Crude Oil, Divorce, and Bear Markets

By Tony Sagami

Everybody loves a parade. I sure did when I was a child, but I’m paying attention to a very different type of parade today. The parade that I’m talking about is the long, long parade of businesses in the oil industry that are cutting jobs, laying off staff, and digging deep into economic survival mode. The list of companies chopping staff is long, but two more major players in the oil industry joined the parade last week.

Pink Slip #1: Houston-based Dresser-Rand isn’t a household name, but it is a very important part of the energy food chain. Dresser-Rand makes diesel engines and gas turbines that are used to drill for oil.
Dresser-Rand announced that it's laying off 8% of its 8,100 global workers. Many Wall Street experts were quick to point the blame at German industrial giant Siemens, which is in the process of buying Dresser-Rand for $7.6 billion.

Fat chance! Dresser-Rand was crystal clear that the cutbacks are in response to oil market conditions and not because of the merger with Siemens. The reason Dresser-Rand cited for the workforce reduction was not only lower oil prices but also the strength of the US dollar.

If you’re a regular reader of this column, you know that I believe the strengthening US dollar is the most important economic (and profit-killing) trend of 2015.

Pink Slip #2: Oil exploration company Apache Corporation reported its Q4 results last week, and they were awful. Apache lost a whopping $4.8 billion in the last 90 days of 2014.

No matter how you cut it, losing $4.8 billion in just three months is a monumental feat.

Of course, the “dramatic and almost unprecedented” drop in oil prices was responsible for the gigantic loss, but what really matters is the outlook going forward.

CEO John Christmann, to his credit, is taking tough steps to stem the financial bleeding, and that means:

• Shutting down 70% of the company's drilling rigs.

• Slashing it's 2015 capital budget to between $3.6 and $5.0 billion, down from $8.5 billion in 2014.

Those aren’t the actions of an industry insider who expects things to get better anytime soon.

I don’t mean to bag on Dresser-Rand and Apache, because they’re far from alone. Schlumberger, Baker Hughes, Halliburton, Weatherford International, and ConocoPhillips have also announced major layoffs. And don’t make the mistake of thinking that the only people getting laid off are blue-collar roughnecks. These layoffs affect everyone from secretaries to roughnecks to IT professionals.

In fact, according to staffing expert Swift Worldwide Resources, the number of energy jobs lost this year has climbed to well above 100,000 around the world.

From Global to Local

Sometimes it helps to put a local, personal perspective to the big-picture national news.

In my home state of northwest Montana, a huge number of men moved to North Dakota to work in the Bakken gas fields. Montana is a big state; it takes about 14 hours to drive from my corner of northwest Montana to the North Dakota oil fields, so that means those gas workers don’t make it back to their western Montana homes for months.

Moreover, the work was six, sometimes seven days a week and 12 hours a day, so once there, they couldn’t drive back home even if they wanted to. This meant long absences… and a good friend of mine who is a marriage counselor told me that the local divorce rate was spiking because of them.

Now the northwest Montana workers are returning home because the once-lucrative oil/gas jobs are disappearing. That news won’t make the New York Times, but it’s as real as it gets on Main Street USA.

From Local to National

Of course, the oil industry's woes aren’t a carefully guarded Wall Street secret. However, I do think that Wall Street—and perhaps even you—are underestimating the impact that low oil prices are going to have on economic growth and GDP numbers going forward.

Let me explain.

Industrial production for the month of January, which measures the output of US manufacturers, miners, and utilities, came in at a “seasonally adjusted" 0.2%.

A 0.2% gain isn’t much to shout about, but the real key was the impact the mining component (which includes oil/gas producers) had on the industrial-production calculation.

The mining industry is the second-largest component of industrial production, and its output fell by 1.0% in January. It was the biggest drag on the overall index.

However, the Federal Reserve Bank said, “The decline [was] more than accounted for by a substantial drop in the index for oil and gas well drilling and related support activities.”

How much did it account for? The oil and gas component fell by 10.0% in January.

Yup, a double-digit drop in output in just one month. Moreover, it was the fourth monthly decline in a row.
Last week’s weak GDP caught Wall Street off guard, but there are a lot more GDP disappointments to come as the energy industry layoffs percolate through the economy. Here’s how my Rational Bear readers are getting ready for GDP and corporate-earnings disappointments that are sure to rattle the markets.
Can your portfolio, as currently composed, handle a slowing economy and falling corporate profits? For most investors, the answer is “no.” Click above to find out how to protect yourself.



