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26 September 2015

Press review 26-09-2016 - The Petrobras jeopardy

The VW scandal with NOx emissions has taken over front pages this week. The climate community seems quite excited with it, as one of the world symbols of fossil fuel combustion falls in disgrace for a most damning cause - lying. It is hard to see at this moment the financial impact the company is to withstand, but it should be something unprecedented.

VW is likely to survive and combustion engines to last. But there are other signs - and far more worrying - pointing to a further declines in fossil fuel extraction in the short term. The present under priced petroleum market is putting a lot of pressure on Petrobras . If up to now it were mostly small companies ailing with 50 $/b, now it is the largest company of the southern hemisphere. Debt rating hawks are out on the prowl and investors scare away.

Petrobras is likely the largest debtor company in the world, with outstanding debt in the order of 200 G$. If it goes down, it will not go down alone.

Pimco, Fidelity Stung by Collapse of Petrobras's 100-Year Bond
Peter Millard, 25-09-2015

When Petroleo Brasileiro SA sold 100-year bonds in June, the move was largely seen as a sign the corruption-tainted oil producer had put the worst of its problems behind it.

For investors like Pacific Investment Management Co., Fidelity Management & Research Co. and Capital Group Inc. -- the three biggest holders of the securities -- that turned out to be a costly miscalculation. Since the $2.5 billion offering, the bonds have tumbled 15 percent. That’s four times the average loss for emerging-market company debt.

The plunge deepened last week, when the securities sank to a record-low 69.5 cents on the dollar after Petrobras, as the Brazilian company is known, had its credit rating cut to junk by Standard & Poor’s. The world’s most-indebted major oil producer was stripped of its investment grade by Moody’s Investors Service seven months earlier as a widening probe into alleged bribes paid to former executives at the state-controlled oil company caused it to delay reporting earnings.
In the US investors fear a debt default or restructuring by Petrobras can percolate to the local bond market. The US market is already under great strain due to the collapsing "shale" industry, as this review has been reporting.
Deutsche Bank Fears Petrobras Will Poison Junk-Bond Market in U.S.
Bradley Keoun, 25-09-2015

The possibility of debt restructuring at Brazilian oil producer Petrobras (PBR - Get Report) will probably drive down prices for high-yield, high-risk bonds in the U.S. in coming months, says Oleg Melentyev, Deutsche Bank's head of U.S. credit strategy.

So-called junk bonds are yielding 5.86 percentage points over U.S. Treasuries of comparable maturity. That gap probably will widen to about 6.5 percentage points, pushing down prices, Melentyev said in an interview.

Petrobras bonds have tumbled this month after Standard & Poor's slashed the government-controlled company's credit rating to below investment grade, making it the world's biggest junk-grade corporate borrower. The oil producer has so much debt outstanding in international markets -- more than $50 billion -- that it's impossible for U.S. markets to avoid some contagion, Melentyev said. The company's dollar-denominated bonds due in 2024 are trading at 67 cents on the dollar, with a spread over Treasuries of 9.92 percentage points, he said.
The so called "shale" industry in the US goes from bad to worst, engulfed in the gargantuan amounts debt it issued to foster an unsustainable business. Imagine using 80% of your monthly income to pay interest on your mortgage - that is where this industry is.
David Stockman's Contra Corner
Going Broke In The Shale Patch——Debt Service Rises From 40% to 80% Of Operating Cash Flow In Last 3 Years
William Watts, 18-09-2015

The chart below from the U.S. Energy Information Administration, based on second-quarter results from 44 companies, illustrates the growing chunk of cash flow that goes to servicing debt. From July 1, 2014, to June 30, 2015, 83% of the companies’ operating cash was devoted to debt repayments—the highest since at least 2012, the EIA found. [...] The agency noted that some companies have managed to refinance their debt, but that maneuver has become increasingly expensive since interest rates for debt issued by energy companies have been on the rise as oil prices have declined. The spread energy companies have to pay to borrow in the high-yield bond market are wider than for any other business sector. [...]

