Shale pioneer Chesapeake Energy files for bankruptcy
reuters.com
reuters.com
Tomorrow hits you hard. Fat tails are a thing.
Which is pretty great for the US all-told. The US doesn't have to pump a barrel of shale oil to keep Saudi Arabia, Venezuela, Russia, and other petty despot oil states on the defensive, to stay independent of their whims. As long as the US has the ABILITY to spin up pumping once oil hits $50, who cares whether we are actually doing it?
So overall, seems like fine news to me. Some banks are taking a haircut (better them than more taxpayer/bailout money). The infrastructure and organization sticks around. America stays independent of petty oil tyranny. Good news for America all around.
This is what bankruptcy, done right, is for!
Can anyone point to any resources that provide a good introduction to the bankruptcy process in the US?
The ability for ownership to exist separately from the "operating" company, for the owners to only be liable up to losing their investment, not more, and for the management and employees not to directly lose money is sorta the "why" for corporations to exist.
It’s why bankruptcy, specifically, restructuring exists.
Lots of countries don’t have restructuring codes. When their corporations go bankrupt, the assets automatically go to the creditors and/or are liquidated.
It's often a more messy process than this, but there's no reason a company going through bankruptcy would necessarily be impacted in any way aside from an ownership change.
https://en.wikipedia.org/wiki/United_States_bankruptcy_court
Energy input is an interesting way of looking at oil. In 1930 we used 1 barrel of oil to obtain 100 more. With shale you are getting closer to spending 1 barrel of oil to get 3. https://youtu.be/WeBtdwPpTQM?t=450
Without the need for holding dollars, rest of the world pulls the plug on the American financial system.
I do wonder what percentage, very roughly, of the money supply that is, and what the actual consequences of selling that would be. Anyone have some rough estimates or places to look?
The best argument for low oil prices crashing the US economy would be in any changes to US debt interest rates. While this would certainly change a lot about US politics and finances, one could not count on continuing to borrow indefinitely at sub-inflation levels, America could almost certainly pay it off if it found the will to do so. The fact that America has a large and diverse non-oil economy that would be strengthened by dropping energy prices is certainly a factor.
KSA meanwhile is a rentier state, with 67% of the budget coming from oil sales. Their non-oil economy is badly underdeveloped, and they depend almost entirely on oil money to keep their population fed, occupied, and suppressed. You’ll notice that I said “occupied”, since at a first glance the Saudi economy doesn’t actually include Saudis; 2/3rds of those employed in KSA aren’t Saudi (90% if you exclude oil), and only 30-40% of working age Saudi’s in KSA either have or want a job.
If the oil money were cut off from KSA, the lifetime of that regime would be measured in hours.
Are you sure about that ? both Putin and Xi would jump to make a deal for future oil exports in exchange for meeting Saudi social / security needs.
> America has a large and diverse non-oil economy
So does India, China <-- not superpower or depend heavily of foreign borrowing.
Pulling the plug on the dollar would materially make Americans poorer, independent analysts have put 50% of the value of the dollar arising from WRC status.
Americans can't handle that level of lifestyle change, without it being turned into a revolution.
Xi is different, but its a big question whether the Saudis would agree to their usually awful terms.
Another interesting tidbit: when Saudi allowed women to drive, oil was in another mini-"bust" cycle. A half-measure to stave off larger social change.
Xi maybe, but that would be a lot of money for future benefits; I doubt China can afford it.
Putin is aligned with Iran, Saudi’s enemy, and would also be in a lot of trouble in a hypothetical collapse in oil prices. He’d be in no place to help.
Also, the Russian economy is actually kind of small; Italy would actually be better positioned financially to bail out KSA than Russia.
> Americans can’t handle that level of lifestyle change without it being turned into a revolution.
Debatable. But between “My lifetime earnings have been halved” and “I can’t get food tomorrow”, I’ll tell you which one will trigger a revolution faster.
[1] https://www.cnbc.com/2020/03/16/reuters-america-analysis-few...
But if demand falls that saudi oil can handle all the demand, and the Saudis know that wind/solar/EV is going to kill off oil so they better make money while they can (which is why they sold off Aramco), then they will sell what they can to keep it under what is profitable for the US alternative sources.
they barely sold off a 1.5% stake, and sold it to their own citizens, who are "forced" to buy it.
Look at all the big shale producers, their stock prices are top left to bottom right. Burning capital. This is not going to last and can only continue in the short term because of near-zero interest rates. Zero rates allow you to kick the can down the road .. for a while.
My model of these companies is that the product they are producing is not oil but the false promise of profits, sold to gullible stock buyers. Along the way some of the money is siphoned off as executive salaries and bonuses.
Reminiscent of many of the dot.com / dot.scam outfits back in the 1990s.
The developing nations are already suffering greatly. That’s why the recent conflict between india and China has occurred. Watch #boycottchina happening in other countries besides India.
