After the initial shock, denial, panic and capitulation, oil producers, service providers, and energy investors must view the future differently based on the lower-for-longer oil price scenario, or risk their own.”

Investment firm Oppenheimer (OPY) said this in a recent note. The folks there must agree with us…there’s more pain ahead for the oil patch. As we’re about to explain, anyone who’s buying into the oil sector right now is getting in too early.

•  Oil giant BP plc’s (BP) quarterly sales fell 41% from last year…

The company shared the bad news yesterday. It was the third quarter in a row that BP’s sales fell by at least 35% from the previous year.

BP’s sales are down because the price of oil has collapsed. Oil peaked at just over $106 a barrel last summer. Today, it’s trading for around $46.

•  BP expects oil prices to stay low for at least another year…

That’s what the company’s CEO, Robert W. Dudley, said during yesterday’s earnings call. The New York Times reports:

In its announcement on Tuesday, the company said it was basing its outlook through 2017 on oil prices of $60 a barrel.

In a call with analysts, Mr. Dudley backed up this view with a slide showing that the futures market was now forecasting oil prices of $60 to $70 per barrel into the 2020s. That is a large drop from earlier this year, when the projections were for about $70 per barrel in 2017 and about $80 by 2021.

BP has stopped all of its exploration and development projects for now. The company expects to spend just $19 billion on capital projects this year, or $5-7 billion less than it had projected before the price of oil plummeted.

To cope with low oil prices, BP also plans to lay off 4,000 workers (about 5% of its workforce) by the end of the year. It has sold nearly $10 billion in assets this year, and it plans to sell another $3-$5 billion in assets next year.

•  BP has not cut its dividend yet…

Oil giants Royal Dutch Shell plc (RDS.A), Exxon Mobil (XOM), and Chevron (CVX) have also kept their dividends intact.

These companies are household names all around the world. They’re also some of the most reliable dividend payers on the planet. For many investors, these dividends are untouchable…a foundational aspect of their family holdings, like grandma’s ring or the family farm.

But we think these resource companies might do the “impossible” soon and cut their dividends. That’s because they’re bleeding cash and running out of other options.

The Wall Street Journal reported on Sunday:

Spending on new projects, share buybacks and dividends at four of the biggest oil companies known as the supermajors— Royal Dutch Shell PLC, BP PLC, Exxon Mobil Corp. and Chevron Corp.—outstripped cash flow by more than a combined $20 billion in the first half of 2015, according to a Wall Street Journal analysis.

These huge oil companies aren’t making enough money to pay their bills, even after huge spending cuts. They’ve already cut spending by more than $30 billion in recent months, according to The Wall Street Journal. But that’s just a small part of the story…

The entire global oil industry has cancelled or postponed more than $200 billion worth of projects this year. And this figure will probably keep going up. Last week, energy consulting firm Wood Mackenzie said about $1.5 trillion worth of North American oil projects are unprofitable when oil trades at $50 or less.

•  Halliburton (HAL) reported awful third quarter results last week…

Halliburton is the second-biggest oil services company in the world. It sells things like pumps and drill bits and safety equipment to the oil industry.

Halliburton’s sales fell 36% from the previous year, and the company reported a $56 million loss. It also announced plans to lay off 4,000 workers.

Meanwhile, third-quarter revenues for Schlumberger (SLB), the world’s largest oil services company, declined 33% from last year. Earnings dropped by almost 50%.

Like Halliburton, Schlumberger is preparing for a prolonged downturn. The company has already cut 20,000 jobs this year, and it plans to cut more in the fourth quarter.

Schlumberger says it expects spending by oil companies to fall for the second straight year in 2016. It’s doesn’t think spending will pick up until 2017.

•  The oil crisis could spread outside the energy sector soon…

Energy spending has been a major driver of U.S. economic growth since the 2008 financial crisis.

The Carlyle Group (CG), one of the world’s largest private equity firms, recently explained just how important energy spending is to the U.S. economy:

Between 2009 and 2014, energy accounted for an astounding 70% of net industrial fixed investment in the U.S., as investment in unconventional oil and gas boomed at the same time business investment in the rest of the economy barely kept pace with depreciation…

In the 1990s, the U.S. invested about half as much in oil and gas rigs as in manufacturing plants; between 2008 and 2014, the situation had reversed, with total U.S. investment in oil and gas rigs 3x larger than investment in manufacturing facilities.

Orders for durable goods (the equipment and machines that companies don’t replace often) fell for the second straight month in September. On Tuesday, Reuters said spending cuts by energy firms were a major reason for the decline.

•  Sales for the world’s largest publicly-traded machinery manufacturer plummeted last quarter…

Caterpillar (CAT) reported its third-quarter results last week. The company’s third-quarter sales fell 19% from last year. Management expects sales to fall another 5% in 2016.

Caterpillar is bracing itself for a major slowdown. It plans to lay off 10,000 workers over the next four years.

Last week, we explained why Caterpillar is a “canary in the coalmine” for the global economy. Its horrible quarterly results point to a slowing global economy…

•  Many major U.S. industrial firms are doing as bad as Caterpillar…

Last week, industrial conglomerate 3M Co. (MMM) said its sales fell 5.2% in the third quarter. The company also lowered its sales expectations for the year by 1.5%. 3M is cutting 1,500 jobs to adapt to slower growth.

Cummins (CMI), the world’s largest diesel engine maker, announced its third-quarter results yesterday. The company’s revenues fell by 6% last quarter. Its profits were 10% lower than they were a year ago.

Cummins also announced plans to lay off 2,000 employees, or about 4% of its global workforce. It blamed the layoffs on slowing engine and power generator sales.

The company expects this year’s revenues to be 2% less than it originally predicted. Cummins’ stock fell 10% on the news. It’s now at a three-year low.

Fastenal (FAST), another huge industrial company, is reporting big drops in spending by its customers, as The Wall Street Journal explained on Sunday:

“The industrial environment’s in a recession. I don’t care what anybody says,” Daniel Florness, chief financial officer of Fastenal Co., told investors and analysts earlier this month. A third of the top 100 customers for Fastenal’s nuts, bolts and other factory and construction supplies have cut their spending by more than 10% and nearly a fifth by more than 25%, Mr. Florness said.

The global slowdown that hit commodity and energy companies first is now hitting major industrial firms now. These companies are slashing sales and profit expectations…and laying off thousands of employees.

These are the companies that sell products for building houses, office buildings, and other infrastructure. Right now, they’re telling us that the “real” economy is slowing. We think it won’t be long before other sectors start feeling the pain of the slowing economy too.

Chart of the Day

The price of natural gas just hit a three-year low.

Today’s chart shows the price of natural gas over the past three months. As you can see, it’s been heading lower since mid-August. Then it fell 3.9% on Friday. This was the largest one-day percentage drop for natural gas in two months.

U.S. production of natural gas has never been higher, thanks to innovative drilling techniques. Earlier this week, Bloomberg Business said the U.S. has the largest stockpile of gas heading into the winter months since 2006. This oversupply is the main reason natural gas prices are so low.


Justin Spittler
Delray Beach, Florida
October 28, 2015

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