August 30, 2024
Things I Learned This Week About 20-Somethings
My lovely daughter celebrated her birthday this week and while it isn’t polite to ask a girl her age, I already know. 23. She lives in Washington, D.C. and is living an idyllic life there. Well, this weekend, my daughter and six of her friends are descending upon me. Not really me, but close. They rented a lake house for the weekend, but I have to buy the groceries, the booze and show them how to use the boat. That my friend, is pressure. This weekend is also the opening of dove season, and by Sunday, I will likely be ready to shoot something! I’m a lucky father. Love you, Tory.
Timing. It’s Slow. So, the contractor rebuilding our lake house told me that his people would be back on the job after the holidays. The problem is that he told me that on Monday, with the holiday a week away. Everyone seems to have started Labor Day Weekend well in advance. The favorite watering holes are full, starting at lunch and for hours after. So, let’s rehash what happened in the oil and gas business this week. Okay. That was about it. Nothing. I know wells are still turning to the right and frac crews are busy with sledges, but I’ll take the “under” on the number of people in the home office who will stay through Friday afternoon. Right now, I could even say that about Thursday afternoon. The final dog days of summer are upon us!
Conundrum. I have always respected the school, but I don’t even know what the whales look like. The US District Court for the District of Maryland said the National Marine Fisheries Service (NMFS) stated that oil and gas drilling in the Gulf of Mexico fails to protect an endangered species of whale and sturgeon, and gave the service until late December to revise the opinion or it will be vacated, which means drilling permits could be revoked. The Rice’s whale and the Gulf sturgeon are at the center of the controversy. And the catalyst for the controversy? Macondo. After the spill, the court decided that they had “underestimated the risk and harms of oil spills to protected species” and because the filling ‘assumed these species’ populations remained as large as they were before the catastrophic Deepwater Horizon oil spill, even though the record evidence and NMFS’s own findings indicated that [the oil spill] significantly diminished their populations.” These are the kind of administrative situations that can occur, forcing an outcome of reduced U.S. oil and gas production. "The disruptive consequences to the Gulf of Mexico states and U.S. economy cannot be understated if the federal agencies fail to timely issue a new biological opinion,” the American Petroleum Institute, the National Ocean Industries Association and the EnerGeo Alliance, all defendants in the case, said in a joint statement.
Stand Almost Alone. “Ghana breaks ground on first $12 billion phase of downstream petroleum hub.” Major oil companies are vacating parts of West Africa due to new efforts by the governments to take control of their fates and their oil production. $12 billion and a 300,000 barrel per day refinery is only phase one of three. It is estimated that West Africa has only 800,000 of oil demand so this would turn the company into a real oil hub. All the best.
It's Not Just Us. Citibank, as it turns out, is one of the largest lenders to the oil and natural gas industry. That made it a target. So far, more than 600 “activists” have been arrested, just in NYC, for blocking the entrances to banks and flooding the lobby with people to disrupt operations. Lately, the “activists” flooded the media with the stunt of using elderly people in their protest so they could claim that even old people are being tossed in jail. The group known as “Fossil Free Citi” posted the following – “Citibank is the world’s second largest funder of global climate catastrophe. When we fight for a fossil free world, we act in solidarity with people most impacted by fossil fuel driven climate change… Ending the reign of fossil fuel consumption and transitioning to renewable energy sources saves lives and trillions of dollars—the costs of resource extraction, air pollution, and damages from climate disasters.” I thought those drugs went away years ago.
Goals, Skoals. Exxon sees 2050 oil use equal to current levels, despite net zero goal. Okay, it is Exxon, but they aren’t talking about emissions, or shareholder rights, or the success of Guyana. It is about time one of the largest producers of a product began predicting that product’s growth rate over time. As a result, they make the point that if oil investment ends, pursuant to the desire of those people over at Citi, the financial impacts would be devastating. What happens if demand growth goes flat and just stays plateaued at 100 million barrels per day for the next 4-6 years and all drilling is stopped? We would be 18 million barrels a day short assuming a 6% decline rate. What happens to the price of oil if that happens? Through the roof. It is the main reason why that scenario is not the one to be played out!
