Shale: Wall Street easy money evaporating

shalebustNo one expects the President of the US to have the time or the scientific background to delve into the geophysical complexities of shale energy. He naturally relies on competent advisers. What if the advisers, instead of being competent, like in so many US government agencies today, are in the sway (and sometimes perhaps pay) of the shale energy companies and their Wall Street investment bankers who have hundreds of billions of dollars riding on promoting the shale hype?

The current US Shale boom is being sustained on steroids, otherwise known as the Fed’s never-ending Quantitative Easing zero-interest-rate policy, a stance that shows no sign of reverting to normal interest rate levels as the economy continues to be depressed since the collapse of the 2007 real estate mortgage securitization bubble. In effect, shale drillers are able to keep in business only because Wall Street and other investors continue to throw money at them like it was falling from trees. Tim Gramatovich, chief investment manager for Peritus Asset Management LLC, an $800 million fund, notes, “There’s a lot of Kool-Aid that’s being drunk now by investors. People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”

Given the endless zero interest rate regime of the Fed, investment funds are desperate to find investments that yield higher interest. They are so desperate they are pouring money into shale gas and shale or tight oil companies like never before. The companies are operating at losses, loaded with debt and the credit rating agencies rate their debt as “junk”, i.e. in a market downturn, likely to default. One such company, Rice Energy, sold its bonds in April with a rating of CCC+ by Standard & Poor’s, seven steps below investment grade. That is below the minimum risk/quality level that major investors, such as pension funds and insurance companies, are allowed to buy. S&P says debt rated in the CCC range is “currently vulnerable to nonpayment.” Despite that, Rice Energy was able to borrow at an astonishingly low 6.25 percent.

“This is a melting ice cube business,” said Mike Kelly, at Global Hunter Securities in Houston. “If you’re not growing production, you’re dying.” Of the 97 energy exploration and production companies rated by S&P, 75 are “junk” or below investment grade. The shale “revolution” is but a Ponzi Scheme disguised as an energy revolution.

F. William Engdahl is strategic risk consultant and lecturer, he holds a degree in politics from Princeton University and is a best-selling author on oil and geopolitics , exclusively for the online magazine “New Eastern Outlook”