May 3, 2024
Things I Learned This Week While Staying Home!!!
The Shape of Things to Come? We have waxed poetic any number of times, pointing out the issues with Electric Vehicles. Fun to drive, expensive to buy, cheap to operate, expensive to fix. And need to be charged. But that isn’t a problem. Okay, yes it is. The biggest issue has been the distance to find chargers and the time it takes to wait at a charging station. Horror stories of people waiting 40 minutes or longer for their cars to charge. The head of GM drove across the country in an E F-150 and the first thing he said at the end was, “there is still some work to do.” He was referring to how much longer it took him to drive across the country in an EV versus an ICE. But Tesla rides to the rescue with plans for building a number of Supercharger sites across the country to alleviate the problem. But plans change. This week, Tesla laid off most of the people responsible for the construction of Supercharger sites, about 500 people. But why, you ask? Maybe because something has changed. This team has already created the largest EV charging network in the U.S. and has agreed to let all EVs use Superchargers. Now, construction has halted on at least a dozen locations across Texas and all the way to New York. And it wasn’t so much of a targeted layoff but broad and included construction down to sales. A research consulting group said that “this is by all accounts, a dramatic move.” Tesla leads the industry in charging ports at over 1,500, with installations up 19% year to date. But now with the layoffs, CEO Musk said, “Tesla still plans to grow the Supercharger network, just at a slower pace for new locations and more focus on 100% uptime and expansion of existing locations.” EV sales are slowing and the inventory of EVs is piling up. About half of the country’s auto dealerships are passing on the $1-$1.5 million cost to service and charge EVs. China is trying to flood the U.S. and European market with EVs that aren’t selling there. And now this. Foreshadowing???
By the Way. Tesla is rescinding offers made to interns for the summer just weeks before they were supposed to start.
Sand, Sand Everywhere. The Alpine Sand deal is currently in the market as we understand it, but it hasn’t priced. Atlas went public last to raise $400 million for its conveyor business, after spending more than that earlier to buy the adjacent Hi-Crush mine location. Now, Apollo steps up and is buying U.S. Silica, one of the oldest and most established sand companies in the industry, for $1.85 billion, in one of the first all cash deals we have seen. The price is an almost 20% premium to the previous price and will now become a private company. The steadiness of the industrial business and the cash flow generation potential of the frac sand business appeared attractive and Silica had tried to both sell its industrial business and consolidate the frac sand business but neither worked, at least not yet. There is a 45 day “go shop” provision but that will be mainly to placate shareholders and demonstrate the company got the best price. We do not see a competing bid. The deal is expected to close in Q3 with Bryan Shinn, the current CEO, and the exceptionally capable executive team staying. SLB and ChampionX, Patterson-UTI and NexTier and other deals were consolidation plays. What makes this very different is that a fund, not a strategic partner, is buying the company outright, rather than combining it with another business. Is private equity back in energy????
Sidelined. A Bloomberg study showed that almost one in four businesses in our fair state of Texas say that the adoption of AI will either decrease employee requirements or alter the composition of their workforce, with about 11% of study respondents saying AI will or already has reduced their headcount needs, primarily in “mid-skill” positions. So, as you look around and see three other people standing around, ask yourself, “which one of us will it be?” Ouch.
Oil and Water, Rates and Price. If interest rates go down, the economy is stimulated, and oil prices typically increase. The oil industry likes inflation. And barring the global political landscape and its impact on oil prices, which is, of course, is impossible, if rates don’t go down, that is bad for oil. If rates stay flat, it doesn’t matter much but, in the last 30 days, the market has gone from “knowing” the Fed was going to cut rates several times this year to consoling themselves with the knowledge rates might not go up. So Iran bombed Israel, and Israel bombed Iran back. Tit for tat. Both sides warned of the attack before it happened to minimize injuries. An interesting way to fight a war! But that might be done for now, dropping the risk factor in the stocks and oil prices decline. It isn’t over and, never say never, but for now, barring any near-term bombings, oil prices could gently slide lower but still be very economic.
