By LIAM DENNING WSJ Excellence
In the wake of OPEC’s decision not to cut output targets, the oil industry frets about too much supply. Its real problem: an excess of certainty.
Conventional wisdom in the exploration-and-production sector held that oil prices were supported by Chinese demand and supply being moderated by the Organization of the Petroleum Exporting Countries.
The added spice was the U.S. shale boom, which sucked in capital on the premise of surging output. Energy economist Phil Verleger draws a parallel with the Internet bubble. In this case, the disruptive technology wasn’t the Web but fracking. Now, with the benchmark U.S. oil price falling below $70 a barrel, and investors’ certainties tanking with it, the money plowed into the E&P revival is at risk.
Stocks are the most obvious victims, and the SPDR S&P Oil & Gas Exploration and Production exchange-traded fund duly slumped 13% on Friday. But the fallout will be further-reaching and more complex than that, creating losers but also some potential winners.
Losers first. While stocks have been hit hard, don’t forget debt, in which obligations tend to remain obstinately fixed regardless of underlying commodity prices. From 2009 to 2013, the U.S. E&P sector outspent cash flow by $272 billion, according to IHS Herold. High-yield debt for the energy sector has risen threefold since 2008, to $210 billion, according to Brian Gibbons at CreditSights. Energy is the biggest sector of the high-yield market.
At $70 oil, E&P sector cash flow falls by a fifth, says Tudor, Pickering, Holt, and that includes the benefit of hedging. Woe to those lacking it: Continental Resources ’ recent decision to unwind its hedges looks especially badly timed. Its stock fell 20% Friday.
Beyond E&P firms, master limited partnerships operating pipelines and other infrastructure have been investor darlings. That isn’t simply due to energy exposure, but also because their high payouts stand out in a low-yield world.
The biggest 15 pipeline MLPs have seen their aggregate market capitalization swell by $153 billion, or 80%, in the past two years alone, according to SNL Energy. In addition, the sector’s high-yield debt has more than doubled since 2010, to $57 billion, according to CreditSights. Now, not only are energy prices uncertain, so, too, is the outlook for U.S. interest rates.
Union power will always trump a dispirited community hard pressed by economics.
We can and should assist those community leaders demanding better for their/our children than public warehousing of our new generations.
We should also point out the wanton abuse of our youth, some in UC, by some how convincing them protesting in Walmart or Macy;s has some connection to Ferguson. Only if you are a communist and socialist Therefore our children are their cannon fodder of the new order.
The real damage was done by allowing godless material nihilists to incite the youth to destruction of business. The wanton cruelty of destroying the dreams of builders in their communities. Contrary to collectivist delusion, small business is the most honest service to a community.
Shame on Juan Williams too. Majestic Civil Rights protests always had a clear purpose. As the objective was to activate fellow Americans to Justice, leaders demand the highest standards of protest. A level of commitment worthy of an offering to God.
There is no connection in the mindless of blocking freeways or disrupting Christmas Shopping. All that is accomplished is to drive fellow Americans away. So it is not a Civil Rights Demonstration but a simple primitive public tantrum.
Of the 16 charter-rich districts, 11 rose in the rankings. And of the eight among those 16 with the highest charter enrollment, all rose save one. The district that jumped furthest, rocketing up 11 spots between 2006 and 2014, was District 5 in Central Harlem, which has the city’s highest charter-school enrollment (43%).
And what about the 16 charter-light districts? Thirteen fell in the rankings, and not one rose. For example, District 12 in the Bronx, which in 2006 ranked higher than Central Harlem, now ranks 13 spots lower. District 29 in Queens, which in 2006 ranked 15 spots higher than Central Harlem and has fewer poor students, now ranks lower.
Average charter-school enrollment was 20% for those districts that rose in the rankings and 6% in those districts that fell.
Charter-school gains do not come at the expense of district schools. Actually, the opposite is true. The district schools in charter-rich districts improved in response to the competition. As judged solely by district-school results, 11 of the 16 charter-rich districts moved up in the rankings.
