On Tuesday the market got yet another reminder of just how painful the “current commodity price environment” has been for producers when Chesapeake eliminated its common dividend in order to conserve cash.
After noting the plunge in Chesapeake’s shares (to a 12-year low) we subsequently outlined why the US shale “revolution” is now running out of lifelines as hedges roll off and as the next round of credit line assessments looms in October.
A persistent theme here – as regular readers are no doubt aware – has been the extent to which an ultra-accommodative Fed has contributed to a deflationary supply glut by ensuring that beleaguered producers retain access to capital markets. In short, cash-strapped companies who would have otherwise gone out of business have been able to stay afloat thanks to the fact that Fed policy has herded investors into risk assets.
In a ZIRP world, there’s plenty of demand for new HY issuance and ill-fated secondaries, which means the digging, drilling, and pumping gets to continue indefinitely in what may end up being one of the most dramatic instances of malinvestment the market has ever seen.
Those who contend that the downturn simply cannot last much longer – that the supply/demand imbalance will soon even out, that the market will clear sooner rather than later, and that even if the weaker hands are shaken out, the pain for the majors will be relatively short-lived – are perhaps ignoring the underlying narrative that helps to explain why the situation looks like it does. At heart, this is a struggle between the Fed’s ZIRP and the Saudis, who appear set to outlast the easy money that’s kept US producers alive.
Against that backdrop, and amid Wednesday’s crude carnage, we turn to Morgan Stanley for more on why the current downturn will be “worse