The Oil Short Squeeze Explained: Why Banks Are Aggressively Propping Up Energy Stocks

Tyler Durden's picture

Last week, during the peak of the commodity short squeeze, we pointed out how this default cycle is shaping up to be vastly different from previous one: recovery rates for both secured and unsecured debts are at record low levels. More importantly, we noted how this notable variance is impacting lender behavior, explaining that banks - aware that the next leg lower in commodities is imminent - are not only forcing the squeeze in the most trashed stocks (by pulling borrow) but are doing everything in their power to "assist" energy companies to sell equity, and "persuade management" to use the proceeds to take out as much of the banks' balance sheet exposure as possible, so that when the default tsunami finally arrives, banks will be far, far, away from the carnage.

All of this was predicated on prior lender conversations with the Dallas Fed and the OCC, discussions which the Dallas Fed vocally denied and accused us of lying, yet which the WSJ confirmed, showing that it was the Dallas Fed who was lying.

This was our punchline:

[Record low] recovery rate explain what we discussed earlier, namely the desire of banks to force an equity short squeeze in energy stocks, so these distressed names are able to issue equity with which to repay secured loans to banks who are scrambling to get out of the capital structure of distressed E&P names. Or as MatlinPatterson's Michael Lipsky put it: "we always assume that secured lenders would roll into the bankruptcy become the DIP lenders, emerge from bankruptcy as the new secured debt of the company. But they don't want to be there, so you are buying the debt behind them and you could find yourself in a situation where you could lose 100% of your money."


And so, one by one the pieces of the puzzle fall into place: banks, well aware that they are facing paltry recoveries in bankruptcy on their secured exposure (and unsecured creditors looking at 10 cents on the dollar), have engineered an oil short squeeze via oil ETFs...




... to push oil prices higher, to unleash the current record equity follow-on offering spree...

... to take advantage of panicked investors some of whom are desperate to cover their shorts, and others who are just as desperate to buy the new equity issued. Those proceeds, however, will not go to organic growth or even to shore liquidity but straight to the bank to refi loan facilities and let banks, currently on the hook, leave silently by the back door. Meanwhile, the new investors have no security claims and zero liens, are at the very bottom of the capital structure, and  face near certain wipe outs.


In short, once the current short squeeze is over, expect everyone to start paying far more attention to recovery rates and the true value of "fundamentals."

Going back to what Lipsky said, "the banks do not want to be there." So where do they want to be? As far away as possible from the shale carnage when it does hit.

Today, courtesy of The New York Shock Exchange, we present just the case study demonstrating how this takes place in the real world. Here the story of troubled energy company "Lower oil prices for longer" Weatherford, its secured lender JPM, the incestuous relationship between the two, and how the latter can't wait to get as far from the former as possible, in...

"Why Would JP Morgan Raise Equity For An Insolvent Company"


I am on record saying that Weatherford International is so highly-leveraged that it needs equity to stay afloat. With debt/EBITDA at 8x and $1 billion in principal payments coming due over the next year, the oilfield services giant is in dire straits. Weatherford has been in talks with JP Morgan Chase to re-negotiate its revolving credit facility -- the only thing keeping the company afloat. However, in a move that shocked the financial markets, JP Morgan led an equity offering that raised $565 million for Weatherford. Based on liquidation value Weatherford is insolvent. The question remains, why would JP Morgan risk its reputation by selling shares in an insolvent company?


According to the prospectus, at Q4 2015 Weatherford had cash of $467 million debt of $7.5 billion. It debt was broken down as follows: [i] revolving credit facility ($967 million), [ii] other short-term loans ($214 million), [iii] current portion of long-term debt of $401 million and [iv] long-term debt of $5.9 billion. JP Morgan is head of a banking syndicate that has the revolving credit facility.


Even in an optimistic scenario I estimate Weatherford's liquidation value is about $6.7 billion less than its stated book value. The lion's share of the mark-downs are related to inventory ($1.1B), PP&E ($1.9B), intangibles and non-current assets ($3.5B). The write-offs would reduce Weatherford's stated book value of $4.4 billion to - $2.2 billion. After the equity offering the liquidation value would rise to -$1.6 billion.


