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We've got a 'creeping tsunami' of bankruptcies: Oil Expert

Canary LLC CEO Dan Eberhart joins Yahoo Finance’s Zack Guzman to discuss the outlook on oil, as the Wall Street Journal reports Chevron is mulling an exploration deal in Iraq.

Video Transcript

ZACK GUZMAN: Right now I want to dig into what we've seen in the energy space. Normally a president would be benefiting, if you are Trump right now, by a drop in prices at the pump, but not maybe so if more Americans aren't commuting to work. And that was a point raised in a new op Ed from a Trump donor himself, Dan Eberhardt, Canary LLC CEO and author of "The Switch" joins us now. And Dan, appreciate you coming back on the show.

A lot of good points you're raising in terms of how President Trump in his positioning in this election year is playing a pro/con situation, obviously wants to support the energy sector. It's a very important one here in the US, gas prices being low traditionally a big boost for voters. But what's your take on how he might be a little bit locked right now since gas prices, or mainly oil prices, I should say, backed up around $40 a barrel, puts a lot of these energy companies in a tight spot?

DAN EBERHARDT: Well, normally you would say that a lower price at the pump is more buying power for consumers and better for the party in office. But I think that logic only really holds within a certain band. And we're really outside of the Goldilocks part of the band right now. The prices are just too low. So what that means is that the rig count started the year about 805 rigs. Right now, as of Friday, we are at 247 rigs. And the problem is just the oil industry can't make any money. So you're seeing us hemorrhage jobs in places like Texas, Oklahoma, North Dakota, New Mexico, maybe pivotally in Pennsylvania.

And so this is really putting a lot of stress on states that normally are would be very pro-republican, very pro Trump. The and gas industry is just ravaged by I think we've had 23 bankruptcies so far, the sector this year defaulting on about $31 billion. And the industry's logs shed more than 100,000 jobs. And I really think that we've got a creeping tsunami right now of bankruptcies. We're going to continue to see bankruptcies in the oilfield service sector and among E&Ps and then a flight to balance sheet strength as even companies like Marathon selling its speedway gasoline stations, as 7-Eleven trying to focus on balance sheet strength. It is quite drastic, really.

ZACK GUZMAN: Yeah, and I mean, we saw oil prices come back. We had that strange futures moment in time earlier in the year when we saw the front contract dip below into the negative territory. But now back at about $42 a barrel here and, as you raised in your piece, I mean, the study from Deloitte points out that about 30% of shale operators are technically insolvent when you're down near $35 a barrel. So where we're sitting right now is kind of just holding it all together. No one's going to be happy in the energy space at that price point. So what's your take on maybe where we go from here and all that President Trump could be hoping for just to get to November with things in tact?

DAN EBERHARDT: Well, look, I think what Trump needs is Trump needs to have a good positive contrast with Biden-- so falling unemployment numbers and rising economic growth numbers. I think it's really bigger than the energy industry. But what I think the energy industry needs is, the price of oil has crept up a little bit, crept up a little bit, crept up a little bit. US production has fallen about 2 million barrels a day from 13 to 11, or down to about 9.7, up to about 11 now.

But the industry has just not recovered remotely yet. And oil price in the low 40s, you're going to continue to see more oilfield service bankruptcies. And you're going to continue to see E&P companies with leveraged balance sheets really try to fight through these quarters. You really need a rising tide to lift all boats right now in this sector. The sector is just going to continue to shrink.

ZACK GUZMAN: Well, to that point, I mean, we had the Wall Street Journal pointing out that Chevron was looking to invest hundreds of million dollars into a project in Iraq said to be announced later this week, which is interesting since the company had already announced it was going to be cutting about 20% of its expenditures and it would also be laying off staff. Iraq's prime minister is meeting with Trump on Thursday. It would be kind of a strange thing for President Trump I think to flex in the idea of Chevron spending more money in Iraq in the energy space. But I mean, is that the trend that we're expected to see since we know it's so much cheaper abroad for a lot of these projects as opposed to what you can do here domestically?

DAN EBERHARDT: Well, I think shale is very cheap and can fight with the best of them. But the infrastructure and the incentives overseas are somewhat a little bit better. And a lot of these, what you're really seeing-- the people doing deals. So Total just announced buying an offshore block in Brazil. You've got Chevron nibbling around in Iraq.

But it's really the people with extreme balance sheet strength that are looking to do a few minor projects. I think those are the exceptions, not the rule. The rule is more nearly all the oil companies are being very, very conservative with new projects. And inherent in all this is the seeds of the next oil boom that's going to happen in nine months or 18 months or whenever. But we're under investing right now. We're doing chronic underinvestment in the industry. And that's going to lead to a super spike at some point in the future.