If you’ve taken advantage in the last two weeks to begin accumulating a long-term energy position, as I have previously suggested, we need to get a further understanding about how to manage that position and what I see as the likely timetable for oil and oil stocks. Here’s my latest “trade” report:
China worries and a few quicker indicators that domestic production was beginning to slacken accelerated my timetable for investment that I laid out in my book, “Shale Boom, Shale Bust.” I now believe that the lows in oil have likely been seen, but that does not mean that I believe that oil will become constructively bullish any time soon either.
Why is that? It’s because so many of the signposts for the next boom in oil that I laid out in my book have not materialized as yet – particularly the consolidation movement of shale assets into the hands of larger major oil companies and a few select private equity players.
One other thing I never counted on when I wrote my book was the varied level of corporate accounting ‘tricks’ that even the most overleveraged shale players were capable of – there is a lesson here in the sophistication of modern investment banking, capable of so many ‘life-saving’ restructures that keep them alive.
Halcon Resources (HK) shows an example of this. In their latest restructuring, they have literally forced bondholders almost at the point of a gun to take fierce haircuts on tranches; pushing effective yields down while exchanging for later dated paper and practically worthless stock. Why are bondholders agreeing to this? Halcon argues to them that they are only going to offer this deal for a portion of their debt – leaving other bondholders with lower priority paper should a bankruptcy occur and further diluting shares to the detriment of equity holders. All this enhances Halcon’s ability to hang on for longer, another argument in favor of getting large holders of bond tranches to agree to this devil’s bargain.
So while the ‘standard’ methods of capital-raising and bond issuance are reaching their limits with the marginal E+P players, many continue to find ways to ‘keep the clock running.’
This kind of debt malarkey only works, of course, if you can push the clock back far enough to wait out a significant crude rally – probably back into the $70 range. This just won’t…