It appears that Horseman Global's Russell Clark may have been spot on with his bearish assessment of the US shale sector.
As a reminder, in his latest letter to investors, Clark said that "the rising decline rates of major US shale basins, and the increasing incidents of frac hits (also a cause of rising decline rates) have convinced me that US shale producers are not only losing competitiveness against other oil drillers, but they will find it hard to make money."
While the bearish thesis has yet to play out, moments ago Anadarko poured cold water on US energy investors after it missed earnings badly, reporting a Q2 EPS loss of 77c, more than double the 33 cent loss expected. However, what was far more concerning to shale bulls (and perhaps oil bears), is that the company admitted that it can no longer support its capital spending budget, and it would cut its 2017 capital budget by $300 million, becoming the first major U.S. oil producer to do so, because of depressed oil prices. In March, Anadarko had forecast total 2017 capex of $4.5 billion to $4.7 billion, a continuation of the recent CapEx rebound which troughed in Q3 2016.
Ahead of the Tuesday earnings call, APC CEO Al Walker confirmed Wall Street's growing fears that oil prices are simply too low to sustain ongoing exploration when he said that "the current market conditions require lower capital intensity given the volatility of margins realized in this operating environment. As such, we are reducing our level of investments by $300 million for the full year."
Ironically it was Walker himself who issued a clear warning to Wall Street in June, when he said that it was the relentless supply of capital that was masking the underlying lack of profitability: “The biggest problem our industry faces today is you guys,” Al Walker, chief executive of Anadarko Petroleum Corp. , told investors at a conference last month, quoted by the WSJ.
Wall Street has become an enabler that pushes companies to grow production at any cost, while punishing those that try to live within their means, Mr. Walker said, adding: “It’s kind of like going to AA. You know, we need a partner. We really need the investment community to show discipline.”
Ultimately, it was up to Walker to demonstrate that discipline when he voluntarily reduced the amount of capital he would reinvest in his business. And since oil exploration is so capital intensive, the hit to revenue will be quick and painful, much to the delight of OPEC which may finally be seeing light at the end of the tunnel.To that point, Anadarko also said it was trimming its 2017 production forecast to 644,000 bpd, a 2% cut.
Incidentally, Horseman is not the first to turn bearish on shale. As Bloomberg reported earlier, Goldman Sachs Asset Management has been shedding oil and gas-related company bonds in the past few months and shorting oil in some portfolios, according to Mike Swell, the firm's co-head of global fixed-income portfolio management. The investment manager has moved from an overweight position in energy-related corporate bonds a few months ago to neutral today and toward an underweight stance, he said in an interview on Friday.
Some investors seem to agree with Goldman's asset-management arm, at least enough to have a touch of skepticism about the prospect of these oil and gas explorers. Since the end of January, credit traders have demanded slightly more yield to own junk-rated bonds of oil and gas companies than other high-yield debt.
If oil prices were to stay below $47 a barrel, which seems possible, Bloomberg Intelligence expects that investors will demand a bigger cushion of extra yield to own junk-rated energy debt. Part of the reasoning is that these firms still require an excessive amount of leverage (and investor faith) to keep operating. Junk-rated oil and natural gas producers have more than $25 billion of credit-line commitments expiring in 2019, Bloomberg Intelligence data show. If oil prices don't rebound, banks have good reason to reduce those lines substantially, siphoning off a crucial funding source.
In an amusing twist, we reported last week that the very same Goldman reported last Friday that junk bonds are finally starting to notice the decline in oil prices:
Anadarko's CapEx cut comes in the same month as the EIA announced that US shale production just hit a new all time high of 5.472mmb/d.
To the disappointment of many energy bulls (and oil bears as a reduction in production means that the shale supply glut is about to get far smaller), it may be all downhill from here.