April 26, 2024
Things I Learned This Week at Camelback Mountain
The Energy Workforce and Technology Council (“EWTC”) held their annual meeting this week in Scottsdale, Arizona. The weather was perfect, warm and sunny and not too hot…yet. It was excellent seeing so many old friends and young friends as well. Our industry is represented by some amazing talent. Several speakers and presentations deserve mention.
Legend. The EWTC honored Andrew Gould and his legacy with the Platinum Award on Thursday, April 25, 2024, during the 2024 Annual Meeting. This award, the highest honor bestowed by EWTC, is a testament to Gould’s exceptional contributions and influence in the energy industry. His talk focused on the cyclicality of our industry and that the focus on future supply is critical. The common factor has been that demand will continue to grow. Even if it doesn’t, more oil needs to be found and produced. By 2040, the IEA says that oil demand will be higher than today. His comments centered on the similarities of the current market relative to the past. Shale will be the fundamental basis of the U.S. future. Capital discipline has lowered the volatility of the industry, and the short cycle of shale production has improved that as well. A clean balance sheet is the key to success of the OFS industry. The best part about our industry is the people.
Offshore Deepwater. Jeremy Thigpin, the CEO of Transocean, and Frank Garcia, CP for offshore development with Murphy, were my panelists. Leading-edge day rates are now at $505k but, more importantly, term of contracts are extending, and that is a seminal change. Three to five year contract terms are being discussed, oil companies are securing rig availability one and two years out and some international oil companies are talking about ten-year commitments. Jeremy promised that no new rigs will be built, at least anytime soon, since most shipyards don’t actually want the work because of all the defaults over the last ten years, and are telling contractors, if they did take the work, it would take five years and cost $1 billion. It makes it easy to understand why we won’t build any new rigs anytime soon. With Deepwater rig utilization almost effectively full and with West Africa, South America and other regions heating up, one would expect day rates to continue creeping up. Frank noted that Murphy is moving overseas more aggressively, in The Ivory Coast and Vietnam, after years of experience in Malaysia. The focus is on creating shareholder value, improving safety and efficiency. Notice no comment on production growth, but a focus on making money. It was a very interesting discussion.
All Things AI. How technology will start to impact the process domain using AI was a fascinating presentation, noting the practicality of using AI for maintenance and operations. Software programming is getting more sophisticated and generating even more efficiency. 25% of work being done today will go away with the use of AI over the next five years, requiring a very different workforce than we have today. So far, the energy industry is in about the middle of the pack in incorporating AI in the industry, but that should change dramatically over the next several years because of its significant potential for improvement. The people who need to implement the AI are not often the person who has the need, in terms of understanding how work happens and what the workflow is. It will evolve as it gets increased use and better understanding as to what it can do. Start with simple workflows and expand from there.
Excellent Presentation. Congressman David Schweikert from Arizona - We are adding $100,000 in debt per second as a country. The two-year note went over 5%. In the last 15 years, the U.S. had more deaths than births. In the 2017 tax reform bill, the goal was to get corporate tax rates in line with the rest of the world, but almost half of the GDP improvement was from accelerating depreciation. “It’s business. It’s all about the money.” 39 cents of each dollar in income taxes goes to interest payments. Tax rates are going up next year and it isn’t being very well understood. Interest and healthcare costs are driving the debt increases. Diabetes is one-third of healthcare costs. $9 trillion is the expected costs of morbid obesity over the next ten-years. The borrowing rate is 9% of the economy when the higher taxes and budget cuts would only yield 2.5% or so, meaning the current situation is not sustainable. We need a dramatic shift in policy but higher taxes won’t do it. Something needs to be done. But it requires both a gradual decline in spending and the supporting of economic growth. If we don’t do something, our country will be run by the bond market.
Safety First. The Onshore Safety Alliance is an organization formed by a large group of companies to work on improving wellsite safety. Why does that matter? Because safety is one of the most critical aspects of our industry, which is inherently dangerous. The mission is to eliminate fatalities in the onshore oil and gas industry.
The Economy. U.S. economic growth slid to an almost two-year low, while a measure of underlying inflation advanced more than the forecast, dampening hopes of a soft landing. Traders pushed back the timing of the first rate cut to December from November.
Headlines.
