August 16, 2024
Things I Learned This Week Redecorating
I have learned a great deal about feng shui, complimentary colors, and matching… anything matching. Remaking my house. Isn’t that what everyone does while hiding away from the 106-degree heat and beautiful scorching sunshine? The place looks great, but I need to get out of town just to quit spending money! Henry went back to Colorado, and it is quiet around the house. However, the calorie consumption of the residents has declined dramatically. I had forgotten how much 21-year-olds eat! Now, I don’t see the food. I just pay for it. And just how badly do I want to get out of town? How about the Golden Nugget Casino in Lake Charles? Now you know how desperate I am!
In Case You Wondered. “OPEC Trims Oil-Demand Forecast on China Softness.” Nice headline that sums up the demand picture of the global oil markets as well as anything. And this is OPEC, which is usually on the more optimistic side of supply and demand arguments. They expected global demand to grow by more than 2 million barrels per day. And that was for this year. They are lowering expectations for next year as well. OPEC+ currently has 2.2 million barrels per day of capacity shut-in to help support oil prices. Can you imagine where the price would be if they brought that back on the market now? More on this.
But, Wait. We Have the IEA. The IEA is only looking for demand growth this year of about 970,000 barrels per day, and 935,000 next year. China is the issue here as well. And it isn’t gasoline or diesel. Naphtha and gas-oil products, used in manufacturing and construction, account for the biggest demand drops. Offshore production from the U.S., Guyana, Brazil and others is driving much of the incremental supply. Demand Growth? China’s share of non-OECD production growth fell to 31%, down from 71% last year. That is still growth, but just barely. The momentum definitely turned down. We can argue until the cows come home whether demand will be 102 MM BOPD or 104 MM BOPD, but the fact remains, growth is slowing, and it is being seen in Chinese oil demand. When does it come back? How long was Japan in stagnation?
He Said It. President Biden announced yesterday that the U.S. is not going into recession and that it is going to be a soft landing. Your lips to God’s ears.
PPHB - U.S. Energy Markets Update Highlights
Commodity Prices: WTI crude oil is currently $76.80 per barrel (up ~2.1% week-over-week) and natural gas is $2.15 per MMBtu (up ~1.7% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.3 MM BOPD (up ~4.7% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories increased by 1.4 million barrels week-over-week vs. an estimated decrease of ~1.9 million barrels.
Frac Spread Count: There are currently 240 frac spreads operating in the U.S. (a decrease of 3 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 569 drilling rigs operating in the U.S. (an increase of 3 rigs week-over-week).
Not Nearly Enough? Carbon Capture. One of the most promising of the emissions reduction ideas in our industry. A number of companies, including the major oil companies, are embracing Carbon Capture. Oops. The environmental activists aren’t having any of it. They are claiming it is all a scam by “big oil” to divert our attention while they continue to produce oil and gas. Say the people in tennis shoes, orange vests, riding bikes or driving cars, using petroleum products in their everyday lives without even realizing it. Now, I am not claiming that CCS is the Holy Grail of emissions reductions and some of the open-air capture technologies don’t make any sense to me. But our industry, which produces some of these harmful emissions, has a highly vested interest in actually reducing the amount of emissions we produce. We have pipelines, storage reservoirs, and generate a great deal of emissions that need to be captured. We are the most logical industry to develop it, and Exxon seems to have the best technology. The industry is serious. Despite all of this, we have activists claiming it is not nearly enough. In fact, it allows them to continue producing oil, rather than phasing it out completely like some want. There are different opinions:
A recent study found that, after taking into account the energy used to capture and isolate CO2 from flue gas at a fossil fuel-burning industrial plant, the carbon capture system would reduce the plant's net emissions by only 10% - 11%, not the estimated 80% - 90% cited by proponents.
While there are no technical barriers to increasing capture rates beyond 90% for the most mature capture technologies, capture rates of 98% or higher require larger equipment, more process steps and higher energy consumption per ton of CO2 captured, which increases unit costs.
The cost of carbon capture and storage (CCS) and carbon dioxide removal (CDR) solutions varies by approach and technology. It is estimated that CCS costs ranged between $15 and $130 per metric ton of carbon dioxide (tCO₂), while the costs for direct air CCS ranged between $100 and $345 per tCO₂.
More than 30 groups, mainly health advocacy and environmental groups, asked the Pennsylvania governor to veto the pending legislation that would allow carbon capture in the state. “Putting resources toward carbon capture and storage instead of renewable energy is wasting time we don’t have.” Activists are upset because carbon capture and storage just allows the industry to continue producing oil and gas, and the goal is to completely phase them out, not just reduce their emissions.
