3/9/2020

Hello there,

I hope everyone had a good weekend and PULLED ALL OF YOUR MONEY OUT OF THE STOCK MARKET AND BURIED IT IN A COFFEE CAN IN YOUR BACKYARD. That or do something fun with it like bet on some random 16 seed to upset a 1 seed in March Madness again this year. The payout on that is too good to pass up. Calling my bookie real quick and putting my life savings on it. And yes, I have really enjoyed both of my knee caps being fully intact so far. I don't know why people keep asking me about them after I bring up this idea. Crazy past couple of weeks with stock markets around the world. Things were amplified this weekend after Saudi Arabia got jacked up on Mountain Dew and decided to make an irrational decision. You know what else is irrational? OKC winning in Boston on Sunday without its leading scorer in SGA. CP3 was absolutely fantastic and Schroder played out of his mind as well. For the first time this year, I have started to wonder if OKC can pull off a 2004 Detroit Pistons run. That Pistons team was solid all around but had no real superstars. It was just really well built and rode a hot, clutch point guard in Chauncey Billups to a title. Could OKC make that kind of run again with CP3 playing the Chauncey role? Slim chance, but fun to think about. What isn't fun to think about is the disaster that has been happening to stock markets around the world because of the coronavirus and news from OPEC. In this weeks #bucketsblog, Saudi Arabia went nuclear, Joe Biden - rapper name is Joe Budden probably - pumped it up on Super Tuesday, Iran didn't want to be left out of the catastrophic news cycle, and the coronavirus continues to deliver body blows to U.S. E&Ps and well, to everything really.

March 9, 2020

Saudi Arabia declares a price war with Russia and the world craters

• OPEC held their quarterly meeting last Thursday and Friday (March 5th and 6th) to discuss further production cuts in order to try and offset the loss in demand that the coronavirus has caused. Early Thursday, Saudi Arabia was targeting an additional cut of a whopping 1.5mmbpd for just Q2 of 2020. Then later that same day, a few OPEC "ministers" discussed cutting production by that same amount for the full year. Russia shot down the proposal on Friday which caused WTI and Brent crude prices to absolutely plummet. Russia is the leader of non-OPEC countries that have participated in production cuts that began in late 2016. Saudi Arabia is the leader of OPEC countries. Both are at odds and Russia is refusing to budge on its stance of not cutting production any more than they already are. According to Tsvetana Paraskova at oilprice.com:

• Markets have responded about as bad as can be expected. However, the "no-deal" outcome was far better than what actually ended up shaking out over the weekend. Not only was there not a further cut in production by OPEC and non-OPEC participating countries, nor was there a production hold, but instead, Saudi decided to square off against Russia and start a price war. Production out of Saudi Arabia is now expected to increase to 10mmbpd by April, up from 9.7mmbpd in January, and could increase up to its maximum capacity of 12mmbpd if needed. To summarize on the production front, OPEC, led by the Saudis, went into their meeting last weekend to cut production by 500mbpd to 1.5mmbpd and came out of the meeting determined to increase production by up to 2.3mmbpd because Russia said no thanks to the production cut idea. The supply/demand picture was already underwater in 2020 due to demand loss caused by the coronavirus. Saudi's are like the infamous Patrick Beverly when asked what it is like to be targeted by LeBron James late in the 4th quarter as the annoying guard said it was "no challenge" to guard the King of the NBA down the stretch. The Saudi's basically said it is "no challenge" to sacrifice economic rationale for hellbent revenge. This is a result of Russia refusing to cut production further and the Saudi's deciding to take revenge and watch the world burn. The goal for Saudi Arabia is to take market share from Russia by lowering it's crude prices by $6-$8/bbl and ramping up production. The price cuts are aimed directly at the customers that Russia markets its oil to. Brent and WTI prices both cratered by more than 20% as a result of the falling out between the Saudis and Russians with both price levels around $36/bbl and $33/bbl, respectively, on front-month pricing. For historical perspective, Robert McNally - president of Rapidan Energy Group which is a D.C. based energy-market consulting firm - said this:

• Saudi's decision to enter a price war annihilated more than just E&P companies in the stock market. All indices across the globe hemorrhaged value Monday (9th). The S&P 500 had to suspend trading for 15 minutes for the first time ever after only 4 minutes of trading on Monday morning as the index fell 7% in the time it takes for an average college basketball team to score more than 2 points.

