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Blunderov
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Grim Economic Prospects for 2012: Social Upheaval,Bank Defaults,Financial Chaos
« on: 2011-12-29 08:27:54 »
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[Blunderov] More and more the USA begins to remind me of Apartheid South Africa as increasingly desperate and totalitarian legislation is enacted. Clearly the Republocratic elite is terrified that there might be a violent revolution when the public realises just how badly it has been defrauded. Anything can happen when the economy tanks and the bread and circuses grind to a halt.

Grim Economic Prospects for 2012: Social Upheaval, Bank Defaults and Financial Chaos
by Bob Chapman
International Forecaster 
Global Research, December 28, 2011

The game goes on, as German leadership tells us the euro is stable, even as it hits yearly lows. We are told the problem is a crisis in several member states. That may be true, but they all are inseparable. The reassurance from politicians and bankers to calm the market place is beginning to fall on deaf ears. No matter what the cause of the debt crisis it exists and leadership as yet cannot find a solution. Even short-term solutions, such as the use of the EFSF are not going to work. All they will do is gain time. In that process, what happens if France’s credit rating is cut one or two levels? How can France then continue to participate?

The present French government has buried the government in losing investments, which we believe in June will force the electorate to choose the Front National to solve national problems. The public, as in most other countries are sick and tired of lies and incompetence from politicians, bankers and bureaucrats possessed with the creation of world government. At this point confidence in the euro is hanging by a thread and Europe’s leadership doesn’t know how to solve the problem. We have seen such crises of confidence often over the past 15 years. It is not unique, but the size of the euro zone is compelling, because the crisis touches so many people. Currency is the vehicle to bring about a solution, but if confidence is lost the currency cannot perform part of its role as monetization continues unabated, confidence continues to fall and inflation as a result flourishes.


It is not that EU leadership doesn’t want a solution; it is that there isn’t a solution, other then to purge the system. In that environment the politicians, bankers and bureaucrats have their power to control the people taken away from them and the citizens take back their countries and their liberty and freedom. The euro has been an unnatural experiment implanted as a nexus for world government. We predicted this in 1992 and nothing has changed. We expected failure and we now have that failure. After years of leveraged profits for the insiders the public is left with unpayable debt.


The debt bomb began with Greece, Ireland and Portugal. It has been followed by Belgium and now Italy and Spain. We see new commitments for bailouts, but will the funds materialize. We are talking more than $1 trillion and that will entail more bank reorganization that is bailouts. That is governments and the public, bailing out the banks again. The debt loads are enormous for sovereigns as well as bankers. European politicians and economists realize six sovereigns are in serious trouble for at least $6 trillion. $4 trillion will be need for Italy and Spain alone, that is just to keep them going sideways. To our way of thinking Greece is a black hole and after elections we believe it will finally default to be followed by Portugal, Ireland and Belgium. We can understand why the sovereigns are so concerned with the group of 6 and the stability of the euro. This is why, without fanfare and very discreetly the Bundesbank, loaned the ECB $644 billion. That is a very large sum of money even for Germany. This transfer loan has been listed under Target 2. We understand why the funds were needed, but will the German public be happy with the program? Remember, 65% were and are against such further programs.


This past week, finally, the ECB’s Long-Term Refinancing Operation (LTRO) became reality. The virtually free money began to flow. Three-year loans of credit flow to keep the euro zone from collapsing. $654 billion will be distributed to 523 banks at a 1% rate of interest. The banks will leverage these funds anywhere from 6 times to 40 times actual face value. These loans are similar to the US FED TARP some three years ago; an offer banks couldn’t refuse. We expect that along the way in funding the 6 weak economies, much more money will be needed – probably at least 3 to 4 times as much. It also means banks will have to rely on the ECB for three or more years for survival.