I Needed Help. Never before have I seen a more sanitized search than I did with “Oregon Healthcare”. I then added “Opinions of”, and “Critical Issues for” to that search. I’ve been doing this for more than a few weeks and researching all kinds of stuff, anything that interests me. I have never seen searches that consistently show me sponsored results or sites that mirror a state site. To catch up, Oregon went to a single payer system a couple of years ago and drafted President Biden’s expert on the subject as its head. Medicare/Medicare for all, including non-citizens, including medical, food, housing and more. It is the “test case” before going national. I had heard that it was having significant issues and has not been nearly the success some had expected. How arcane. I am by no means a conspiracy theorist. Here there is no conspiracy. Every company and government since the beginning of time has floated “trial balloons” or run “test cases” to improve things. Not all work. However, I can’t tell if it works or not because I couldn’t find anything on that topic after 20 minutes of searching. I did find that Oregon’s Medicare group has signed a contract with 3,100 unionized registered nurses in November that provides an immediate 15% pay raise, plus more raises totaling 19% through July 2025. Everyone is short critical workers, including nurses and doctors in healthcare. Shortages give pricing power. Most hospitals in Oregon are non-profits and only two are privately owned. But any update on how it’s going? Crickets. No one cares to report on it, which is amazing in the day and age of everyone being a “journalist.” Just something to think about.
Have Some Backbone. Eight months ago, the administration cut a deal with Venezuela. We will end the sanctions and restore Chevron‘s license to produce if Venezuela promises fair elections. The deal was struck. Venezuela’s revenues increased by billions then comes the election. Mr. Maduro, the current president, officially clenched the presidency as the Supreme Court declared him the winner. The U.S. had declared victory for the opposition candidate by an overwhelming margin. Maduro insists that he was elected. What a surprise. The Venezuelans have not provided us with the voter documentation yet. “Yet”… as if they ever would. So, we cut a deal with Venezuela that gives them billions. Then they broke those promises. How long before we do something? Something!? Resend Chevron‘s license? Reimpose sanctions? There are rumors floating around that the U.S. is considering sanctions on individuals in the top ranks of Maduro’s government. But there are no rumors of sanctions on the government itself, so the increased revenues will continue to prop up Maduro’s regime. I hope for a successful outcome.
PPHB U.S. Energy Markets Update Highlights.
Commodity Prices: WTI crude oil is currently $74.52 per barrel (up ~2.1% week-over-week) and natural gas is $2.10 per MMBtu (down ~4.4% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.3 MM BOPD (up ~3.9% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 0.8 million barrels week-over-week vs. an estimated decrease of ~2.7 million barrels.
Frac Spread Count: There are currently 229 frac spreads operating in the U.S. (a decrease of 5 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 566 drilling rigs operating in the U.S. (a decrease of 1 rig week-over-week).
Not All Sunshine and Roses. The UK is in trouble. The new Labor Prime Minister said so. “Britain is 'broke and broken', new government declares.” Labor won in a landslide in July and has since been telling everyone how bad the economy is, with the government projecting a $26 billion shortfall this year. The PM said, “this government would rebuild hope and opportunity in the UK ‘brick-by-brick’ and would show people that ‘politics can be a force for good’. “That’s why this project has always been about fixing the foundations of this country. But I have to be honest with you. Things are worse than we ever imagined. In the first few weeks, we discovered a £22 billion black hole in the public finances. And before anyone says, ‘oh this is just performative’. Or ‘playing politics.’ Let’s remember. The OBR did not know about this. They didn’t know. They wrote a letter saying they didn’t know. Even just last Wednesday, we found out that. We borrowed almost £5 billion more than the OBR expected in the last three months alone. That’s not performative – that’s fact.”
One Sided. Hezbollah has fired over 6,700 missiles and drones into Israel, causing the displacement of many civilians. There was intelligence that suggested another major assault was being planned, so Israel began a preemptive strike. Israel hit facilities in southern Lebanon with 100 Israeli jets, and they seemed to primarily hit depots where ammunition was being staged or stored, taking out 2/3 of Hezbollah‘s offensive capacity. 210 rockets and 20 drones were either intercepted or hit deserted areas. One Israeli sailor died, getting hit by shrapnel, and an older woman suffered cuts. Slap the tiger and he reacts.
