Fire in the DSV market… literally…

The sea, the great unifier, is man’s only hope. Now, as never before, the old phrase has a literal meaning: we are all in the same boat.

Jacque Cousteau


Ultimately, these strains expose growing problems in the quality of the underlying assets, leading to fire sales of assets which accelerate declines in asset prices, resulting in further balance sheet pressures. Throughout this process, funding liquidity crises can exacerbate solvency concerns. These tensions feed on imbalances in bank funding structures, such as excessive recourse to debt financing that is reflected in historically high degrees of leverage. As the increase in debt often finances expansion into riskier business areas, this spills over into a deterioration of the quality of bank assets. If it goes unchecked, the process may lay the foundation for future financial crises and severe dislocations in bank funding markets.

Bank for International Settlements, 2013 (Financial crises and bank funding: recent experience in the euro area)

That the Nor Da Vinci caught fire on the way mobilise for the BP Trinidad work with Oceaneering seems likely a metaphor for the market as whole. The Da Vinci had sat in Blyth for 18 months without working a day, and then on its mobilisation voyage had a small fire necessitating a mayday call, which does not bode well for a complex worksite and a dive crew that have never worked as a team on the vessel before. I have no idea what Oceaneering and BP have agreed as a scope for getting the vessel on the dive site but one would have thought it would involve trial wet bell runs and other extensive testing, and one would have thought this will be to the owners or charterers account because there is no reason for BP to take this risk on an asset they don’t control in the current market.

The work doesn’t help the Nor owners much as the vessel will undertake a 21-25 day transit for c. 30 days of work, although the asset will be repositioned in a better location than Aberdeen, not that it helped the Bibby Sapphire. But surely the mobilisation and other costs were done on at most a reimbursable basis? But the fact such contracts are being so keenly contested surely shows how unprofitable the whole market is at the moment?

All DSVs are still working at rock bottom rates,  when they can get work, and both Bibby and Nor need further liquidity injections to remain viable in the short-term. Rumour has it that the Sapphire and Atlantis will enter lay-up but they will only join a vast amount of latent capacity in the system that under any rational analysis would point to a profitable market for contractors being a long way off.

But just as some of the fleet will be laid up it would appear the UDS have passed the point of no return where the yard will now deliver the two large construction DSVs. UDS had already struck a deal with the yard to take on the old Mermaid Ausana, the vessel still hasn’t worked and brokers report UDS bidding for anything anywhere with the vessel at rock bottom rates. They can do this because until I see proof to the contrary I do not believe UDS are paying a penny for the vessel and the same can be said for the other two new builds. UDS has in effect created a 3 North Sea class DSV company, the same number of vessels as Bibby who still turned over GBP 120m last year, without paying a cent for vessels. That is not a positive development if people actually want the market to function on some sort of rational basis.

Like the Keppel new build it will be interesting to see if there is a good second-hand market for the UDS vessels should the yards decide to stop financing them. Flashtekk is one of the major component suppliers and is controlled by parties related to UDS and not a known supplier of high quality systems (or rather I shoould say systems at all having never delivered a complete DSV on anything like this scale). One of the intriguing questions of this money go round is whether the yard is paying Flashtekk and then receving the funds back as progress payments? And frankly how big are the progress payments?

The backer of UDS is a wealthy individual but not wealthy enough to start buying multiple DSVs at USD 150-200m. There have been no announcements of any financings or associated fundraisings with the new builds and no indications that any banks, even Chinese, are behind the yard in this and it would appear that Chinese yards are in effect financing at least four very expensive new DSVs now if you include the Fugro chartered DSV in Asia. In the North Sea Vard still have the Haldane sitting as latent capacity and no realistic hope of moving the vessel to a North Sea contractor, and thus realise close to its build cost, for the foreseeable future.

All these assets are effectively financed by debt. Paper obligations with almost no equity or real cash backing them. It is well known what happens in markets where a small group of companies, holding highly illiquid assets with little tangible equity, when they drop: asset prices plummet and and cause major instablity in both solvency and liquidity terms for those involved. There is now no difference between banks and DSV owners in terms of their interactions between asset values and financing as they are both equity light/asset heavy companies and hence my quote above (albeit DSVs have no central bank to backstop asset prices.. well maybe in Singapore). Someone can no more give you the accurate “value” of a North Sea class DSV at the moment any more than they could a complex CDO in 2008, all you can get is a price and that makes raising any finance to back these assets very hard because the prices are fire sales only.

