Things I Learned This Week in Milwaukee

September 8, 2023

Deep Freeze. One of my nephews is getting married this weekend in Lake Geneva, Wisconsin. I flew into Milwaukee today and was greeted by 66-degree weather. Yes, an almost chilly 66 degrees. It is expected to heat up over the weekend to a scorching 75 on Sunday. I know those of us who have been in Texas, and those poor souls who are there now, can’t even fully comprehend 66 degrees. You know when you walk into your house or office from outside and the AC hits you and it feels like magic?? 66 degrees is colder than that. Okay, I’ll quit now.

Pesky Second Derivative. U.S. crude oil production increased again in June and is approaching the record high that was set in November 2019 at 13mm BOPD. After falling through the pandemic, where global oil demand dropped 10% in a year, production and activity started to improve but the pace of growth slowed after oil prices started to drop a year ago. Total crude and condensates production rose to 12.8mm BOPD in June, up from 12.6mm BOPD in May. Output from the Lower 48 states excluding federal waters in the Gulf of Mexico set a record at 10.6mm BOPD, according to the EIA. Lower 48 production had increased by almost 10% but the rate of growth, the second derivative, is slowing, which is usually a negative predictive indicator.

SMU Joins the ACC!! SMU has accepted an invitation to join the Atlantic Coast Conference in all sports. "Joining the Atlantic Coast Conference is a historic milestone in our institution's history, and the start of a new chapter in SMU Athletics," said SMU President R. Gerald Turner. SMU will join alongside the University of California, Berkeley (Cal) and Stanford University after the ACC Board of Directors voted to formally admit the three schools. The trio will join the ACC as full members with full voting participation effective July 1, 2024. SMU has a long and storied history of program-wide success, boasting nine overall national championships, almost 200 team conference championships, over 100 individual national championships, more than 150 NCAA top-10 finishes, nearly 2,000 All-American honors and over 150 Olympic appearances. Over just the past decade, all of SMU's 17 programs have reached the postseason and 15 different programs have won conference championships. SMU is the only NCAA FBS program in Dallas, and since 2013, has invested over $250 million to develop and enhance its championship-caliber facilities.

From Raymond James. “After a few lackluster weeks for crude, the commodity stormed back ahead of the extended holiday weekend as supply worries start to outweigh demand concerns. China remains in the spotlight, and rightfully so given its dull outlook, but so far that has been more than offset by aggressive cuts by OPEC+. U.S. stock draws over the summer translated to about a 1 million bbl/d decline for the past 5 weeks, which finally put some serious upward pressure on prices. With OPEC production cuts extended and a U.S. rig count that only just stopped hemorrhaging last week, only falling 1 rig to 631, means there is limited incremental supply to look for in the coming months outside of an OPEC turnaround. WTI closed 2.3% higher Friday to $85.55/bbl, capping off a 7.2% run for the week. Brent rose 2% to $88.55/bbl. Equities inched up, with the S&P 500 up 0.2%. The energy indices fared as well or better: E&Ps rose 2.4%, Oilfield Services 3.1%, Midstream 0.8% and Clean Tech 1.2%. Ahead of the open, both equity and oil futures are down.”

August Company. ACC members include Boston College, Clemson, Duke, Florida State, Georgia Tech, Louisville, Miami, North Carolina, NC State, Notre Dame, Pitt, Syracuse, Virginia, Virginia Tech and Wake Forest.

Things You Don’t Think About. The Securities & Exchange Commission has passed some rules recently that will impact all of us as investors and change the cost and availability of capital to our industry. Private Equity (PE) funds, venture capital firms and hedge funds will see a sharp increase in reporting and filing requirements, which has been de minimis in the past since there are high wealth and income requirements and they are considered sophisticated investors, not in need of government protection, as well as the costs to administer. It seems that not only have private funds outperformed the market by 50% over the last 30 years, but they also own and run private companies, of which there are now a record 700+ with valuations above $1 billion. And they aren’t going public because they don’t need to, and that takes power, prestige and control away from the SEC. So, they are changing the rules. The new SEC rule requires that certain fee arrangements be “fair and equitable”. One aspect of the rules changes the way “shareholders” are counted. If a fund invests in a private company, the shareholder count would not be one, but the number of investors in the fund, which would require many private companies, with a 2,000-shareholder limit, to go public. Exactly what the SEC is trying to accomplish by these rules. Possible good news? A successful court challenge. Stay tuned.