The results are clear: Parent choice and school competition improve educational opportunities for children in New York City. Yet the policy that brought us to this point—letting charters use underutilized school facilities—is under attack by charter-school opponents.
Opponents claim that co-location of charter and district schools in the same building hurts the district schools. False. In fact, it makes them better, as improved overall test scores in charter-rich districts have shown.
Opponents claim that co-location causes crowding in public-school facilities. False. Charter-school students aren’t grown in test tubes or rocketed from the planet Krypton. They are local children who would be occupying seats in public-school buildings regardless. By drawing students into underutilized facilities, charters even out enrollment and ease overcrowding.
Opponents claim that communities don’t want co-location. False. While the teachers union sometimes scares district parents into opposing co-locations with false allegations of harm, most parents want more options for their kids. Witness the 43% of families sending their children to charter schools in Harlem and the tens of thousands of kids on charter-school wait lists.
Opponents claim that families in co-located district schools feel like second-class citizens. Maybe so—but that’s no reason to oppose co-location. District-school parents should be asking questions like why their kids aren’t learning to read, why their children’s teachers don’t answer phone calls, and why their facilities are shabby despite huge budgets for construction and maintenance. These types of questions will improve district schools.
These false critiques are about one thing only: opponents of charters schools recognizing that co-location turbocharges charter-school growth.
Critics charge, however, that the academic successes posted by our schools and other charters result from cherry-picking the best students—and that since the harder-to-educate students are dumped in district schools, any academic gains by charters are offset by losses in district schools.
It is now possible to evaluate that claim.
New York City has 32 community school districts. The availability of free facilities in some of them has spurred rapid charter-school growth, while in others, the absence of such facilities has thwarted it. As a result, charter enrollment varies widely, from nearly half of students in the Central Harlem district to none at all in other districts.
This divergence, much like Germany’s division after World War II into a free-market West and a Communist East, has created perfect conditions for a real-world experiment. We can examine the 16 districts where charter school enrollment is highest (charter-rich districts) and the 16 districts where it is lowest (charter-light districts) and see how their relative rankings, based on their results on statewide English and math proficiency exams, changed between 2006 and 2014.
Upon his re-election in 2006, then-New York City Mayor Michael Bloomberg and Schools Chancellor Joel Klein offered the free use of underutilized school facilities to a bumper crop of charter schools opening that year—including my first. Fueled by this policy, charter-school enrollment in the city grew from 11,000 to almost 70,000 by the end of Mr. Bloomberg’s second term in 2013, and my one school grew to 22.
As the founder and CEO of Success Academy Charter Schools—free public schools open to all children in New York City through a random lottery—I’ve seen firsthand how allowing “co-location” with district schools has helped charter schools and their students thrive. Success Academy currently has 32 schools spread across the Brooklyn, Bronx, Manhattan and Queens boroughs and recently was granted approval from our chartering authority, the State University of New York, to open 14 more.
Three-quarters of our students are poor enough to receive subsidized lunch, and 94% are children of color. Our students have excelled. They not only rank in the top 1% in math and top 3% in English among all state schools, but they take top honors in national debate and chess championships. They compete in ballroom dancing, soccer and track and field.
One way to read the OPEC decision is therefore as a price war to shake marginal U.S. producers from the market. The U.S. shale boom and high global oil prices have encouraged new areas of production with widely varying break-even price levels. Much of such proven areas as the Bakken Shale in North Dakota can remain profitable even at $50 a barrel, by most estimates. The Eagle Ford Shale in Texas also has a relatively low break-even. But newer areas with higher exploration and development costs could suffer if prices keep falling.
That’s how markets are supposed to work, with supply and demand rather than a cartel of dictatorships setting prices. A lower oil price will mean pain for some U.S. producers, and it is showing up in lower share prices for energy companies.
But no boom lasts forever, and lower prices will discipline American drillers to focus their investments on the most promising areas and innovate further to reduce costs. A shake-out might have long-term benefits if it doesn’t go too far.
