Stay Out of The Oil Patch Part 2 This Time It Ain’t Different

The U.S. stock market is showing signs of fatigue

iShares S&P/TSX Energy (XEG : TSX : $12.25), Net Change: -0.18, % Change: -1.45%
Canadian Natural Resources* (CNQ : TSX : $33.17), Net Change: -1.07, % Change: -3.13%
Suncor Energy* (SU : TSX : $32.13), Net Change: -0.43, % Change: -1.32%

Another week, another drop in the price of oil, oil sector stocks – As We Forecast , the C$ and Canadian equities.

The S&P/TSX lost another 5% last week and erased nearly all its gains for the year.

To make things worse, the U.S. stock market is showing signs of fatigue, and macro risk indicators that
s are all flashing red. With oil prices becoming a gauge of investors’ risk appetite, it seems that only a bottom in prices could halt the slide in global equities.

But with WTI breaking below the key resistance of US$60/bbl, investors are bracing for the worst. There are not many historical parallels of supply-driven oil shocks. Past periods of price weakness have been demand-driven. That said, the current experience shows :
similarities to the 1986 oil shock, when OPEC boosted production to gain market share. Last week, OPEC cut its 2015 customer
demand forecast by 300,000 barrels per day (b/d) to 28.9 million b/d – that’s the lowest level in 12 years. The downward
revision reflects the upward adjustment of non-OPEC supply as well as the downward revision in global demand. In 2015, nonOPEC
oil supply is forecast to grow at by 1.36 million barrels a day to 57.31 million a day. Growth is seen coming mainly from
the U.S., Canada, and Brazil, while declines are expected in Mexico, Russia, and Kazakhstan.

Separately on Friday:
International Energy Agency (IEA) released its oil market report for December. The IEA cut its outlook for 2015 global oil demand growth by 230,000 b/d to 900,000 b/d on lower expectations for Russia and other oil‐exporting countries.
This is the second consecutive year of growth below 1 million b/d. The IEA believes, “barring a disorderly production response, it may well take some time for supply and demand to respond to the price rout.” The IEA adds, “As for demand, oil price drops are sometimes described as a ‘tax cut’ and a boon for the economy, but this time round their stimulus effect may be modest…The resulting downward price pressure would raise the risk of social instability or financial difficulties if producers found it difficult to pay back debt. Continued price declines would for some countries and companies make an already difficult situation even worse.”


Bankers Petroleum* (BNK : TSX : $2.59), Net Change: 0.09, % Change: 3.60%, Volume: 1,717,990
Bankers Petroleum has reduced its 2015 capital guidance to a maintenance level in order to average 21,000-22,000 b/d, in line with its 2014 average.

The company will spend approximately $218 million in 2015, which is within its cash flow and debt utilization means in a $60/bbl realized Brent price environment.

The company intends to reduce its rig count from six to three rigs by early 2015 but remains positioned to respond quickly when oil prices recover by potentially reinstating drilling rigs.

The three focus areas of the company will be: 1) execution of its horizontal drilling program;

2) acceleration of its secondary recovery program; and

3) targeting capital for operational improvements that will result in reduced costs (with projected cost savings of $2-3/bbl in the next two years).

The company remains well positioned for low commodity prices in 2015 with a reported September 30, 2014, cash balance of $88 million and only $104 million drawn on its $224 million line of credit. With the budget, Bankers continues a theme of fiscal responsibility, cash preservation and maintenance of 2014 production levels. In the interim, the company has the
ability to operate within its means while maintaining current production levels. Bankers plans to release its Q4/14 operational
update Tuesday, January 6, 2015.

the dramatic plunge in oil prices has made some shale projects unprofitable. Investors are waking up to the realization that not all shale oil is created equally.

Drilling for oil is extremely capital intensive. Companies often borrow money to fund the exploration and drilling. Now that oil is sitting at just $55, it’s likely to get much more difficult for shale players to get the financing they need after years of low interest and bond rates.

Investors are betting that at least some of these more speculative shale companies won’t survive if oil prices stay low for a prolonged period.

Don’t take our word for it. Just look at the junk bond market, which has been rattled by the energy turmoil. High-yield energy bonds have tumbled almost 10% this month alone, according to S&P Dow Jones Indices.

“It becomes a vicious spiral. If bonds stay where they are, it’s going to be very difficult for these companies to raise new capital to continue to live,” said Spencer Cutter, a credit analyst at Bloomberg Intelligence.

high yield debt
High-yield U.S. corporate energy bonds have tumbled in recent weeks amid the oil price meltdown.