You can read all the optimistic pronouncements you want about the market getting better but until someone shows me the money and the numbers I won’t believe it. It is also worth stressing again with additions like the Kruez new Vard vessel  to Brunei, the NPCC purchase of the Swiber Atlantis, and other additions the time charter market is even more competitive than ever as these vessels are replacing jobs that were chartered every year.

But the UDS story is the biggest mystery of all. In order to justify the price of these new-builds they would have to work in the North Sea, and as Harkand and Bibby have shown that isn’t profitable, but current Asian DSV rates are not even reaching USD 100k with divers.  So either UDS have got some sort of Chinese government/oil company linkup or the yard/ an associated bank will finance those vessels forever, and if that happens the market will be in disarray for years because a substantial part of the the high-end DSV fleet will be effectively getting the boats for free in a time of over capacity. It is a recipe for endless sub-acceptable economic returns.

Further evidence on the shale narrative and rational decisions…

The FT noted yesterday:

Kosmos, which had a market capitalisation of $2.5bn in New York on Tuesday, has earned a reputation as one of the most successful international exploration companies after a string of big discoveries off the coast of west Africa. Andrew Inglis, Kosmos chief executive, said the company wanted to widen its shareholder base beyond the US, where offshore exploration has been eclipsed by onshore shale oil and gas production in investors’ affections. “The US shareholder base has become very focused on shale and we believe there is a better understanding in the UK market of the opportunities that exist in conventional offshore exploration,”

It is not a good sign for offshore that the deepest and most liquid capital market in the world doesn’t seem to recognise the value in offshore. This is a further sign that the investment narrative is moving to shale. Ultimately even large E&P companies feel responsible to their shareholders, if the largest capital market in the world starts preferring companies that invest in shale then companies will alter their capital investment plans to relfect this, there is an element of marketing in this not just based on strict economic evaluation of the potential investments available.

If you want further proof that financial decisions aren’t always rational and markets the human interaction that is part of this look no further than this fascinating paper (from Matt Levine) “Decision Fatigue and Heuristic Analyst Forecasts” where it is found:

We study whether decision fatigue affects analysts’ judgments. Analysts cover multiple firms and often issue several forecasts in a single day. We find that forecast accuracy declines over the course of a day as the number of forecasts the analyst has already issued increases. Also consistent with decision fatigue, we find that the more forecasts an analyst issues, the higher the likelihood the analyst resorts to more heuristic decisions by herding more closely with the consensus forecast and also by self-herding (i.e., reissuing their own previous outstanding forecasts). Finally, we find that the stock market understands these effects and discounts for analyst decision fatigue.

Did you get that? Act on investment banking notes if they come out early in the morning! I love the findng the market understands this. The authors note that analysts may start the day by looking at companies they have the best information about but ask why they would do this?

The link here is just that financial decisions are not always purely rational and are based on herding, narrative, and other behavioural instincts. Managers who believe they will be rewarded by the stock market for moving their investment profile to shale will do this regardless of how attractive other investment opportunities may be on a strictly “rational” basis. Not every decision, but as I always say economic change happens at the margin.

Tidewater, European banks, and zombie companies…

You walk outside, you risk your life. You take a drink of water, you risk your life. Nowadays you breath and you risk your life. You don’t have a choice. The only thing you can choose is what you’re risking it for.

Hershel (The Walking Dead)

Tidewater announed their restructuring today… as is widely reported they have written off USD 1.6bn of debt and reduced operating lease expenses by USD 73m. US Chap 11 isn’t perfect, and having nearly been on the receiving end once I find it amazing that US courts will claim jurisdiction essentially on the basis of a US domestic dollar bank account and Delaware address (which clearly isn’t the case here), but it is remarkably efficient from a macroeconomic perspective.

Last week The Economist published an article on Zombie companies noting:

there is a growing belief that the persistence of zombie firms—companies that keep operating despite a poor financial performance—may explain the weak productivity performance of developed economies in recent years.

