August 9, 2024
Things I Learned This Week Watching the Olympics.
I am Not 27 Anymore.
Foreshadowing? Remember how miserable life was last time you lost power? Everybody considers buying a generator back up. If it isn't on within a couple of days, we panic. Now imagine being a utility customer in Dallas and you can't pay your bill. And so, if you haven't paid your bill or set up a payment plan, the utility company will cut you off. When a utility company cuts you off that is the same as a hurricane, taking out your electricity as well as your water services. That would not be considered a good position to be in. Yet, a quarter of our local utilities customers are behind on bills and are at risk of getting cut off. 25%. And this is a utility customer, so this is pretty much everyone. Now think about the economics of it. Few people in River Oaks or Highland Park are going to be behind on their utility bills. Most of the people in Preston Hollow and Memorial won't either, so that concentrates that percentage into smaller and smaller areas and without question, they have to be increasingly less affluent areas of town.
Potential Reality. I have been saying for some time that credit cards are getting maxed out, there's no more Covid money coming in, pay raises are shrinking, and layoffs are increasing. That doesn't help an economy. Especially the credit side of the economy. Debt. An equity recession is when you buy a stock for 100 and it goes to 50. A credit recession is where they come take your house. So, is this foreshadowing? I mean, if you can’t afford to pay your bill and keep your lights on and refrigerator running, what else can’t you afford? Almost anything. So, has the consumer economy finally hit the rocks? There are no longer lines at the exclusive stores in the shopping mall. Retail chains are missing earnings and closing down. And now 25% of the population of a major city is at risk of having their utilities cut off. I am not foreshadowing disaster, but I am advocating a dispassionate view of risk in the current world and market. We complain in the oil business that there is no premium in the oil price for the Middle East issues going on. So, we are hoping that oil prices spike due to increased unrest or war in the Middle East, probably involving Iran? No sane person would wish for that, despite the lack of a war premium, it does not mean that war is any less likely. And the economy is debating between a soft landing and a hard landing. Some people, including myself, have been expecting a recession for the last 18 months at least. Boone Pickens told me once that being 15 years early is almost the same as being wrong. Timing is everything with the Fed trying to slow the economy. We were keeping it on a razors edge anyway. If there's an issue with whether we raise rates in July or September, there's too much volatility in the market anyway. But there's nothing we can do but vote, keep our heads down, and plow ahead. Pay attention and be dispassionate. Do not in fall love with all things financial and economic.
A Well-Turned Phrase. Intel is laying off 18,000 with hopes of improving the bottom line. And more cuts are expected from other companies as a weakening economy is hurting earnings and expectations. For a while. Unless it is due to increased efficiency, fine. If it is to improve the bottom line, it means you are negatively affecting future growth and opportunity. But personnel reductions are starting to happen, as the Fed’s effort to slow the economy is finally seen. Right about the time we are going to go the other way. Balancing the canoe. Let’s hope the US economy doesn’t get swamped. And the phrase I love - “Meanwhile, consumer-oriented companies are suddenly talking more cautiously about their customers. The reason is real simple: They ran out of cash a long time ago, have been running up credit card bills, and now are worried about their job status.” - Matt D’Alto
Another Deal Done. Ace Fluid Solutions is a chemical company that makes friction reducers, surfactants and other frac-related products, and is focused on the Permian Basin. SNF is a chemical company based in France whose product suite includes products used to treat, recycle, preserve water, save energy and reduce carbon footprints. While French, it is a global company with almost 30% of its global workforce, 2,300 people, here in the US. 41% of total revenues come from North America, and Oil & Gas represents 25% of its business. While terms were not disclosed, SNF has acquired Ace Fluid Solutions, who was represented by PPHB. Well done guys.
PPHB – U.S. Energy Market Update Highlights
Commodity Prices: WTI crude oil is currently $75.04 per barrel (up ~2.1% week-over-week) and natural gas is $2.13 per MMBtu (up ~8.1% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.4 MM BOPD (up ~6.3% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 3.7 MM BOPD week-over-week vs. an estimated decrease of ~1.6 MM BOPD.
Frac Spread Count: There are currently 243 frac spreads operating in the U.S. (an increase of 6 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 566 drilling rigs operating in the U.S. (a decrease of 2 rigs week-over-week).
Atlas Holds Up the World. “Positive pending more detailed guidance. Adj EBITDA of $72MM matched consensus. With better-than-expected logistics and completion of the Kermit feed system reconstruction at the end of June, 3Q results are expected to "meaningfully improve." We estimate the $106MM 3Q consensus is still in play, with volumes a big question. We believe expectations are low as AESI has materially underperformed the OIH since May 21 (-26% vs -10%) on anecdotes of spot frac sand pricing in the teens, questions about the Dune Express economics, and expiration of the Hi-Crush lock-up on Jun 3. Dune Express construction remains on time and on budget. The quarterly dividend was bumped and now yields ~5%.” – Raymond James.