Cash flow negative: Huge energy companies like ExxonMobil (XOM) and Chevron (CVX)have plenty of financial flexibility to weather low oil prices, but that’s not the case for many smaller, highly-leveraged players.

Some of them are cash flow negative, meaning they aren’t generating enough revenue to offset the heavy investments they are making. Up until now, they’ve plugged those holes by selling stock or raising equity.

But $55 oil has changed that equation. Few investors are willing to provide affordable financing.

For example, the bonds of SandRidge Energy (SD), Midstates Petroleum (MPO) andResolute Energy (REN) are trading at distressed levels of just 50 cents or 60 cents on the dollar, according to FactSet.

“It’s hard to go from cash flow negative to cash flow positive on the turn of a dime when the commodity you’re selling falls by 45%,” said Cutter.


Defaults ahead:

The cash crunch is likely to be exacerbated by pressure from the banks, which may start reeling in credit revolvers currently cushioning shale companies’ balance sheets.

“Banks are not notoriously friendly in these down cycles. The lack of financing alternatives could speed up the demise” of some companies, said Tim Gramatovich, chief investment officer and co-founder of Peritus Asset Management.

Gramatovich predicted a “considerable” amount of defaults among high-yield energy bonds due to the looming cash crunch.

It is human nature to look for bargains – and destroy your portfolio as you gather losers into what used to be a ” nest” egg.

Look at Seeking Alpha and count the ” analysts” saying Dryships ( DRYS) is going to turn – how none forecast the sub dollar level it now enjoys.

What To Do ?

Here is our recent letter:

Managed Accounts Year End Review and Forecast

November 2014 – 40 % cash position
Gold and Precious MetalsThe largest gains for our clients came from the exit from the gold producers at $18oo an ounce and continuing until we hold no gold and no gold miners . This from the author of The Gold Investors Handbook.2015 – We continue to be on the sidelines for this sector – regardless of the gnomes of Switzerland . As a safe haven gold simply wasnot there for investors despite turmoil in the Middle East, Africa and Ukraine.How much more frightening can the prospect for peace be than to have wars in multiple locations? Secondly the spectre of inflation – on which I have given numerous talks – simply failed to materialize. In fact economists and portfolio managers such as myself are now more concerned about deflation – and the spectre is a Japanese style decades long slide in the world economy.
Shipping Sector / Bulk ShippersYou can review our stock market letter at to follow our profits in the shipping sector before our retreat as overcapacity has yet to effect continued overbuiding. In 2008-9 rates-  illustrated by the Baltic Dry Index – were at their peak. The BDI hit over 10,000. Today it is roughly 10 % of that benchmark and the sector slide continues. We have an impressive watchlist of former ” darlings” – but we are content to watch and wait.
Oil/ EnergyI am very happy for the call in natural gas prices – out at $12 and into oil. When oil was above $100 we lessened positions and that is our saving grace in the past two weeks. We are not bottom feeders and will wait for a turn in the market before reentering drillers or producers.On Friday November 27th, crude oil prices dropped to below $72 and the slide has continued into the weekend, with Brent crude oil at $70.15 as I write this post. Shares of major oil companies traded down on Friday. Our former energy sector holdings are down another between 4% and 11%, including SDRL, which dropped another 8% following Wednesday’s 23% plunge…

Have you avoided these sectors – you would have been better off to follow our advice in 2014 and now you have to decide for 2015.
No one – and I am not being humble here – can project the future with great accuracy but our clients continue to do very well and we offer that experience to you.

Fees : 1 % annual set up and a performance bonus of 20 % – only if we perform.

You can withdraw your funds monthly if you require an income stream.

Alternate Guaranteed Income Payments

Private client funds Minimum $10,000 Maximum Loan $500,000

Our client is seeking funds to expand their tanker fleet .

Interest 12 % compounded – paid 1% per month

Floating charge of the full $500,000 against the fleet – valued at  more than $ 1 M


Contact information:

To learn more about portfolio management ,asset protection, trusts ,offshore company formation and structure for your business interests (at no cost or obligation)

Email OR  OR

Call Jack direct at 604-858-3202

10:00 – 4:00 Monday to Friday Pacific Time ( same time zone as Los Angeles).

Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

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Lor Loewen's photo.

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