Maersk, the largest shipping company, by volume, in the world, just announced that it’s cutting 20 ships and 400 jobs. More bad news for shipping… but also bad news for the oil industry.
Why oil? Besides Maersk’s fleet of container ships, Maersk Oil has a fleet of 130 tankers, it runs 77 oil drilling platforms and three floating production, storage and offloading units around the world. It also has 16 drilling rigs and 10 drilling barges around the world. Maersk also has a 50 percent stake in Egyptian Drilling Company.
You may not think of Maersk as an oil company, but it’s responsible for producing 235,000 barrels of oil daily. So the cutbacks are another major signal that the global economy is far from healthy, or even in recovery mode
In the U.S., it hasn’t been all bad news in the oil industry. U.S. oil inventories were down 2.5 million barrels more than expected in recent weeks. A little tightening and higher prices are an encouraging sign for the industry, although maybe not our wallets at the pump.
However, one big, long-term problem still hangs over not only the oil patch, but the U.S. economy in general: most of the U.S. exploration and production firms (E&Ps) have their debt payments coming due over the next few years.
Right now, oil is too cheap for them to make any money. Oil needs to be more than $50 a barrel before U.S. E&Ps profit.
That’s not good news for these firms, since oil isn’t likely to rise in value significantly, barring some catastrophic event. First they shuttered operations to save money. Now they’re pumping again just to cover expenses, but still at a loss.
This is a very dangerous game.
Adding to the risk in the oil patch is the fact that the banks holding these loans are also at risk if these firms start to go under. All those lines of credit, all those loans for equipment and payroll, all dumped at the banksters’ door.
This is potentially very destabilizing for the economy if banks have tens of billions of debt defaulted on and no way to cover those losses. Not just the U.S. economy, either. In Canada, it was recently revealed that Canadian banks have double the loan exposure to the oil industry than was previously reported or known. Only a review of company filings discovered the extent of the problem.
But as usual, there is always opportunity where there is danger. Here is where the big, cash-rich firms step in both in the financial and the energy sector. As these banks and E&Ps swirl the drain, integrated oils and national banks can snap up smaller institutions at great prices and with little regulatory red tape from Washington, since they are more than happy to let the private sector assume the risks of bailing out these two sectors.
If you also pay attention to the filings of the larger hedge funds, you’ll note, as Barron’s did this past weekend, that very big players including Buffett, Soros, Icahn and Einhorn have sold off the Apples and Walmarts in their holdings and have bought shares in banks and financial institutions. Millions of shares. What do they know that we don’t? Maybe nothing, but I would get ready for a round of mergers as the small are eaten by the big, further consolidating corporate influence.
If you’re an investor, I will restate what I have said before. The jury is still out on the energy patch. There are some good signs, which don’t cancel out the bad signals, but at least they’re good signs.
If you really want to play this sector, the best bet is through big integrated oils and large financial institutions. They will provide the safest path through this treacherous channel if the worst comes to pass, since they will be able to take advantage of a collapsing sector. They also pay some very respectable dividends.
Physical ownership of precious metals like gold and silver are still good bets. Prices are rising, but you can’t judge these metals by the news of the sentiments coming from Western nations. Gold and silver are a traditional store of value among the almost 3 billion people in India and China.
— GS Early
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