December 6, 2024
Things I Learned This Week Post Thanksgiving
The best food part of Thanksgiving is the turkey sandwich the next day, mayonnaise, salt, pepper, cranberry and a dab of stuffing and gravy makes it deadly. Now, I am getting ready for another Christmas party. I’m off planning and execution duty soon. Back into “operations.” All, please have a very safe and very happy Holiday season!
Directions. The Oil and Gas business continues to drift along. Power, midstream, anything energy infrastructure related are all doing well and in demand by investors in the broad sector. E&P can do well even in a lower oil price environment as long as it deploys technology that can bring down expenses at a faster rate. Oilfield Service is once again the end of the whip. “Doing more with less” has become a common phrase but the Oil and Gas industry has adopted it with a vengeance. We can set new liquids product records even with a falling rig count and what had been considered, anemic oil prices. The 15-year average oil price is $69, not adjusted for inflation. We are at the long-term average. Those who say that prices will move up and up have not been right for over a decade. Oil companies can take advantage of the spread between cost and price with OFS technology. The OFS companies, however, don’t normally get paid for the value they bring. That has been a true statement for most of the last 50 years. Look at the benefits of the seismic evolution and there are only a handful of companies that make money in the space. Without performance-based contracts, the OFS companies should change course and apply their technologies directly. Halliburton, Schlumberger and the rest have been drilling wells for years but keeping it under wraps. Maybe we should either get paid for performance or compete using our technology.
While No One Was Looking… The French government failed this week. How can that happen? The Prime Minister was ousted by the National Assembly after a no-confidence vote. The country’s finances are a mess, and people are not happy. The Prime Minister is Michel Barnier, with Macron still the President. The problem? The public debt is 112% of GDP, a level the U.S. is expected to hit by the end of next year. And look what it is doing to France. Borrowing costs are the highest level in 12 years, since the Eurozone debt crisis in 2012. He was undone by the party led by leader Marine Le Pen, a left-leaning and anti-immigrant party. To remember, Germany is in a recession, the UK is having a very difficult time with the Labor Party now in charge, and the rest of Europe is not doing dramatically better. Whatever problems we have, we are still the world’s best economy. Biggest, sure. But best on a relative basis is very important too.
The OPEC Debate. OPEC+ decided to hold production flat and wait to put more oil on the market because of current weakness. This is not popular with all members. “Because Trump got elected, U.S. oil production will move up sharply as “drill baby drill” gets implemented.” As a result, several members of OPEC want to start ramping up their production now, to sell as much as they can now before the wave of Trump oil hits the market. There are, of course, several things wrong or potentially wrong about that argument. It was met by a comment that gives you faith, from Saudi Arabia. “They won’t be able to bring oil production online next year.” Succinct. Correct. Unemotional. Reasonable. And sometimes that is how an oil price crash gets averted. But the OPEC+ attitude caused Angola, the #2 oil producer in Africa, to leave the organization.
Chemistry Stays Hot. Nighthawk is based in Midland and is a leading provider of proprietary chemicals and fluid systems used during the drill-out phase of well completions and for clean-outs of producing wells. A group of well-known OFS investors just acquired a majority stake in the company. Bruce Ross, who has made me money in the past, will be the Chairman. Tracy Turner, David Dunlap, McGowin Patrick, and Stacy Racca, are included in the group. Ed Cerny, head of the Backcast group, another investor, said “Our investment in Nighthawk reflects Backcast’s confidence in the Nighthawk’s robust business model, the capabilities and reputation of its management team and sponsor group, and its specialized, leading role within its markets.” You would expect him to say that but he just put his money where his mouth is so he definitely believes his pitch. All the best guys.
Friend’s Observation. The problem with acceptance of nuclear power today isn’t Three Mile Island or anything else. It is just that most people today got their education of the industry from watching the Simpson's. Damn.
Gunning. The state of Texas filed a lawsuit against BlackRock, Vanguard and State Street in federal court, alleging they are “conspiring to artificially constrict” the coal market. That is one ambitious effort and 11 other states have joined with Texas on the filing. The state has “demanded” a jury trial, according to the filing. The lawsuit alleges the three asset managers violated the Sherman Act and Clayton Act — which govern antitrust law — as well as state antitrust laws from Texas, Montana and West Virginia. The filing noted that all three investment firm’s combined individual holdings in public coal producing companies, amounts to collective influence. This is after last year it unfolded that of the three firms, one was the largest shareholder in 90% of the companies in the market. There is no question they have abused their power, though the SEC and individual states are easing that issue, but the focus on coal was a surprise.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $68.30 per barrel (up ~0.4% week-over-week) and natural gas is $3.08 per MMBtu (down ~8.3% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.5 MM BOPD (up ~3.2% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 5.1 million barrels week-over-week vs. an estimated decrease of ~1.6 million barrels.