There will be increased risk of bank defaults, banks will be reluctant to lend to each other and that means interest rates will move higher. The excuse for the massive amount of funds is that banks will need these funds to lend to individuals and companies. We believe part of these funds will become available to be lent to sovereigns in trouble. Not to be overlooked, the ECB will allow weaker collateral to be used in obtaining loans, such as toxic waste, MBS and CDO’s, the bonds that contain mortgages. The ECB has also increased 14-day loans from $5.1 billion to $33 billion and 98-day loans to $30 billion as well. All pretence of financial conservatism has been thrown to the four-winds. We can assure part of the unspoken deal is that banks will borrow at 1% and buy toxic sovereign debt at much higher rates of return. Again we have another Ponzi scheme just like we saw in the US previously. Nothing will be done to correct the fall in GDP and unemployment on a longer-term basis. It is more important to bankers to save the banking system and governments. The public is just an afterthought.


In the first quarter $30 billion in bank bonds are maturing. Without these loans from the ECB there would be little lending by these banks constrained by debt service. For 2012 banks will have to refund 35% of their debt, or $800 billion, 75% of which is unsecured.


As an example French banks BNP Paribas SA, Societe General SA, Credit Agricale SA and Group BPCE, which are France’s biggest banks will have to raise $48 billion in the first quarter, something that now they should not have a problem with. They may use derivative structural products a Class A collateral such as prime real estate. Will these new funds available enable these three banks to make for three years and the answer is probably. Still though, overhanging the euro zones is the debt issued by the six problem countries of $681 billion.


Overall euro zone debt that will have to be rolled just in the first quarter will be about $400 billion. The first quarter is the most difficult ever for fundraising. US banks and pension funds are withholding some $80 billion in US dollar funding. That could change with the new ECB loan structure.


Banks raising funds in the market will have to pay more and they’ll have to cover or collateralize all of that debt. As an example French bank external debt is 104% of GDP, of which 60% is short-term. Will they be able to raise those funds? We will just have to wait and see.


In reference to the antics of PM Cameron of the UK, we find them interesting. His complaint about the taxing of trades in the “City of London” may not be the only reason for the disagreement. It could be that England wants to be cut loose from Europe or that Europe wants to be cut loose from the Anglo-American combine. No matter what the reason the UK is moving father away from Europe. In 2014 Scotland is supposed to join the euro. With all the turmoil that may not happen, do they really want to put themselves in the same spot as the British taxpayer has been in having funded all the banks losses since 2008? We don’t believe so. Don’t forget England was the first to have problems and little if any aid came from Europe, the US or even China. This historic fact and with inflationary depression moving forward in the US, UK and England, it could end up every man for himself.


Social and political trends are taking their toll on all three regions. The leadership in the US via both parties is trying to destroy the US Constitution, as being irrelevant. Congressman Ron Paul is the only presidential participant defending Constitutional principles, as the remainder in both parties seeks world government. The experiment, which we have seen played out in Europe over the past 20 years, has been an abject failure. There is no question this is a crucial period in US history, as well as that of the UK and Europe.

There is no question upheaval is on the way, particularly in the US. If Ron Paul becomes president much can be rolled back and changed peacefully. Another four years of an Illuminist president could spell violent revolution in the US. The utter temerity of recent legislation, which allows the president to name anyone a terrorist, goes far beyond the pale. It is the throwing of the gauntlet.


2012 is going to be quite a year with falling economies in the UK, Europe, the US, China, Japan and the remainder of Asia. Latin America, and Mexico by comparison should fare fairly well overall. England is in a death spiral. Europe is next, the US is not far behind and China and Japan will soon join the disjoined group. We are about to witness the end of the period that developed since the end of WWII. That is economically, financially, socially and politically. The transition into the future is going to be borne out of chaos. If you have any doubt just look at the recent legislation passed in the US allowing the president to pick up and incarcerate, torture or murder dissidents. Americans will be labeled terrorists for any reason government decides. 

