FLASH UPDATE: $50 oil is worse for consumers than you think

The price of crude oil has fallen approximately 55% since June.  At the same time production is hitting all time highs...Supply and demand tells us that we could be setting up for more downside in the energy complex.  For many reasons, overall rig count is down 15% since October 2014, matching the lowest levels since October 2010.  The Bakken Shale and Permian Basin, where horizontal drilling has been the primary method used in the tight rock formations, have seen significant shut downs.

Producers have already guided that spending in the US & Canada will be 30-35% less than last year. Internationally, Qatar Petroleum & Royal Dutch Shell canceled plans for a $6.5 B petrochemical plant, due to the JV becoming "commercially unfeasible" in the current energy market.  This is after Qatar announced a $6 B project cancellation in September as well.  Statoil ASA also announced a delay in an offshore drilling project.  Cost cutting and delaying investment has already started selectively.  Something has got to give soon...

Schlumberger just announced that they cut 9,000 jobs at the year end.  They took $1 B in charges in Q4, $300 mm of which directly related to downsizing staff.  Separately, three contract drillers that we are aware of recently had clients terminate rig contracts early.  One of them layed off 700 employees unexpectedly.  A senior economist at the Dallas Fed said that Texas could lose 140,000 jobs if crude stayed below 50% of the 2014 average.

The Perryman Group estimated that the energy industry generates $1.2 T in gross product annually, as well as providing 9.3 mm permanent jobs.  Since Dec 2007, 1.36 mm jobs have been gained in shale oil states vs -424 k in non-shale oil states.  Please read that last sentence again.  This is much worse for the consumer than you may think.  The consumer is already on weak ground, and a major loss of jobs & confidence could be a death blow.

Depending on the index, ETF or mutual fund, energy makes up 15-25% of high yield exposure. Marty Fridson calculated that 18.1% of high yield energy issues are already trading at distressed levels (vs 8.45% overall and 4.16% overall excluding energy).  This pain in the energy sector of the high yield market could be the catalyst we have been waiting for to set things off.  I have no doubt that if crude remains low, this will be a major blow for the economy and the consumer.  We are excited that we've been able to add to positions above par while "all is well" outside of energy.

We are back!  Enjoy the long weekend and Happy New Year to everyone.  Please reach out to investorrelations@thetradexgroup.com to receive an invitation for our next webinar on "The State of the HY Market", presented by our Senior Advisor, Dr. Edward Altman

Best regards,

Richard Travia
Director of Research.