He’ssss Baaaaccckkk! Superior Energy Services, the company founded by Terry Hall in 1989 and went through bankruptcy four years ago, is getting a new CEO. It looks like he is getting the band back together!!! Brian Moore took over as CEO from David Dunlap post-bankruptcy in 2021 after almost 20 years with Superior. Enter David Lesar, the former CEO and Chairman of Halliburton, who left Halliburton in 2019 and served as interim CEO at a healthcare company, and as CEO of CenterPoint Energy. One of his Halliburton top managers, Jim Brown, also joined Superior with David, after almost 30 years as one of Lesar’s top right hands. Said Mr. Lesar, “This is an exciting time to be returning to the energy services sector and Superior represents a unique platform to capitalize on both the opportunities as well as the challenges inherent in the sector. Jim and I look forward to working with the talented employees of Superior as we continue to strive to provide the best service possible to our customers.” That is a lot of firepower for a small company. Welcome back, David!!
Anybody Care?
This Was a Surprise. I thoroughly enjoyed the Olympics this summer and I read stories about many sharing my opinions. Watching parties and planning days or weekends around events is something I don’t remember as vividly during previous Olympics. It was a great way to spend the summer. And of course, the metal count, we won again, but I saw an article that surprised me. The question was: What college won the most medals? It turns out that one college won 39 medals, which is more than double any of the other U.S. schools and even bested the Netherlands, Germany, Canada, and South Korea. This isn’t new, they would’ve placed 11th in Tokyo and 10th in the previous Olympics in Rio de Janeiro. So now that I’ve got your interest, have you thought about who it might be? Keep reading.
$1 a Bushell!! We wrote last week about how farmers are suffering from low prices and not buying as much seed from Bayer’s subsidiary, Monsanto, causing the company to miss earnings. That is now getting more attention since we are facing a global oversupply of agricultural commodities. Farm prices were low from 2015 to 2020, to the benefit of consumers but farmers also had access to cheap capital. Now it is the weather. While globally, many places are getting hit with record heat, most of the most prolific growing areas are having a great summer of rain and sunshine. The USDA forecasts a record corn yield even though production was about 1% below last year. But production is still the 3rd highest total ever in the U.S. Soybean production is expected to increase by 10% and hit new record levels. We saw a very interesting presentation by a futurist at a NOIA conference a few years ago. The biggest winner in global warming? North America. We have more water per capita and more agricultural lands from the Gulf Coast up through Canada. To summarize, this puts enormous strain on farmers who need capital to buy seeds for next year as prices fall. But for consumers, it is a significant benefit, after seeing food prices increase more than 20% in the last four years.
Production Growth. It is a fine balancing act. We have found out that very small amounts of physical oil on the margin can be very volatile. The U.S. set global all-time records for the most and fastest production growth ever. That was just a couple of years ago. And for the first time in a long time, U.S. production actually matters on the world stage. And now, OPEC+ is expected to drop production by 1 million barrels. At the same time, several non-OPEC countries will grow production by 1.4 million barrels. And it looks to be continued. The U.S. is expected to grow production by 400,000 barrels per day, even with a continuously declining rig count. Efficiencies. And with the introduction of AI capabilities throughout the work and value stream, they will likely continue. Of course, this does put some ceiling on prices! In a market where almost everyone has been calling, for well over a year now, that oil prices just have to move up, after a while you have to think the market has adjusted.
Heretic. I don't like the idea of working remotely. There, I said it. I'm a heretic, in this day and age of reading about office vacancies at record levels and people moving to where they'd rather live while working from home. I guess for some jobs that might work, or maybe even be optimal. But I don't believe that applies to a number of jobs where many of its professionals do work from home. I have no problem with being in the office on Tuesday, Wednesday and Thursday. But collaboration among peers is too important. There are too many ideas mentioned off the cuff that others hear, and you may not remember. These can end up being groundbreaking… In whatever it is you do, it is important. In geophysics, the idea of working alone was unheard of. Sure, we made our own maps, but to be able to walk next-door to a person you knew to be a very talented geophysicist and ask his opinion? Invaluable. And that's not the kind of thing you can call someone up and say “I'm sending you a file. Take a look at it and tell me what you think.” That's not interaction. In the securities business, most of the best information and insights I ever gleaned were not generated while behind the computer screen in my home office. Many will say that they go out. Sometimes a lot. And visit the home office on occasion. I do that with my Houston office, and I can tell you it is not close to the same. There was an article I read this week about how the former CEO of Google had to walk back comments when he said the company was losing the AI race because of its remote work policies. And you know if he's having to walk back something he said, he probably said something too honest for innocent ears. Many will point to solitary jobs being better in a remote-work environment, but typically those jobs were already solitary before COVID started the work-from-home craze. It works. I get that. The goal is to optimize everything, not just “work”. But I would rather drive a Ferrari than a Yugo, all things being equal.
