Banks Taking Some Heat

Jim Brown
 
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JP Morgan opened a box of pain for the banking community this week after they said they were increasing their loan loss reserves for questionable energy loans. The financial sector crashed again on the disclosure.

CEO Jamie Dimon said the bank was boosting reserves by $600 million to $1.6 billion. If oil prices stay in the $20s for much longer they will have to double that to $3.1 billion. JP Morgan has $25 billion in investment grade loans to energy companies with $5 billion drawn against their commitment. They have $19 billion in high-yield debt of which $9 billion has been drawn.

For a bank the size of JP Morgan with $2.6 trillion in assets, the loan loss reserves for energy is pocket change. However, there are plenty of smaller regional banks that have energy loans and their underwriting is probably less strict and they probably have less capital to back them up if the loans go bad. That is why JP Morgan's admission caused a ripple through the sector.

I reported over the last couple weeks that Deloitte said there were 175 producers in danger of bankruptcy and 50 of them were at high risk of filing bankruptcy. Another banker said on Wednesday there was more than $100 billion in what used to be investment grade loans that were about to move over to the high yield classification because of the decline in the sector.

Companies can no longer drill new wells at $30 oil. The Devon CEO said in a speech at CERAWeek in Houston earlier in the week, "$30 and $2 does not work," referring to $30 oil and $2 natural gas. "Most of us are in a place to make sure we can survive and make sure we are in place when the upturn begins." We are cutting costs, dropping rigs, selling assets, cutting dividends and issuing stock to make ends meet.

The Devon CEO said even if prices came back soon the balance sheets and cash flow for a lot of companies would not let them restart exploration even at $45 to $50. At $60 most companies could go back to work.

The Pioneer Resources CEO said, "This is the worst I have seen it from a balance sheet standpoint. Everybody's debt is trading at 30 cents to 40 cents on the dollar." A lot of the smaller companies are scraping together every penny they can find and buying back their debt at mere pennies on the dollar because debt holders fear bankruptcy. Most companies now have more debt than they have assets so a bankruptcy would be ugly.

Financing is no longer available. Anyone without an active credit line is locked out of raising more money unless they sell stock or assets. Some producers are facing real hardship, including fire sales or bankruptcy.

Daniel Yergen, IHS Vice Chairman said, "They are going through another round of cuts and it is now about protecting your balance sheet" rather than increasing production or acquiring more leases.

There was some hope that the proposed production cap for OPEC and non-OPEC producers would provide some stability in the prices. There is a meeting scheduled in early March to try and come to some agreement. However, everyone says there will be no production cuts and most believe producers will cheat on the production limits.

Saudi Arabian oil minister Ali Al-Naimi told the audience at CERAWeek that any production cuts were not possible because there was no agreement and producers have a history of saying one thing and doing another. They cheat on limits. He also said the proposed production limit would probably not be effective because of cheating. If producers did agree and if they actually did what they said he thought the oversupply could be brought back into balance within a year. Yes, A YEAR.

Just freezing production at January levels of 32.6 mbpd would still represent about 1.5 mbpd of surplus production. Add in Iran's plan to boost production by 700,000 bpd in 2016 and it is well over 2.0 mbpd of excess production. Sooner or later we are going to run out of storage space and that would be a disaster for prices.

The repeated headlines about the March meeting have lifted crude prices to $33. Hope is everywhere but reality will be back. Speculators are hoping the agreement will produce a surprise by agreeing at some level under 32.6 mbpd. Do not hold your breath. They are also hoping a production limit agreement will build confidence that will lead to a production cut when OPEC meets on June 5th. With oil prices at $30 there is a chance OPEC will do something but June is a long way off.

Halliburton (HAL) announced another 5,000 worker layoff on Thursday. That is in addition to the 22,000 job cuts they announced in 2015. More than 150,000 energy workers in the U.S. have been cut.

On the positive side U.S. production is finally crashing. Over just the last four weeks production has declined -132,000 bpd to 9.102 mbpd. That is down from 9.61 mbpd in April 2015 at the peak. The IEA increased their estimates for production declines earlier in the week saying U.S. production in 2016 could decline -600,000 bpd and another 200,000 bpd in 2017. That has helped to provide a floor under crude prices.

Crude prices are near $33.00 tonight ahead of the production limit meeting next week.


This newsletter reaches a lot of people involved in the oil and gas industry. Toby Martinez of K&T Energy Partners emailed me this week asking about oil and gas properties for sale.

"I am reaching out to investment groups and trusts who may own producing oil and gas assets of which they are looking to divest. We are seeking both operated and non-operated working interest, 100+ barrels of oil per day, anywhere in the lower 48 states. We are able to evaluate and close deals quickly."

If you have anything you would like to sell you can contact Toby here:



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  Active Rigs

Active drilling rigs declined -27 to 514 for the week ended on Friday 2/19 and that is another 18 year low. Oil rigs fell -26 for the week to 413. Active gas rigs declined -1 to 101. Active rigs have now declined -1,417 since the high of 1,931 in September 2014. Active offshore rigs were flat at 25.


Oil Inventories Week Ended 2/19/16

Crude inventories rose +3.5 million barrels to 507.6 million and a new record high.

Refinery utilization declined slightly from 88.3% to 87.3%.

U.S. production declined -33,000 bpd from 9.135 to 9.102 mbpd.

Cushing inventories rose +400,000 barrels to 65.1 million and a new record high. Cushing only has 2.0 million barrels of available capacity at that level.

Gasoline inventories fell -2.2 million barrels to 256.5.

Distillate inventories fell -1.7 million barrels to 160.7 million.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week. In the graphic below green represents a recent high and yellow a recent low. The blue-green represents a record high.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

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