Tuesday, January 27, 2015
Oil 101 – Revision XLAX
So, everybody is again an expert on what will happen with the “highway robbery” price of oil dispapperaing like John Boehner's tan! It's called Boehnergeneis – affiliated with Obama's “Health Care Plan” that bombarded the “Tanning Booths” with a “TAX” so participation as a cancer guinea pig fell off rapidly. So, with my curiosity this oil pricing, I use a bellwether stock that seems to promote a very good indicator upon the “economic viability to survivorship” of the energy exploration to exploitation sector – in this case it is “Pioneer Natural Resources”. A Texas base “Marginal” that has found success along with failures, so the reason it appears to be a very good stock to act as that “bellwether”. See, it is a good company to use as an indicator, as this company tried to break into the “lucrative” Alaskan scene dominated by “Big Oil” but failed and at the same time it is like the “boss” in the lower-48 shale plays! Now “Marginal” means not the “Big Oil” and not the little Podunk mom & pop, but an entity that has lost investments trying to compete with “Big Oil” and at the same time has made out pretty well, especially taking the opportunity to invest time polished by money and energy into this new fandango “Fracing” affair. Yes, PNR lost its underwear in Alaska, but down in the shale plays, it is today another loosing proposition. OK, it hasn't hit that status quite yet, so hope is always an option. But remember what Abdullah said during his last breath, get rid of the “Marginals”, which when translated means “vomits”! That is it in a Leon Panetta nutshell, as to what is behind this sudden “sinkhole” that is sucking up profits destined once-upon-a-time towards oil brokerage firms, heading south like there is no tomorrow - with “fracing” under attack by environmentalists and John D. Rockefeller oil barons. Now when you analyze the PNR stock, it is very interesting. Right now and for the last few months, the experts have classified PNR a solid “HOLD”, which means not much is going on and how it reacts on the “Dow” may be a good indication of what is in store. “Hold Your Horses” can have devastating consequences and at the same time rewards – it is a gambler that “knows when to hold them”...The “Big Oil” stocks would not offer the same as an “economic health gauge”, just too clumsy an industry as would the mom & pops not be able to offer up any worthwhile “ticker-tape” parading around naked, just too flabby. But PNR is a mature “Marginal” and fit to act as an indicator. So, PNR was heavy into “fracing” and extracting boatloads of hydrocarbons, through downhole deep “fracing” successes. It is proud of that fact, even with all the negative publicity following those “red” Haliburton trucks around. What you mean Dick's gang lost another radio-active source? Now PNR doesn't own any refineries, doesn't own any gas stations, it explores to exploit and sells that commodity to many bidders through a diversified portfolio. So it has contracts, and today is still delivering the same amount of oil at the same damn price it was doing so a year ago back, when the price of oil was hanging around a $100-buckaroos and change. See, many of those contracts were “collared” at $70-bucks a barrel. When prices go higher, the contractor still pays the contract price, $70-bucks in a “Take or Pay” setup. Now when oil was at that $100-buck extravaganza, well we know damn well that the $70 was averaging about $10-bucks above the “chasity-belt” break-even point, so for every penny above $60-bucks, it was all profit for PNR and the contractor that is buying the oil, also happy as he is getting one hell of a break – like a $30-buck discount! Yes, it is an all around money making proposition, except for the “consumers”! So now the oil price crashes to $45. The contracts are still in force, “Take or Pay” so everybody maintains, the status quo relieves the PNR stock from cratering. If instead on a “spot” market exchange, it would have already meant “collapse”! Look, Wall Street is to blame for any illness that this oil price crash initiates, as instead of minding its own business, the “speculators” have run amuck! Said again, as Wall Street has made beaucoup bucks with this $100-barrel fee-for-some, the consumers are the ones who pay for the “brats” extravagant lifestyles. And even though the refiners could today buy oil cheaper on the “spot”, with a “Take or Pay”, it doesn't work. Now this status quo can maintain for awhile, until such time the “contracts” are re-negotiated, sometime next fall. So the catch here is that the production “under contract” up until the crash started, it must maintain, to fulfill those contracts. And since oil finds very little in storage to offset dips & flips, this is a very dynamic inning of the INS verses the OUTS. So who is getting hurt now, instead of the consumers? Not so fast, as the consumer is not out of the fire-storm, not yet! Now the electrical utilities and refineries, they will be the first to see the repercussions. A utility must, through regulation, it has an obligation to offer electricity at a rate that is determined by the “spot” market – sometimes referred to as “King Henry's Hubbub”. So about once every year, there comes a cost-of-fuel adjustment that calculates what we will pay for electricity based on Henry. So the utility infrastructure is sitting pretty good, as we are paying about the same for electricity because adjustments were accomplished some time ago, when this spot was still spotless and we have become conditioned to not paying attention as to how that cost is generated – the reason a utility can make its CEO and executive staff $millionaires$, on your buck. Look, there is a reason that those utility bills are impossible to understand. I received an electric bill for $1.25 due the fact I had a credit, with “NO PAYMENT REQUIRED”, but it was still 5-pages long! Now the refineries are a different story, as they sell a commodity like motor gasoline based also on the “spot”, but it isn't like a utility but a free-market approach – the reason that gasoline is at an all time low of $2-bucks on average from sea to shining sea. But if these refiners were hooked into “Take or Pay” for the oil used to make a commodity product, it is costing them dearly and any profits so affected by this “crash”, well they could be digging deep to cover the loses. The cost of doing business, don't worry as they always find a ways and meanie means to recoup for the shareholders. But most likely “Big Oil” has only a small percentage of its feed stock associated with such contracts, so is loosing some profits but not at the point of pain & suffering. So for awhile, things will remain “status quo” with low oil prices, accept Dick's chain-gang may get to take a break and go on un-implodement benefits as with the existing price stalemate, even the “marginals” will have a tough time getting Wells Fargo to loan out the bucks for future development. So, it means no “new production”, and the only industry that gets hurt, well it is “Big Oil” to begin with. This is the pain & suffering endured by trying to take back what was their domain to begin with – total domination! And since the pain & suffering is not cruel and unusual – no bailouts from Uncle Sam allowed! See, it was this “La Dee Freaken Da” fracing that catapulted us into shock-treatment like oil prices, wherein “Big Oil” was caught off-guard and it started hurting the bottom-line. So this rescue attempt, well it took a few years to corral the “beast” and in a few years we will witness the fallout. Big Oil will lassoo the “Marginals” and behead, by strangling what that faction has succeeded in so far – interference! And in the end with the “Marginals” gone and the mom & pops in bankruptcy, “Big Oil” will be in control once again without Wall Street's asinine assistance and gas prices and oil prices will once again be tame – as Wall Street will also find out you can only mess with “Big Oil”, well until you have screwed them over. And retaliation is what they perform better then shooting holes in the ground for that “Black Gold”. In the end, oil prices with hover around $56-bucks, for the long haul. Yes, controlled at the point of no-return wherein it disenfranchises any interest for the “Marginals”, and with that we will continue to see not as friendly gas prices as today – put marginally tame!
Posted by Green Mountain Boy at 12:22 PM