Things I Learned This Week

April 14, 2023

Last weekend I spent two days with 40,000 people, NONE of whom had a cell phone on them. Hard to imagine. Some people looked lost and kept grabbing at their pockets. Some took up the old method and actually had live conversations with other people. Wow. Saturday 45 Degrees and rain do not make for the best golf day. Sunday, I shed three layers by 10:30am. Bucket list item checked. Next!?!

Business Expansion. We have long argued that we can approach climate and emissions issues in two ways – Say it won’t work and targets won’t be achieved in the timetable set, or you can find a way to play. The first may have you on the steps of the poorhouse shouting “I told you so”, or you can find a way to participate in one of the most aggressive spending sprees in decades. There are any number of issues with plans to be carbon neutral by 2050, starting with the fact that we won’t reach it by then. But trillions and trillions of dollars will be spent trying to achieve that goal. Some lament the lack of positive economics but then the oil business lost billions over those last ten years and we are still here. But how? What do I do? I’m in the oil business. No. You are in the energy business and there are many opportunities. Liberty, primarily a pressure pumping company, launched Liberty Power Innovations last week with the acquisition of Siren Energy. Their mission – “Siren Energy is assisting in the global energy transition’s mission to reach Net Zero. Across three service verticals: alternative bulk fueling solutions (CNG, RNG & Hydrogen), pipeline integrity & pipeline pump down, and flare-capture services, it is Siren Energy’s goal to economically reduce our customers’ carbon footprint.” Compression and delivery. We know a great deal about both. And Liberty paid $78 million for Siren so someone is already making money on it. According to Liberty, the new business’s initial focus is on CNG supply, field gas processing and treating and wellsite fueling and logistics. Siren was formed in 2021 and has Chevron as its primary customer. The price tag and valuation are having some people scratch their heads but expansion through acquisition can make up for slower activity growth. Well done, Chris.

U.S. Energy Markets Update.

Commodity Prices: WTI crude oil is currently $81.49 per barrel (up 1.1% week-over-week) and natural gas is $2.19 per MMBtu (up 1.4% week-over-week)
Crude Oil Production: U.S. crude oil production is currently ~12.3 million barrels per day (up 4.2% year-over-year)
Crude Oil Inventories: U.S. crude oil inventories increased by 0.6 million barrels week-over-week vs. an estimated decrease of ~0.6 million barrels
Frac Spread Count: There are currently 287 frac spreads operating in the U.S. (a decrease of 8 spreads week-over-week)
Onshore Drilling Rig Count: There are currently 733 drilling rigs operating in the U.S. (a decrease of 3 rigs week-over-week)

OPEC. Of the gazillion words written about the latest OPEC+ move, I will chime in, though briefly. So higher oil prices fuel inflation but also demonstrate global demand growth. Growth vs Inflation. Godzilla vs Mothra. The move pushed Brent up 8% at one point, to close up 6%. OPEC+ has already “taken” over 2 million barrels per day of production off the market. Oil that can be shut off can be opened back up fairly quickly and the market seems to know it. It also seems to think that producers can’t really hold the price up as effectively as they could or would like. This isn’t an opinion on oil or oil prices but of the overall market and what signals it takes from the oil markets. The 10-year has been highly correlated with oil prices and only moved 2.2 basis points on the OPEC+ news. We want the world to be blasé’ about the OPEC+ move. Move along, nothing to see. Meanwhile, we hump along on $80 crude, smiling all the way to the bank.

Big Brother’s Big Brother. A statesman is one who is willing to take risks and do what is right, even if not everyone agrees with him. An idiot is one who makes a pronouncement having no clue of the issues, challenges and reality of the situation and just likes telling people what to do. Without putting anyone specifically in either category, the Biden administration, through the EPA, is making the automobile industry a “de facto state-directed utility”. The new emission standards proposed by the EPA will force automakers to make EVs, and almost nothing but, whether consumers want them or not, and with no consideration of the issues involved in making that so. Copper use in EVs is 2.5x that of ICE vehicles (internal combustion engine). China processes about half the world’s copper. Cobalt and lithium? The Democratic Republic of Congo has some of the largest deposits of both, but we ignore child labor to facilitate an all-EV industry. Battery disposal? Turn a blind eye. Those are minor issues compared to a government agency deciding what cars are made and sold by what is ostensibly an independent industry. What does that mean? That they are no longer independent. And the whole idea is an exceptionally regressive tax. EVs cost 30%-35% more than that of ICE models so the poorer areas will be powered by ICE’s and older ICE’s, with their attendant emissions, and the wealthier areas will have clean air and hopefully a couple of charging stations.

