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Authored by Nick Cunningham via OilPrice.com,

The financial stress sweeping over the U.S. shale sector has led to a sharp contraction in activity.

Oil and gas activity in Texas and parts of New Mexico declined in the third quarter, with the Dallas Fed’s business activity index reporting a reading of -7.4, down from -0.6 in the second quarter.

A negative reading signals contraction while a positive reading indicates expansion. Falling deeper into negative territory indicates that shale drillers in the Permian further cut drilling activity over the last three months.

A slowdown in drilling is an even larger problem for oilfield services companies, who provide the equipment, manpower and drilling services that oil companies need. A producer may be able to do more with less, but that “less” falls on the service providers, who have been hit hard. The Dallas Fed said that the business activity in the oilfield services sector fell to -21.8 in the third quarter, down from 6.6 in the second.

Another reading demonstrated the pain for oilfield services. The Dallas Fed’s “equipment utilization index” plunged to -24 from 3, and the figure for the third quarter was the lowest since the oil market’s nadir in 2016.

Problematic for shale drillers is that costs still grew, although at a much slower rate. The “input cost” index stood at 5.6 in the third quarter, an indication of slowing cost increases compared to the 27.1 reading in the second quarter. But the bad news for the industry is that the reading was still in positive territory.

Employment is also weakening. The employment index fell to -8.0 from -2.5, meaning that the Permian likely saw job losses for the second quarter in a row.

When surveyed by the Dallas Fed, 42 percent of the executives from 142 oil and gas firms said that low prices was their most significant constraint on growth. Another 20 percent said the lack of access to capital, followed by 13 percent of which said investor pressure to generate free cash flow. Only a small percentage of respondents said that infrastructure bottlenecks and labor shortages were the top constraint on their growth.

The more intriguing part of the Dallas Fed survey comes in the comments section, which includes statements submitted anonymously by oil and gas executives. Since they are anonymous, the executives are very candid, offering an unvarnished window into sentiment in the sector.

And the mood is decidedly grim.

The downbeat comments cover a range of topics, including market volatility, reduced access to capital, trade war concerns, operational problems, and complaints about environmentalists. Below is a sampling.

First on lack of capital:  

• “The capital market has dried up for small E&P companies.”

• “Unless there is a material pullback, the environment is static around $55 per barrel and, even if your business is rock solid at this price, the capital markets aren’t functioning well, so it’s hard to move off of the ”stuck” or “static” outlook.”

• “It seems no one has any money for oil and gas projects. Lack of Wall Street participation in oil is very apparent.”

On operational and cost problems:

• “[M]any oil shale projects are failing to meet production projections… Further cost declines will not be forthcoming.

• “The industry is admitting what independents who drilled with industry partners early on figured out: You cannot make money drilling at this price structure. An ongoing drilling program consumes all your returns and continues to require new money.”

• “We are seeing increased costs in supplies, and vendors are attributing the increases to tariffs.”

• “Over $130 billion of junk status bonds are coming due after 2020 over a two-year period for those that got in the treadmill drilling business, with wells that decline 70 percent in the first year.”

On the slowdown in drilling and production:

• “U.S. oil production is about to fall significantly. The rig count has declined dramatically from one year ago (down 170 rigs), and our customers are not completing wells in order to save cash flow. This all equals a big shift down.”

• “E&P companies have pulled back on spending and continue to pressure service company prices. I expect there will be a number of insolvent companies looking for help in the next six months.”

And on pressure from environmentalists:

• Relating to proposed carbon taxes: “That would kill the independent arena of the U.S. domestic oil industry that just vaulted America to the world’s #1 oil producer spot. And people would be willing to sacrifice that contribution to the U.S. trade balance [and] domestic employment, as well as tax payments to states? It’s a sad testimonial to the decline of the American educational system!”

• “Protestors are so rude and ugly toward oil and gas but, yet, they want our money. Protestors do not have a solution to replace oil and gas in New Mexico.”

