Raymond James Energy Stat: Massive Monetary Stimulus Has Bullish Implications for Oil < Send me an email if you'd like to read the full report dmsteffens@comcast.net
JOHN FREEMAN, CFA
July 27, 2020
In today's energy stat, we take an in depth look at the magnitude and direction of this year's unparalleled U.S. monetary stimulus and its potential implications for the oil market. This stat draws seven main conclusions:
1) oil prices have historically moved upwards with big swings in the CPI;
2) the money supply increase in the U.S. over the past 6 months dwarfs anything seen before;
3) large deficits are poised to continue and further grow M2 ;
4) the jump in M2 should eventually result in inflation;
5) troughs in the ratio of hard assets to financial assets (like what we potentially saw in April) are good harbingers for oil;
6) high-levered energy companies (especially E&P) stand the most to gain in inflationary periods; and
7) the reversal of globalization trends makes inflation a much bigger risk than during the last recession.
RJ: Fed's Stimulus Packages will increase oil price - July 2
RJ: Fed's Stimulus Packages will increase oil price - July 2
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: RJ: Fed's Stimulus Packages will increase oil price - Ju
If you believe inflation is coming (I sure do) then read this carefully:
Raymond James: High-Levered E&Ps Stand to Gain the Most From Potential Bull Market in Oil
"To state the obvious, E&Ps stand the most to gain from a bull-run in commodities (hold most of the oil reserves), especially given their high
debt-levels. Looking at the graph below, you can clearly see the huge amount of maturities facing E&Ps over the next few years ($160B through
2026 for the 37 public companies included in our analysis). While debt is not adjusted for inflation, the value of commodities certainly are, as we
demonstrated on the first page. This year has shown how quickly the EBITDA effect can cause a leverage issue for E&Ps (leverage covenants were a
particular concern), but the same phenomenon occurs when prices are going the other way (nobody fears covenants at $100 oil). Working against
this, is the high debt loads in the industry, in general, as anyone refinancing will have to do so at higher interest rate as presumably rates will rise to
counter inflation, but given the switch to capital discipline, we believe this will mainly affect E&Ps with near-term maturities that could be forced
to refinance before being able to pay down debt with FCF. Then again, E&Ps have been paying way higher interest rates than other corporate
borrowers given the declining oil prices we’ve seen, whereas in a rising oil price environment better credit ratings from lower leverage (due to
EBITDA effect mentioned above) will partially make up for the end of the easy money era. The ideal E&P for this environment would be those with
high-debt levels and far away maturities (APA, LPI, and MTDR come to mind) as a sharp increase in oil prices would allow them to repay notes with
FCF or at the very least make their leverage much smaller in proportion to their earnings."
Raymond James: High-Levered E&Ps Stand to Gain the Most From Potential Bull Market in Oil
"To state the obvious, E&Ps stand the most to gain from a bull-run in commodities (hold most of the oil reserves), especially given their high
debt-levels. Looking at the graph below, you can clearly see the huge amount of maturities facing E&Ps over the next few years ($160B through
2026 for the 37 public companies included in our analysis). While debt is not adjusted for inflation, the value of commodities certainly are, as we
demonstrated on the first page. This year has shown how quickly the EBITDA effect can cause a leverage issue for E&Ps (leverage covenants were a
particular concern), but the same phenomenon occurs when prices are going the other way (nobody fears covenants at $100 oil). Working against
this, is the high debt loads in the industry, in general, as anyone refinancing will have to do so at higher interest rate as presumably rates will rise to
counter inflation, but given the switch to capital discipline, we believe this will mainly affect E&Ps with near-term maturities that could be forced
to refinance before being able to pay down debt with FCF. Then again, E&Ps have been paying way higher interest rates than other corporate
borrowers given the declining oil prices we’ve seen, whereas in a rising oil price environment better credit ratings from lower leverage (due to
EBITDA effect mentioned above) will partially make up for the end of the easy money era. The ideal E&P for this environment would be those with
high-debt levels and far away maturities (APA, LPI, and MTDR come to mind) as a sharp increase in oil prices would allow them to repay notes with
FCF or at the very least make their leverage much smaller in proportion to their earnings."
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: RJ: Fed's Stimulus Packages will increase oil price - Ju
"This Time It's Different" (Why Inflation Should Hit Harder After this Recession)
"To close, we anticipate that the biggest pushback against this piece will be, "That's what everyone said during the last recession." Our main
argument against that is composed of two parts: 1) As we showed on the second page of this stat, the two aren’t comparable in size. Like comparing
an atom bomb to a hydrogen bomb, which uses an atom bomb as its trigger (yes, all our metaphors in this piece are depressing). Sure, they are
based on the same principles, but the magnitude is completely different. 2) Our second argument deals with the demand for dollars while the
rest of this piece and our first argument focused on the supply. Back in 2009, the world was still trending towards increasing globalization and
international trade, a trend that stimulated demand for dollars as the currency of choice for trade contracts. In fact, per the Hoover Institute,
“the dollar’s share as an invoicing currency is 4.7 times its share in world imports and 3.1 times its share in world exports," meaning more trade
equates to more dollar demand. According to the WTO, the globalization trend was already beginning to reverse itself before the pandemic hit
with international trade falling 3% on a dollar adjusted basis in 2019. This was even before companies saw the benefits of building resiliency
into supply chains due to COVID-19 related disruptions. Following the decline we saw in 2019, the WTO now projects world merchandise trade
to plummet by between 13 and 32% in 2020 due to the pandemic, and it remains to be seen if it will grow at the high pre-2019 rate ever again.
Adding to this, the petro-dollar has long been a staple of dollar demand for international trade, and the recent agreement between China and
Iran will throw that into question as it is highly unlikely these sales will be priced in dollars (given the sanctions we have on Iran, not to mention
escalating U.S.-China tensions). All of this should contribute to a fall in the demand for dollars (or at least the growth rate) which has the same
effect as an increase in supply, namely inflation."
"To close, we anticipate that the biggest pushback against this piece will be, "That's what everyone said during the last recession." Our main
argument against that is composed of two parts: 1) As we showed on the second page of this stat, the two aren’t comparable in size. Like comparing
an atom bomb to a hydrogen bomb, which uses an atom bomb as its trigger (yes, all our metaphors in this piece are depressing). Sure, they are
based on the same principles, but the magnitude is completely different. 2) Our second argument deals with the demand for dollars while the
rest of this piece and our first argument focused on the supply. Back in 2009, the world was still trending towards increasing globalization and
international trade, a trend that stimulated demand for dollars as the currency of choice for trade contracts. In fact, per the Hoover Institute,
“the dollar’s share as an invoicing currency is 4.7 times its share in world imports and 3.1 times its share in world exports," meaning more trade
equates to more dollar demand. According to the WTO, the globalization trend was already beginning to reverse itself before the pandemic hit
with international trade falling 3% on a dollar adjusted basis in 2019. This was even before companies saw the benefits of building resiliency
into supply chains due to COVID-19 related disruptions. Following the decline we saw in 2019, the WTO now projects world merchandise trade
to plummet by between 13 and 32% in 2020 due to the pandemic, and it remains to be seen if it will grow at the high pre-2019 rate ever again.
Adding to this, the petro-dollar has long been a staple of dollar demand for international trade, and the recent agreement between China and
Iran will throw that into question as it is highly unlikely these sales will be priced in dollars (given the sanctions we have on Iran, not to mention
escalating U.S.-China tensions). All of this should contribute to a fall in the demand for dollars (or at least the growth rate) which has the same
effect as an increase in supply, namely inflation."
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group