Tony Sagami

30 year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here.

To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.

The article Connecting the Dots: Oil, Divorce, and Bear Markets was originally published at mauldineconomics.com.

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Russia and China’s Natural Gas Deals are a Death Knell for Canada’s LNG Ambitions

By Marin Katusa, Chief Energy Investment Strategist

In recent years, a number of Asian companies have been betting that Canada will be able to export cheap liquefied natural gas (LNG) from its west coast. These big international players include PetroChina, Mitsubishi, CNOOC, and, until December 3, Malaysian state owned Petronas.

However, that initial interest is decidedly on the wane. In fact, while the British Columbia LNG Alliance is still hopeful that some of the 18 LNG projects that have been proposed will be realized, it’s now looking less and less likely that any of these Canadian LNG consortia will ever make a final investment decision to forge ahead.

That’s thanks to the Colder War—as I explain in detail in my new book of the same name—and the impetus it’s given Vladimir Putin to open up new markets in Asia.

The huge gas export deals that Russia struck with China in May and October—with an agreed-upon price ranging from $8-10 per million British thermal units (mmBtu)—has likely capped investors’ expectations of Chinese natural gas prices at around $10-11 per mmBtu, a level which would make shipping natural gas from Canada to Asia uneconomic.

At these prices, not even British Columbia’s new Liquefied Natural Gas Income Tax Act—which has halved the post payout tax rate to 3.5% and proposes reducing corporate income tax to 8% from 11%—can make Canadian natural gas globally competitive.

These tax credits are too little, too late, because Canada is years behind Australia, Russia, and Qatar’s gas projects. This means there’s just too much uncertainty about future profit margins to commit the vast amount of capital that will be needed to make Canadian LNG a reality.

Sure, there are huge proven reserves of natural gas in Canada. It’s just been determined that Canada’s Northwest Territories hold 16.4 trillion cubic feet of natural gas reserves, 40% more than previous estimates.

But the fact is that Canada will remain a high-cost producer of LNG, and its shipping costs to Asia will be much higher than Russia’s, Australia’s, and Qatar’s. So unless potential buyers in Asia are confident that Henry Hub gas prices will stay below $5, they’re unlikely to commit to long-term contracts for Canadian LNG—or US gas for that matter—because compression and shipping add at least another $6 to the price.

Shell has estimated that its proposed terminal, owned by LNG Canada, will cost $40 billion, not including a $4 billion pipeline. As LNG Canada—whose shareholders include PetroChina, Korea Gas Corp., and Mitsubishi Corp.—admits, it’s not yet sure that the project will be economically viable. Even if it turns out to be, LNG Canada says it won’t make a final investment decision until 2016, after which the facility would take five years to build.

But investors shouldn’t hold their breath. It seems like Korea Gas Corp. has already made up its mind. It’s planning to sell a third of its 15% stake in LNG Canada by the end of this year.

And who can blame it? The industry still doesn’t have clarity on environmental issues, federal taxes, municipal taxes, transfer pricing agreements, or what the First Nations’ cut will be. And these are all major hurdles.

Pipeline permits are also still incomplete. The federal government still hasn’t decided if LNG is a manufacturing or distribution business, which matters because if it rules that it’s a distribution business, permitting is going to be delayed.

And to muddy the picture even further, opposition to gas pipelines and fracking is on the rise in British Columbia and elsewhere in Canada. While fossil fuel projects are under fire from climate alarmists the world over, Canadian environmentalists are also angry that increased tanker traffic through its pristine coastal waters could lead to oil spills.

Canada is now under the sway of radical environmental groups and think tanks like the Pierre Elliot Trudeau Foundation, which take as a given that Canada should shut down its tar sands industry altogether. For these people, there’s no responsible way to build new fossil fuel infrastructure.

Elsewhere, investors might expect money and jobs to do the talking, but Justin Trudeau’s Liberal Party, which has called for greenhouse gas limits on oil sands, is now leading the conservatives in the polls. (Just out of curiosity, does Trudeau plan on putting a cap on the carbon monoxide concentration from his marijuana agenda? But I digress.) If a liberal government is elected next year, it might adopt a national climate policy that would cripple gas companies and oil companies alike.