An inability to kill off failing companies seems to have two main effects. First, the existence of the zombies drives down the average productivity level of businesses. Second, capital and labour are wrongly allocated to such firms. That stops money and workers shifting to more efficient businesses, making it harder for the latter to compete. In a sense, therefore, the corporate zombies are eating healthy firms.

… [the] analysis builds on the work of an OECD paper* published earlier this year which found that, within industries, a higher share of capital invested in zombie firms was associated with lower investment and employment growth at healthier businesses.

A fair summation of European shipping and offshore at the moment if ever I read one.

The contrast with the European shipping and offshore firms, where the banks have constantly tried to pretend that insolvent companies are viable by allowing them to pay interest only and deferring the principal payments, and the willingness of US firms to restructure and move on is clear. Part of it is structural as US banks have a smaller percentage exposure to these troubled assets but that doesn’t change the outcome. Quite how long auditors are going to allow this to continue when there are clear market based transactions with demonstrable asset values is anyone’s guess but eventually these loans will default. I agree with short-term measures, the equivalent of a liquidity rather than a solvency crisis for firms, when it really is that but with depreciating assets eventually the bullet payment is due and years into these situations the arguements for writedowns on a scale not yet seen is becoming more apparent.

The Nordic banks have been through this before during the Nordic Banking Crisis (1988-1993) having overextended themselves in real estate loans, in this case the credit bubble was driven by deregulation, like offshore shipping with a high oil price, the boom was procyclical.

Nordic Banking and Real Estate 1988-1993

Nordic Banking Crisis Data.png

As can be seen a reduction in asset values leads to a dramatic reduction in the amount of bank credit. The same thing will happen in shipping in offshore, despite it being a much smaller part of the overall bank loan books, and this reduction in credit is likely to permanently impair asset values. Economists have called this process the financial accelerator and it is clearly interacting between the banks and zombie offshore and shipping companies.

The sceptic in me thinks only a combination of liquidations, writedowns, and scrapping is going to return these sectors to an economically viable level. But the actions of the various stakeholders, individually rational but collectively irrational, the collective action problem I have mentioned here before, makes this unlikely. A future of low profitability and structural overcapacity in Europe beckons while restructured American companies with clean balance sheets look to be able to move ahead with a cost base that matches the operational environment.

Diverging results point to the future of offshore… procyclicality reverses…

Colin, for example, has recently persuaded himself that the propensity to consume in terms of money is constant at all phases of the credit cycle.  He works out a figure for it and proposes to predict by using the result, regardless of the fact that his own investigations clearly show that it is not constant, in addition to the strong a priori reasons for regarding it as most unlikely that it can be so.

The point needs emphasising because the art of thinking in terms of models is a difficult–largely because it is an unaccustomed–practice. The pseudo-analogy with the physical sciences leads directly counter to the habit of mind which is most important for an economist proper to acquire…

One has to be constantly on guard against treating the material as constant and homogeneous in the same way that the material of the other sciences, in spite of its complexity, is constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worth while falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth.

Keynes to Harrod, 1938


A, having one hundred pounds stock in trade, though pretty much in debt, gives it out to be worth three hundred pounds, on account of many privileges and advantages to which he is entitled. B, relying on A’s great wisdom and integrity, sues to be admitted partner on those terms, and accordingly buys three hundred pounds into the partnership.The trade being afterwords given out or discovered to be very improving, C comes in at fivehundred pounds; and afterwards D, at one thousand one hundred pounds. And the capital is then completed to two thousand pounds. If the partnership had gone no further than A and B, then A had got and B had lost one hundred pounds. If it had stopped at C, then A had got and C had lost two hundred pounds; and B had been where he was before: but D also coming in, A gains four hundred pounds, and B two hundred pounds; and C neither gains nor loses: but D loses six hundred pounds. Indeed, if A could show that the said capital was intrinsicallyworth four thousand and four hundred pounds, there would be no harm done to D; and B and C would have been obliged to him. But if the capital at first was worth but one hundred pounds, and increasedonly by subsequent partnership, it must then be acknowl-edged that B and C have been imposed on in their turns, and that unfortunate thoughtless D paid the piper.
A Adamson (1787) A History of Commerce (referring to the South Sea Bubble)

The Bank of England has defined procyclicality as follows:

  • First, in the short term, as the tendency to invest in a way that exacerbates market movements and contributes to asset price volatility, which can in turn contribute to asset price feedback loops. Asset price volatility has the potential to affect participants across financial markets, as well as to have longer-term macroeconomic effects; and
  • Second, in the medium term, as a tendency to invest in line with asset price and economic cycles, so that willingness to bear risk diminishes in periods of stress and increases in upturns.

