Wednesday, January 13, 2016

Short Course in Overproduction

From The Wall Street Journal, Tuesday, January 12, 2016

Nothing compels overproduction like overproduction; overproduction and the transition from accumulation to disaccumulation:
Energy companies that took on huge debt loads to finance their slice of the US drilling boom have no choice but to keep on pumping to generate cash for interest payments.  As they do they are drilling themselves into a deeper hole....
...Even those producers with better balance sheets say they will keep pumping more.  ConocoPhillips and Pioneer Natural Resources Co., two of the most successful shale operators in the US, plan to boost production this year.
Scott Sheffield, chief executive at Pioneer, said pulling more oil and gas out of the ground makes sense even though prices are low because the company's most efficient wells still make good returns.
The devaluation of assets-- overproduction trumps ground-rent; overproduction always trumps ground-rent:
Companies that drill themselves into a hole so deep they cannot escape will be forced to sell assets or tap revolving credit lines.  That is a tricky proposition given that many energy players expect to see their borrowing bases cut as debt limits are reduced in light of the plunging value of oil and gas reserves in the ground.
Every cloud has a silver lining, so let a smile be your umbrella-- asset liquidation and devaluation, wishful thinking, cannibalizing the carrion, and other countervailing tendencies.
More than $100 billion from private-equity firms is waiting to scoop up assets that are sold either before, or after, bankruptcy, experts say.  But major corporate mergers and acquisitions remain unlikely, because any buyer would have to pony up voluminous amounts to cover the debts of a seller.  Instead, opportunistic firms are waiting for the wave of bankruptcies to arrive.  Once debt is wiped out, oil-and-gas fields will be cheap.  The longer the oversupply sticks, depressing prices, the more companies will falter, leaving their assets ripe for picking at a discount.
If an array of US shale companies go bankrupt or assets fall into new hands and bondholders get crushed, bankruptcies will wipe the debt slate clean and lower the oil price need to fetch a profit.
As oil goes so goes the world... of capital:  Financial Times Wednesday 13 January 2016.
Nickel, zinc and copper follow in crude's wake
The price of nickel fell to its lowest since 2003 and zinc plumbed a six-year low yesterday as the rout in global commodities deepened.
Copper...hit its lowest level since May 2009...
...About 80 percent of global nickel production is losing money and miner have failed to cut production substantially.  Vale, the Brazilian miner, plans to boost nickel production this year...

January 13, 2016

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