Shorting Oil, Hedging Tesla

[jhm]

I'm cross-posting this from Coronavirus thread. It seems to bear some semblance to renewable energy and all that.

Few people know about my tech startup company, SolaBag. We work in the obscur intersection of photovoltaics and colon therapeutics. We think if we could secure a government grant, we could develop a really powerful sunlight enema. We're really close to a market ready breakthrough. Critics say solar power can't work where the sun don't shine, but we're ready to prove them wrong. So, Mr President Trump, we know you're working hard to open the economy, battling blockage and discomfort, democrats and the nasty press. At SolaBag, we're here to wash that all away with the power of UV light and help you get things moving in the USA again.

 

[TheTalkingMule]

@jhm has finally gone around the bend. The lockdown got him!

 

[Unpilot]

@jhm has finally gone around the bend. The lockdown got him!

I want in on the first rd!

 

[TNEVol]

No jhm is replacing elasticity with elastic strips for the bag.

 

[jhm]

No jhm is replacing elasticity with elastic strips for the bag.

You can do a lot with fibre optics these days. Just sayin'.

 

[Dare]

U.S. Natural Gas to Be World’s Priciest Amid Virus Upheaval

 

[doug]

You can do a lot with fibre optics these days. Just sayin'.

I don't think that's the kind of fiber that is supposed to be good for the colon.

 

[mspohr]

Don't bail out fossil fuels. Buy them out instead | Opinion

Many American fossil fuel companies are teetering on the brink of collapse, with tens of billions of dollars of industry debt set to mature over the next couple years. This leaves us with two choices. We could wait for the fracking bubble to fully burst, and let Washington politicians and industry lobbyists arrange a hasty "rescue" package, which will undoubtedly enrich CEOs and Wall Street investors but leave workers in the lurch. Or we could seize this moment to help address the existing financial crisis and at the same time make great strides in addressing the climate crisis as well.

Simply put, here's how the buyout can work: The federal government purchases enough stock to take a majority stake in the largest American fossil fuel companies, and over the next decade winds down drilling and fracking operations while managing a rapid, just transition to clean, renewable energy. This would drastically reduce climate-warming emissions while creating hundreds of thousands of stable new jobs at a time when American workers need them most. As documented in our 2019 report "Building Climate Justice," the vast majority of these jobs are based in readily available technologies, including solar panel production and energy efficiency retrofitting

 

[Unpilot]

Oil prices could remain under pressure, according to satellite imagery analysis

 

[jhm]

https://www.advisorperspectives.com...investors-shouldnt-count-on-big-oil-dividends

Thoughtful article on whether it is time for the oil industries to use the Covid-19 crisis to restructure dividend policies and expectation.

There is a strong case to be made that having a progressive dividend in such an inherently volatile business as oil is asking for trouble. Big Mining acknowledged as much back in 2016, when BHP Billiton Plc, for example, switched away from progressive dividends to tying its payouts to a percentage of (fluctuating) profits.

A dividend that erodes the balance sheet, thereby raising the risk premium, stops being a down-payment on value and ultimately becomes a drag on it. Put another way, above a certain level, dividend yields indicate the market isn’t paying up for promises of more — so maybe just stop promising.

Moreover, the implacable issue of climate change stokes expectations of peak demand, making promises of ever-rising dividends look even more incongruous. So why not use the shock value of negative oil prices to reset dividend policy?

As the author points out, the era of "growth plus dividends" for the oil industry has come to an end. Covid-19 might be the best point in time to pivot to a dividend policy that will make sense as the industry suffers degrowth.

Viewed in that light, the dividend is an insurance policy against doing stupid stuff. “Dividends and debt prevent undisciplined companies from being more undisciplined,” says Doug Terreson, oil analyst at Evercore ISI. If management doesn’t have a loose billion or so lying around, they’re less likely to blow it on an ill-timed acquisition or mega-project. “The bottom line is that it’s not that dividends are too high for Big Oil, it’s capital discipline that is too low,” Terreson adds.