There are few, if any, upbeat comments about the state of play in the shale sector in the survey. To be sure, none of this means that the collapse of the industry is just around the corner. In fact, Rystad Energy put out a commentary downplaying the financial predicament for the industry. “In a nutshell, we do not believe the recent bankruptcies that have beset a number of shale players are indicative of an industry-wide epidemic,” Alisa Lukash, a senior analyst on Rystad Energy’s North American Shale team, said.

However, it’s hard to ignore the deep sense of despair from more than a few shale executives. And as Rystad noted, the top 40 shale companies have $100 billion in debt coming due over the next seven years, which will likely force a reckoning in the sector.

Moments after an anonymous whistleblower complaint against President Trump was released, acting Director of National Intelligence Joseph Maguire is offering public testimony before the House Intelligence Committee to discuss the matter. 

Watch: 

The recent attack on Saudi Arabia’s Abqaiq oil processing facility has netted Saudi Arabia a modicum of international sympathy, which has temporarily quieted criticisms of the Kingdom’s many egregious human-rights violations (like bankrolling one faction in Yemen’s civil war and beheading teenagers for speaking out against the state).

But with the one-year anniversary of Jamal Khashoggi’s murder inside the Saudi consulate in Istanbul coming up next week, many of those old passions could soon resurface.

The backlash from the government-insider-turned critic’s murder was extremely embarrassing for the kingdom. Many American businesses, including the big banks, vowed to cut business ties with Saudi Arabia, and many bold-faced names pulled out of MbS’s “Davos in the Desert” forum.

So now, in a transparent attempt by Saudi Crown Prince MbS – widely blamed for ordering the killing – to assuage investors’ concerns about the Kingdom’s human rights record ahead of Aramco’s IPO, the Crown Prince sat for an interview with PBS’s Frontline where he said he ‘takes responsibility’ for Khashoggi’s murder, even though he continued to deny having any foreknowledge of the killing.

“It happened under my watch,” Prince Mohammed told PBS reporter Martin Smith in a trailer released on Tuesday for the Frontline documentary, which kicks off the season . “I get all the responsibility. Because it happened under my watch.”

And how could this have happened without MbS knowing?

“We have 20 million people,” he said. “We have 3 million government employees.”

And how did the kill squad get access to a government plane? MbS blamed it on his subordinates.

“I have officials, ministers to follow things and they’re responsible, they have the authority to do that,” he said.

Nearly one year ago on Oct. 2, Khashoggi walked into the Saudi consulate in Istanbul for an appointment to obtain a document he needed to marry his Turkish fiancée. Inside, he was ambushed by death squad of 15 Saudi agents who had flown in a few hours earlier on a government jet. After reportedly refusing to return to Saudi Arabia with them, Khashoggi was strangled by a member of the team. His body was dismembered in the consul’s office, and his killers disposed of his remains. They have never been found.

MbS

The Kingdom punished members of the kill squad, including charging 17 people with Khashoggi’s murder, a charge that could carry a death sentence (by beheading) in Saudi Arabia, though few expect any to actually be convicted.

Turkish and international investigators have determined that the Saudi State sanctioned the attack then tried to cover it up, and the CIA has also reportedly determined that MbS directly ordered the murder of Khashoggi, who had been living in Virginia and working as a columnist for the Washington Post.

But the Frontline interview is one of the only examples of MbS publicly discussing the Khashoggi case. But if MbS and the Saudi state are worried about some kind of shareholder boycott hurting the valuation of Aramco’s IPO, they can probably relax. If anything, the Khashoggi affair showed how quickly international outrage can subside and be forgotten.

Just look at how quickly US investment banks have scrambled to join the ranks of the underwriters for Aramco’s IPO.

The Frontline episode featuring the interview will air next Tuesday. Watch the trailer below:

There were no surprises in today’s second revision of Q2 GDP, which the BEA reported moments ago printed at 2.0%, just as expected, and unchanged from the 2.0% first revision estimate; the number, of course, was down from the 3.1% annualized GDP growth in Q1 which was not revised.

The revised Q2 increase in real GDP reflected increases in consumer spending and government spending, while inventory investment, exports, business investment, and housing investment decreased. Imports, which are a subtraction in the calculation of GDP, decreased. 

The increase in government spending reflected increases in both federal and state and local government spending.

