From JP. Morgan Dec 1,2014

  • US oil producers unlikely to slash output anytime soon – while US firms may slow new investment, they will prob. continue pumping from existing fields.  The cost of production in existing fields is low and many US producers have hedges in place that will protect profitability.  WSJ   http://goo.gl/sdwjsY
  • US oil drilling starting to slow?  Permits for new wells dropped 15 percent across 12 major shale formations last month according to Reuters.  For the first time there are signs of a retrenchment in US output.  Reuters   http://goo.gl/UQsZHE
  • Asia forecasts big Saudi price cuts – Asian refiners forecasted big price cuts of $2-$3 a barrel for Saudi Arabia’s January crude exports – Reuters/Gulf Business   http://goo.gl/q7idEI
  • The crude price decline could become a “systemic” event by sparking a series of debt defaults – energy companies make up anywhere from 15 to 20% of all US junk debt according to various sources (up from only 5% in ’05).  The industry has been one of the most prolific junk issuers over the last few years.  A wave of defaults could ripple through the financial system, weighing on banks, asset managers, and ETFs.  “I’ve no doubt the (high-yield) sector will get bad, but the worry is that because of the general lack of liquidity in high yield overall that it could be an environment that makes contagion very much a possibility” – CNBC    http://goo.gl/T142Vp
  • Energy-linked corporate debt slides in prices.  The FT discusses how energy sector corporate bonds have slide in price along w/the crude decline.  Within the distressed portion of the market, energy accounts for 29% of all issuance.  FT   http://goo.gl/PMjzlF
  • US shale boom likened to dotcom bubble by Lukoil exec; a senior Lukoil exec has compared to current shale boom to the dotcom bubble of the late ‘90s and warned that many American E&Ps will simply “vanish”.  “In 2016, when Opec completes this objective of cleaning up the American marginal market, the oil price will start growing again”.  London Telegraph.  http://goo.gl/b8UKMU
  • Energy-linked corporate debt slides in prices.  The FT discusses how energy sector corporate bonds have slide in price along w/the crude decline.  Within the distressed portion of the market, energy accounts for 29% of all issuance.  FT   http://goo.gl/PMjzlF
  • Energy price slump starting to impact banks (FT) – according to the FT, Barclays and Wells Fargo were unable to sell a bridge loan extended to help fund the Sabine/Forest deal and as a result both banks may be facing losses on the $850MM commitment.  Meanwhile, UBS and Goldman couldn’t sell a loan earlier this week for the Apollo/Express Services deal.  Of the 180 distressed bonds in the BoA/ML HY index, ~29% were issued by energy companies.  FT   http://goo.gl/MU8ddH
  • Banks could be affected by lower oil prices, says BMO Capital
    BMO Capital says that if oil prices stay at or slightly below $70 for more than 90 days, energy loan growth could slow, while prices in the low $60s would lead to a significant deceleration. Some credit issues could develop if prices drop to the mid-$50s and stay there for more than two years, while the economies of energy-dominant states could be hurt in that scenario, added the firm, It says that 19% of BOK Financial’s (BOKF) loans were made to the energy sector, while Cullen/Frost (CF) has 14% exposure, Zions Bancorporation (ZION) 8%, Prosperity Bancshares (PB) 7%, and Comerica (CMA) 7%. :  In addition to those names which we are short except Zion and Comerica, I would add Iberiabank, a Louisiana based bank, VRBT, Veritex Holdings, and VPFG, View Point Financial.  An equal dollar amount of KRE long would provide an excellent pairs trade if you think rates are going to rise and regional banks benefit.  We are long 75% KRE and short a basket of the above banks.