Everyone is offshore recognises these traits: as the oil price rose and E&P companies started reporting record results offshore contractors had record profits. Contractors and E&P comapnies both began an investment boom, highly correlated, and on the back of this banks extended vast quantities of credit to both parties, when even the banks started getting nervous the high-yield market willingly obliged with even more credit to offshore contractors. And then the price of oil crashed an a dramatically different investment environment began.

What is procyclical on the way up with a debt boom always falls harder on the way down as a countercyclical reaction, and now the E&P companies are used to a capital light approach this is the new norm for offshore. The problem in macroeconomic terms, as I constantly repeat here, is that debt is an obligation fixed in constant numbers and as the second point above makes clear that in periods of stress for offshore contracting, such as now, the willingness to bear risk is low. Contractors with high leverage levels that required the industry to be substantially bigger cannot survive financially with new lower demand levels.

I mention this because the end of the asset bubble has truly been marked this week by the diverging results between the E&P companies and some of the large contractors. All the supermajors are now clearly a viable entities at USD 50 a barrel whereas the same cannot be said for offshore rig and vessel contractors who still face large over capacity issues.

This chart from Saipem nicely highlights the problem the offshore industry has:

Saipem backlog H1 2017 €mn

Saipem backlog Hi 2017.png

Not only has backlog in offshore Engineering and Construction dropped 13% but Saipem are working through it pretty quickly with new business at c.66% of revenues. The implication clearly being that there is a business here just 1/3 smaller than the current one. You can see why Subsea 7 worked so hard to buy the EMAS Chiyoda backlog because they added only $141m organically in Q2 with almost no new deepwater projects announced in the quarter.

It is not that industry conditions are “challenging” but clearly the industry is undergoing a secular shift to being a much smaller part of the investment profile for E&P companies and therefore a much smaller industry as the market is permanently contracting as this profile of Shell capex shows:

Shell Capex 2017

A billion here, a billion there, and pretty soon you are talking real money. The FT had a good article this week that highlighted how “Big Oil” are adapating to lower costs, and its all bad for the offshore supply chain:

The first six months of this year saw 15 large conventional upstream oil and gas projects given the green light, with reserves of about 8bn barrels of oil and oil equivalent, according to WoodMac. This compared with 12 projects approved in the whole of 2016, containing about 8.8bn barrels. However, activity remains far below the average 40 new developments approved annually between 2007 and 2013 and, with crude prices yo-yoing around $50 per barrel, analysts say the economics of conventional projects remain precarious.

Not all of these are offshore but the offshore supply chain built capacity for this demand and in fact more because utilisation was already slipping in 2014. And this statistic should terrify the offshore industry:

WoodMac says that half of all greenfield conventional projects awaiting a green light would not achieve a 15 per cent return on investment at long-term oil prices of $60 per barrel, raising “serious doubt” over their prospects for development. By this measure, there is twice as much undeveloped US shale oil capable of making money at $60 per barrel than there is conventional resources.

The backlog (or lack of) is the most worrying aspect for the financing of the whole industry. E&P companies have laid off so many engineers and slowed down so many FIDs that even if the price of oil jumped to $100 tomorrow (and no one believes that) it would take years to ramp up project delivery capacity anyway. Saipem and Subsea 7 are not exceptions they are large companies that highlight likely future work indicates that asset values at current levels may not be an anamoly for vessel and rig owners but the “new normal” as part of “lower for longer”.