How?? The EPA is using its authority under the Clean Air Act to regulate tailpipe pollutants, which forces auto makers to produce more EVs whether consumers want them or not. The EPA cannot mandate EVs but will set CO2 emission standards such that automakers will have to have EV’s contribute to 2/3rds of vehicles made. Recently government agencies have been reined in on some proposals that are really the purview of Congress, but this doesn’t seem to qualify. Yet. The EPA proposal is even more aggressive than President Biden’s August 2021 executive order, which set a goal of 50% EV sales in 2030. EPA says at least 20 countries have announced plans to phase out internal-combustion engine cars in the coming decades, so its proposal is no big deal. I beg to differ as do others. In February 2023 the EU gave preliminary approval to a measure to phase out sales of ICE passenger vehicles in its 27 member countries by 2035, a situation cited by the EPA, however, conveniently ignores that the EU walked back the ban last month amid concerns about its enormous costs.

Hurrah! On Friday, the biggest banks reported numbers, all good and generally beat expectation. This is a good thing from a global credit perspective. We will follow up.

Hard At Work. The Energy Workforce and Technology Council, who holds its annual meeting in Austin later this month, looked at the data from the Bureau of Labor and ran analyses on these numbers to determine that there are 656,368 people who work in the U.S. oilfield and equipment industry. For reference, the pre-pandemic employment was 706,528.

March State-by-State Breakdown

TX 319,848
LA 54,807
OK 49,950
CO 26,649
NM 24,548
CA 24,023
PA 23,761
ND 20,413
WY 15,228
OH 10,896
AK 10,174
WV 10,042

It is my experience that a large number of oilfield workers, especially offshore, are from Mississippi.

I’ll Trade Ya. The company formerly known as Encana, and now known as Ovintiv, has spent $4.3 billion on three companies out of Encap’s portfolio and then sold its own Bakken position to a fourth Encap portfolio company. Black Swan Oil & Gas, PetroLegacy Energy, and Piedra Resources are all being acquired whereas Grayson Mill Bakken, another Encap portfolio company, takes over the Bakken assets for $825 million in consideration. Ovintiv will acquire 65,000 net acres of relatively undeveloped acreage in Martin and Andrews counties, adding 1,050 net locations at an average lateral length of 10,000 feet, according to the company. Production is projected to be 75,000 boepd, 80% oil, by the closing date in June.

Research. We had almost 845 land rigs running in November last year and now we are down to about 803. This has caused some consternation among investors that the land contract drillers are in trouble. Maybe, but not all. In November, about 73% of the active rigs were 1,500HP+ AC rigs, a subset of which were the super-spec rigs. Super-spec rigs are defined as rigs that have at least 1,500HP, AC draw works, 750,000lb hook loads, 7,500 psi circulating systems, and are pad capable. Data shows that 80% of the active rigs in the US were 1,500HP+ rigs, with three mechanical rigs, 56 SCR rigs, and 616 AC rigs. 24 sub-1,500HP AC rigs were also active in November and while such rigs may be considered underpowered for most shale applications, they can work in parts of the Marcellus and the Rockies. As of early April, the rig count had fallen by 42, but the 1,500HP AC rig count had declined by only eight, and the drop in super-spec rigs may have been even less than that. The industry estimates that about 520 super-spec rigs have worked in the past three years and that these 520 rigs were 100% utilized, despite the total rig count dropping by 42, or about 5%, and the change in super-spec rigs was well below 1%. Bottom line – not all drilling contractors are getting hit by the drop in land rigs, leading edge rates have not changed for super-spec rigs, and companies that have mostly super-spec rigs are in a much better position. Data from ATB capital markets.