From PPHB. U.S. Energy Markets Update (September 7, 2023) with key highlights listed below:

Commodity Prices: WTI crude oil is currently $87.54 per barrel (up 4.7% week-over-week) and natural gas is $2.94 per MMBtu (up 6.1% week-over-week)
Crude Oil Production: U.S. crude oil production is currently ~12.8 million barrels per day (up 5.8% year-over-year)
Crude Oil Inventories: U.S. crude oil inventories decreased by 6.3 million barrels week-over-week vs. an estimated decrease of ~2.1 million barrels
Frac Spread Count: There are currently 244 frac spreads operating in the U.S. (a decrease of 2 spreads week-over-week)
Onshore Drilling Rig Count: There are currently 631 drilling rigs operating in the U.S. (a decrease of 1 rig week-over-week)

Consolidation in Energy Continues. Enbridge, the Canadian pipeline company, agreed to buy three gas utilities from Dominion for $9.4 billion which will make the company North America’s largest natural gas provider. The deal for East Ohio Gas Co., Questar Gas Co. and Public Service Co. of North Carolina will double the Calgary-based company’s gas utility business.

Real Money. The Dallas Cowboys reached an agreement with right tackle Terence Steele on a five-year, $86.8 million contract extension that includes $50 million guaranteed. The deal has a maximum value of $91.8 million. That is $1 million per game. The 26-year-old went to Texas Tech and is from San Antonio.

Oil Company Leads. You have to give it to Oxy. First, one of the most aggressive corporate mergers in ages, and now the darling of the Biden administration. That is range. Oxy is championing direct air capture to take CO2 out of the atmosphere and store it underground. It is interesting that this method of removing CO2 from the atmosphere represents about 0.04% of total volume. It has not proven to be very commercially effective with a very limited number of trials in place. The energy requirements for the giant fans and compressors are significant and offset a great deal of any captured gas. But just the fact that an oil company is aggressively putting programs and systems in place to reduce their overall emissions footprint has to be galling to many activists and environmentalists. Just because an effort is noble, it doesn’t mean it is economic or successful, but big oil being notably noble is a great thing to see.

Moats. There has been some talk about bringing nuclear power back to run the above-mentioned direct air capture (DAC) projects. Nuclear power plants generate about 1 gigawatt on average. That means we need 15,000 nuclear power plants to fulfill all the world’s power needs. That just tells you “All of the above” is the real answer to future energy needs but nuclear certainly needs to be in the mix. In the last 50 years, nuclear has reduced CO2 emissions by over 60 gigatons, which alone is almost two years' worth of global energy-related emissions.

Over-Arching View. According to David Blackmon, “there has been a very noticeable shift in the overarching narrative related to the energy transition that has taken place since January. That obviously intentional shift, well-coordinated with ever-cooperative legacy media platforms, has essentially ended the original narrative and replaced it with a new, less rosy one… This new narrative now tacitly admits the chosen alternatives won’t work as promised, but tells us we must accept them to “save the planet,” while also accepting we will have to live smaller, less mobile lives with far lower standards of living and endure not just the higher costs for energy, but all manner of additional deprivations as well.”

Shorted Out. The latest anti-EV push? Two Tesla’s had their batteries short out and catch fire in the recent New Orleans flooding. The evacuation was so crowded that some people were in stop and go traffic for 8-12 hours. It turns out that EV batteries don’t like saltwater at all, which is what flooded parts of New Orleans due to high tides. So only two cars have caught fire so far, but you would think it was 100 from all the press. Tesla was singled out though with the largest share, so it is to be somewhat expected. Saltwater shorts out all EV batteries, not just one manufacturer’s. We learn.

