06/24/15

Expect A Wave Of Consolidation In The Oil Industry

As stated previously, asset monetization by small E&P operators will start in earnest in the second half of this year out of cash flow necessity. Most, if not all, smaller market capitalization companies, public or private, are still free cash flow negative (operating cash flow less capital expenditure) and only a few of the larger ones are now, or will be, based on guidance. The point is, with volumes languishing (and probably poised to decline) tied to a flat oil futures price curve and with economics marginal at $60 per barrel, many E&P operators find themselves running through hedges in 2015 and still in need to finance their already reduced capital spending.

With Wall Street unwilling to lend anymore and prospects of fall credit line redeterminations looming, further reducing liquidity, it is likely small E&P operators will turn to either mature producing asset sales or, more likely, to undeveloped assets which require more capital spending. We are seeing this being factored into stock prices as we speak, as small cap E&P valuations have collapsed to 4-6 times the Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) from 6-8X EV/EBITDA. This not only reflects solvency risk but also the natural course of bringing assets to a price more in line with their underlying sale value.

Wall Street is famous for getting public prices at levels that magically make deals happen and, with better funded E&P companies trading at substantial premiums vs. the leveraged ones, this is what is occurring. Take the collapse of Goodrich Petroleum (GDP) as a prime example as to what is now taking place and what will continue through the latter half of this year. Here is a company with $100million in liquidity but who continues to be free cash flow negative on current strip pricing in 2015 & 2016. However, it has a capital spending budget of $100 million for 2015 and 2016 and a free cash deficit of $60 million-$80 million in each of 2015 and 2016 depending on asset price assumptions. To plug the hole it hopes to sell its Eagle Ford assets this year.

This isn’t intended to make a case on GDP but to demonstrate the quantifiable ongoing stupidity of perpetuating models that aren’t self-funded which were being fueled by easy money from the Federal Reserve. This also demonstrates how the OPEC strategy of maintaining an oil price ceiling is affecting U.S. E&P companies, forcing a consolidation which I believe will be unprecedented in size and scope. This will eventually improve the industry cash flow break even points, based on improved cost and scale and, as a result, cast doubt over the long term viability of the OPEC strategy. It appears the Saudis, despite being educated here in the US, have neglected their capital market & economic classes as we are witnessing the E&P model self-correcting itself. State run oil companies don’t do this very well and usually fail to adjust to price movements while free market capital-based societies do.

The revival of the US oil industry will occur after the upcoming consolidation and will reduce the number of cost inefficient players as well as the short selling in group while ultimately, self-healing the industry by improving cash flows, given the likelihood of oil remaining below $100. I fully expect valuations to expand in 2016, once the wave of asset sales starts in the months ahead. These operators with plenty of cash will be the biggest beneficiaries.

On a final note, listening to the Federal Reserve yesterday it was clear that the pressure on the dollar rise is being lifted as they now realize that, despite attempts to fudge economic statistics, the US economy is in recession and rate hikes are a farce based on hope and little else. Expect the dollar to weaken considerably, breaching the 2015 lows thus supporting oil prices now and into 2016. This reality is not baked into expectations and the 1-2 percent dollar correction which took many by surprise is only the beginning.

Source: http://oilprice.com/Energy/Crude-Oil/Expect-A-Wave-Of-Consolidation-In-The-Oil-Industry.html

By Leonard Brecken of Oilprice.com

12/16/14

Will the European Union reindex stock markets to 100 points?

By: Wim Grommen

The introduction of the euro brought the citizens of Europe many advantages, including uniformity. It would be nice if that uniformity also applied to the comparison of the various stock exchanges. An index point is not a fixed unit in time and does not have any historical significance, so the European citizen may therefore not attach any significance for the future. Comparing index points to their history and also comparing the various stock exchanges makes no sense. The time is ripe to reindex European stock exchanges to 100 points.

Reindexing to 100 points has many advantages

After the introduction of a single currency for Europeans, it is important that the EU also creates uniformity in the stock exchanges. Because a stock market index has no relevant future value, the time is ripe to re-index stock markets to 100 points. The re-indexing of the stock exchanges to 100 points can be easily implemented.

For each stock market index, a so-called DIVISOR100-value is introduced.

The value of each DIVISOR100 is determined by the number of index points from the final position of a stock market at a certain date, eg. December 31, 2013 divided by 100. On December 31, 2013 the AEX ended at 401.79 and thus AEX_DIVISOR100 gets the value 4.0179 (401.79 divided by 100). The DAX ended December 31, 2013 at 9552.16 and thus DAX_DIVISOR100 gets the value 95.5216 (9552.16 divided by 100).

AEX_DIVISOR100 4.0179 DJIA_DIVISOR100 165.7666
DAX_DIVISOR100 95.5216 S&P500_DIVISOR100 18.4836
FTSE100_DIVISOR100 67.4909 NASDAQ_DIVISOR100 41.7659
CAC40_DIVISOR100 42.9595 NIKKEI_DIVISOR100 162.9131
BEL20_DIVISOR100 29.2382 HANGSENG_DIVISOR100 233.0639

Table: Overview of values ​​for DIVISOR100 for the various stock exchanges

Dividing the number of points of each stock market by the DIVISOR100-value, the stock market is reindexed at 100 points. The AEX ended on December 31, 2013 at 401.79, and the number of points for the AEX is now divided by 4.0179, the value of the AEX_DIVISOR100. The DAX ended December 31, 2013 at 9552.16 and the number of points on the DAX is now divided by 95.5216, the value of the DAX_DIVISOR100. To this the indexes of these stock exchanges on reindex-date January 1, 2014 are at 100 points.
The advantage of this method of re-indexing is that each stock market retains its own characteristic properties, such as composition and calculation and that the history of the market chart also is retained. The technical analyst can still continue to apply the same methods to the stock market graph and recognize patterns in the graph.

For the citizens of Europe the stock markets are much more transparent with this reindexing.

The closing position of the market prices at June 30, 2014 without reindexing:

AEX 413.59 DJIA 16826.60
DAX 9833.07 S&P 1960.23
FTSE100 6743.90 NASDAQ 4408.18
CAC40 4422.84 NIKKEI 15162.60
BEL20 3127.21 HANGSENG 23190.72

The closing position of the market prices at June 30, 2014 after reindexing:

AEX_2014_100 102.91 DJIA_2014_100 101.51
DAX_2014_100 102.94 S&P500_2014_100 106.05
FTSE100_2014_100 99.92 NASDAQ_2014_100 105.54
CAC40_2014_100 102.95 NIKKEI_2014_100 93.07
BEL20_2014_100 106.96 HANGSENG_2014_100 99.50

At a glance,citizenscan see howa stock marketis doingcompared to the100 points. He seesimmediatelywhat percentage the indexdeclined orrosefromJanuary 1, 2014. Comparingmarket indicesinside andoutside Europeisapiece of cake. Theemotionfactorin the currentformulas of themarket indices, the reluctance and or euphoriaof investors caused by largefluctuationsin points is greatlyreduced bythere-indexing,and hence therationality of citizensand investors willpredominate.

Transition and costs

In order for the citizens of Europe to get used to the idea of ​​re-indexing of the exchanges, the old index values can still be published alongside the new index values ​​during a transition period​​. In due course they will only have a view for the new index values​​. The cost of this project for the European citizens will be nil; the formulas that calculates market indices are already changed several times annually.

For additional background information:

The Dow Jones Industrial Average: a Fata Morgana

Stock Market Indices Are Fata Morganas