LET THE CUTTING BEGIN

Let the cutting begin. And it has. 

What once was an obvious paradise for some has now become big trouble in more than just the oil patch.

It sometimes might take awhile, but humans--especially those in business--have a way of changing their behavior when things get too touchy. 

And people in the oil business are no different. While some might view this as a big negative, we take a different tact. 

People losing their jobs is never a pleasant thing and we don't like it one bit. But like governments, industries get bloated. And sooner or later retrenching is necessary, something governments around the globe need to learn. However, we'll leave that one for another time.

For now a quick cruise around the Internet and one will see just how fast the oil industry is retrenching. The fallout from these cuts stretches far beyond just jobs and the oil sector. 

Housing market fallout: In the not too distant past, Credit Suisse was calling for brisk growth of up to 14% in Texas' home construction industry. Now the bank predicts a 20% drop because of the "knock-on effects" caused by job losses and reduced confidence from the energy slide.

Avoid homebuilders: For now, Credit Suisse is telling investors to steer clear of homebuilders with heavy exposure to oil-centric markets like Houston, Dallas, San Antonio, Austin and Denver.
 
All the articles below were written within the last few days. And you can expect many more depending on where oil prices settle.

JACKSON, Miss. — Low oil prices mean the driller that has been the most bullish on an oil region that straddles the Louisiana-Mississippi line is cutting back.

Goodrich Petroleum Corp., based in Houston, said Friday that it will spend $80 million to $100 million on exploration and drilling this week, down from $150 million to $200 million it had previously projected.

The company had projected that it would drill 16 to 21 wells in the Tuscaloosa Marine Shale region in southwest Mississippi and Louisiana’s Florida Parishes. A spokesman didn’t immediately respond to a request for comment, but the new budget will mean fewer wells drilled.

A number of other companies that had been drilling in the region have cut back or pulled out, in part because of high drilling costs per well.

Texas Keeps Losing Drilling Rigs

The Permian Basin has lost 65 rigs since the beginning of the year, to 371. The Eagle Ford Shale has lost 22 rigs since early January, with 178 still in the field as of today.

Other states with oil and gas activity have also seen a drop in the number of active drilling rigs. The U.S. is down 268 rigs so far this year, to 1,543.

North Dakota is down 26 rigs for the year, to 143. Oklahoma has lost 26 rigs, with 183 rigs still working. New Mexico is down 14 rigs, to 87 this week, according to Baker Hughes.

The research firm Drillinginfo recently looked at rig movement in the Eagle Ford by some of the biggest drilling companies. It said:

“It doesn’t appear that rigs are moving into or away from the Eagle Ford at an appreciable rate either way over the last couple of months. Additionally the Permian Basin, and Eaglebine are showing strong localized activity, and we have outlier activity along the coast and into further south Texas.”

Oil prices rallied on Friday to $47.59. Crude oil was selling for more than $100 per barrel in June, though.

Oklahoma drilling company to cut 2,000 jobs.
January 30, 2015

Oklahoma-based drilling contractor company Helmerich & Payne’s CEO announced Thursday that the company may have to cut as many as 2,000 jobs.

Helmerich & Payne CEO John Lindsay commented:

“Our field employee count is directly proportional to our rig count. Based on what we know today, it is possible that we will have approximately 2,000 or more field positions eliminated by the foreseeable rig reductions. This is, without question, the worst part of the downturn.”Helmerich shares fell as much as 10 percent to $54 on Thursday as weak forecast for 2015 margins and revenue overshadowed a better-than-expected quarterly profit. Helmerich said less than 200 rigs would be active by the end of the current quarter, down from over 297 in the first quarter. The company said that it expects rig revenue in its U.S. land drilling unit to average $27,000-$27,500 per day in the second quarter, below the $29,457 it recorded in the first quarter. Helmerich, which had about 11,901 employees as of September 30, also said it would now build only two high-tech FlexRigs per month this year, down from the four rigs it had planned.Halliburton recently released its fourth quarter earnings report for 2014 and reported total revenues of $8.8 billion compared to the previous quarter’s $8.7 billion, according to The Bakken Magazine.