First LNG and Now Ammonia. Woodside, which paid about $1 billion last month for the LNG company, announced today it was spending $2.35 billion to buy an ammonia plant in Texas. Of course, the reason is to lower Woodside’s global emissions footprint, producing more environmentally friendly ammonia, and working with Exxon and others to capture produced carbon, dropping emissions “quotas” even more. “Potential applications for lower carbon ammonia are in power generation, marine fuels, and as industrial feedstocks as it displaces higher emitting fuels” according to Woodside. Makes you wonder what’s next?
Twist and Shout. I have been reading about how the recent movie Twisters was getting criticized by some because it didn't address climate change in the movie. The Director said it well. “I just don't feel like films are meant to be message oriented.” What was really interesting is that among all these criticisms, the reality, according to the National Ocean and Atmosphere Association, the NOAA, the number of tornadoes with winds of at least 80 mph haven't changed much. They're occurring on fewer days, but the number of days with major outbreaks have increased, with more occurring in fall and winter, but fewer in spring and summer. So far, the majority of research stops short of connecting historical change in tornado behavior to a warming climate - a quote from the NOAA report. It's a movie for heaven's sake. It's meant to be entertainment not educational and especially not when the education is skewed incorrectly. Now, I gotta go see the movie.
Berkeley. The bastion of free speech once upon a time and now known as a little more left leaning than center. Well, the school has done a study about electric vehicles. From the study - “counties with affluent left-leaning cities” like Cambridge, San Francisco, and Seattle “play a disproportionately large role in driving the entire national increase in EV adoption.” The researchers found that over the past decade, about half of all the EVs sold in the U.S. were in the most heavily Democratic counties in the country. The summary of the study deserves quoting at length:
“The prospect for EVs as a climate change solution hinges on their widespread adoption across the political spectrum. In this paper, we use detailed county-level data on new vehicle registrations from 2012-2022 to measure the degree to which EV adoption is concentrated in the most left-leaning U.S. counties. The results point to a strong and enduring correlation between political ideology and U.S. EV adoption. During our time, about half of all EVs went to the 10% most Democratic counties, and about one-third went to the top 5%. There is relatively little evidence that this correlation has decreased over time, and there are even specifications that point to increasing correlation. The results suggest that it may be harder than previously believed to reach high levels of U.S. EV adoption.”
And finally, from the Gallup organization, the EV market is primarily defined by class and ideology. Some 57% of EV owners earn more than $100,000 annually, 75% are male, and 87% are white. Last March the group reported that, “a substantial majority of Republicans, 71%, say they would not consider owning an electric vehicle.” And this is not from the industry, but from Berkeley. Wow.
A Mercedes? We will see these kinds of stories like this from time to time because it draws a lot of clicks and feeds theories. But there's your Mercedes sitting in the parking lot. An underground parking lot. It wasn't being charged. It was just sitting there and for some unknown reason it spontaneously erupted in flames. And yes, the car was a total loss. As were the dozen or so that were “incinerated”, and another hundred cars damaged. As I said, it was an underground garage. Above the garage was a residential tower which of course had to be evacuated as it lost power and electricity. As usual with these battery fires, they burn very hot and they're hard to extinguish. This one took eight hours to put out. My F150 has never done that. Yes, it's sensationalism, but it sure does feel good.
OK, This Was Irresistible. “Dog chews lithium-ion battery, starts blaze.” That was the headline. It was a serious housefire in Oklahoma. The dog lived. Stellantis tells owners of over 24,000 hybrid minivans to park outdoors due to battery fire risk. Not good. More and more.
Headlines.
In the Permian Basin and elsewhere, energy players consider adding small modular reactors and microreactors to their energy supply mix as electricity demand grows.
Around half of working Americans are employed by a firm with less than 500 workers.
Nine in ten banks are community institutions that hold less than $10 billion in assets.
Labour councilor calls for far-right rioters’ throats to be cut. – UK Telegraph
Aramco Awards $25 Billion in Contracts as Jafurah Shale and Master Gas System Expansion Enters Next Phase.
Weekly Monitor: Valid Concerns Set In About Demand. Economic Concerns Weigh on Prospects for Demand Growth.
The IEA believes the world will reach peak oil in 2029, consuming 105.6 MM BOPD. OPEC, a cartel of oil-producing countries led by Saudi Arabia, sees no peak, with oil use rising to at least 116 MMBOPD in 2045.
