Thread regarding Chevron Corp. layoffs

It will be ugly!

Oil and gas companies borrowed heavily when oil prices were soaring above $70 a barrel. But in the past 24 months, they've seen their values and cash flows erode ferociously as oil prices plunge — and that's made it hard for some to pay back that debt.

This could lead to a massive credit crunch like the one we saw in 2008. With our economy just getting back on its feet from the global 2008 financial crisis, timing could not be worse, especially in an election year. It makes you wonder: How could this happen again? Quite easily, as it turns out.

The #OilAndGas Industry fundamentals are being misunderstood.

A $30 Nymex West Texas Intermediate crude price on a screen is the price paid when that barrel is delivered to Cushing, Okla. However, the producer of that same barrel in the Permian Basin will receive only $27 per barrel. Lesser quality crudes such as West Texas Sour might only fetch $15 a barrel. When prices were above $100 or even $60, those margins mattered less. With oil around $30, it's a much bigger deal.

A similar problem exists with lender's reserve values used for credit judgments. Notwithstanding the persistent decline in oil prices, commercial banks still use escalated price decks. These often mirror or exceed slightly, the forward price curve on the Nymex. Today, a $30 WTI barrel is forecast by the futures market to be sold at $39 per barrel a year from now. Those escalations become very significant, again, because of the margin squeeze.

With global oil demand flat, or even declining somewhat, OPEC price "hawks" producing all they can, OPEC price "doves," Saudi Arabia and its near neighbors producing to regain market share, and inventories at record highs — is a price escalation likely? The banks believe it is.

No matter how you cut that cake, there will be a flood of hard defaults with bank lenders and bondholders over the coming few months.

Significant year-end losses and write-offs are also coming, and very likely more write-offs in the ensuing quarters. Auditors will likely start to qualify their assessment of whether firms are a viable "going concern." Those also constitute an event of hard default with most lenders. These specific events of hard defaults with a senior lender generally will create a cross-default on other debt styled securities.

Even more importantly, most oil-price hedges, price swaps/derivatives, also have cross-default provisions. Thus, counterparty credit risk begins to escalate as those parties are forced to disgorge cash payments on those instruments.

Given the ferocity and rapidity surrounding this meltdown, can lenders effectively process this burgeoning inventory of defaulted credit? Time will tell, and there is a relative paucity of experienced workout/restructuring professionals to be spread around. Let's now add to that the banks to which the loan originators syndicated these credits. Highly doubtful they possess the army of specialists required to work through this problem.

Here are a few more gauges of the crisis to come: Since 2006, an additional $1 trillion of capital expenditures by just 59 companies has been spent on shale drilling and operations, according to oil-and-gas industry site And another $1 trillion of energy-bond debt has gone on the books, according to the Bank for International Settlements. Energy-company bonds will sell off and create a pall of risk avoidance across all industries.

A staggering $2 trillion of debt was meant to generate a 3-to-1 increase in value. That value today is definitively less than half of what was spent. Overinflated year-end 2015 reserve values and hard-defaulted credit facilities will combine with an absence of private and public equity markets. The contagion through the expanding and loosely regulated derivative market is surely destined for surprises. Leases will be forfeited and meaningful plugging and abandonment liabilities will build. If the company cannot pay, the banks will be forced to do so.

Now, let's take a look at the 2008 credit contraction. There were overinflated values, aggressive and lax lending, deteriorating credit worthiness, an expanding and unregulated derivatives market, and a gross underestimation of lender exposure, coupled with expectations that price increases would cover credit errors.

Sound familiar?

Oh, and home prices dropped 61 percent over three years during that crisis, according to the Case-Shiller Index. Oil prices have declined 69 percent in just two years.

But, there's a very important difference: Houses had a value, albeit only for the dirt in the worst-case scenarios. Uneconomic oil and gas reserves – those that have been deemed to be not economically viable to extract – have zero value and then create further liabilities to plug them up.

Near term, we are going to see devastatingly bad news in energy company 10ks and conference calls. And then comes the recognition that it's even worse than that.

The selloff in energy bonds now underway creates general risk avoidance across the board. Ballooning loan write-offs hit the major banks and those smaller banks to whom the loans were syndicated. The manifestation of counterparty credit defaults and its cross defaults hit the banks again and many other firms that began originating swaps.

Even with the selloff to date, one cannot gauge the magnitude of the problem and how it might play out. But we know one thing for sure: It will be ugly.

| 3193 views | | 10 replies (last )
Post ID: @OP+Fr2Ewff

10 replies (most recent on top)

Thanks for letting everyone know who #numnuts is, Numnuts. And like the previous piece of Dead Wood posted, we don't need a a Numnuts poster re-posting CNBC articles. We can all read CNBC, Marketwatch, CNN, etc. etc. etc on our own and most of us do. This is a layoff's forum, Numnuts. Post something relevant and try to stay original such as what you're reading now. No cheating.


over and out.

Post ID: @1brx+Fr2Ewff

Plagiarism is seen everyday. Who cares? No one except @1air. I hope you read and understood the article I pasted from CNBC. Hopefully you and the readers appreciate it and think a little bit more about your respective 401k investments. Sad it would be to lose a good part of your hard earned savings and then get laid off too.

Post ID: @1yul+Fr2Ewff

What's REALLY UGLY is some numnuts hack on the Chevron layoffs forum cutting and pasting an entire lengthy chicken little article without even putting quotes or referencing the source (CNBC?) that he/she stole/plagiarized it from. We can Google, idiot. Get a life!

Post ID: @1air+Fr2Ewff

If you think this oil rout is going to get uglier, that's not all. Watch out for this $1 trillion stock bubble...

As volatility in the stock market grows, a handful of experts are raising an alarm about the rise of index ETFs and mutual funds, which has never accounted for this much of the market before.

They warn that the unprecedented amount of index ETFs trading in the market — index ETFs accounted for nearly 30 percent of the trading in the U.S. equities market last summer — could magnify, or even cause, flash crashes.

In turn, that may put individual investors, who are increasingly invested in index funds, more at risk. And many may not realize how exposed they are to the risks of a relatively small group of stocks held in the major indexes, said experts.

Post ID: @ghs+Fr2Ewff

The 2008 crisis was compounded by derivative speculation on the underlying MBS securities. The economy has a far lower exposure to derivatives of commodities.

Post ID: @oae+Fr2Ewff

OP, yours is a good post, but suffice it would be to just summarize and paste the link to the entire article. But, I agree, it's going to get ugly.

Post ID: @amn+Fr2Ewff

Many flawed premises in this post - the magnitude of the impact is not even close to what we dealt with during the housing crisis. Also, it is the Collateral Debt Obligations that got us in trouble during the housing crisis (this amplified the crisis about 1,2000 times, times - not percents), that component is missing here...

Post ID: @kei+Fr2Ewff

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