For both the third and fourth quarters of 2014, the company’s adjusted operating income was $1.4 billion. For the third quarter, the operating income was $1.6 billion. For the fourth quarter, the company’s operating income was $1.3 billion. Total revenue for the previous year was $32.9 billion, a 12 percent increase from the company’s earnings in 2013.

Halliburton’s total operating income for 2014 was $5.1 billion, up substantially from the $3.1 billion operating income for 2013. The company stated that the increase can mostly be attributed to increased onshore activity in the United States and operations in the Macondo Prospect.

In a press release, Halliburton chairman and CEO Dave Lesar said, “We delivered an excellent 2014, but it is clear that 2015 will be a challenging year for the industry. As a result of the weakening outlook, during the fourth quarter of 2014 we took a $129 million restructuring charge to temper the impact of anticipated activity declines.”

Lesar also commented on the impact of the current global oil price market by saying, “Halliburton has successfully weathered multiple industry cycles. We are confident that we have the right people, technology, and strategies in place to outperform throughout this cycle too, and emerge as a stronger company.”

Late last year, Halliburton entered into a merger agreement with Baker Hughes. The pending deal is valued at $34.6 billion in which Halliburton will acquire the entirety of Baker Hughes’ outstanding shares in a stock and cash transaction. The deal is expected to be finalized in the second half of 2015 pending approval by stockholders of each company, traditional closing conditions and regulatory approval. After the deal is finalized, stockholders of Baker Hughes will own roughly 36 percent of the incorporated entity.

In the past few weeks, both companies have announced layoffs in various branches. Baker Hughes reported on plans to reduce capital spending by 20 percent and the layoffs of approximately 7,000 employees. Martin Craighead, Baker Hughes CEO, said the moves were a result of the industry-wide slowdown. Halliburton recently confirmed layoffs in its Duncan branch and projects to cut 1,000 jobs across multiple regions in the coming months.

HOUSTON – Petroleum producers took 94 oil-drilling rigs off the market in the United States this week as sub-$50 oil continued to wreak havoc on the oil industry, Baker Hughes reported Friday.
It was the biggest one-week decline for oil rigs since 1987, the earliest year of Baker Hughes data available. That year, the oil industry had faced another oil bust that left hundreds of rigs idle or repossessed by banks, which sold them for scrap.

This week’s drop left 1,223 oil units up, the lowest number in three years.
In Texas, 58 rigs were taken off the market, cutting the state’s count to 695 rigs. That’s down from 840 at the beginning of this month.

All told, the number of oil and gas rigs active in the United States fell by 90 to 1,543, as gas rigs increased by three and one other, so-called miscellaneous rig was propped up. The U.S. offshore rig count declined by 5 rigs, down to 49 units.

The decline came a day after the CEO of Helmerich & Payne CEO John Lindsay told investors the Oklahoma-based drilling contractor may have to cut 2,000 jobs in light of the falling rig count.
Lindsay said even some of the company’s souped-up FlexRigs, some of the most advanced models on the market, have been released, and that’s likely to continue.

Trouble has been looming over the oil patch since crude prices began falling last summer, from over $100 a barrel to under $50 today. But only now are the long-feared effects of a bust starting to ripple through the complex energy ecosystem, affecting Houston executives, California landowners and oil old-timers in Oklahoma.

DALLAS—Rumor became reality here last week when dozens of workers lost their jobs at Laredo Petroleum Inc. The Oklahoma-based energy outfit said it closed its regional office to cope with plunging oil prices.

The layoffs were “kind of like a death in the family,” says Robert Silver, age 62, a geophysicist who had helped Laredo decide where to drill in the Permian Basin in West Texas.

Trouble has been looming over the oil patch since crude prices began falling last summer, from over $100 a barrel to under $50 today. But only now are the long-feared effects of a bust starting to ripple through the complex energy ecosystem, affecting Houston executives, California landowners and oil old-timers in Oklahoma

Texas leads nation in drilling rig losses–again

6 days ago 1,330 Views

Max B. Baker | Fort Worth Star-Telegram

In Texas everything is bigger, or so the saying goes.

