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How Shale Is Becoming The Dot-Com Bubble Of The 21st Century

Tyler Durden's picture




 

Submitted by Leonard Brecken via OilPrice.com,

As I review the financials of one of the largest shale producers in the United States, Whiting Petroleum (WLL), I can’t help but notice the parallels to the .COM era of 1999 which, to some extent, has already returned to the technology and biotech sectors of today. Back then, the faster you burned cash to capture customers regardless of earnings to drive your topline, the higher your valuation. The theory was that after capturing the customers (in energy today, it is the wells) spending would slow and so would customer additions allowing companies to generate cash. By the way, a classic recent case is none other than Netflix (NFLX) which, in the past was exposed for accounting gimmicks that continue even today. It is still following this path of burning cash for the sake of customer additions, while never generating any cash in its entire existence.

Cash was plentiful in 1999 so it could always be raised as the Federal Reserve began its easy money era creating a series of bubbles for the next 15 years. Does this sound familiar to what is occurring now? It will end the same way and that process has already started as currency wars heat up and our economy grinds to a halt proving QE does not, in fact, create wealth (temporary yes for the 1%, short term, until POP) but instead it destroys it by distorting asset prices, misallocating investments, and ultimately creating an equity crash.

We just witnessed this in energy, as all the economic stats that distorted the real underlying economic weakness in the economy led energy producers to overproduce while easy money fueled it and expanded speculation in the futures market. Back in 1999 did the internet companies adapt their business models? Some which still survive today did, but most went bankrupt. The parallels here with energy are simply stunning as most E&P companies need to spend well over their operational cash flow in order to not only grow but to replace the wells that are producing tied to depletion. Money is free right? Well we are witnessing the first stages now and it may not last, as junk bond investors in energy can attest.

Further, US equity markets are beginning to “realize” that the US economy isn’t better off vs. Europe and the US dollar begins to fade as it shows signs of correcting as well. The Fed clearly isn’t as accommodative by instantly launching QE4, for a host of reasons, thus potentially opening the door to a deeper correction vs. prior ones in order to get what the 1% wants again: more QE. Yes the Keynesian feedback loop is real as, in the past, each equity correction was met with more QE.

WLL, in its March quarter, generated over $200M in cash from operations and, with hedges and production expected to be flat sequentially for rest of year in 2015, expects to earn at least $850M in cash from operations, give or take. The problem is though, they need to spend $2B to keep it up because depletion rates are so high. They claim “growth” capital expenditures are discretionary (just like NFLX by the way, in capturing customers), but the realities are that wells in the Bakken deplete 80% in 12 months, so does that really sound discretionary?

What is worse is WLL continues to grow production even though prices have collapsed and cash generation is in decline. In fact, year over year cash generated from operations fell 30% despite production growing some 70% plus percent. Does this sound like a company you want to invest in or like one that is run efficiently? So, let’s review: .com companies did the same and the majority went bankrupt so if WLL and other E&P companies continue to spend cash well above their operation capacity, not because they want to but because they have to, it will lead to the same result as it did in 2000… POP!

Most of these E&P companies who do not adapt will go bankrupt as the money runs dry, unless they spend within their operational CF. As of now, WLL specifically does not seem to be adapting as production rises this year and next. On their EPS call, management did say next year CF would fully cover capital expenditures which is encouraging, assuming current strip. Those companies that do adapt will not only survive but will thrive, as we believe that the ultimate result of all this will be much higher oil prices from here. The shale revolution will see a dramatic period of slow growth/no growth or more likely declining production as marginal players leave and costs to drill overall, outside of most prolific areas (as they run dry), rise. And as a reminder, OPEC does not have the spare capacity in hand to supply the market leading to the next boom in prices longer term. In the short term and as a rule of thumb, do not invest in those companies who spend considerably above the operation cash flow and only consider those that respect their limits.

 

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Fri, 05/01/2015 - 09:05 | 6050161 ZH Snob
ZH Snob's picture

but I feel so independent

Fri, 05/01/2015 - 09:05 | 6050162 1000yrdstare
1000yrdstare's picture

WAR will fix it...

Fri, 05/01/2015 - 09:42 | 6050297 Horseless Headsman
Horseless Headsman's picture

War uses a lot of oil. Just sayin'....

Fri, 05/01/2015 - 10:06 | 6050396 GMadScientist
GMadScientist's picture

Thermonukes don't need petrol. Just sayin'...

Fri, 05/01/2015 - 17:23 | 6052046 Abbie Normal
Abbie Normal's picture

So how do you plan to deliver them, by slingshot?

Fri, 05/01/2015 - 12:24 | 6050962 Benjamin123
Benjamin123's picture

Not true.