• The S&P started to "rally" a bit after the halt in trading expired but is still experiencing a significant sell-off. Energy is leading the downward trend as the sector was down by 17% at one point on Monday. The Dow, NASDAQ, and S&P 500 have fallen 19%, 19%, and 18% from their respective peaks hit earlier this year. According to the Wall Street Journal (WSJ), a drop of 20% would officially halt an 11-year bull market that began in early 2009. Some already believe the bull market is officially over as Peter Cecchini, chief market strategist at Cantor Fitzerald, specifically said the bull-market is over and it is not just about hitting the 20% threshold in order to kick off a recession, according to WSJ. He went on to explain how suppressed interest rates over the years has directed investors to buy stocks which drove up market indices. In the meantime, underlying signals have pointed towards global growth slowing with his example being when the inverted yield curve (famous for predicting recessions) appeared last year. With this in mind, he explained that:

• Unless Russia comes back to the table soon, then the rest of 2020 and beyond looks quite a bit like a bear instead of a bull for nearly all sectors. It is mind blowing to think how a handful of decision makers in Saudi Arabia can cause global markets to lose billions of dollars in value in a matter of hours.

Don't call it a comeback. Nah, just kidding. Call it a comeback for ole Joe

• Former VP Joe Biden's campaign was deemed dead by almost every single political pundit and political hack (me) two weeks ago and even more so after he was throttled in the Nevada Caucuses. Biden and his team has long proclaimed that the first three states (Iowa, New Hampshire, and Nevada) to vote would not be great for him, but that the fourth state, South Carolina, would be his firewall state. His camp has long held on to the belief that Biden would carry the majority of the African American vote which is needed to win the Democratic Primary. In South Carolina, African-Americans make up ~60% of the Democratic primary electorate, according to USA Today. This segment of voters has been a struggle for former front-runner Senator Bernie Sanders to convince that he is the right guy in general. Biden though, Biden held firm to his belief in South Carolina and its large percentage of African-American voters and wow did that state deliver for him. Biden earned 48% of the votes and 39 delegates out of the 54 that were awarded. The other 15 went to Sanders as no other candidate passed the 15% threshold to be allocated delegates. Winning South Carolina was the PG&E power line spark to start a California wildfire for Biden's campaign. My apologies if that is too soon on the fire thing. What helped propel Biden to such great heights in South Carolina was receiving the endorsement of Democratic "kingmaker" House Majority Whip from SC, Jim Clyburn, on the Wednesday before the Saturday primary in South Carolina. From Mr. Clyburn's Twitter internet thing:

• He is the highest ranking black member in Congress and his endorsement carries some serious weight. MSNBC's Joe Scarborough had this to say about Clyburn's endorsement:

• Scarborough's words about money became more spot on after billionaire Tom Steyer ended his campaign the day after the South Carolina primary and Mike Bloomberg ended his the day after Super Tuesday. Between the two rich dudes, they spent over a half a billion dollars. That is pretty wild. Biden's win in South Carolina caused up-and-coming Democrats Pete Buttigieg to end his candidacy the day after the South Carolina primary and for Amy Klobuchar to end hers the day before Super Tuesday. Both came as a bit of a surprise and both came out and endorsed Joe Biden for president. Clearly there had to be some back room deals being made for both of those strong, albeit long-shot, candidates to drop out of the race right before Super Tuesday. It wouldn't be a surprise if Buttigieg is awarded a cabinet position if Biden goes on to win. Maybe one there for Klobuchar as well but there is a chance she just agreed to receive a boatload of cash whenever it is time for her to run for re-election as she is already a U.S. Senator. In summary, going into Super Tuesday, Biden received the kingmaker's endorsement, won big in South Carolina, and watched Buttigieg and Klobuchar end their campaigns and endorse him so the moderate vote wouldn't be split up so much which would have substantially helped out Bernie Sanders. Only Biden, Sanders, Warren, and Bloomberg were left going into Super Tuesday. Warren is likely cannibalizing votes that would mostly go to Sanders if she wasn't running. The perfect storm was setup for Biden to compete on Super Tuesday, and he did. Biden won Virginia, North Carolina, Tennessee, Arkansas, Alabama, Oklahoma, Minnesota (Klobuchar's home state), Massachusetts (Warren's home state), Maine, and the second biggest prize of the night - Texas. Sanders picked up Utah, Colorado, Vermont, and the biggest prize of the night - California. The win in Texas was big and somewhat unexpected for Biden. His campaign had spent only $550k in that state while Bloomberg dropped $57.5mm there and Sanders spent $5mm. Biden received popular, but not really a current elected person, former Texas Rep. Beto O'Rourke's endorsement right before Super Tuesday arrived. If the last few days have taught us anything, it is that endorsements are more valuable than dropping cash to earn votes. Now there is a tight, two man race the rest of the way after Warren announced she was dropping out of the race last Thursday (5th) after running a solid campaign. The map below reflects the latest delegate count as of 3/5/2020:

