August 2, 2024
Things I Learned This Week About Staying Home. For Now.
Realizing that I have spent about half of the last two months living out of a suitcase, it feels great to be home. At least it did for a few days. Now I have itchy feet again. And hunting season is about ready to start. Conflicted. Very conflicted. But I’ll figure it out!! And remember – if you need someone to give a market overview talk after a quail hunt, I have all fees!!
Long List. I was asked recently to come up with a few topics that are impacting the industry today. While I am sure that it was asked during the day, it was only later that evening that I finally got around to it and surprised myself in several ways. There was very little wine involved. Or Scotch. There seems to be a lot going on right now. And I didn’t even mention Iran, Israel, Lebanon, Gaza or Qatar.
OPEC+ is debating putting more crude on the market with somewhere between 1.5 and 3+ MM BOPD shut in.
China continues to lag. And continues.
US inventories dropped but there is no near-term correlation between that and prices.
There is a proposed law before congress making it illegal to communicate with OPEC pretty much at all. Absurd, but…
Drill, baby, drill sounds great but if you aren't in the industry, you would think a tsunami of production was coming as soon as the election is over. If you're in the industry, you know that we're drilling at our economic limit right now without subsidies, and even Trump wouldn’t succeed in giving the oil industry subsidies.
Everyone is now on board with the idea that things will be better starting soon and through 2025. That sounds great but that's exactly what people were saying 12 months ago about oil prices.
Oil prices are 3.8% above where they were this time last year. So much for “To the Moon, Alice, to the Moon”.
Natural gas is about $2.07. It's the peak of the air conditioning season. The gas production has continued to move up ever so slightly and it will be sometime before additional LNG demand hits, probably sometime next year.
The rig count is down about 20% year to date. Some pressure pumping revenues were down 17%. Now everyone is forecasting Q3 to be the bottom but it's hard to tell how much of that is wishful thinking and how much of it is based on actual decisions.
Consolidation by the oil industry definitely put the brakes on activity this year as seen in the rig count drop. The ones already announced will start to shake out as we get to the end of the year, but there's probably more coming.
We have been preaching the benefits of consolidation, even the non-obvious consolidations. Patterson, Nextier and Ulterra are the poster child. However, Helmerich and Payne buying KCA Deutag is a very good acquisition as well. Exceptionally complementary. We expect to see more of it, and it could happen with some of the larger players.
International news is focused on the road and now airport closures by Just Stop Oil. And the long prison sentences. Shell is continuing to downsize its North Sea wind business and hasn't got much press.
Russia, Iran and Kazakhstan are still over producing but there is little reason for them to stop.
So we seem stalemated. Unless you are in Deepwater that is. Utilization above 90%. No new construction, it would take 5 years and about $1 billion. $585k day rates up to mid $650k per day based on performance, and once a Deepwater project kicks off, it can run for 6-7 years even if it doesn't work.
No commentary about Ms. Harris though she has wanted to ban fracking in her previous campaign.
How Quickly We Forget. Back in October of 2023, the Biden administration lifted the punitive sanctions that had been imposed on Venezuela since 2019. It was done with the “understanding” that Venezuela would “take steps towards holding a free and fair presidential election”. So, a couple billion US dollars flow into the Venezuelan government coffers, to continue supporting a corrupt and repressive regime. The idea was that since Saudi had stiffed Biden on increasing oil production to lower US gasoline prices, lifting the sanctions and allowing Venezuela to sell to very nearby US refineries would accomplish the same thing. Sure, we sold out our integrity to win an election, the only thing we can wring out in return is a mumbled “promise” to hold fair elections. And of course, in the headlines today, we see Maduro stealing the election and then using the military to put down protestors, there is no mention of that “promise”, it’s broken now, even if it was ever made. And Maduro now has the financial resources to prevail. And gasoline prices did not go down.
Snippets.
About 30 carbon capture projects have been proposed in Louisiana, according to a tracker maintained by environmentalist group Clean Air Task Force.
25 Republican attorney-generals lodged a joint plea before the Supreme Court for an emergency stay of new power emission rules that they fear may shut down generation plants running on fossil fuels.
The EU is demanding that Hungary pay a €200 million fine for refusing to open their borders, and also fining the country €1 million extra EVERY day that they refuse to open borders.
Climate Action against Disinformation, an association of environmental groups, suggest that AI could drive up global emissions by 80%.