A dividend policy that helps discipline management not overinvest into a glut could be really helpful. Paying out a fixed dividend (rather than one that is responsive for fluctuations in earns and cash flow) means that when oil prices are high and it is easy to generate cash, management is tempted with surplus cash on hand. But this is precisely when the industry must exercise capital constrant. A few years of strong oil prices can quickly turn into a glut of overinvestment leading back to low price. In this part of the cycle, the fixed dividend becomes a burden on strained balance sheets. Indeed borrowing money to pay a dividend can imperil the long term value of a company. High dividend yeilds, such as ExxonMobil at 8.5%, signal that the market is losing faith in the long-term value of the stock. The fat dividend payout may be doing more harm than good, by levering up the company.

Clearly a progressively growing dividend that is out of touch with cash flow is not going to be sustainable as demand for oil goes into structural decline. So a shift in dividend policy is inevitable. A policy that is more adaptive, such as one which pays out a certain fraction of earnings, looks much more sensible to me. Even this means that more cash is sitting around for management to play with when profits (read oil prices) are high, but not as much as the fixed policy. So this means a little more capital discipline to avoid surging into oversupply. It also means less balance sheet abuse when oil prices are low.

But a fractional earning payout dividend policy doesn't doesn't directly connect with the reality of structural decline in fuel demand. I would like to suggest a stock buyback policy that would scale with declining fossil demand. In particular energy assets must decline with fuel demand. Imagine a stock buyback policy that was based on targeting a certain level of energy assets per share, say $100 of energy assets per share. This can stabilize the share price. The effectiveness of management comes down to making sure that a marginal $100 investment in assets has solid returns and is worth more than just buying back a share. Earnings not reinvested in energy assets are paid out as a dividend. As demand for fuel declines, a company structured like this is able to preserve the value of energy assets while returning capital to shareholders. It is no longer a question about where management can grow a bigger portfolio of energy assets, but rather how much profit they can squeeze out of $100 of energy assets. The balance sheet can shrink, while the number of shares shrinks with it.

Note that in the above scheme the target energy assets per share could alternatively be set to grow over time, say 3% per year or some such. It does not fundamentally change the concept.

 

[mspohr]

https://www.advisorperspectives.com...investors-shouldnt-count-on-big-oil-dividends

Thoughtful article on whether it is time for the oil industries to use the Covid-19 crisis to restructure dividend policies and expectation.




As the author points out, the era of "growth plus dividends" for the oil industry has come to an end. Covid-19 might be the best point in time to pivot to a dividend policy that will make sense as the industry suffers degrowth.




A dividend policy that helps discipline management not overinvest into a glut could be really helpful. Paying out a fixed dividend (rather than one that is responsive for fluctuations in earns and cash flow) means that when oil prices are high and it is easy to generate cash, management is tempted with surplus cash on hand. But this is precisely when the industry must exercise capital constrant. A few years of strong oil prices can quickly turn into a glut of overinvestment leading back to low price. In this part of the cycle, the fixed dividend becomes a burden on strained balance sheets. Indeed borrowing money to pay a dividend can imperil the long term value of a company. High dividend yeilds, such as ExxonMobil at 8.5%, signal that the market is losing faith in the long-term value of the stock. The fat dividend payout may be doing more harm than good, by levering up the company.

Clearly a progressively growing dividend that is out of touch with cash flow is not going to be sustainable as demand for oil goes into structural decline. So a shift in dividend policy is inevitable. A policy that is more adaptive, such as one which pays out a certain fraction of earnings, looks much more sensible to me. Even this means that more cash is sitting around for management to play with when profits (read oil prices) are high, but not as much as the fixed policy. So this means a little more capital discipline to avoid surging into oversupply. It also means less balance sheet abuse when oil prices are low.