Credit is Critical. I’m stealing a headline from below, but “Almost $1.5 trillion of U.S. commercial real estate debt comes due for repayment before the end of 2025” is very scary for several reasons. First, much of this debt is held by community banks who are an unknown quantity at present in terms of risk and few are aggressively making new loans or refinancing old ones. For the past year, I have been most worried about a credit recession. The old equity recession we have seen before is when the stocks drop, and you lose money. A credit recession is when they come and take your house. A big Houston area multifamily company just failed and considering how strong that market has been, and how many units we have added, belly up was not expected. I am not sure we are out of the woods yet. I am not putting new money to work in the market yet though there are several energy stocks I find interesting. On a relative basis, we are the prettiest girl in the room, having assiduously paid down debt across the energy spectrum over the last few years.

Returns – ROIC. But we are still at the end of the whip of volatility and while we may do just fine, investors are easily spooked in this market and will expect the worse. Looking at energy valuations, majors trading at 7x EPS and pressure pumping at 2x-3x, they trade like they are going out of business. They aren’t. Don’t focus on the stock price but instead, make sure you are cash flow positive with positive net income. Investors are caring less about EBITDA, especially if the bottom line is positive. ROIC is very much the name of the game.

Pay Up. We have noted in the past our concern about sovereign debt in some of the world’s poorer countries, many of whom accessed the debt markets over the past several years based on floating

interest rates and denominated in U.S. dollars. The double whammy is the spike in inflation around the world over the past two years. Debt Justice issued a report that said paying back external debt will cost lower-income countries about 16.3% on average of government revenue in 2023. Sri Lanka, Pakistan and Zambia will pay over 30% of revenues on debt payments. Globally, this is the heaviest debt burden in 25 years. Janet Yellen is pushing for debt-relief talks as officials from the World Bank and IMF met this week. And then this week, World Bank President David Malpass on Thursday said progress on sovereign debt issues would be measured by actual restructuring deals being agreed for Ghana, Ethiopia and Zambia, and said there was still no agreement on his longstanding call for a standstill in debt service payments for countries seeking help. The issue continues.

Here We Go Again. For the last year, we have been expecting a recession. Hard or soft landing, every analyst, pundit and broker have been calling for recession. Even when we had two quarters of negative GDP, which has been the definition of a recession, it didn’t happen. Then the bank failures started and about a month ago, it became inevitable that the long-awaited recession was now imminent. But still, no recession. I have been more worried about a credit recession than an equity one. Neither has materialized and now the expectation among many is for the Fed to start easing rates before year-end, which acts like a light at the end of the tunnel. We will wait and see what the next “crisis” is for the next surge in expectation of a recession. Maybe we have become jaded but regardless, one must be a little impressed and slightly chagrined that the “inevitable” still hasn’t happened. My fingers are crossed.

Depth of Inventory. The latest rumor in the industry is for Exxon to buy Pioneer. I think this is a GREAT deal and that Exxon should really pay up. Oh, I own Pioneer. Never mind. But it does point out an issue that is coming into increased focus – depth of inventory. How many years of core acreage is left for XYZ oil company? If it is short, they are a buyer. If it is long, they are a seller. Well productivity is falling. We can argue about the rate but not the event. We have been drilling “core” oil acreage for at least 10 years now and while technology can assist in the economics of “not core”, it will only do so much. And if you can buy barrels in the stock market cheaper than you can drill for them, that is another reason you will see E&P M&A continue. Chevron for Devon?? I own Devon too so I am just talking my book, but…..

More Please. The current consensus is that the Fed will hike rates one more time, to the 5%-5.25% level at the next meeting in May and then be done with rate hikes. In fact, the consensus today is for the Fed to actually drop rates by year-end. The consensus isn’t always right but I like this one.

Headlines.

