WUEG March 2015 Newsletter

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in their pipelines and processing plants. With oil prices falling - and with no end in sight - producers have been forced to sell pipes and plants for some quick cash in order to stay in the black (on top of layoffs and spending cuts). One such deal involved Canadian gas giant Encana Corp., who solds its Bakken pipeline network for $3 billion to Kinder Morgan last month. Back in December, Encana also sold gas pipelines and plants in Western Canada’s Montney shale region for a sum of $328 million. Other companies that have done the same include Royal Dutch Shell and Devon Energy. Meanwhile, fellow producer Pioneer Natural Resources is seeking a similar deal for its Eagle Ford shale interests for an expected sale price of over $3 billion. Conversely, some shale producers are continuing to pump the black gold out of the ground, with the US shale oil industry as a whole pushing output to 30-year highs and contributing to stockpiles that are at their largest since tracking first began in 2004. It appears at first to go against business sense to do so with oil prices where they are, but studies suggest that doing otherwise would leave the producers severely in debt. Many in the industry have borrowed to risky levels of leverage, at more than three times operating profits. From a paper by derivatives expert Satyajit Das, if firms don’t meet existing debt commitments, then the resulting decrease in available funding and higher costs as debt markets close for these firms will create a negative spiral. Inability to borrow sharply reduces production capacity, and this lower production combined with low prices reduces cash flows to the point of possible default. Another study out of the Bank of International Settlements similarly revealed that American oil companies have developed quite the appetite for debt, with capital expenditures far exceeding cash flow. Thus, “highly leveraged producers may attempt to maintain, or even increase, output levels even as the oil prices falls in order to remain liquid and to meet interest payments and tighter credit conditions.” But the US isn’t the only country where shale producers are continuing to pump at a loss. Russia’s Rosneft and Brazil’s Petrobras are also overleveraged due to annual increases in borrowing by 13 percent in Russia, 25 percent in Brazil, and 31 percent in China. However, these companies have a distinct advantage in that they are all government-backed, so their financing needs are met by treasury or sovereign funds. Most forecasts for oil prices have crude staying fairly low for the near future, with futures markets as of writing putting WTI prices sub- $60 through December 2016. Therefore, one can expect both trends to continue as long as the market stays constrained. However, with the furious activity in the industry that has taken place, there may be a breaking point approaching where companies reach some sort of new normal where $50 oil is the benchmark, at least until oil’s next big move. Sources: Bloomberg Economonitor
CFL - an Amazing Investment Josh Haghani – Senior members, Academic Committee By replacing incandescent light bulbs with compact fluorescent lights (CFLs), a 476% taxfree annual return can be achieved. The EIA estimated that in 2012, 461 billion kWh were used to light both U.S. residential and commercial sectors. Lights amounted to 17% of total electricity consumption for the residential and commercial sectors, and an amazing 12% of total U.S. electricity consumption. A typical incandescent light bulb produces 1,600 lumens using 100 watts, while standard CFLs produces the same 1,600 lumens using only 23 watts.[ii] By implementing CFLs instead of incandescent light bulbs, a 77% energy saving can be achieved. An average household can save 13.09% of their electricity bill by switching to the more efficient CFLs. Total U.S. electricity consumption could be reduced by 9.24%, while giving consumers an annual tax-free return of 476%. Without taking into consideration the energy efficiency of CFLs, incandescent lights are still more expensive in the long run because incandescent light bulbs have a shorter expected lifetime. Richard A. Muller, in his book Energy For Future Presidents, explains “A tungsten bulb lasts typically 1,500 hours… that means that over the 10,000 hour lifetime of the CFL, you would have to buy more than six ordinary bulbs at a total cost over $2.” However, for my calculations I will give CFLs a handicap and only use the greater efficiency to calculate the annual return a consumer would achieve by switching to CFLs. I will compare a 1,600 lumens, 26-watt Longstar brand CFL costing $3.89, to a 1,600 lumens, 100 watt GE brand incandescent light bulb costing $0.83. For my calculations I used 5 hours a day of typical light use, and $0.11 per kWh. Effective interest rate = (100%/payback period) = 476% Try earning a 476% return with any other investment! Sources: Energy Information Administration Home Depot Energy for Future Presidents Bulbs.com Amazon
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WUEG March 2015 Newsletter

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