The beginning of the bust

Things are starting to get damn interesting in the energy space.  The debt market has tightened up, as the junkiest companies in the group are on verge of default.

More from the Wall Street Journal:  http://www.wsj.com/articles/oil-and-gas-debt-deals-sting-investors-1438634208

The fact that these over-levered companies, that weren't profitable at 90 dollar oil, even found funding is a sign of the times.  People are taking massive unreasonable risks, likely because of the demand for yield.

The key question is will these risks be contained?  It may just.  and a bust cycle would be great for the industry, but we appear in early stages still.

The clearest bearish argument towards easy money is the global over-capacity theory.  The basis of the theory is that things will look and feel okay, but because debt is so freely available in corporate bond markets, there will be LONG slow bleed cycle (rotting from the inside, if you will) in various industries and the economy in general.  This seems to be exactly what the energy space is in the midst of now.  Check out Schlumberger's comments on their latest conference call

“We do believe that the North American rig count has now reached bottom, but that we will only see a slow increase in drilling and completion activity in the second half of the year, which will not make any material dent in the massive overcapacity that has been created. This again means that there will be little to no improvement in pricing levels and, hence, the market will still remain very challenging for the foreseeable future."

Source: SKrisiloff

Energy stocks look horrendous.  Oil is testing lows, but may be in for a bounce soon.  If the energy patch gets a bounce, it seems like another short.  We still haven't seen many big investors making some moves in the group.  That can be interpreted as the risk/reward vs the uncertainty is still unattractive.

Trade 'em well!