December 18th, 2014

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The marginal cost, oil and bears!
Thomas Chaize  Dec 10  

Russia and China’s Natural Gas Deals Are a Death Knell for Canada’s LNG Ambitions
Doug Casey  Dec 06  

Are Oil Prices Ready to Break out of the Trough?
Frank Holmes  Dec 05  

OPEC to US oil producers - "You’ll break before we do."...
Clive Maund  Dec 01  

The Looming Uranium Crisis: Strategic Implications for the Colder War
Doug Casey  Nov 15  

»» more editorials in the archives

market data

Ux U3O8 Price (Uranium)Dec 15th, 2014
$37.00 -$0.75

»View Commitment of Traders.

expert analysis & newsletter briefs

Cub Energy Inc.

"Cub Energy Inc. is drilling in Ukraine. Unfortunately, more than half of its production is in East Ukraine, a conflict area. It is still producing, but it cannot drill more wells. It is, however, getting good results from West Ukraine. Cub is a good, long-term Ukraine gas play." (12/11/14) - The Energy Report Interview with Chen Lin

Mart Resources Inc.

"Mart Resources Inc. has been my home run of the past few years. I've already received a dividend that was more than my original investment. Mart just announced the new pipeline has started flowing. Once the new pipeline is fully ramped up, we should see the production triple, which will generate huge cash flow. Mart's production cost is exceedingly low." (12/11/14) - The Energy Report Interview with Chen Lin

Pan Orient Energy Corp.

"Pan Orient Energy Corp.'s pilot oil sands project is in Alberta, but it also owns many conventional projects in Asia. Pan Orient is my favorite energy play because of its very strong balance sheet. The company just announced a $42.5M asset sale in Thailand. This brings its cash value, plus the other 50% of the Thai project, to CA$2.25 per share. It is trading now at $1.70/share. Beyond that, you get Canada and Indonesia for free.

Pan Orient plans to sell its Canadian asset. But right now, that asset is valued, for share purposes, at zero. At rock bottom, it's worth $100M. In Indonesia, Pan Orient's partner will cover drilling costs for 2015. The company announced the Indonesia deal with Talisman Energy on Nov. 11, so its cash position will go even higher. In addition, Pan Orient will have an experienced partner with major Indonesia presence drilling on its very large concessions; the target is as large as half a billion barrels of oil equivalent. That's a huge wild card the market didn't expect. The company is in an ideal situation now because the cash position is there, Canada is producing, Thailand is producing, and the cash flow is covering the expenses." (12/11/14) - The Energy Report Interview with Chen Lin

Energy Fuels Inc.

"We also really like Energy Fuels Inc. The company is holding several mines on standby. It can start two or three of the mines within six months to a year, and within two or three years of a production decision, it can launch an additional half dozen mines. Production scalability is very high. Energy Fuels owns the only conventional mill for processing uranium in the U.S., and that gives the firm a great strategic advantage. Right now, the mill is on standby because of the previous low-price environment. But as the uranium spot price blasts through $44/lb, a nicely leveraged Energy Fuels will soon be able to pump out profits." (12/9/14) - The Mining Report Interview with Rob Chang

Fission Uranium Corp.

"Cantor Fitzgerald likes Fission Uranium Corp. Fission's Patterson Lake South is emerging as a world-class asset. We believe Fission will eventually control more than 100 Mlb of high-grade U3O8. It is expected to put out its first resource estimate by the end of the year. Some of the best uranium drill holes ever reported are on Fission's property, and that is pretty impressive." (12/9/14) - The Mining Report Interview with Rob Chang

featured companies

Avanti Energy (TSX-V : AVN.V)
Enhancing Oil Production in Brazil and Colombia
[news ][website ]

Pan Orient Energy (TSX-V:CAN)
Canadian junior oil and natural gas company based in Calgary, Alberta.
[news ][website ]

Quantum Energy (QEGY.PK:OTC)
Development stage publicly traded diversified holding company with an emphasis in oil field development trading
[news ][website ]

Super Nova Minerals Corp. (SNP:CNSX, OTC:SNOVF)
Oil & gas exploration company focused on developing the Millford Bakken property
[news ][website ]

The Energy Report ()
Investment ideas for saavy investors
[news ][website ]

Torchlight Energy (NASDAQ: TRCH)
Oil Drilling and Working Interest in Oil Projects
[news ][website ]

from the publisher
  Robert J. Moriarty

Welcome to 321energy.