I recently spoke to a senior E&P financier in Houston who is convinced “the man from Oaklahoma” is right but only because he thinks overcapacity will keep prices low: c. 50% of fracing costs come from sand, which isn’t subject to productivity improvements, and he is picking that low prices eventually catch up with the prices being paid for land. I still think that the more large E&P companies focus on improving efficiency will ensure this remains a robust source of production given their productivity improvements as Chevron’s results showed:

Chevron Permian Productivity 2017

Large oil came to the North Sea and turned it into a leading technical development centre for the rest of the world. Brazil would not be possible without the skills and competencies (e.g. HPHT) developed by the supermajors in the North Sea and I think once these same companies start focusing their R&D efforts on shale productivity will continue to increase and this will be at the expense of offshore.

It is now very clear that the supermajors, who count for the majority of complex deepwater developments that are the users of high-end vessel capacity, are very comfortable with current economic conditions. They have no incentive to binge on CapEx because even if prices go up rapidly that just means they can pay for it with current cash flow.

That means the ‘Demand Fairy’ isn’t saving anyone here and that asset values are probably a fair reflection of their economic earning potential. Now the process between banks and offshore contractors has become one of counter-cyclicality where the asset price-feedback loop is working in reverse: banks will not lend on offshore assets because no one knows (or wants to believe) the current values and therefore there are no transactions beyond absolute distress sales. This model has been well understood by economists modelling contracting credit and asset values:

Asset Prices and Credit Contracttion

Getting banks to allocate capital to offshore in the future will be very hard given the risk models used and historical losses. Offshore assets will clearly be subject to the self referencing model above.

I remain convinced that European banks and investors are doing a poor job compared to US investors about accepting the scale of their loss and the need for the industry to have significantly less capital and asset value than it does now. Too many investors thought this downturn was like 2007/08, when there was a quick rebound, and while this smoothed asset prices somewhat on the way down this cash was used mainly for liquidity, it is now running dry and not more will be available (e.e. Nor Offshore) at anything other than penal terms given the uncertainty. Until backlog is meaningfully added across the industry asset values should, in a rational world, remain extremely depressed and I believe they will.

North Sea refinancings continue… Volstad and Bibby edition

On Monday the Bibby Offshore bonds jumped from £0.32 (implying Bibby Offshore was worth £56.0m) to £0.39 (implying a value of £68.3m), the only tangible cause would appear to be the refinancing of Volstad Maritime which would give Bibby continued access to the Topaz as the Volstad Subsea bond was redeemed in full. The two companies make an interesting contrast as to how a likely refinancing will happen at Bibby.

I note that far from being a fringe opinion when I raised it early this year Bibby Offshore management have now accepted they need to change the capital structure to make the business sustainable. That means a restructuring event. However, the business still looks unprepared for the scale of change required in order to attract sensible amounts of new equity:  for example until recently there were 21 people in the US office which has had less than 30 days work in 2017. As early as Nov 16 that office should have been shut down and an agent appointed to sub-lease out the building, instead they have blown at least USD 3m in OpEx, with nothing to show for it and flown a new senior manager over just weeks before the cash crunch bites.

A refinanced Bibby Offshore, if it happens and I think it is a real if, will revert back to being a two, maybe three, North Sea DSV operation. Maximum 80 people and an Aberdeen office only. Quite how the musical chairs in management play out in the new structure is beyond me, but the days of effectively one Board per DSV are gone. Not even the UK operation is making money so any re-financing relies on new money accepting a “market recovery” will come in 2018, because without it you need GBP 20-30m in OpEx just to keep the doors open. As I have said before there is no backlog and that is the problem. The US, Singapore, and Norwegian offices are just vanity projects and if there is no structural way to close them through a pre-pack then the re-financing will fail.

Investors who believe the share pledge, Sapphire, and Polaris, the only security behind the bonds would be worth GBP 68m are either delusional or have not been following vessel values closely. The maximum in a fire sale for those 2 vessels is likely to be USD 30m excluding the running costs for the six months it would take. The business has fixed assets of £35-40m on a non distressed sale basis, but requires £20m OpEx for 1 year to access their full value, putting a value on that is very difficult because in a poor year (like this year or the year before) you have just blown £20m on Opex and clearly the business has negative value.

The Bibby bondholders face a realistic recovery of 5-10% of their initial investment under a bankrupcy scenario and this fact alone may convince them to put some money in for OpEx to try and see if time will buy them a higher recovery rate. But they will not invest anything like the current running costs of the company and therefore they will need a legal change in the structure and something significant to the cost base going forward.

