Wednesday, September 30, 2020


by Steve St. Angleo, SRSrocco:

The four-decade long monopoly of the U.S. Petro-Dollar as the world’s reserve currency is coming to an end.  Unfortunately, most Americans have no clue that when the Dollar loses its reserve currency status, life will get a lot tougher living in the U.S. of A.  Let’s say, Americans will finally receive “Precious metals religion.”

The U.S. Dollar Index fell considerably yesterday and is now down below a key support level.  In early morning trading yesterday, the U.S. Dollar Index fell to 91.46, down 73 basis points:

According to technical analyst, Clive Maund, in his recent article, DOLLAR update as LOSS OF RESERVE CURRENCY STATUS LOOMS..., he stated the following:

The dollar is on course to lose its reserve currency status. This is not something that will happen overnight, it will be a process, but at some point there is likely to be a “sea change” in perception, as the world grasps that this is what is happening, which will trigger a cascade of selling leading to its collapse, whereupon gold and silver will rocket higher.

In that article, Clive posted the following chart on the U.S. Dollar Index (USD index) and its key support level:

As we can see, traders are looking closely to the Key support area at 92.5 for the USD index.  With the USD index now below that key support area, it could spell real trouble for the Dollar if it closes below that level at the end of the week.  After the markets opened today, the Dollar fell to a low of 91.08.  So, it looks like the Dollar will close this week well below the key support area.

Now, part of the reason for the selloff in the Dollar may have been due to the disaster that took place in the 10-year U.S. Treasury Repo market today.  According to Zerohedge’s article “We’ve Never Seen Anything Like This”: Repo Market Snaps As 10Y Suffers “Epic Fail”:

 Commenting on this dramatic move in 10Y repo rates, Stone McCarthy’s Alan Chernoff, in a note titled “Epic Fail”, writes that “the 10-year note has been below the fails rate and shows no signs of moving! It opened at -350 basis points, and though pressure has eased off of it slightly, it is STILL below the fails rate at -300 basis points.”
Commenting on this dramatic move in 10Y repo rates, Stone McCarthy’s Alan Chernoff, in a note titled “Epic Fail”, writes that “the 10-year note has been below the fails rate and shows no signs of moving! It opened at -350 basis points, and though pressure has eased off of it slightly, it is STILL below the fails rate at -300 basis points.”

The pressure on the U.S. Treasury 10-year repo market is likely a reaction to what came out of the annual BRICS summit in China yesterday,  According to the article, Escobar Exposes Real BRICS Bombshell: Putin’s “Fair Multipolar World” Where Oil Trade Bypasses The Dollar:

“To overcome the excessive domination of the limited number of reserve currencies” is the politest way of stating what the BRICS have been discussing for years now; how to bypass the US dollar, as well as the petrodollar.

Beijing is ready to step up the game. Soon China will launch a crude oil futures contract priced in yuan and convertible into gold.

This means that Russia – as well as Iran, the other key node of Eurasia integration – may bypass US sanctions by trading energy in their own currencies, or in yuan.

This announcement by Putin that oil trade should by-pass the Dollar came a few days after China announced that they plan to start trading oil on their Shanghai Exchange in Yuan, which will be backed by gold.  While we have heard for years that China was going to back their currency or trade with gold, we now see actual plans to start implementing it sometime this year.

By China backing its new oil trading benchmark in Yuan with gold, it provides countries with a great deal of confidence in trading oil in another fiat currency besides the U.S. Dollar.  Thus, countries that acquire a lot of Chinese Yuan by trading oil don’t have to worry about devaluation as they can convert Yuan into gold.

This Is Bad News For the Saudi-Petro Dollar System

The Petro-Dollar system that has been the foundation of world oil trade for the past four decades is now about to become obsolete.  Even though many countries will continue trading oil in Dollars in the future, a larger percentage will likely move into trading oil in Chinese Yuan as it provides a “gold-backed protection” against fiat currency devaluation.

Not only is the Petro-Dollar under severe pressure, so is Middle East’s largest oil exporter that was the foundation of this monetary system back in the early 1970’s.  Ever since the price of oil peaked in 2014 and has fallen by more than half to $49 currently, this has put an enormous strain on Saudi Arabia’s financial bottom line.  In the past three years, Saudi Arabia sold over $250 billion of its foreign exchange reserves, which are mostly in U.S. Treasuries, to fund its national government.

