August 23, 2024
Things I Learned This Week About Golf and Blackjack
My firm, PPHB, had an employee group outing last weekend to the Golden Nugget Casino in Lake Charles, Louisiana. I was very surprised. It is owned by the Fertitta family and has 11 of their restaurants, a very good golf course, pickleball courts (we had a tournament) and a very nice casino. Rows of blackjack and craps tables, no one in wheelchairs with oxygen bottles and was a very fun vibe. The rooms were great too. Who would have thought? I was impressed. And I won $500 at Blackjack! Golf was a bit different. Playing with a group of former CEOs, investment bankers, and several board representations is always fun and entertaining. Being the worst golfer in the group (someone has to be… I still won money though!), I got an interesting perspective over 18 holes. Not much conviction, but lots of hope in terms of our industry. All have a great deal of financial net worth invested in the sector, so there is no shortage of hope, but at this point, the hope beats reality.
Breaking Records. We are good. Everyone should realize this. Being good has downsides as well. Last year, we drilled 6,000 wells in the Permian Basin, which is now producing ~5.7 million barrels per day. And we did it with 100 fewer rigs than we operated in 2018-2019, before COVID. Not only did we set records with fewer rigs, but we also set a new Permian record of 10,032 feet per well. Think of the operating efficiency gains that have allowed us to do that in just a few years. That amounts to 11,453 miles of lateral holes, twice any other basin. So, the Permian is the most active, critical and productive of the shale basins, facts we already know. But understanding the efficiencies and impacts of the technologies brought to bear in the last few years is hard, since it seems to move so very fast. Now imagine 2-3 years from now when AI and quantum computing are much more broadly used.
PPHB – U.S. Energy Markets Update Highlights.
Commodity Prices: WTI crude oil is currently $73.17 per barrel (down ~3.5% week-over-week) and natural gas is $2.33 per MMBtu (down ~0.6% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.4 MM BOPD (up ~4.7% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 4.6 million barrels week-over-week vs. an estimated decrease of ~2.0 million barrels.
Frac Spread Count: There are currently 234 frac spreads operating in the U.S. (a decrease of 6 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 567 drilling rigs operating in the U.S. (a decrease of 2 rigs week-over-week).
The Big Mover. China approved 11 new nuclear reactors this week, a record number of permits. China currently has 56 operating reactors, accounting for ~5% of its total electricity generation. In 2011, China made a really big deal about moving to nuclear energy as a main source of power and a step towards improving its emissions profile. Oops. There have been several years of delay, following the delays associated with the Fukushima incident. This caused targets to move down. The goal changed to 15% of electricity generation from nuclear by 2035 and 0%-25% by 2050. So, the 2020 target has not yet been reached and we are now expecting 18% by 2060. Last year, China opened over 100 new coal fired plants over the course of 12 months and nuclear targets continue to decline. History shows that the countries with the lowest energy costs dominate trade. China seems to be remembering this.
Cleaner Please. The Biden administration got on the Climate bandwagon during the recent Climate Conference in Dubai, focusing on how to best reach the unobtainable goal of “net zero” by 2030. One of the last actions discussed by Biden’s EPA might be a federal tax on methane emissions from oil and gas operations. Do we need to reduce methane emissions? Absolutely, and the industry is already doing that in a big way, even if natural gas prices aren’t high enough to justify the economics of laying gathering lines and systems for capturing flared natural gas and methane. But the industry has been doing that for years because we are all good shepherds of our planet and culture, and because our clients, the oil companies, have been driving this for years. The climate law dictates that the fee must be levied in 2025 based on methane leaked in 2024. And the EPA’s proposal in January states that companies must report their emissions and pay any relevant fees by March 31, 2025 — the same day major emitters have long been required to report their greenhouse gas emissions from the previous year. The “Waste Emissions Charge” starts at $900 per metric ton for 2024 reported methane emissions, increasing to $1,200 for 2025, and $1,500 for years 2026 and later. One more regulation, one more thing to drive the price of oil higher. The most likely penalized? Aluminum smelters, cement plants, refineries, chemical plants, steel mills and more.
Where Does Sentiment Lie? In a shop of horrors. Interactive Brokers just ran out of $XOP to short. According to Bloomberg, there are 12.3 million $XOP units short out of 19.8m units outstanding. Units recently peaked on April 15 at 28.3 million, so we’ve seen a massive liquidation since then. I have spoken to several very smart generalist portfolio managers who are still in energy. They are getting increasingly bullish on oil and natural gas and their preference seems to be for natural gas and LNG export. So, when we reach the inflection point of no more stock left to short and some begin to buy, you could see a heck of a short squeeze from just a little buying in some in oil and gas stocks. Contrarian, oil or gas bull. There are all sorts of names, but the big money is starting to look at energy again.
Gassy. I have known Art Berman for decades, though I don’t always agree on his math and conclusions. Regardless, he recently wrote about a topic we too have covered – natural gas supply and demand. On a Btu equivalent, the gas to oil ratio is technically 6.0 but is currently about 44.5x… Btu switching is a thing of the past. This isn’t helped by the continued anemic market for natural gas, with Europe in a multi-year warm spell and China still in meltdown. The correct long-term average BOE ratio is 15:1 assuming an average NGL yield of 50 bpm. Long-term, we love natural gas and understand it will not be a “transition” fuel but a long-term baseload business. And Art is right that right now, natural gas is plentiful, impacting the price and activity. But that is pretty well known by now.