The world says, 'sure, we can take another piece of catastrophic news,' so Iran delivers

• Maybe we should start chanting at the world to "lock it up! lock it up! lock it up!" like people at Trump rallies did in 2016 when intelligently discussing the potential ethical and security violations of Hilary Clinton's private email server she was using while serving as the Secretary of State. The world is dealing with enough drama and strife at the moment as the coronavirus situation continues, the U.S. vs China trade war is ongoing, America is in the midst of a presidential election year, and stock markets around the globe are acting more volatile than a game-to-game box score of a full dion/DION season. Now the world has to deal with the news that broke last week from the Middle East, via the WSJ:

• Iran, the U.S., the U.K., Russia, France, China, and Germany all famously agreed to a Nuclear Accord in 2015 during the Obama Administration. The intent of this Accord was to slow down Iran's production of enriched uranium and add to the time frame it would take the country to enrich enough uranium to develop a nuclear bomb aka the "breakout time." This Accord was widely supported by Democrats in the U.S. but widely panned by Republicans because the two parties are incapable of agreeing on anything. Then the Trump Administration famously quit the Accord in May 2018 and started a "maximum economic pressure" campaign that has severely hampered Iran's economy by cutting off it's ability to export its oil (~4mmbpd) among other things. The idea was to force Iran back to the negotiation table via economic force by destroying the country's economy. So far, it appears as though this strategy has backfired. Iran instead began to ramp up its nuclear activities in July 2019 in response to the U.S. quitting the Accord and ramping up sanctions. For those of you who are scientists and understand kilogram things, this note is for you:

• Some of the material is believed to be enriched as high as 4.5% purity. Weapons grade uranium requires the purity level to be greater than 20%, according to the WSJ. Iran would need north of 1,000 kilograms of low-enriched uranium to begin the next phase. Once that is achieved, then it could take Iran as little as four months to produce enough weapons-grade material, ~25 kilograms, to have a nuclear bomb ready to go, according to former senior IAEA senior official Ollie Heinonen. After Iran has the uranium part ready, it would then have to develop a guidance system and missile design that could carry a nuclear payload. However, according to the WSJ:

• The year 2020 needs to have a restart button like an X-box or something. Maybe all the bad news is getting out of the way early this year and the second half will be blissful and filled with championship parades for the Thunder. I still don't think OKC can win a title this year, but that doesn't mean I won't be cheering for it and start saving my spot on Broadway downtown for the parade like I have done every year since 2008.

U.S. E&Ps debate whether or not CP3 could be a dude, and then coronavirus impacts

• The majority of U.S. independent oil and gas co's held their 4Q-19 / FY-19 earnings calls over the past couple of weeks. Every single call started off with each company issuing a statement on whether or not CP3 could be a dude for OKC in the playoffs or not. After that, the coronavirus's impact on demand, and thus strip pricing, was discussed and executives explained what their current approach is to their business plans for 2020. Only one of those things is true and I really really wish it was the first statement. That would make every call interesting at least. Instead execs talk about real stuff like "profits" and "margin" and "cash flow" and "oh crap the coronavirus is destroying our 2020 business plan." For the most part, U.S. E&Ps are taking a wait-and-see approach, according to S&P Global. One E&P that is under more pressure than most is Occidental (OXY). OXY acquired Anadarko for roughly the same amount of money that Mike Bloomberg is worth last year and, as a result, is under extreme pressure to meet its hefty dividend that it has in place while trying to keep its balance sheet from imploding. An angry man named Carl Icahnthinkofonlyonedudeanditsme is calling for the jobs of CEO Vicki Hollub and anyone who has ever exchanged text messages with her, probably. Ms. Hollub oversaw the relentless pursuit of Anadarko and this made Icahn angrier than RUSS after Pat Bev injured his knee in the 2013 playoffs and ruined OKC's title chances with it. Ms. Hollub said this in her earnings call about the impact of the coronavirus:

• So far, no companies have made a move to change their 2020 business plans. Siebert Williams Shank & Co LLC Managing Director for Equity Research Gabriele Sorbara believes that the "danger zone" is quickly approaching for most E&Ps though as most capital plans are based on a $50-$55/bbl price deck. A prolonged stretch of depressed oil and gas prices will force the hand of E&Ps and likely make them reduce spending significantly for the remainder of 2020. - Alright I need to address the elephant in the room. How does Sorbara's name, company name, and title fit on a business card? That has to be a size three font or something. - Sorbara believes it could still be a month or two before E&Ps start to adjust business plans and spend less as hopefully there will be more clarity on the actual impact to oil and gas demand globally by then. Tricky part will be getting the timing right for E&Ps. Too early and you could miss out on some dough. Too late and it could cost the company dearly and perhaps even damage the company beyond repair. There is a positive person out there though. Huzzah! Pioneer's CEO actually had a positive take on 2020:

• Everyone take a second and pop open a quart of oil and spray it around everywhere like its champagne in a newly crowned champion's locker room. Just kidding. There would be a lot of angry people if that happened I think. Your call. Of course, the above statement was made before Saudi Arabia went full Lance Stephenson.

