The Four Scariest Charts For Energy Investors

Much has been said, and many charts shown demonstrating how collapsing oil prices equate with a recessionary (and, according to at least one Dallas Fed respondent, "depressionary") hit for the US energy space and manufacturing sector first, and subsequently, contagion for US banks various other investors in the US shale space, and ultimately the broader economy.

Perhaps too much.

So in an attempt to simply some of the confusion, here are just four charts which, in our opinion, are among the scariest for energy investors.

First, plunging oil prices mean sliding revenues, resulting in collapsing cash flows and soaring leverage ratios...

... Ratios which will likely deteriorate substantially if one takes the price of oil as a leading indicator where EBITDA will be 8 months from now:

 

Should the deterioration continue it will suggest even further widening of junk spreads, which will mean a spike in default ratios, which will result in substantial impairment charges for underreserved banks and a hit to both profitability and capital ratios.

 

This feedback loop can be short-circuited: all that would take is for the soaring trade weighted dollar - the key driver of plunging oil prices - to tumble. However,  for that to happen, Yellen will have to not only relent, but admit full blown defeat and undo the past year and half of preparation for rate hikes because the "global economy is ready", which we now know it isn't and virtually everyone has admitted the Fed made a mistake.

Summarizing all of the above: the vicious spiral of low oil prices, collapsing profits, impairment provisions, and economic contraction will continue until the Fed finds a way to weaken the Dollar... something it is now unable to do without losing all credibility.

In short, the Fed remains trapped and with every passing day it does not "fix" its policy error, these charts will only get scarier.