Hundreds of Oil Stocks Could Go to Zero…Will You Still Be Owning One of Them?

By Justin Spittler

The largest shale oil bankruptcy in years just happened. If you own oil stocks, you'll want to read today's essay very closely. Because there's a good chance hundreds more oil companies will go bankrupt soon. As you probably know, the oil market is a disaster. The price of oil has plunged 75% since 2014. In February, oil hit its lowest level since 2003.

Oil crashed for a simple reason: There’s too much of it. New methods like “fracking” have led to a huge spike in global oil production. Today, oil companies pump about 1 million more barrels a day than the world uses.

Last year, America’s biggest oil companies lost $67 billion..…

To offset low prices, oil companies have slashed spending by 60% over the past two years. They’ve laid off more than 120,000 workers. They’ve sold assets and abandoned projects. Some have even cut their prized dividends.

For many oil companies, deep spending cuts weren’t enough…

The number of bankruptcies in the oil industry has skyrocketed….

Bloomberg Business reported earlier this month:

Since the start of 2015, 130 North American oil and gas producers and service companies have filed for bankruptcy owing almost $44 billion, according to law firm Haynes & Boone.

And that doesn’t even include two “big name” bankruptcies in the last couple weeks. Two weeks ago, Linn Energy filed for bankruptcy, making it the largest shale oil bankruptcy since 2014. It owes lenders $8.3 billion.

A week later, SandRidge Energy declared bankruptcy. It became the second biggest shale oil company to go bankrupt. The company owes its lenders about $4.1 billion. Ultra Petroleum, Penn Virginia, Breitburn Energy, and Halcón Resources also filed for bankruptcy in the past couple weeks.

Hundreds more oil companies could go bankrupt this year..…

The Wall Street Journal reported last week:

This year, 175 oil and gas producers around the world are in danger of declaring bankruptcy, and the situation is nearly as dire for another 160 companies, many in the U.S., according to a report from Deloitte’s energy consultants.

Defaults by oil and gas companies are already skyrocketing. The Wall Street Journal continues:

Oil and gas companies this year have defaulted on $26 billion, according to Fitch Ratings data. That figure already surpasses the total for 2015, $17.5 billion.

Fitch, one of the nation’s largest credit agencies, expects 11% of U.S. energy bonds to default this year. That would be the highest default rate for the energy sector since 1999.

Many investors thought the oil crisis was over..…

That’s because the price of oil has surged 80% since February. Dispatch readers know better. For months, we’ve been warning there would be more bankruptcies and defaults. We said many oil companies need $50 oil to make money. The price of oil hasn’t topped $50 a barrel since last July. Even after its big rally, oil still trades for about half of what it did two years ago.

Oil prices will stay low as long as there’s too much oil..…

Although the world still has too much oil, the surplus has shrunk in the past few months. In February, the global economy was oversupplied by about 1.7 million barrels a day. Thanks to U.S. production cuts, the surplus is now just 1.0 million barrels a day. The number of rigs actively looking for oil in the U.S. has dropped by 80% since October. This month, the U.S. oil rig count hit its lowest level in 70 years.

However, many other countries aren’t cutting production at all. Saudi Arabia and Russia, two of the world’s biggest oil-producing countries, are both pumping near-record amounts of oil. Frankly, these countries don’t have much choice. Oil sales account for 77% of Saudi Arabia’s economy. And oil accounts for 50% of Russia’s exports. If these countries stop pumping oil, their economies could collapse.

Low prices have made it impossible for some oil companies to pay their debts..…

U.S. oil companies borrowed nearly $200 billion between 2010 and 2014. If you’ve been reading the Dispatch, you know the Federal Reserve is mostly to blame for this. It’s held its key interest rate near zero since 2008. This made it incredibly cheap to borrow money. When oil prices were high, the debt wasn’t an issue. Companies made enough money to pay the bills. That’s no longer the case. Today, many oil companies are burning through cash to pay their debts.

To make matters worse, many weak oil companies have been cut off from the credit market..…

Before prices collapsed, oil companies could refinance their debt if they ran into trouble. This could buy them time to sort out their problems. These days, many banks will no longer lend oil companies money. Bloomberg Business reported last month:

Almost two years into the worst oil bust in a generation, lenders including JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. are slashing credit lines for struggling energy companies…
Since the start of 2016 lenders have yanked $5.6 billion of credit from 36 oil and gas producers, a reduction of 12 percent, making this the most severe retreat since crude began tumbling in mid-2014.

