How Broken Are The Energy Markets?

A few commenters have mentioned peak oil recently. I am cautious about making forecasts and predictions and prefer instead to observe and document the data as the peak oil story unfolds. I have in fact published a couple of charts recently illustrating aspects of peak oil, one showing a possible peak in the rest of the world that excludes N America and OPEC (Figure 1). The other shows the undulating plateau in conventional crude + condensate that has persisted since 2005 (Figure 2). In my last post on oil price scenarios two of those showed global oil production capacity 1 to 2 Mbpd lower in 2016 than 2014. If that comes to fruition, will we have passed peak oil but does it matter?

The current “low oil price crisis” is providing a clear and new perspective on the nature of the peak oil problem. If low price does indeed destroy high cost production capacity then this will raise the question if the high cost sources can ever be brought back? IF low price kills the shale industry can it come back from the dead?

The response of the oil price to scarcity in the period 2002 to 2008 was for it to shoot up. And the response of the energy industries to scarcity and high price was to develop high cost sources of energy – shale oil and gas and renewables. The longevity and permanence of these new initiatives has always been dependent upon our ability and willingness to pay. Of course, most of us who have cars continued to use them but have perhaps subliminally modified our behaviour through driving less or buying more fuel efficient vehicles. OECD oil consumption has at any rate been in decline and robust economic growth has been elusive....

Figure 1 Global oil production has been split into three geo-political categories: 1) USA and Canada, 2) OPEC and 3) the Rest of the World (RoW). RoW production bears the hallmarks of having peaked in the period 2005 to 2010 and this has consequences for oil prices, demand and prosperity in parts of the world, especially the OECD. Most of the growth in oil supply has been in the USA and Canada where the market has been flooded with expensive oil. Data are crude oil + condensate + natural gas liquids (C+C+NGL) and exclude biofuels and refinery gains that are included by the IEA in their total liquids number.

Figure 2 Conventional crude oil + condensate production has been on an undulating plateau just over 73 million barrels per day (Mbpd) since May 2005, that is for almost 10 years and despite record high oil prices! Note that chart is not zero scaled in order to amplify details.

Figure 3 QE appears to have impacted demand for oil and may have created the lines of credit enabling energy companies to produce high cost gas and oil at a loss. But the oil price has been equally controlled by OPEC controlling supply. Chart by Gail Tverberg.

Lower oil prices and debt combine to create a squeeze
http://www.houstonchronicle.com/business/energy/article/Lower-oil-prices-and-debt-combine-to-create-a-5939341.php#/0
December 6, 2014

Smaller companies are at the most risk if crude futures don’t stage a recovery

If oil prices stay below $75 for nine months to two years, oil analysts and credit experts say, many of the smaller independent oil companies pumping crude from U.S. shale plays will be at far greater risk of comingup short on cash to pay back billions of dollars of high-yield corporate debt they’ve used to drill expensive horizontal wells.

Because the energy sector makes up the biggest portion of the high-yield debt market, a surge of defaults could resemble earlier telecommunications and real estate busts that infected banks and hit other quarters of the U.S. economy, said Oleg Melentyev, head of U.S. credit strategy at Deutsche Bank in New York.

According to JPMorgan Chase & Co., if U.S. benchmark West Texas Intermediate crude remains around $75 a barrel through 2017, the default rates for the energy sector’s high-yield debt issuances - known as junk bonds because they carry higher risk for investors - could reach 8 percent if companies cut spending and sell assets, and 12 percent if they don’t.

Right now, the high-yield debt market is forecasting a 12-month default rate of 2.6 percent overall, but the energy sector’s projected default rate has risen to 5.4 percent - rising sharply after the Nov. 27 OPEC meeting, said Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors.

Energy now makes up 14 percent of the $1.3 trillion high-yield debt market, up from 4.3 percent in 2004, according to Barclays.

U.S. energy debt performed worse than all other industries by far in November with a 3.4 percent loss in total returns, according to the Bank of America Merrill Lynch High Yield Index.

But it will take at least a year for oil prices to have a dramatic effect on balance sheets, as about 7 in 10 U.S. oil companies have contracts in place locking in prices at around $90 a barrel through 2015, said Andrew Byrne, director of energy equity research at energy research firm IHS. Lenders typically require more such hedging as a company’s debt increases.

