In October 2015, Crude Oil was in the midst of an epic crash, down more than 50% from its high in 2014. At $49, credit concerns were front and center, as spreads on Energy High Yield bonds exceeded 1000 basis points.

The pundit talking points at the time were as follows:

  • With Crude Oil under $50, there would be a wave of energy company defaults.
  • Any further decline in Oil would accelerate those defaults.
  • Absent a rise in Crude Oil back above $100, nothing could stop the carnage that was about to occur.

By February 2016, Crude Oil had dropped nearly 80% from its high, hitting a low of $26. Credit spreads on High Yield Energy bonds approached 2000 basis, their highest level ever. The collapse was said to be imminent.

Then a funny thing happened. The collapse never occurred.

Crude Oil rallied and credit spreads tightened. That much was to be expected, but what happened next nobody foresaw. Crude Oil stopped rallying but credit spreads kept on tightening. Today, with Crude Oil trading at the same level as October 2015 ($49), Energy Credit Spreads stand at only 437 basis points.

How is that possible?


Via Bloomberg:

“We’ve turned shale drilling from art into science,” Cindy Taff, Shell’s vice president of unconventional wells, said on a recent visit to Bongo 76-43, about 100 miles (160 kilometers) west of Midland, Texas, capital of the Permian.

Bongo 76-43, named after an African antelope, is an example of a leaner, faster industry nicknamed “Shale 2.0” after the 2014 oil-price crash. Traditionally, oil companies drilled one well per pad—the flat area they clear to put in the rig. At Bongo 76-43, Shell is drilling five wells in a single pad for the first time, each about 20 feet apart. That saves money otherwise spent moving rigs from site to site. Shell said it’s now able to drill 16 wells with a single rig every year, up from six in 2013.

With multiple wells on the same pad, a single fracking crew can work several weeks consecutively without having to travel from one pad to other. At Bongo 76-43, Shell is using three times more sand and fluids to break up the shale, a process called fracking, than it did four years ago. The company said it spends about $5.5 million per well today in the Permian, down nearly 60 percent from 2013.

“We’re literally down to measuring efficiency in minutes, rather than hours or days,” said Bryan Boyles, Bongo 76-43’s manager.

Guidry, head of Shell’s shale, said the company could make money in the Permian with oil at $40 a barrel, with new wells profitable at about $20 a barrel.

Energy companies adapted to lower Oil prices by becoming leaner and faster, and they did so in order to survive. Those unable or unwilling to adapt have perished.

In biology, adaptations enhance the fitness and survival of individuals. In economics, adaptations enhance the fitness and survival of businesses.

As an investor, you too need to adapt. Markets change, relationships change, and the relative attractiveness of opportunities are forever changing. That’s what makes the game so interesting but at the same time so hard. For change is never easy, only necessary in order to grow and survive.


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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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