Funny I read through the transcripts of EOG, CLR, WLL, OAS, CHK, and a few more and I didn't get that "over 40" feeling ... unless of course they mean $50 and $60 (which are over $40). EOG CEO was adamant about $60 and not just if it touches $60.
Lots of stuff written in articles recently. I'll paraphrase an article I read which essentially was KISS as in that golden chestnut of Keep It Simple Stupid. Gist of the article
1. Why do we have low oil prices ==> over production
2. What do we need for higher oil prices ==> production cuts
Obvious but not easy .... who's going to cut?
3. Current "problem" ==> lots is of debt-financed oil production out there (esp in shale)
4. Debt financed production cannot be held back as you need the cash to service the debt.
5. Equity financed oil production has the capability to shut off the spigots.
What is likely to occur? Low oil prices create debt defaults. Time is the enemy as debt needs to be repaid (and covenants maintained)
6. Debt gets converted to equity, wiping out existing equity holders and bond holders becoming the new equity holders in exchange for writing off their debt claims.
7. Time is the friend of the new equity owner. They become the swing producers pulling back production and beginning the long awaited reduction in supply.
Lots of equity raises going on in US at present. DVN and MRO in the past week.
The other part of the puzzle is that particularly shale producers have given first liens to most of their assets to the banks and then come the second lien and unsecured noteholders. The banks have the PDP but I guess will happily "sell it" the next in line who might just get all that 1P PUD (not to mention the possible further 2P upside in a price recovery scenario) and little to no cost. Enormous transfer of wealth could occur. PE being the beneficiary (e.g. Oaktree).
In a major/minor way this is also happening with SSN as we speak. Trying to find a way out of the debt trap by buying cheap Reserves that require little capital to bring online to try and generate more cash to be able to service the larger debt and try and make time their friend with a potential price recovery.
What's happened to the acquisition? No news has rarely been good news has it?
GFTA
SSN Price at posting:
0.6¢ Sentiment: None Disclosure: Not Held