Water Water Somewhere. So, I have been saying for some time that the next wave of IPOs are likely to be in the water management segment. I had expected some level of consolidation before the filings started but now, I am not so sure, in part because it didn’t happen! At least in any major way. And that is because they have enough size, scale and margins that it isn’t really needed. Delek Logistics is buying H2O Midstream and Aris Water Solutions, which took advantage of the only significant IPO window in a while, going public three years ago. But midstream companies are performing well, and you don’t have to have an MLP structure anymore to be considered “midstream”. Keep an eye out.
Brilliant. This is from a document called “Our Contract With You” on the Reform UK website. The document states: “Net zero means reducing man-made CO2 emissions to stop climate change. It can’t. Climate change has happened for millions of years, before man-made CO2 emissions, and will always change. We are better to adapt to warming, rather than pretend we can stop it.”
Most Medals Won. Stanford. Who got it right without looking?
Headlines.
Flint Hills Resources to build $52M solar farm to help power Corpus Christi West refinery.
U.S. Fights Resurgent Islamic State in Syria.
Talks are Planned in Brutal Sudanese War.
ExxonMobil, PETRONAS consider floating LNG project offshore Suriname following “outstanding” exploratory success.
“Oil companies sold the public on a fake climate solution — and swindled taxpayers out of billions” – National Observer.
The UN. Again. The UN secretary general is not a fan of the oil and gas industry. He has spent years telling global financial institutions to quit lending to the sector. Now the UN is claiming “a massive disinformation campaign is slowing the global transition to green energy and this “backlash” is being fomented by the oil and gas industry. I could have sworn companies like Exxon, BP, Shell, Chevron, Agip, ENI and others all started working on emissions reductions and investing in renewable businesses several years ago. I was in London almost four years ago for the “Oil & Money” conference where the promises were made. Disinformation? Realizing that many of the investments made by the oil and gas industry into renewables, biomass and others didn’t make economic sense, some of the companies cut back on their most aggressive measures or are finding other ways to accomplish their renewable goals. I am on several industry trade association boards, and I have yet to hear anyone promote, state or in any way participate in a disinformation campaign. We sell our products to people who want to use them and want to buy them. If no one bought their products, they would cease to exist. But since no one wants to drop their standard of living by 100 years, it isn’t happening and won’t. That isn’t disinformation. That is a statement of fact echoed by any person asked.
Who Is Right? There was a large poll by the UN that found that 72% of people wanted a “quick transition” away from fossil fuels, including people in countries that produce oil and gas. Great. I’ll take world peace. If we get 72% of the people in our poll to support world peace now, we should just show that resolution to Gaza, Israel, Syria, Sudan, Ukraine, Iran, Yemen and others so they will stop their wars. Don’t you wish it worked that way? But it doesn’t. Just because 72% of people want something, the laws of physics still come into play. Replace them “quickly”? Isn’t that what we have been trying to do with the trillions spent on renewables? Well, yes, but oil demand has continued to go up, even in countries that have aggressively adopted EVs. “Climate appears to be dropping down the list of priorities of leaders,” UN head Gutters said. “But we really need leaders now to deliver maximum ambition. And we need maximum cooperation. Unfortunately, we are not seeing that at the moment.” “Despite everything we see [in the form of extreme weather], we’re still not seeing the level of ambition or action that the world desperately needs.”
What He Said. Sometimes, there will be some short snippet that catches your attention and gives one hope that the great unwashed of our society are paying attention to energy issues. This via the Energy Security and Freedom site – “The Big Green Grift, the Energiewende and all the other green energy scams are about to be slowly shuttled aside because we need massive amounts of new energy these schemes cannot deliver. Moreover, we can no longer afford the virtue-signaling, power-seeking and money-grabbing nonsense these ventures involve. Indeed, there's a big wreck about to happen at the intersection of Artificial Intelligence Boulevard and Net Zero Avenue. Future AI data center demand is forcing energy discussions to suddenly get very real.”
Snippets.
Ecopetrol said its decision to not move forward with a $3.6 billion deal to acquire Oxy's CrownRock LP assets was mainly due to the impact on its leverage, but also political shifts under Colombian President Gustavo Petro.
The power sector accounted for 25% of all U.S. greenhouse gas emissions in 2021, with natural gas accounting for about 40% of U.S. electricity generation and coal with 18%.