Oil stocks are still very risky..…

But that doesn’t mean you should avoid them entirely. As we’ve said before, oil stocks have likely entered a new phase. You see, when oil prices first tanked, investors sold oil stocks indiscriminately. Both strong and weak stocks plunged. In other words, investors “threw the baby out with the bath water.” You often see this behavior during a crisis.

Exxon Mobil (XOM), the world’s biggest oil company, fell 34% since 2014. Chevron (CVX), the world’s second biggest, dropped 48%. Now that oil has stabilized, the stronger companies are separating themselves from the weaker companies. This year, Exxon is up 15%. Chevron is up 11%. The crash in oil prices has given us a chance to buy world class oil companies at deep bargains.

If you want to own oil stocks, stick with the best companies..…

If you're going to invest in the sector, there are four key things to look for: 

Make sure you buy companies that can 1) make money at low oil prices. You should also look for companies with 2) healthy margins 3) plenty of cash and 4) little debt.

In March, Crisis Investing editor Nick Giambruno recommended a company that hits all of these checkmarks. It has a rock-solid balance sheet…some of the industry’s best profit margins…and “trophy assets” in America’s richest oil regions. It can even make money with oil as cheap as $35.

The stock is up 9% in two months. But Nick thinks it could just be getting started. After all, it’s still 30% below its 2014 high. You can get in on Nick’s oil pick by signing up for Crisis Investing. If interested, we encourage you to watch this short presentation. It explains how you can access Nick’s top investing ideas for $1,000 off our regular price.

This incredible deal ends soon. Click here to take advantage while you can.

You’ll also learn about an even bigger “crisis investing” opportunity on Nick’s radar. This coming crisis could radically change the financial future of every American. By watching this video, you’ll learn how to profit from it. Click here to watch.

Chart of the Day

Oil and gas companies are losing billions of dollars, we’re in earnings season right now. This is when companies tell investors if their earnings grew or shrunk last quarter. A good earnings season can send stocks higher. A bad one can drag stocks down.

As of Friday, 95% of the companies in the S&P 500 had shared first quarter results. Based on these results, the S&P 500 is on track to post a 6.8% decline in earnings. That would be the biggest drop in quarterly earnings since the 2009 financial crisis.

Oil and gas companies are a big reason U.S. stocks are having such a horrible earnings season.

As you can see below, first-quarter earnings for energy companies in the S&P 500 have plunged 107% since last year. Keep in mind, this group includes Exxon, Chevron, and other blue chip energy stocks.

Again, if you’re looking to buy oil stocks, make sure you “look under the company’s hood” before you buy it. Steer clear of companies that are losing money and have a lot of debt.

The article Hundreds of Oil Stocks Could Go to Zero…Will You Still Be Owning One of Them? was originally published at caseyresearch.com.

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Obama’s Cuban Ambitions as Seen by Cubans Themselves

By Jeff Thomas

For half a century, Americans have been largely unable to visit Cuba and have had to rely on the US government and media for an understanding of the political, social and economic conditions there. What has been described as the “American Berlin Wall” has been successful in providing Americans with quite an inaccurate view.

Throughout this period, those Cubans who exited the island in 1959 (and their descendants) have maintained a propaganda programme that, rightly or wrongly, reflected their desire to return to Cuba and to once again rule it. Additionally, they’ve contributed regularly to both the primary US political parties in order to assure that the blockade would be maintained and that Americans would be kept out until such time as the island could be re-taken.

This is not to say that all is rosy in Cuba. For the past 25 years or more, I’ve periodically spent time there, observing its developments, beginning with its attempt to recover from the loss of its principle trading partner, the Soviet Union, in the early 1990s. It’s been a rocky road, as Cuba has sought to become an international tourist destination whilst attempting to maintain a closed, communist society. Results have been mixed, to say the least.

Still, the US government embargo remains in place and Americans have little real understanding of Cuba, or how the Cuban people view the US. All Americans can rely on is the “official view”—reports fed to the US media by their government, which, in turn, are influenced by Miami-based Cubans.

Recently, Barrack Obama visited Cuba, gave speeches and even walked the streets of Havana, “meeting the people”. Americans have now had time to digest the official US view of that visit, yet, understandably, have no idea whatsoever as to the Cuban view.