“You should save this photo to present to anyone who b****** to you about a 6-acre drill pad being an eyesore” David Blackmon
Go On a Diet. I am a member of the “Plastic Alliance”. I was fishing in remote Southern Mexico, and the amount of plastic and trash on the beaches and in the mangroves was unbelievable. Most said it was just garbage from Cuba. That may have been the case. All I know was the place was covered! I understand that plastics are a very vital and critical component of many things that we do and none of us will live long enough to be weaned off plastic. There just aren’t any alternatives that are practical or economic. In fact, they aren’t even close. But all that plastic that was washed up on the beach in Mexico didn’t look critical to me. If anyone is still buying water and plastic bottles on a regular basis, please stop. I will be happy to send you a refillable water bottle and take some of the plastic ones out of the loop.
Shameless Plug. I met a guy on a hunt in Spain several years ago. I was with a group of friends, and all had significant exposure to operating companies, many of which were in the oil and gas industry. This guy was from New Jersey and had the accent to match. As a result, several people in the group dismissed him, much the way that some people in NYC look at Texans as soon as we open our mouths. They underestimate our IQ. On this trip, this guy started talking about how some of these people were using capital to operate and started suggesting ways to improve their capital situations. These conversations continued well into the night and left all of us amazed at the depth and understanding of this guy. I was so impressed; I gave him a couple of shekels to invest for me. Thanks to Ralph, my children have a very secure future and so do I. He was with Morgan Stanley at the time but has now moved to Florida, along with a few hundred thousand people from his neck of the woods and has his own money management business – Carter Ridge Strategic Advisors. His name is Ralph Marra. His email is otcbrkr@gmail.com. I rarely recommend stocks much anymore and even more rarely recommend brokers and money managers. Ralph is an exception, and I just wanted to thank him publicly for all he has done for me and my family.
Headlines.
A Natural-Gas Glut Is Forcing Drillers to Dial Back - Again.
Civitas: 4-mile Colorado Laterals A ‘Competitive Edge’ in D-J Basin.
US Energy - 2Q24 13F Survey; HFs Broadly Increase Energy Exposure.
Global oil demand may exceed 110 MM BOPD by 2050, Enbridge CEO predicts.
APA Corp. mulling $1 billion sale of Permian basin oil and gas drilling properties.
Marathon Oil investor sues to block $17 billion ConocoPhillips deal amid U.S. oil and gas M&A spree.
Oil. Demand deterioration in China, estimated at a loss of 0.7mm BOPD, has been the biggest driver of falling oil prices, with some analysts cutting China’s oil demand for the next 12 months by as much as 50%. For 2025, it is expected that we would have a global oversupply of about 0.5 mm BOPD even if OPEC+ does not change its current production levels. In the US, last month’s jobs report was readjusted, bringing it down almost 1 million jobs. This doesn’t help with global demand at all. One research shop went to great lengths to explain why this could keep oil prices low. The good news? We hit an all-time high for global crude oil demand at 103 MM BOPD.
Snippets.
Borr Drilling predicts a surge in shallow-water rig retirements. Seatrium Limited has successfully delivered its fourth jackup rig, named "Vali," to Borr Drilling, about a year ahead of the planned delivery date.
A glut of natural gas is depressing prices and prompting fresh cutbacks in America’s drilling fields, despite one of the hottest summers on record.
Demand deterioration in China takes center stage as focus shifts from the summer swoon to OPECs looming quota decision.
Morgan Stanley’s 20 Top Stock Picks. One was energy. One. The research analysts picked their 20 top conviction picks within each industry. The winners? Schlumberger was the only company to make the list. And apologies to SLB, but the company was referred to as Schlumberger, not SLB. Old habits die hard. Stock specific risk is high for energy, financials and communications. Congratulations, SLB.
The Death of a Dream. This week, Ford announced it was abandoning its plans to produce an EV SUV, taking a $1.9 billion loss for work already done. It also announced that it was scaling back its plans, by 30%, for its production of the F-150 Lightning, the EV pickup truck. There are too many examples of this happening every day now. We have already written about how the IRA included money for Biden’s promised 500,000 charging stations around the U.S. Though, this week the number of completed stations was raised from 6 to 8. The projected demand for lithium, cobalt and other rare earth minerals may see revisions down starting any day now and the fact that 71% of EVs sold in the U.S. were in wealthy, liberal geographic locations should speak volumes. If you have an EV because you love it, great. If you are getting an EV to save the planet, you should save your money.
EIEIO…Fast Facts. From Texas Tech.
Entrepreneurship: 71% – the percentage of Gen Zer’s who say they have taken on a side hustle in the past 12 months, along with 68% of millennials (Marketwatch).
Innovation: 80% – The percentage of all private R&D that is conducted by U.S. venture-backed companies (NVCA).
Education: 97% – The percentage of kindergarten and pre-school teachers who are female (Forbes).
Impact: 40% – the percentage of major infrastructure projects in the Inflation Reduction Act that have been delayed or paused indefinitely (Financial Times).
Opportunity: 195% – the percentage increase in the supply of rental housing in Buenos Aires since President Javier Millei's repeal of rent control laws took effect on December 29 (Newsweek).
I Consider This Disinformation.
“Older Adults Do Not Benefit From Moderate Drinking, Large Study Finds”
A recent conversation on Twitter:
Kermit - “When I said that I wanted to be able to buy a frac spread one day, I was hoping that the possibility arose because I was rich and not because the price of horsepower had plummeted to nothing.”
Zac - “Isn't that how people got rich? Buy valuable things when undervalued?”
Kermit – “Buying frac pumps seems to be how many people get poor.”
Business Post. “Revealed: Growing data centre demand cancelling out green energy progress. New figures show the volume of new renewables connecting to the grid in 2023 was ‘eaten up entirely’ by data centre demand.”
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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.