Stranded. Years ago, while running a marine seismic crew out of Darwin, Australia, I did a bad thing. My navigation team was using SatNav equipment and operators had to be stationed on various uninhabited islands in the area where we were shooting in order to precisely record our position. They were originally put on these islands with tents, food, a generator, transmitters and plenty of fuel. While there was no alcohol, they got any food they wanted delivered to them in what was planned to be only one or two trips. The plan had been to rotate the guys off the island every six weeks. But the navigation company was subcontracted to us and while we used them a great deal, they weren't part of our company, so when they informed us that they didn't have anyone to replace my three transmitters, we were faced with a dilemma. Do we quit shooting and come in, picking up the three transmitters along the way, or do we just let them stay out there transmitting and continue to provide them with everything that they need. Of course, the answer was the latter and these gentlemen stayed on these islands for a total of six months, without seeing another human being. Our supply boat would drop supplies at night and then back out to sea to tell them that their provisions were there so they didn’t get the chance to board the boat and leave. When I walked into the hotel in Dampier, it was like escorting three cavemen. Checking into the little hotel in Dampier, you would have thought they had never seen a woman before. This came up because of the international space station. Two astronauts went on their mission a month ago and they were supposed to stay for eight days. Now it looks like they're staying for eight months. Their ride home has been an issue. Do you take Boeings Starliner now? Or do you wait until February to take Elon's SpaceX? Boeing doesn't inspire a great deal of confidence in anyone right now and NASA has concerns that it may not be safe enough. That would be the kiss of death for the company but all the matters is getting the astronauts home. It'll just be about eight months late. I was nicer to my navigators.
Wind Blowing Hard. We have written about the issues with wind farms on the East Coast. Cancelled, delayed, contracted badly – take your pick. All of this resulted in “U.S. offshore wind sector fundamentally broken” says BP exec. Last year, BP took a $500+ million pre-tax impairment charge, after “reassessing” the fair market value. Equinor did the same, taking a $300 million impairment for its US East Coast wind projects. The state of New York just decided against a big offshore wind project because the “complexities of the deal” were too great and said “material modifications to projects bid into New York’s third offshore wind solicitation caused technical and commercial complexities between provisional awardees and their partners, resulting in the provisionally awarded parties’ inability to come to terms”. The financials don’t work.
And It’s Not Just Wind. Shell discontinued its hydrogen station network in California. Why are hydrogen stations closing? Green hydrogen supply proposals didn’t get much financial interest because the suppliers couldn’t find buyers. Offtakers look for economic input and green hydrogen prices itself out of the market. “Green hydrogen is not a practical climate solution for our daily lives simply because of the amount of energy it takes to produce it.” - Rishya Narayanan. While some claim that we can safely blend up to 20% of hydrogen with fossil fuels to use in pipelines, a 2022 study says that blends with only 5% of hydrogen should be considered safe to use. The EPA, in issuing its Power Plant Emissions Rule, decided to leave hydrogen OUT of the picture because the technology is not advanced enough for common use and they were afraid of the litigation from mandating something dangerous and difficult to use. In a very odd perspective, as more EVs hit the road, the potential market for hydrogen as a transportation fuel wanes. You can’t win either way! And now the Inflation Reduction Act contains billions to build hydrogen hubs around the country. It is like the plans for all the winds farms off the East Coast. Hitting the skids.
You Gotta Love This. The headline reads “Glencore sticks with coal and a sign that ESG is fading.” That was fun to read. ESG isn't going away, but it's going to turn into something close to Sarbanes Oxley, that assists in the regulation and reporting of businesses. I don't think it's going be the ideological powerhouse for the middle letter “S” that it was developing into. So, Glencore, one of the largest mining companies in the world, announced a while back that it was going to sell its coal division to embrace the energy transition. Investors didn't like the idea. 2/3rds of the voting shares expressed their views in the company vote as to whether to proceed. Of the respondents, 95% wanted the company to retain its coal operations. But it also points out a really interesting reason behind pulling the sale. The company was selling the coal operations to focus more on its mining business and primarily mining, minerals, and materials used in making batteries for electric vehicles. We now all know what is happening to the growth rate of electric vehicle sales. If I had pinned my hopes a year ago on the growth of electric vehicles, I most certainly would be changing my hopes into a different direction. Remember, Larry Fink put the head of Aramco on his board last year. That should have been some small sign. Economics win out. Glencore is a $50 billion market cap company and generates billions from its coal mining and trading businesses.
Reality. “I have destinesia. That is when you get where you wanted to be but can’t remember why.” - Brian Crane. I understand all too well.
