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 happen in time, and Halcon remains on my ‘walking dead’ list. In my mind, they’ve only managed a temporary stay from the electric chair. Still, you can bet that several other oil and gas companies will follow suit in Halcon’s outline and we’ll see these kinds of bond swaps from Goodrich Petroleum (GDP), Linn Energy (LINE), Exco Resources (XCO) and Sandridge Resources (SD), to name a few.
These kinds of shenanigans also insure that a full-scale “market clearing” needed for oil to stage a real and constructive recovery will also take longer as well – so while I was fairly sure of the W-type recovery in oil that seemed to have begun, I also don’t see prices rallying much above $52 in the mid-term.
Why the majors have been so quiet, at least so far, in finding value in solid shale players to make bids for here has also frankly surprised me. For the long-haul, Hess (HES), Continental Resources (CLR) and even EOG Resources (EOG) strike me as three tremendous opportunities for Exxon (XOM) and Chevron (CVX) to look at – particularly as Shell (RDS.A) continues to blow (as in waste) billions into future production potential in the Arctic. US shale, at least in these few solid names, is a far more bankable bet, in my view.
But no one called me to be a major executive for a major oil company, that’s for sure. In the meantime, I am expecting oil to maintain a (relatively) narrow range for a while, making it clear where your investment opportunity will emerge – on down days in crude and in equities, to add to positions, and in up days in both near the top of my projected range to lighten up a bit.
And that’s what I’m going to be doing for the next few weeks, barring something new emerging.