Damn! Consumer confidence slumped to the lowest since mid-2022 as Americans’ outlook for the economy deteriorated.
An Underwater Drone. Drones are changing the face of warfare as seen in the both the Middle East and Ukraine. Sure, they might get shot down, but pilot is in a chair in an airconditioned room playing with a joystick. No fatalities. At least not for the delivery system. The receiver is not so lucky. So, it was just a matter of time, and now we get to try and figure out who wins this one. But if a drone in the air changes warfare, what does a drone submarine do???
One I Own. PTEN reported earnings and, while the company returned about 3% of its market cap, about $130 million through stock buybacks and dividends, which is impressive, and EBITDA margins were 24.4%, falling slightly in the quarter. But, in a flat market, pricing generally erodes, even if just by a little. As a result, PTEN expects weaker U.S. drilling and completion activity, with guidance down 12% from the consensus at the time. Superspec rigs, highly capable pressure pumping and solid drill bits all make for a great deal of potential, and we see PTEN generating a 13%-15% free cash flow yield run rate by year end. But it’s early yet. Impressive management and assets are always a positive start and we expect the continuation of its improvement.
Payback?? A couple of weeks ago, we wrote about how, in California, utilities are scaling back what they pay for electricity bought from residents who have EVs or solar panels because they were paying peak incentive rates for power when it wasn’t needed. So now, V2G is a big deal everywhere. Bidirectional charging lets EVs sell their power into the grid! Wow. Now more and more EVs are being equipped with the capability. Right as California, yes, California, has even come around to the enormous cost of incentives that don’t really contribute. So, while it seems like a huge step forward, I can sell the electricity back that I have already put in my car. So I bought it, charged my car, and then sold it back at a higher price. Nice business model. Sure, it incentivizes people to buy EVs since it comes with a way to make money back. As long as it is wanted, when it is available. And that is the rub. When I don’t need it, no one else does either, and when I do need it, so does everyone else. So California cuts the price it pays for off-peak electricity from EVs and renewables by as much as 80%+. Just as everyone adapts, the rug gets pulled out from under. Sure does make planning fun, doesn’t it?
A Conundrum. No one seems to like pressure pumping right now. ProPetro can understand that, trading at about 2x next year’s EBITDA. But, they did beat expectations, by a mile, with EBITDA almost 20% higher than the analysts had expected. According to management, results were driven primarily by extremely high efficiency in pressure pumping and very high profitability levels in the wireline segment. 2024 guidance remained the same and analysts are modeling a 17% FCF yield. The company has bought back 8% of its outstanding shares over the last year. And 2x EBITDA. Oh, yes, they just signed Exxon for a three-year contract to provide electric frac capacity, with its FORCE electric-powered frac fleets, which includes the deployment of two electric fracturing fleets with an option for a third and is set to begin in this year's first half and may extend into early 2025. It sure does reflect the negative investor sentiment in the sector when a well-run company trades at only 2 times its current cash flow runrate.
Sunshine. The world economic outlook is perking up as growth proves more resilient and inflation is set to cool faster than previously expected in many countries, according to the Organization for Economic Co-operation and Development (“OEDC”). It raised its 2024 global GDP forecast to 3.2%. This has been the problem in the U.S. The U.S. economy is strong and resilient but is fueling increased inflation at the wrong time. But we will take what we can get.
Ouch. Trеasury Secretаry Jаnet Yеllеn rеcеntly аdmitted thаt natіоns аround thе wоrld wіll contіnue tо dump thе U.S. dоllar...
Everyone Thinks It Is Taiwan. We have written about the spat between China and the Philippines, with China claiming almost the entire waterway between the two countries in the South China Sea. Now, the Chinese are firing cannons at Philippine boats. Of course, they were water cannons, but it is still an escalation of the dispute, which doesn’t see headlines since they have little perceived strategic value. Wake up. This doesn’t need to boil over.
