RE:RE: Article...cigarbutt1 wrote: The issue of leverage and firm survivorship has been studied from many angles.
Perhaps an analogy to a geologic manifestation interacting with human nature is relevant here in order to help spot the fulcrum security in a distressed leveraged structure. Why do people live on the slopes of dangerous volcanoes? Despite numerous eruptions that may be, to a certain degree, unpredictable, killing people and livestock, and covering crops with ash and lava flows, individuals and their families keep coming back. The main reason is the rich volcanic soil can develop into some of the richest agricultural lands on earth. People are willing to take a high-risk gamble in order to maximize the return of their soil production: food.
So, it may be OK, after an eruption, to go back close to the volcano (very close if you like to gamble) the same way that you may want to maximize your return with leverage. The fulcrum security concept here may have something to do with your capacity to run, but more likely, your survival odds are probably proportional to the distance of your land to the center of the volcano. Those who forego some potential yield on their crops may hold the geographic flexibility to save their lives when the volcano erupts.
So, referring to the FP article, I find that the TBE saga was not about a race for survival or “getting down to the wire”, it was about the fact that the eruption (downturn) occurred at night. With the lava coming and rushing down, it became simply too late to run for some. Leverage can burn.
What the heck are you talking about, Cigarbutt? There was no volcano here, just an engineered market collapse of oil prices, over the last few years, then an insufficient reaction by the Twin Butte Board, to try and seek alternatives. And when they found an alternative, it wasn't a real alternative, although it could have been technically legal, if the Debenture Holders voted to give their money to Shareholders. (Some proper hedging, and talking to Debenture Holders earlier, would have helped.)
This entire industry, is built on leverage. Without access to capital, the cashflow from production, is insufficient to develop new reserves. When oil prices were $100/bbl, oil companies were still going bankrupt. Oil companies need debt, and Twin Butte's debt was serviceable, as long as prices were high. The dividend payments were an issue, for sure, as profits were paid out to shareholders, that should have been used to reduce debt.
We will soon see a volcano erupt allright, but it is going to be a price explosion, as the lack of capital spending, continues to take its toll on production. When that day comes, companies like Twin Butte, will be cash-cows. Unfortunately, because the Board didn't drag things out in a prolonnged CCAA receivership, there will be no recovery for shareholders.
The profits from the higher prices, will be shipped offshore to China, to help the trade imbalance. They sell junk made in China, and in turn we ship money over there, from the assets they purchase in fire-sales. Only a Government with longer term thinking, rather than "free market, live for today" mentality, could take on this problem. The Courts are useless, and the Government regulatory agencies, won't look at a small deal.