Bob Chapman is a frequent contributor to Global Research.
« Last Edit: 2011-12-29 08:41:09 by Blunderov » Report to moderator   Logged
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Re:Grim Economic Prospects for 2012: Social Upheaval,Bank Defaults,Financial Cha
« Reply #1 on: 2011-12-29 22:55:24 »
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Quote from: Blunderov on 2011-12-29 08:27:54   

[Blunderov] More and more the USA begins to remind me of Apartheid South Africa as increasingly desperate and totalitarian legislation is enacted. Clearly the Republocratic elite is terrified that there might be a violent revolution when the public realises just how badly it has been defrauded. Anything can happen when the economy tanks and the bread and circuses grind to a halt.

Grim Economic Prospects for 2012: Social Upheaval, Bank Defaults and Financial Chaos
by Bob Chapman
International Forecaster 
Global Research, December 28, 2011
<snip>

[Fritz]"Ohhh .... Happy Days"
Blunderov, you may be thankful to to be were you are as this Global 'Cluster F@ck' unfolds


http://www.youtube.com/watch?v=OSHD8GAx68Q&feature=relmfu
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Re:Grim Economic Prospects for 2012: Social Upheaval,Bank Defaults,Financial Cha
« Reply #2 on: 2012-01-02 15:51:32 »
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The article clearly draws parallels with the current Chinese initiatives yet I see the US companies in South America and the Middle East clearly described. History does give insight and food for thought, even as we run for cover.

Cheers

Fritz


The Company that ruled the waves

Source: Economist
Author: Print Edition
Date: 2011.12.17



The East India Company
The Company that ruled the waves


As state-backed firms once again become forces in global business, we ask what they can learn from the greatest of them all

A POPULAR parlour game among historians is debating when the modern world began. Was it when Johannes Gutenberg invented the printing press, in 1440? Or when Christopher Columbus discovered America, in 1492? Or when Martin Luther published his 95 theses, in 1517? All popular choices. But there is a strong case to be made for a less conventional answer: the modern world began on a freezing New Year’s Eve, in 1600, when Elizabeth I granted a company of 218 merchants a monopoly of trade to the east of the Cape of Good Hope.

The East India Company foreshadowed the modern world in all sorts of striking ways. It was one of the first companies to offer limited liability to its shareholders. It laid the foundations of the British empire. It spawned Company Man. And—particularly relevant at the moment—it was the first state-backed company to make its mark on the world.

Twenty years ago, as the state abandoned the commanding heights of the economy in the name of privatisation and deregulation, it looked as if these public-private hybrids were doomed. Today they are flourishing in the emerging world’s dynamic economies and striding out onto the global stage.

State-controlled companies account for 80% of the market capitalisation of the Chinese stockmarket, more than 60% of Russia’s, and 35% of Brazil’s. They make up 19 of the world’s 100 biggest multinational companies and 28 of the top 100 among emerging markets. World-class state companies can be found in almost every industry. China Mobile serves 600m customers. Saudi Arabia’s SABIC is one of the world’s most profitable chemical companies. Emirates airlines is growing at 20% a year. Thirteen of the world’s biggest oil companies are state-controlled. So is the world’s biggest natural-gas company, Gazprom.

State-owned companies will continue to thrive. The emerging markets that they prosper in are expected to grow at 5.5% a year compared with the rich world’s 1.6%, and the model is increasingly popular. The Chinese and Russian governments are leading a fashion for using the state’s power to produce national champions in a growing range of “strategic” industries.

The parallels between the East India Company and today’s state-owned firms are not exact, to be sure. The East India Company controlled a standing army of some 200,000 men, more than most European states. None of today’s state-owned companies has yet gone this far, though the China National Offshore Oil Corporation (CNOOC) has employed former People’s Liberation Army troops to protect oil wells in Sudan. The British government did not own shares in the Company (though prominent courtiers and politicians certainly did). Today’s state-capitalist governments hold huge blocks of shares in their favourite companies.