"During a downturn, it helps to have deep pockets." -Recent college grad E&P analyst, likely

• S&P dishes out fantastic articles with great analysis all the time. The title of the article this blurb is about is, "'Deep pockets' could help oil majors ride out long-term coronavirus impacts." Pretty genius analysis right? Oil and gas co's with shallow pockets do not have the cash reserves to ride out a prolonged slump in commodity prices whereas oil majors do. Not a lot of mind-blowing news in that statement. What was interesting in this article was what Edward Jones analyst Jennifer Rowland had to say in regards to M&A by majors:

• Then she goes on to say:

• If oil majors are going to be reluctant to purchase smaller producers relative to their size, then what does that say about the future of most independent shale producers? Now should be prime time to buy shale producers that are operating smoothly, have a bit of runway in front of them for future oil and gas production, but may be a bit short on future free cash flow. Oil majors have mostly instituted some type of climate related focus into their future strategies. To acquire a shale player in the U.S. would most likely require them to go against that strategy which would risk a further selloff in the stock market by upset shareholders. To not acquire a shale player may hinder future earnings and be viewed as a short-term win in exchange for a long-term detriment to the company's long-term viability once good ole hindsight rolls around. For shale companies, if no oil major is available to acquire you, but future outlook is bleak due to lack of cash flow, then what is the other option? To merge with another shale co that is likely in the same situation? Maybe. Likely. Who really knows. Oil prices could shoot up to $80/bbl+ by June and natural gas prices rise to $3.00/mmbtu+ during the same time-frame and none of this will ultimately matter for a while. Or prices could continue their slumps and leave shale companies in a precarious situation by the end of 2020 and into 2021.

U.S. LNG exports could end up getting Mutombo'd

• With low prices comes great responsibility.... to cancel LNG cargoes. Prices for shipping U.S. LNG overseas to major markets in Asia continue to be suffering the wrath of the coronavirus. Sanford C. Bernstein & Co analysts foresees an increasing likelihood that U.S. LNG production will soon be shut-in. Bernstein analysts said in a March 4th note that "the current gas market is unsustainable. Prices will have to rise or U.S. capacity has to shut down." Platts Japan Korea Marker is the benchmark spot-traded LNG index for Northeast Asia and it has been hovering around $3/mmbtu which does not justify shipping LNG cargoes from the U.S. Gulf Coast to Asia. However, the question is no longer if LNG will be shut in but the question is now which LNG exporting companies will be shut in? Cheniere Energy is the gold standard of American LNG exporting companies as they were the first major player to the market and were able to lock in long-term take-or-pay sales agreements as a result. Long-term take-or-pay agreements are hard to come by nowadays, but Cheniere has them in spades since it was the first major mover. The giant LNG exporter views a "significant or prolonged" supply curtailment as unlikely for the company's operations. This comes on the heels of two April cargoes being cancelled. Cheniere said that was no big deal and they still plan to load, export, and sell those two cargoes somewhere else in the world via spot transactions. Financially for LNG exporters, their take-or-pay contracts will support them throughout the downturn as they will be getting paid either way. However, if LNG facilities begin to turn back feedgas, then that could spell disaster for U.S. gas producers. Currently, LNG exports make up about 10% of U.S. natural gas demand. U.S. natural gas prices are already suffering enough. If LNG facilities begin to slow down demand, then this will ultimately end up hurting natural gas producers far worse than it will LNG exporters. Tough, tough year and really past few years for U.S. gas producers and bearish news just seems to keep breaking every week.

Thoughts of the week:

• There is a chance that March Madness will be played in front of zero fans in the actual arenas because of the coronavirus. That is hard to wrap my head around. I am going to have to YouTube "crowd noise" or something while I watch the best weekend in sports.

• Golf would be a lot more interesting if players were allowed to hit the ball with any instrument of their choosing. It would be sweet to see Tiger Woods tee off by throwing up his golf ball in the air and then hitting it with an aluminum baseball bat.