Wasington, DC -- (ReleaseWire) -- 01/28/2015 --DAWN BENNETT: Greg Zuckerman is a Special Writer at The Wall Street Journal and the author of The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters. Before that, he was the managing editor of Mergers & Acquisitions Report, a newsletter published by Investment Dealers' Digest. Zuckerman writes about hedge funds, big financial trades and other things of interest and regularly pens the widely read 'Heard on the Street' column. Today, Greg is here to discuss how collapsing energy prices are impacting America's domestic energy producers and why he thinks oil will stay below a $100 a barrel for years to come. Greg, welcome to Financial Myth Busting.
GREG ZUCKERMAN: Good morning. Nice to talk to you.
BENNETT: The price of oil is collapsing and I see that you're predicting oil is going to remain below a $100 a barrel for at least another year. Why?
ZUCKERMAN: Well, I've written a book. It's called The Frackers and it is about this revolution that we've had, this renaissance of energy production in this country. When you talk to people in the field, when you talk to the people responsible for moving this country towards energy independence, you realize how much they are producing and it's really only getting about 8 or 9 percent of the oil and gas from shale formations that's there. So the technology keeps improving, more oil and gas is flowing, gushing from these fields, and even at lower prices, you can still see growth. Meanwhile, the Saudis have all kinds of reasons to keep pressure on the frackers, to keep pressure on the Russians, to keep pressure on Iranians, they have all kinds of reasons to keep pressure on prices and that's going to continue.
BENNETT: You would think that plunging oil prices and the resulting mothballing of the highest costing domestic producers would actually lead to a collapse in U.S. oil production. Yet, my understanding is that the U.S. is set to pump a 42 year high amount of oil in 2015. Why are U.S. drillers ignoring the recent decline in price?
ZUCKERMAN: Well, it takes a little while. So what we've done is we have gone from a nation that was producing about 5 million barrels a day in 2006 to one that's right now, we're at about 9.1 million barrels a day, a huge, remarkable shift that's never really happened in this country so dramatically. Now we are on par, right up their with the Russians and the Saudis for production of oil. So a lot of these fields have just been booming. So, yes, the prices have fallen but they have already invested, they have already leased, they have already put the investments in these wells, these formations. So they have already pulled a lot of these costs in, so you can't turn off the tap. You don't want to. The marginal cost right now is limited. Now, they are going to pull back on new drilling, at least the expensive kinds. It's all about fracking and it's all about horizontal drilling and that can be expensive in some places like North Dakota, in places like Texas. So you're going to see slowdown in the growth, but there is so much in place already that it is really going to be hard to turn off this American revolution.
BENNETT: You've predicted that the U.S. is going to pass both Russia and Saudi Arabia and become the world's biggest oil producer. Is this all from the Bakken Region in the Central Northwest?
ZUCKERMAN: It's from various regions of the country, that's what I write about in my book. The Bakken area is North Dakota, it's little bit of Canada, and it's Montana, and we get about a million barrels a day from that region. It was barely anything just a few years ago, but we are also getting some from areas of Texas too, Eagle Ford Formation and the Permian, each day about million barrels come from those areas. So that's where the oil largely comes from, both the North Dakota and Texas. But also other places like Oklahoma and some other spots too.
BENNETT: You do think that the United States is actually going to pass both Russia and Saudi Arabia and become the biggest oil producer?
ZUCKERMAN: I do. We are not that far off right now. Again, because we've invested so much already and we're seeing such growth. Just in the past year, we've gone from about 8 million barrels a day to 9.1, and we are probably about to hit about 10.5 this coming year, even if oil prices slow. I'd have thought it would be 11.00 in 2015, 2016, had the prices not collapsed, but instead we will have about 10.00, 10.50. So yeah, these guys have made such remarkable investments, but also innovations, that it's hard to turn these pumps off.
BENNETT: How long do you think the Saudis might continually intentionally depressing the price of crude? How long can they, and do you think the U.S. will take any measures to counter-act the Saudis?
ZUCKERMAN: Counter-act the Saudis? This is great! We're all enjoying lower prices. I just filled up my whole tank for about $21 in New Jersey, and you know all the bad guys are under pressure now, Putin, Venezuela. Why you think Cuba is finally opening up to us? Because they are not getting money from Venezuela and Russia. The Iranians are in trouble, all the bad guys are in trouble, so the U.S. is thrilled now. The frackers are not excited because they are not going to make quite as much, so some of the billionaires that I write about in my book have lost several billions of their net worth, but they are still billionaires and they'll still do fine.