Meanwhile, companies that rely on bank credit to meet short-term cash needs typically go through a reassessment—or “redetermination”— process twice a year. This is when banks reassess the value of the borrower’s oil wells and other assets. As explained by analysts at Bank of America Merrill Lynch in a note last week:

If the value of the assets has fallen below the drawn amount of credit at the time of redetermination, the company will need to make up the shortfall, known as the borrowing-base deficit. Therefore, the longer oil stays at depressed levels, the harder it becomes for cash flow generated by the depreciated asset to sufficiently pay back the gap in funding/asset value. Borrowing from Peter to pay Paul works when oil is at $100/bbl. and low-rated energy companies can continue to explore for new assets. It doesn’t work if oil prices remain depressed and funding begins to dry up like the wells themselves.
Bankruptcies of small petroleum companies succeed in the US. The flat futures curve is putting an end to hedging strategies and rocking the foundations of the house of cards.
Oil Companies Running Out Of Options
Nick Cunningham, 20-09-2015

[...] A company can hedge their oil production at a certain price, and many did so last year, which offered a degree of protection through much of 2015. But as those hedges expire, new hedging positions can only be secured at today’s prices. So that isn’t even really an option to deal with the precarious financial position companies find themselves in today.

For the smaller, more distressed shale companies, options are dwindling. Another round of credit redeterminations is underway. With the value of their assets a fraction of what they once were, lenders will slash the borrowing base for indebted shale companies. That could lead to a liquidity crisis for some, as they can no longer stay above water. Samson Resources Corp., an Oklahoma-based driller, filed for chapter 11 bankruptcy on September 16, the latest victim of the oil bust.

According to the Wall Street Journal, the default rate for energy companies jumped to 4.8 percent in the last few months, the highest level since 1999. For the sub-segment of exploration companies, the default rate is 8.5 percent. This compares to an average U.S. corporate default rate of just 2.9 percent. But with some companies set to lose their access to credit in the coming weeks, the default rate could climb.
In Europe the story repeats, even though for now restricted to service companies.
Oil Companies in Europe Seek Creative Funding as Lenders Retreat
Luca Casiraghi and Jonas Cho Walsgard, 24-09-2015

Oil services companies in Europe are finding alternative ways to raise cash and repay debt after falling crude prices made it difficult for them to get funding from traditional sources.

Dolphin Group AS has sought to persuade private-equity and hedge funds to finance projects exploring and mapping seabeds in return for interest tied to sales, according to people familiar with the matter. At least two Norwegian drillers are planning to sell and lease back ships to raise cash and fund operations as they struggle to access loan and bond markets, said the people, who asked not to be identified because the matters are private.

Energy companies are being shut out of bond markets and lenders are reducing credit lines after prices dropped about 60 percent from last year’s peak. Services companies in Europe are starting to run out of cash as producers from Royal Dutch Shell Plc to Petroleo Brasileiro SA cut their own investments and delay projects.
And from Kazakhstan comes a somewhat unexpected currency de-peg from the US dollar, a last resort measure to deal with declining fossil fuel revenues. The worldwide reach of the financial troubles inflicted by 50 $ petroleum attests well to the inadequacy of this price.
Kazakhstan Joins The List Of Suffering Oil Exporters
George Voloshin, 22-09-2015

On August 20, the National Bank of Kazakhstan (NBK) came forward with a surprise announcement. The central bank’s chairman, Kairat Kelimbetov, made official the immediate shift to a floating exchange rate of the tenge, the national currency.

Since its introduction into circulation in late 1993, the tenge has been largely pegged to the US dollar, being allowed to fluctuate only within a strictly defined trading band maintained in place through NBK foreign currency interventions. In July 2015, the NBK had said it was expanding the previous band upwards by another 13 points—that is, from 170 to 198 tenge per US dollar.

The last time the band was adjusted was in September 2014, half a year after the 20 percent overnight devaluation of the tenge. While it was initially expected that the tenge-dollar exchange rate would last mostly unchanged into 2016, the latest move has taken ordinary Kazakhstanis and professional market players alike by surprise (Tengrinews.kz, Kursiv.kz, August 20; Newskaz.ru, July 15; Inform.kz, February 11, 2014).
Even among the alternative media the developing story with coal is yet to get full exposure. But now a major US bank comes out crying "Peak Coal". Personally, I find this rather likely, the growth in coal extraction produced by China throughout the past decade is likely unrepeatable.
Goldman Sachs: “Peak Coal” Is Here
Charles Kennedy, 24-09-2015

“Peak coal” is here.