Likelihood of Market Balance Tightening in Focus, But Macro Remains Key Lever.
Asteroid the size of 33 armadillos to pass Earth Sunday – NASA.
Global Investment in the energy transition must increase by $47 trillion by 2050 to achieve 1.5C.
Even with Recent Cost Inflation, Global CapEx in 2023 Is Down 40% from the Record Level of 2013.
The bond market has gone berserk.
Almost $1.5 trillion of U.S. commercial real estate debt comes due for repayment before the end of 2025.
Over 1,300 UK North Sea oil workers set to strike in April.

Life Headline. Man’s Busy Schedule Forces Him To Start Skipping The Gym At Night Instead Of Skipping In The Morning.

A Moment of Silence. A true revolutionary died this week, a woman who has been celebrated by at least half the people on the planet. Mary Quant died. The name may not be immediately recognizable, though her lifetime achievements are. Mary is the inventor of both the miniskirt and hot pants. Ernestine Carter, an American-born British museum curator, journalist, and fashion writer, and at one point the associate editor of The Sunday Times, said “It is given to a fortunate few to be born at the right time, in the right place, with the right talents. In recent fashion there are three: Chanel, Dior, and Mary Quant.” Rest in peace. And Thanks.

Diplomacy 101. U.S. President Joe Biden took his three-day tour of Ireland to Dublin for an address to parliament and a banquet at Dublin Castle as his focus shifted from Northern Irish peace to celebrating his heritage. He did not discuss the leak of intelligence documents with British Prime Minister Rishi Sunak when the two leaders met this week, White House press secretary Karine Jean-Pierre said.

Diplomacy 601 (Graduate Level). President Biden spent three days in Ireland. XXI spent a couple of days in the Middle East and brought Saudi Arabia and Iran together, long-term enemies. So 1, Biden 0. This is not to say that Ireland and our relationship with the UK isn’t important. It is. But in the grand scale of global politics, it isn’t a critical tinderbox in today’s world. There is a growing belief that the U.S. is losing its edge in the leadership of global politics and that is not good for any of us.

What??? 18,000 cows were killed in an explosion and fire in Dimmit, Texas. Castro County. A piece of farm equipment caught fire. Imagine 18,000 cows. But then, we eat 33 million cows every year.

Very Sorry. I owe San Francisco an apology. Rare I know. The other week, a known crypto investor and Cash App founder Bob Lee was stabbed on the streets of San Fran, which seemed to highlight the rampant crime in the city. A former fire commissioner was severely beaten by a 24-year-old homeless man, but it turns out Lee was basically assassinated by someone he knew. Lee was riding in a car with a friend, got into an argument and got out of the car. The driver, Nima Momeni, got out of the car as well, stabbed Lee Multiple times and then drove off. Wild. And San Fran, sorry for rushing to judgement. You have enough problems without that.

From Twitter. “As an energy investor and oilfield worker I want to hate on the green energy agenda because it’s stupid, but if I am being honest, the stupidity in DC keeps oil high and thus I make money. If there was no red tape and DC was pro-oil, oil would be $20 and I wouldn’t have a job lol.”

Bite the Hand. We recently wrote about our NAPE panel and the issues facing LNG, particularly in Europe. One big issue was the unwillingness of either the public utilities, who don’t have the balance sheet to make long term promises, and governments who don’t look past the next election cycle and think Russia could be their natural gas provider again someday. Long-term contracts provide energy security which is very needed in Europe today. As a result, project financing for new LNG capacity for Europe can’t be built. The EU decided to put a couple nails in the coffin. So, The EU recently announced a ban on long-term contracts for unabated fossil gas after 2049. This study shows that this plan may destabilize the market due to the lack of supply security for customers and demand security for producers.

Victory for Sanity. I do not comment on things like abortion or other more personal choice issues but the recent action by a Texas based federal judge, who ruled that 20 years ago, the FDA did not do an adequate job evaluating mifepristone, the morning after pill. It has been used safely for decades and even half of the Republicans think the suspension of the drug was politically motivated. A federal appeals court ruled that mifepristone will remain available in the United States for now but with significant restrictions, including a requirement for in-person doctor visits to obtain the drug. Whether you are pro-choice or not, a drug used safely for 20 years and then suspended for the reasons mentioned really does make very little sense to me.

