Things I Learned This Week in Austin

April 28, 2023

Party!! The annual meeting of the Energy Workforce and Technology Council (EWTC) was held this week in Austin, at the very nice Omni Barton Creek Resort and home to difficult golf courses. The meeting was titled “Answering the Call – Delivering Through Headwinds.” It was a great event. Leslie Beyer, who joined the organization in 2014 and transformed it to what it is today, is stepping down. Her long-time trusted lieutenants Molly Determan and Tim Tarpley will serve as Co-Presidents. We wish her well.

The Organization. EWTC represents over 625,000 oilfield workers in the U.S., Canada and increasingly around the world. It was formerly the Petroleum Equipment and Services Association which describes its original mission and membership. It is broader now and increases with every step in technology. I am on the Advisory Board, so I am obviously biased, but it is an excellent organization and at the end of today’s missive is a list of companies that aren’t members. It’s easier that way. But they do need to get off that list.

My Job. I moderated a panel of U.S. Onshore Operators and got to grill them on why they don’t pay OFS companies more. Okay, I was not that direct at all, but it was an informative discussion. The idea of close collaboration is still a future hope and not a reality yet but developing a relationship seems to be a very critical point made by all on the panel. Safety first, then efficiency. Almost by definition, any process or product that is more efficient than its predecessor is more environmentally friendly. The outlook for natural gas was positive, pointing to the significantly lower current price relative to the futures strip.

Consensus. Capital discipline and return of cash as well as return on cash, was endorsed by all. More infrastructure is needed, and the permit process and delays were the focus of regulatory discussions. People were a key point made as well. The number of petroleum engineering graduates has dropped 75% from 2017. We need to make sure that the duration of our industry is well understood and that our industry is the leading edge of practically paced climate goals.

My August Panel. Included Michael DeShazer, VP Business Units, Coterra Energy; Julia Gwaltney, SVP & COO, Ranger Oil; Steve Pruett, President & CEO, Elevation Resources; and Mohit Singh, EVP & CFO of Chesapeake.

Steve Pruett. “The need for stability and capital deployment in our industry is so important. That is why it is important to ensure we invest in the relationships with our service partners who execute everything we do.”
Julia Gwaltney. “The beauty of our business is that it’s a very entrepreneurial business. We can stand side by side with multinational companies as well as mom and pop shops. It’s more challenging as more regulations come into play, but we use all the tools at our disposal to build the strongest company possible.”

The Big Issue? One panel focused on the Business of Carbon, a very broad topic, moderated by Maynard Holt, Founder & CEO, Veriten. His panel included Robin Fielder, EVP, Low Carbon Strategy & Chief Sustainability Officer, Talos Energy; Warwick King, Vice President Low Carbon Technologies, ConocoPhillips; and Molly Smith, Vice President Drilling & Completions, Murphy Oil. The panel discussed what their businesses are doing to lower emissions and their perspectives on sustainability. Recognizing oil and gas will be necessary for decades to come, they are focused on how to do what they do best, but with lower greenhouse gas intensity.

Robin Fielder. “Sustainability for me is about strategy. It's about how we are going to position the business to be successful to attract additional investors to navigate through changing demand for our product over a longer period of time. But it's also about attracting the right talent for us to be a successful energy company.”
Warwick King. “We believe fossil fuels will be needed for decades and maybe well into the next century. We believe we are very good at what we do, and that we should focus on making sure that our products are both the lowest cost of supply and the lowest GHG intensity. The primary goal of our team is to work with our business units across the globe to help them decarbonize.”

Oil & Money. The Capital Markets panel was moderated by James West from Evercore ISI and included Sal Pareja, Managing Director, Goldman Sachs; Jonathan Regan, Partner, Quantum Energy Partners; and Mike Scott, Managing Partner, Pelican Energy Partners. Multiples are low, companies are undervalued and there isn’t much money around, from really every source. Too many investors are basing decisions on rhetoric, not reality, but that makes it reality if you are looking for money. E&P M&A needs to and will increase, the bigger the deal, the easier it is to get done. You have to produce cash, it’s critical and a new thing for E&P. If you are a seller and have a really good growth company, you get lots of bids and good valuations. Otherwise, not much. As we have noted, we are no longer a growth industry so any complementary, synergistic, and high growth revenues outlook, the bigger companies have to play to get whatever total growth they possibly can. ESG was a topic. Mike Scott made a great observation – in terms of companies, there are three buckets. 1. Save the world, do everything right, 2. We want to make money, but we need to greenwash ourselves to look good but, make money, 3. Screw it. Make money. “It makes sense in many ways. Doing the right thing and putting pressure on our industry to do so is key. But capital allocation. Using ESG to allocate capital is not going to last long.”

ESG. Exxon won the organization’s ESG award for reducing flaring in the Permian and they continue to work towards net zero in their operating assets in the Permian by 2030. I sat with their team, all from Midland, at dinner. Exxon still does hire some of the best and brightest in the industry and it is still very common to spend your career there, a rarity in today’s world. Congrats guys.