BENNETT: Oil prices were relatively stable until the 1970's, when Nixon broke the direct convertibility of the U.S. dollar to gold that was established at the Bretton Woods conference. Do you think this is a coincidence or do you think it is causative, the linkage between the Nixon Shock and the oil crisis?
ZUCKERMAN: It is also the Arab boycott, don't forget that. I mean, I remember being a little kid, being in the back seat of my parents car and there is a long line at the gas station. So you know, a lot of this is intertwined, a lot it is because we as a nation, we gave up on drilling for oil and gas in our country and that's what my book is about, The Frackers. It's about how Exxon and Chevron, and BP, all the giants, gave up on America. They were drilling off-shore in Africa, in Asia, anywhere but America, and it took some really stubborn, creative wildcatters, Americans who said, 'You know, we will ignore what the experts say. They will say that we are running out of national gas and crude, and we will figure out the way to get oil and gas from America, from shale, from these formations and kinds of rock, that everyone gave up.' And all these experts laughed at them and scoffed, and they've figured it out and they changed the world and they've put so much pressure on the Saudis that they had to respond.
BENNETT: This unlikely group of entrepreneurial wildcatters, these billionaires you are talking about, can you tell us about some of them?
ZUCKERMAN: Yes. So that's in my book, The Frackers. It's people like Harold Hamm. So Harold Hamm is the—born really dirt poor, 13th of 13 children, in a little town in Oklahoma, so poor that he could not even go to school each year until around Christmas time. That's when he began because he had to help his parents in the fields. They were sharecroppers, picking cotton and watermelon. And he didn't go to college, didn't have any engineering or geology background, but he hungered to find a lot of oil and gas, to try to change his life and change the country. And he saw some in Oklahoma, but then he heard about the possibilities, the prospects of oil up north in North Dakota, this Bakken Region that we talked about. And he's the one. He leased up more acres than anybody else. His company is called Continental Resources and it took them a while, but they figured out the technology—they and others—they are not the only ones. But today Harold Hamm is worth $8 billion. He was worth about $15 billion two months ago before oil started plunging, but you don't have to feel so bad for him at $8 billion. He's going through a divorce unfortunately now and he will have to write a check for a billion dollars to his wife, so she's doing pretty well herself.
BENNETT: Let's talk about Wall Street. There's been talks that these drilling operations are beginning to fail, and there are junk bonds servicing some of these. Unfortunately, those are going to default and banks could go under might be an even bigger problem. I noticed that your Wall Street Journal colleague, Holman Jenkins, argued the opposite, that these low prices are nothing to be concerned about. What's your take on this? Is there a risk, and could it cascade into other markets?
ZUCKERMAN: That's a good question. I think there is a lot of risk for a lot of the smaller players. They don't have much in the way of cash flow, they've had to make huge investments, and they borrowed a lot of money in the junk bond markets from banks, bank loans, etcetera, at high rates, and without much cash flow it is going to be tougher for them to make these payments and it's going to be tougher for them to borrow more money. So they are going to be really under pressure. There will be all kinds of consolidations, people are going to have to default, there will be bankruptcies. So the smaller, let's say, or the weakest 25 percent of the frackers are going to have real deep problems. But you will see bigger guys who finally get it, like Exxon, now that they finally believe in this country, they will dice some of these people up, there will be consolidation, there will be a nice shakeout, and that will be painful for some of these people, but for the market, for the country, it's all pretty healthy.
BENNETT: Even when Exxon, or BP, or any of these international giants come bail them out, they are not going to pick up the junk bonds. The junk bonds will default, won't they?
ZUCKERMAN: That's true. Often that debt converts into equity in a new company in a restructuring, so there will be defaults of some of these companies. They have already been priced down—a lot of these. So the prices of some of the debt is 40 cents on the dollar, and that's sort of the area where there will be restructuring. So, yes, it will be quite messy in the debt world for some of these companies.
BENNETT: Let's talk about liquefied natural gas, LNG. Before Obama has a stronger hand at the international negotiating table, I think America needs to be able to export LNG. Isn't Obama opposed to doing that, though? Isn't he cutting us off at the knees?
