I keep waiting for a sign, a sign that the crushing of the oil renaissance is going to crush our economy. I keep waiting for the moment when the $250 billion in junk bonds floated by oil companies at the top of the market brings that cohort to its knees. I keep anticipating that Texas will take a nosedive of epic proportions, bringing down a chunk of the nation's banking system with it as we are so conditioned to see happening from previous oil crashes. I figure it is only a matter of time before the over-levered, eyes-too-big-for-their-bank-account oil men go belly-up, taking tens of thousands of jobs off the table with their recklessness and rendering boom cities into ghost towns.
But, here we are in our sixth month of the oil crash and the bust just hasn't occurred. It's the most widely telegraphed crash in history and the ripple effects just aren't all that visible in the vast panoply that is the U.S. economy or even for the epicenters that have thrived so much from the renaissance.
Take the most recent data points. Last night Halcon (HK), widely considered to be the single most stretched major independent, reported a five cent profit yesterday. I don't know a soul who thought this company could make any money at these oil prices. Then again, though, how many people figured that CEO Floyd Wilson, thought to be one of the biggest bulls on oil, would have been so completely hedged at much higher prices? How many people would have figured that he's got about three quarters of this year's production hedged at $90.32? That's right, ninety bucks. How many would have seen that he has more than a billion in liquidity -- cash and borrowing power -- and can easily chop that $1.1 billion capital budget to make things work just fine for 2015 at these prices?
Halcon was supposed to be an early goner.
Of course, if oil stays down here in 2016, things will get tougher. But the drilling costs are falling so fast, in many cases 25% from where they were just a few months ago, and Halcon has enough high-grade properties, that 2015 will not be the horrendous year that it is supposed to be.
But it isn't just oil companies that haven't felt the bite yet. I interviewed Wayne Goldberg, the terrific CEO of La Quinta (LQ), the hotel chain with 30% of its business in Texas, and they haven't been hit as hard by the lower oil prices as much as they have benefitted from additional travel and lower energy bills -- the latter being a huge part of his expense structure. While acknowledging that he's seen a downturn in former oil boom towns Midlands, Odessa, Victoria and San Angelo and "a little bit of softness " in Houston, it's been made up by strong business in Dallas, San Antonio and Austin.
Or take Toll Brothers (TOL) the other day. "Our sales per community this quarter in Houston were actually stronger than in the same period last year." That's incredible. "And in several Houston Master Plans, where we are under contract to sell about 400 lots to third-party builders, not one builder has stepped away from their commitments," the company reported.
Toll, too, said that lower oil prices were a clear net positive.
Now, we know some larger oil companies are going to get hit hard for missing numbers the way the smaller fry Rosetta Resources (ROSE) did when it disappointed earlier in the week. But its liquidity isn't in question. Anyway, there's so much private equity money ready to step in, and so many well-capitalized or soon to be well-capitalized oils -- I am thinking about the 21 million shares of Noble Energy (NBL) just filed last night, in part to be acquisitive because the company had a pretty manageable debt load -- that there is a cushion.
To be sure, the drillers are hurting. Their day rates are being slashed in some cases to where they must be losing money. And some smaller community banks will be hurt, although the larger state banks seem pretty strong. Still, overall we haven't seen much real pain, and given the hedges, given the stemmed decline, maybe, just maybe, we won't -- at least vs. the stunning positives that the cut at the pump is giving individuals and businesses nationwide.
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