Some energy majors are already shying away from Canadian LNG. BG Group announced in October that it’s delaying a decision on its Prince Rupert LNG project until after 2016. And Apache Corp., partnered with Chevron on a Canadian LNG project, is seeking a buyer for its stake.

Not everyone is throwing in the towel. Yet. ExxonMobil—which is in the early planning phase for the West Coast Canada LNG project at Tuck Inlet, located near Prince Rupert in northwestern British Columbia—has just become a member of the British Columbia LNG alliance.

But Petronas was a key player. It was thought that the company would be moving ahead after British Columbia’s Ministry of Environment approved its LNG terminal, along with two pipelines that would feed it.

Instead, Petronas pulled the plug. We can’t know how many things factored into that decision nor whether it’s absolutely final. All the company would say is that projected costs of C$36 billion would need to be reduced before a restart could be considered. (That $36B figure includes Petronas’s 2012 acquisition of Calgary based gas producer Progress Energy Resources Corp., as well as the C$10 billion proposed terminal, a pipeline, and the cost of drilling wells in BC’s northeast.)

This latest blow leaves Canadian LNG development very much in doubt. In fact, most observers believe that Petronas’s move to the sidelines probably sounds the death knell for the industry, at least for the foreseeable future.
For more on how the Colder War is forever changing the energy sector and global finance itself, click here to get your copy of Marin’s New York Times bestselling book. Inside, you’ll discover more on LNG and how this geopolitical chess game between Russia and the West for control of the world’s energy trade will shape this decade and the century to come.

The article Russia and China’s Natural Gas Deals Are a Death Knell for Canada’s LNG Ambitions was originally published at casey research

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New LNG Plant in North Dakota will Supply Oil and Gas Producers

A new natural gas liquefaction plant is slated to come online this summer in North Dakota to reduce the flaring of gas in the Bakken Formation and provide fuel for Bakken oil and gas operations. The developer, Prairie Companies LLC subsidiary North Dakota LNG, announced earlier this month that the plant would provide an initial 10,000 gallons per day (gal/d) of liquefied natural gas (LNG), and could expand to 66,000 gal/d. Assuming a 10% processing loss, the plant would take in a maximum of 6 million cubic feet per day (MMcf/d) once expanded. In 2012, North Dakota vented and flared 218 MMcf/d of natural gas because of record high oil production and insufficient pipeline takeaway capacity for natural gas produced as a byproduct.

Hess Corporation will supply the natural gas for liquefaction at Prairie's Tioga natural gas processing location. After the LNG is produced, it will be sent via truck to storage sites at drilling locations, where – once regasified – it can be used to power rigs and hydraulic fracturing operations as well as LNG vehicles. LNG itself cannot burn; in its liquefied state, its temperature is minus-260 degrees Fahrenheit. However, as a liquid, it takes up only 1/600th of its volume as a gas, so LNG is an excellent form to store or transport natural gas. Currently, most drilling operations run on diesel, and converting to natural gas provides potentially significant cost savings given the current differential between diesel and natural gas prices. In 2012, EIA estimated that nationally oil and gas companies consumed more than 5 million gal/d of diesel in their operations, representing a significant expense.

While conversion to natural gas might not be possible in many cases, in the past few years, several companies have developed and are marketing technologies that would allow drilling rigs and fracturing pumps to run in both dual fueled and or single fueled modes.

Although the liquefaction plant will be the first LNG project in the Bakken, some producers have begun using natural gas to power their operations, citing cost savings, access to natural gas, and environmental benefits. Statoil uses compressed natural gas (CNG) to fuel some of its drilling equipment. The natural gas is produced in the Bakken and compressed using General Electric's CNG in a Box system.

Additionally, outside of the Bakken, other companies have successfully used natural gas to power drilling operations. In 2012, Seneca Resources and Ensign Drilling installed GE LNG fired engines on drilling rigs in the Marcellus Shale. Apache, Halliburton, and Schlumberger have successfully used CNG and LNG to power hydraulic fracturing operations in the Granite Wash formation in Oklahoma.

Some of these companies have estimated fuel savings on the order of 60% to 70% compared to diesel, as well as payback on the conversion investment in about a year. The basic economics that have driven the recent interest in converting or manufacturing more heavy duty trucks to run on LNG are driving some of the interest in converting to natural gas for fueling stationary oil and gas operations.