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Two Nuclear Power Plants In Florida Are Directly In The Path Of Hurricane Irma

by Michael Snyder, End Of The American Dream:

Hurricane Irma is more powerful than all of the other major Atlantic storms this year combined, and it has an eye as large as the entire Detroit metro area. It is being reported that “upwards of 90{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}” of Barbuda has already been destroyed by the storm, and it is being projected that some areas of Puerto Rico could be without power “for between four and six months”. You may want to view these photos and these videos to get a better idea of the immense destructiveness of this very powerful storm. The latest forecasts have Hurricane Irma making landfall in Florida, but so far the two nuclear power plants in Florida that would be directly in the path of the storm have not even started the process of shutting down

In anticipation of powerful Hurricane Irma, which projections on Wednesday showed headed straight for South Florida, Florida Power & Light’s two nuclear plants were finalizing staffing plans and cleaning up the grounds. But neither Turkey Point nor the St. Lucie plant further up the coast had made the call yet to shutting down the plants.

Peter Robbins, spokesman for FPL, said shutting down a reactor is a gradual process, and the decision will be made “well in advance” of the storm making landfall.

We all remember what happened with Fukushima, and we definitely do not want to see a repeat on U.S. soil. The Fukushima nuclear disaster changed millions of minds about the safety of nuclear power, and as a member of Congress I will do all that I can to encourage the development of our solar power, wind power and geothermal power capabilities.

Let us hope that Hurricane Irma weakens before it gets to Florida, because the destruction that it is causing right now is off the charts. When it made landfall in Barbuda, there were some wind gusts that were “above 215 mph”

Irma first made landfall in Barbuda — an island with a population of about 1,600 — around 1:47 a.m. ET Wednesday. Local weather stations there captured wind gusts of 155 mph before going silent, indicating the instruments had been blown away. Irma’s sustained winds have been reported at 185 mph, with gusts above 215 mph.

When you have winds that high, there is little that you can do to prepare. According to one top official, “upwards of 90{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}” of Barbuda has already been destroyed…

At least one death was reported in Barbuda, according to ABS TV Antigua. Charles Fernandez, minister of foreign affairs and international trade for Antigua and Barbuda, told ABS that destruction on Barbuda was “upwards of 90{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}.”

Irma destroyed government buildings, tore roofs from houses and left northern Caribbean islands without power or communications.

Considering what has already happened in the Caribbean, it astounds me that Miami is not being evacuated yet. If all of these communities in the south Florida area try to wait until the last minute to evacuate, it is going to create a traffic nightmare of epic proportions. According to CNN, we could be looking at “one of the largest mass evacuations in US history”…

Based on Irma’s projected path, which includes Florida’s heavily populated eastern coast, the enormous storm could create one of the largest mass evacuations in US history, CNN senior meteorologist Dave Hennen said. Miami-Dade, Broward and Palm Beach counties combined have about 6 million people.

Monroe County, home to the Florida Keys, has already ordered mandatory evacuations. Broward County, which includes Fort Lauderdale, issued a mandatory evacuation Wednesday for areas east of Federal Highway.

There is still a chance that the storm may not hit Florida at all, and let us hope that is the case.

Sadly, there are some out there that actually want the storm to hit Florida. In fact, some leftists on Twitter are actually rooting for the storm to destroy President Trump’s Mar-a-Lago resort.

How can people be so cruel? When I first made the decision to jump into the world of politics, I thought that I would be able to avoid much of the nastiness, but I quickly found out that people are going to call me all sorts of names too. I am starting to understand why it is so hard to get good people to run for office, because there is a great price to be paid for putting yourself out there.

In this situation, my hope is that people down in south Florida won’t wait for a formal evacuation order and will start getting out well ahead of this storm. According to CNBC, Hurricane Irma could cause a quarter of a trillion dollars in damage if it is still a category 5 storm once it reaches Miami…

But if it stays a Category 5 and hits Miami, the $125 billion estimate could be doubled, making it by far the costliest storm ever. At $105.8 billion, Hurricane Katrina in 2005 is currently the leader, though Hurricane Harvey, which struck Houston two weeks ago, could well surpass that total.

Can you imagine what a quarter of a trillion dollars of damage would look like?

And let us not forget that another hurricane is following right behind Irma. This could easily become the worst hurricane season in all of U.S. history, and we still have many more weeks to go before the season is over.

Meanwhile, a disaster of another sort is unfolding out west. Large portions of Washington, Oregon, Idaho and Montana are literally on fire. One of the reasons why we are having such a huge problem with wildfires out west is because the federal government is not properly managing public lands. So when these fires hit areas controlled by the feds, they tend to burn more intensely than they should. I intend to fight to have control of those lands transferred to state governments, and I hope that you will support my efforts. Here in Idaho, it has been estimated that we have more than a trillion dollars worth of natural resources under our feet, and if we can get full control of our public lands it would end our state budget problems permanently.

