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The trouble is not the cost of capital but the depreciation schedules that are used to report costs that are much lower than they should be. If a well produces 60% of all the oil that it will produce over its lifetime in two years it makes sense to write off 60% of the costs over those two years. The trouble is that the accountants use models that lower the depreciation costs and hide the lousy economics of shale production. While that works for a while there is a point after which the cost of drilling enough wells to offset the depletion is too high to hide the problem. The price collapse has been a boon for shale company executives because they can now use the collapse to blame the failure of their companies. If they play their cards right after the sector collapses and accounts are settled some of them may be able to try the same scam yet again when prices of oil rise once again.
1 month ago on Crash-O-Matic Finance: The ‘Shale Miracle’ Was An Epic Cheap Money Stunt
@modestproposal1 @scott_matagrano @DA_Stockman
But the cost is not $50. It is $100 or higher for the average well in the average shale formation. If the cost were $50 the primary producers of shale oil would have been able to generate positive cash flows even as they increased their drilling activity because of the huge depletion rates that ensure that most of the return comes over the first two years. That has not happened.
From what I see this is Nortel all over again. The shale players are carrying highly priced assets on their balance sheets that have no or negative value. Once reality intervenes we are looking at a typical collapse yet again.
@Adam Price Perhaps, but only because of possible technical reasons. The fundamentals for the US economy are not good and as far as I can see the USD is just a note that is issued by a technically insolvent Federal Reserve System. With around $60 billion of capital backing up $4 trillion of liabilities I do not see how the Fed survives the next crisis without requiring a bailout. The problem for dollar bulls is that when that happens you are looking at a 70% devaluation, not an increase, no matter what happens to the USD in relation to other currencies. Playing a game where we speculate about the relative strength of fiat currencies is useless unless we are a huge institution that has access to lots of free cash and has assurances of bailouts by the taxpayers. For the rest of us mere mortals it makes a lot more sense to avoid the nonsense and to keep acquiring physical gold and silver as long as the powers that be help keep the prices low.
1 month ago on Mind The Global Dollar Short——Its A $9 Trillion Time Bomb
I am sorry but this is total nonsense. Three quarters of the Bakken wells are uneconomic even at $85 oil. The only reason why there is an appearance of economy has to do with accounting games that permit companies to use Estimated Ultimate Recovery rates based on guesses rather than likely Ultimate Recovery rates that are based on the production curves. I have been trying to find any primary shale producer that has been cash flow positive or has not been reporting funding gaps for the past few years. I have yet to find one.
Note that this is not an income reporting issue because the companies can come up with any number they want by playing around with the depreciation schedules. Where we see the problems appear are on the balance sheets and cash flow statements. We also need to note that the company CEOs have been relatively honest about the fact that they have funding gaps years after they got into the shale business. As before, the issue is not really disclosure as much as it the abandonment of reason on the part of analysts and the investing public.
1 month ago on Three-Fourths Of Bakken Wells Are Uneconomic At $55/Barrel
@Ronald Thomas West
Sorry but the neocons work for both the left and the right wings of the totalitarian bird of prey. I think that your error, my friend, is assuming that there is an important difference between the GOP and Democratic Party.
4 months, 1 week ago on Behind Washington’s Demonization Of Putin: Graft For Hunter Biden, Shaft For Collaboration On Iran & Syria
Shale gas? If the Ukraine is as good a target as the US shale will destroy a huge amount of investment capital. The simple fact is that regardless of the hype the EURs outside of a few core areas are way too tiny to make shale economic.
I am sorry but all of the evidence suggests that Mitt is just as bad on economics, foreign policy, and constitutional integrity as Obama. The idea that somehow the GOP is better at containing the growth of government and protecting individual liberty on the fiscal front than the Democrats is a myth that is not supported by any empirical evidence. If anything Mitt is even more rabid about attacking Iran and getting into foreign conflicts than Obama. He is waving the red cape at Russia when there is absolutely no reason to engage with the Russian kleptocracy and pushing China into retaliating against the USD and the US capital markets. At a time when some in the CP are listening to the advocates of Hayek and Mises the GOP is squarely in the Keynesian camp and insisting that a bigger government run by Republicans is the solution to our current problems.
2 years, 3 months ago on Three Futures