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Are some segments of the fossil fuel industry the next subprime danger?

heezsafe
in Off-Topic
I have been thinking about energy investments lately, if only because I am so woefully ignorant of their economics. However, I've been seeing a lot of anecdotal stories like the following, which are giving me pause. All booms bust, eventually. If the huge debts taken out to scale up shale extraction cannot at some point be serviced, where will it be discovered to reside---as pieces in securitized products, like subprime mortgages were?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10957292/Fossil-industry-is-the-subprime-danger-of-this-cycle.html

"Data from Bank of America show that oil and gas investment in the US has soared to $200bn a year. It has reached 20pc of total US private fixed investment, the same share as home building. This has never happened before in US history, even during the Second World War when oil production was a strategic imperative"

"IHS Global Insight said the average return on oil and gas exploration in North America has fallen to 8.6pc, lower than in 2001 when oil was trading at $27 a barrel. [...} A large chunk of US investment is going into shale gas ventures that are either underwater or barely breaking even, victims of their own success in creating a supply glut. One chief executive acidly told the TPH Global Shale conference that the only time his shale company ever had cash-flow above zero was the day he sold it - to a gullible foreigner."

"The cumulative (global) blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Output from conventional fields peaked in 2005. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years. What is shocking is that upstream costs in the oil industry have risen threefold since 2000 but output is up just 14pc," said Mark Lewis, from Kepler Cheuvreux. The damage has been masked so far as big oil companies draw down on their cheap legacy reserves."

Comments

  • scott
    edited July 2014
    I did a fairly lengthy post about this about a month and a half ago with some comments at the end. I do agree with a lot of the above. I DO think that people should be invested in energy. I DO also think that people should really lean towards the most blue chip names, as I think a lot of the speculative names will be obliterated when things eventually turn (look at the linked story about Rice Energy in my discussion link below.) I also think that, long-term, some of the fracking-specific names that have done exceedingly well (like the sand names that have soared) could see significant declines if there's a turn.

    http://www.mutualfundobserver.com/discuss/discussion/13960/some-concerns-with-the-fracking-theme
  • heezsafe
    @scott
    Thanks for the redirect to a very thoughtful post. I'll have what you were eating that day.:)
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