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US Shale Oil Executives Strike Black Gold in Firms’ Red Ink
From:
Albert Goldson --  Indo-Brazilian Associates LLC Albert Goldson -- Indo-Brazilian Associates LLC
New York , NY
Monday, September 14, 2020

 

Legalized Looting

In an unabashed almost tragicomic perspective on present-day capitalistic greed there's no better (or worse?) place to look than US shale oil executives boldly stripping their respective shale oil corporate carcasses with pre-bankruptcy filing bonuses almost to the bone leaving virtually nothing for the shareholders and creditors who made their personal financial success possible. The executives didn't just bite the hands that fed them, they bit them off cleanly.

Although these pre-bankruptcy legal looting tactics are being undertaken in many different industries, what makes this unique is that the US shale oil industry has been the high-profile darling that propelled the US to the # 1 oil producer in the world, creating thousands of jobs and keeping energy prices affordable for consumers and businesses.

The dark side to this record-breaking production is that the historical return on investment for almost every shale oil firm has been either negative or razor-thin positive. Shareholder and creditor complaints to the executive management of these firms to rein in operating costs went unheeded for years. So when the oil market collapsed the only winners were the executives who legally yet immorally and unethically secured bonuses prior to bankruptcy filings.

US shale oil is one of those industries where executives are generously overpaid for under-performance that borders on fiscal irresponsibility and fiduciary negligence. They may not have broken the law but they certainly broke its spirit.

Furthermore the firms' and industry-related supporting firms' workers are suddenly unemployed with little compensation. The local communities where they operated are "holding the bag" with respect to environmental poisoning due to orphaned (and leaking badly) oil wells. Although these US shale oil firms are contractually obligated to set aside a specified amount for environmental clean-up, many of these are grossly underfunded. In others words aside from economically hollowing out these communities, these executives have also left petroleum excrement.

An ominous reason for such extreme predatory financial mendacity is because the economy is wrecked and finding an equivalent job within or outside the industry is impossible. For this reason this heist is their de facto retirement package.

Cinematic Portrayal of Greed

Historically greed is one of human nature's viruses. The unnerving trend is that Hollywood has given the audience an unfiltered "fly on the wall" peek into the realistic portrayal of wealthy individuals who proudly admit that what they have isn't enough and their malignant narcissism in their callous pursuit of "more" will hurt the "salt of the earth" and ultimately not consider the possibility that excessive greed could easily backfire on themselves.

A cinematic compilation of financial avarice and amoral behavior by the ultra-rich can be viewed through the following links:

  • Land baron Noah Cross played brilliantly by John Huston in the movie Chinatown (1974) in 1930s Depression-era California explains his reasons for dubious land acquisitions despite his advanced age.
  • The about to be released safecracker convict played by Sean Connery explains society's hypocrisy between his profession and government/private industry laws and institutions in the movie The Anderson Tapes (1971).
  • The infamous investment banker Gordon Gekko played with unerring bravado by Michael Douglas in Wall Street (1987).
  • Finally the sequel to Wall Street – Money Never Sleeps (2010) – in which the greed mindset hasn't change one iota as succinctly expressed by financier Bretton James played by Josh Broslin.

Bankruptcy Bitterness

More ominously the bankruptcy filings have just begun. Because of the expected tsunami of filings the bankruptcy courts and lawyers may be overwhelmed and not review a particular case for months.

After executive bonus payouts the firms' financial position may have considerably changed from its pre-bankruptcy filing and alter the fate of the firm. The fate of employees and the community will hinge whether the bankruptcy court decides on a reorganization or liquidation.

The following chart US Bankruptcies at 10-Year High As Pandemic Takes Its Toll developed by S&P Market Intelligence and provided by Statista, a German online statistical firm on 13 August 2020 supports this trend.

The aforementioned bankruptcy figures are actually far worse than indicated, Unlike earlier years, there was a draconian lockdown for several months. Until there was a re-opening could firms assess the financial damage and then decide whether to file for bankruptcy.

Furthermore any early 2020 determination that filing for bankruptcy would be inevitable, the courts were closed and unable to process the filings. For this reason expect a tsunami of filings after Labor Day. an amount that would far exceed year-on-year bankruptcy filings when compared to previous years' September and October.

The Collapse of Corporate Credibility

Following the legal looting of Wall Street firms by top management during the Great Recession, these huge payoffs in non-financial sectors parallel are being emulated elsewhere in that this strategically planned and premeditated tactic has destroyed the remnants of the corporate ethics mantra.

This behavior which seems to repeat itself across many industries, underscores a morally corrupt corporate leadership that undermines any efforts at ethics training for middle management and the salt & earth employees. This behavior continues to represent a gross betrayal to the shareholders, creditors, and employees who make their success possible.

In the case of US shale oil executives they escaped a rapidly sinking Titanic by boarding spacious lifeboats serving steak & lobster disturbingly all quite legal.

The Slippery Road to Recovery

The US shale oil industry will recover as the global economy eventually recovers. However there will not be any déjà vu with respect to the living large spending years of the 2000s and 2010s. Those firms emerging from bankruptcy or new firms will have far tighter lines of credit with even tighter terms & conditions particularly on executive pay and will be contractually linked to specific milestones with a maximum hard cap.

There's the stubborn myth cleverly perpetuated across all industries that firms will be unable to attract experienced talent unless salary and perks are generous. There's always a bottomless pool of up & coming young highly motivated executives willing to step in for less money and will perform far better than their predecessors particularly if the corporate objective mandates a social cause with financial incentives for exceptional performance.

The smart creditors and shareholders will break "protocol" insure their investments are staffed with a new and better generation of shale oil executives which is where the smart money will inevitably end up.

 

Copyright 2020 Indo-Brazilian Associates LLC

Indo-Brazilian Associates LLC is a NYC-based think-tank and advisory service that provides prescient beyond-the-horizon contrarian perspectives and risk assessments on energy investments, geopolitical dynamics and global urban security

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