We Forget It’s Still There. BP has given the go-ahead for the Kaskida project, which will be BP’s sixth hub in the Gulf of Mexico, featuring a new floating production platform with 80,000 barrels of capacity per day. From the first phase of six wells, an estimated 275 million barrels will be produced. Production is expected to start in 2029. An important point to make though is that the pressures of this reservoir are high and will require 20,000 psi equipment to develop. This also means that Transocean’s new 20,000 psi drillship has real value in the current market. Technology continues to advance and the renewed wave of “automation” and the continued development of AI capabilities, will keep the GoM from ever being the “dead sea”.
LONG Delay. We are used to regulatory delays, but some legal delays put regulatory to shame. The Chevron/Hess merger, announced last October, now can’t close before next summer. That is the summer of 2025. A pivotal arbitration hearing concerning Hess’s position offshore Guyana is set for May 2025. Post arbitration hearing, a decision is usually reached within three months. Late next summer. Both requested that this hearing be held earlier, but the arbitrators’ common schedules did not make this possible. It is proposed at a $53 billion deal value. Hang on.
Shooting Feet. Windfall profits taxes are so passe’. “Energy Profits Levy” is the correct term. So, Britian’s new Labour government, recognizing the country’s till is empty, have decided to increase the Levy, because they need the money and because they can. The Levy will increase to 38% from November 1st onward, raising the headline tax rate on upstream oil and gas activities to 78%. In addition, the level will now stay in place until March 31, 2030. But that isn’t all. The government removed the Levy’s main 29% investment allowance for qualifying expenditure incurred, another hit to industry and a win for government coffers. But the price of oil has always been determined by the cost of the incremental provider, meaning that the UK is gradually pushing the oil and gas industry out of the UK. That will make the “Just Stop Oil” people happy, but anything made from a petroleum product will cost more and everything in our lives includes critical components made from hydrocarbons. And of course, the government will go broke without the oil and gas tax and royalty payments. But we are an easy target. Expect the left side of the political spectrum to make life in our industry more interesting.
Your Media at Work.
Window Dressing? We all know about how BP and Shell have scaled back their promises and plans on emissions, and “non-core” or non-economic, renewable energy businesses. But “scaled back” doesn’t mean “gone to zero”. BP spent $1.8 billion on “transition growth engines” in the first half of this year. Five to ten hydrogen projects are expected by BP this decade, with green hydrogen and sustainable aviation fuel being produced and carbon and energy from refineries being inputs. BP is working on U.S. hydrogen hubs in the U.S. as well, in partnership with several American groups including the Midwest Alliance for Clean Hydrogen (MachH2) in Indiana, Illinois and Michigan. Of the almost $2 billion spent in the first half of 2024, it is broken down by the following growth drivers:
Hydrogen for $100 million
Renewables and power for $700 million
Bioenergy at $500 million
Electric vehicle charging at $300 million
Convenience at $200 million
Peak Oil?? Lower 48 shale Oil Production was roughly flat both month-over-month and YTD as of May. “The era of US shale "hyper growth" is over”. – Opinion, Eric Nuttall
Vindicated!!! “There really isn’t a major difference in the energy expended,” says Graeme Close, a professor of human physiology at Liverpool and John Moores University in England, head of performance nutrition for the DP World Tour Golf and European Ryder Cup team and one of the study’s authors. According to this new study, the calories burned from carrying a golf bag, with 14 clubs, weighing 15 pounds, wasn’t significantly different than manually pulling a golf bag on wheels or using an electric trolley. Specifically, the authors found that the study’s participants burned 3.4 calories a minute carrying a bag, or 688 calories over the entire round of 18 holes; they burned 3.6 calories a minute from pulling a manual trolley, or 756 for the round; and they burned 3.2 calories a minute from using an electric trolley, or 663 for the round. So much for schlepping.