But a fractional earning payout dividend policy doesn't doesn't directly connect with the reality of structural decline in fuel demand. I would like to suggest a stock buyback policy that would scale with declining fossil demand. In particular energy assets must decline with fuel demand. Imagine a stock buyback policy that was based on targeting a certain level of energy assets per share, say $100 of energy assets per share. This can stabilize the share price. The effectiveness of management comes down to making sure that a marginal $100 investment in assets has solid returns and is worth more than just buying back a share. Earnings not reinvested in energy assets are paid out as a dividend. As demand for fuel declines, a company structured like this is able to preserve the value of energy assets while returning capital to shareholders. It is no longer a question about where management can grow a bigger portfolio of energy assets, but rather how much profit they can squeeze out of $100 of energy assets. The balance sheet can shrink, while the number of shares shrinks with it.

Note that in the above scheme the target energy assets per share could alternatively be set to grow over time, say 3% per year or some such. It does not fundamentally change the concept.

I just wonder about the alternative reality of the fossil fuel companies. It's been clear for some time that "growth" will not be happening; borrowing money to pay dividends is stupid and is becoming more difficult; their industry is in decline.
They need to realize that the best management approach is to try to wind things down as cleanly as possible, not loot banks and the government to feed their greed. (Probably unrealistic expectation.)

 

[TheTalkingMule]

Current narrative seems to be oil in the $40's by end of the year, then $60's next year. Laughable, but I'm loving it if the markets take this as a realistic scenario.

Shale's Decline Will Make Way For The Next Big Thing in Oil | OilPrice.com

 

[jhm]

I just wonder about the alternative reality of the fossil fuel companies. It's been clear for some time that "growth" will not be happening; borrowing money to pay dividends is stupid and is becoming more difficult; their industry is in decline.
They need to realize that the best management approach is to try to wind things down as cleanly as possible, not loot banks and the government to feed their greed. (Probably unrealistic expectation.)

I think the oil companies have been frightened to upset the illusion of BAU in the minds of dividend investors. Covid-19 can give them an opportunity to come clean and reset expectations.

Growth is an illusion already.

Production asset growth --> Oversupply --> Depressed fuel prices --> Poor return on assets

Increasing assets per share is not an effective strategy to increase EPS. Worse, when dividend > EPS, you are either shrinking assets per share or increasing leverage. So asset growth plus dividend > EPS leads to a highly leverages and hence risky balance sheet.

This is why I think it would be tremendously transparent to link stock buyback to strategy of preserving assets per share. What does a $100 of ExxonMobil assets earn? Last year, about $3.91. Under this buyback policy, EPS becomes immediately identified with ROA. Bulking up on poor performing assets would kill EPS, and hence the source for dividends, and you can't hide that reality by simply buying back more shares.

BTW, if dividend investors are more concerned about a dividend cut than a dividend financed by debt, they deserve to lose share value.

 

[mspohr]

How to bail out the oil industry without destroying the planet

The other key thing is that the U.S. oil sector is buried in debt. Oil production, and especially shale oil production, is a capital-intensive industry, and it's only becoming more so as all the easy-to-get oil is tapped out. As impressive as the domestic oil boom was this past decade, it had to be fueled by a ton of borrowing. The industry now owes $86 billion that's coming due between now and 2024 — a lot of which is risky, low-quality debt. Pipeline companies owe another $123 billion over the same period.

And right now, thanks to the coronavirus crisis, the oil industry has never been a cheaper bargain. Haliburton's stock is down by two-thirds. ExxonMobil's is down by 38 percent. Every energy company on the S&P 500 could be bought out for a grand total of about $700 billion — or roughly one-third of what the U.S. government just spent on the CARES Act.

In the meantime, an oil industry bailout in the here and now, depending on how it's structured, could also lay the groundwork for that. If the federal government just gives the oil industry straight cash or cheap loans, that's obviously not good. But lawmakers are also discussing a deal whereby the government takes ownership of the surplus oil that's in excess of demand, or it gets oil industry stock in exchange for aid. In that case, the federal government could get to decide when — or if — that excess oil ever gets consumed at all. And if the shares the government gets from the industry are voting shares (a key and critical point), it could begin to wield influence over big oil's corporate governance. Then, assuming Democrats win in November, they can use that power as a stepping stone to grab up the rest of the industry.