Can you imagine being Iran, watching your economy being destroyed simultaneously by your biggest enemy, US, via sanctions. Then watch your countrymen get destroyed by your biggest ally, China, via Muslim concentration camps and coronavirus? And what if this leads to a rogue state where it attacks every ship coming out of Hormuz? And it leads to a sudden spike in oil price?
We live in interesting times
What are you saying here ? India-China conflict occurred due to the impact of low-priced oil ? This is a silly thing to say. India, China, Japan etc. benefit vastly from this price movement. India is infact now supplementing for lost tax revenue (by its stupid overreactive policies) by increasing petrol prices.
The only ones who lose are countries like Russia and those in the Middle East that rely hugely on oil/gas, and perhaps the US, partly due to the Shale oil bankruptcies, but I imagine, vastly more, due to the weakening of the petro-dollar, esp. in a time of unhinged money-printing.
Texas is going to be hard hit this recession.
SA, Russia, and Venezuela are not the international players you want to have leverage over US foreign policy. If we let a weird unexpected market rout (like covid) wipe the shale producers out entirely, we really screw ourselves into letting SA call the shots on the world stage. Cuz you know SA and Russia are NOT going to let their pumping capacity collapse.
(To be clear I'm not arguing for a bailout to prevent banks or investors from taking haircuts on the investments — those haircuts have to happen. But "letting all the jobs go" means letting the companies dissolve, vs reorganize, and that's not a good idea, IMO).
Always neat seeing how much cheaper gas costs in the US compared to Canada, meanwhile the rhetoric would cause you to think otherwise
Most stuff runs on electricity.
60% or more is generated by oil + gas.
Source is an NREL research paper I read ~7 years ago, can’t find the link at the moment.
Their only priority is to ensure that a given percentage of energy demand is met by domestic (or closely allied) suppliers. There are both National Security and Economic reasons for this. Not only does it prevent war by insuring no enemy thinks they can quickly force a surrender by cutting off energy supplied, but it also helps guard against things such as the OPEC oil shock of the '70s.
What energy subsidies are trying to avoid is a scenario where the majority of fossil fuel is produced in the countries where it is cheapest, such as the Middle East or Russia. Such a scenario would give those countries a massive amount of economic power.
If you want energy subsidies to not go to fossil fuels, you simply need to eliminate demand for fossil fuels.
As fossil fuel demand drops, the energy subsidies assigned to them will also drop. They are only trying to maintain a domestic percentage. So cut domestic demand by 50% and fossil fuel subsidies will also drop by roughly half.
Solar probably could have been pushed substantially as well with better research funding.
Battery storage probably could have been pushed for practical EVs earlier as well.
Sure there's a lot of monday morning quarterbacking there, but we are in a major hole with GHG levels in the atmosphere, and our oil and gas friendly policies over the last century are a major cause.
But people don't talk about the fact that the opposite can occur with industries.
Petroleum has ridden huge economies of scale to the point their refining facilities are massive, their transport ships are massive... and there is bloat.
But more importantly, most of the cheap extraction oil is gone. The current economies of scale were keeping shale/tar sands extraction with terrible EROEI profitable. But a contraction in demand makes those unable to be used. A compression in demand will make refineries less profitable, and tankers less profitable.
And this is a cycle of destruction, just like economies of scale boosting rising technologies is an enhancing feedback cycle.
Oil and Gas is going to be rocky fall down a steep mountain.
Notice Exxon and Chevron didn't launch any big acquisitions during the extreme implosion in the industry with the pandemic. They always go into hunker down mode at the wrong time. Why haven't they stepped in to take out Occidental + Anadarko (the Anadarko deal was valued at a comical $55 billion)? They want to wait until the combination's current $16b market cap rebounds back to $35b (and then pay $42b for the deal), so they can be sure of what they're doing. And since Occidental paid so much for Anadarko by itself, they'll pat themselves on the back that they're paying a good price.
Exxon bought XTO Energy (natural gas heavy) in Dec 2009 in an all-stock deal initially valued at $41b (plus an assumed ~$11b in debt). They bought them shortly after the natural gas price bubble crashed (I'm sure they thought it was a good deal) and right before shale production would permanently bury natural gas prices. Another classic poorly timed acquisition disaster in the industry. Analysts at the time of course overwhelmingly praised the deal as smart (calling XTO's price cheap).
If anyone scoops up Chesapeake coming out chapter 11, most likely it will be private equity types specializing in energy markets. Then Exxon will buy it from them at a huge price increase in seven or eight years, right before an oil crash.
Also, can the same stock be re-bought within 3 days?
I’ve seen a lot if different takes on these issues, and an unsure what to believe.
Day traders use margin accounts.
You can indeed buy the same stock back, but it has tax implications. Look up “wash rules”.