Fri, 05/01/2015 - 09:06 | 6050164 firstdivision
firstdivision's picture

Not to worry.  Shale is totally sustainable, especially once we start our exporting of NG to the world.  US will have plenty of stock build for itself though, cause companies care about you and I.

Fri, 05/01/2015 - 09:10 | 6050182 viator
viator's picture

More Ehrlichian mush...

Fri, 05/01/2015 - 09:11 | 6050183 cordial savage
cordial savage's picture

So, does that mean it's going to come back with a vengeance in about 15 years, run by an even douchier stable of founders?

Fri, 05/01/2015 - 18:33 | 6052239 Ms No
Ms No's picture

I would say yes but probably sooner than 15 years. 

Fri, 05/01/2015 - 09:12 | 6050189 franciscopendergrass
franciscopendergrass's picture

This boom is also like the gold rush.  It brought people far and wide to work in remote areas.  Towns sprang up totally dependent on the growth of the boom.  Just like the gold rush, it will probably leave behind broken dreams and lives in its wake.

Fri, 05/01/2015 - 10:37 | 6050494 A Nanny Moose
A Nanny Moose's picture

...and brothels?

 

What the shale's going on?!?!

Fri, 05/01/2015 - 09:16 | 6050207 Wait What
Wait What's picture

stagflation, bitchez!

the Fed's gonna have 1 helluva time trying to give the markets that 1 last QE fix with the ECI pushing 3%. turns out all those minimum wage hikes the peasants are getting are not without consequences.

gotta create some more slack in the labor market before QE4 begins, lest the hyperinflationary fears of QE1 finally come true.

No QE until we get more layoffs and wage deflation.

Fri, 05/01/2015 - 09:18 | 6050217 NoWayJose
NoWayJose's picture

Getting harder to find negative oil articles, huh Tylers? Especially when Goldman goes long oil...

Fri, 05/01/2015 - 09:19 | 6050226 silverer
silverer's picture

Anybody got the skinny on UPL?  I've seen the stock bounce all over the map for the last several months.  What about long term?

Fri, 05/01/2015 - 09:22 | 6050233 The Shape
The Shape's picture

"The problem is though, they need to spend $2B to keep it up because depletion rates are so high."

But I thought rig counts don't matter and shale would keep producing forever even when the price went down?

Fri, 05/01/2015 - 09:40 | 6050287 venturen
venturen's picture

you are aware the US has increase supply with technology that could go to any of country...we aren't running out of oil....and technology drives down cost. It is baloney to believe the costs they state...oil should be at $35...but I guess Cushing will have to over flow to get there. Oil demand in American is falling!

Fri, 05/01/2015 - 10:18 | 6050427 GMadScientist
GMadScientist's picture

Can it "increase supply" faster than Chinese and Indian people fuck?

Fri, 05/01/2015 - 13:27 | 6051133 Zerozen
Zerozen's picture

You've got it backwards, buddy. Technology does not create lower prices. 

Higher prices create new technology.

New oil extraction technology always requires higher prices to justify extracting harder-to-get barrels.

Most people make the mistake of thinking that we invent new technologies which make things cheaper, whereas new technologies are more complex and complicated and require higher prices (read: energy inputs) to justify their existence.

Fri, 05/01/2015 - 18:56 | 6052310 Benjamin123
Benjamin123's picture

Bullshit, its a mix. Sometimes technology makes some things cheaper, while higher prices makes increases the supply.

Fri, 05/01/2015 - 12:23 | 6050957 Benjamin123
Benjamin123's picture

I get it. It is expensive to produce. So what. Since oil is cheap and shale uneconomical, it wont be produced. Obviously there is more than enough oil from conventional sources. Once these are depleted shale will come back and now there is actual evidence that it works.

Fri, 05/01/2015 - 09:23 | 6050235 The Shape
The Shape's picture

Tyler and Goldman told me so.

Fri, 05/01/2015 - 09:36 | 6050273 venturen
venturen's picture

Ya can you show me where supply and demand have made a difference in the last 10 years of manipulation? Oil will go to $100....as Cushing is dumping oil into the rivers because of oversupply. Capitialism is dead....Manipulism!!!

Fri, 05/01/2015 - 09:47 | 6050321 WhyWait
WhyWait's picture

Hey Tyler, many of us count on you to tell us in real time about significant events the MSM ignores!  

On Tuesday Senator Bernie Sanders said he was going to run for President of the US, as a Democrat. Yesterday he made a formal announcement.  His Facebook campaign site already has over 1/3 million Likes.

I wouldn't expect my local daily newspaper to like him or agree he has any chance of actually winning, but it certainly changes the dynamics of the race dramatically so it is important news.  

They didn't print one word about it.

Neither apparently did ZH.