JP Morgan and Morgan Stanley also happen to be lead underwriters on the equity offering. The proceeds from the offering are expected to be used to repay the revolving credit facility.


In effect, JP Morgan is raising equity in a company with questionable prospects and using the funds to repay debt the company owes JP Morgan. The arrangement allows JP Morgan to get its money out prior to lenders subordinated to it get their $401 million payment. That's smart in a way. What's the point of having a priority position if you can't use that leverage to get cashed out first before the ship sinks? The rub is that [i] it might represent a conflict of interest and [ii] would JP Morgan think it would be a good idea to hawk shares in an insolvent company if said insolvent company didn't owe JP Morgan money?

The answer? JP Morgan doesn't care how it looks; JP Morgan wants out and is happy to do it while algos and momentum chasing daytraders are bidding up the stock because this time oil has finally bottomed... we promise.

So here's the good news: as a result of this coordinated lender collusion to prop up the energy sector long enough for the affected companies to sell equity and repay secured debt, the squeeze may last a while; as for the bad news: the only reason the squeeze is taking place is because banks are looking to get as far from the shale patch and the companies on it, as possible.

We leave it up to readers to decide which "news" is more relevant to their investing strategy.

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KnuckleDragger-X's picture

Well, thank god there ain't any bid rigging going on, because that would be illegal.......

nope-1004's picture

<----- Peak Oil

<----- Peak Cronyism


Price will tank like a motherfucker over the next couple of years - plenty of desperate countries trying to create cash flow to stabilize their economies before the peasants revolt, and hang the ruling class out to dry.

NoDebt's picture

Well the Fed TOLD THEM TO DO THIS (as sleuthed out in a decent piece of investigative journalism by ZH last month).  And now guess what?  They are doing it.  Shocker.

At the time, I did say we hadn't heard the last of that story (despite reaching a technical conclusion on who actually did the talking).  

Ladies and gentlemen, this is how you REALLY front-run the market.  Not that penny-ante HFT bullshit sucking off a thin skim.  You PRE-UNLOAD EVERYTHING weeks, months in advance knowing there will be NOTHING left afterwards- not even dry bones to pick a scrap of sinew off of.



knukles's picture

Lemme count the ways laws are being broken.
The banks have loans outstanding to the beleaguered oil companies.
Senior secured loans
Meaning they get a plethora of non-public information abut the companies (That's the way senior loans work... not a problem here)
BUT they know the companies are in deep shit.  And have that privileged non-public (get where I'm a goin'?) information. 
Using that, they want to get out.  No problem there.  They're sane
BUT if they try to sell other securities to other people on the basis of said information, then we got trading on non-public material inside information
And Securities Fraud

Now, as to not even dry bones left to pick over... that's where the trem "Skullfucking" came from.
Yes, you can still do that!

Fish Gone Bad's picture

Weatherfords symbol should be WTF .

waterwitch's picture

they'd need to steal it from the FED

pods's picture

First thing Jamie does when he sits down with a cup of coffee in the morning:

"Who we gonna fuck today?"

Even the mob just burnt a place to the ground when it was tapped out.  

But now I know where the Chinese got the idea of charging the family for the bullet used to execute one of their own members.


Tall Tom's picture

If this type of shit is allowed to continue then I foresee the Department of Homeland Security creating the Banking Security Agency, (BSA), on the taxpayer dime.


As the murders of Banking Executives increase there will be major draconian measures to stop it.,


I forsee that Bank Executive Murders will become a National Pasttime. When there are no legal solutions, then alternative solutions will manifest to replace improbable legal solutions,


So, in response, then you, as being a member of the chattel class, will be corralled and required to be run through the gauntlet of the Rape-I-Scan, then Wanded, and then having your children groped and molested, while you are strip searched and deprived of your last remaining vesticges of dignity, at every single Bank Branch entrance in the Nation....if you want "your deposits".