Posted courtesy of the EIA


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Apache Reports Strong First Quarter Results as Record Production Leverages Higher Oil Prices

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Apache Corporation (ticker APA) reported record worldwide production in the first quarter of 2012 as the company benefitted from higher prices for oil and natural gas liquids and its balanced approach helped it weather the continuing deterioration of North American natural gas prices. Daily production increased 7 percent over the same period the prior year, adjusted for dispositions.

Worldwide production was 769,000 barrels of oil equivalent (boe) per day, compared with 732,000 boe per day the same period the year before. Last year's total included 11,000 boe per day from certain assets in Canada and East Texas that were sold in the second half of 2011. U.S. liquids production reached 148,000 barrels per day, representing an 11 percent increase over first quarter 2011 results, as global liquids production rose 6 percent over the same period.

Apache reported earnings of $778 million, or $2.00 per diluted share, for the three month period ending March 31, 2012, reflecting the impact of a $390 million non cash, after tax reduction in the carrying value of its oil and gas properties in Canada stemming from lower North American natural gas prices. For the same period last year, Apache reported earnings of $1.1 billion, or $2.86 per diluted share.....Read the entire report at ApacheCorp.com

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Apache CEO Steve Farris on Cordillera Acquisition

Apache CEO, Steve Farris, discusses the acquisition of Cordillera Energy Partners for $2.85B, saying its a unique bolt on opportunity that more than doubles Apache's acreage in a highly liquids-rich fairway in the Anadarko Basin.



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Knowing Your Oil Companies Pays Off Big in These Geopolitical Events

Everyday, day in and day out we push the importance of the fundamentals, the numbers. But this weeks events reminds us that doing your home work and knowing where big oil companies and oil services companies are invested pays off big. Where does their risk lie? Today Dan Dicker from The Street .Com gives us some ideas on who is at risk and how he is trading the Egypt unrest. One company he mentions is Apache who does a large percentage of their business in Egypt. Just click here to get a free trend analysis for Apache.



Here is your pivot, support and resistance numbers for Tuesday......

Crude oil was lower overnight as it consolidates some of the rally off last Friday's low. However, stochastics and the RSI remain bullish signaling that sideways to higher prices are possible near term. If March extends the rally off last Friday's low, January's high crossing at 93.46 is the next upside target. Closes below the 10 day moving average crossing at 89.05 would temper the near term friendly outlook. First resistance is Monday's high crossing at 92.84. Second resistance is January's high crossing at 93.46. First support is the 10 day moving average crossing at 89.05. Second support is the 38% retracement level of the May-January rally crossing at 85.51. Crude oil pivot point for Tuesday morning is 91.14.

Natural gas was lower overnight as it consolidates some of Monday's rally. Stochastics and the RSI are oversold but remain neutral to bearish signaling that sideways to lower prices are possible near term. If March extends last week's decline, the 62% retracement level of the October-January rally crossing at 4.225 is the next downside target. Closes above the 10 day moving average crossing at 4.501 are needed to confirm that a short term low has been posted. First resistance is the 20 day moving average crossing at 4.482. Second resistance is the 10 day moving average crossing at 4.501. First support is last Friday's low crossing at 4.252. Second support is the 62% retracement level of the October-January rally crossing at 4.225. Natural gas pivot point for Tuesday morning is 4.390.

Gold was higher due to short covering overnight as it consolidates some of the decline off January's high. Stochastics and the RSI are turning bullish hinting that a low might be in or is near. Closes above the 20 day moving average crossing at 1359.10 are needed to confirm that a short term low has been posted. If February extends the aforementioned decline, the 25% retracement level of the 2009-2010 rally crossing at 1296.40 is the next downside target. First resistance is the 10 day moving average crossing at 1341.00. Second resistance is the 20 day moving average crossing at 1359.10. First support is last Friday's low crossing at 1309.10. Second support is the 25% retracement level of the 2009-2010 rally crossing at 1296.40. Gold pivot point for Tuesday morning is 1335.10.