European Real Estate Deals Slump to Lowest Level in 13 Years
“Wind Overtakes Fossil Fuels as the UK’s Largest Power Generation Source”
“China's Coal Dependence to Persist Despite Global Climate Goals”
The World’s Biggest Energy Traders are Returning to Metals
The Ultra-Rich should Pay to Save Social Security, According to the Latest Bloomberg News/Morning Consult Poll of Swing State Voters
An Overwhelming 77% of Registered Voters in the Seven States That’ll Decide the Presidential Election like the Idea of a Billionaires Tax
Halliburton, Rhino Resources to Develop Deepwater Exploration Hot Spot in Prolific Orange Basin Offshore Namibia
Fading in Importance. U.S. fund managers with ESG mandates suffered their worst-ever outflows in the first quarter of this year, to the tune of about $8.8 billion, according to Morningstar. It’s the latest sign U.S. investors are turning their backs on the strategy.
Slowing Down. U.S. births declined in 2023 to their lowest level in more than 40 years, continuing a two-decade trend of Americans having fewer children. Blame economic strain, work instability, student loans and access to health care, among other things.
Highlight. “Weatherford International Performance Continues To Exceed Expectations; Margins May Trend Towards 30% In 3-5 Years!” - Raymond James
Bureaucracy Lingers. Interior Finalizes Offshore Wind Modernization Rule. The Department of the Interior finalized the updated regulations for OCS renewable energy development. According to the Interior, the final rule includes provisions that:
Eliminate unnecessary requirements for the deployment of meteorological buoys
Increase survey flexibility
Improve the facility design, fabrication, and installation certification and verification process
Established a public renewable energy leasing schedule
Reform BOEM’s renewable energy auction regulations
Tailor financial assurance requirements and instruments
Clarify safety management system regulations
Clarify and strengthens oversight of critical safety systems and equipment
U.S. Energy Markets Update, With Key Highlights Listed Below
Commodity Prices: WTI crude oil is currently $83.36 per barrel (up ~1.5% week-over-week) and natural gas is $2.09 per MMBtu (down ~8.7% week-over-week)
Crude Oil Production: U.S. crude oil production is currently ~13.1 million barrels per day (up ~7.4% year-over-year)
Crude Oil Inventories: U.S. crude oil inventories decreased by 6.4 million barrels week-over-week vs. an estimated increase of ~1.6 million barrels
Frac Spread Count: There are currently 260 frac spreads operating in the U.S. (an increase of 8 spreads week-over-week)
Onshore Drilling Rig Count: There are currently 599 drilling rigs operating in the U.S. (an increase of 1 rig week-over-week)
Amazing Guy. One of the most outstanding people in our industry is my good friend, Loren Singletary. Retiring from several senior positions at NOV, he now serves on several boards and is a beacon of history and information about our industry. The Oilfield 360 podcast with Loren Singletary can be seen here. It is most definitely worth your time.
Batter Up. Shohei Ohtani hit a 450-foot home run in his first visit to Nationals Park. His sixth homer of the season was the hardest-hit of his career at 118.7 mph. Last week, he hit three doubles in one game. He is 6’4”, 209 lbs., and 29 years old. He is a pitcher and a designated hitter, a very rare combination, and he has a ten-year, $700 million contract. Go play catch with your son.
Garden Leave?? The U.S. Federal Trade Commission (“FTC”) voted to adopt a near-total ban on non-compete clauses, which limit the ability of workers to switch jobs within an industry. The landmark decision comes three years after President Joe Biden signed an executive order encouraging the FTC to limit the employer-friendly restrictions, which constrain roughly one-in-five Americans. The agency’s three Democrats voted to strike down non-compete clauses while its two Republicans voted to keep them. Since non-compete provisions are in many company management separation agreements, it will be interesting to see how it plays out. If you sign and agree to terms, one of which a non-compete, what constitutes a contract?
Rate Cut Odds. Traders Add Bets That Fed Will Skip Interest-Rate Cuts This Year. The consensus still for a 40-basis point drop in rates, or about two 25-basis point drops, but the leading edge in options disagrees.
The Prado. Join me in Madrid for my presentation, “What Does It Mean to Our Industry”, at the IADC World Drilling 2024 Conference & Exhibition, which will take place on June 18th – 19th in Madrid. For the complete program and registration, learn more here.
The Pitch. GE Vernova is accelerating the path to more reliable, affordable and sustainable energy, while helping our customers power economies and deliver the electricity that is vital to health, safety, security and improved quality of life. The mission? “Addressing the climate crisis is an urgent global priority and we take our responsibility seriously. That is our singular mission at GE Vernova: continuing to electrify the world while simultaneously working to help decarbonize it. If we want our energy future to be different…we must be different. Our mission is embedded in our name. We retain our treasured legacy, 'GE,’ in our name as an enduring and hard-earned badge of quality and ingenuity. “Ver” / “verde” signal Earth’s verdant and lush ecosystems. “Nova,” from the Latin “novus,” nods to a new, innovative world.” I am still not completely sure what they do.