Could falling oil prices spark a financial crisis?

Nick Cunningham of
December 4th, 2014

The oil and gas boom in the United States was made possible by the extensive credit afforded to drillers. Not only has financing come from company shareholders and traditional banks, but hundreds of billions of dollars have also come from junk-bond investors looking for high returns.

Junk-bond debt in energy has reached $210 billion, which is about 16 percent of the $1.3 trillion junk-bond market. That is a dramatic rise from just 4 percent that energy debt represented 10 years ago.

As is the nature of the junk-bond market, lots of money flowed to companies with much riskier drilling prospects than, say, the oil majors. Maybe drillers were venturing into an uncertain shale play; maybe they didn't have a lot of cash on hand or were a small startup. Whatever the case may be, there is a reason that they couldn't offer "investment grade" bonds. In order to tap the bond market, these companies had to pay a hefty interest rate.

For investors, this offers the opportunity for high yield, which is why hundreds of billions of dollars helped finance companies in disparate parts of the country looking to drill in shale. When oil prices were high and production was relentlessly climbing, energy related junk bonds looked highly profitable.

But junk bonds pay high yields because they are high risk, and with oil prices dipping below $70 per barrel, companies that offered junk bonds may not have the revenue to pay back bond holders, potentially leading to steep losses in the coming weeks and months.

The situation will compound itself if oil prices stay low. The junk bond market may begin to shun risky drilling companies, cutting off access to capital. Without the ability to finance drilling, smaller or more indebted oil companies may not have a future. The Wall Street Journal profiled a few fund managers who are beginning to steer clear of smaller oil companies. Moody's Investors Service downgraded the oil and gas sector on November 25 to a "negative" outlook because of falling oil prices.

If oil prices stay at $65 per barrel for three years, 40 percent of all energy junk bonds could be looking at default, according to a recent JP Morgan estimate. While that is a long-term and uncertain scenario, the pain is being felt today. The FT reported that a third of energy debt issued in the junk-bond market is currently in "distressed" territory.

That begs the question; could a shakeout of the oil industry spark a broader financial crisis? Banks and other financial institutions could be overly exposed to energy debt. The Telegraph paints a dire scenario in which the debt bubble bursts because of low oil prices, leading to a cascading 2008-style financial collapse, at least in the junk bond market.

Such a scenario may be a bit overblown. Persistently low interest rates keep demand for junk bonds high, meaning oil companies will probably be able to restructure their debt and continue to access capital. Also, drillers will not immediately face an existential crisis because many have hedged themselves, locking in prices for a certain amount of production.

But a junk bond crisis could become more likely if oil prices stay low for an extended period of time. Once a few companies begin to default, the problem could quickly spread. Another variable is how quickly the U.S. Federal Reserve will raise interest rates, which could significantly affect the attractiveness of the junk bond market.

Local and regional banks could be highly exposed as well, especially if energy loans make up a large share of their lending portfolio. The Wall Street Journal pointed out that banks like Oklahoma-based BOK Financial – with 19 percent of its loan portfolio made up of energy loans – could be the most vulnerable. Moreover, an economic downturn in regions that depend heavily on energy, such as Texas or North Dakota, could see a broader decline in demand for loans of all kinds. That could add to the pain for local banks.

Low oil prices are not just a problem for oil companies. Investment funds, hungry for yield in a low interest rate environment, have poured money into oil and gas. To be sure, we are far from a crisis at this point, but if oil prices don't rebound, a lot of people are going to lose a lot of money.

Nick Cunningham of
December 4th, 2014

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