If I could sum up the Cuban people’s perception, based upon discussions with Cubans in Havana after the visit, I’d say that the best word to describe their reaction would be “wary”. Cubans are only too aware that Americans have, for half a century, received a highly one-sided view of anything Cuban and, for the most part, tend to agree with their leaders that any dealings with the US government should be cautious.

As in any country, there are varied viewpoints and, to be sure, the Cubans who oppose the existing regime to the point that they’ve stolen a boat and braved the seas to escape Cuba, would have a far different view from those who are glad to remain in Cuba.

A particular concern that they tend to voice is that Americans leaders are arrogant, seeming to believe that they have all the answers for every country and seem to perceive themselves as magnanimous, in offering to unilaterally change other countries “for the better”. In the present instance, they resent Mister Obama stating in a Havana speech that his country is considering diminishing its economic punishment of Cuba, but that, first, he would need to be assured that the Cuban political structure be altered to reflect the American model more closely. As stated by President Raul Castro in the Havana Reporter, “he should not expect the Cuban people to give up their destiny…for which they have made huge sacrifices.”

A continuing sore in the side of Cuba is the occupation of Guantanamo Bay. Cubans, when confronted with their government’s admitted incarceration of some citizens for political reasons, may respond by reminding Americans that Cubans regard Guantanamo as “the horrible torture center”, housing the US government’s political prisoners. They are bolstered in their view by American presidential candidates who vehemently support the continued violation of the Geneva Convention at Guantanamo. (Most Cubans have television and there’s no restriction on American broadcasts. Cubans therefore know far more about the US than Americans know about Cuba.)

Again, quoting the Havana Reporter, “The Cuban authorities request for the illegally occupied military territory to be returned, although spokespeople for Obama’s administration say that the subject is not on the agenda for discussion.”

Again, the American presidential message, as seen from the Cuban perspective, appears to be, “We’ll decide what we will or won’t do for you, and we’ll decide what you’ll do for us.”

And the discussion is not an isolated one. For many years, the UN has regularly held votes on the legality and morality of the blockade and, in each case, all members except the US and Israel vote for its elimination. Just prior to Mister Obama’s Cuban visit, Federica Mogherini, Vice President of the European Commission, reiterated the UN request for the “rejection of the economic, commercial and financial blockade imposed on Cuba by the US”, which she described as both outdated and illegal.

In his book, “Obama and the Empire”, Fidel Castro comments, “You state…that your country…would not tolerate any intervention in the hemisphere, reiterating that this right must be respected, while demanding the right to intervene anywhere in the world with the aid of hundreds of military bases and naval, air and space forces distributed across the planet. I ask: Is that the way in which the United States expresses its respect for freedom, democracy and human rights?”

To be sure, Mister Castro has his own agenda, as do all political leaders, yet his point is well taken. In spite of US pressure, he has outlasted ten US presidents since 1959. Cuba boasts universal literacy and the lowest rate of violent crime in the hemisphere, whereas, in the US, the percentage of those who are functionally illiterate varies between 15% and 35% (depending on the definition of illiteracy). The US also has both the highest number of prison inmates and the highest percentage of inmates per capita. Whether the US or Cuba has the greater claim to the moral high ground is therefore very much an individual assessment.

But, what’s the view on the street in Havana? What’s the reaction of the average Cuban to the Obama visit?

Well, for a start, people in the street, who are accustomed to seeing their leaders with a minimal entourage and few armed guards, were surprised to see a virtual army of suited protectors, making Mister Obama’s stroll through Havana anything but casual. Of course, this has become the norm for any American leader, but what message does this convey, when the visitor displays such a show of force?

In spite of this; however, a young waiter at a bistro in the popular Empedrado Callejón del Chorro commented that, whilst he doubted the sincerity of the visit, anything that brings the two countries closer together can only be an improvement. And, to be sure, younger Cubans are more likely than the previous generations to acknowledge that the inevitable passage out of the Castro’s leadership may be overdue, but that a softening of Cuban distrust of the “American imperialists” can only take place if the American government learns to regard Cuba as a sovereign nation, not as a whipping boy.

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And, of course, this is a sentiment that we see worldwide. The more the US positions itself as the world’s policeman, the more it alienates the peoples of other countries. At a time when the US has begun its economic decline, it would do well to soften its approach, yet it is clearly doing the exact opposite. This does not bode well for the US. No one likes a bully. Bullies are typically only tolerated until they weaken. When this occurs, people turn on the bully, whether he is a person, or indeed, a government. What we are observing is the decline of a large nation and, soon, the rebirth of a small one. As events unfold, the comparisons between the two will be fascinating to observe.