Fun and Interesting. Eric Traupe, a former FBI assistant director and national intelligence leader, spoke. It was interesting listening to the “inside story” on many issues. Hans Schroder, the EVP and COO of NFL Media was a keynote speaker, so we are now well educated on pro football and who watches it. Robert Anderson Jr., Chairman & CEO of Cyber Defense Labs spoke and his comments on the topic were worrisome. There are about 700 different digital currencies, not just Bitcoin, and the number of hacks and scans for data are in the millions. Do not travel with your own phone and always use a two-factor authorization on every device you own.

Platinum Sponsors were Baker Hughes, GD Energy Products, NOV and ProPetro Services.

Strategic Partners included Chevron, NexTier Oilfield Solutions and SLB.

Snippets.

Google-parent Alphabet reported $54.5 billion in ad revenue for the first quarter.
Suncor Energy is buying Total Energies’ Canadian operations, including Fort Hills oil sands project, for $4 billion with earn-out potential of $440 million.
The global renewable energy market was valued at $881.7 billion in 2022 and is projected to reach $1,977.6 billion by 2030, growing at a CAGR of 8.4%. – AM Research

News. Honeywell announced it will acquire Compressor Controls Corporation (CCC) from INDICOR, LLC, for $670 million, which represents ~15x 2023E EBITDA on a tax adjusted basis, in an all-cash transaction. CCC is a leading provider of turbomachinery control and optimization solutions, including control hardware, software and services, and primarily serves the LNG, gas processing, refining and petrochemical segments. CCC will be integrated into the Process Solutions business which has industrial control, automation and process solutions, billed as “enabling customers to accelerate their energy transition”.

I Don’t See Racism in the Chart.

EIA Weekly.

Draw was above expectations. 1.0 MMBBLs were released from the SPR. Recall DOE offered to sell 26 MMBBLs (congressional mandate) from the SPR during April to June. Refining margins are under pressure as refinery runs increase and OPEC+ cuts support feedstock.
U.S. crude production: indicated at 12,200 MBPD, down 100 MBPD from previous week, and up 300 MBPD from same period last year.
Refinery runs 15,833 MBPD, down 11 MBPD w/w and up 149 MBPD y/y. Utilization at 91.3%.
Crude Imports (net): 1,557 MBPD, down 166 MBPD w/w and down 656 MBPD y/y. Brent-WTI spread at $3.4/bbl, down $0.5/bbl w/w.

The Negative OFS Argument. We talked to both investors and management who have met with investors lately. The argument - You are adding capacity in the face of fewer gas wells drilled and a 10% addition to capacity. Pricing will fall, someone will break ranks and then it’s every man for himself. That is the argument being made about buying OFS in general and drillers and pressure pumpers specifically. Okay, the very good client gave us a multi-year contract for building and deploying an E-fleet with money up front. You are supposed to turn that down? And that is viewed negatively by investors even though it’s the highest ROIC in years. 2014 was NINE ago and for the last nine years, we have worked off a great deal of what had been excess capacity and inventory. Many things normalize over 10 years, many things wear out in 5 years. The barriers of entry for another super spec rig contractor are exceptionally high. The only way out for OFS is to prove performance, increase returns, and time. It took some time before investors believed E&P. We have to earn it.

Headlines.

By 2035, renewables will generate 60% of the world’s electricity.
New Zealand feral cat-killing competition for children axed after backlash.
New York City might need to track your farts to save the planet.
The 'new car smell' is caused by chemicals linked to cancer, study finds (nothing is sacred anymore).

Diesel. Remember when we had a significant shortage of drivers and trucks? There were surcharges for the high price of diesel and it did nothing to dent demand. Now, we are into a nationwide freight slowdown that has helped cut U.S. diesel prices by ~50% versus last year’s record prices. While that might sound good for some, not for all. A slowdown in industrial output can first be seen in the supply logistics of a company. Business may be good today but not next month, so you reduce orders. And deliveries. And the trucks needed to transport them. Last year’s 40-year highs of record diesel prices made it more expensive to operate excavators at construction sites, run machinery on farms, and haul goods from ports, rail yards or factory floors. Then a warm winter with lower demand for heating fuel and Russia’s surplus supply has helped to bring prices down, but with a slowing economy, we have to pay more attention.

Another Culture War. I understand that many people don’t like Elon Musk. I understand that. But most people like his cars, and many admire the success of SpaceX which now has a contract for a moon landing. When he bought Twitter, he became political. If you have a million bucks and buy something you really want for $90,000, that is what Musk did. The value has been cut more than in half. Why? Because advertisers and celebrities are leaving the platform. One of THE leading social networks, and advertisers and celebrities lose a contact channel to millions of potential customers or fans. Because Elon owns it? Because it claims to support free speech? Because it no longer has a controlled liberal bias? And that’s not an opinion but facts. And the latest to leave? The Metropolitan Transportation Authority, with 74,000 union workers, members of the Transportation Workers Union. They follow General Motors, Eli Lily, Audi, United Airlines and others. I understand renegotiating rates with lower “viewership” but completely abandoning a multi-million platform?