So it should come as no surprise that the Lone Star State leads the nation, for the second week in a row, in the loss of rigs searching for oil and natural gas, according to Baker Hughes, the Houston-based oilfield services company.

There were 13 fewer active rigs, leaving 753 still operating in Texas. Counting the 44 rigs pulled last week, there are 57 fewer crews working in the field, Baker Hughes reported. Since Jan. 2, the number of rigs working in Texas has dropped by 87, the company reported.

The number of rigs nationally dropped by 43 to 1,633 — 1,317 rigs exploring for oil and 316 for gas. A year ago, there were 1,777 rigs active, the Houston firm said.

Related: US rig count falls by 43 to 1,633

“There is no surprise there,” said Bernard Weinstein, an economist at Southern Methodist University’s Maguire Energy Institute. “The industry is still reacting to the expectation that prices will remain subdued for an extended period.”

While oil prices stabilized last week, the price per barrel continued its slump on Friday, closing at $45.49, a 72 cent drop for the day. The price of oil has been cut by more than in half since June.

Among the other major oil- and gas- producing states, North Dakota lost nine, Oklahoma fell eight, Ohio four, California and New Mexico each lost three and Utah two.

Kansas, West Virginia and Wyoming dropped one apiece.

In the Barnett Shale, the number of rigs, most of them primarily searching for natural gas, increased by one to 11, following a loss of six the week before, according to data compiled by RigData.

Tarrant, Denton and Jack counties each reported having two rigs, while Johnson, Palo Pinto, Parker, Stephens, and Wise reported one rig each.

As previously pointed out in one of our other post, "Oil Cuts Continue," some might get surprised how fast the oil industry can cut.

OIL CUTS CONTINUE

Harold Hamm, the CEO of Continental Resources, of late was in the news owing to his bitter divorce case and the size of the check (pictured above) that he wrote his ex-wife. She originally rejected the check but eventually cashed it, according to reports.

The check was for $974 million,790 thousand,317 hundred and 77/100.

Last time we checked the census there are supposed to be seven billion of us currently inhabiting the planet. Probably one-half of one-half of one-tenth of one-fourth of one-eighth of one-sixteenth of one-twenty fourth will ever get a chance to write a check like that let alone cash one.

Hamm is an oil magnate and his views are of interest to anyone who follows the industry. Recently, he spoke at a conference in Houston.

Hamm: Oil prices could rise sooner than you think

Posted on January 28, 2015 at 12:39 pm by Ryan Holeywell in Crude oil, Production

(AP PhotoKevin Cederstrom)

HOUSTON — The market doesn’t understand just how quickly oil companies are scaling back their activities, and as a result, oil prices could rebound faster than many observers expect, Continental Resources CEO Harold Hamm said Wednesday.

Hamm, addressing the Argus Americas Crude Summit in downtown Houston, noted the slew of companies that have quickly pulled back on their capital expenditures as oil prices have fallen by more than 50 percent since the summer.

He said exploration and production companies can’t afford to borrow money, and falling stock prices make it hard to raise cash by issuing equity. “You’re limited in what you can do if you don’t conserve cash,” said Hamm, whose company is primarily active in North Dakota and Oklahoma.

Continental Resources recently cut its 2015 capital budget from $4.05 billion in 2014 down to $2.7 billion this year. Hamm — considered one of the pioneers of hydraulic fracturing — noted that his own company went through five or six budget revisions before settling on that figure.

He said oil companies will save cash by laying down rigs and deferring well completions until service companies’ rates drop further. ”Why complete a well today when these service costs are coming down?” Hamm said.

He also said some companies will likely stop producing oil from existing wells and simply leave it underground as they wait for oil prices to increase. “It’s not going anywhere,” Hamm said. “It’s locked in a rock.”