Similar to last month, the increase in consumer spending reflected increases in both goods and services that were widespread across major categories. After jumping an upward revised 4.7% in the first revision, personal consumption was modestly trimmed, rising to 4.6% currently, which was still tied for the highest PCE in almost five years, since Q4 2014, and up sharply from just 1.1% in Q1.

Looking at the inflationary components of the report, the GDP price index rose 2.4% in 2Q after rising 1.1% prior quarter; largest increase in a year.

Yet one number came in hotter than expected, with Core PCE rising 1.9% in 2Q after rising 1.1% prior quarter, and above the 1.7% expected and also as reported in the first revision.

Nonresidential fixed investment, or spending on equipment, structures and intellectual property fell 1%.

Finally, the BEA also reported corporate profits rose 3.7% in prior quarter, down from 5.1% previously, and noted the following:

• Corp. profits up 1.3% Y/Y in 2Q after falling 2.2% prior quarter
• Financial industry profits increased 0.6% Q/q in 2Q after rising 5.8% prior quarter
• Federal Reserve bank profits up 9.9% in 2Q after falling 10.9% prior quarter

The House Intel Committee has released the full (modestly redacted) complaint letter from the so-called ‘Whistleblower’ regarding Trump’s “urgently concerning” conversations with Ukraine.

Perhaps the most interesting part is the following…

“I was not a witness to most of the events described”

Full Letter below:

Overnight, we cited two icons in rates/repo business, both of whom confirmed that contrary to what so-called self-professed twitter “experts” claimed, what is going on in the repo market is bad and getting worse, and more problematic is that nobody knows what is causing it.

The first one was BMO’s rates guru, Ian Lyngen who had this to say:

As we approach quarter-end, it’s intuitive that funding markets are attracting heightened attention after last week’s repo fiasco. One thing has become clear, however, and that is that the Fed is willing to provide significant  amounts of liquidity to primary dealers to alleviate as much stress as possible. By upsizing injections to $250 bn or  more (assuming overnight remains at $100 bn through October 1 and the terms are $30 bn/$60 bn/$60 bn, respectively) the fact that we’re discussing a quarter trillion dollars is telling as to the depth of the constraint in repo.

The second one was from Curvature securities repo wizard, Scott Skyrm, who was even more laconic:

It’s great that the Fed is pumping liquidity into the system, however, why were the existing operations insufficient?

As of today, the Fed had injected $105 billion in liquidity into the Repo market, but rates were still stubbornly high. Whatever changed last week to cause the funding spikes is clearly still an problem.

Which in turn brought us to this morning’s commentary from ICAP’s Lou Crandall. As a reminder, ICAP is the world’s biggest interdealer broker, and as such the plumbing in the bond market is its bread and butter. This is what Crandall had to say ahead of the conclusion of today’s second, expanded (from $30BN to $60BN term repo), quoted by Bloomberg:

Increases in the Fed’s overnight and term-repo operations Thursday may be “sufficient to ensure that the remainder of the Fed’s operations through quarter-end are undersubscribed.”

As a result, Wrightson ICAP’s “tentative guess” is that dealers take $50b of the term operation and $60b of the overnight action, though risks are on the high side of the term estimate and on the low side for the overnight. However, as Crandall added, “risk remains that dealers might take the full $60 billion of term operations.”

And… Bingo, because moments ago, the NY Fed confirmed that one day after the most oversubscribed overnight repo operation yet, which saw $92BN in securities tendered for the latest overnight repo op before it was expanded from $75BN to $100BN…

… moments ago the Fed announced results from the second Term Repo meant to address the quarter-end liquidity shortfall is what ICAP would have dubbed the worst case scenario: not only was it oversubscribed, but it was so by a whopping $13BN, as some $72.5BN in securities ($43BN in TSYs, $29.25BN in MBS, $0.5BN in Agencies), were submitted for today’s $60BN repo.

In other words, not only is the liquidity shortage getting worse, but the more liquidity the Fed provides via repos, the more liquidity primary dealers indicate they need.

And with it now appearing guaranteed that the full allotment of $250BN across term and overnight repo will be used up, we look to today’s overnight repo result in a few minutes, where if the term repo is any indication, the full $100BN allotment will be blown through with ease as banks confirm that their dollar shortage is far, far worse than anyone expected… and certainly is not going away after last week’s “one-time” tax payment and bill settlements.

