Peak Shale Oil

This confirms that even the world’s biggest miner doesn’t know what it is doing with oil assets.  BHP Billiton bought up these shale assets in 2011, when prices were high, but a surge in drilling produced a glut and the price dropped and now BHP is hoping to sell, having lost $40 billion (and they don’t have a buyer yet). This has been exacerbated by Saudi Arabia’s refusal to be the “swing producer” any more – adjusting production to keep the price stable.  The US should now be the swing producer, but is caught up in the frantic “Drill, baby, drill!” boom.

Shale oil is altogether a less profitable business than conventional oil.  Drilling the wells is more complex and expensive, and involves fracking the well to increase the exposed surface area.  Then the production of the well drops off very quickly – 90% in the first 4 years, so the drilling frenzy must be maintained. And finally the oil doesn’t match the hydrocarbon profile of conventional crude (like WTI) so must be sold at reduced prices and blended with heavier oils to produce the same product mix after refining.

Clearly the ERoEI of the complete process is going to be worse than for conventional oil, and hardly worth the effort.  Nobody would be doing it at all if it wasn’t for a lack of good oilfields to develop. There are no giant oilfields left to discover, and the only big ones involve drilling under deep seas and in polar regions, where the additional costs are obvious.

Peak Oil is alive and kicking, and the life-blood of Industrial Civilisation is becoming more scarce by the year.  It is only a matter of time before investors realise this, and take a hard look at the projections of Ultimately Recoverable Resources of the oil majors’ fields.  Then they will be seen as liars about their bankable “assets” and their share price will tumble, causing the next Great Crash which will see the end of Industrial Civilisation for good.  This will at least solve the Climate Change problem, but will be far more serious for humanity.

When it happens, people will say how could we have been so blind?  But people always want to see the most optimistic side of things, especially when the alternative is so pessimistic, so Cognitive Dissonance helps maintain the fiction.  Plus, of course, those with all the wealth tell such lies to hide the truth, even though they know they will be exposed sooner or later.

http://www.zerohedge.com/news/2017-08-22/more-peak-shale-worlds-largest-miner-selling-its-shale-assets

More Peak Shale: World’s Largest Miner Is Selling Its Shale Assets

Over the past several months, we have wondered if despite new all time high shale production, whether the US shale sector in the has peaked. Some of our recent thoughts can be found in the following articles:

The “peak shale” narrative got a boost in late July when one of the world’s most bearish hedge funds, Horseman Global, announced it was aggressively shorting shale companies on the thesis that funding is about to “run dry”, resulting in a sharp drop in production and with the lack of capex, would lead to another round of industry defaults (while sending the price of oil higher).

More evidence was revealed in the latest Baker Hughes data, which showed that both active Horizontal and Permian oil rigs had finally peaked and were now declining, while the number of oil rigs funded by Public junk bond deals had plateaued, suggesting little interest in future funding:

Fast forward to today when overnight, we got the clearest indication yet that the US shale sector may have indeed have peaked, when BHP Billiton – the world’s largest miner – said it was in talks with potential buyers of its U.S. shale assets, purchased during a frenzied $20 billion buying spree in 2011, just as the price of oil peaked.

“We’re talking to many parties and we’re hopeful” of completing a small number of trade sales to divest the onshore oil and gas division, Chief Executive Officer Andrew Mackenzie told Bloomberg Television Tuesday in an interview, adding that the moves on shale and potash aren’t the result of shareholder pressure. “We have been moving in this direction for some time” on shale.

As Bloomberg adds, BHP’s strategic pull-back by comes after new Chairman Ken MacKenzie, who starts his job next month, met more than a hundred investors in recent weeks in Australia, the U.S. and the U.K. in the wake of the campaign by some shareholders calling for reform.

BHP’s admission that there is no more upside for its shale assets, in their current form, is a victory for Elliott Singer’s ongoing activist campaign, which has been pushing for a disposition of these assets in a vocal activist campaign. According to Singer’s Elliott Management, strategic missteps by BHP’s leadership, including in the shale unit, have destroyed $40 billion in value; Elliott launched its public campaign seeking a range of reforms in April.

Admitting that Elliott is right, during a call with analysts, CEO Mackenzie said BHP’s 2011 shale deals had been too costly, poorly timed and the eighth-largest producer in U.S. shale didn’t deliver the expected returns. That said, if the company expected oil prices to rebound, or if the shale assets to become sufficient productive where they would generate positive returns, he would hardly have sold them. Which is why in the current configuration of prices and technology, at least one major player in the space has confirmed that shale’s euphoric days may be over.