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$10,000 or more gold price doesn’t need a failure in currencies to occur if it soon comes to back oil trade instead

by Kenneth Schortgen, The Daily Economist:

As central banks have gone on to expand money supplies to unthinkable levels over the past 17 years, many analysts in the gold space have discussed the possibility of returning sovereign currencies to a gold standard because debt levels have simply gotten too high.  And with these hypotheses have also come conjectures on just how much the price of gold would have to be raised to backstop the world’s nearly $250 trillion of debt.

But yesterday saw a much different scenario hit the financial world, and one that could completely change or eradicate the long-standing petrodollar system that protects America’s dollar hegemony.  And this scenario is coming out of China and offers the potential for a gold standard not coming from the backing of sovereign currencies and fiat debt, but from what many consider the one true currency that is needed to run every aspect of the global economy.


China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry.  

The contract could become the most important Asia-based crude oil benchmark, given that China is the world’s biggest oil importer. Crude oil is usually priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars.  

China’s move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong. – Nikkei Asia via The Daily Economist

Interestingly, using oil production as a benchmark for gold rather than trying to correlate a gold price for the hundreds of different sovereign currencies that do not all move in tandem is a much more stable measure since the only two variables in play are the amounts of gold and oil produced each year.  And from there all you would have to do is use the gold to oil ratio to determine price.

As of late 2016 oil was a $1.72 trillion market, with gold production being only a $170 billion one.  This equates to an Oil to Gold ratio of approximately 10.12:1.  And at the current gold price of $1320, it would mean the price would have to multiply by that amount ($13,355) to be in line with a fair price value to backstop the energy sourse in an oil contract.

If you think about it, oil has been the global reserve currency since 1973 when the United States dollar went off the gold standard, and instead measured its value in relation to oil.  So for the past 44 years oil has been the true global reserve currency, and all sovereign currencies simply measure themselves on that commodity.

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How Did Things Get This Bad This Fast for Oil Giant, Pemex?

by Don Quijones, Wolf Street:

One of the biggest surprises awaiting seasoned travelers to Mexico these days is the daily sight of privately branded gasoline stations. For the past eight decades Mexican drivers had only one choice of filling station: state-owned oil behemoth Petróleos de Mexico (A.K.A. Pemex). Now they have six.

Of the first five private companies to open operations in the sector, three were Mexican (Hidrosina, La Gas, and Oxxo Gas) and two were US-based (Gulf and Petro-7). From 2018, foreign operators will even be allowed to sell imported gasoline from the gas stations they operate. It will be the first time since Mexico’s oil industry was nationalized, in 1938, that non-Mexican gasoline will be legally sold from non-Mexican gas stations.

This massive increase in competition is yet another big blow for an already debilitated Pemex and its myriad partners, for whom the retail business is (or at least was) a vital source of funds and profits, generating roughly 730 billion pesos ($36 billion) of revenues a year. Debt-burdened Pemex needs every peso it can get its hands on.

But rather than getting better, things just keep getting worse.

Pemex reported that in July its average crude oil production slipped below the psychological barrier of 2.0 million barrels per day, the lowest daily level registered since 1980. It’s a far cry from the glory days of the early 2000s when the company was pumping an average of 3.4 million barrels per day.

It’s not just Pemex’s crude production that’s falling. The total production of petroleum products in July was 834,000 barrels per day, 157,000 barrels per day less than in June. That’s a monthly drop of 19{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. Compared to July 2016, Pemex produced 246,000 barrels per day less — a year-over-year drop of 29{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}.

How did things get this bad, this fast?

There are many reasons, including bad management, lack of vision, severe budget cuts, shrinking oil reserves, sinking oil prices, lack of investment resulting in poor or obsolete infrastructure, negligence and the huge tax burdens the government imposed on it in the years preceding Mexico’s oil reforms, while lavishing foreign companies with massive fiscal incentives to invest in Mexican oil fields. But there’s an even bigger reason: corruption.

Simple, plain, white-collar corruption.

There’s no better example of this than the accusations leveled against Pemex’s former CEO, Emilio Ricardo Lozoya Austin (2012-2016). Lozoya, formerly a board member of the scandal-tarnished Mexican subsidiary of the Spanish construction firm OHL and one-time senior election campaign advisor to Mexico’s current president, Enrique Peña Nieto, is accused by senior executives of the Brazilian construction firm Odebrecht of receiving “tips” worth some $10 million in exchange for his support in obtaining public work contracts.

