Friday, March 20, 2009
Updated Chart and 4 Week Moving Average
I have updated the chart with the latest Rig data and added a 4-week moving average for production. With the high amount of noise in the data, this should help everyone see the trends better.
The Impact of the AIG 90% Tax
Congress has just made a huge mistake and one that will cause any economic recovery to be delayed by one year or more.
What has Congress done? The house has passed a law that taxes 90% of all bonus payments to ALL firms who have received more than $5 billion in TARP money. This includes all the top banks, such as Goldman, Wells Fargo and Bank of America. In addition, the tax is on family income. Needless to say thousands of people who do work at these institutions will be impacted. For example, say two mid-level executives both earn $150,000 a year, then their bonuses will be taxed at 90%. So every bank under TARP now has an incentive to get rid of the TARP funds as fast as possible. Does anybody really think Goldman can operate under these rules? Their business model does not work under these rules. Thus, all banks have an immediate incentive to pay back the TARP funds NOW.
Up to this point the TARP has been designed to increase lending in the economy. You can argue if the program has been successful or not. But in order for the program to work, the banks have to use the money to make loans. The program was designed for only the 'best' banks to get money. But now Congress has put an extremely onerous provision: You can't give any bonuses! Congress has showed that agreements with the government are only good as long as the political will remains constant.
How will banks react? They will move to immediately pay back the government. To the extent possible, they will stop lending, stop dividends, stop everything to get back their bonuses. Wouldn't you? If you were the head of Wells Fargo and were faced with paying ZERO bonuses for almost all your employees wouldn't you stop everything and try to get out of this disaster? This will start a major run on the capital markets and stop lending. THE VERY OPPOSITE THING TARP WAS DESIGNED TO ENCOURAGE!
Because of the reduced lending, the economy may be faced with a much longer and slower recovery. Would you trust the government to put money into your company? With all the strings that will eventually be attached? If I were President of GM, I would rather face bankruptcy than Congress running my business!
The point is government intervention in the operations of corporations has been shown to be disruptive. The economy will suffer and unemployment will be significantly higher than all prior estimates.
What has Congress done? The house has passed a law that taxes 90% of all bonus payments to ALL firms who have received more than $5 billion in TARP money. This includes all the top banks, such as Goldman, Wells Fargo and Bank of America. In addition, the tax is on family income. Needless to say thousands of people who do work at these institutions will be impacted. For example, say two mid-level executives both earn $150,000 a year, then their bonuses will be taxed at 90%. So every bank under TARP now has an incentive to get rid of the TARP funds as fast as possible. Does anybody really think Goldman can operate under these rules? Their business model does not work under these rules. Thus, all banks have an immediate incentive to pay back the TARP funds NOW.
Up to this point the TARP has been designed to increase lending in the economy. You can argue if the program has been successful or not. But in order for the program to work, the banks have to use the money to make loans. The program was designed for only the 'best' banks to get money. But now Congress has put an extremely onerous provision: You can't give any bonuses! Congress has showed that agreements with the government are only good as long as the political will remains constant.
How will banks react? They will move to immediately pay back the government. To the extent possible, they will stop lending, stop dividends, stop everything to get back their bonuses. Wouldn't you? If you were the head of Wells Fargo and were faced with paying ZERO bonuses for almost all your employees wouldn't you stop everything and try to get out of this disaster? This will start a major run on the capital markets and stop lending. THE VERY OPPOSITE THING TARP WAS DESIGNED TO ENCOURAGE!
Because of the reduced lending, the economy may be faced with a much longer and slower recovery. Would you trust the government to put money into your company? With all the strings that will eventually be attached? If I were President of GM, I would rather face bankruptcy than Congress running my business!
The point is government intervention in the operations of corporations has been shown to be disruptive. The economy will suffer and unemployment will be significantly higher than all prior estimates.
Tuesday, March 17, 2009
Update for Robry's latest data
In looking at the Robry data, the production has fallen to the lowest point in 09. We currently are at the same level of production as the week of July 11, 08. Given the steep decreases in drilling rigs, we have not seen the real decreases in production. Unless prices for natural gas rise quickly, we could see a sub 400 week in May. This would be lower than almost all weeks in 08.