This was confirmed by Macquarie Wealth Management Division Director Martin Lakos who said that BHP likely concluded the shale and Jansen assets were “not going to generate the returns that is going to make the grade,” although he added that “it’s most likely the Elliott activity has accelerated the shale sales process.”

BHP’s disposition of shale has been a long time coming:

Discussions among BHP shareholders have been dominated by concerns over shale and potash, according to Craig Evans, a portfolio manager at Tribeca Investments Partners Pty, which holds the producer’s shares. Tribeca and other investors have also pressed the case with BHP directly, he said.

 

“Elliott put the first balls in motion on this in calling them to task,” Evans said. “It’s no coincidence that we’re talking about those issues now.”

 

Investors including AMP Capital, Schroders Plc, Escala Partners and Sydney-based Tribeca have added to criticism of BHP, or offered support for some of Elliott’s proposals, in recent weeks. Elliott didn’t immediately respond to a request for comment on BHP’s decisions on shale and potash

Some believe that BHP timed its asset sale at just the right time: “BHP are going to get better value than they would have two years ago after the surge in crude oil price from last year’s 12-year low,” David Lennox, an analyst at Fat Prophets, said on Bloomberg TV. The company has “probably picked an opportune time because we’ve seen the oil price come up from a bottom,” he said.

Of course, a much bigger question is whether the potential buyer will agree, as any acquiror will be purchasing not on current or historical prices, but where they expect oil prices to go in the future. As such, the big wildcard is shale’s access to cheap funding, which for the past 3 years has been the only factor that mattered not only for the US oil industry, but also for OPEC, whose repeated attempts to push the price of oil higher has been foiled every single time thanks to record low junk debt yields and an investor base that will oversubscribe every single shale offering. Well, as we showed last month, that is now ending as bond investors have suddenly turned quite skittish, and the result is that US shale production has not only peaked but is once again declining. While it remains to be seen how the overall industry will respond, if indeed we have hit “peak shale”, OPEC’s long awaited moment of redemption may finally be here.

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Andy Hall, The Oil Trader Known as ‘God’, Is Closing Down His Main Hedge Fund

God doesn’t know everything, apparently. It is surprising mistakes by experts, like this that could crash the world economy. When oil is priced below $50 /barrel, it means that either there is too much supply or too little demand. Whenever an “expert” tells you that it is the former, you can expect it is probably equally likely to be the latter.

Since oil is the life-blood of industry, (think transportation of raw materials, and finished goods), this means that industry is in a bad way. No one wants to say it because they never want to talk down expectations and be the one responsible for crashing the markets. So instead they say it is an over-supply problem and that prices will rise soon. Do that for long enough, two and a half years, and you go bust.

https://www.bloomberg.com/news/articles/2017-08-03/oil-trader-andy-hall-is-said-to-close-main-astenbeck-hedge-fund

The Oil Trader Known as ‘God’ Is Closing Down His Main Hedge Fund


By Nishant Kumar, Javier Blas, and Suzy Waite
4 August 2017

Andy Hall, the oil trader sometimes known in markets as “God,” is closing down his main hedge fund after big losses in the first half of the year, according to people with knowledge of the matter.

The capitulation of one of the best-known figures in the commodities industry comes after muted oil prices wrong-footed traders from Goldman Sachs Group Inc. to BP Plc’s in-house trading unit. Hall’s flagship Astenbeck Master Commodities Fund II lost almost 30 percent through June, a separate person with knowledge of the matter said, asking not to be identified because the details are private.

“I’m shocked,” said Danilo Onorino, a portfolio manager at Dogma Capital SA in Lugano, Switzerland. “This is the end of an era. He’s one of the top oil traders ever.”

Hall shot to fame during the global financial crisis when Citigroup Inc. revealed that, in a single year, he pocketed $100 million trading oil for the U.S. bank. His career stretches back to the 1970s and includes stints at BP and legendary trading house Phibro Energy Inc., where he was chief executive officer.

“Andy Hall is one of the grandees of oil trading,” said Jorge Montepeque, a senior vice president of trading at Italian energy major Eni SpA.