The money allegedly passed through shell companies in the British Virgin Islands before coming to rest in private bank accounts belonging to Lozoya in Switzerland, Liechtenstein, and Monaco. Lozoya is one of countless public figures in a dozen Latin American and African countries, including Venezuela, Colombia, Argentina, Peru, Angola and Mozambique, to be accused of having his pockets lined by Brazil’s largest construction company.

The Odebrecht case could end up costing the Brazilian firm over $4 billion in fines — money it claims it does not have. The resulting corruption probe has imprisoned Brazil’s most prominent politicians and business owners. It has also done massive damage to Brazil’s state-owned oil behemoth Petrobras. Even Brazil’s former president, Luiz Inacio Lula da Silva, could face prison time for allegedly accepting Odebrecht’s paying for his family’s vacation home (while Brazil’s current bribe-drenched President is protected by the Senate).

In Mexico, the Attorney General, Raul Cervantes Andrade, is dragging his feet — perhaps no surprise, given a) he is a very close friend of President Peña Nieto, who is in turn a very close friend of Lozoya’s; and b) he worked alongside Lozoya on Peña Nieto’s presidential campaign. Within weeks of Nieto’s victory in 2012, Andrade was given the top job in Mexico’s justice system and Lozoya was handed control of Pemex, just as Nieto was about to begin denationalizing Mexico’s oil sector.

During his three-and-a-half years at the helm, Lozoya oversaw a dramatic deterioration in Pemex’s already poor financial performance. By 2015 the group’s total sales had plummeted by 21{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} and its operating losses had soared to an eight-decade high of $38.5 billion.

Between 2012 and 2016 the ranks of senior management and administrators on the company’s payroll tripled. Despite Pemex’s growing losses they awarded themselves generous salary rises and lucrative perks, including three executive planes and a helicopter, and 911 company cars and SUVs.

The planes and helicopter, personally requested by Lozoya himself, were supposed to be deployed in the fight against the mass theft of oil by armies of amateur opportunists who live close to the major pipelines that crisscross the country as well as some of Mexico’s most ruthless and organized drug gangs; instead, as the Mexican weekly Proceso reported this week, they were used to shuttle Lozoya and his fellow executives to and from luxury resorts in Mexico and the United States, at public expense. There’s no public record of who accompanied Lozoya on those jaunts.

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Why The Shale Oil “Miracle” Is Becoming A “Debacle”

by Chris Martenson, Peak Prosperity:

Energy is everything. 

This is an amazingly important concept. Yet it’s almost universally overlooked.

Sometimes it’s hard to appreciate the magical role energy plays in our daily lives because most of what we experience is a derivative of it. The connection is hidden from direct view.  Because of this, most people utterly fail to detect or appreciate the priceless and irreplaceable role of high net-energy fuel sources (such as oil and gas) to our modern lifestyle.

With high net-energy, society enjoys increasing complexity and technological advances. It’s what enables us to pursue massive goals like desalinating billions of gallons of seawater, or going to Mars.  But without high net-energy fuel sources, our capabilities quickly regress to those of decades — or even centuries — past.

Which is why understanding where we truly are in the ‘net-energy story’ is so incredibly important. Is the US on the cusp of being “energy independent” from here on out? Is the “shale miracle” ushering in a glorious new ‘boom’ era that will vault America to unprecedented prosperity?

No. The central point of this report is that the US is deluding itself when it comes to energy abundance (generally) and oil (specifically).

Yet that’s not what we hear from the cheerleaders in the industry or in our media. From them, we hear a silver-tongued narrative of coming riches — a narrative that contains some truth, some myth, and a lot of fantasy. 

It’s those last two parts — the myths and fantasies — that are going to seriously hurt many investors, as well cause a lot of extremely poor policy and investment decisions. 

The bottom line is this: The US shale industry resembles a fraudulent Ponzi scheme much more so than it does any kind of “miracle”.

How do I know that?  Because, collectively, US shale companies have lost cash in every year of their existence.  The burned through cash when oil was $100 — and again when it was $90, $80, $70, $60, $50, $40, and $30 a barrel.  They burned through cash in 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016.

You don’t have to be a finance guru to appreciate or understand that any industry that persistently burns through cash is a bad deal.  Especially one whose prime product – shale wells – principally deplete (-85{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}) in roughly three years.  If you’ve been in business for 9 years drilling wells that mostly run out in 3 years, and you haven’t managed to produce positive cash flow at any point along the way, then it’s time to admit that your business model simply doesn’t work.

As even The Economist magazine recently noted:

The [US shale] industry has also lifted productivity. Drilling is faster, more selective and more accurate, and leakage rates are lower. Wells are being designed to penetrate multiple layers of oil that are stacked on top of each other.