Daily oil production from the country’s biggest plays — the Bakken, the Permian Basin and the Eagle Ford — could actually start to decrease mid-year or even earlier, Hamm said. That’s considerably sooner than other observers’ forecast, who’ve said production would still likely increase this year even if drilling activity slows.

“U.S. producers will demonstrate market discipline and act uniformly,” Hamm said. “We have the same market forces on us, so we do the same thing.”

“The market does not appreciate how rapidly U.S. producers are reacting,” he added.

Hamm acknowledged he didn’t know at what level oil prices will bottom out. In the longer-term, he said, they’ll likely be less than $100-per-barrel the industry has enjoyed in recent years as the markets come to understand the size of the resource base U.S. shale drillers have access to.

Hamm apparently is not alone in his view. For another view, see Montana Bakken.

MONTANA BAKKEN

The Bakken oil boom in Montana has gone bust, or at least that’s the belief held by Terry Johnson, director of energy research at the University of Montana’s Bureau of Business and Economic Research.

Montana Public Radio reports that Johnson said, “I would argue that the Bakken boom in Montana actually occurred back in 2005 and 2006. That the boom is really no longer that present in Montana at this point in time.”

Last Friday, Johnson gave a presentation in Missoula and said it appears that Montana’s oil wells in the Bakken formation have reached maturity and yielding less with each passing year. Now that the price of oil has declined over half within the past year, there’s not much motivation for companies to drill new wells.

According to MPR, Johnson said, “Continental Resources, the largest oil producer in Montana, is projected to cut their spending by 40 percent, and they also are projecting that they will reduce the number of drilling rigs by about a third, or 33 percent.” Oil production in the state has already declined compared to last year, and when combined with the decreased price of oil, the total value of the resource being extracted will be substantially less than the previous year. He predicts the overall value of oil produced in the state will drop by half with the coming year.

Related: Oil may boom, but infrastructure is busting Montana oil, gas counties

Natural gas production isn’t looking up either. Johnson said, “I’m not seeing any positive signs there because of our maturing wells, reduced investments, so I’m seeing probably about a 10 percent decline in natural gas.” Coal production, however, is expected to hold steady throughout the year, despite the shrinking of domestic demand as many coal-fired plants are decommissioned or converted to use natural gas.

The production decline of fossil fuels will inevitably reduce incoming tax revenue, though not in areas many would suspect. He explained, “When you talk about the state general fund budget, which is the budget that primarily funds the general operations of government, oil, natural gas, etc. are not a real large component.” The regions that will be most impacted will be county governments and school districts, due to the high percentage of oil and gas revenues they receive.

Although Johnson projects that fossil fuel production will be in decline over the coming year, he asserts that renewable energy is expected to continue growing.  Johnson told MPR, “I would argue the only real bright spot is wind. We’ve seen incredible growth, somewhere in the range of about 20 percent per year since about 2006 through 2007. From 2013 to 2014 it was almost 29 percent.” The continued growth of wind energy, however, will be highly dependent on the re-authorization of the federal wind energy production tax credit.

Cheaper oil makes more expensive alternatives less attractive. So there's a push-shove bind here that will have to get worked out. 

Part of the current consensus thinking is energy companies will complete current projects, but Hamm seems to imply something different as does this article.

Unlike a cat the energy glut may have a much shorter life than many expect.

QE GONE AMUCK

In a recent post, "Whatever It Takes," we noted the following:

In a weekend editorial, "No need for hostilities in the money currency war," one anointed genius writes, "The ECB should ignore accusations of competitive devaluation."


Much of the justification for EU QE we have read came from those citing U.S. and UK monetary policy, the assumption being they were not only successful but worth emulating. After all, it seem to work for them. Why not us and what's the holdup?

Talking that up with a litany of excuses why QE is pure and devoid of any nasty ulterior motives, especially those as nasty as competitive devaluation, the Financial Times quipped:

There is little to suggest that the ECB is skewing its policy easing towards weakening the exchange rate.


There were two points in our post, one about the currency wars--Singapore without any warning yesterday cut its interest rates and Denmark which cut rates there--and the idea as expressed in the above quote about emulating what as yet is an unproven successful consequence to the Fed's QE programs.

