Things I Learned This Week in Montana

September 22, 2023

Fish. Okay, last week’s fish pic was me. I caught some very nice fish in Pennsylvania. Montana was not as nice. Great company (thanks DdR, Loren, Tony) and for me, it was only okay fishing. That is why this week, the mantle goes to Ryan Phillips, the head of Axis Energy. A whopper and he had several. Enjoyed sharing the boat. But next time….

Wow!! $95 Oil!! But I don’t seem to hear quite as many champagne corks as one might have expected. To me, the best part is that natural gas is above $3 as far out as the futures go and that is the sector that has needed some relief. As we mentioned previously, the gas to BTU equivalent of oil price ratio was 6-1 and is now 45-1. It will stay wide, but we appear to have found a boundary. Everyone is happy. Cautiously. Some analysts have advised taking profits and others are looking for $150 a barrel. We are definitely in the news again after being dropped like a hot potato after the Ukraine/Russia war didn’t foster a long period of very high oil prices. Now there is talk of releasing more oil from the SPR, after putting nothing back in when prices were low (China’s SPR is up to 1 billion barrels). Okay, oil closed around $91 on Friday but the point is still the same. E&P profits will still hit a 2-year low but with a better outlook based on higher oil prices.

So Where is Drill Baby Drill? Discipline is being tested, but right now it seems to be more focused on Saudi and OPEC+ and whether they stay disciplined with their 1-2 million barrels of oil that are currently off the market. Europe is going into recession, China is slowing down after a 40 year growth run and real estate values are dropping hard in many places and subsectors. But being bullish on oil was never about terribly rational evaluations, rather a gut feeling that has worked so well in the past. That was sarcasm. As an industry, we are terrible at predicting oil and natural gas prices. Wall Street is no better and probably worse, but their use of oil forecasts is wildly different. As a result, most of the operating industry uses the strip. It will be wrong, but it is transactional. And right now, the futures strip for oil has it below $80 a year from now and continuing down after that. Right or not, it is what is used for economic analysis of an E&P company’s capex, and the industry as a whole. Buy the champagne by the bottle, not a case on a long-term subscription.

Home is Where the Heart Is. My oldest is off the payroll, living in DC with a good job. The youngest is steering his way through the University of Colorado. I mention this because a recent study showed that half of young Americans live at home with Mom and Dad. And they are not ashamed to admit it, in contrast to years ago when it was almost an indicator of defeat. A pandemic, lockdowns, high inflation, soaring student debt levels and a shaky job market have made living on your own increasingly difficult, so young people are staying at home and loving it. Henry – we broke your plate. Work hard.

Market. Recent conversations indicate that the deal market remains slow. We are working our way through the negative sentiment that has existed so far this year but there continues to be “lethargy” towards the sector. Sustainable technologies in production oriented sub-sectors such as artificial lift, chemicals and others are continuing to see interest. Cash flow valuations, and more importantly the sustainability of the cash flow, is the major focus among potential buyers, but multiples are still 20%-30% below the 2018-19 period. Family offices continue to be active and private equity appears to be more interested in monetization rather than additional investment.

TGS and PGS Merge. In what is one of the biggest deals in ages in the seismic sector, two of largest companies are combining. Both are Norwegian listed companies but with a significant presence in Houston. The world’s marine seismic fleet will be consolidated into two players with one Chinese firm still in the mix. A great deal for all parties in our humble opinion. This is a big deal for one of the most critical subsectors of our business.

Positive Optimism. Exxon Mobil said it expects earnings from refined products and chemicals to reach $16B by 2027, ~$4B higher than current levels, as demand continues to rise.

EIA Weekly.

Crude Imports (net): 1.5mm BOPD, down 3.0mm BOPD w/w and down 1.9mm BOPD y/y. Brent-WTI spread at $4.0/bbl, up $0.5/bbl w/w.
Gasoline: Bullish – draw above expectations. Demand up 1.2% w/w and up 1.1% y/y.
Distillate: Bullish – draw above expectations. Demand up 16.4% w/w and up 22.2% y/y.
Refinery Runs: Utilization at 91.9%. The peak of seasonal demand is behind us, but hurricane disruption and turnaround season is ahead, reducing runs.

Competition. China represents about 60% of global EV sales and while vehicles are stacking up in storage lots there, Chinese EVs are starting to hit Europe, much to the dismay of European car manufacturers, especially ones like Mercedes who welcomed the Chinese into their factories and taught them how to make really good cars. Karma. And it isn’t just EVs. Solar panels, wind towers and batteries from China are dominating the European market and there is a scramble by Europe to figure out how to compete. And of course, since the Chinese equipment is heavily subsidized, it can undercut European costs and pricing by up to 20% according to some estimates. And while Chinese EVs are just less than 4% of the European market now, the growth rate (law of small numbers) is very high. Subsidizing manufacturing costs? Like we do here? And you get an even larger subsidy if a union worker makes the car. So now it is a battle to see who can subsidize their “green” businesses the most. Yikes.