But the fact that the industry makes huge accounting losses has not changed. It has burned up cash whether the oil price was at $100, as in 2014, or at about $50, as it was during the past three months.

The biggest 60 firms in aggregate have used up $9bn per quarter on average for the past five years.

As a result the industry has barely improved its finances despite raising $70bn of equity since 2014. Much of the new money got swallowed up by losses, so total debt remains high, at just over $200bn.


Let’s run that math. Five years is 20 quarters. That times $9 billion/quarter is $180 billion dollars in cumulative operating losses. This begins to give us a sense of the magnitude of losses investors will face when the music finally stops.

Or we could note the $200 billion of total debt outstanding for the industry.  Hmmmm…with WTIC oil at $47/barrel, a typical wellhead price (that the operators actually receive being less than WTIC, always) might be closer to $40.  $200 billion divided by $40 means that 5 billion barrels of future wellhead production is required just to pay back the debt! 

If the industry decided to use the next 5 billion barrels coming out of the ground to debt reduction (it never would decide this, but bear with me for the sake of this intellectual exercise), we’d also need to include the time value of money (and actual production rates over time) and observe that the debt carries an interest rate of 5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} to 8{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} (depending on the company). Taking that into consideration, then the next 6 billion barrels would be required to satisfy the debt, plus interest payments! 

Oh, right. And then there’s the issue of repaying the $70 billion of equity raised since 2014. With some sort of return, if possible, of course.

I hope you see the same staggering disconnect in these numbers I do. Which is why, without have to go too far out on a limb, I’ll state that massive losses are coming to the (bag)holders of all this debt and equity.

So why care? Because you need to understand these details in order to position yourself properly for the future. The implications are enormous.

The Danger Behind Myths and Fantasies

Once you become aware of the magical thinking involved, you then have a chance of knowing why the future is going to be very difficult for the shale industry, its investors, and then the nation(s) depending on its oil production.

Hey, sometimes myths and fantasies are harmless to hold. Like dreaming that someday you’ll be a major rock star.

But some can be incredibly damaging because they lead to poor life choices and decision-making. Like emptying your bank account to bet on the Powerball lottery, where your chances of winning are 292,201,338 to one. Or committing your nation to a ground war in Asia thinking you can “win”. 

The promise of US shale oil is a very dangerous siren song. It was so carefully marketed to gullible investors that even Obama’s speechwriter and fact checkers got swept along.  This is from Obama’s State of the Union speech from 2014:

Now, one of the biggest factors in bringing more jobs back is our commitment to American energy.  The all-of-the-above energy strategy I announced a few years ago is working, and today, America is closer to energy independence than we’ve been in decades.


What does “energy independence” mean?  It turns out, this crowd-pleasing phrase is a fantasy that lacks any useful grounding in reality.  What  those who claim “energy independence” are doing are lumping all forms and sources of energy into a single bucket, and then asking if the size of that bucket matches our current demand.

This is an inappropriate and dangerously misguided way to look at things is because the various types and sources of energy are not interchangeable.  They don’t function the same way. They generally can’t be substituted for each other. And they don’t cost the same.

For example, your automobile might run on gasoline which costs $2.50 a gallon.  Suppose instead you could buy coal cheaper than gasoline on a BTU basis; is that any help to you as an auto driver?  Would you suddenly put crushed coal into your gas tank instead of gasoline? No, of course not.

What if you had a micro hydro plant operating in your backyard and could extract a more Kilowatt hours of electricity from it each week than you needed. Would that make you “energy independent?”

Not if you drive a car that requires gasoline. Or cook on a gas-powered stove. Or heat your house with an oil-burning furnace.

The same is true for the US (or any country). A country is not “energy independent” unless it can meet all of its national energy demands with enough BTUs in each of the needed fuel types. Just looking at oil alone, the US still imports millions of barrels per day — even with the “shale miracle”. I’ll get into this more deeply in just a moment.

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THE FALLING EROI KILLS WESTINGHOUSE: 2 U.S. Nuclear Reactors Construction Halted

by Steve St. Angelo, SRSrocco:

Yes… it’s true.  Two state of the art nuclear power projects bankrupted the mighty Westinghouse Electric Corporation, a company founded in 1886.  Actually, this is old news as Westinghouse filed for bankruptcy back in March 2017.  However, the breaking news is that the Westinghouse bankruptcy has now forced two utility companies to stop construction on two nuclear power reactors in South Carolina. (photo: courtesy of 12 News, Augusta, Ga)

While many factors will be attributed to the halting of these two nuclear power reactors, such as rising costs, construction delays, decreasing electricity demand and the bankruptcy of Westinghouse, the real reason is the FALLING EROI – Energy Returned On Investment.