Real Work. A new study published in the scientific journal, Climate, and peer-reviewed by 37 researchers from 18 countries suggests that current estimates of global warming are contaminated by urban warming biases. The study also suggests that the solar activity estimates considered in the most recent reports by the UN’s IPCC likely underestimated the role of the sun in global warming since the 19th century. It is well-known that cities are warmer than the surrounding countryside. While urban areas only account for less than 4% of the global land surface, many of the weather stations used for calculating global temperatures are located in urban areas. For this reason, some scientists have been concerned that the current global warming estimates may have been contaminated by urban heat island effects. In their latest report, the IPCC estimated that urban warming accounted for less than 10% of global warming. However, this new study suggests that urban warming might account for up to 40% of the warming since 1850.

Real Work #2. The study also found that the IPCC’s chosen estimate of solar activity appeared to have prematurely ruled out a substantial role for the sun in the observed warming. When the authors analyzed the temperature data only using the IPCC’s solar dataset, they could not explain any of the warming since the mid-20th century. That is, they replicated the IPCC’s iconic finding that global warming is mostly caused by humans. However, when the authors repeated the analysis using a different estimate of solar activity – one that is often used by the scientific community – they found that most of the warming and cooling trends of the rural data could actually be explained in terms of changing solar activity. The lead author of the study, Dr. Willie Soon of the Center for Environmental Research and Earth Sciences (CERES-Science.com), described the implications of their findings: “For many years, the general public has been assuming that the science on climate change is settled. This new study shows that this is not the case.” Another author of the study explained: “This analysis opens the door to a proper scientific investigation into the causes of climate change.” -Both from Patrick Moore, PhD in Environmental Sciences and co-founder of Greenpeace.

Into the Red. After what has been hailed by critics as windfall profits and excessive margins, the natural gas companies this quarter are expected to lose money. Overall, the public shale gas E&P companies reported negative free cash flow in the second quarter due to low Henry Hub gas prices that were well below the breakeven requirement for operators. The reinvestment rate exceeded 100% for the first time since 2020. Outspending cash flows for E&P operators has always been a really bad idea. Oil prices are high, which has helped oil-focused U.S. E&P companies but a still relatively bleak price outlook and the need for more ambitious, growth-oriented capital spending, especially for Haynesville players, “opens the door for uncertainty surrounding the short- to medium-term profitability of the shale gas sector,” - Rystad Energy.

Headlines.

The shale gas sector is again cash flow negative – what’s next?
Two-thirds of recent wells in the Permian would be commercial at $50 WTI.
U.S. crude hits $85 per bbl as OPEC production cuts tighten crude market.
Gabon was the eighth military takeover in a former French colony in the past three years.
Petrobras to install 11 new FPSOs for Brazil presalt offshore production.
New Covid Variant more deadly for people with extremely low IQ.

Can You Say “Bust!”? In a highly anticipated event, the Biden administration held the first-ever auction of offshore wind development rights in the Gulf of Mexico. Wow. This is big!! But, oh wait. There was only one successful bid. One $5.6 million bid won the day, reflecting meager demand for the clean energy source in a region known for its oil and gas production. The winner was German Utility RWE. Two other areas received no bids at all. The Lease is 44 miles off the coast of Louisiana, with water depths of 30-80 feet. RWE said that the lease area has the potential to host up to 2 GW of new capacity, enough to power over 350,000 U.S. homes. The project is expected to be operational by the mid-2030s, contingent upon permitting timelines. One factor mentioned as a reason for the weak interest, was the fact that offshore Atlantic wind farms are killing baleen whales, and no one wants to bring that liability on themselves. In the Gulf however, we deal with the Rice’s whales. They’re everywhere!!!

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.