I note that the funding Bibby Line Group made available (subject to Board approval and definitely not unconditional) was roughly equivalent to the Dec interest payment and ROV interest. It may be a coincidence but I think likely this was done only to help strengthen the BLG position in any negotiations, because if they miss a single interest payment the company is not theirs but the bondholders. Another poor year of trading results have made this a relatively pointless gesture. Remember BLG is only agreeing to guarantee Barclays a secured portion of the revolver facility, they are not actually injecting money into Bibby Offshore. In the Tidewater and CGG restructurings shareholders not putting in new equity have ended up with less than 5% of the equity and given the scale of the writedown bondholders will take here similar formulas will be used, I find it hard to see a meaningful role for Bibby Line Group in the restructured entity because they simply don’t have cash required for a significant recapitalisation.

Volsdtad on the other hand was another classic Norwegian restructuring. It doesn’t solve anything permanently but buys some headroom and financial flexibility. The real surprise was redeeming the bond in full which valued the Topaz at USD 60m if viewed as a standalone transaction. Clearly it wasn’t that but was blended in the overall cost of the equity injection from the Saevik family. The bondholders appear to have done well out of this as the bonds have traded as low as the mid-30s and large chunks I understand traded in the 40s recently, being redeemed at par was infinitely preferable to taking the Topaz in the current environment.

But Volstad has five other highend CSVs, three with a blue chip charterer with multi-year 365 contracts. If there is a recovery these assets will be a part of it. The risk of course is that Helix renew at dramatically lower charter rates or choose alternative tonnage, very easy now, which is all but a certainty even if they love the vessels. Some press reports tended to indicate a parachiol Norwegian element to the transaction but effectively the Saevik family paid USD 36m for a 49% share that gives them exposure to USD 540m of assets. If Bibby don’t make it, and the Topaz isn’t sold quickly, I guess the vessel can go into lay-up and the other five vessels keep ticking over. But the big contrast is that with the amount of backog the new investor is taking some risk on the asset price over time but no short term risk on OpEx as the is in the majority covered. As with DeepOcean you need backlog to successfully refinance in this market I would argue.

Long term however I am not sure Volstad shareholders are in a materially better place than the Bibby bondholders:  There are a large number of large CSVs either idle or entering lay-up, Bibby get rid of the Ares next week and the Boa vessels are available for example. Unless there is a fundamental increase in demand there are simply too may vessels and their capital value will remain below their contracted debt levels, the windfarm work that many are gravitating to covers OpEx only without even a basic contribution to drydocking.

The Saevik family have already achieved a similar result with the financial restructuring of Havila. It may give a runway until 2020 but this is a business that for Q1 2017 still lost (exclusive of restructuring charges NOK 100m) for 26 vessels 9 of which are in lay-up. But the link to Bibby is that with a poor order book Havila raised more in equity capital than it had to write off in debt and while every case is different it shows the scale of the challenge Bibby have in restructuring. The contrast between the Saevik and Bibby families could also not be greater: the Saeviks who have diversified interests in ship contruction and property, are investing equity, pure risk capital, as a core part of deals they are involved in. Instead of Michael Bibby flying to Aberdeen and telling staff the capital situation will be sorted it would be good to see them issue a corporate guarantee to all staff and small trade creditors of Bibby Offshore that regardless of circumstances they will not see them suffer should the worst occur.

Longer term I still feel that the European owners are positioning themselves poorly compared to the US counterparts. All the US deals involve significant writedowns on the secured elements of the debt whereas Havila, SolstadFarstad etc just involve deferral of the largest parts. Volstad will face the same issue when the Helix charters come up for renewal without a dramatic, and very hard to see, change in market circumstances.

Hasty generalisations and shale…

The being without an opinion is so painful to human nature that most people will leap to a hasty opinion rather than undergo it.