Authored by Steven Vannelli via Knowledge Leaders Capital blog,

In our mid-quarter update, we highlighted the plunge in the University of Michigan’s consumer confidence indicator, suggesting that “good feelings” among consumers were starting to fade. Often surveys offer a leading glimpse into economic activity. A more confident consumer is more likely to make those big-ticket purchases, like homes and cars, as well as consuming more services.

Earlier this week, we got the latest reading of the Conference Board’s version of their consumer confidence indicator. It came in at 125.1, missing expectations of 133.2.

While consumer’s assessment of their present situation fell slightly, it was consumer’s expectations for the future that took a big hit.

Crawling through the details of the report, there was at least one interesting detail. The Conference Board will survey people if jobs are hard to get or plentiful. We have a simple indicator where we take the percent of respondents that say jobs are plentiful and subtract the percent of respondents that say jobs are hard to get. This indicator correlates pretty well with the unemployment rate going back over the last 30 years. In the last month, the jobs indicator dropped by more than 5 points. The unemployment rate troughed at 3.6% in April. Historically, peaks in the jobs indicator occur concurrent to lows in the unemployment rate.

Comparing the University of Michigan also yields an interesting tidbit. The University of Michigan asks respondents how their personal finances are, while the Conference Board asks respondents how the economy is doing. Often, recessions are preceded by troughs in the University of Michigan to Conference Board ratio. The logic here is that prior to a recession, consumers feel good about their finances because they still have a job, but see storm clouds on the horizon that may negatively impact the economy.

On Thursday morning Beyond Meat punished short-sellers, again, this time with a press release, stating that it has signed an exclusive agreement with McDonald’s to test new plant-based burgers in Canada.

McDonald’s will be conducting a 12-week test of a new plant-based burger called the P.L.T. (Plant. Lettuce. Tomato). The new P.L.T. will be available in 28 restaurants across Southwestern Ontario, starting next Monday [September. 30].

“McDonald’s has a proud legacy of fun, delicious and craveable food—and now, we’re extending that to a test of a juicy, plant-based burger,” said Ann Wahlgren, McDonald’s Vice President of Global Menu Strategy. “We’ve been working on our recipe, and now we’re ready to hear feedback from our customers.”

The P.L.T. has no artificial colors, artificial flavors, or artificial preservatives, it’s a great-tasting “open wide and sink your teeth into it” sandwich, said, Wahlgren, adding that it’ll be priced around $5.

Shares of Beyond Meat were up nearly 20% on light volume at 7:37 am est., while McDonald’s was flat.

As of September 12, short interest in Beyond Meat was 5.452 million, or a whopping 42% of the float, explains why any press release with a major fast-food chain can pop the stock on relatively low volume.

Short interest has declined fractionally since hitting a record high in mid-August, perhaps an indication that the hedge fund community had suffered bigly in shorting the stock when it rocketed +257% from May to July, and has since fallen into late summer.

However, the squeeze is clearly still one with a borrowing rate well into the triple digits: Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners tweeted Tuesday that Beyond Meat “is still a short squeeze candidate. Shorts are down $697mm in year-to-date mark-to-market losses & stock borrow rates are 114% of existing shorts & over 200% fee on new stock borrows – a rally would probably squeeze some shorts out of their losing and expensive shorts.”

Yes, $BYND is still a short squeeze candidate. Shorts are down $697mm in year-to-date mark-to-market losses & stock borrow rates are 114% of existing shorts & over 200% fee on new stock borrows – a rally would probably squeeze some shorts out of their losing and expensive shorts https://t.co/DdIpNQYQwW

— Ihor Dusaniwsky (@ihors3) September 24, 2019

When Beyond Meat soared over 150 to 220 per share earlier this summer, people in New York, New Jersey, Florida, and California were Googling how to short the company.

As far as global tests of its plant-based burgers, Beyond Meat likely has a war chest of press releases to punish short-sellers, but as we might add, once the press releases become ineffective in driving short-covers, then lookout, the stock will crater.