From Raymond James-

And The Winner Is… 2023 Q1 sales reports from 11 automakers are in. Gas/diesel sales made up 95.7% of all cars.

% of EV sales by automakers who reported were:

GM 3.5%
Ford 3%
VW 15%
Volvo 5%
BMW 8%
Hyundai 4%
Nissan 3%
Kia 2%
Audi 2%
Mazda 00.01%

Automakers: "Customers aren't interested in our EVs."

Biden EPA: "Our Soviet style five-year plans will help them change their minds, comrades."

Like It or Else. The Biden administration is on track to propose the toughest-ever U.S. curbs on car pollution, while stopping short of an electric-vehicle mandate or ban on gas-powered models. The proposed standards on cars and light trucks, set to be announced Wednesday in Detroit, are expected to govern tailpipe emissions of carbon dioxide, smog-forming nitrogen oxide and other pollution from vehicles manufactured for model years 2027 through 2032. The plan is part of a multipronged Biden administration strategy to clamp down on planet-warming pollution from transportation and electricity, taking advantage of hundreds of billions of dollars of clean energy incentives under the Inflation Reduction Act. The Environmental Protection Agency, which is writing the new performance-based standards, is also set to propose new rules for greenhouse gas releases from heavy-duty and power plants as soon as later this month. – Bloomberg

Hindsight is 20/20 or Let’s Undo the Marriage after 5 Kids. Sen. Elizabeth Warren and three other Democrats have requested that the DoJ investigate the Warner Bros/Discovery merger over alleged anticompetitive behavior a year after it was completed. "Antitrust laws seek to promote consumer choice, product variety, and industry innovation," Warren wrote. "Accordingly, if a consummated merger results in dramatically less available content and discourages innovation, the merger should be reassessed." The company was created a year ago when Discovery combined with AT&T's WarnerMedia unit. So after a year, Senator Warren wants to reverse the deal. It is amazing to me how incredibly naïve she is in terms of corporate structure. Amazed but not surprised.

California’s Budget Deficit Blows Up. The affluent who pay 40% of the state’s taxes aren’t as flush as they were. The decline in tech values and the reductions in force in the sector are expected to very negatively impact California’s finances. After $100+ billion surpluses over the last two years, this year California is expected to see a $22 billion deficit. Just like the rainwater that flows unused into the ocean after not building any water reservoirs for the past couple of decades, the budget surplus is also flowing into the gutter.

Congratulations! Avi Silverberg, pictured below, has won the women’s Heroes Classic powerlifting tournament in Alberta. She has been the head coach for Team Canada Powerlifting for more than 10 years and entered the contest after identifying as a woman. She smashed the standing records for women’s powerlifting. The previous champion of the event was Anne Andres, a transgender athlete.

From Stop Oil. “President Joe Biden’s recent approval of the Willow Project in Alaska has alarmed many young people and once again made us question his seriousness about addressing the climate crisis before it is too late. His decision to greenlight ConocoPhillips’ massive oil project isn’t just a betrayal of his promises on the campaign trail when he vowed to halt drilling on federal lands and to help the United States make the transition toward clean energy. It’s a betrayal of our generation’s future and of the millions of people suffering from the impact of the climate crisis. As if that were not enough, the Biden administration is auctioning off more than 73 million acres of waters in the Gulf of Mexico to offshore oil and gas drilling — double the size of the Willow Project if it goes ahead as planned. The president faced one of the greatest tests of his commitment to addressing climate change, and he failed. His administration must step up and commit to do better.” Biden is a hero to oil and villain to progressives. What year is this??

Damn. Goldman Sachs says the approaching U.S. earnings season is expected to be the gloomiest since the first year of the pandemic. Analyst consensus expectations are for S&P 500 earnings-per-share to fall 7% in the first quarter from a year earlier, marking the sharpest decline since the third quarter of 2020 and a low point in the profit cycle, the bank’s strategists wrote in an investor note.

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 service 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.