Otherwise the similarities are striking. Both the Company and its modern descendants serve two masters, keeping one eye on their share price and the other on their political patrons. Many of today’s state-owned companies are monopolies or quasi-monopolies: Brazil’s Petrobras, China Mobile, China State Construction Engineering Corporation and Mexico’s Federal Electricity Commission, to name but a few of the mongrel giants that bestride the business world these days. Many are enthusiastic globalisers, venturing abroad partly as moneymaking organisations and partly as quasi-official agents of their home governments. Many are keen not only on getting their government to provide them with soft loans and diplomatic muscle but also on building infrastructure—roads, hospitals and schools—in return for guaranteed access to raw materials. Although the East India Company flourished a very long time ago, in a very different world, its growth, longevity and demise have lessons for those who run today’s state companies and debate their future, lessons about the benefits of linking a company’s interests to a nation’s and the dangers of doing so.

The gifts of government

One of the benefits the Company derived from its relations with the state was limited liability. Before the rise of state-backed companies, businesses had imposed unlimited liability on their investors. If things went wrong, creditors could come after them for everything they possessed, down to their cufflinks, and have them imprisoned if they failed to pay. Some firms had already been granted limited liability, and the Company’s officers persuaded Queen Elizabeth that it should be given this handy status too.

A second benefit of state backing was monopoly. In the 17th century, round-the-world voyages were rather like space missions today. They involved huge upfront costs and huge risks. Monopoly provided at least a modicum of security. The third benefit was military might. The Company’s Dutch and Portuguese competitors could all call on the power of their respective navies. The English needed to do likewise in order to unlock investors’ purses.

Still, getting into bed with the government was risky for the Company. It meant getting close to courtiers who wanted to extract revenue from it and exposing itself to politicians who wanted to rewrite its charter. The Whig revolutionaries who deposed James II in 1688 briefly promoted a competing outfit that the Company first fought and eventually absorbed. Rival merchants lobbied courtiers to undermine its monopoly. But for the most part it dealt with these political problems brilliantly. Indeed its most valuable skill—its “core competence” in the phrase beloved of management theorists—was less its ability to arrange long-distance voyages to India and beyond than its ability to manage the politicians back home.

The Company created a powerful East India lobby in Parliament, a caucus of MPs who had either directly or indirectly profited from its business and who constituted, in Edmund Burke’s opinion, one of the most united and formidable forces in British politics. It also made regular gifts to the Court: “All who could help or hurt at Court,” wrote Lord Macaulay, “ministers, mistresses, priests, were kept in good humour by presents of shawls and silks, birds’ nests and attar of roses, bulses of diamonds and bags of guineas.” It also made timely gifts to the Treasury whenever the state faced bankruptcy. In short, it acted as what George Dempster, a stockholder, called a “great money engine of state”.

The Company was just as adept at playing politics abroad. It distributed bribes liberally: the merchants offered to provide an English virgin for the Sultan of Achin’s harem, for example, before James I intervened. And where it could not bribe it bullied, using soldiers paid for by Indian taxes to duff up recalcitrant rulers. Yet it recognised that its most powerful bargaining chip, both home and abroad, was its ability to provide temporarily embarrassed rulers with the money they needed to pay their bills. In an era when governments lacked the resources of the modern tax-and-spend state, the state-backed company was a backstop against bankruptcy.

State-backed monopolies are apt to run to fat and lose their animal spirits. The Company was a model of economy and austerity that modern managers would do well to emulate. For the first 20 years of its life it operated out of the home of its governor, Sir Thomas Smythe. Even when it had become the world’s greatest commercial operation it remained remarkably lean. It ruled millions of people from a tiny headquarters, staffed by 159 in 1785 and 241 in 1813. Its managers reiterated the importance of frugality, economy and simplicity with a metronomic frequency, and imposed periodic bouts of austerity: in 1816, for example, they turned Saturday from a half to a full working day and abolished the staff’s annual turtle feast.