ZUCKERMAN: He's not—again, it's exporting. We're going to be starting in 2015—there is a company that I wrote about in my book called Cheniere Energy. Charif Souki is the one behind that and he has a fascinating story, that is, an immigrant from Lebanon, he was investment banker and didn't know much about energy. He built this huge company to import natural gas because all the experts said we were running out of natural gas, and he listened to these experts. It turns out we weren't running of natural gas, we had a glut developing and he figured out, 'OK. If we have a glut of natural gas, maybe instead of importing it, we should be exporting it.' So he became the first one, his company, to get the permission of the government. Now, one can criticize the Obama administration for not moving quickly enough to allow other people to be exporting, and there are others who now have the licenses and will be exporting liquefied natural gas, which is a sort of natural gas that you liquefy, and then you can send it abroad. But there will be more of those and I would argue that they should be approving more companies, and they will eventually get to them. And they should also be allowing people to export crude, so that would all incentivize more drilling and help some of those frackers there.
BENNETT: Do you think the incoming Republican control of Congress is going to help prioritize energy in America? What do you think is on their agenda, and do you think the Keystone Pipeline will finally pass?
ZUCKERMAN: Well, I do think that the GOP is going to prioritize energy, if only because they don't have any other options. I mean, it is easy to criticize the politicians for not doing anything, but it's not that much, what can they do, instead of not getting in the way of American innovation and creativity. So, one thing they can do is approve things like Keystone and approve more LNG plants for exports. I do think that there will be an effort, once the GOP takes over both the Senate and Congress, to focus on that and there will be a sort of trade off. Some Democrats agree with this. Unions are big backers of the frackers and this energy revolution because it creates all kinds of jobs. Environmentalists aren't thrilled, but there are some segments of the Democratic Party, I think, that will be okay with an emphasis on energy under a GOP Congress.
BENNETT: Is this strengthening America's hand at the negotiating table? Russia's influence in the European energy markets is waning, and as you say, America's energy wealth is growing.
ZUCKERMAN: Oh, very much so, and it's not just with Russia. Look at the Iranians. I mean, we've been trying to get them to stop building a nuclear bomb for a long time and only now we're starting to see that we can put pressure on them because we're producing so much more oil in our country. I mean, we've got them off the market and yet oil prices were stable for a long time and now they are plunging. So the Iranians are in real trouble. So it gives us all kinds of political power when it comes to Russia but also with the Iranians and others. And with the Cubans too, you could argue that maybe we should have waited and the Cubans would have imploded on their own, but you know, maybe this helped President Obama and the administration in negotiations with Cuba as well.
BENNETT: In writing The Frackers, you visited different fracking sites and companies. Can you tell us what kinds of threats these low oil prices have on American frackers, and is there a price point that they need to maintain in order for their operations to remain profitable?
ZUCKERMAN: Well, generally speaking, around $60 dollars a barrel these guys feel pressure. So we are there.
BENNETT: Yes, we are there.
ZUCKERMAN: At that point where many are feeling pressure, not to say they will turn off the taps. As I said, they will continue pumping, they are just not going to make nearly as much, and the weakest players are really going to feel the pressure and they are going to have to restructure, fail, throw in the towel, that kind of thing. So they are not thrilled but as a nation, the frackers, what they have done for us is just remarkable. They create jobs and even environmentally, our carbon dioxide emissions have dropped because we're shifting to natural gas from coal. So there are environmental dangers, but it's a possibility for being a positive there too. I mean, obviously we are paying less at the pumps, so that's helping us, giving everybody a nice break around Christmas time.
BENNETT: New science that's coming out shows what you just said, that fracking can actually be a net positive for the environment. Are you finding that the American people, Hollywood in particular, are surprised to hear this?
ZUCKERMAN: Yes. I mean, it's not that it is good. It's good for the environment in that we can switch from coal, which is quite dirty, to natural gas, and that's helping. It's not to say that there are no dangers. There are risks with fracking wells, but it's like any other industrial endeavor, there is risk for everything. So we've got to control the risks. My big argument has always been that, instead of condemning the frackers, we should be working with them and putting pressure on them and making sure we embrace the best standards possible. So New York State, instead of embracing that and saying we are going to have the best standards in the country and everyone should look at us and see how should they be drilling for natural gas, they are banning it. Even as New York embraces gambling. So to me that's a mistake and we as a nation should, instead of condemning the frackers, work with them and embrace them and thank them for lower oil and gas prices and the jobs that they've created.
BENNETT: With oil prices below $60 now and the frackers feeling the pressure, what if it stays there, or goes lower for the entire year of 2015?
ZUCKERMAN: Then, we will see the pressure on stocks, the junk bond market in general, because about 50 percent of the junk bond market is made up of energy. There are banks in Oklahoma and Texas that have 15 percent of their loans to the energy industry, so those areas are problems, but we'll all feel the benefit of lower prices.
BENNETT: Gregory, thanks so much. Gregory Zuckerman wrote The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters. You can get it on Amazon, and you should.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com. She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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