Bragging Rights. “The Biden-Harris Administration is canceling all remaining oil and gas leases issued under the previous administration in the Arctic Refuge. The Administration also took new action to protect more than 13 million acres in the Western Arctic.” – The White House Twitter feed.

It Sounded So Noble. The green wave continues to break on the rocks of reality. “What we are doing now, including tax cuts on fuel, increases emissions, but we are doing a lot of other things that will lead to lower emissions long term.” “Don’t forget that this is a very tough time for a lot of people.” Both statements by Sweden’s Finance Minister. It seems that the first country to set milestone targets for emissions reduction is now thinking that some of those goals won’t be reached, for the good of the people. Wow. Sweden won’t reach their goal for 2045 with current measures, according to the center-right government’s 2024 budget submitted this week, citing a tough economic climate along with a plunging currency causing a shifting of priorities. So, do you continue to pursue the long-term environmental goals full force now or do you instead choose to help your citizens who are going through a difficult economic time? Of the 19 climate and environmental targets listed in Sweden’s 2024 budget, the government said it is set to miss seven, including goals to reduce domestic pollution and emissions from the transport industry. Only two targets were due to be met.

Foreshadowing? When you think about it though, is this the way it will all go? Clearly, many of the goals involved everyday people experiencing increasing reductions to their standards of living that seem to be required to save the planet. And then there is the growing body of evidence that says the planet doesn’t need saving, at least with the draconian measures currently being recommended. Everyone in our industry understands climate change. It is the global cooling and warming issues we are concerned about since we deal in such longer time frames than days and years to track the 6 billion years of change in our planet’s history. What are you willing to sacrifice? We are learning the answer.

And It’s Spreading. Rishi Sunak, the UK’s Prime Minister, has also decided to roll back some green energy policies as the health of the overall economy is seeming to take precedence.

The World Petroleum Conference. Oil must play a major role in the global energy transition according to the CEOs of both Exxon and Aramco. Both chief executive officers touted capturing and storing carbon as one of the best ways to significantly reduce emissions. They also stated that cutting oil usage too quickly would be dangerous, given the growing global demand for energy. Aramco CEO Nasser said he expects record usage of 103 – 104 million barrels per day for the 2nd half of this year, expecting demand to hit 110 million barrels per day by 2030. Saudi Energy Minister Prince Abdulaziz bin Salman said the kingdom wants to support the transition, but politicians must be honest about the challenges ahead, and the risks if the shift isn’t managed well. From Exxon Mobil and Norway’s Equinor to China’s Sinopec, there was apparent unanimous sentiment this week in Calgary that carbon capture and storage, or CCS, is central to the industry’s future.

Catch-22. One sticking point in all of this. “Don’t we get our chance??” Omar Farouk Ibrahim, secretary general of the African Petroleum Producers Association, said that “Given our peculiar situation in terms of socioeconomic development and the fact that the problems of climate change were caused not by us but by the economically advanced countries of the world using fossil fuels, calling us to join the same speedy train to net zero is unfair and punitive.” Whether Africa with oil or China with coal, developing nations believe they deserve their industrial revolution effort with any environmental issues to be at the cost of the developed nations. That creates a big divide.

Headlines.

California Man Arrested for Riding a Horse While Drunk.
Pickleball is Worse For You Than Cigarettes, Soda, Fast Food and Crack.
The High Cost of Electric Vehicles: Mining for Minerals Puts U.S. Water Supplies in Danger.
By the time a man realizes that his father was right, he has a son who thinks he's wrong. - Charles Wadsworth
Striking unions impacting the economy at a level not seen in decades. - CNBC
Middle East jackup market remains hot with 53 jackups moved to the region just in the past year.

Cheered Up. Bloomberg is the buzz kill of the week. Two comments sum up a lot. “All while Wall Street is reeling post-Fed. Stocks dropped the most in six months as a slide in jobless claims underscored the higher-for-longer mantra.” “Larry Summers said the Fed's projections for a soft landing are too optimistic. And Bill Gross warned bond markets are headed for an unprecedented third year of losses.” Thanks. We needed cheering up. They’ve only been wrong a lot in the last year or so.

Not Cheap. PwC, the big accounting/consultant group, has done a study on what, where and how we need to proceed to achieve current environmental targets. They also note several gaps in the goals, identifying disconnects between existing technologies, infrastructure and investment. Global clean energy investment has grown, hitting a record high of $358 billion in the first half 2023 and matching that of hydrocarbon investments in 2022 at about $1.1 trillion by BloombergNEF’s estimates. Wood Mackenzie says annual spending must jump to $2.4 trillion annually to achieve net-zero targets and the Intergovernmental Panel on Climate Change’s estimate ranges from $4 trillion to $6 trillion. “We need more renewables to hit some of these long-term goals, however, there is also a need to protect the base” according to the report. “The gap is significant in both.”

Presentation Schedule.

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.