Editor’s Note: Nick Giambruno, editor of Crisis Investing, thinks Cuba is a huge investing opportunity...
Nick is an expert “crisis investor.” He invests in markets that are bombed out, hated, and depressed. This strategy allows Nick to buy world-class companies at bargain prices… and to buy a dollar’s worth of assets for pennies. This sets him up to make big gains, like the 210% gain he made on the Cypriot hospitality business Lordos Hotels in the wake of that country’s banking crisis a few years back.

According to Nick, Cuba has been in a slow motion crisis for decades. The U.S.' ban on trade with Cuba killed any chance of economic growth for the last 60 years. But Nick says the embargo will soon become “a page in the history books.” When this happens, money should pour into Cuba. Nick has a “back door” way to profit from Cuba’s huge untapped potential...

Here’s Nick:

Cuba has over 2,000 miles of pristine coastline and the potential to be a top tourist destination. If Cuba ever opens up, there’s potential to make a fortune.

Nick’s investment is a legal way to profit from the “opening up” of Cuba while the embargo is still in place. It trades on the NASDAQ stock exchange. This investment is up over 25% in the last three months. But Nick expects it to go much higher. We can’t disclose the investment here, because it wouldn’t be fair to paying subscribers. But you can get instant access to Nick’s “back door” Cuba investment by signing up for a trial subscription to Crisis Investing. Click here to learn more.

The article Obama’s Cuban Ambitions as Seen by Cubans Themselves was originally published at internationalman.com.

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Do You Own the Next Enron?

By Justin Spittler

Companies are hiding more from you than you realize. Back in the late 90s, energy company Enron was a Wall Street darling. From 1998 to 2000, its stock surged 342%. It became America’s seventh biggest corporation…but the company was a farce. Management used shady accounting to inflate its sales and profits. When the fraud came to light, Enron’s stock plummeted. In 2001, it filed for bankruptcy.

In April, former Enron CEO Andy Fastow issued a serious warning…..
Fastow was one of the main actors in the Enron scandal. He spent six years in jail for his crimes. According to Fastow, many corporate executives are now doing what he did at Enron. He even accused tech giant Apple (AAPL) of misleading investors. Business Insider reported:

His point – an entirely correct one – is that the world’s largest company today is engaged in tax dodging behavior that, while perhaps technically legal, is clearly designed to increase profits and inflate the stock by misleading and confusing regulators (and perhaps investors) via a massively complex web of entities – exactly what he did at Enron! And this is 100% routine, common behavior among most large US companies.

Some people might find Fastow’s claim ridiculous. He is a convicted felon, after all. But Casey readers know better than to trust Corporate America.

Regulators have accused Valeant (VRX) and SunEdison (SUNE) of similar crimes..…
You’ve probably heard about the drug maker Valeant and the renewable energy company SunEdison. Their downfalls have been two of the year’s biggest investing stories. Like Enron, both companies were hot investments. From January 2013 to July 2015, Valeant gained 332%. SunEdison’s stock surged 892% over the same period.

Like Enron, both companies used “creative accounting.” According to The Wall Street Journal, the Securities and Exchange Commission (SEC) is investigating whether “SunEdison misrepresented its cash position to investors as its stock collapsed.” Valeant is under investigation for its pricing and accounting practices. And like Enron, both stocks have crashed. SunEdison plunged 99% before it announced plans to file bankruptcy. Valeant’s stock has plummeted 89%.

The mainstream media paints Valeant and SunEdison as a couple “bad apples”…
According to most reports, it’s rare for public companies to pull tricks on investors. But if you’ve been reading the Dispatch, you know that’s not true. For the past few months, we’ve been telling you about the huge surge in share buybacks. A share buyback is when a company buys its own stock from shareholders.

Buybacks reduce the number of shares that trade on the market. This boosts a company’s earnings per share, which can lead to a higher stock price. But buybacks do not actually improve the business. They just make it look better “on paper.” According to research firm FactSet, 76% of the companies in the S&P 500 bought back their own shares between November and January. Most companies used debt to pay for these buybacks. The Wall Street Journal reported last week:

The biggest 1,500 nonfinancial companies in the U.S. increased their net debt by $409 billion in the year to the end of March, according to Société Générale, using almost all—$388 billion—to buy their own shares, net of newly issued stock. Companies have become far and away the biggest customer for their own shares.