SunPower Has Gone Down. SunPower was one of the earliest solar companies that became one of the larger solar companies in the U.S., hitting a market cap of $9 billion in 2021. It filed for Chapter 11 bankruptcy this week with assets totaling $92 million. They talked about how business had slowed down and there were so many places where they could not make money on installation or leasing of panels. SunPower had gotten out of the design and manufacturing of solar panels in 2021, selling the Singapore based business and focusing instead on technology, energy storage and installation. A quote from the company at the very top of its market in 2021 - "We also finished the year with strong execution as we exceeded our net income and adjusted EBITDA guidance, expanded our margins, strengthened our balance sheet and generated positive cash flow. Looking forward, with favorable industry tailwinds, increasing demand for our innovative solar solutions and further investment to significantly expand our solar and storage addressable market, we believe we are positioned to accelerate our growth through 2022 and beyond." My how the mighty have fallen. And the next time you hear a company talk this way about their future, look under the hood. I didn't think this could happen to renewable companies, considering the level of subsidies. It's all just business in the end.
Surprise, Surprise. I hadn't realized that food prices were going down. At least I haven't noticed that in the stock market or the grocery market. But Monsanto has. Now owned by Bayer out of Switzerland, Monsanto is one of the largest seed companies and crop chemical companies in the industry. And they are losing money, weighed down by their crops science division as “agricultural companies face a tough market, amid falling crop prices”. And it looks like it will keep going down. The company lowered its previous projections for the year, and so far, it has led to lower prices for wheat, corn, and soybeans. Part of this has been an extremely strong harvest and the expectation that positive growing weather is going to continue both here and abroad. And for those of you who pay attention to numbers, crop division revenues were down 28% year over year. Being in the energy business, we understand volatility. I expect to see it on the downside for food commodities.
Don't Panic! Aramco can afford to pay its dividend. The company posted a net profit of $29 billion and is going to pay a $31 billion dividend. That's returning capital to shareholders. Even if the shareholder is primarily your government. No, they're not giving it all away at once. There's a base dividend of $20 billion and the rest is performance linked. So far this year they are on track to generate $124 billion in dividends paid out. That's dedicated. This comes on the heels of Exxon, Shell, BP and other majors beating expectations in the second quarter primarily due to record production. And we wonder why the price of oil isn't higher.
Correct. “The potential recession energy handbook is fairly straightforward given energy is a late cycle performer and typically benefits from underlying economic inflation. When commodity prices fall as economic activity slows down that typically leads to lower cash flows and reduced capex spending by operators which then flows down to impact oilfield services companies. Our preferred OFS names are positioned for international and offshore growth; our favorite U.S. onshore exposed stocks are HAL and LBRT.” - James West, ISI.
Real Estate Development Developing. We’ve been writing for some time about the Chinese real estate crisis. The largest developers are going bankrupt. Cities sitting empty. Bankruptcy and restructuring continuing. In the energy business we always talk about a weaker Chinese economy than we had expected being a drag on oil prices. That is correct. The problem is the real estate crisis in China continues to get worse. Transactions in July for the top 100 real estate developers were down 20% in July after a 17% drop in June. Minimum interest rates on mortgages and reduced down payment requirements should’ve bolstered a little bit of demand. But it hasn’t. Consumers are now concerned about their own economy and feel cash strapped and debt burdened just like the governments of areas where they live. The Chinese economy is likely to continue down this road just as the US stands the risk of seeing a recession driven in part by the weakening commercial real estate market in the US. As an example in the paper today, it was noted that a building in New York City sold for $3.5 million after selling for over $300 million just a few years ago. There will be many. PIMCO just quoted a figure we have been warning of for some time – there is about $1.5 trillion of real estate in the US that has to be refinanced by the end of next year. Don’t walk under any office buildings where the windows open.
Perspective. US stocks swooned in a sell off, Apple iPhone revenues fell for a second consecutive quarter, Amazon projected weaker-than-expected revenue growth, Intel plans to lay off thousands of employees and paused its dividend. AB InBev said it sold less beer in the second quarter hurt by weaker demand in China and the continued fallout from a Bud Light boycott. This is all while sitting drinking my coffee in one small 5” x 3“column in the paper. Just a bad day? Capital City. Houston reinforced its dominance in the oil and gas business and California demonstrated why they have issues. Chevron is moving its headquarters to Houston from San Ramon and gave the reason as the states “adversarial” position on its businesses. This should add about 2,000 people to the existing 7,000 employee base the company has in Houston. A couple of years ago, Exxon moved from Dallas to Houston. Should I be listing the house??
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.