Winning People Over?? Recently “Just Stop Oil” protestors interrupted the World Snooker Championships by dumping orange powder on the snooker tables and sitting on them. Nigel Farage is a broadcaster and known commentator and I liked his take:

“These people will stop at absolutely nothing to stop all normal life from going ahead, and we’ve got to think very hard about how we deal with this. Are we going to allow this small, slightly crazed minority, are we going to allow them to disrupt every aspect of our national life and our sporting life? I don’t know if we can afford to. I think we are going to get much, much tougher.”
“In some cases, I can’t blame them, really. You see, they’ve been told since primary school that because of people driving 4x4s in Chelsea, the world is about to end. We have spread – among some of these young people – climate hysteria without any sense of balance whatsoever.”

A Few Earnings. We aren’t an analyst anymore, so we have actually seen the sunshine this week, as opposed to those in the grind. But we did catch a couple of conference calls.

NOV reported earnings of $0.32 which beat the consensus by $0.09, driven by better equity income from unconsolidated affiliates and a lower book tax rate. EBITDA disappointed some. Completion & Production had a sub-1.0x book to bill with a 1.5x book to bill in Rig Tech. Supply chain issues impacting drill pipe operations were a drag. “While the decline in North American natural gas prices may be a near-term headwind, the recovery in offshore and international activity is continuing to build strong momentum.”- Clay Williams, CEO
Weatherford had net income of $0.97/share on revenues of $1.19 billion. Adjusted EBITDA - Well Construction & Completions to 22.8% from 19.5%, Drilling & Evaluation to 29% from 20.2%, Production & Intervention to 19.5% from 13.6%. "This very encouraging start to the year gives us confidence to continue to reduce debt, improve our outlook, and raise our guidance for the full year," Weatherford said.
Patterson reported earnings of $0.46 beating the consensus by $0.10, generated $234 million of cash, $117 million of capex and $117 million of free cash flow. The share repurchase authorization was raised to $300 million, and 2023 capital expenditure estimates were lowered from $550 million to $510 million.
Oceaneering reported adjusted EBITDA of $55M exceeding the $40-50M guidance range, where Manufactured Products was the clear winner, with revenue increasing 13% quarter over quarter and operating margins expanding by 387 basis points. “We believe market conditions continue to be supportive of healthy activity levels and pricing improvements in the majority of our energy businesses for the remainder of the year.” – Rod Larson, CEO
NexTier reported another slight beat with management expecting moderate sequential revenue growth in Q2 and another improvement in adjusted EBITDA. Demand remains strong and the company expects its frac equipment to remain sold out. The company reiterated its view to return almost $500 million in FCF for 2023. In talking to Robert this week, he noted “we aren’t dead, but the market seems to think so.”
Helmrich & Payne reported a solid quarter with no real surprises. In typical HP manner. Revenue increased by 6.9% sequentially and 64.5% annually, up in North America and Internationally, but down in the Gulf. HP expects an average active rig count of 163–167 rigs during F3Q and forecasts North American direct margins of $265 million to $285 million. Capex is expected to be $400 million to $450 million.

Can You Say Goodbye? Or You are Officially Cut off! Beleaguered First Republic shares fell to their lowest ever this week, down 50% in one day, as U.S. regulators weighed downgrading their private assessments of the regional bank—a move that may curb the troubled firm’s access to Federal Reserve lending facilities. Wow. If I downgraded a stock after it was down 50%, people would think that I’m not doing my job very well.

Crap. There is a 1-kilometer-long sludge of plastic rolling through irrigation ditches in Indonesia. I am a member of the Plastic Alliance. This isn’t climate. It’s pollution of the worst kind. So the picture is no joke.

Speaking of Scale. Meta, which most of us know as Facebook, reported quarterly results and saw revenues rise for the first time after a 3-quarter decline. So, you ask? Their Q1 revenues hit $29 billion. Twenty-nine BILLION for the quarter. Facebook. Geez.

Hat’s Off – Scott Sheffield. We wrote last week about the Exxon-Pioneer combination rumor, where the WSJ writer ran the story even after Scott told him he was on vacation with his wife and that wouldn’t seem to fit. I have known Scott for several years. We serve on SMU’s Energy Institute Board together and he was awarded Pitte Energy Leadership Award by the Institute in 2013. He has been a fabulous activist for the industry’s realistic future and has driven this industry with his leadership and ideas. He is also one of the luckiest men alive, sitting on top of a huge gold mine before the gold was even found. He is not going away but he is retiring from Pioneer. Richard P. Dealy, currently the President and COO, will replace Scott, who will retire at the end of 2023, but is expected to continue to serve on the Board.

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.