world today. That ME oil costs 4$/bbl and sells at 110$/bbl if used on a well-distributed per capita over the world; aka not on a speculative bubble basis.
Its that 106$/bbl profit that has created profits for oligarchs and debt for everybody else.
And that real economic bubble thanks to petrodollar print has created the financial bubble 100 times bigger!
It all began in 1971, our bubble economy under Pax Americana and Saud collusion.
One problem the oil patch workers and chemical/mechanical engineers and execs have is when they are laid off, they cannot turn to their pension plans for emergency cash since those plans are usually 80% in the company that just laid them off and is down 50% or more.
Hopefully they have socked away 12 motnhs of cash for hard times like these in the cyclical ups and downs.
What I'd like to know is who started shorting oil and gas just before the saudi announcement weeks ago.
Oh noes!!
When did energy become a boom and bust business?
/
the guys that manage pension funds and 401k's are the same ones that call their customers "muppets" and not just insult the regular folk that work and trust, but do them harm by investing their money in crap like this. and ali baba and lots of other stuff that is stupid and they themselves are not invested in.
betrayal. I have never been burned only because I have never used middlemen.
When KKR Ponzi comes knocking on your business door, you know it's time to get an offshore account, buy some land in a non-extriditable country and study up on how to embezzle.
That chart looks like the spot price at the Henry Hub distribution area. The spot price of natural gas is next to meaningless. Most nat gas is sold under multiyear contracts for about $5 or more. For that matter a lot of oil is sold to refineries under net back contracts where the refiner and the oil producer split the profit. Even the Saudis sell oil that way.
Only fools, gamblers and Russians live and die by the spot price. Don't have a cow over the spot price of energy which is just as phony (and probably rigged ) as the old LIBOR interest rate figure.
Yes, and when you are getting royalty checks you really appreciate that. During the last crash (ancient history, circa 2009), I had one paying gas well shut in for a couple of months waiting for the price to get better. During the down time they re-frac'ed it, which boosted the production nicely. And low and behold, the price came back due to less drilling.
That gas costs almost nothing to produce, and the estimated life is another 17 years.
Questions: will the loans keep flowing? If not, oh shit! Here's hoping for a polar vortex, stat!