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Page added on October 9, 2017

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No More Free Lunch Is the Big Change Under Way in the Oil Market


For years, investors have played Popeye to the energy industry’s Wimpy, the cartoon character famous for his “I’ll gladly pay you Tuesday for a hamburger today” motto. In return for the promise of future profits, they’ve funded loss-making energy producers and explorers through a generous mix of loans, bonds and equity.

That may be changing, according to a chorus of analysts ranging from Morgan Stanley to Sanford C Bernstein & Co. LLC. Following Anadarko Petroleum Corp.’s pledge last month to buy back up to $2.5 billion worth of shares, they’re now discussing a new phase in the oil market, with producers far more keen to reward investors and more disciplined when it comes to funding their own expansion.

“Investors are no longer rewarding ‘growth at any cost’,” said Martijn Rats and Amy Sergeant at Morgan Stanley in a note published late last week. U.S. energy companies have under-performed the broader S&P 500 Index this year partly because of a growing perception that the “E&P (shale growth) model is capital destructive,” according to their colleague, Evan Calio.

Securing such investment has been relatively easy in an era of low interest rates, cheap financing and eager capital markets, with major investors from short-seller Jim Chanos to DoubleLine Capital LP’s Jeffrey Gundlach drawing links between the easy monetary environment and an undisciplined boom in U.S. oil production that spurred a collapse in prices.

Curbing exploration and investment in favor of spending on investors could help reduce U.S. oil output at a time when markets are still worried about an over-supply of crude, but it could also be an uphill battle in the face of energy companies that have long been encouraged to burn through cash in order to justify aggressive growth targets.

Bernstein analysts led by Neil Beveridge warned late last month that energy executives may feel compelled to spend on pricey land and capex in order to differentiate their companies from the rest of the industry. Nevertheless, they note: “Capital markets have clearly decided what they want. Reduced spending, higher returns and increased cash returns to shareholders.”

Anadarko’s buyback announcement, and the subsequent 8.5 percent pop in its share price, “could be taken as a subtle shift in behavior,” they added.


12 Comments on "No More Free Lunch Is the Big Change Under Way in the Oil Market"

  1. rockman on Mon, 9th Oct 2017 10:03 am 

    “Capital markets have clearly decided what they want. Reduced spending, higher returns and increased cash returns to share holders.”

    Unlike what they wanted when oil was $90+/bbl: INCREASED spending, higher returns and increased cash returns to shareholders. Which is exactly what the capital markets will again demand when/if oil prices return to record levels.

    Always amazes me when some writes about a “new” phenomenon they just discovered. A dynamic that has existed from the first day folks started investing in companies. I suppose when you get paid by the word you have to come up with any story even if you have nothing new to add.

    Maybe they’ll next write about the boom/bust cycle of the petroleum industry they just discovered. LOL.

  2. Anonymous on Mon, 9th Oct 2017 11:53 am 

    At $90, they wanted growth and debt financed capex. At $30, they wanted capex slashed and production to shrink.

    Just lately, they showed that $55 seems to be enough to start firing up the shale band again. A brief trip to the 40s, cooled that fire. Now we are at $50 and investors want a middle course.

    The whole thing is just common sense econ 101. Invest in oil production when prices are high. Harvest when low. Duh. Would be the same in any other business.

  3. Boat on Mon, 9th Oct 2017 12:40 pm 


    Actually, US rig counts were jumping higher when WTI oil was in the low 40s. Now that 300 plus rigs have been added and production is up 1.1 mbpd since July 2016. The rig count has plateaued in the last few weeks while production and wells drilled but not completed continues to rise.

  4. deadlykillerbeaz on Mon, 9th Oct 2017 1:13 pm 

    Suffice it to say that the ignorant small investor is too trusting of what the markets really are and can easily get taken to the cleaners.

    The small investor is a chicken about to become a broiler

    If drinking don’t kill me, her memory will.

    I’ll never forget old what’s her name.


  5. Anonymouse1 on Mon, 9th Oct 2017 1:24 pm 

    Look, we have

    A) A shill

    B) Nony(see C)

    C) A retard

    D) Plantytard

    …..all chiming in on this one. All you need now, is for clogged-fraud to come along to remind you all that e-planes, robo-cars and self-assembling wind turbines either exist, or will soon(tm), to make the picture complete.

  6. rockman on Mon, 9th Oct 2017 2:19 pm 

    A – “The whole thing is just common sense econ 101.” Of course. And if one studies the long history of petroleum investments the best returns were made when oil/NG prices were low. And the biggest loses when investments were made during periods of high prices. As you say Econ 101: buy low/sell high. LOL.

    Unfortunately most investors suck when it comes to timing such moves. Especially when those “expert” brokers are yelling in their ear to buy when markets are near the top. Imagine buying Chevron for $30/share in the summer of 2004 and then selling for $70/share just 4 years later. Or buying at $120/share in the summer of 2014 and being forced to sell for $70/share just a year later when your margin account is called. Or buying for $70/share that same summer when doomers looking at the ETP model are proclaiming the company is terminally ill and then just 12 months later see you stock increase 40% in value. LOL.

    And yes, the Rockman did buy a little Chevron back then. But, sadly, too old to risk very much.

  7. rockman on Mon, 9th Oct 2017 2:31 pm 

    Big Oil is such a long game. Chevron just brought on its first LNG train of an Australian project. A $34 BILLION INVESTMENT. It will take years to start generating a profit. And when it does it might just be marginal. Or extremely profitable. And no way to predict which today so obviously no way to do so several years ago when it committed to the project.

  8. print baby print on Mon, 9th Oct 2017 2:35 pm 

    I dont see a problem lets print a few trillions more

  9. deadlykillerbeaz on Mon, 9th Oct 2017 2:45 pm 

    In the fall of 2008 after the meltdown when Hank Paulson went to Congress hat in hand and begged for 700,000,000,000 dollars, Minnesota Mining fell to 54 and change, I had a few shekels to buy some. It is at 214 today and I still have some!

    John Deere was down to 26 and change, Caterpillar was 28 and change. Should have bought some of those too, they both went to over a hundred. Can’t win them all.

    Energy and manufacturing stocks are no brainers to buy when the getting is good, not everybody is going to beat the odds.

    Anonymouse1, how retarded are you beyond what everyone here already knows?

  10. Boat on Mon, 9th Oct 2017 8:24 pm 


    I have been throwing in a few shekels a month in an aggressive fund and an index fund for 30 plus years. I want to cash it in sit among piles of 100’s but alas, I throw more shekels at it. I remember the dow around 2,000. Now 22,774 What a ride.

  11. GregT on Mon, 9th Oct 2017 10:49 pm 

    “I want to cash it in sit among piles of 100’s but alas, I throw more shekels at it.”

    Wow Boat, that’s impressive. I thought stuff like that only happened on ‘Lifestyles of the Rich and Famous’.

    Sitting among piles of 100’s is something that everyone should strive towards.

  12. Boat on Tue, 10th Oct 2017 12:46 am 


    That’s why your here, live and learn.

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