The Oil Patch, All In

Posted: Mar 04, 2016 12:01 AM
The Oil Patch, All In

In poker the big bet is made when the player says ALL IN. At that point if his hunch is correct, then smiles and congratulations are in order. However should someone else’s cards be better, it is game over.

The Big Boys have been playing ALL IN since the beginning of the year based on a hunch that oil prices have bottomed. Since Jan. 1, $9.2 Billion have been thrust into the hands of the U.S. oil industry. Not through the normal channels of debt but through the last ditch effort of equity. This one is for all the marbles. ALL IN

The thinking goes –even though the majority of barrels of shale oil are being produced at a loss for all concerned, sooner or later the world’s largest producers such as Saudi Arabia, Iran, Russia and others will somehow come to their senses and agree to reduce production. In addition low prices will ultimately stimulate demand (I have yet to figure out HOW you can put more than 20 gallons into a 20 gallon tank if the price of gas has dropped 50%)

The combination of reduced production and increased demand dictates that a bottom MUST be in for oil so ALL IN. The US shale oil industry will be saved. The questionable billions being thrust into Energy shares today will net billions tomorrow ---The thinking goes.

The energy companies are quickly recognizing this insatiable desire to go ALL IN and win the whole pot. They are quickly doubling and tripling their secondary offerings at no risk to their balance sheet as it is shared ownership. That is called stock, not debt.

Since the big boys are playing ALL IN should? Before you join in be mindful that the big boys are, as always, using other people’s money. Unfortunately you are using your own. Should their ALL IN gambit fail they can fall back on the time tested Too Big Too Fail and go hat in hand to the Fed for a little poker relief. You however are only left with your hat in your hand and no relief.

Before making the big bet and go ALL IN you should remember the words of a fairly knowledgeable insider, EXXON’s CEO Rex Tillerson: “waves of oil equity issuance are destroying value”.

Texas hold’em anyone?