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I don't think things are quite as bad as you paint it, markets are not irrational and they really are not going to keep investing in a losing enterprise. As fo

by eloff 8y ago

I don't think things are quite as bad as you paint it, markets are not irrational and they really are not going to keep investing in a losing enterprise. As for the crude quality, this seems like an ideal synergy with heavy oil sourced from the Alberta tar sands, and yet another good reason for constructing the Kinder-Morgan pipeline to make importing it cheaper and more environmentally friendly. People will probably jump all over me for saying that - but the alternative is not leaving it in the ground, the alternative is Diesel powered trains, which are just riskier, costlier, and worse for the environment. This is one of the few (only?) Obama-era decisions that Trump has rolled back where I actually think he did the right thing.

thematt 8y ago
True, there is a bit of hyperbole in my comments. It's certainly not a sub-prime mortgage type situation. But at the same time people have been pouring money into these companies for 10 years and have seen no free cash flow to speak of. When 70% of the asset you just invested in disappears in the first year, it's a vicious cycle to get out of. That difficulty gets compounded with the service companies like Schlumberger/Halliburton increasing their costs (32% in the last year) and interest rates creeping back up. The Canadian situation is unfortunate. Collectively, it represents so much lost revenue for them. Setting aside the environmental issues and inefficiencies with shipping by rail and truck, companies are having to sell their oil at a steep discount to what they could otherwise be getting.
- woodandsteel 8y ago
  >people have been pouring money into these companies for 10 years and have seen no free cash flow to speak of. I find that highly improbable. They would have run out of cash long ago. Or if they were super-rich from money earned elsewhere, then they would be smart enough to not throw it away like that. Another key point you neglect is that the efficiency of fracking keeps improving, so it can turn a profit at ever lower prices.
  - thematt 8y ago
    Why do you find this improbable? It's easily verifiable. This is all public financial data we're talking about. Here are some sources to avoid having to crunch the data though: https://www.nytimes.com/2018/09/01/opinion/the-next-financial-crisis-lurks-underground.html https://www.nytimes.com/2018/09/01/opinion/the-next-financia... http://ieefa.org/ieefa-u-s-more-red-flags-on-fracking-focused-companies/ http://ieefa.org/ieefa-u-s-more-red-flags-on-fracking-focuse... The technology improvements (namely horizontal drilling) have just allowed the companies to suck more oil out faster. It hasn't changed the economics of it. Particularly because you're dealing with an expendable resource and to move on to the next well requires further capital investment. Here is a great (recent) podcast that discusses exactly what I'm talking about: https://www.bloomberg.com/news/audio/2018-12-13/bethany-mclean-discusses-the-fracking-industry-podcast https://www.bloomberg.com/news/audio/2018-12-13/bethany-mcle...
  - JanSt 8y ago
    thematt is absolutely right with everything he says. Without external funding pretty much all companies would not operate at all. Many did run out of cash in the last downturn. Those that survived did so by a) external funding (that can dry up quickly) - debt and equity offerings b) high-grading their drilling inventory, only drilling the very best locations, boasting efficiency-improvements (and collecting more money) c) real technical improvements that are far from enough to be cash-flow positive long term The efficiency is not improving as much as they make you think. It even declines when they stop drilling their best wells. They reduced their costs substantially in the downturn because they gobbled up fire-sale equiqment from bankrupt competitors, squeezed service margins etc. All that will be gone at some point. Interest rates rise. Best wells will be drilled. Acres in the permian are damn expensive now. Service companies need to raise prices. The 70%yoy decline rates are absolutely terrible. They will keep growing a few years, but after that they will have to drill so damn much in worse spots than now, that many will crash down quickly. Losing 70% of producing assets every year is just terrible and puts you to the full market forces. There is pretty much no way to stop drilling because that would decimate your company by 5-6% every month. So drill baby, drill!
Al-Khwarizmi 8y ago
> the alternative is not leaving it in the ground, the alternative is Diesel powered trains, which are just riskier, costlier, and worse for the environment. I'm not sure if I get where you are coming from. Why not electric powered trains? (and in the near future electric cars, etc.)
- eloff 8y ago
  Electric powered freight trains in the US don't exist (at least in general) they're all diesel-electric locomotives. But even if you solve that, it's not going to be as efficient or safe as a pipeline.
- antidesitter 8y ago
  A pipeline is still safer and cheaper.
- HillaryBriss 8y ago
  the argument is that such oil-bearing trains derail frequently enough that they actually spill more oil than the pipelines would