Meanwhile, lower oil prices are an unmitigated boon to American consumers. The average gasoline price per gallon in the U.S. fell to $2.79 on Friday, down 50 cents from a year ago. That’s a big difference to the average family filling up the SUV each week, especially wage earners who haven’t had an increase in their standard of living during this entire economic expansion. Consumers who feel less pinched might open their checkbooks for non-energy purchases.
Lower prices will also add to the economic pressure on some of the world’s worst dictators, notably Vladimir Putin . Russia doesn’t belong to OPEC but it has benefited to the extent that the cartel’s production controls have kept prices high. Already under pressure from EU and U.S. sanctions, Mr. Putin’s ability to buy domestic political support will decline along with oil prices.
All of these benefits are flowing from a U.S. oil boom that government didn’t predict and had almost nothing to do with. The political class has force-fed subsidies to renewable energy with little economic benefit. The new oil order is a reminder that markets and American ingenuity are better economic pillars than all the schemes of government planners.
America’s unconventional oil boom continues to yield major benefits—economic and geostrategic. The latest evidence is OPEC’s decision on Thursday to defy expectations and maintain its current oil production target despite the steepest price decline since the 2008-2009 recession. The price of Brent crude, the global oil benchmark, plunged as a result to about $70 a barrel, continuing its decline from a peak of nearly $116 in June.
Not too many years ago the Organization of Petroleum Exporting Countries might have cut production to maintain higher prices. The cartel’s countries have long sought to keep prices high at a level consistent with a growing global economy, not least to keep the revenue flowing into government coffers. Rogue states such as Venezuela and Iran desperately need the cash flow.
But the cartel has lost much of its pricing power thanks in part to the revival in U.S. oil production. Horizontal drilling and hydraulic fracturing—business innovations done mainly on private land—have pushed U.S. oil output to its highest level since the 1980s.
The Energy Information Administration says U.S. production reached more than nine million barrels a day this year and is expected to keep climbing. OPEC is afraid that demand for its crude will keep falling as U.S. supply continues to grow and more of it makes its way to the global market as American export barriers fall.
Excellent analysis. There is however current pressure on ngl pricing.
The natural gas swaps take a big step down in price beginning 2016.
They would be lucky to find buyers for shale properties and it would not be anywhere near $750k. The bank of Permian campaign has been closed by geopolitics cut lose from American influence.
I agree LINE likely could squeak by with the accrete from the completed deals and hedges. Offsetting the collapse in gasoline blending ngls. But it would likely weaken the credit rating. All EPs are under the closest attention.
Being a pessimist like Ben Franklin who likes to be pleasantly surprised rather than bitterly disappointed, I would expect a large distribution cut with a first quarter announcement of the strategy for the new asset configuration. If management can configure so that all capital needs are met from cash flow, the perception of risk will be greatly reduced.
The real boogieman for the analysts is LINE being forced into issuing dilutive equity at these prices. Which is the risk exposure to long term valuation models. To the extent management maintains the distribution knowing it can not be sustained in 2016, the greater the risk markdown.
What we do know is even the mighty SA sovereign wealth fund can not close the current budget hole at $70 for much over two years. The object is to inject enough uncertainty into American oil production that are our free market growth rate is dramatically bent down. At least until America's economy is allowed to grown normally again and demand picks up.
Poor Al Jazeera Willie will claim rationality is caused by Fox News. If we all just pretend it is about market share all will be well. Next year some how Progressive base load solar panels and wind mills will supply surface fuel needs.
Reid and Pelosi have absolutely destroyed the democratic Party. But as their voters do not even know who they are, they were reelected. It is religion. Primitive irrational religion.
Yes, LIne could take the money and let production wind down.
Something ultra did with natural gas.
Management could choose not to make sustaining capital investment and let oil production decline. So that the hedging moves towards 100%.
I have said the challenge for LINE and all American energy producers is to get through the irrational Obama times.
Saudi Arabia's objective is to disrupt the American oil industry. Put in a high risk factor which #$%$ growth.
While low oil prices will spur economic growth and oil demand. So they come out of the process able to set prices in the $80s+.