Ride That Roller Coaster! Crude oil futures fell to their lowest in seven weeks Wednesday following U.S. data that showed a surprise and sharp weekly build in crude stocks as exports fell and refineries reduced their capacity use.
Scott Shefield Should be Flattered. The Biden administration doesn’t like Scott. I, on the other hand, have a great deal of respect and admiration for a guy who built a company, championed profitability and was an excellent advocate for our industry. I have had the honor of serving on a board with Scott and consider him a friend. Not so for the FTC. They said that the Exxon/Pioneer merger would only be approved if Scott was not on the Exxon board. His sin? He sent public market data on the domestic oil and gas industry to members of OPEC. Not price fixing or collusion or sharing of confidential information. He tried to educate the organization that produces about 28% of the world’s oil. Maybe Mr. Biden is upset that OPEC didn’t listen to him when he begged for more oil production to help his reelection chances. Out of spite for a successful Texas oil man? Whatever the reason, Scott won’t have a seat on the board, a seat he deserved, and the deal will close with the administration giving a clear signal that successful mavericks and entrepreneurs are not welcome.
EIA Weekly Petroleum Report
Crude Implications: Bearish – build vs expected draw. WTI 1M-12M backwardation at $7/bbl, down $1/bbl w/w. Money managers cut ICE Brent and NYMEX WTI net long positions by 12% w/w, with net positioning 15% below the recent peak of Sept/23.
US Crude Production: Indicated at 13.1mm BOPD, unchanged w/w, and up 0.8mm BOPD y/y.
Refinery Runs: 15.6mm BOPD, down 0.2mm BOPD w/w and down 0.1mm BOPD y/y. Utilization at 87.5%.
Crude Imports (net): 2.9mm BOPD, up 1.5mm BOPD w/w and up 1.2mm BOPD y/y. Brent-WTI spread at $4.5/bbl, lower by $0.5/bbl w/w.
Gasoline: Bearish – build vs expected draw. Demand up 2.3% w/w and flat y/y.
Distillate: Neutral – draw above expectations. Demand up 3.5% w/w and down 5.0% y/y.
Frac Spread Count: There are currently 257 frac spreads operating in the U.S. (a decrease of 3 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 596 drilling rigs operating in the U.S. (a decrease of 3 rigs week-over-week).
Recession. I have been worried about a credit recession rather than a stock market recession. In an equity or stock market recession, your stock could drop from $100 to $50. In a credit recession, they take your house. It is much more serious and much more impactful. So, I asked MetaAI if we are going into a credit recession. The answer?
“A credit recession refers to an economic downturn caused by a decline in credit availability, often triggered by a financial crisis or excessive debt levels. The likelihood of a credit recession is difficult to predict, but various indicators can provide insights.
Some current factors that could contribute to a credit recession include:
1. Rising interest rates: Increasing borrowing costs can lead to reduced credit demand and higher debt servicing costs.
2. High global debt levels: Elevated debt-to-GDP ratios in many countries and sectors may lead to reduced credit availability and increased default risks.
3. Geopolitical tensions and trade uncertainties: Ongoing conflicts and trade disputes can impact global economic growth and credit markets.
4. Inflation concerns: Higher inflation can lead to higher interest rates, reducing credit demand and increasing debt servicing costs.
5. Financial market volatility: Turbulence in financial markets can reduce investor appetite for risk, leading to reduced credit availability.
However, central banks and governments have implemented various measures to mitigate these risks, such as monetary policy adjustments and fiscal stimulus packages.
To assess the likelihood of a credit recession, consider monitoring:
1. Credit spreads and bond yields
2. Debt-to-GDP ratios and credit growth rates
3. Financial market conditions and investor sentiment
4. Economic indicators like GDP growth, inflation, and employment rates
5. Central bank policies and regulatory actions
Keep in mind that predicting a credit recession is complex and subject to many factors. Staying informed about economic trends and indicators can help you make more informed decisions.”