by eloff 8y ago

thematt 8y ago

True, there is a bit of hyperbole in my comments. It's certainly not a sub-prime mortgage type situation. But at the same time people have been pouring money into these companies for 10 years and have seen no free cash flow to speak of. When 70% of the asset you just invested in disappears in the first year, it's a vicious cycle to get out of. That difficulty gets compounded with the service companies like Schlumberger/Halliburton increasing their costs (32% in the last year) and interest rates creeping back up. The Canadian situation is unfortunate. Collectively, it represents so much lost revenue for them. Setting aside the environmental issues and inefficiencies with shipping by rail and truck, companies are having to sell their oil at a steep discount to what they could otherwise be getting.

woodandsteel 8y ago
>people have been pouring money into these companies for 10 years and have seen no free cash flow to speak of. I find that highly improbable. They would have run out of cash long ago. Or if they were super-rich from money earned elsewhere, then they would be smart enough to not throw it away like that. Another key point you neglect is that the efficiency of fracking keeps improving, so it can turn a profit at ever lower prices.
- thematt 8y ago
  Why do you find this improbable? It's easily verifiable. This is all public financial data we're talking about. Here are some sources to avoid having to crunch the data though: https://www.nytimes.com/2018/09/01/opinion/the-next-financial-crisis-lurks-underground.html https://www.nytimes.com/2018/09/01/opinion/the-next-financia... http://ieefa.org/ieefa-u-s-more-red-flags-on-fracking-focused-companies/ http://ieefa.org/ieefa-u-s-more-red-flags-on-fracking-focuse... The technology improvements (namely horizontal drilling) have just allowed the companies to suck more oil out faster. It hasn't changed the economics of it. Particularly because you're dealing with an expendable resource and to move on to the next well requires further capital investment. Here is a great (recent) podcast that discusses exactly what I'm talking about: https://www.bloomberg.com/news/audio/2018-12-13/bethany-mclean-discusses-the-fracking-industry-podcast https://www.bloomberg.com/news/audio/2018-12-13/bethany-mcle...
- JanSt 8y ago
  thematt is absolutely right with everything he says. Without external funding pretty much all companies would not operate at all. Many did run out of cash in the last downturn. Those that survived did so by a) external funding (that can dry up quickly) - debt and equity offerings b) high-grading their drilling inventory, only drilling the very best locations, boasting efficiency-improvements (and collecting more money) c) real technical improvements that are far from enough to be cash-flow positive long term The efficiency is not improving as much as they make you think. It even declines when they stop drilling their best wells. They reduced their costs substantially in the downturn because they gobbled up fire-sale equiqment from bankrupt competitors, squeezed service margins etc. All that will be gone at some point. Interest rates rise. Best wells will be drilled. Acres in the permian are damn expensive now. Service companies need to raise prices. The 70%yoy decline rates are absolutely terrible. They will keep growing a few years, but after that they will have to drill so damn much in worse spots than now, that many will crash down quickly. Losing 70% of producing assets every year is just terrible and puts you to the full market forces. There is pretty much no way to stop drilling because that would decimate your company by 5-6% every month. So drill baby, drill!

Al-Khwarizmi 8y ago

> the alternative is not leaving it in the ground, the alternative is Diesel powered trains, which are just riskier, costlier, and worse for the environment. I'm not sure if I get where you are coming from. Why not electric powered trains? (and in the near future electric cars, etc.)

eloff 8y ago
Electric powered freight trains in the US don't exist (at least in general) they're all diesel-electric locomotives. But even if you solve that, it's not going to be as efficient or safe as a pipeline.
antidesitter 8y ago
A pipeline is still safer and cheaper.
HillaryBriss 8y ago
the argument is that such oil-bearing trains derail frequently enough that they actually spill more oil than the pipelines would