Will Your Favorite Oil Company Go Bankrupt?

By Justin Spittler

Oil companies are getting desperate. If you’ve been reading the Dispatch, you know oil is in a horrible bear market. The price of oil has crashed 69% since June 2014. Last month, oil hit its lowest price since 2003.

The world has too much oil..…
For years, many folks thought the world was running out of oil. The price of oil soared more than 1,200% from 1998 to 2008. The “Peak Oil” crowd saw this as proof that oil production was in terminal decline. They were very wrong. “Peak Oil” believers failed to understand that high prices would create huge incentives to develop new ways to produce oil. Oil companies developed new methods like “fracking” to unlock billions of barrels of oil that were once impossible to reach. U.S. oil production has nearly doubled over the last decade. Last year, it hit its highest level since the 1970s. World oil production levels are also near record highs.

The world isn’t consuming oil fast enough..…
The global economy produces about 1.7 million more barrels a day than it needs. With U.S. oil reserves at their highest level since the Great Depression, companies are running out of places to store the extra oil. To deal with the surplus, companies have started storing oil on tankers floating at sea and in empty railcars. Other companies are selling barrels at huge discounts just to get rid of them.

Low oil prices have hammered major oil companies..…
The world’s five biggest oil companies—Exxon (XOM), Chevron (CVX), Total S.A. (TOT), BP (BP), and Royal Dutch Shell (RDS.A)—have fallen an average 34% since June 2014. Oil services companies, which supply “picks and shovels” to the oil industry, have crashed, too. Schlumberger (SLB), the world’s largest oil services company, has plunged 36% since 2014. Halliburton (HAL), the world’s second biggest, has plunged 53%.

Oil companies have cut spending to the bone..…
Companies have walked away from billion dollar projects. They’ve sold pieces of their businesses. As Dispatch readers know, some have even cut their prized dividends. The industry has laid off more than 250,000 workers since oil prices peaked. Last year, oil and gas companies cut spending by 22%. Reuters reports that the industry could cut spending another 12% this year.

On Thursday, Halliburton laid off 5,000 workers..…
It’s now laid off 29,000 workers, more than a quarter of its workforce, since 2014. Like most companies in the oil business, Halliburton is struggling. Its sales have fallen four straight quarters. Last year, the company lost $671 million, its first annual loss since 2004. The latest round of layoffs suggests Halliburton doesn’t expect business to pick up anytime soon.

The oil market is cyclical..…
It goes through big booms and busts. Right now, it’s going through its worst bust in decades. Eventually, the oil market will boom again. After all, the world needs oil. Companies that survive this bust should deliver huge gains during the next boom. If you can buy great oil companies near the bottom, you could set yourself up for huge gains when the next boom comes. So…is this the bottom?

According to The Wall Street Journal, one third of U.S. oil producers could go bankrupt this year. To be profitable, many companies would need the price of oil to get back up $50. With oil at $32.84 a barrel on Friday, those companies are in trouble. We expect a wave of bankruptcies to rip across the oil industry. This would likely trigger another leg down in oil stocks. So we’re not ready to buy oil stocks yet.

Instead, we recommend “stalking” your favorite oil companies..…
Nick Giambruno, editor of Crisis Investing, just added a world-class oil company to his watch list.
If you don’t know Nick, his specialty is buying beaten-down assets during a crisis. Most investors run away from crisis. But if you can keep your head and buy when everyone else is panicking, you can often pick up a dollar’s worth of assets for a dime or less.

Shale oil stocks are in crisis today. Even the largest shale companies have been obliterated. Major shale oil producer Apache (APA) has plunged 51% since June 2014. Anadarko (APC), another larger shale company, has plummeted 65%. Shale oil is more expensive to extract than conventional oil. And at today’s prices, most shale oil projects can’t make money.

Many shale companies borrowed too much money during oil’s boom times. Now that oil is in a bust, they can’t generate the cash flow to pay back their debts. Last month, investment bank Oppenheimer & Co. Inc. warned that half of all U.S. shale oil producers could go bankrupt before oil prices recover. To survive, these companies would need the price of oil to more than double.

Nick has found a shale company unaffected by these problems. It’s a world-class shale oil company that has virtually no risk of going bankrupt. However, its stock has gotten extremely cheap along with all other shale oil stocks. Nick says this company has “trophy assets in the major U.S. shale basins. It has a solid balance sheet.

And, unlike many of its peers, it didn’t over leverage itself during the last boom.” The company also has the industry’s highest profit margins. Nick plans to buy this company at once in a generation prices. He will tell Crisis Investing readers when it’s time to pull the trigger.

In the meantime, Nick is investing in Cuba..…
As you may know, the U.S. has had a trade embargo against Cuba since 1962. The embargo bans all trade, making it illegal for Americans to invest in Cuba. But that could soon change. About a year ago, Cuba and the U.S. announced they were working to repair diplomatic and economic relations. In August, the two countries reopened their embassies in each other’s capitals. President Obama is going to Cuba next month. He will be the first sitting president to visit Cuba since Calvin Coolidge in 1928.

Nick thinks the embargo could soon “become a page in the history books”..…
The end of the embargo will create the “potential for enormous profits,” as Nick explained in Crisis Investing.

When the embargo goes away, American tourism to Cuba will explode. The International Monetary Fund estimates there could be up to 10 million visits from Americans every year as soon as the embargo comes down.

Today, it’s still illegal to invest in Cuba. But Nick has a “back door” way to profit from the opening up of Cuba’s economy. Nick’s investment in Cuba legally trades on the NASDAQ stock exchange. It should deliver huge gains when the embargo is lifted…which may happen very soon. You can get in on Nick’s Cuba investment by signing up for Crisis Investing. You’ll also learn about the world class shale oil company on Nick’s watch list. Click here to begin your risk-free trial.