A representative of Astenbeck Capital Management LLC declined to comment. The Southport, Connecticut-based company managed $1.4 billion at the end of last year, according to a Securities and Exchange Commission filing.

Hall is the latest high-profile commodity hedge-fund manager to succumb to the industry’s low volatility and lack of trending markets. At least 10 asset managers in natural resources have closed since 2012, including Clive Capital LLP and Centaurus Energy LP. Goldman Sachs reported its worst-ever result trading commodities in the second quarter.

Oil hedge funds such as Astenbeck wagered earlier this year that production cuts led by Saudi Arabia and Russia would send prices climbing. Yet, their bets backfired as U.S. shale producers boosted output and Libya and Nigeria recovered from outages caused by domestic disturbances and civil war.

Stockman: Amazon is the New Tech Crash

Who knows when the bubble will burst, but it cannot be long now. 6 stocks in the S&P-500 account for 40% of the gain in market capitalization since January 2015, pumped up by the G3 Central Banks (US, Japan, Europe). The rest are surviving by borrowing to buy back there own shares – a clear indicator that they don’t know how to make a profit through production.

https://dailyreckoning.com/amazon-new-tech-crash/

Amazon is the New Tech Crash


August 1 2017

It won’t be long now. During the last 31 months the stock market mania has rapidly narrowed to just a handful of shooting stars.

At the forefront has been Amazon.com, Inc., which saw its stock price double from $285 per share in January 2015 to $575 by October of that year. It then doubled again to about $1,000 in the 21 months since.

By contrast, much of the stock market has remained in flat-earth land. For instance, those sections of the stock market that are tethered to the floundering real world economy have posted flat-lining earnings, or even sharp declines, as in the case of oil and gas.

Needless to say, the drastic market narrowing of the last 30 months has been accompanied by soaring price/earnings (PE) multiples among the handful of big winners. In the case of the so-called FAANGs + M (Facebook, Apple, Amazon, Netflix, Google and Microsoft), the group’s weighted average PE multiple has increased by some 50%.

The degree to which the casino’s speculative mania has been concentrated in the FAANGs + M can also be seen by contrasting them with the other 494 stocks in the S&P 500. The market cap of the index as a whole rose from $17.7 trillion in January 2015 to some $21.2 trillion at present, meaning that the FAANGs + M account for about 40% of the entire gain.

Stated differently, the market cap of the other 494 stocks rose from $16.0 trillion to $18.1 trillion during that 30-month period. That is, 13% versus the 82% gain of the six super-momentum stocks.

Moreover, if this concentrated $1.4 trillion gain in a handful of stocks sounds familiar that’s because this rodeo has been held before. The Four Horseman of Tech (Microsoft, Dell, Cisco and Intel) at the turn of the century saw their market cap soar from $850 billion to $1.65 trillion or by 94% during the manic months before the dotcom peak.

At the March 2000 peak, Microsoft’s PE multiple was 60X, Intel’s was 50X and Cisco’s hit 200X. Those nosebleed valuations were really not much different than Facebook today at 40X, Amazon at 190X and Netflix at 217X.

The truth is, even great companies do not escape drastic over-valuation during the blow-off stage of bubble peaks. Accordingly, two years later the Four Horseman as a group had shed $1.25 trillion or 75% of their valuation.

More importantly, this spectacular collapse was not due to a meltdown of their sales and profits. Like the FAANGs +M today, the Four Horseman were quasi-mature, big cap companies that never really stopped growing.

Now I’m targeting the very highest-flyer of the present bubble cycle, Amazon.

Just as the NASDAQ 100 doubled between October 1998 and October 1999, and then doubled again by March 2000, AMZN is in the midst of a similar speculative blow-off.

Not to be forgotten, however, is that one year after the March 2000 peak the NASDAQ 100 was down by 70%, and it ultimately bottomed 82% lower in September 2002. I expect no less of a spectacular collapse in the case of this cycle’s equivalent shooting star.

In fact, even as its stock price has tripled during the last 30 months, AMZN has experienced two sharp drawdowns of 28% and 12%, respectively. Both times it plunged to its 200-day moving average in a matter of a few weeks.

A similar drawdown to its 200-day moving average today would result in a double-digit sell-off. But when — not if — the broad market plunges into a long overdue correction the ultimate drop will exceed that by many orders of magnitude.