As a refresher for newer readers, the falling EROI means that it’s taking more and more energy inputs to produce less and less net energy for the market.  For example, in 1970 the U.S. EROI of its oil and gas industry was 30/1.  Thus, the burning of one oil barrel worth of energy produced 30 oil barrels to the market.  Today, shale oil production comes in at a whopping 5/1 EROI, six times less that the profitable energy in 1970.

Moreover, those who have been following my analysis on energy, understand that the falling EROI of oil and natural gas are gutting the entire global economy.  Even though nuclear power generation doesn’t come from burning oil and natural gas, the construction of the reactors most certainly consumes a massive amount of fossil fuels.  Actually, it takes a great deal of the burning of coal, natural gas and oil to produce nuclear, solar and wind power plants.

This was especially true for the construction of Westinghouse’s two nuclear power plant projects, the Vogtle Plant in George and the V.C. Summer plant in South Carolina.

Two Nuclear Power Plant Projects That Bankrupted Westinghouse

The Vogtle Nuclear Plant (Units 3 & 4), located near Waynesboro, Georgia, started construction with the new Westinghouse AP1000 nuclear reactors in 2013.  Here is a picture of Vogtle Plant under construction last year.

As you can see, Vogtle 3 & 4 are the extension of the original Units 1 & 2 that were commissioned in 1987.  Originally, the Vogtle 3 & 4 were to cost $14 billion and be operational by 2016 (Plant #3) and 2017 (Plant #4).  However, the total costs are now estimated to reach $29 billion for the Vogtle Plant, and it won’t be operational until at least 2022. (source: Reuters article).

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We’re Moving Closer and Closer to a Major Buying Opportunity in Oil

by Marin Katusa, Katusa Research:

As we entered the summer months, many investors wanted to believe a terrible time for oil and gas stocks was nearing an end. Now that we’re six weeks into summer, we see that’s not the case.

During the first half of 2017, oil and gas stocks were among the market’s worst performers. The Dow Jones US Oil & Gas Index declined 17{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. Some of the more highly levered oil and gas stocks fell twice that much. After such a big fall, value-hunting investors began buying. But last week, we saw that oil and gas stocks are still vulnerable to waves of selling that send them to 52- week lows.

Take Pioneer Natural Resources for example. In the mutual fund and hedge fund world, it’s considered one of the premier independent oil and gas companies… a “go to” stock for getting exposure to the oil sector. After reporting second quarter earnings and stating it would delay drilling projects, Pioneer stock was crushed 17{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in the following two days and hit its lowest level of the year. A true wipeout… in one of the sector’s best operators.

Pioneer is not an isolated case. Last week, a handful of other oil and gas stocks hit yearly lows, including Apache, Range Resources, Southwestern Energy, Parsley Energy, RSP Permian, Sanchez Energy, Carrizo Oil & Gas, and Noble Energy.

An especially notable loser last week was Canadian producer Seven Generations Energy. It’s a major player in one of my favorite areas for investment, Canada’s prolific Montney shale. It has exceptional assets. However, quality was no sanctuary last week. After reporting second quarter earnings, “Seven Gen” dropped as much as 18{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} and reached a fresh yearly low.

***Regular readers will recall my writings on the oil patch back in June. At the time, I stated that although the oil and gas sector had suffered massively in 2017, more pain was on the way. Last week’s declines show that my expectations are being met. They are also moving us closer to a significant bottom in the oil sector. I’m getting closer and closer to pulling the trigger on high-quality names marked down to discount prices. More on this to come.

How Index Funds Are Impacting the Gold Sector

Over the past seven years, index funds and exchange-traded funds (ETFs) have dominant forces in the market. Typically, these funds don’t try to beat the market. They are the market. They own broad indexes (like the S&P 500) or sector groups (like retail or energy). And they’ve become widely popular with investors.

Index funds are so popular that many investors are warning about the effects index funds are having on the overall stock market. Since index funds buy stocks based on an index – not good old fashioned fundamental analysis – they have the potential to make popular, overvalued stocks even more overvalued… and warp the market.

What you may not have heard however, is how ETFs are influencing returns in the gold stock sector. Since spring, the smaller mid-tiers (sub 400,000 ounces of gold production annually) have experienced significant selling which we will explain later.  This significant selling of the smaller mid-tiers has lowered the overall mid-tier index relative to its performance to the senior index in past years.

And still true today, as a group, the mid-tiers overall are cheaper than the senior gold producers.

