The “picks and shovels” of the oil industry are bleeding cash…
As regular readers know, the world has too much oil.
In recent years, new technologies like “fracking” have unlocked billions of barrels of oil that were once impossible to extract. U.S. oil production has doubled since 2008 to its highest level since the 1970s. Global oil production is also near an all-time high.
The massive oversupply has caused oil prices to crash. Oil has plunged 70% since June 2014.
Two weeks ago, investment bank Morgan Stanley (MS) said the “oil price downturn is now deeper and longer than any of the previous downturns since 1970.” According to Morgan Stanley, oil is in “uncharted territory.”
• Oil stocks have crashed…
Exxon Mobil (XOM), the largest U.S. oil producer, has dropped 28% over the last 19 months. Chevron (CVX), the second largest, has dropped 38%.
Schlumberger (SLB), the world’s largest oil services company, has plummeted 44%. Its sales have dropped four quarters in a row. Oil services companies sell equipment, including drill rigs, to oil companies.
• Yesterday, Halliburton (HAL) reported a 42% decline in its fourth-quarter sales…
Halliburton is the world’s second-largest oil services company. Like Schlumberger, its sales have declined four straight quarters. The company reported a net loss of $28 million last quarter. For comparison, it made a $901 million profit during the final quarter of 2014.
Halliburton’s stock fell 3.0% on the news, and is now down 57% since June 2014.
• 1,100 North American oil rigs have shut down in the past 16 months…
According to oil services company Baker Hughes (BHI), the number of rigs actively pumping or looking for oil has plunged 68% since October 2014.
With fewer rigs in service, oil producers are buying less equipment from companies like Halliburton and Schlumberger.
• Halliburton has laid off 25% of its employees since the downturn began…
That’s 22,000 workers in less than two years. The company laid off 4,000 workers last quarter alone. On Monday, Halliburton’s CEO warned that this year could be worse…
2016 is shaping up to be one tough slog through the mud and the industry is going to have to take it a quarter at a time.
Bloomberg Business reports the global energy industry slashed $100 billion in spending and cut 250,000 jobs last year.
On Thursday, energy news website FuelFix.com reported:
The worst downturn in more than four decades likely will bring Big Oil earnings down by 30 percent to 70 percent this year and cut operating cash flows 10 percent to 15 percent, Morgan Stanley said. Oil and gas spending, the investment bank projected, will fall 34 percent from 2014 to 2017.
• The oil industry is highly cyclical…
It goes through booms and busts. Today, the industry is in its worst bust in decades.
Eventually, this cycle will end with absurdly low prices for oil services stocks. We’ll get an opportunity to buy these companies at fire-sale prices. But for now, we recommend staying away while the world works through its oversupply of oil.
• Credit card company American Express (AXP) reported bad results last week…
Sales fell 7% from last year. It was the fourth consecutive quarter of shrinking sales. To offset falling sales and earnings, management plans to cut costs by $1 billion over the next two years.
The stock is down 21% this year after falling 25% in 2015.
E.B. Tucker, editor of The Casey Report, has been warning his readers about the “death of credit cards.” In short, E.B. believes that innovative new technologies like “digital wallets” will replace physical credit cards soon. Digital wallets are more convenient and more secure than credit cards.
• However, E.B. expects American Express to survive. He explains why in this short essay…
American Express (AXP) is under real pressure. It’s the kind of pressure that’s going to create tremendous change in the credit card business. You see weak companies, and people, crack under pressure. They can’t take it.
American Express is not that kind of company. It’s a survivor.
Over the last year, American Express lost the exclusive right to issue Costco’s (COST) in-store credit card. For years, Costco only accepted payment by cash, check, or American Express. Losing that status cost AmEx 8% of its entire customer spending. Worse…it lost 20% of outstanding credit card balances.
Most credit card companies make money two ways. First, they take a percentage of every transaction from the retailer. This ranges from 1%-5%. American Express is known as being most expensive.
Second, they charge customers a monthly interest rate, usually very high, on unpaid balances.
American Express had a third way to make money. It calls cardholders “members” and charges them annual membership fees. Green, Gold, and Platinum define the levels and fees range from $100-$500 per year. Recently, the members aren’t seeing the benefit. What was once exclusive now seems standard.
The company’s entire premise is under assault. As you can see in this chart its stock is down 26% over the last year. That compares to an 11% increase for competitor Visa (V).
But American Express is not finished. In fact, I bet the company will emerge stronger than ever.
For reasons I explain in The Casey Report, plastic credit cards are going extinct. But the best credit card companies will survive. They own the customer relationship. They must evolve into digital payment companies.
This is the future…and it’s a trillion dollar trend. Eventually, we’ll look back to study how this trillion dollar trend changed the credit card business. I bet we’ll see that a wounded American Express got up swinging and changed its industry forever.
• While E.B. isn’t betting against Amex, he is betting against credit card terminals…
In a recent Casey Report issue, E.B. recommended shorting (betting against) credit card terminal maker VeriFone Systems (PAY). VeriFone makes the terminals you swipe your credit card through at the store.
As payments go digital, E.B. believes that credit card terminals will go extinct. Casey Report readers are currently up 24% on the VeriFone short.
Every month, E.B. and Casey Research founder Doug Casey share their top investment ideas with Casey Report readers. This month, E.B. recommends buying three key companies that “feed the masses” in America. You can get in on these picks by taking a risk-free trial to The Casey Report.
Chart of the Day
Oil rigs are shutting down at a record pace…
Today’s chart shows the number of oil rigs in North America currently pumping or looking for oil. As you can see, North America’s “active” rig count soared more than 500% from 2008 to 2014.
But when oil prices crashed in 2014, many companies shut down their rigs. They couldn’t make money at low oil prices. There are 68% less active rigs today than there were in October 2015.
Energy consulting company Wood Mackenzie estimates that $1.5 trillion worth of oil projects in North America can’t make money at $50 oil. With oil at $30 per barrel today, the value of money-losing projects has likely climbed past $2 trillion.
The North American oil industry has about 1,100 oil rigs sitting idle today. If oil prices recover, oil companies can bring these rigs back online. That’s bad for oil services companies, like Schlumberger and Halliburton, which make money selling oil rigs to oil companies.
Delray Beach, Florida
January 26, 2016
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