The oil crisis is about to take down a lot more victims…will you be one of them?
As you likely know, the oil market is in a full-blown crisis. Last summer, the price of oil peaked at just over $106 per barrel. Today, it’s trading for about $46.
Low oil prices mean U.S. oil companies are making less money. Chevron (CVX), the country’s second-biggest oil company, is just one example. During the second quarter, Chevron had its worst quarterly profit in twelve years.
Meanwhile, oil companies are trying to stay afloat by drastically cutting spending…
Last month, global bank Barclays (BCS) said oil companies have already cut capital spending in North America by $68 billion. That figure will probably go much higher soon. On Monday, energy consulting company Wood Mackenzie said that an estimated $1.5 trillion worth of oil projects in North America can’t make money when oil trades at $50 or less.
• Even after big spending cuts, many U.S. oil companies are struggling to pay their huge debts…
And the number of credit rating downgrades in the oil industry is surging…
Rating agencies downgrade a company’s credit rating if they think the company’s financial health is getting worse. There are two main factors driving credit downgrades in the oil industry right now. One, profits tanked along with the price of oil. Two, these companies borrowed ridiculous amounts of money when oil prices were higher…which they’re now struggling to pay back.
• U.S. oil companies borrowed almost $200 billion between 2010 and 2014…
That translates into 55% more debt for U.S. oil companies, according The Wall Street Journal.
This was only possible because the Federal Reserve has held its key interest rate at effectively zero since 2008, making it incredibly cheap to borrow money.
Now oil companies that borrowed during the “boom” are struggling to pay back their huge debts. Last month, the U.S. Energy Information Administration (EIA) said debt payments are eating up most of the cash that U.S. onshore oil producers are bringing in. Between June 2014 and June 2015, these companies put 83 cents of every dollar they generated towards debt. That’s the highest rate since 2012.
• In the past, oil companies could “paper over” debt problems by refinancing…
For a long time, it was common for oil companies to borrow money at lower interest rates to pay off old, higher-rate loans. But that’s not an option for most oil companies any more.
Since the price of oil crashed, it’s become much more expensive for oil companies to borrow. The EIA reports that companies in the energy industry must pay lenders around 11% on average to borrow money. For perspective, industrial companies are paying around 7%. And the consumer discretionary sector is paying around 5%.
It didn’t used to be like this. Before the price of oil crashed, energy companies generally paid the same rates as other sectors to borrow money. But their borrowing costs skyrocketed when the price of oil tanked.
• The oil crisis is also hitting Halliburton, which just released bad third-quarter results…
Halliburton (HAL) is one of the world’s biggest oil services companies. The company sells “picks and shovels” to the oil industry…everything from drill bits to pumps to safety equipment.
Halliburton’s third-quarter sales were 6% lower than they were last year. The company also reported a $56 million loss.
Halliburton blamed the bad results on the weak North American market, pointing specifically to the slowdown in “fracking.”
Fracking is short for hydraulic fracturing. It’s a technique for getting shale oil, which is trapped deep within rocks, out of the ground.
Fracking is a lot more expensive than drilling for conventional oil. Earlier this year, Fortune said the average “‘all-in,’ breakeven cost for U.S. hydraulic shale is $65 per barrel.” This means most shale oil companies lose money on every barrel of oil they sell for less than $65. With oil at $46 a barrel, many of these companies have stopped drilling.
This has created big problems for Halliburton, which sells more “picks and shovels” to the fracking industry than any other company in the world.
• On Monday, Halliburton also announced plans to lay off 4,000 workers…
That’s on top of the other 14,000 workers it’s laid off since last summer.
Halliburton’s stock closed Monday down 1.2%.
A 36% drop in sales would typically cause a company’s stock to fall a lot more than 1.2%. The fact that Halliburton’s stock only fell 1.2% on awful results means the market was likely expecting this bad news.
However, we don’t think the bad times are over for oil companies. Things could still get much worse. As we noted earlier, an estimated $1.5 trillion worth of oil projects stand to lose money at today’s prices.
This past weekend, at the 2015 Casey Research Summit, our founder Doug Casey said he’s betting that the price of oil will keep falling…
At some point, there will be spectacular opportunities to buy oil stocks for pennies on the dollar. But we’re not there yet.
• In today’s mailbag, Steve M. asks…
Is there a currency bubble? Is it about to pop? And will it be more devastating than the 2008 housing bubble?
Justin Spittler comments:
“Currency bubble” is an interesting way to put it, Steve.
If you read this letter on a regular basis, you know that central banks around the world reacted to the 2008 financial crisis by printing trillions of dollars, euros, yen, and other currencies. They were desperately trying to “paper over” bad debts and bad investments.
Doug Casey thinks this unprecedented financial experiment will lead to a second leg of the 2008 financial crisis:
The U.S. created trillions of dollars to fight the financial crisis of 2008 and 2009. Most of those dollars are still sitting in the banking system and aren’t in the economy. Some have found their way into the stock markets and the bond markets, creating a stock bubble and a bond super-bubble. The higher stocks and bonds go, the harder they’re going to fall.
It’s difficult to say when this bubble will pop…but the ingredients for a currency crisis are all there.
You shouldn’t wait until this crisis is at your doorstep to prepare. We recently published a book packed full of concrete steps you can take now to protect yourself from any financial crisis. It’s called Going Global 2015. I think it includes some of the best research we’ve ever published. Click here to learn more.
Chart of the Day
Fracking stocks have plunged with the price of oil…
Today’s chart shows the performance of the Market Vectors Unconventional Oil & Gas ETF (FRAK) over the past sixteen months.
FRAK owns companies in the unconventional oil & gas space, including a large number of shale oil companies. FRAK’s two largest holdings are EOG Resources (EOG) and Occidental Petroleum (OXY), two of the largest shale oil companies in the U.S.
The chart starts in late June 2014, when the price of oil peaked last year. As you can see, fracking stocks have tanked right along with oil. FRAK is down 49% since late-June.
Delray Beach, Florida
October 21, 2015
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