Reuters today reported:

The Danish central bank cut its key interest rate for the third time in two weeks to another historic low after intervening in the market to keep the crown within a tight range against the euro. 

The central bank cut its certificate of deposit rate to -0.5 percent from -0.35 percent, making a reduction of 45 basis points since Monday last week. 

While analysts said last week that its actions might not be enough to weaken the crown, few expected another cut so soon, especially as Denmark's rate went below the eurozone equivalent of -0.20 percent, making it less attractive than the euro. 


From MarketWatch, Stephen Roach, former chairman of Morgan Stanley Asia and now a Yale University faculty member, yesterday wrote: 

The ECB, however, will have a harder time making the case for wealth effects, largely because equity ownership by individuals (either direct or through their pension accounts) is far lower in Europe than in the U.S. or Japan. For Europe, monetary policy seems more likely to be transmitted through banks, as well as through the currency channel, as a weaker euro EURUSD, +0.06%  — it has fallen some 15% against the dollar over the last year — boosts exports.

The real sticking point for QE relates to traction. The U.S., where consumption accounts for the bulk of the shortfall in the post-crisis recovery, is a case in point. In an environment of excess debt and inadequate savings, wealth effects have done very little to ameliorate the balance-sheet recession that clobbered U.S. households when the property and credit bubbles burst.

MarketWatch

Real consumption has grown slowly since the recession, despite massive quantitative easing by the Fed.

Indeed, annualized real consumption growth has averaged just 1.3% since early 2008. With the current recovery in real GDP on a trajectory of 2.3% annual growth — two percentage points below the norm of past cycles — it is tough to justify the widespread praise of QE.

Japan’s massive QQE campaign has faced similar traction problems. After expanding its balance sheet to nearly 60% of GDP — double the size of the Fed’s — the BOJ is finding that its campaign to end deflation is increasingly ineffective. Japan has lapsed back into recession, and the BOJ has just cut the inflation target for this year from 1.7% to 1%.

Finally, QE also disappoints in terms of time consistency. 

For Roach's full article here's the link.

http://www.marketwatch.com/story/the-lemmings-of-qe-2015- 

THE EUROPEAN MESS

There is never a shortage of fear mongers. Like last year's Scottish referendum, the fear-inspiring crowd rolled out the big dogs the closer and the more in doubt the outcome came.

The same holds true for the current mess called Greece. Greece is a country like others in the EU which has lived above its means. Hardly anything new here, except one might get an argument about who is better at it, the Italians or the Greeks.

And despite what Brussels bureaucrats might be saying now, they knew way back when the EU was being formed, but decided as is their want to look the other way.

The Greeks have been getting handouts from the Brussels' crowd for a long time, far more monies than they sent to  Brussels. All this ranting against the Germans for their fiscal probity, including references to the Marshal Plan after WWII, is blatant verbal legerdemain to cover up the real issue:

Brussels bureaucrats rolled the dice on a known economic half-stepper and the dice came up snake eyes. End of story. Man up and take a tip from Moses--let the Greeks go. The globe will be better off and so will an ill-conceived, poorly-thought-out and improperly-executed creation called the European Union.

Give them the benefit of their beloved drachma.



For once in your pathetic bureaucratic existences, be a group of good cupcakes, suck up the losses and move on. You might even gain a little respect in the process. And for that matter, a name change is also in order, EM--European Mess, you've created.

For the record here's a brief recap of Greece's and the EU's problems. Looks like there's enough blame to go around.

How did Greece and the EU get into this mess in the first place? The seeds were sown back in 2001, when Greece finally qualified to adopt the euro as its currency. Greece had been an EU member since 1981, but its annual budget deficit was never low enough to satisfy the eurozone's Maastricht Criteria.

All went well for the first several years. Like other eurozone countries, Greece benefited from the power of the euro, which meant lower interest rates and an inflow of investment capital and loans.
http://useconomy.about.com/od/Europe/p/What-Is-The-Greece-Debt-Crisis. 