LINE with the Hugoton assets is really a deal at these prices. It should be considered a deep value play rather than for income.
If only Americans were thinking logically rather than emotionally and elected McCain or Romney. If we had allowed the free market to function rationally, our energy market would be to efficient for SA to play there games.
Assuming Progressives remain successful with their grubering to keep American natural gas out of competition with oil as surface fuel.
Lower gasoline prices will spur our economy. Enlightened economic policy, defined by Progressives as conservative, like Reagan and Clinton could unleash a wave of prosperity. Which would change the supply demand equation.
Unfortunately we have two more years of Obama's destructive clowning to go. His immigration order has no productive purpose. These human beings were not being deported. They are clearly working and their citizen children receiving welfare benefits. It is after all an underground economy. We are very likely to find that the powerful economic incentive is to stay in the underground economy rather than declare income.
Worse still this is just an abusive executive order. One not supported by the majority of Americans. One that is likely not to stand. So nothing have changed.
Except Americans are divided and not focusing on what we should do with our energy Providence for the general Welfare. Like is says at the beginning of our Constitution.
It is an interesting thing. The one word or idea a Progressive collectivists will never utter is Liberty. To live in a condition of libertine self absorption which of course is not personal freedom. For self absorption is exclusive to the higher condition of Liberty. Aware choice.
Our honourable protector is known for his iridite logic expressed in a smooth stream of choice words.
Then one day Mr. Payne says coal. Col Peters then clearly transports us to middle earth. Salt of the earth American coal miners are orks defiling the land. Destroying mountain tops for their Lord Sauron, otherwise known as big business.
Col Peters and his good wife climbed to the top of the mountain and looked upon the Ohio Valley. Now the land of Doom, with smog wreathing the greedy eye of Sauron.
If I ever play chess or Go with Mr. Peters I will wait seven moves, hit the clock then whisper American Coal is Great! Using the wisdom of Sun Tzu on the wily old honourable master.
Asia is putting into service a new coal plant every month if not every week. Coal requires the most basic infrastructure to deliver. It is easily stored in great inert piles. It far superior to the common practice of drying human and animal waste for cooking food and warming the hovel.
Regulation is of course necessary. But enlightened regulation is the product of Toa. The solution to all pollution is dilution. So a coal plant in a Kansas corn field is not the same as a coal plant in the San Joaquin Valley of California. Further it is self destructive to abuse regulations to outlaw coal.
Generating capacity diversification is critical. As we learned last year in the polar vortex. It adds critical dependability to the generation.delivery system under stress. So the rational objective is to improve coal technology not pervert common law by legalism.
If honourable Col Peters can be turned into a reactive emotional mass by collectivist religion, what chance do naive youth have? Especially those born into the systemic failure of collectivism imposed for the last 50 years?
Natural gas in ices - onshore - thousands of year supply.
The finite thing is absurd.
The end point of human power needs is fission. Tiny foot print and materials. Of course nuclear power is the only thing cleaner than natural gas. Nuclear power is ideal to make hydrogen.
LINE could sell the puts and diffuse the swaps. Real gain real cash.
Management should set the distribution based on forward earnings ex-ante with a margin of safety in relationship to volatility or uncertainty.
GAAP earnings is really only a set of rules trying to measure sustainable free cash flow.
The power of increasing a dividend is actually in the forward signaling from management.
Already answered. Sorry.
I does give the TAxi portfolio access to very cheap funding.
I do not think so.
LINE is taking stress from collapsing ngls. Something with the oil hedges they should be able to manage in 2015. But 2016 brings on the step down in the ng swaps prices.
Check the cme oil futures and you will see a slight normal contago slope. Near is just under $70 and further out it is $74 or so.
A year under $70 will make it impossible for some oil states to subsidize food. American drillers already have their access to capital shut off.
Truth is this not a rational free market. Nor is Obama acting rationally. No one knows for sure.
A this point it probably is logical for LINE management to cut the distribution. Otherwise it will just add to concern and therefore high risk discounts coming into 2016. But really more than this is already in the market price.
The really interesting variable is how fast the associated natural gas supply from oil drilling can drop off.