THis action will prevent a rash of those terroristic Bank Robberies, serve to protect the dishonorable and unethical Bank Executives from justifiable homicide. and totally prevent any Bank Runs.


It will also put more of the Child Molesters and Criminals of America back to work, having them become responsible taxpayers, while giving them an opportunity to fuck you over once again....while wearing a badge


Bank customers and Bank Executives deserve safety. You just cannot be too safe, right?


Maybe I ought to stop the meditative self induced hypnotic trances which induce these precognitive views into the future.


Everytime that I look into the future I just see the development of a nightmare.

philipat's picture

"why would JP Morgan risk its reputation by selling shares in an insolvent company?"

Reputation? Hahahahahahahahaha..........

A more relevant question perhaps is why would anyone buy this toxic shit?

And isn't this more perfect proof of just whose interests The Fed is protecting?

NoDebt's picture

That is why they are doing it with the legal blessing and guidance of the Federal Reserve.  Sure the banks might end up getting some "slap on the wrist" fines, but that's a small price to pay vs. taking the full roundhouse kick to the nutsack holding a ton of paper that's about to be worthless.

I'll defer to your greater experience on the skullfucking thing.  ;)

knukles's picture

And bonuses all around for getting the shit off the books!
Another Round of Blowjobs for Everybody!  On the House!  (Get it, on the house)  (Oh fuck me)

knukles's picture

Talking about Skullfucking.... A timely question

Would you personally feel safe leaving your bowling ball alone in a dark room with Bill Clinton?

Four chan's picture

jews named jamie are particularly tricky and untrustworthy in my experience. katz 

Fish Gone Bad's picture

We leave it up to readers to decide which "news" is more relevant to their investing strategy.

I always feel like such an insider when I read stuff like this.

oldmanofthesee's picture

I stopped reading after a couple of lines. Good for Jamie! Better than the swindle that scumbag Paulson pulled, bailing out AIG with tax dollars, so they could pay GS the $20 billion they lost trading in London!

No Half Measure's picture

You’re God Damn right the Fed gave the banksters a “code red”.  They were doing it so much two weeks ago that they could not print money fast enough to cover their sham treasuries auction and buy all the oil contracts at the same time, so the treasuries had to wait.  These mother fuckers are the biggest bunch of crooks that have ever been.

Well Zero Hedgers; are you sick of having your accounts decimated by actions of Central Banksters?  Do something,  it takes 10 minutes at the most.

Below is the link for you to file FOIA requests with the Fed Board of Governors about their market manipulation, via treasuries, stwaks, oil, metals, or currencies.

I made a simple request below and would suggest that others do the same.  It will more than likely lead to nowhere, but it will at least make the Fed aware that their actions are being watched and noted.



Any or all information where the Fed has either directly participated in, or directed member banks to purchase oil future contracts for any reason over the past 60 days.



Let’s make Yellen’s balls sweat a little bit.

Mentaliusanything's picture

I continue to ask.. Why do they still have a Banking Licence at ALL.

Another inside information Job with The Dallas Fed giving the green light to get out of Dodge.

Again and again

Groundhog Day's picture

C'mon.  I'm no portfolio manager or CEO or PHD, but which of thier clients would actually buy these secondary stock issues?  Can they be that dumb?

nope-1004's picture

The Fed and its (digital) printing press.  Insiders and the moneymen have no ethics when it comes to trying everything to avoid a natural and much needed bankruptcy.  Just be happy that no matter the outcome, you and your kids will pay the bills of these criminals.


SoilMyselfRotten's picture

 Can they be that dumb?


Generally speaking, how smart can a muppet be?

Kirk2NCC1701's picture

It's not personal to them. To them it's just Business, just their version of Monopoly.

JRobby's picture

SOP at the "Big Boy Table" there will be buyers to "spread the losses around the table"

Fish Gone Bad's picture

Who would such risky assets?  I don't know, CalPERs perhaps?  Sunshine don't fix stupid.