Chart of the Day

Shale oil stocks have been decimated. Today’s chart shows the performance of the Market Vectors Unconventional Oil & Gas ETF (FRAK). This fund tracks 50 companies involved in the shale oil and gas industries. FRAK has crashed 65% since June 2014. Last month, it hit an all-time low. As we mentioned, most shale oil companies simply can’t make money right now.

The article Will Your Favorite Oil Company Go Bankrupt? was originally published at caseyresearch.com.

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Obama’s Secret Pipeline

By Marin Katusa, Chief Energy Investment Strategist

Isn’t it odd that an 800 mile pipeline that runs across environmentally sensitive land has been permitted without any mention in the media? Not a word about it from President Obama either.

Obama’s Secret Pipeline will be built over land that’s much more sensitive than that of the Keystone XL pipeline, which gets nothing but front page coverage. It will actually be 17% (six inches) larger in diameter than Keystone XL (36 inches) and it will transport natural gas, not oil.

Bill 138

The Senate of Alaska, the state in which the pipeline will be built, has just passed Bill 138, which makes the state a partner of three of the world’s largest oil companies, including one that has a horrible environmental track record on U.S. soil. In a nutshell, Alaska’s government is now partners with BP, ExxonMobil, and ConocoPhillips.

Only one more signature is required—Governor Sean Parnell’s—and it’s expected that he will sign the deal.

Not Even the US Government Wants US Dollars

For more than 100 years, the U.S. government has been receiving a royalty and tax revenue paid on the amount of oil or natural gas produced on American soil—a fee that is paid in U.S. dollars. Bill 138 has changed this forever.

Instead of Alaska receiving its dues in U.S. dollars, the state legislature has decreed through Bill 138 that the state will be paid “in kind.” In other words, the state will be getting its share of royalty and tax revenue in natural gas instead of U.S. dollars.

For the record, this is the first time ever that a US state has entered into a partnership like this. Essentially, Alaska is now a 25% equity partner with BP, ExxonMobil, and ConocoPhillips—which also requires the state to cough up cold, hard cash to build the entire project, including the 800 mile long, 42 inch wide pipeline.

Overall, the project is currently estimated to cost north of U.S. $50 billion, and we expect that when all the capital expense overruns and government inefficiencies are accounted for, the whole project will come in at more than U.S. $75 billion, using the total costs of similar projects for comparison.

But it will be 2015 before the final negotiations and the specific details of the partnership are agreed on, and remember, the devil is in the details. Who do you think will get the better end of the deal—a bunch of government bureaucrats with zero oil and gas experience, or the world’s top oil and gas producing companies? I know whom I’m betting on.

Which leads us to the point of this weekly missive.

And the Winner of Obama’s Secret Pipeline Is…

We already know which company will be building and operating Obama’s Secret Pipeline. The company I’m talking about has a lower price to earnings (P/E) ratio and a better yield than all of its peers. That’s good, because shareholders get paid a monthly yield for owning the stock while sitting back and watching the share price rise as well.

The Ultimate Oil Toll Booth

Think of it this way: this company charges the world’s most powerful oil and gas producers for every barrel of oil that passes through its “road network,” and now it can also charge the state of Alaska. Regardless of the price of oil or natural gas, this company gets its fee.

It’s a low-risk way to benefit from a high risk enterprise. This company is a current Buy in our Casey Energy Dividends portfolio. The Energy team is currently working hard on the upcoming issue, which will in detail cover the company that’s bound to gain big from Obama’s Secret Pipeline.

I know you haven’t heard about this pipeline yet, but you will soon enough.

That’s what we do here at the Energy Division of Casey Research: We’re the first to uncover breakthrough stories, and the first to uncover the best energy investment opportunities in the world. Doug Casey and I just got back from a whirlwind European tour, where we visited many of Europe’s most promising energy projects.

Here’s a picture of Doug Casey and me at Europe’s largest onshore drill site. This drill rig is 15 stories high and uses about 16,000 liters of diesel a day to turn the drills—which Doug and I are holding in this picture. As a side note, just the crank shaft that we’re holding costs U.S. $2 million—this rig is expensive and gigantic.

For you to get a better perspective on the true size of Europe’s largest onshore drill rig, here is a picture of Doug Casey and me with our friends Frank Holmes, Frank Giustra, and Matt Smith.

(From far left to right: Frank Holmes, Doug Casey, Marin Katusa, Frank Giustra, Matt Smith)

 

Do Your Portfolio a Favor and Try Out the Casey Energy Report

Doug Casey and I have done all the hard work for you. The current issue of the Casey Energy Report is a compilation of our Europe trip, including in-depth descriptions of our site visits and a new recommendation with a hugely promising project in an out-of-the-way European country that we personally checked out. The company is backed by mining giant Frank Giustra, and you bet he knows what he’s doing.

The Casey Energy Report comes with a free one year subscription to Casey Energy Dividends (a $79 value), including, of course, the upcoming May issue with our “Obama’s Secret Pipeline” pick.

There’s no risk in trying it: You have 90 days to find out if it’s right for you—love it or cancel for a full refund. You don’t have to travel 300+ days a year (as we do) to discover the best energy investments in the world—we do it for you.

If you don’t like the Casey Energy Report or don’t make any money within your first three months, just cancel within that time for a full, prompt refund. Even if you miss the cutoff, you can cancel anytime for a prorated refund on the unused part of your subscription. Click here to get started.

The article Obama’s Secret Pipeline was originally published at Casey Research

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