Red-Headed Stepchild. Pressure pumping seems like constant football, getting kicked around, winning or losing. First, things go flat. The observation that we know how to manage spiking growth and plummeting drops, but not flat times, was made by many to me. Pricing gradually erodes. Now account for the consolidations we have seen in E&P and the slowdown in activity that always follows such a trend. Smaller players have to work at lower prices to keep their crews busy. And the rig count falls. The dreaded “double whammy”. Now the Q2 results have shown some pressure pumping revenues are down 17% sequentially. That is big in one quarter considering it doesn’t feel like a complete crash throughout the industry. Then this headline- “NexTier Says Tier 2 Frac Service Pricing Has Dropped To Breakeven Levels”. As expected, Tier 1 is doing better. But that is a relative term. “Frac Monitor: July weakness continues as month ends.” Another one. Everyone believes that Q3, or at worst Q4 would see a bottom in the rig count and then everything will start to trend up. Investors heard that a year ago about how oil was headed north and hard. Everyone agreed. Investors don’t stick around for the very detailed and nuanced reasons we were wrong. Just that we were wrong. Pressure pumping will come back but the inherent volatility seems to attract many more traders than investors. Below is a Rystad chart on frac activity. Hello volatility.
OKC. If you happen to find yourself in Oklahoma City on September 18th, I have an idea for you. The Energy Workforce and Technology Council (“EWTC”) is holding its Oklahoma Chapter Luncheon. It is at the Hamm Institute for American Energy, on 9th Street. The speaker is Kevin Turner, the Emissions Program Manager for Continental Resources, Harold Hamm’s company. The EWTC does an excellent job in promoting, educating and assisting our industry, across disciplines and borders. Then someone gives a quick market outlook. Hope to see you there.
They May be Right. One of the most comprehensive aerial surveys of methane emanating from US oil and gas facilities shows operators must cut emissions by roughly 80% or more to meet major industry targets. The nonprofit Environmental Defense Fund conducted about 30 flights between June and October of last year over fossil fuel basins that account for nearly three-quarters of onshore oil and gas production in the contiguous US. On average, the data collected show that around 1.6% of gross gas production is released as methane. Methane is more than 28 times as potent as carbon dioxide at trapping heat in the atmosphere. Rules and regulations are being put into place, government money is available to help it happen and there is no better industry to capitalize on it any better than we can. It HAS to happen. Who benefits and how?
Clean Coal? Every second, the world burns 275 metric tons of coal, the dirtiest of all fossil fuels, enough to fill 10 large dump trucks. That makes nearly 17,000 tons per minute, or one million tons an hour. Every six hours, the world consumes enough to build a coal replica of the Great Pyramid of Giza. China opened over 100 coal fired power plants last year and 50% of its electric grid is powered by coal. Coal demand is expected to continue growing for several more years. There is really no such thing as “clean coal”. Since the 1997 Kyoto Protocol was signed, coal demand has gone up 75%, and by 15% since the 2015 Paris climate agreement was finalized.
Amen!
Great News! The Energy Permitting Reform Act of 2024, a bipartisan bill, was introduced by Senate Energy & Natural Resources Chairman Joe Manchin and John Barrasso. The bill improves expediting the permitting process for key energy and mineral projects. The bill got massive support from all the industry trade associations. Tim Tarpley, president of the Energy Workforce and Technology Council, emphasized the need for faster permitting to keep up with growing energy demand. “Streamlining the permitting process is crucial to building the necessary infrastructure quickly,” he said. “This reform is essential to maintaining America's energy leadership and competitiveness. Ending the LNG permitting pause is a critical step to unlocking our energy potential.” We will miss Joe Manchin when he retires at the end of this year. But thanks for this.
Care for a Smoke? “Avoid burning wood in your fireplace or firepit and minimize sources of indoor air pollution such as candles, incense, pan-frying and grilling. If you must be outdoors, keep the time brief and wear a tightly fitted N-95 or P-100 respirator to help reduce exposure. Limit the use of gasoline powered lawn and garden equipment.” – California officials reacting to the wildfires.
Headlines.
Albemarle is putting its expansion plans in Australia on hold, as the lithium price slump deepens.
Minnesota has become the second U.S. state where flying car regulations have gone into effect. (Spoiler – NH)
Apollo Closes $1.85B Take-private Acquisition of U.S. Silica.
An E&P Deal. Vital Energy and Northern Oil and Gas have joined to acquire the assets of Point Energy Partners, a Vortus Investments portfolio company, for ~$1.1 billion. The joint purchase agreement splits ownership at 80% to Vital and 20% to Northern. The deal is expected to close by the end of the third quarter. Net to Vital, they acquired $820 million of assets, and are expected to produce 15.5 Mboe/d (64% oil) in Q4. Post close, its leverage ratio should be 1.5x, falling to 1.3x within 12 months. The transaction was valued at 2.4x the next twelve months’ EBITDA.