However, in 2004, Greece announced it had lied to get around the Maastrict Criteria. Surprisingly, the EU imposed no sanctions! Why not? There were three reasons.

1. France and Germany were also spending above the limit at the time. They'd be hypocritical to sanction Greece until they imposed their own austerity measures first.
2. There was uncertainty on exactly what sanctions to apply. They could expel Greece, but that would be highly disruptive and possibly weaken the euro itself.
3. The EU wanted to strengthen, not weaken, the power of the euro in international currency markets. This would put pressure on other EU countries, like the UK, Denmark and Sweden, to adopt the euro. (Source:Bloomberg, Greece Cheated, May 26, 2011; BBC News, Greece Joins Eurozone, January 1, 2001; Greece to Join Euro, June 1, 2000).

As a result, Greek debt continued to rise until the crisis erupted. Now, the EU must stand behind its member or face the consequences of either Greece leaving the eurozone, or even worse, a Greek default.

http://useconomy.about.com/od/Europe/p/What-Is-The-Greece-Debt-Crisis.

CROSS POLLINATION HAS ITS RISK

The dismal science is another of those institutions we've alluded to that are hardly held in high esteem by the public today. From our interesting trips and reads around the web here's the best line in the post.

The whole field may end up doomed to failure and hopefully won't become another dismal science, but I thought it was worth a look, and was wondering if any other specs are familiar with it.

If nothing else, it might cross pollinate with some ideas for trading.

source: .dailyspeculations.com
 

Cliodynamics, from Dylan Distasio January 27, 2015 | Leave a Comment

  

 
 
I recently stumbled across the work of Peter Turchin, an evolutionary biologist, who is attempting to applying quantifiable scientific techniques to the study of history as part of a field known as cliodynamics. From the Santa Fe Institute's blurb on it:

The past does not repeat itself, but it rhymes," Mark Twain once said, a reference to the patterns of history, perceived anecdotally. Today, a new field is coalescing around the notion that historical patterns are, to some degree, measurable, and that the future can, also to some degree, be predicted. Researchers involved in the field call it "cliodynamics" after Clio, the Greek muse of history.

Scholars of human history traditionally have studied the past as a chain of idiosyncratic events, with each event a unique response to unique circumstances, says SFI External Professor David Krakauer. Historical fields such as paleontology have relied on collections of evidence—fossils, for example—to draw inferences about the past.

A few fields have made strides in approaching history as a science. In archaeology, for example, rigorous field survey methods have provided new, quantifiable information about the location, distribution, frequency, and organization of certain human activities. In population genetics, evolutionary outcomes are modeled as probabilities. Cliodynamicists would like to see the historical fields sharing methods among themselves and adopting approaches and theories from physics and other long-quantified fields.

The tools of complexity science are now beginning to make the task tractable, Krakauer says. Mathematical and computational techniques such as agent-based models, power-law relations, and more classical differential-equation models are in several fields helping scientists develop new theoretical frameworks, for example.

Although he did not perhaps agree with how reductionistic cliodynamics seems at first glance, I can't help but see echoes of Giovanni Battista Vico's New Science in this effort.
I have to give credit for the sheer audacity of this pipedream.
Turchin has published a book called Secular Cycles related to this topic and also maintains a website. I started to wade through his paper on analyzing the "Dynamics of political instability in the United States, 1780–2010" also. It's not without flaws, but is worth a look.
The whole field may end up doomed to failure and hopefully won't become another dismal science, but I thought it was worth a look, and was wondering if any other specs are familiar with it.
If nothing else, it might cross pollinate with some ideas for trading.

anonymous writes: 

This sounds VERY much like the premise behind Isaac Asimov's Foundation Series, the books that got me hooked on his work and Sci-Fi in general.

From the above wiki:
The premise of the series is that the mathematician Hari Seldon spent his life developing a branch of mathematics known as psychohistory, a concept of mathematical sociology. Using the laws of mass action, it can predict the future, but only on a large scale.  

As long as it doesn't cross pollinate into the dismal science, we're all for it.