Note that production often falls in April, but this year in addition to the normal seasonal effect, we have drilling rigs levels collapsing and completion levels collapsing even more. The result should be a dramatic fall in production from now till prices rebound. How low of production can we go? I do expect to see sub-400 levels of production before May. This would be much lower than last year's production.
Raymond James has the following quote: "our rig/production model doesn’t have U.S. gas supply down on a year-over-year basis until after June." Given Robry's data, I expect their will be days in March which YOY the production will be down. In April, I would expect there to be weeks where the production was down YOY. Last year production fell in April, so it will be hard to fall faster than the decrease last year, but without a doubt, we will NOT see the increases we did last summer. I predict that for the month of May 09, the production will be less than May 08. Raymond James has been out ahead of everyone on the large increases in production. And while I do not think the price of natural gas is going to rise to $10, I think any price below $3.50 is unsustainable and will cause production to fall to unacceptable levels.
Note that production often falls in April, but this year in addition to the normal seasonal effect, we have drilling rigs levels collapsing and completion levels collapsing even more. The result should be a dramatic fall in production from now till prices rebound. How low of production can we go? I do expect to see sub-400 levels of production before May. This would be much lower than last year's production.
Raymond James has the following quote: "our rig/production model doesn’t have U.S. gas supply down on a year-over-year basis until after June." Given Robry's data, I expect their will be days in March which YOY the production will be down. In April, I would expect there to be weeks where the production was down YOY. Last year production fell in April, so it will be hard to fall faster than the decrease last year, but without a doubt, we will NOT see the increases we did last summer. I predict that for the month of May 09, the production will be less than May 08. Raymond James has been out ahead of everyone on the large increases in production. And while I do not think the price of natural gas is going to rise to $10, I think any price below $3.50 is unsustainable and will cause production to fall to unacceptable levels.
Friday, March 13, 2009
Rig Count Continues to Fall like a ROCK.
In the chart below, you can see Value's estimated Horizontal Natural Gas Rig count continues to fall.
But the Canadian rig count is also falling and more importantly is HALF what it was last year. HALF!
Ahh, but Texas will save us!---- well actually the rig count there looks even worse:
While production has yet to really fall, it MUST. You can not cut the rig count by 50% and not see an impact on production!
Are all the drilling programs worthless? Have companies really been drilling lots of dry holes?
As a result, I expect production to shortly fall to levels LOWER than 2008. The only question is when the production rolls over.
The next question is how low will production fall? Will production fall by more than 10% from January levels? That would be a 6 bcf/day fall in production by September. I think that is very possible if prices stay in the $4 area or lower.
But the Canadian rig count is also falling and more importantly is HALF what it was last year. HALF!
Ahh, but Texas will save us!---- well actually the rig count there looks even worse:
While production has yet to really fall, it MUST. You can not cut the rig count by 50% and not see an impact on production!
Are all the drilling programs worthless? Have companies really been drilling lots of dry holes?
As a result, I expect production to shortly fall to levels LOWER than 2008. The only question is when the production rolls over.
The next question is how low will production fall? Will production fall by more than 10% from January levels? That would be a 6 bcf/day fall in production by September. I think that is very possible if prices stay in the $4 area or lower.
Tuesday, March 10, 2009
Update for Robry's latest data
Production increased slightly during the week. The daily numbers show a temporary spike in the middle of the week, with production then falling below the prior week's average. If the late week numbers continue next week, the production would decline below the level of the past several weeks.
Friday, March 6, 2009
Rig Update for 3.05.09
The data has been updated with the latest Valueconcious data for 3/5/09. It looks like the decrease in horizontal rigs has slowed down. I don't know if this is a trend or a one week event, but is interesting. From the industry chatter, some rigs are under contract and many of the remaining rigs may be under contract for several months.
Tuesday, March 3, 2009
The updated Robry chart shows production has stabilized at 435 a week. Note that this is very unusual. At no time in the past few years have we had 3 weeks of production at exactly the same level. Why the stability? Could be just coincidence or it could be something in the underlying data. Any ideas?
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