Dear PGM Capital Blog readers,
On Friday, April 22, in its weekly release, Houston-based oilfield services company Baker Hughe (NYSE: BHI) reported another record fall in the U.S. rig count (number of rigs searching for oil and gas in the country) from the previous week.
As can be seen from below chart, the USA oil rig count fell by 8 to 343, to a new 6-year low.
As can be seen from above chart, U.S. energy firms cut oil rigs for a fifth week in a row to the lowest level since November 2009, oil services company Baker Hughes Inc said Friday, as energy firms continue to slash spending despite a bigger than 60 percent spike in futures since hitting a near 13-year low in February.
The number of 343 U.S.A. oil rigs currently operating compares with the 703 rigs operating in the same week a year ago.
PGM CAPITAL ANALYSIS AND COMMENTS:
In 2015, drillers cut on average 18 oil rigs per week for a total of 963 for the year, the biggest annual decline since at least 1988 amid the biggest rout in crude prices in a generation. Before this week, drillers cut on average 12 oil rigs per week for a total of 185 so far this year.
Energy firms have sharply reduced oil and gas drilling since the collapse in crude markets began in mid-2014.
Brent crude futures fell from over US$107 a barrel in June 2014 to a near 13-year low around US$ 28.50 in February as can be seen from below 5-year chart.
Peak Production in the USA:
According with a brief from the USA Energy Information Agency (EIA), of July 7, 2015, it acknowledged that U.S. oil production peaked in April, hitting 9.7 million barrels per day (mb/d), the highest level since 1971 as can be seen from below chart.
Why Peaking of the USA Oil production is so important:
The slowing US production due to the higher break-even and production costs will reduce supplies in the global oil market. As a result, we could see the supply and demand gap to narrow down in 2016. US production averaged 9.3 MMbpd in 2015 and is expected to slow down to 8.8 MMbpd in 2016.
As can be seen from below chart, the crude oil production in the USA, continued to decrease in 2016, and was a 8,953 million barrels per day in the week ending on Friday, April 15, 2016.
Decreasing U.S.A. oil production combined with a rig count decrease is like music in the ears of Crude Oil Bulls, because it means that when shortage hits the market it will be difficult to bring those rigs back in operation in order to fill the demand supply gap.
With the cooling and driving season 2016, to start in approx. one month, we believe that most probably, we have seen the lowest for the oil prices by now.
Our research team has a report of some great Oil producers, -services and drillers company, which benefit the most from the coming oil price recovery.
Like Warren Buffett said:
"BE GREEDY, WHEN OTHERS ARE FEAR FULL and FEAR FULL WHEN OTHERS ARE GREEDY"
The following quote from John Maynard Keynes, might also be applicable for crude oil its producers:
"MARKETS CAN REMAIN LONGER IRRATIONAL, THAN YOU CAN REMAIN SOLVENT"
Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that commodities prices and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.
Dear PGM Capital Blog readers,
On Wednesday, April 13th, Peabody Energy (NYSE: BTU), the largest U.S. coal miner, filed for bankruptcy, marking the end of an era for big publicly traded companies that have fueled American industry for more than a century.
Peabody was the last major U.S. coal miner still standing. Arch Coal, Alpha Natural Resources, Patriot Coal, and Walter Energy all filed bankruptcy within the past year.
Those companies have lost a combined US$30 billion in stock-market value since 2010, and the coal sector has shed 31,000 jobs since 2009, according to the Mine Safety and Health Administration.
Coal; meaning "mineral of fossilized carbon" is composed primarily of carbon along with variable quantities of other elements, chiefly hydrogen, sulfur, oxygen, and nitrogen and is the largest and most widespread fossil fuel resource providing 23 percent of the world’s energy.
Metallurgical versus Thermal Coal:
While metallurgical coal and thermal coal have similar geologic origins, their commercial markets and industrial uses are vastly different.
Thermal coal or steaming coal is burned for steam to run turbines to generate electricity either to public electricity grids or directly by industry consuming electrical power (such as chemical industries, paper manufacturers, cement industry and brickworks). During power generation the coal is ground to a powder and fired into a boiler to produce steam to drive turbines to produce electricity.
Metallurgical coal or coking coal is used in the process of creating coke necessary for iron and steel-making. Coke is a porous, hard black rock of concentrated carbon that is created by heating bituminous coal without air to extremely high temperatures.
Plunging Coal Price:
As can be seen from below chart, the price of coal has plunged 75% since 2011.
The U.S. simply has too much coal, for which its coal production has hit a record high in 2008 as can be seen from below chart.
That year, America entered its worst financial crisis since the Great Depression.
Coal demand fell and never recovered.
On top of that, the U.S. government is trying to regulate the coal industry to death. Strict laws have made it almost impossible for coal to compete with natural gas, a cleaner fuel source. Natural gas is set to overtake coal as America’s main source of power this year, according to the Energy Information Association.
PGM CAPITAL ANALYSIS AND COMMENTS:
America may never again see a coal company as big as Peabody. Founded in 1883 by Francis Peabody with US$100, a wagon and two mules, according to the company’s corporate history, Peabody grew into a juggernaut, producing coal for customers in 25 countries and employing 7,600 people.
As can be seen from below chart, Peabody's shares have crashed from their record high of more than US$ 1,300 in 2008 to US$2.07 on Wednesday, April 13, 2016.
Its market capitalization was U$74 million Wednesday, down from over U$20 billion in 2008, according to Thomson Reuters data.
Peabody has lost money nine quarters in a row and although many of its mines are still profitable, but not profitable enough to take care of the debt it has run up.
The company over-expanded when times were good. In 2011, Peabody bought Macarthur Coal, an Australian coal miner, for US$4 billion.
Peabody was the largest U.S. corporate bankruptcy this year and it certainly won’t be the last.
It is also worth mentioning that so far, 2016 has been the year of nervous investors, volatile markets and fragile sentiment. Now it turns out that it’s also been the year of defaults.
According to a report published by rating agency Standard & Poor’s on Friday April 8th, 40 companies have defaulted globally so far this year, for which 14 of the 40 defaults have come from the oil and gas sector, with eight from the metals, mining, and steel sector.
In other words, those sectors account for more than half of all global defaults. than during the start to any year since 2009.
At this rate, 138 companies could default this year. That would be 30% more than last year and nearly triple the number of defaults in 2014.
The above also proves, that countries cannot build sustainable economic growth by counting on revenues obtained from commodities, but has to use commodities bonanza cycles to diversify their economy and to invest education.
Until next time.