The chart below is the Katusa Senior Gold Index which is made up of the 15 global publicly listed primary gold producers that produced over 1 million ounces of gold in 2016. The senior golds have outperformed the Katusa Mid-Tier Gold Producers which is made up of 25 publicly listed primary gold producers that produced between 250,000 and 1 million ounces of gold in 2016.

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by Steve St. Angelo, SRSrocco:

Even though U.S. shale oil production continues to reach new record highs, investors might be finally losing faith in the industry that just isn’t profitable.  A perfect example of this, legendary oil trader Andy Hall, known as “God” in the industry, is shutting down his main hedge fund.  Hall, who is a noted bull in the oil market, saw his hedge fund, Astenbeck Master Commodities Fund II, lose 30{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} in the first half of 2017.

While Hall’s hedge fund likely lost money betting that oil prices would rise, the entire energy complex took a beating last week, even though oil and natural gas prices increased.   According to the article, Oil Has A Crisis Of Faiththe situation in the U.S. E&P energy sector took a turn for the worst:

If tumbling oil and gas prices aren’t the obvious reason for the sell-off in E&P stocks, then what is?

The likeliest culprit is fear that, even if oil prices aren’t falling further, they are low enough to affect E&P firms’ growth plans — as evidenced in guidance given on a number of quarterly earnings calls this week and last.

One of the biggest losers this week has been Pioneer Natural Resources Co., down 16.5 percent since reporting results on Tuesday evening. Part of the reason it was clobbered so badly is that while it merely trimmed its overall growth rate, it sharply cut its guidance for how many more barrels of higher-value oil it will produce this year. Pioneer blamed this on problems it had with what it called “train-wreck” wells suffering from changes in pressure and the amount of water coming up, forcing the company both to delay its drilling schedule and spend more to strengthen wells.

As we can see in the chart above, all types of energy stocks sold off even though the price of oil increased.  In addition, Pioneer Resources stock price is now down nearly 17{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} since their second quarter news release:

Pioneer Resources is one of the larger players in the Permian oil basin in Texas.  According to the data put out by Gurufocus.comPioneer suffered a negative Free Cash Flow of $155 million Q1 and $252 million in Q2.  Actually, Pioneer spent a great deal more on capital expenditures (CAPEX) in the second quarter of 2017, by investing $731 million versus $519 million in the first quarter.

Which means, Pioneer spent $212 million more on CAPEX in the second quarter, only to suffer a larger negative free cash flow of nearly $100 million more versus the previous quarter.  Of course, this makes perfect sense in our TOTALLY INSANE business world today to spend $212 million on CAPEX only to lose an additional $100 million in free cash flow.

Another large oil player in the Permian, Occidental Petroleum, lost $300 million in its core upstream U.S. segment.  The upstream segment of an oil company’s earnings comes from its oil and gas wells.  Downstream is the selling of its petroleum products in retail markets and etc.  Not only did Occidental lose $300 million in its domestic U.S. upstream earnings in Q2, it also lost $191 million in the first quarter.

Big 3 U.S. Oil Companies Still Struggling Even With Higher Oil Prices

The Big Three U.S. Oil companies have also suffered losses in their U.S. upstream earnings. Exxonmobil lost $201 million and Chevron lost $22 million in the first half of 2017 in its U.S. upstream earning segment.  ConnocoPhillips lost $2.7 billion in its U.S. earnings segment during the first half of 2017, however this was mostly due to a huge impairment write-down.

Regardless, no one is really making money producing oil and gas in the United States.  While some of these companies may now be reporting positive free cash flow, this has been mainly due to the huge cutting of their of CAPEX spending.  For example, these top three U.S. oil companies were spending a great deal more on CAPEX in 2013 than they will in 2017:

Top 3 CAPEX Spending (Exxonmobil, Chevron & ConnocoPhillips):

2013 = $86.6 billion

2017 Est. = $31 billion

These top three U.S. oil and gas majors will reduce their CAPEX spending by $55.6 billion in 2017 compared to 2013.  This is a decline of two-thirds in CAPEX spending in just four years.  When a company drastically cuts its CAPEX spending, it becomes easier to make free cash flow.  However, by cutting their capital expenditures by two-thirds, these U.S. oil majors will not be adding much in the way of new discoveries or additional oil production in the future.

Moreover, Occidental Petroleum, the largest oil producer in the Permian, enjoyed decent free cash flow during the second quarter of 2017.  However, a large percentage of their $1 billion in free cash flow was due to a NOL- Net Operating Loss adjustment of $737 million.   Occidental actually suffered a negative free cash flow of $111 million in the first quarter of 2017.