Companies are also using “financial engineering” to make their businesses appear healthier…
Financial engineering is when companies use accounting tricks to goose their sales, profits, or cash on the balance sheet. It’s how Enron, Valeant, and SunEdison hid problems from investors. Many other companies are doing similar things.

As you may know, U.S. corporations are required to report “GAAP” earnings per share. GAAP based earnings comply with accepted accounting guidelines. A growing number of companies are also reporting “adjusted” earnings that do not comply with GAAP. Many companies use adjusted earnings to strip out “temporary” factors like the strong dollar or a warm winter. Management decides what to leave out and include when measuring adjusted earnings.

Two-thirds of the companies in the Dow Jones Industrial Average report adjusted earnings…
In 2014, adjusted earnings were 12% better than GAAP earnings. Last year, they were 31% better. Companies say adjusted earnings give a more complete picture of their business. But it’s becoming obvious that companies are using non-GAAP earnings to hide weaknesses.

As Dispatch readers know, the U.S. is in its weakest “recovery” since World War II. Europe, Japan, and China are all growing at their slowest pace in decades too. With the economy so weak, many companies have had to “get creative” to grow earnings.

Sales for companies in the S&P 500 have fallen four straight quarters..…
Earnings are on track to decline a fourth straight quarter. That hasn’t happened since the 2008-2009 financial crisis. These results would be even uglier if companies didn’t report adjusted earnings.

You see, it’s much easier for companies to mask weak sales or profits when the economy is growing. When the economy slows, those problems become too big to hide. Right now, the global economy is clearly slowing. So expect to hear about more “Enrons” in the coming months.

The stock market is a dangerous place to put your money right now..…
If you're going to invest in stocks, keep three important things in mind. You should avoid investing in businesses you don’t understand. Many hedge funds wish they had followed this advice with Valeant and SunEdison. Despite these companies’ complex and unclear business models, some of the largest hedge funds in the world invested in them. This earned Valeant and SunEdison the nickname “hedge fund hotels.” We also encourage you to avoid companies with a lot of debt. These firms will struggle to pay the bills as the economy worsens.

Finally, we recommend you steer clear of companies that need buybacks to increase earnings. Buybacks can give stocks a temporary boost, but they’re no way to grow a business. In short, money spent on buybacks is money not spent on new machinery, equipment, or anything else that can help a company grow. It’s especially a poor use of cash when stocks are expensive…like they are today.

We encourage you to set aside cash and own physical gold..…
A cash reserve will help you avoid big losses during the next big selloff. It will also put you in a position to buy world-class businesses for cheap after the “rotten apples” are exposed. Physical gold is another proven way to defend your wealth. Gold has served as real money for centuries because it has a rare set of qualities: It’s durable, transportable, easily divisible, has intrinsic value, and is consistent across the world.

It’s also protected wealth through the worst financial crises in history. Investors buy it when they’re nervous about stocks or the economy. This year, gold is up 22%. It’s at its highest level since January 2015. For other proven strategies to protect your money from a stock market crash, watch this short video. In it, you’ll learn how to fully “crisis proof” your wealth. Click here to view this free presentation.

Chart of the Day

The U.S. stock market is wobbling on one leg. Dispatch readers know buybacks have been a major driver of U.S. stocks. Since 2009, S&P 500 companies have shelled out more than $2 trillion on buybacks. As noted, buybacks can make earnings look better “on paper.” They can also prop up share prices. With the economy slowing and earnings in decline, buybacks have been one of the things keeping stocks afloat…but even that’s starting to give way.

Today’s chart compares the performance of PowerShares Buyback Achievers Fund (PKW) this year versus the S&P 500. PKW tracks companies that bought back more than 5% of their shares over the past year. Holdings include McDonald's (MCD), Lowes (LOWE), and Macy’s (M).

From March 2009 to May 2015, PKW gained 314%. The S&P 500 rose 215% over the same period. Since then, PKW has fallen 10%. The S&P 500 is down 3%. Investors appear to be losing confidence in companies that buy a lot of their own stock. That’s a big problem for the stock market, which is showing major signs of weakness.

The article Do You Own the Next Enron? was originally published at caseyresearch.com.

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