 

[TheTalkingMule]

We're decentralizing and headed towards efficient abundance, government ownership is diametrically opposed to both those things. Fossil interests will be starved out and left behind.

 

[jhm]

How to bail out the oil industry without destroying the planet

The other key thing is that the U.S. oil sector is buried in debt. Oil production, and especially shale oil production, is a capital-intensive industry, and it's only becoming more so as all the easy-to-get oil is tapped out. As impressive as the domestic oil boom was this past decade, it had to be fueled by a ton of borrowing. The industry now owes $86 billion that's coming due between now and 2024 — a lot of which is risky, low-quality debt. Pipeline companies owe another $123 billion over the same period.

And right now, thanks to the coronavirus crisis, the oil industry has never been a cheaper bargain. Haliburton's stock is down by two-thirds. ExxonMobil's is down by 38 percent. Every energy company on the S&P 500 could be bought out for a grand total of about $700 billion — or roughly one-third of what the U.S. government just spent on the CARES Act.

In the meantime, an oil industry bailout in the here and now, depending on how it's structured, could also lay the groundwork for that. If the federal government just gives the oil industry straight cash or cheap loans, that's obviously not good. But lawmakers are also discussing a deal whereby the government takes ownership of the surplus oil that's in excess of demand, or it gets oil industry stock in exchange for aid. In that case, the federal government could get to decide when — or if — that excess oil ever gets consumed at all. And if the shares the government gets from the industry are voting shares (a key and critical point), it could begin to wield influence over big oil's corporate governance. Then, assuming Democrats win in November, they can use that power as a stepping stone to grab up the rest of the industry.

I think Musk has described a "good" engineer as someone who can optimize a thing that should not exist. It takes a great engineer to see that a thing need not exist.

Put bluntly, the oil and gas industry should not exist. Rather its should scale back to face obsolescence. There is no value to bailing out this industry. Perhaps unemployed workers should get certain benefits broadly available to all workers, but that's it. The sooner oil and gas workers find better industries to work in, the better it will be for everyone.

 

[ItsNotAboutTheMoney]

Put bluntly, the oil and gas industry should not exist. Rather its should scale back to face obsolescence. There is no value to bailing out this industry. Perhaps unemployed workers should get certain benefits broadly available to all workers, but that's it. The sooner oil and gas workers find better industries to work in, the better it will be for everyone.

Given that we're not even close to providing an renewable alternative for shipping, aviation and rail freight saying that it "should not exist" is stupid.

 

[jhm]

Energy Transfer weighs crude storage in idle pipelines

Energy Transfer is proposing to move oil around in its oil pipes so that it can store about 2 million barrels. It sounds like that point is to move oil away from Cushing, where storage at risk of filling up. The would need to install pumps to alter the flow. But I guess if the price of oil goes negative again, these pumps would be quickly paid for.

 

[TheTalkingMule]

Energy Transfer weighs crude storage in idle pipelines

Energy Transfer is proposing to move oil around in its oil pipes so that it can store about 2 million barrels. It sounds like that point is to move oil away from Cushing, where storage at risk of filling up. The would need to install pumps to alter the flow. But I guess if the price of oil goes negative again, these pumps would be quickly paid for.

You've forgotten.....EPA regulations are suspended. They simply need to open the other end of the pipeline when pricing goes negative and print money!

 

[jhm]

Given that we're not even close to providing an renewable alternative for shipping, aviation and rail freight saying that it "should not exist" is stupid.

No, it's not stupid. An industry that is chronically oversupplied does not need a bail out. It needs to shrink. It needs lower levels of investment.

On the flip side, renewable alternatives do need to exist. The oversupply of fossils has been a major headwind impeding the scale up of alternatives. We don't really know how fast these alternative can scale as long a over investment in oil and gas persist. So I reject your premise that "we're not even close." Where we are is function of being crowded out by things that should not exist. When we clear out the things that should not exist, we make much more room for the things that should exist.