RE:RE:RE: Article... an engineered market collapse of oil pricecigarbutt1 wrote: PetroExplorer,
As an investor, I came to the oil industry sector opportunistically when it got into distress. I have learned a lot but understand that you have relevant background. I am asking for your valuable input.
I decided to buy TBE debentures because I felt I understood some key aspects the oil price dynamics. Basically, I want to understand what you mean by "an engineered collapse". The oil price collapse was a surprise to most market participants. Wasn't it?
There are many moving parts here. Demand from China and other emerging countries may be less than expected especially going forward. The analysis of the demand side of the equation is challenging. On the supply side, the USA shale oil revolution is real and will probably put a relative cap on price, which I believe is no higher that 55-60$ per barrel. Do you agree? Going back to TBE when it was challenged, I thought that the biggest (and potentially reversible) supply side variable was the role of Saudi Arabia as a swing producer. In 2014-5, Saudi Arabia flushed the market with excess production (I never understood that) hoping to, presumably, kill the competition. For me, this was the major factor behind the massive decline in oil prices so, in a sense, I agree that the collapse was engineered. In May 2016, a new energy minister, Khalid al-Falih, was appointed. Putting that nomination in the context of Saudi Arabia's very precarious fiscal situation, I thought that the nomination signalled a major strategic shift (decrease production in order to increase price and try to obtain a learger net benefit on the demand/supply curve). At that time, I had spotted many investment possibilities but chose the TBE debentures because of its discount to intrinsic value and relative margin of safety. I see that you invested in both shares and debenture of TBE. Do you agree with some of what is written above?
As I am expecting the liquidating distribution, I am planning to move out of the oil sector as I'don't see opportunities now for the short and long term. You mention that you expect that oil prices will explode. Can you elaborate on the demand and supply side reasons that support your conclusion?
I thought this price collapse would play out like previous collapses, the most recent being the 2008-2009 collapse. In that one, the price collapsed, then Saudi made cuts, and restored the prices, to bring supply/demand, into better balance. At that time, alot of oil stocks were hammered to low levels, and debt/cashflow multiples, skyrocketed.
It was possible to pick up various companies shares, for fairly cheap. Then a slow price rise ensued, to a point that within a couple of years, many stocks were trading at nice multiples, and people would have made good money.
Saudi played different, this time, and chose to actually increase production still higher. But their financial reality is poor too, so the country was actually losing money. They need a higher oil price, to provide the social benefits, to keep people happy. They had the young prince in there for awhile, talking about diversifying the Saudi economy, but I he has now been told to stand in the corner, and let the older guys handle things.
The complicating factor in all of this, has been the shale oil plays. Horizontal multi-fractured drilling exploded, which increased production. But the US oil producers have seen numerous bankruptcies, because they couldn't make cashflow to cover debt, although they had increased production. So the only way they were profitable, was to renegotiate debt, and make people take a haircut.
So I still say the price collapse was engineered, as it is still in the best interests of Saudi, to support higher prices. But this whole Trump election, could change things, and they are still waiting to see where things are going. There could be a nice price spike coming, as some geo-political event occurs. Something will get blown up, somewhere. Just give tne new US administration some time, to figure out what kind of world they want to run.
In the meantime, US refineries like the medium crude that companies like Twin Butte, produce. Mosf of the shale oil is condensate, so it can't get handled very easily, by their refineries. So we need to see where things are going to shake out, with supply/demand.
Twin Butte Debentures seemed like a safer investment, if the proper laws were followed. But the Long Run deal set the first dangerous precedent, of giving a reduced payout to debenture holders, if they voted to accept it. Once that precdent was established, why not try and see if people would accept some lower payout, like say 14 cents on the dollar? If you threaten and intimidate people enough, they might agree to accept the deal.
Luckily Debenture Holders said "No Deal". Unfortunately, TBE management proved that they were prepared to give-up on their own investments in the company, and throw it all away, to make the point that management knows best, even if they don't know squat.
But if the system starts getting challenged by small investors, that shows that most management staff are just lucky to have their jobs, then it starts to make things shaky for many people, that might have to take on lower paying technical jobs.