What's up with that?

Fri, 05/01/2015 - 10:15 | 6050418 GMadScientist
GMadScientist's picture

I may not agree with Bernie, but I admire that he sticks by his principles in a town full of windsocks.

Unless he became suddenly wealthy beyond the dreams of avarice, his entry won't change the dynamics of the race one iota. Frankly, I'd be surprised if they even let him into debates, should he last that long during the primaries.

 

Fri, 05/01/2015 - 11:37 | 6050759 WhyWait
WhyWait's picture

How about large numbers of angry working people hounding the omedia everywhere the other candidates go and staging massive protests at the debates?  Refusing to take no for an answer?  Just for starters.

Would that change the political dynamics?

Fri, 05/01/2015 - 10:21 | 6050432 Wild Theories
Wild Theories's picture

I saw a bit of his news, and his public mention of billionaires buying the political process

you know he won't get the nomination

Fri, 05/01/2015 - 10:30 | 6050474 mastersnark
mastersnark's picture

He wasn't at Bilderberg last year, or ever as far as I can tell, so he hasn't been selected or even positioned as a loyal opponent.

Fri, 05/01/2015 - 10:37 | 6050493 Niall Of The Ni...
Niall Of The Nine Hostages's picture

I would have been thrilled when I was young and and still as foolish as Bernie Sanders.

Now? Bernie's living proof that there's no fool like an old fool.

Forgive me if I don't wish him luck, but DC has plenty of socialists in high places already.

Incidentally, thanks to Bernie Sanders and others of his ilk, Vermont is little more than a holiday camp for New Yorkers who've made their nut on Wall Street and want a hobby farm to retire to. Lovely place to wait for God. To live? Fuck that. Anybody who has to work for a living and can leave does. The only booming industry catering to locals is the street drug trade.

Fri, 05/01/2015 - 10:40 | 6050505 Niall Of The Ni...
Niall Of The Nine Hostages's picture

Nah. We didn't need to buy pet food online. We do need shale oil.

Our friends in Manhattan are merely picking off the smaller producers so they can buy their claims for a song while the wait joyfully for Saudi to run out of oil in 15 years. Call it buying the dip if you like.

Fri, 05/01/2015 - 10:42 | 6050508 g'kar
g'kar's picture

On another energy related front, Tesla is producing the Powerwall. A solar powerable battery system for the home. 7kw and 10kw systems, $3000 and $3500. 10 year warranty. As I slowly migrate more and more to home solar this battery system is a boon. Downside is they have to install it, which sucks and drives the price up to ?

http://www.teslamotors.com/powerwall

Fri, 05/01/2015 - 11:00 | 6050591 thestarl
thestarl's picture

  get your fire insurance up to date

Fri, 05/01/2015 - 12:11 | 6050901 g'kar
g'kar's picture

LOL...I'd definitely put it outdoors.

Fri, 05/01/2015 - 12:19 | 6050937 Benjamin123
Benjamin123's picture

10 year warranty on a battery?

Sat, 05/02/2015 - 08:09 | 6053248 g'kar
g'kar's picture

That's what they claim on their website. Good luck getting that kind of warranty on SLA batteries (AGM and others).

Fri, 05/01/2015 - 11:13 | 6050642 falak pema
falak pema's picture

Hats off to the Man who first taught me about the upcoming crash of 2008 when he wrote this in HARPER'S  Magazine in feb 2008 : 

http://harpers.org/archive/2008/02/the-next-bubble/

His name Eric Janszen. If you read this article in toto you will see that he predicts, as ZH has done over all the years, the inevitability of another crash just as he had correctly predicted the Lehman moment, after subprimes.

But, his prediction was the new bubble would be : Renewables and the bubble would burst in 2014 and the asset hole would be 20 Trillion. 

Well he is not far off. Its not renewables its another type of fudged energy segment : fracked tight oil and his 20 T overhang of FIRE asset inflation bubble has to be confirmed.

But kudos to Janszen for being so prescient and of course to ZH for the same reasons.

We unwashed in the ways of rigged markets live and learn.

Fri, 05/01/2015 - 11:38 | 6050767 Never One Roach
Never One Roach's picture

Just 'cause the tap watr smells bad, doesn't mean it's going to give me liver cancer.

 

At least, not yet.

Fri, 05/01/2015 - 13:41 | 6051202 BoPeople
BoPeople's picture

Right ... because the dot com 2.0 bubble is government sponsored and supported.

The shale oil boom is a targeted attack on Saudi Arabia. It can fizzle and still accomplish its objectives.

Fri, 05/01/2015 - 18:30 | 6052231 Ms No
Ms No's picture

What's the next bubble?  Water?  Maybe oil again?  Something has to be brewing.

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