This article was published by The McAlvany Intelligence Advisor on Wednesday, December 16, 2015:  

Bertrand Russell and Paul Krugman each had their own versions of the game of chicken: Russell’s related to the Cuban Missile Crisis; Krugman’s relates to ’s refusal to allow the ECB (European Central Bank) to accept any more Greek debt as collateral for loans. As Krugman explained at the time:

to Greece:  Nice banking system you have there. Be a shame if something were to happen to it.


Greece to Germany: Oh, yeah? Well, we’d hate to see your nice, shiny European Union get all banged up.

The latest version goes something like this:

Chesapeake Energy to OPEC: Nice cartel you have there. Be a shame if something were to happen to it.


OPEC to Chesapeake: Oh, yeah? Well, we’d hate to see your heavily debt-laden balance sheet blow up your company.

At the moment Chesapeake is blinking. In its desperate rush to save itself from the cratering junk bond market that has taken its own issuances to 29 cents on the dollar and its stock from $21.49 to $3.87, the company has hired Evercore Partners, specialists in resuscitation, to apply its own brand of CPR: offer bond-holders the “opportunity” to exchange their savaged bonds for CHK stock, along with provisos that if the company is liquidated they will get first dibs on what’s left.

It might not be enough, or soon enough. On Monday WTI (West Texas Intermediate, priced in Oklahoma City) dropped through $35 a barrel, while Brent (priced in London) pushed through $38, both touching lows not seen since the Great Recession. As Adam Longson (an analyst at Morgan Stanley) put it: “While the market is oversupplied, as it should be for much of 2016, there is no intrinsic value for oil.” In layman’s terms, Longson is saying that the price of oil could confirm Goldman Sachs’ prediction that crude could drop to $20 a barrel before finding its “intrinsic value.”

In some markets, it’s nearly there. Heavy crude prices are already below $30 a barrel and dropping. Thicker, blacker, heavier oil – high in sulfur – is more difficult, and expensive, for refineries to refine into finished product. Mexican crude, for example, traded at $27.74 on Monday, while Western Canada Select (the so-called Canadian “tar sands” oil) traded at $21.37 a barrel, the lowest in almost eight years.

Bitumen, the thickest, blackest, nastiest conglomeration of sand, sulfur and on the planet, is selling for $13 a barrel. That’s down 80 percent in a year.

There are others in survival mode, adding to OPEC’s determination to wait out the carnage before cutting back on its production: SandRidge Energy, Midstates Petroleum, and Halcom Resources are making similar offers to their beleaguered bond holders.

There is at least one “energy” company waiting on the sidelines and enjoying the show: Walmart. Yes, Walmart, the company whose stock suffered nearly a complete meltdown less than two months ago when it provided a less than joyous outlook for the New Year. Looking closely at the company, however, professionals are now picking up the stock as an “energy play.” Walmart stores have seen four quarters of increasing traffic as the middle class, which is currently enjoying savings of an estimated $38 a month on gas, is spending, according to JPMorgan Chase, 80 percent of the savings on stuff that Walmart sells. Touching $56.30 a share in early November, WMT is now going out at just a nickel below $60.

In some games of chicken there are no winners, just survivors. In the present game it isn’t yet clear who the survivors are likely to be. But Walmart stockholders don’t care. They’re from the sidelines and enjoying the game.


The game of chicken

Paul Krugman’s version of chicken

One year chart of CHK

Definition of CPR: Cardiopulmonary resuscitation

Bloomberg: Crude Falls Below $35 per Barrel in New York for First Time Since 2009

Bloomberg: IEA Sees Oil Glut Lasting to Late 2016 as OPEC Keeps Pumping

Bloomberg: OPEC History Shows It Can Deal Even Bigger Blows to Oil Price

Bloomberg: Never Mind $35, The World’s Cheapest Oil Is Already Close to $20

Background on Chesapeake Energy

Journal: Chesapeake Energy Works on a Recovery Plan With Evercore’s Advisers – Update

One year chart of crude traded on NYMEX

Bloomberg: Wal-Mart May Be a Big Winner as Oil Drops Below $35 a Barrel

Background on Evercore Partners

One-year chart on WMT


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