The Company’s success in preserving its animal spirits owed more to necessity than to cunning. In a world in which letters could take two years to travel to and fro and in which the minions knew infinitely more about what was going on than did their masters, efforts at micromanagement were largely futile.
Adam Smith denounced the Company as a bloodstained monopoly: “burdensome”, “useless” and responsible for grotesque massacres in Bengal

The Company improvised a version of what Tom Peters, a management guru, has dubbed “tight-loose management”. It forced its employees to post a large bond in case they went off the rails, and bombarded them with detailed instructions about things like the precise stiffness of packaging. But it also leavened control with freedom. Employees were allowed not only to choose how to fulfil their orders, but also to trade on their own account. This ensured that the Company was not one but two organisations: a hierarchy with its centre of gravity in London and a franchise of independent entrepreneurs with innumerable centres of gravity scattered across the east. Many Company men did extremely well out of this “tight-loose” arrangement, turning themselves into nabobs, as the new rich of the era were called, and scattering McMansions across rural England.

Money and meritocracy

The Company repaid the state not just in taxes and tariffs, but also in ideas. It was one of the 18th and 19th centuries’ great innovators in the art of governing—more innovative by some way than the British government, not to mention its continental rivals, and outgunned only by the former colonies of America. The Company pioneered the art of government by writing and government by record, to paraphrase Burke. Its dispatches to and from India for the 15 years after 1814 fill 12,414 leather-bound volumes. It created Britain’s largest cadre of civil servants, a term it invented.

State-backed enterprises risk getting stuffed with powerful politicians’ half-witted nephews. The Company not only avoided this but also, in an age when power and money were both largely inherited, it pioneered appointment by merit. It offered positions to all-comers on the basis of exam performance. It recruited some of the country’s leading intellectuals, such as Edward Strachey, Thomas Love Peacock and both James and John Stuart Mill—the latter starting, at the age of 17, in the department that corresponded with the central administration in India, and rising, as his father had, to head it, on the eve of the Company’s extinction.

The Company also established a feeder college—Haileybury—so that it could recruit bright schoolboys and train them to flourish in, and run, India. These high-minded civil servants both prolonged the Company’s life when Victorian opinion was turning ever more strongly against it and also provided a model for the Indian and domestic civil service.

The Company liked to think of itself as having the best of both private and public worlds—the excitement and rewards of commercial life, on the one hand, and the dignity and security of an arm of the state on the other. But the best of both worlds can easily turn into the worst.

The perils of imperialisation

In the end, it was not rapacious politicians who killed the Company, but the greed and power of its managers and shareholders. In 1757 Sir Robert Clive won the battle of Plassey and delivered the government of Bengal to the Company. This produced a guaranteed income from Bengal’s taxpayers, but it also dragged the Company ever deeper into the business of government. The Company continued to flourish as a commercial enterprise in China and the Far East. But its overall character was increasingly determined by its administrative obligations in India. Revenue replaced commerce as the Company’s first concern. Tax rolls replaced business ledgers. Arsenals replaced warehouses. C.N. Parkinson summarised how far it had strayed, by 1800, from its commercial purpose: “How was the East India Company controlled? By the government. What was its object? To collect taxes. How was its object attained? By means of a standing army. What were its employees? Soldiers, mostly; the rest, Civil Servants.”

Sir Robert Clive with wife, daughter and local help

The Company’s growing involvement in politics infuriated its mighty army of critics still further. How could it justify having a monopoly of trade as well as the right to tax the citizens of India? And how could a commercial organisation justify ruling 90m Indians, controlling 70m acres (243,000 square kilometres) of land, issuing its own coins, complete with the Company crest, and supporting an army of 200,000 men, all of which the East India Company did by 1800? Adam Smith denounced the Company as a bloodstained monopoly: “burdensome”, “useless” and responsible for grotesque massacres in Bengal. Anti-Company opinion hardened further in 1770 when a famine wiped out a third of the population of Bengal, reducing local productivity, depressing the Company’s business and eventually forcing it to go cap in hand to the British government to avoid bankruptcy.

The government subjected the Company to ever-tighter supervision, partly because it resented bailing it out, partly because it was troubled by the argument that a company had no business in running a continent. Supervision inexorably led to regulation and regulation to nationalisation (or imperialisation). In 1784 the government established a board to direct the Company’s directors. In 1813 it removed its monopoly of trade with India. In 1833 it removed its monopoly of trade with China and banned it from trading in India entirely. In 1858, the year after the Indian mutiny vindicated the Company’s critics, the government took over all administrative duties in India. The Company’s headquarters in London, East India House, was demolished in 1862. It paid its last dividend in 1873 and was finally put out of its misery in 1874. Thus an organisation that had been given life by the state was eventually extinguished by it.