If Obama had not been a willful child with policy blocking xl and ng export, our markets would have been free market rational enough to take this action from SA.
"American shoppers have a lot of reasons to feel more confident this holiday season. Six months of strong economic growth have produced an upsurge in employment; wages are growing, if only barely; and a sharp drop in gasoline prices has put another $20 to $30 a month into most American’s wallets."
The journalists were doing so good then ran off the Progressive NYNY rails. Gasoline prices began dropping about 5 months ago. Which bought some temporary jobs to take as unemployment benefits were curbed.
Average American family uses a depressed 1,100 gallon of gasoline year. Retail prices about about $1 lower.
$1,100 dollars of real 'disposable' family income back in the account. It is more like $100's per family per month. Given it dramatically improves the position of hard pressed wage earning Americans, not surprise Walmart and Target are off and running. But the good news is American want actually still demand a deal. Plenty of free market competition and American consumers are very rational.
Way past time to follow the science of energy, ecology and economics and kill the insane and human blood covered corn ethanol mandates. Then we can get to one science based blend manufacturers can tune their engines to. Gains in mpg of 10%+ and real improvements in air quality. Not to mention all the food inflation still working its way to consumers.
Hopefully more than 50% of American have learned the lesion of allowing Progressive to impose via their 'activist' government. It is not the same as using our tax money as an incentive or persuasion. It results in Progressive grubering in a collectivist orgie of destructive hubris.
We need to get our natural gas and ngls into valued added manufacturing. This means we must also lift the capital investment chill of Progressive grubering. Plus we do need corporate tax reform. Lower the rate by getting all the Progressive crony capitalist feeding out.
America is ready to rock. We must get Progressive out of our way.
Wal-Mart Stores Inc.WMT +0.04% and Target Corp.TGT +0.08% reported strong Thanksgiving Day traffic as shoppers focused on big-ticket electronic items.
Neither retailer reported specific sales figures early Friday morning, but both bragged about the number of customers that shopped at stores and online.
Wal-Mart and Target were among a host of retailers that began offering special “Black Friday” sales on Thanksgiving Day, starting at 6 p.m., in an effort to boost struggling sales in a tight economy and keep up with online retailers.
Online sales were key this year, as Target said Thursday was its biggest online sales day ever, while Wal-Mart said it was the second-highest online sales day ever, behind only last year’s Cyber Monday, the nickname for the Monday after Thanksgiving when retailers tend to offer special deals online.
Wal-Mart also said it had more than 22 million customers at its stores between 6 p.m. and 10 p.m. Thursday, compared with 10 million last year."
The Progressive automatons will still chant make it all up with efficiency.
It is one thing for special interests to get our government to lavish 'incentives'. It another to allow those special interest to impose by mandate.
Toyota has the fuel cell with other Asian companies close behind. America is stuck with the cost of extreme cost base solar and variable wind mills. Thanks ot Obama and his Fool Phd Chu with a Nobel Prize. Hey Obama has one of those for Peace. Hum.
"VIENNA (Reuters) - Saudi Arabia blocked calls on Thursday from poorer members of the OPEC oil exporter group for production cuts to arrest a slide in global prices, sending benchmark crude plunging to a fresh four-year low.
Brent oil fell more than $6 to $71.25 a barrel after OPEC ministers meeting in Vienna left the group's output ceiling unchanged despite huge global oversupply, marking a major shift away from its long-standing policy of defending prices."
The cure for low commodity prices is low commodity prices. All this Progressive nonsense about SA and market share. Make up a 30% price decline on volume.
Their intent is clearly to disrupt the oil market for a time. Really a shame XL is not open delivering heavier oil.
We could put those undemocratic Venisualian Progressive collectivists out of the business of oppressing their people and destroying their economy in the process out of business.
Drillers issued a great deal of low grade bonds. Already this has distributed the junk markets.
Sauds are a great deal more sophisticated than the OLB and all Progressives for that matter.
Given the agreement to keep quotes, clearly they have decided there is a good change they can dent American oil production.