Goldman Sachs released a September 22 research note that predicted that coal will decline and never come back. “Peak coal is coming sooner than expected,” the investment bank concluded. “The industry does not require new investment given the ability of existing assets to satisfy flat demand, so prices will remain under pressure as the deflationary cycle continues.”

The conclusion is a stunning one, especially considering the years of predictions that coal would climb inexorably as developing countries expanded their grids and their economies grew quickly. Last December, for example, the IEA predicted that coal consumption would grow steadily in the years ahead, expanding by about 2.1 percent per year for the rest of the decade. China would account for three-fifths of the growth in demand. “We have heard many pledges and policies aimed at mitigating climate change, but over the next five years they will mostly fail to arrest the growth in coal demand,” the IEA’s executive director said in December 2014.

But a lot has happened since then. Most important is the growing realization that China’s coal demand may not continue, a remarkable development, and perhaps a fatal one for many coal producers. The slowing demand for coal, along with the general commodity bust around the world, spells bad news for the coal industry. Goldman Sachs takes a dim view of coal prices for the foreseeable future. “We also reset our long-term forecast to $50/[tonne], down 23 percent from $65/[tonne], to reflect what we see as the remote likelihood that the market will tighten ever again,” the bank wrote.
The note below offers another precious piece of the puzzle in the coal story. The expansion of high speed rail in China is flattening or even peaking as most important connections are now in service. Less infrastructure requires less steel and therefore less coal.
European Tribune
Peak CRH
DoDo, 12-09-2015

[...] In the 18 months since then, the network in operation almost doubled again:

At least a dozen more lines are due by the end of the year, while half a dozen more are due to begin construction. As for new projects, compared to 18 months ago, the most significant additions are the ones forming a second Beijing–Hong Kong corridor (more on the need for this later).

This year represents a peak of construction, at least in line length terms (with focus shifting to the superstructure-heavy lines across the mountains around Sichuan, cost per kilometre grows), and network expansion will slow down. Almost every line on the map will be finished by 2022 (year of the Beijing Winter Olympics). After that, I only expect a couple of additions and higher-speed upgrades each year.
On renewable energy I would just like to highlight the newly found love of the US military for solar power. The scale of the investments reported here point to something far larger than mere propaganda.
Washington Post
Pentagon bets heavily on sun, wind with major energy projects
Joby Warrick, 17-09-2015

[...] Kings Bay’s solar panels are only the latest in a series of newly announced solar projects, part of a military-wide renewable-energy binge that has been gaining intensity in recent months. From Florida to California, defense officials are signing contracts with local utilities for huge solar and wind ventures inside military bases or on land nearby.

The Pentagon said it is seeking to generate its own power in part to enhance energy security at a time when traditional electric grids are under the threat of cyberattacks. But because of their sheer size, the projects are unavoidably affecting energy markets elsewhere in the country, driving down costs for renewables and dampening the demand for new power plants that burn natural gas or coal.

“We’re in the middle of a perfect storm — a perfect, positive sunlight storm,” said Dennis McGinn, the Navy’s assistant secretary for energy, installations and environment, who helped break ground for the Kings Bay project on an overcast morning last week. “We look forward to doing a lot more of these.”
This reviews closes on a philosophical note with an expressive graph dug out by Ugo Bardi. Apparently, "Peak Oil" did not survive in popular culture as other memes related to the broader question of Limits to Growth have (climate change in particular). But is it such a bad thing? Considering what climate change has become, probably not. Apocalyptic types that surfed the wave of popularity between 2006 and 2008 are not mostly absent, leaving the space to those genuinely worried with the transition to a sustainable society and economy.
Resource Crisis
What happened to peak oil? The cycle of a meme and of its antimemes
Ugo Bardi, 21-09-2015

Likely, you haven't heard much, recently, about peak oil. If you did, it was only to hear that it was "wrong". Indeed, as you see in the figure above, peak oil had a peak of interest around 2006, a second one around 2008, then it gradually declined.

Finally a musical suggestion to all apocalyptic types out there, the sound from a most exceptional DVD I got on the mail a few weeks back.

Have a great weekend.

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