Excerpted...

Chesapeake Energy Corporation (CHK)

-NYSE

20.05

1.63(8.85%) 2:25PM EST - Nasdaq Real Time Price

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Income Statement

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All numbers in thousands

Period Ending		Sep 30, 2014	Jun 30, 2014	Mar 31, 2014	Dec 31, 2013
Total Revenue		5,703,000	5,152,000	5,046,000	4,541,000
Cost of Revenue		4,355,000	4,320,000	4,116,000	3,799,000

Gross Profit		1,348,000	832,000	930,000	742,000

	Operating Expenses
	Research Development	-	-	-	-
	Selling General and Administrative	123,000	162,000	129,000	177,000
	Non Recurring	101,000	73,000	13,000	248,000
	Others	37,000	79,000	78,000	80,000

	Total Operating Expenses	-	-	-	-


Operating Income or Loss		1,173,000	610,000	733,000	249,000

	Income from Continuing Operations
	Total Other Income/Expenses Net	13,000	(75,000)	75,000	(67,000)
	Earnings Before Interest And Taxes	1,145,000	398,000	785,000	(56,000)
	Interest Expense	16,000	27,000	39,000	63,000
	Income Before Tax	1,129,000	371,000	746,000	(119,000)
	Income Tax Expense	438,000	141,000	280,000	(46,000)
	Minority Interest	(30,000)	(39,000)	(41,000)	(43,000)

	Net Income From Continuing Ops	706,000	146,000	425,000	(535,000)

	Non-recurring Events
	Discontinued Operations	-	-	-	-
	Extraordinary Items	-	-	-	-
	Effect Of Accounting Changes	-	-	-	-
	Other Items	-	-	-	-


Net Income		661,000	191,000	425,000	(116,000)
Preferred Stock And Other Adjustments		(492,000)	(47,000)	(51,000)	(39,000)

Net Income Applicable To Common Shares		169,000	144,000	374,000	(155,000)

Chesapeake Energy Corporation (CHK)

-NYSE

20.03

1.61(8.76%) 2:27PM EST - Nasdaq Real Time Price

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Income Statement

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View: Annual Data | Quarterly Data

All numbers in thousands

Period Ending		Dec 31, 2013	Dec 31, 2012	Dec 31, 2011
Total Revenue		17,506,000	12,316,000	11,635,000
Cost of Revenue		13,945,000	9,588,000	8,074,000

Gross Profit		3,561,000	2,728,000	3,561,000

	Operating Expenses
	Research Development	-	-	-
	Selling General and Administrative	686,000	723,000	740,000
	Non Recurring	794,000	3,662,000	46,000
	Others	314,000	304,000	291,000

	Total Operating Expenses	-	-	-


Operating Income or Loss		2,069,000	(1,694,000)	2,921,000

	Income from Continuing Operations
	Total Other Income/Expenses Net	128,000	1,167,000	284,000
	Earnings Before Interest And Taxes	1,669,000	(897,000)	2,924,000
	Interest Expense	227,000	77,000	44,000
	Income Before Tax	1,442,000	(974,000)	2,880,000
	Income Tax Expense	548,000	(380,000)	1,123,000
	Minority Interest	(170,000)	(175,000)	(15,000)

	Net Income From Continuing Ops	305,000	(1,072,000)	1,722,000

	Non-recurring Events
	Discontinued Operations	-	-	-
	Extraordinary Items	-	-	-
	Effect Of Accounting Changes	-	-	-
	Other Items	-	-	-


Net Income		724,000	(769,000)	1,742,000
Preferred Stock And Other Adjustments		(250,000)	(171,000)	(172,000)

Net Income Applicable To Common Shares		474,000	(940,000)	1,570,000

I’m probably thinking of some outdated stories on Chesapeake. They have had to sell assets to cover debt a few times.

Chesapeake Ruling Shocks With $117 Million Loss: Credit Markets
http://www.bloomberg.com/news/2013-05-13/chesapeake-ruling-shocks-with-117-million-loss-credit-markets.html

Chesapeake Energy Swings to Loss
http://www.wsj.com/articles/SB10001424052702304709904579406722824091240

Chesapeake (NYSE: CHK) Reports Major Q3 Losses
http://www.energyandcapital.com/articles/chesapeake-nyse-chk-reports-major-q3-losses/2759

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