Amazon’s stock has now erupted to $1,000per share, meaning that its market cap is lodged in the financial thermosphere (highest earth atmosphere layer). Its implied PE multiple of 190X can only be described as blatantly absurd.

After all, Amazon is 24 years-old, not a start-up. It hasn’t invented anything explosively new like the iPhone or personal computer. Instead, 91% of its sales involve sourcing, moving, storing and delivering goods. That’s a sector of the economy that has grown by just 2.2% annually in nominal dollars for the last decade, and for which there is no macroeconomic basis for an acceleration.

Yes, AMZN is taking share by leaps and bounds. But that’s inherently a one-time gain that can’t be capitalized in perpetuity at 190X. And it’s a source of “growth” that is generating its own pushback as the stronger elements of the brick and mortar world belatedly pile on the e-commerce bandwagon.

Wal-Mart’s e-commerce sales, for example, have exploded after its purchase of Jet.com last year — with sales rising by 63% in the most recent quarter.

Moreover, Wal-Mart has finally figured out the free shipments game and has upped its e-commerce offering from 10 million to 50 million items just in the past year.

Wal-Mart is also tapping for e-commerce fulfillment duty in its vast logistics system — including its 147 distribution centers, a fleet of 6,200 trucks and a global sourcing system which is second to none.

In this context, even AMZN’s year-over-year sales growth of 22.6% in Q1 2017 doesn’t remotely validate the company’s bubblicious valuation — especially not when AMZN’s already razor thin profit margins are weakening, not expanding.

Based on these basic realities, Jeff Bezos will never make up with volume what he is losing in margin on each and every shipment.

The Amazon business model is fatally flawed. It’s only a matter of the precise catalyst that will trigger the realization in the casino that this is another case of the proverbial naked emperor.

Needless to say, I do not think AMZN is a freakish outlier. It’s actually the lens through which the entire stock market should be viewed because the whole enchilada is now in the grips of a pure mania.

Stated differently, the stock market is no longer a discounting mechanism nor even a weighing machine. It’s become a pure gambling hall.

So Bezos’ e-commerce business strategy is that of a madman — one made mad by the fantastically false price signals emanating from a casino that has become utterly unhinged owing to 30 years of Bubble Finance policies at the Fed and its fellow central banks around the planet.

Indeed, the chart below leaves nothing to the imagination. Since 2012, Amazon stock price has bounded upward in nearly exact lock-step with the massive balance sheet expansion of the world’s three major central banks.

At the end of the day, the egregiously overvalued Amazon is the prime bubble stock of the current cycle. What the Fed has actually unleashed is not the healthy process of creative destruction that Amazon’s fanboys imagine.

Instead, it embodies a rogue business model and reckless sales growth machine that is just one more example of destructive financial engineering, and still another proof that monetary central planning fuels economic decay, not prosperity.

Amazon’s stock is also the ultimate case of an utterly unsustainable bubble. When the selling starts and the vast horde of momentum traders who have inflated it relentlessly in recent months make a bee line for the exits, the March 2000 dotcom crash will seem like a walk in the park.

US Growth negative since 2008

When the USG wants to borrow money it issues Treasury Bonds, and the Federal Reserve buys them using newly printed money. The USG then spends the money, this makes GDP rise, and the economy appears to grow, any everyone is happy. But this neat arrangement hides the fact that the growth is all based on Fed money-printing, not on real production.

So how much real production has happened since 2008? – none, in fact growth has been negative!.

https://econimica.blogspot.sg/2016/11/trump-lies-no-different-than-obama-or.html

Trump Economic Fabrication no Different than Obama or Bush Economic Deceptions

November 13, 2016

GDP or gross domestic product is the big lie used by politicians because it neatly avoids the debt undertaken to achieve it’s purported growth. The chart below shows annual US GDP growth back to 1980.

However, the chart below shows both sides of the equation…the annual GDP growth and the annual federal debt incurred, spent, and (thus counted as part of the growth) to achieve the purported growth.

Below, annual GDP minus the annual growth in federal debt to achieve that “GDP growth”. The last eight years were abysmal and 2016 the third worst year in history (this even assumes Q4 GDP comes in at a relatively strong 2.5%). This trend ain’t yer friend.

Over the last eight years, the Obama economy (as measured by GDP) grew $3.9 trillion and federal debt grew by $9.6 trillion…said otherwise, GDP contracted $5.7 trillion when all the new debt is subtracted.