An Important Plug. “Why Climate Misinformation Persists” - Noble lies, conventional wisdom, and luxury beliefs. By Roger Pielke Jr. I remember when NPR did a two-day piece on Dick Cheney and his time at Halliburton. I called the author after his piece aired and told him it was the most fair, balanced and accurate account I had seen. He said he was being vilified by his peers for being a “sell out”. Click the link. https://rogerpielkejr.substack.com/p/why-climate-misinformation-persists?r=18ol70&utm_medium=ios&triedRedirect=true
It Just Has to Be Said Again. “Wall Street’s enthusiasm for that vision has faded, as U.S. electric-vehicle demand hasn’t taken off as expected. Now, with signs that pricing is losing steam as the American car buyer grapples with high interest rates, investors are looking for reasons to stick around.”
How Much and Where?? RBN Energy does an excellent job researching many different topics. They, like us and everyone else, have been getting AI Power Demand slides ready for our next presentation. But I hadn’t seen the geography of it before. From RBN – “While the national-level growth estimates are substantial, the geographic concentration of the industry and the local challenges it creates are even more striking. As shown in Figure 1, nearly 50% of 2023 U.S. data center load was concentrated in only four states: Virginia, Texas, California and Illinois. Including another 11 states brings the total to 80% of the load. Virginia alone accounted for 22% of the national data center demand, benefiting from strong internet connections, minimal disruptive events, an available skilled labor force, proximity to population centers and users, and reliable backup power sources.”
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $77.91 per barrel (down ~0.5% week-over-week) and natural gas is $2.04 per MMBtu (down ~1.4% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.3 MM BOPD (up ~9.0% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 3.4 MM BOPD week-over-week vs. an estimated decrease of ~1.6 MM BOPD.
Frac Spread Count: There are currently 237 frac spreads operating in the U.S. (an increase of 9 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 568 drilling rigs operating in the U.S. (an increase of 4 rigs week-over-week).
Oh Canada! Canada’s standard of living is on track for its worst decline in 40 years, according to a new study by Canada’s Fraser Institute. As if Trudeau didn’t have enough problems already. Unlike previous recessions, Canada is not recovering this time as it has in the past. According to the Financial Post, since 2019, Canada has had the worst growth out of the top 50 developed economies. Inflation-adjusted Canadian wages have been flat since 2016. Since the pandemic, Canada’s official food inflation is up 25%, and energy is up 30%. Canadian bankruptcy filings jumped 40% last year, while CIBC reports nearly half of Canadians have zero emergency savings. The good news? It can’t get much worse?!? The bad news? It keeps getting worse. When are the elections?
A Higher Standard? Weatherford announced earnings and a small 3% miss and a small drop in Q3 margin expectations dropped the stock almost 10% in the last week. The stock is still up 20% for the year and one of the better performers. What struck us is that EBITDA guidance was closer to 25% rather than the 26% reported in Q2, but that 26% was higher than SLB, HAL, BKR, or NOV posted for the quarter. While no one was looking, Weatherford got fixed and while some ask me if they are making any money yet, the reality of having better EBITDA margins than your well thought of peers? Respect. Earned and deserved.
Nice Advert. ADNOC has announced the deployment of “RoboWell”, AIQ’s pioneering artificial intelligence autonomous well-control solution, in its operations at the offshore NASR field. This world’s first offshore deployment of RoboWell highlights how ADNOC is leveraging advanced technologies to drive efficiencies. We have written about how ADNOC is expanding its reach into drilling, drilling services and all other technologies, looking to be a leading edge, integrated player in the space. Very nice start.
Now is the Time. The acquisition of KCA Deutag by Helmerich & Payne got only a short mention by us due to the timing. Now, after most of the dust has settled, we took time to look at the deal. HP has long had an international presence, but it was never material enough to generate much attention. But buying KCA changes all that. For its $1.9725 billion in cash, HP gets a diverse global drilling company. KCA Deutag has a significant land drilling presence in the Middle East, which represents approximately 2/3rds of the company’s EBITDA, with additional operations in South America, Europe and Africa. In addition to its land operations, KCA Deutag has asset-light offshore management contract operations in the North Sea, Angola, Azerbaijan and Canada, with super major customers and long-term earnings visibility through a solid backlog. This transforms HP from a Tulsa-based domestic driller with some international assets to a global drilling rig contractor. Congratulations guys. Well done.
