Friday, August 29, 2014

Hey, Good News: Shale Is Not a Ponzi! (But what is a Ponzi?)

We've been at the front of the line complaining about cash flows, free cash flow, cash on cash returns and all the other arcana that makes me so exciting at parties.
From the Financial Times:
Shale oil and gas producers’ finances lift growth hopes
The independent oil and gas companies at the forefront of the US shale revolution have substantially improved their financial position – boosting confidence that the rapid growth in production can continue.

Cash earned from operations by 25 leading North American exploration and production companies is expected in aggregate to exceed their capital spending next year for the first time since 2008, according to an analysis by Factset for the Financial Times.

US oil and gas production has grown sharply in the past decade, thanks to advances in hydraulic fracturing and horizontal drilling techniques, as well as higher oil prices that made it viable to develop shale reserves.
As production has grown, however, the industry has been reliant on sustained inflows of capital to finance its drilling programmes – through borrowing, equity issuance and asset sales.

Some critics have described the industry as a “Ponzi scheme”, relying on the excitement over the shale boom to attract new investment, and warned that it could collapse when companies ran out of financing to drill more wells. However, shale companies’ finances have improved rapidly as a result of a shift by many away from natural gas towards more lucrative oil production and a pick-up in natural gas prices after they fell to 10-year lows in 2012....MORE
HT: FT Alphaville whose Izabella Kaminska not only knows this stuff:: 

...Joy for shale! And all gratitude to break-even oil prices of no less than $90 per barrel.

Except, as John Kemp at Reuters recounts, the sceptics aren’t necessarily convinced (our emphasis)....MORE
But who appears to be working on Ponzi recognition at her personal blog.
From Dizzynomics: 

Having become totally bored of explaining why things like Bitcoin are a Ponzi, I thought for a change I would approach the issue from the opposite direction.

What then doesn’t constitute a Ponzi?
So here we go:
1) any enterprise that can take your money and invest it in an activity that generates earnings which can cover operational costs/taxes and leave an excess to be reinvested in the business or to be paid out to shareholders, (irrespective of new money coming in or not)....MUCH MORE
Which was followed by:

What is not a Ponzi? (Short version)
The preceding post became tl;dr.
To summarize....MORE