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Cramer: The gigantic oil crash that hasn't occurred

The Street logo The Street 3/12/2015 Jim Cramer

We keep waiting for the bust, the gigantic rollover of oil companies that just plain collapse under their own weight and the $50 price that you get for West Texas Intermediate.

It hasn't happened.

We keep waiting for the junk bond market that is riddled with $200 billion in oil and gas paper to be crushed by defaults and restructurings.

It hasn't been.

In fact, the iShares iBoxx $ High Yield Corporate Bd, the high-yield exchange-traded fund that includes a lot of this suspect paper, is pretty much unchanged for the last three years and has enjoyed a sustained rally since the bottom back when most of the major oil stocks hit lows, rallying from $86 to $91 before falling back to $90 where it is now.

Hardly catastrophic.

Jim Cramer: The Gigantic Oil Crash That Hasn't Occurred© TheStreet Jim Cramer: The Gigantic Oil Crash That Hasn't Occurred

We keep seeing stories that indicate that this quarter represents the peak of production and that it is all downhill from here. Nope. I think the first quarter's going to show extraordinary growth, despite the reduced drilling, with oil from the Permian, the Eagle Ford, the Bakken, the Gulf of Mexico, Mexico itself and Canada, where new pipe has brought tons of crude to market, all vying for precious refinery space because of the export ban for our own crude that the federal government isn't about to abandon.

So why hasn't it happened? Why have we only seen Whiting Petroleum put itself up for sale, despite billions of dollars in loans and debt taken down by dozens of now stretched U.S. producers? And is Whiting only giving up, so to speak, because it made the last -- and dumbest -- buy, the purchase of Kodiak, a second rate Bakken producer, for $3.8 billion in stock plus an assumption of $2.2 billion in debt?

I think I have the answer: the equity market. Since the collapse of the oil price, 25 companies that are regarded as either troubled or prudent, depending on your view, have come to the market with equity worth in aggregate $8.3 billion to help pay down debt, fund drilling or meet the tests of their revolvers.

The record of the deals? Not bad: You are up on nine, some big; you are down on 11, none big; and you are flat on five. Given that oil is pretty much flat during this period, below or trending at $50, frankly, these have been pretty good deals. They could be terrific if we spike a bit, as we did last week when even more of the deal stock went positive.

Plus, because of that record, the door isn't shut. There's another billion dollars in the queue, something that could be gobbled up rather quickly even at these oil prices.

There are several amazing drivers of the lack of a collapse: First, it hasn't taken all that much equity to satisfy the borrowers, especially when drilling budgets have been ratcheted back. Second, the amount of money these companies are allocating to drilling might have shrunk dramatically, but so has the cost of drilling, namely from roughly $29,000 a day to about $20,000 a day, with the amount of time being cut in some cases to eight days from 25 days. Some of this drill time saving is because of high-grading -- the companies only going after their easiest properties in order to more easily satisfy cash flow -- but some of it is recent breakthroughs in technology that happen at a fortuitous moment for the group.

Consequently, not only has the crash not occurred but those on the sidelines waiting -- such as Exxon Mobil, which talked glowingly of the opportunities to swoop in and buy cheap but solid properties, or the myriad private equity funds that stand at the ready -- have largely come up empty handed. Given the fairly strong nature of Whiting's Bakken properties, it is entirely possible that this company will entice multiple bidders simply because of the scarcity of merchandise for sale and the need for an outfit like Statoil, which has eyed Bakken properties and snapped some up before, to increase production given the steady drop in North Sea Crude.

So given all the capital sloshing around, given how the break-evens have fallen so almost all of the major shales are producing positive cash flow, if things stay right here, this is the crash that hasn't occurred.

I am sure that at a certain point later this year we will see the amount of oil being produced in this country declining at a faster rate, but that sure hasn't happened now. If anything, it's wildly overflowing, insuring that a steady glut is in the cards.

In other words, we are at a level where we can't expect many belly-ups, because of the billions of dollars that want in and the lack of need for them, given how the banks and the debtors didn't require nearly as much equity raised as we thought, and the drilling techniques are so good that the old "$80 and below we are broke" theory is just so full of holes that you can drive a truck through them.

This set of circumstances is by no means a cause to rejoice: There will be more oil coming to market than expected, with every dollar price increase and more equity raised with every stock price jump. But as for a catastrophe? Keep waiting. It doesn't look like it will happen.


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