A dangerous connection

Ever since its ignominious collapse the Company has been treated as an historical curiosity—an “anomaly without a parallel in the history of the world”, as one commentator put it in 1858, a push-me pull-you the like of which the world would never see again. But these days similarly strange creatures are popping up everywhere. The East India Company is being transformed from an historical curiosity into a highly relevant case study.

The Company’s history shows that liberals may be far too pessimistic (if that is the right word) about the ability of state monopolies to remain healthy. The Company lasted for far longer than most private companies precisely because it had two patrons to choose from—prospering from trade in good times and turning to the government for help in bad ones. It also showed that it is quite possible to rely on the government for support while at the same time remaining relatively lean and inventive.

But the Company’s history also shows that mercantilists may be far too optimistic about state companies’ ability to avoid being corrupted by politics. The merchants who ran the East India Company repeatedly emphasised that they had no intention of ruling India. They were men of business who only dabbled in politics out of necessity. Nevertheless, as rival state companies tried to muscle in on their business and local princelings turned out to be either incompetent or recalcitrant, they ended up taking huge swathes of the emerging world under their direct control, all in the name of commerce.

The Chinese state-owned companies that are causing such a stir everywhere from the Hong Kong Stock Exchange (where they account for some of the biggest recent flotations) to the dodgiest parts of Sudan (where they are some of the few business organisations brave enough to tread) are no different from their East Indian forebears. They say that they are only in business for the sake of business. They dismiss their political connections as a mere bagatelle. The history of the East India Company suggests that it won’t work out that way.
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Re:Grim Economic Prospects for 2012: Social Upheaval,Bank Defaults,Financial Cha
« Reply #3 on: 2012-01-07 23:18:00 »
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[Fritz]A useful synopsis of were we are and where we are headed. ... and the "Western Civil Wars are over" *Mao Xia Ting 

Paddy Ashdown: The global power shift

http://www.ted.com Paddy Ashdown claims that we are living in a moment in history where power is changing in ways it never has before. In a spellbinding talk at TEDxBrussels he outlines the three major global shifts that he sees coming.


http://www.youtube.com/watch?v=zuAj2F54bdo
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Re:Grim Economic Prospects for 2012: Social Upheaval,Bank Defaults,Financial Cha
« Reply #4 on: 2012-01-08 13:22:06 »
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[Blunderov] Thanks Fritz for the Ashdown video. Very thought provoking.
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Re:Grim Economic Prospects for 2012: Social Upheaval,Bank Defaults,Financial Cha
« Reply #5 on: 2012-08-26 11:22:46 »
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DEBT BOMB - The Global Financial Crisis Stripped Bare
 
http://www.youtube.com/watch?v=GXcLVDhS8fM&feature=plcp
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« Reply #6 on: 2014-06-10 16:43:31 »
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SO much for that route to salvation.