Moving on Up. Tesla is also still valued at four-times the combined market cap of General Motors and Ford Motor, but, recently, the market cap of Exxon passed that of Telsa and has higher ratings than Tesla. May the best man win.
EU Car Sales. Notice how Hybrids HEV have overtaken battery only BEVs.
Just an Example. Baker Hughes (“Baker”) got a "significant" order from Aramco to supply gas technology equipment for the third phase of this country’s “Master Gas System” expansion project, supplying 17 pipeline centrifugal compressors driven by state-of-the-art aeroderivative gas turbines. This is a follow-on win for Baker who has supplied 18 centrifugal compressors in previous phases of the project. Baker also delivered the first two trains of advanced hydrogen compression for the largest green hydrogen plant globally, and it is also in Saudi. The U.S. will stay a stable and large market for energy services for a long time, but the growth in the industry over the next few years will be from the Middle East, with accelerating deepwater activity having an impact in over six-years. SLB buys CHX, Halliburton, NOV and others are expanding local manufacturing and content. While compression is by no means new, the technology requirements of today require more than just the rental of a compressor, and it seems obvious that one of the larger, and increasingly high-tech, OFS companies is adding so much value on what was arguably old and basic equipment items. Well done, guys.
Power in Action. An article in the Wall Street Journal, by Erith Ren Kumar, was talking about the energy needs of AI data centers. The concern comes from the fact that AI chips consume 4 to 5 times as much electricity to run as a normal chip, and, since AI chips are going to be in everything, increase in demand is significant. Quoting an interesting piece by the author on current solar, wind, and battery, technologies aren’t advanced enough or cheap enough in many parts of the world to cost effectively provide the 24-7 power data centers need. A single data center can use as much electricity as hundreds of thousands of homes. “We are worried about the efficiency of wind and solar. We wrote last week about how Texas when it wasn’t too hot or too cold, the wind was blowing. The sun was shining still had to warn consumers to conserve energy because the demand on the grid were growing so great. With bitcoin up as high as it is, cryptocurrency mining has now emerged as an issue in terms of consumption of energy. This pushes fossil fuels back to the forefront. For developed countries like the U.S. and UK. It can be understandable that there’s a big push for renewable energy. But, from any countries in Africa and developing countries around the world, they cannot afford the luxury of being “green”. They are looking for the cheapest form of energy possible to run their economies. Their economies are seeing increasing demand of electricity just like we’re saying in the U.S. But the most reliable form of energy and the least expensive form of energy, at least in the short term, continues to be fossil fuels. It’s gonna be interesting to see the fight going forward. Do you benefit from all the modern conveniences that we have today and include the idea of artificial intelligence eating us in every part of our daily life? Of course we do, and giving up these conveniences is hard, if not impossible for most people. The energy industry is as intent as any industry on reducing emissions, reducing pollution and keeping the world that we all live in as clean as possible. This wasn’t forced by the recent push of the word transition but because it is a normal course of business to become more efficient. Improve your surroundings. And serve customers.
Any and all comments, arguments and rebuttals are welcome!
In addition to my association with PPHB, I serve on three private company boards. Merit Advisors is a property valuation company and I have long been a fan of optimizing how a business is run, not just the tools we make. Merit is in the business of savings companies’ money, actual cash, by doing a much more in-depth and realistic view of equipment and reserve valuations and I am very impressed with their work. I am also on the advisory board of Preng & Associates, a leading executive search boutique that specializes in all things related to Energy & Power. Nova is a gas compression company run by a very dynamic CEO with a very strong board and ownership.
I serve on the Advisory board of the Energy Workforce & Technology Council (formerly PESA), the National Ocean Industries Association (NOIA), and the Maguire Energy Institute at SMU my alma mater.
jim
214-755-3914 | james.wicklund@pphb.com
Leveraging deep industry knowledge and experience, since its formation in 2003, PPHB has advised on more than 180 transactions exceeding $11 Billion in total value. PPHB advises in mergers & acquisitions, both sell-side and buy-side, raises institutional private equity and debt and offers debt and restructuring advisory services. The firm provides clients with proven investment banking partners, committed to the industry, and committed to success.