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ONGC, Indian Oil Share Sales May Raise $4.1 Billion for Indian Government

India may raise as much as 190 billion rupees ($4.1 billion) selling shares in Oil & Natural Gas Corp., the country’s biggest energy explorer, and Indian Oil Corp., to help cut its budget deficit. Indian Oil, the nation’s second biggest refiner, may raise a further 100 billion rupees by selling fresh equity to help it fund a new crude oil processing plant it is building, Oil Secretary S. Sundareshan told reporters in Mumbai today.

“The plan is to complete the disinvestments before the end of the fiscal year,” Sundareshan said. “It will be Indian Oil followed by ONGC. In the last quarter, hopefully.”

Prime Minister Manmohan Singh wants to raise 400 billion rupees from asset sales in the year ending March 31 to help fund the construction of roads, ports, hospitals and schools. The government said in January it can sell shares in as many as 68 companies as it seeks to shrink its budget deficit to 5.5 percent of gross domestic product this fiscal year from an estimated 6.9 percent last year.

Indian Oil is building a refinery in Orissa state with an annual processing capacity of 15 million tons. The refiner plans to spend 145 billion rupees in the financial year ending March compared with 135 billion rupees last year to increase capacity, Serangulam V. Narasimhan, finance director, said Jan. 6.

ONGC will complete the valuation on BP Plc’s assets in Vietnam in a few weeks as it seeks to buy them in partnership with Vietnam Oil & Gas Group, Sundareshan also said.

State owned ONGC is considering all options for buying partner BP’s stake in a Vietnam gas field, Chairman R.S. Sharma said July 22. The London based company, which is raising funds to pay for the Gulf of Mexico oil spill, agreed July 20 to sell fields in the U.S., Canada and Egypt to Houston based Apache Corp. for $7 billion and plans to dispose of assets in Pakistan and Vietnam.

Bloomberg reporter Natalie Obiko Pearson can be reached at npearson7@bloomberg.net.



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Crude Oil Trying To Prove Short Term Low is Here

Crude oil closed higher due to short covering on Wednesday as it consolidates some of this month's decline. The high range close sets the stage for a steady to higher opening on Thursday.

Stochastics and the RSI are oversold but are neutral to bullish hinting that a short term low might be in or is near. Closes above the 20 day moving average crossing at 65.91 are needed to confirm that a short term low has been posted.

If August extends the decline off June's high, the 62% retracement level of this spring's rally crossing at 54.97 is the next downside target.

First resistance is the 10 day moving average crossing at 62.09
Second resistance is the 20 day moving average crossing at 65.91

First support is Monday's low crossing at 58.32
Second support is the 62% retracement level crossing at 54.97

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Natural gas posted a key reversal down on Wednesday as it consolidates below broken support crossing at 3.520. The low range close sets the stage for a steady to lower opening on Thursday. Stochastics and the RSI are oversold but remain neutral signaling that sideways to lower prices are possible near term.

If August extends this summer's decline, weekly support crossing at 3.155 is the next downside target. Closes above the 20 day moving average crossing at 3.718 are needed to confirm that a short term low has been posted.

First resistance is today's high crossing at 3.53
Second resistance is the 20 day moving average crossing at 3.72

First support is Monday's low crossing at 3.23
Second support is weekly support crossing at 3.16

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Crude Oil Industry Headline News

"Oil Rises, Rebounding From Two Week Low, on Signs of Stronger Fuel Demand"
Crude oil rose, following a rally in the stock market, and as a government report showed U.S. fuel consumption increased....Complete Story

"Chevron Reports New Discovery in Gulf of Mexico That May Rival Jack Find"
Chevron Corp., the second biggest U.S. oil company, made an oil discovery in the Gulf of Mexico that may rival the 500 million-barrel Jack prospect found in 2004....Complete Story

"US Lawmakers Preparing to Draft New Offshore Drilling Laws"
Federal lawmakers are gearing up to legislate a new offshore drilling plan that could restrict development in major areas of the Outer Continental Shelf, but allow some acreage previously closed to access to be opened for exploration....Complete Story

"China's Sinopec Takes A Close Look at Mexico's Oil Patch"
China's Sinopec Group is the first integrated oil company to test the waters in Mexico after Congress passed an energy reform last fall....Complete Story

"Apache Won't Resort to Layoffs at This Time"
Oil and gas producer Apache Corp. will hold on to its employees despite the fact that energy price and profits have plummeted in recent months....Complete Story