Cheers

Fritz


Shakeout Threatens Shale Patch as Frackers Go for Broke


Source: Bloomberg
Author: Asjylyn Loder
Date: 2014.05.27




The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.
Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.
“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”
Some investors are already bailing out. On May 23, Loews Corp. (L), the holding company run by New York’s Tisch family, said it is weighing the sale of HighMount Exploration & Production LLC, its oil and natural gas subsidiary, at a loss.
HighMount lost $20 million in the first three months of the year, after being unprofitable in 2013 and 2012, Loews said it its financial reports. As with much of the industry, HighMount has shifted its focus to oil after natural gas prices plunged and has struggled to find sites worth developing, company records show.
Mary Skafidas, a spokeswoman for Loews, declined comment.
In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter, according to company records compiled by Bloomberg on 61 exploration and production companies that target oil and natural gas trapped in deep underground layers of rock. And companies including Forest Oil Corp. (FST), Goodrich Petroleum Corp. (GDP) and Quicksilver Resources Inc. (KWK) racked up interest expense of more than 20 percent.
Production Declines
Quicksilver acknowledges the company is over-leveraged, said David Erdman, a spokesman for Quicksilver. The company’s interest expense equaled almost 45 percent of revenue in the first quarter. “We have taken concrete measures to reduce debt,” he said.
Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.
Interest Expenses
“Interest expenses are rising,” said Virendra Chauhan, an oil analyst with Energy Aspects in London. “The risk for shale producers is that because of the production decline rates, you constantly have elevated capital expenditures.”
Chauhan wrote a report last year titled “The Other Tale of Shale” that showed interest expenses are gobbling up a growing share of revenue at 35 companies he studied. Interest expense for the 61 companies examined by Bloomberg totalled almost $2 billion in the first quarter, 4.1 percent of revenue, up from 2.3 percent four years ago.
The drilling spree boosted U.S. oil production to 8.4 million barrels a day, 16 percent more than a year ago and the highest since 1986. Growth has been driven by advances in horizontal drilling and hydraulic fracturing, or fracking, which unlocked crude and natural gas trapped in formations like North Dakota’s Bakken shale or the Marcellus in the U.S. northeast.
Costly Gains
The gains haven’t come cheaply. Goodrich said earlier this month that it’s trying to whittle its well costs in the Tuscaloosa Marine Shale down to $11.5 million apiece. The $1.1 billion company, based in Houston, spent almost $52 million more than it earned in the first quarter.
The company has enough money to cover its 2014 capital needs and is working with its board to fund 2015 as it ramps up drilling, spokesman Daniel Jenkins said in an e-mail.
A successful well announced last month has propelled Goodrich shares to $25.34, more than double the 2014 low of $12.28.
While borrowing to spend is typical of start-up companies, it’s not always sustainable. Forest Oil, where interest expense totaled 27 percent of revenue in the first quarter, in February reported disappointing well results, and warned that it might run afoul of its debt agreements. Forest on May 6 announced a plan to sell itself to Sabine Oil & Gas LLC in an all-stock transaction. Denver-based Forest declined to put a value on the deal. The company declined comment. Shares have declined 39 percent so far this year.
Eagle Ford
Zaza Energy Corp. (ZAZA), which got its start as a joint venture with Hess Corp. (HES), bought up oil rights in the Eagle Ford shale field and the nearby Eaglebine in South Texas, near the heart of the U.S. oil boom. Its first quarter revenue fell short of interest expense. The firm’s accountants in March voiced “substantial doubt” about the Houston-based company’s ability to stay afloat.
Hess, which dissolved the partnership almost two years ago, lost money on the deal. And its foray into what has turned out to be the biggest shale play in the U.S. prompted Elliott Management Corp., billionaire Paul Singer’s investment firm, to oust John Hess last year from the chairmanship of a company his father founded more than 80 years ago. Zaza has since entered into a joint venture with EOG Resources Inc. in Houston, one of the few shale companies to bring in more cash than it spends. Zaza’s shares have declined 28 percent this year.
“We are now significantly increasing our production volumes and revenue,” said Todd A. Brooks, president and chief executive officer.
Negative Outlook
Swift Energy Co. (SFY) has slowed drilling while trying to sell acreage or find a partner to shoulder some of the costs. The company on May 6 announced a $175 million joint venture with a unit of a government-controlled energy company in Indonesia. The proceeds will be used to help pay down debt. The deal announcement still didn’t stop Standard & Poor’s from cutting Swift’s credit rating on May 15 and tagging the company with a negative outlook. Shares have declined 19 percent so far this year.
“Traditionally we’ve been a financially conservative company,” said Bruce Vincent, president of Houston-based Swift. “We’ve become more leveraged than we historically have been and we’ve become uncomfortable with that.”
To contact the reporter on this story: Asjylyn Loder in New York at aloder@bloomberg.net
To contact the editors responsible for this story: Rick Schine at eschine@bloomberg.net Susan Warren

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