There is a lot of uncertainty in today’s markets. Specifically investors do not know what to think of the latest credit downgrade issued by Standard & Poor’s. Last week the Dagong Global Credit Rating Co. (China’s premier credit rating agency) downgraded America’s rating to ‘A with a negative outlook’. Due to the fact that China’s credit rating agency is a newcomer in the sovereign debt rating industry, the downgrade did not get much attention from the American media. That has all changed since the S&P has followed suit.
The current market uncertainty stems from fact that Dagong Global is a new credit rating agency, and there is speculation that since it is a China-based agency that it might have ulterior motives for their recent downgrade. It also stems from a poor S&P rating history that recently gave AAA ratings to the mortgage backed securities which led to the financial crisis in 2008. Personally, I am watching Moody’s Investors Service and Fitch Ratings to see if they follow S&P’s lead (or should I say Dagong Global’s lead). I am also watching to see if the executive and legislative branches of our government take active steps to decrease our spending and increase our revenues. The debt problem will not be fixed overnight, but passing a balanced budget that shows fiscal responsibility will help prove to the world that America is nothing less than AAA.
Europe’s Problem
There is another global issue that we need to watch closely due to the fact that it could have a cascading effect on the global economy if it is not handled properly. The creation of the Eurozone in 1999 bundled countries with high credit ratings and countries with low credit ratings by the introduction of the Euro currency. (It sounds a lot like the creation of the mortgage backed securities doesn’t it?) Now the European Central Bank is discussing a strategy to bail out the distressed economies of Italy and Spain, and Eurozone countries with a strong economy, such as Germany, may need to provide assistance to these distressed economies to avoid a European financial meltdown.
O&G Service Sector
Many sectors will feel the effects of this turbulent economy and the financial problems listed above, but I believe the oil and gas service industry will stay strong and mostly stable despite the market fluctuations. Oil and gas prices may rise and fall with the current economic concerns, but the fact is that hundreds of companies have spent millions (if not billions) of dollars to secure leases in some of the major oil and gas shale opportunities throughout the United States. These leases have term limits that require the companies to drill or forfeit their lease within a certain time frame (typically three years). Rigs are also in limited supply, and many companies are on year long waiting lists with various drilling companies. Thus, the drilling will continue and the need for pipe, tubing, compressors, pumpjacks, fracking equipment, operations, etc. will remain constant despite the economic fluctuations. The costs for these services may fluctuate slightly, but they will not fall and rise as drastically as oil and gas prices. For this reason, I am confident in Freestone’s sector and Freestone’s future despite the economic instability that may occur in our near future.
Clayton Carter, President and CEO