Walter Bagehot

John Dizzard in the FT this week spoke to a man from Oaklahoma and decided that the whole shale sector was just the result of market liquidity pumping money into the small debt financed E&P companies. Dizard suggests capital markets are “subsidising” the sector. This appears to have been a hasty generalisation… The data point appears to be based on Drilled-But-Uncompleted wells:

As one Oklahoma oil and gas man I know says: “There is still unlimited capital, and as long as that is true, you can grow anything. If the companies had been forced to live within their cash flow, then their production would go down. Then they would have run into a death spiral where nobody would want to invest in them.” The shale companies struggling with sub-$40 or sub-$50 oil prices were also able to live off the excess inventory of drilled-but-uncompleted (DUC) wells that had built up during the boom years.

As our Oklahoman says: “There were thousands of DUCs that had not been taken account of. The companies could just complete and connect those to offset the declines in production from older wells.”

The problem is I don’t see this:

DUC 17

Source: EIA, Baker Hughes, Jeffries

First of all we had the meme that shale was too expensive on a per unit basis, and now we have the meme that actually it is only possible because high-yield investors don’t understand what they are buying and funding. Admittedly HY doesn’t always get it right, as offshore bonds currently show, but to suggest that shale is solely the result of a capital misallocation is surely mistaken?

US capital markets are probably the most efficient in the world at adapting. The various restructurings happening in offshore (Paragon, Tidewater etc) highlight that banks and investors take the writedowns and move on. They are also efficient at funding companies for long periods prior to cash flow break even (Uber being the most notorious example). Shale is here to say it is only a question of how big it is.

On holiday…

I have been coming to Greece for years and every year for the past three years there has nealy been a currency and banking crisis before we arrive (last year only foreign Visa cards worked at the ATM)… I have no wish to open the Euro debate while on holiday I just note the past which is one of the reasons I like economic history:

“Throughout the latter half of the 1920s Germany was living on borrowed time. Foreign debts, many of which called be recalled at short notice, were allowed to pile up to an extent which, in view of the industrial development of the country and high tariff barriers imposed by the creditors, could never be justified by her actual or potential export earnings. How Germany was supposed to meet her obligations once capital imports ceased seems never to have been seriously considered by creditors, a lack of foresight difficult to explain. Even had there been no economic crisis or check to lending at the end of the decade it was inconcievable that Germany could have gone on absorbing such large capital imports for much longer. The alternatives were limited; any attempt to secure an improved external balance would have required severe deflation and even ths would hardly have been sufficient. It is possible that the Germans shrank from positive action to demonstrate their aversion to the obligations imposed by the Aliies. That the Allies should have attempted to conceal the impossibility of the burden, at least in the short term, by pouring capital into Germany speaks volumes for their economic wisdom”

Derek Alcroft, From Versailles to Wall Street, p257

From Reuters June 15:

But the Washington-based Fund, which Europeans value for its rigor but had fallen out with over its demands they forgive Athens some of its debt, will not disburse any of its money yet. It still wants the euro zone to offer sufficient extra detail on possible debt relief in 2018 to let the Fund calculate that it will be enough for Athens to sustain its debt in the long run.

The standby arrangement was a second best solution to a full debt deal, Lagarde said, but it would buy the euro zone, Greece and the IMF time to work out the details for next year.

A senior IMF official said they were still not satisfied the euro zone was ready to do enough on debt relief but had joined the bailout anyway as Greece risked being in difficulty again.

To accommodate the IMF’s need for more specifics on debt relief, the euro zone finance ministers said in a statement that in 2018 they would be ready to consider extending the maturities and grace periods of their loans to Greece by a range from zero to 15 years. The average maturity now is 30 years.

But they did not go any further than that and the IMF said it was not enough to calculate Greek debt sustainability.

I therefore may read this on my holiday:

Once upon a time, in the 1990s, it was widely agreed that neither Europe nor the United States was an optimum currency area, although moderating this concern was the finding that it was possible to distinguish a regional core and periphery (Bayoumi and Eichengreen,1993). Revisiting these issues, we find that the United States is remains closer to an optimum currency area than the Euro Area. More intriguingly, the Euro Area shows striking changes in correlations and responses which we interpret as reflecting hysteresis with a financial twist, in which the financial system causes aggregate supply and demand shocks to reinforce each other. An implication is that the Euro Area needs vigorous, coordinated regulation of its banking and financial systems by a single supervisor—that monetary union without banking union will not work.

Although this is one of the best books I have read in while… Caio for 2 weeks from Skala Eresou, Lesvos…