All Warm and Fuzzy – From Jennifer Granholm.
“Every American deserves equal access to transportation that meets their needs.”
“The Bipartisan Infrastructure Law is building transformative projects to improve quality of life for communities across the United States.”
Wait on that King Air. The aviation industry is working to “go green” just like everyone else. Delta at one point said it would be emissions neutral by planting a gazillion trees. An offset. That doesn’t work anymore. So… battery powered airplanes? No, but hybrid airplanes will hit the market in about five years. Able to hold 9 people on a retrofitting conventional plane. Like any hybrid, when you need the gas engine, you have it, and when you need electricity, you have it. Operating systems are built to optimize their performance, cutting fuel costs by as much as 50% with the battery providing power for about 25% of the distance. But it is estimated by several of the industry’s participants that it will be 20 years before we have a 100-passenger hybrid and decades before a 700-passenger model. That 16-seater G650 is safe for a while. And a lot can happen in decades.
Valued. Capital One’s E&P “focus list” trades at 4.1x 2025 EV/EBITDA.
Deal Time. HMH Holding Inc. has filed an S-1 with the SEC for their IPO. HMH is owned by Baker Hughes and Oslo-listed Akastor. The IPO is expected to raise $100 million. HMH’s core customer categories are drilling contractors, operators, and manufacturers (primarily offshore), who buy HMH’s equipment and products. Additionally, sales of equipment from brands such as Maritime Hydraulics, Wirth, and Hydril represent about 25% of the business and aftermarket services represent about 75%. In 2023, HMH had revenues of $786 million, adjusted EBITDA of $132 million, giving an EBITDA margin of approximately 17%.
Contrary Opinion. Goldman Sachs has said that Saudi Arabia is scaling back its oil and gas capex. Aramco, majority owned by the government, doesn’t look to benefit in the Kingdom’s asset allocation model. 73% of total investments by 2030 will be in non-oil sectors while the country had previously been saying 66%. Vision 2030, the plan to rebrand the country and open up its economic transformation, is being pursued aggressively and is expected to reduce oil capex by $40 billion over the next four years. We keep seeing anecdotal indications of an oil and gas shortfall. Saudi needs it, as does everyone else. The country’s budget had a deficit last year, a rarity for one of the lowest cost producers.
Never Say Die. We are an industry of optimists. The “never quit” attitude of our industry springs from the knowledge and optimism that you will eventually succeed. That makes it very hard to be negative on the industry and its outlook, armed with the idea that things will get better. But for whom? Too much oil supply can mean lower gasoline prices. Record production with a less than record rig count is great for E&P companies but not so good for oilfield services. Midstream operates on throughput volume, where growth is slowing, forcing increased consolidation. But one thing I learned very early in my career is that there are a very large number of variables that affect our industry and the main ones continue to be oil processing and natural gas prices. So today, we are over supplied, and OPEC+ will be deciding in the next two weeks if they will put 2.2+ million barrels back on the market or if they will cut more.
Sentimental? No, not nearly. Exxon got the Pioneer deal done with the worst government requirements ever announced. It is now starting to reorganize its holdings. What that means is the legacy part of Pioneer, the conventional drilling that put them on the map appears to be going away. Exxon announced the pending sale of up to at least $1 billion in conventional Permian production that was once the heart of Pioneer. It always kills me when somebody says they want to buy some old field from Exxon and Exxon wasn't paying any attention to it at all. I disagreed because someone at Exxon was paying attention to it, and it was important to someone at Exxon. But when combinations like these are made, there is often fallout. This is $1 billion worth of properties that many small E&P companies have dreamed about owning for years. We look forward to finding out what conventional production and acreage is worth these days, and I guess we're going to learn that eventually. This is one reason why drilling and frac activity slows down following a business combination of this scale. The first thing that combined companies have to do is decide what they're going to keep and how much they're going to spend on the things they don't want to keep. So, this is positive perspective - Exxon is well on its way to integrating Pioneer, shedding unwanted or unneeded properties and resuming activity on the areas that are most important. Mergers and acquisitions are a rite of passage and a process that benefits the entire industry.
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.
