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Debt Pile-Up To Fuel Further Oil Price Pressure

Tyler Durden's picture




 

As regular readers are no doubt aware, a long-running theme here has been the vicious deflationary feedback loop inadvertently created by DM central bank policy. In the case of the heavily-indebted US shale complex it works like this: investors’ quest for yield in a world governed by ZIRP and NIRP drives demand for HY issuance which in turn allows otherwise insolvent drillers to keep drilling by tapping the debt market to stay afloat. Meanwhile, the very act of continuing to drill puts more pressure on prices, imperiling the companies even further and encouraging still more debt issuance, which leads to more drilling and so on and so forth. This is exacerbated by the fact that the more debt you take on, the more interest expense you incur, adding further incentive to drill, drill, drill. In short: the entire sector is digging itself a hole (no pun intended). 

This is a microcosm of the dynamic that’s taking place in the macroeconomy. Those with access to easy money overproduce without witnessing a concurrent increase in demand from those to whom the benefits of ultra loose monetary policy do not immediately accrue. Defaults are averted when troubled companies tap yield-starved investors for cash, which leads to further excess capacity, still more pressure on prices, still lower yields, further herding into risk assets, and around we go. Citi’s Matt King recently described this as “creative destruction destroyed” and as the process by which “zombies are born.” 

Here’s WSJ with more on the “pressure to pump”:

Both independent and state-owned companies are involved in the borrowing bonanza, issuing $86.8 billion worth of bonds in dollars, euros and yen globally this year, up 10% from the same period in 2014, according to Dealogic, a data-tracking company. The rise is largely due to a high number of bond sales in Europe, the Middle East and Africa, and in the U.S., where both Exxon Mobil Corp. and Chevron Corp. have recently tapped investors…

 

Add in syndicated bank loans and total borrowing by the oil-and-gas sector rose to $2.5 trillion at the end of 2014, up from $1 trillion of outstanding debt at the end of 2006, according to the Switzerland-based Bank for International Settlements. It has warned that an “oil-debt nexus” could create a vicious circle whereby overindebted companies pump more oil to ensure they can pay interest on their loans, adding to the current global oil glut, and further depressing energy prices…

 

Oil companies are borrowing more in part because they were caught flat-footed by the halving in oil prices since last summer. Several, including Chevron, BP PLC and France’sTotal SA, have announced plans to slash costs and capital spending. But the oil-price decline means revenues have fallen quicker than they can cut outlays.

 

Some major oil companies are borrowing more to ensure they can afford still-high investment plans and keep their commitments to pay generous dividends—a key element of their appeal to equity investors.

 

Cheap borrowing rates have underpinned oil companies’ thirst for debt. Many are eager to secure funding now before global interest rates start to rise and in case the broader economic backdrop deteriorates.

 

“Those who can borrow at affordable rates will go to the market now,” said Yash Kaman, head of natural resources at Deutsche Bank AG in Hong Kong.

 

Investors have been eager to lend as they continue to search for higher-yielding assets in a global market where interest rates are low. 

And here’s more from BIS:

Overall, the stock of debt of energy firms has risen even faster than that of other sectors. Debt issued by oil and other energy firms accounts for about 15% of both investment grade and high-yield major US debt indices, up from less than 10% just five years earlier.

 

A substantial part of the increased borrowing has been by state-owned major integrated oil firms from emerging market economies (EMEs). From 2006 to 2014, the stock of total borrowing (syndicated loans and debt securities) of Russian companies grew at an annual rate of 13%, that of Brazilian companies 25% and that of Chinese companies 31%. Borrowings of companies from other EMEs increased by 17% per annum. The increase in the leverage of EME companies contrasts with the stable leverage of comparable-sized large firms in the United States (Graph 2, right-hand panel). These EME companies have substantial existing production and therefore revenue. In many cases, their borrowing has coincided with large dividend payments to their sovereign owners. Hence, their behaviour appears similar to that of large, cash-rich firms in other sectors that have used very easy borrowing conditions in international markets to increase equity returns.

 

US oil companies have also borrowed heavily. They account for around 40% of both syndicated loans and debt securities outstanding. Much of this debt has been issued by smaller companies, in particular those engaged in shale oil exploration and production. Indeed, while the ratio of total debt to assets has been broadly unchanged for large US oil firms, it has on average almost doubled for other US producers - including smaller shale oil companies. These firms borrowed heavily to finance the expansion of production capacity, often against the backdrop of negative operating cash flow. Indeed, shale investment accounts for a large share of the increase in oil-related investment. Annual capital expenditure by oil and gas companies has more than doubled in real terms since 2000, to almost $900 billion in 2013 (IEA (2014)).

And finally, a few of our favorties:

 

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Tue, 04/28/2015 - 14:01 | 6039196 Chuck Knoblauch
Chuck Knoblauch's picture

Oil prices will go up again when the shit dollar is shunned like a leper.

Get your ass out of the USD$ before it's replaced with shit no onw wants.

All the derivatives contracts in the world wont save it.

Tue, 04/28/2015 - 14:05 | 6039202 So Close
So Close's picture

The folks that are making money at these prices are gearing up their operations.  Those on the cusp are trying to figure out how to make it into the first group.  The rest will be washed out.