Students?? It costs about $90,000 a year to attend Columbia University. Here is the elegance of the main quad. “‘Israel Must End Its Illegal Occupation!’ Cry People Staging Illegal Occupation.”
Complimented. Halliburton reported earnings and we listened to the call and read the reports. Argus had a nice write up. “The higher earnings (in the quarter) reflected higher operating income in each of the company’s business segments, stronger pricing for most of the company’s services and equipment, stronger margins and increased crude oil drilling activity, mostly concentrated in international end markets. We are raising our 2024 EPS estimate to $3.43 from $3.41 to reflect the first-quarter performance, which beat our forecast by $0.02 per share. Our estimate assumes continuing strength in international drilling demand and expanding margin growth. We are also reaffirming our 2025 EPS estimate of $3.98 per share, which implies approximately 16% year-over-year earnings growth from our 2024 estimate. Our forecast also assumes a modest improvement in North American drilling demand.”
Headlines.
High Rates Appear on Track to Persist Long-Term.
Energy Guzzling, Artificial Intelligence has Become the New Driver of Growing Demand for Renewable Electricity Supply Can’t Keep Up.
Tornadoes Hit Oklahoma This Week Killing Four.
Higher Home Values and Interest Squeeze Younger Buyers, While Older People Grow Rich.
The headline is a little bit deceiving people who bought or refinanced during the pandemic are doing great. But people buying now with mortgage rates close to 7% at home prices up 40% in the last four years new buyers are getting priced out of the market. But new buyers being priced out of the market only in the last two years. I think that’s called cyclical. But the headline is definitely "clickbait.”
“The reality is, we can keep adding renewables until we are blue in the face and it won’t be enough”, said Sumat Shinhan, the CEO of Renew, one of India’s largest renewable energy companies.
The global Artificial Intelligence (AI) Chips market was valued at $5.6 billion in 2023 and is anticipated to reach $50 billion by 2030, witnessing a CAGR of 36.6% during the forecast period 2024-2030.
The Use of Air Conditioning is Expected to Soar as Incomes and Temperatures Rise. -IEA.
Be Careful of What You Ask For. Fast food prices get upsized in California read the headline. September of last year, California moved to require fast food chains to increase their minimum hourly pay to $20, which started in early April, that has caused casual restaurants to raise their prices by an average of around 10%, and this is after the significant inflation and food cost seen in restaurants over the last four years. They used to be that fast food restaurant jobs were the place for teenagers to get working experience. Now, the argument is that people are making their life effort and work being a casual restaurant employee, and they’re finding they don’t make enough to survive. It’s an interesting societal question. I have told my children for years they could major in anything they wanted to in college as long as they can get a job and support themselves when they got out. That would apply to them if they didn’t go to college and were still living at home. I understand paying people adequate wage, but market supply-demand still matters. According to sources in California, the layoffs of restaurant employees will be significant, because the amount that needs to be paid to stay the same requires fewer workers. Consequences, and they’re not always expected or good.
It Causes Everything!! Global warming is threatening meteorites, new research shows. It turns out that over 60% of all meteorites that hit the earth hit Antarctica as the ice melts. We won’t be able to find the meteorites that land. Let’s try a little auto course that Antarctica is a land-based continent not moving ice sheet, like the North Pole and the Arctic. And it’s not threatening meteorites. It’s threatening the find of meteorites, and that is a completely different topic. Next meteorites will be racist.
Moving Backwards. The anti-LGBT law recently passed by parliament over the weekend, would impose heavy fines and prison sentences on gay and transgender people. The British foreign secretary called it “dangerous and worrying.“ The new law poses a sentence of 10 to 15 years for same-sex relations and prison terms of one to three years for people who undergo or perform gender, transition, surgeries and for the “intentional practice of effeminacy” and bans any organization that promotes “sexual deviancy,” with sentences of at least seven years and a fine of no less than $7,600. If you’re reading this and wondering what the heck I’m talking about since you haven’t seen anything in the news. We need to tell some of the protesters in New York who are embracing Islam. The new law is in Iraq.
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.