JRobby's picture

Disregard often risk they of good the all for 



It averages out when you are in "the club!"

venturen's picture

how often do you think pension fund manager get asked to go skiing in aspen or heck to a strip club. My friend just got back from taking his clients to Aspen...why you ask? Like a pension fund manager really cares what happens to his funds the day after he leave. Isn't like they are getting a large paycheck to being with. Lots of low paid people with lots of of other people's money. Look at any state pension fund 

EscapeKey's picture

they didn't exactly struggle finding "sophisticated investors" last time around

besides, if all else fails, there's always the fed

ImmodestExtant's picture

Many shmucks around who will buy that shit. Euro banks are always among the most stupid, pension funds are good targets, as are insurance companies, then there's always retail investors who have no idea what they're doing and can be roped in by a "trustworthy" bank asset manager or advisor (just look at Italian banks). Basically, the same crowd that bought CDOs, ABS, ABS CDOs (that's sadly a real thing) and all the other putrid, impossible to valuate, junk in the GFC. Oh, also, you can always WiMP it up and ship it to China. The Chinese are apparently so desperate to get their money out of the country they will apparently buy virtually anything.

cheech_wizard's picture

>Can they be that dumb?

There's one printed every minute.

BandGap's picture

You prop things up that would otherwise fall over. Don't have to explain anything to me.

ghostzapper's picture

China should deliver the knockout punch with a substantial deval.  

silverer's picture

And then dump the balance of their US treasuries and buy COMEX contracts for gold, demanding actual physical delivery instead of a cash settlement for the contract.

Groundhog Day's picture

and them watch the nukes come in

Antifaschistische's picture

If a pile of lead gets nuked, does it turn to gold?

FrankieGoesToHollywood's picture

They can't demand Physical.  They only why they can demand, as indicated by the post above, is through a nuke.

Kirk2NCC1701's picture

They SHOULD. But they won't, because they are just as corrupt and part of the Global Oligarchs game, called Neo-Feudalism. Sorry, we're on our own.

Go Trump, Go Bernie! Anyone but the Establishment, to reshuffle the deck, or start a new game with new players. 

Soul Glow's picture

The only question then is which bank will take a knife in the back when the margain calls come.

Chuckster's picture

I hope they all take a the shorts.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) Mar 8, 2016 1:31 PM

It's a good thing that jews aren't involved in any banks... That way, we know FOR SURE that they have nothing to do with any sort of 'rigging' schemes...

dumb_funded's picture
Why Banks Are Aggressively Propping Up Energy Stocks

"The Spice Must Flow.  He who controls the spice controls the universe"

And OT: 

the Turd writes "Whenever London stands down and gold rises, it's almost always beaten back on Comex instead"

Say, speaking of STAND DOWN: "Mineta's Presidential Emergency Operations Center (PEOC) testimony was also edited out of the 9/11 Commission video archive."

Cheney Gave Stand Down Order


Kirk2NCC1701's picture

That just the Chicoms playing the Pump & Dump game, to swap Paper for Bullion. They want that Blue Light Special to continue.

SillySalesmanQuestion's picture

"Coordinated lender collusion to prop up the energy sector."

That says it all...thanks for playing Jamie.
Excellent work TD & ZH!

Kirk2NCC1701's picture

TD/ZH, can you please explain to me how low oil prices help the strength of the USD, i.e. the "PETRO-Dollar"?

You'd think that it would harm it, as low prices can't absorb all that USD fiat out there. Something seems fishy.

Theonewhoknows's picture
Theonewhoknows (not verified) Mar 8, 2016 1:33 PM

It is after people realised that the size of energy sector bond bubble is waaaay bigger than what 2008 CDO/MBS bubble was. It will be painful to watch this one burst into people's faces

JohnnyBlaze's picture

When oil falls and Russian stocks and the Ruble temporarily go down I want the fuck in.  Aside from going to Skank of America and getting some Rubles at a premium and buying some Gazprom stock I am at a loss.  Can we talk the fuck about how to capitalize on this shit rather than just illustrate its happening.  I know the dick is in my ass.  Help me get it the fuck out.