Tue, 04/28/2015 - 14:09 | 6039217 Pinto Currency
Pinto Currency's picture

 

 

Does the BIS paper consider a gold-for-oil trade restart?

https://www.bullionstar.com/blogs/koos-jansen/shanghai-international-gold-exchange-comes-to-life/

Tue, 04/28/2015 - 14:14 | 6039237 Chuck Knoblauch
Chuck Knoblauch's picture

China hubs are going to determine market prices for all commodities soon.

China likes LA more than NYC.

Too many Satanists in NYC.

Tue, 04/28/2015 - 14:42 | 6039259 Weaponized Innocense
Weaponized Innocense's picture

Yea in time as things flush out things as oil can be easily done in exchange for gold .... Among other things of value if the dollar demise happens this fall.
But yea after the what isn't capitalism oil glut is flushed out.
As I have to remember than much of my income comes from oil and mat gas production so I'm cool on that side... Not that anyone can afford it when we get there. But I am still in black if prices drop down to ten bucks a barrel. My cost is uber low for production. If we even have any costs anymore really. Thinks that flushed out many decades ago. We have other stuff that can be drilled one day but that's a different topic.
The gov could always tax me more than they will pay us producers at they did during the oil crises while paying open higher prices..... That could get me. I think I could afford to run in the red and one can uncap wells now so...

Ask the clintons as to why they've been collecting their resources around the world for such an event occurring from their political jobs.

Tue, 04/28/2015 - 14:22 | 6039265 Oh regional Indian
Oh regional Indian's picture

Picture perfect description of a  Vicious cycle...they are everywhere now, devouring real wealth and brandishing fiat...

 

Tue, 04/28/2015 - 20:53 | 6041004 greyghost
greyghost's picture

at last an article on oil that is not from oil"PRICE".com!!!! very well written and straight to the point. debt have to be paid.......pump baby pump......simple really. the endless chatter from the "PRICE" chipmunks gives one a headache trying to sift thru the bullshit. thank you tylers.

Wed, 04/29/2015 - 04:16 | 6041770 legend247
legend247's picture

Since I started freelancing I've been bringing in $90 bucks/h… I sit at home and i am doing my work from my laptop. Th? best thing is that i get more time to spent with my family and with my kids and in the same time i can earn enough to support them... You can do it too. Start here... www.globe-report.com

Tue, 04/28/2015 - 14:12 | 6039234 KnuckleDragger-X
KnuckleDragger-X's picture

There's a big difference between gamblers and risk takers and guess which the casino prefers. But as they are finding out in Las Vegas, eventually you run out of high rollers and the risk takers know better than to play a rigged game. All those bonds will either pay off or default and by the end of this year the pain will be intense.....

Tue, 04/28/2015 - 14:16 | 6039241 Captchured
Tue, 04/28/2015 - 14:18 | 6039248 Gone Full Retard
Gone Full Retard's picture

Funny. The crack up boom for crude.

Tue, 04/28/2015 - 14:22 | 6039264 astoriajoe
astoriajoe's picture

Oh, and don't forget the hedges that producers have, helping to shift the risk to already overleveraged banks.

Tue, 04/28/2015 - 14:25 | 6039281 Jack Burton
Jack Burton's picture

Breaking Off Topic News.

"A forest fire has erupted in the Chernobyl Exclusion Zone. More than 200 firefighters, 15 fire engines, two aircraft and one helicopter are battling the fire, according to Ukraine's acting emergencies minister Zoran Shkiryak.

Ukraine's Interior Minister Arsen Avakov wrote on his Facebook page that as of 6:30 PM Kiev time (3:30 PM GMT) the situation had gotten worse and the fire was approaching the Chernobyl nuclear plant.

Read more: http://sputniknews.com/europe/20150428/1021488212.html#ixzz3Yd6a1700"
Tue, 04/28/2015 - 14:33 | 6039328 Monetas
Monetas's picture

When this comes to the USSA .... it will be even worse .... for us Capitalist Pigs .... there, I finished it for you !

Tue, 04/28/2015 - 14:26 | 6039287 Baby Eating Dingo22
Baby Eating Dingo22's picture

One more set of dishes the Fed clowns need to keep spinning

Drop in oil prices was taking a hard toll on patch and stock market and jobs, so now we have higher oil prices again almost overnight with no other explanation, just like stawks and houses

Looking forward to a mosaic glut

Tue, 04/28/2015 - 14:30 | 6039311 Monetas
Monetas's picture

Communists will sell you the very rope .... oops .... will sell you the oil .... to hang them with ! Fucking Bolshevik banana republics !

Tue, 04/28/2015 - 15:04 | 6039489 JimCramerisaGoon
JimCramerisaGoon's picture

Nobody cares about your shit hole blog

Tue, 04/28/2015 - 15:04 | 6039490 JimCramerisaGoon
JimCramerisaGoon's picture

Nobody cares about your shit hole blog

Tue, 04/28/2015 - 14:45 | 6039392 Never One Roach
Never One Roach's picture

I'm guessing we're gonna see $30 before not to long as the economy sinks deeper into recession. Al those O&G layoffs ain't gonna incentivize more long driving vacations, or for that matter, ANY vacations when you don't have a job.

Tue, 04/28/2015 - 14:50 | 6039416 venturen
venturen's picture

Debt good....Oil $100!

Tue, 04/28/2015 - 15:33 | 6039663 The central planners
The central planners's picture

Bad news are good news?

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