Perspective. “From a service provider perspective, the efficiency of our industry may mean less rigs, but that doesn’t mean less opportunity. As efficiencies take center stage, efficient service providers will stand out – ‘day rate” contracts are starting to evolve to ‘performance rate” contracts – we aren’t seeing that across the board, but performance-based contracts is definitely the trend and there is great alignment between the service provider and the operator, huge opportunity for service providers to evolve their contracts to performance based.” - Tobey Rice.
Price Hike? "Power prices on the biggest US power grid are about to hit a record-high amid a wave of plant retirements and surging demand, thanks in part to new data centers being built. Generators that provide electricity to the 13-state grid will get a record $269.92 per MW-day from utilities to provide capacity over a 12-mth period starting in June. That’s more than 9x last year $28.92 in the auction." Mark Chediak, Bloomberg.
Debunk #2388.
Drive You Crazy. The august consulting firm, McKinsey, did a recent study that shows more than 35% of EV owners plan to return to ICE’s (internal combustion engine) with most complaints about charging issues, and 46% are “very” likely to switch back. McKinsey Mobility Consumer Pulse got responses from 37,000 participants who own electric vehicles, with only 9% who consider current electric vehicle charging infrastructure to be sufficient. Of the survey respondents who still drive ICE cars, 38% said they would consider buying either a battery-electric car or a plug-in hybrid as their next car. This echoes comments made by the head of Toyota a year or so ago, that the “dirty little secret” among car companies’ execs is that the future lies in hybrids, not fully electric vehicles. He has been completely right so far. Now if they could just make a more attractive body for that Prius….
On the Same Page. “Low arrests may hurt GOP claim” followed by “Two caravans heading North towards US.”
Popularity. Earnings season for energy has been mixed with international and deepwater both strong and US onshore weaker than expected. Much is being blamed on the E&P consolidation that has reduced the amount of near-term work being done, putting a great deal of pressure on the smaller companies who are cutting prices to stay busy. That just drags everyone down. Slower demand recovery and the OPEC+ overhang starting to come back have pushed oil prices down to the low levels of early June. U.S. drilling activity is expected to bottom here soon and begin to recover but remember the oil price projections of a year ago that put oil at $100. Easy. Looking at seasonal factors and fundamental outlooks, we could see a recovery in US drilling by year-end, but there seems to be more and more optimism in these projections than true belief or proof. Investors are not ready yet. They too heard the chorus of experts preaching $100 oil for the last 18 months and here we are hoping to hold $70? Well, yeah. We missed China demand. Okay, so what are we missing this time? Investors have no confidence in the answer that comes next. And it has proven that being early in energy can be exceptionally punitive and being a little late may not be a bad thing. So, until we can prove out better fundamental performance than we see today, energy equities are likely to stay under-owned.
What More Could I Say? “Profits at the German auto giant Mercedes plunged on Friday as sales of its slick, new range of electric vehicles (EVs) went into freefall. Porsche abandoned its sales targets for battery-powered cars amid waning demand from customers. Ford is losing over $60,000 on every EV it sells, while Tesla’s profits dropped 45%. Meanwhile, battery manufacturers such as Germany’s Varta are getting wiped out. Over the last few days, it has become clear that the EV industry is on the brink of collapse. Hundreds of billions of euros, dollars and pounds have been pumped into this industry by political leaders and the subsidy junkies that surround them – and it is surely time they were held to account for the vast quantities of taxpayer cash that has been wasted." – The Telegraph. 18.1% of Mercedes-Benz cars sold in Q2 were electric, down from 18.6% last year. All-electric car sales saw a 25% reduction from the second quarter of 2023, while plug-in hybrid car sales increased by 27%, demonstrating the market preference for hybrids versus full electrics.
Podcast. One of our Partners at PPHB, Joe Hoepfl, was a guest on the ARS Global – “Coming Down The Pipe” podcast. Joe discussed investment trends in oil & gas, the future of E&P consolidation, and key considerations for raising capital in the energy space. Hoepfl gave a run-down of the history of PPHB and the changing capital markets conditions throughout his tenure as a banker. Joe emphasized the challenges of navigating a relatively flat period in the oil & gas industry that is characterized by capital discipline and delivering yield to investors. Click the link to listen: https://ars-global-coming-down-the-pipe.castos.com/episodes/energy-investment
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.