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Why Big Oil Will Become Big Green

by Marin Katusa, Katusa Research:

On June 9, 2017, the shareholders of oil major ExxonMobil enjoyed an incredible milestone. The company paid a quarterly dividend of 77 cents per share.

This dividend payment was larger than the one ExxonMobil paid to shareholders at the same time as the year before, and marked the 35th consecutive year ExxonMobil increased its dividend payment.

When you consider how the brutal competition of capitalism makes it difficult for most companies to even pay dividends – let alone steadily increase them for years year – you realize 35 consecutive years of dividend raises is an impressive accomplishment.

Because of dividend records like this, many investors view the dividends paid by ExxonMobil and its Big Oil peers such as Chevron, Shell, and BP (British Petroleum) as sacrosanct… income streams you can count on during retirement. Big Oil has paid reliable dividends for so long that many investors see their Big Oil shares like they would grandma’s ring or the family farm.

And you read it here first: If Big Oil companies want to be seen as steady dividend payers for years into the future, they are going to need to become Big Green. They are going to have to get into solar, wind, and hydroelectric energy in a big way.

I know many will view my suggestion as ludicrous. But after you review the data and facts as I have, I’m confident you’ll agree.

An Unstoppable Trend in the World’s Biggest Business

The business of providing energy to power our cars, trucks, airplanes, factories, and homes is the biggest business in the world. And it’s changing in a big way.

In the year 2000, renewable energy (solar, wind, hydro, etc.) provided 1.4{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528} of the world’s power. Since then, renewable energy’s share of the global power market has increased to 7.5{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}. It’s a stunning share increase of more than 400{5f621241b214ad2ec6cd4f506191303eb2f57539ef282de243c880c2b328a528}.

The chart below shows the global market share of renewable power since 1990.

Renewables are grabbing more market share because they are getting cheaper. As I’ve written many times in the past few years, the cost of renewable energy sources like solar and wind power have plummeted in the past decade. In many areas, unsubsidized solar and wind power is now cheaper than power generated by burning fossil fuels. Plus, the political pressure to move from fossil fuels to renewables is incredible. It’s not going away.

The world isn’t going to stop using oil for a long time. There will money to be made in oil for a long time. However, the best days of fossil fuels are in the past. The world’s largest oil companies know it. But that doesn’t mean Big Oil has to shrivel up and die. Smart oil executives don’t see themselves as just in “the oil business.” They see themselves as being in the “energy business.” If that energy comes from oil, natural gas, solar, or wind, then so be it. Smart oil executives know the transition from dirty energy to clean energy will be the biggest strategic shift in their market in the coming decades.

Big Oil has ignored renewable energy for a long time. But we’re starting to see a shift in its thinking.

***For example, in 2016, the French supermajor, Total SA, acquired green energy storage manufacturer Saft for $1.1 billion.

***Statoil, Norway’s National Oil Company, partnered with Alterra Power Corp and the National Energy Authority of Iceland to drill the deepest geothermal well in history.

***And perhaps most significantly, the European oil giant Royal Dutch Shell is looking into buying Equis Energy, Asia’s largest green power producer. Equis Energy has put itself up for sale and Shell and a handful of large pension funds are evaluating it. There is no formal offer from Shell yet, but I believe Shell will make a bid. I think it’s a savvy business move. Buying Equis Energy would provide significant perpetual cash flow and dividend potential.

Equis Energy is a private company, so financial details are scarce. At the project level, Equis Energy has assets in Indonesia, Japan, Taiwan, Philippines, Thailand, Australia and India. Total operational green power capacity is 4.4 gigawatts. This is enough electricity to power over a million homes.

Furthermore, Equis Energy has a robust pipeline with an additional 6.7 gigawatts of development stage green power production capacity. Using industry average capacity factors and efficiency rates, Equis Energy likely generates between 10 to 12 terawatt hours (TWh) of green power.

Its reported that the purchase price being considered for Equis Energy is $5 billion. This yields an implied valuation of approximately $440 per MWh of green power production. Compared to industry averages, this is a high multiple.

Why Green Energy Offers Safety and Stability

Big Oil executives have to make multi-billion dollar capital allocation decisions that have 15 – 30 year time frames. Their projects are among the biggest and most expensive projects on Earth. They have to think very big and very long-term.

When it comes to investing $5 billion in an oil and gas project, oil executives face many unknowns. What kind of engineering challenges does the project present? How will electric cars affect future oil demand? How will developing nations like China and India affect future oil demand? How will plunging costs of solar and wind energy affect demand for natural gas (which is also used heavily in power generation). When you’re putting billions of dollars to work, the less unknowns, the better.

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