Only Carbon Capture and Storage has the potential to meet emission reduction requirements while enabling continued use of existing coal and gas-fired power plants.
Americans are pulling money out of brokerage accounts to make online bets on sports, according to a new study that said the practice is prevalent in financially strapped households.
This is What We are Guilty Of? From the Natural Resources Defense Council – “According to the report, ‘Six fossil fuel companies, including BP, Chevron, Exxon, and Shell, spent an estimated $700 million on academic research programs between 2010 and 2020.’ Institutions that received funding from the fossil fuel industry tended to publish research that was more favorable to methane gas than to renewable energy. These companies have spent millions of dollars influencing some of the nation’s leading academic institutions, including Harvard Kennedy School, Princeton University, Tufts University, the Massachusetts Institute of Technology and the University of California, Berkeley. These are just a few of the over 80 academic institutions that have received funding from the fossil fuel industry in recent years. Internal communications from Shell revealed their plans to ‘embed Shell scientists’ at the University of California, Berkeley, where Shell spent over $25 million over five years to fund the university’s Biosciences Institute.” We funded research that was more favorable to natural gas than renewables. Considering the relative track record, the issues with turbine blades and hail damaged solar panels, those studies are probably more right than wrong. And we hoodwinked Harvard, Princeton, MIT, UC Berkeley? And in addition to $25 million, they loaned them scientists as well? Guilty as charged.
How Much? The chart shows the different costs in reducing CO2 emissions. Battery storage is the top, Nuclear at the bottom. We have already displaced so much CO2, we are the only country currently in accordance with the Paris Climate accord, replacing coal with natural gas. Data from the State CO2 - EOR Deployment Work Group.
Dominate What? Exxon has completed appraisal drilling in the Smackover formation in Southwest Arkansas. They have declared it a commercial and economic success and will now proceed to the development phase. Oil? That was so yesterday. Lithium baby! Exxon is planning on being one of the larger, if not the biggest lithium player in the U.S. and one would think they would eventually move overseas. They produce lithium from saltwater brine in the formation which is one of the richest around. Property was leasing in NE Texas to try and take advantage of the Smackover there. But as happens in the oil business, it isn’t as productive, but that doesn’t stop those who are buying up leases, or options for leases, and hoping to flip them to Exxon or one of its peers. Exxon plans to scale up its exposure and be a leading supplier of lithium by 2030. The company has 120,000 acres covering the Smackover formation.
Monkey Wrench. A Marathon Oil investor has sued to block the $17 billion Conoco deal, saying that the deal could deprive Marathon investors of up to $6 billion. Martin Siegel says that Marathon, its directors and financial advisor Morgan Stanley, misrepresented the deal in a proxy statement which recommended that shareholders back it. In today’s litigious society, one cannot be surprised.
Overreach? Last week, the D.C. Circuit Court of Appeals vacated permits for the Rio Grande LNG project, which was already under construction and was valued at $6 billion. The Court faulted FERC for not considering “public interests” in the permitting process relating to greenhouse gas and other issues. So, if a court can destroy the economics of LNG investment or any other energy project, by something as nebulous as that, then who would put up money for the project? The owner of the project, NextDecade, just awarded a construction company a multi-billion-dollar lump-sum contract for a project that may not become operational. Realistically, the project is very likely to eventually go ahead. The permitting was referred back to the FERC and NextDecade can reapply. The ruling also shut down the “Texas LNG” project, owned by Glenfarne, which is also located in Brownsville, Texas. First, the administration paused all new permits and now the courts are vacating those already issued. NextDecade didn’t agree with the decision and is committed to “taking any and all available legal and regulatory actions to ensure that Phase 1 will be delivered on time and on budget” and that “FID [final investment decision] of Trains 4 and 5 will not be unduly delayed.” And in case you think that these projects are nothing but more emissions, Rio Grande LNG claims to be the first and only U.S. LNG project offering CO2 emissions reduction of more than 90% via planned carbon capture and storage – capturing and permanently storing more than 5 million metric ton of CO2 per year, equivalent to removing more than one million vehicles from the road annually. Let’s hope that NextDecade’s appeal/reapplication works.
Top Picks. Goldman screened for post-selloff stocks with healthy fundamentals at a discount. "If economic fears continue to fade and the market becomes more micro-driven in coming months, then the recent sell-off represents an attractive opportunity to buy stocks with healthy fundamentals at valuation discounts." Who qualifies? Only 3 companies made the list of the top 50 stocks likely to see a significant rebound. Not much.
12. TechnipFMC (FTI), -11%, 40%
23. Flowserve Corporation (FLS), -10%, 15%
40. CenterPoint Energy (CNP), -7%, 7%
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.