Frac Spread Count: There are currently 215 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 1 rig week-over-week).
Movement, in the Right Direction. We have written before about the Rice whale restrictions in the Gulf of Mexico and the fact that the environmental approval for basically all offshore oil and gas production was going to be pulled by December 2nd unless a plan was put forward before then. Everyone but the government stated that the timetable was too restrictive and they needed more time. In playing brinksmanship, it was left till the last minute. Activists and the government filed (get ready for it!) the Fourth Stipulation to Modify the Stipulated Settlement Agreement. (Wos) It extended the deadline finalize a new Rice’s whale critical habitat designation to July 15, 2025. It may fare much better under Mr. Trump than it was doing under the current administration.
Snippets.
Britain’s ‘Quiet Quitters’ Are Costing the Economy £257 Billion, showing a deterioration in attitudes toward work, which underscore the productivity crisis that’s holding back GDP.
Global Demand Growth Slows - The IEA projects global oil demand to grow by 921,000 barrels per day (bpd) in 2024, reaching 103.8 million bpd.
U.S. Leads Global Supply - set to break records again, with production expected to reach 13.23 million bpd in 2024 and climb to 13.53 million bpd by 2025.
Pound Another Nail. Weakness in China for General Motors cars will result in a $5 billion charge in Q4. GM, VW, Mercedes - it’s got to be over $12 billion so far. Due to both weakness in the Chinese economy, and stronger competition from what are now well made, good looking, tech forward cars. Since the government has continued Chinese EV car manufacturers as a way to keep people employed and give the appearance of a better economy, there is a tremendous surplus of such cars, with tens of thousands sitting in giant parking lots. Why not sell them at any price to people in the US and EU? And this is where we are today.
VW, profits slump by 64%.
Audi, profits slump by 91%.
BMW, profits slump by 84%.
Mercedes-Benz, profits slump by 54%.
Water Water Everywhere. Water is one of the most critical issues in powering AI in terms of cooling power. One city shows that AI demand for water globally by 2027 could count for more than the total annual amount withdrawn for use in Denmark or half of that used in the UK. That's a lot of water. That does provide opportunity though. The other most critical issue is power. Where can I find enough water that doesn't have to be potable and just clean enough to cool big data centers with enough affordable power nearby as well? What a completely loaded question. Throughout the oil patch. Everybody's been focusing on how natural gas demand will spike due to the need for power for AI data centers. And it's not wrong. But remember location, location, location? Cheap power and a dry area with little access or expensive access to water won't win the bid. Maybe local power producers and water companies could get together....
Sanity. Costco recalled several tons of butter after the FDA noted that one very important ingredient was not listed. The packaging did not include that milk was used in the making of the butter.
Landman 2. We were out last week talking about the new TV show by Taylor Sheridan, Landman. It’s getting pretty good reviews with the best reviews coming last week from Fort Worth. The Fort Worth chapter of the American Association of Patrolman (APL) had a TV party for the movie. Their 12,000 members showed up deposed with life-size cardboard cut outs of the show’s star cast that has John Barron and Maurice, his wife. The show got pretty good views from the crowd. It’s over the top. I don’t know many landman who have dealt with highway explosions and cartel violence. But they all have stories, and they love being represented in such a light. Maybe Landman will do what JR did for Dallas. It will definitely help our image and maybe even improve access to capital. JR got backed, didn’t he?
Snippet. It had been 13 years since Texas played A&M. Wow. Time flies. They have played each other 111 times going back to 1894 when the rivalry started. Two of the 10 highest paid college athletes are the two quarterbacks for Texas. And the A&M quarterback who’s been benched is making almost $630,000 this year. It was a great and close game. A defensive battle royale. Well done on both sides. (SMU however is now ranked #6 and plays Clemson Saturday for the ACC championship.)
Jilted?? Did you know that a climate conference has been going on and it ended with either a bang or a whimper depending on which side you’re on? Rich countries should give poor countries more money to fight climate change and recover from climate-change induced weather. That one sentence is so filled with question marks and debates that it is stunning. The idea that floods in Europe, this time, are due to climate change and 100 years ago were due to something else, seems to have no impact. Bangladesh being hit by monsoons is an annual occurrence. Iceland just had a volcano erupt and I’m waiting to see if someone will try and pin that on climate change as well. At the conference, the poor countries were trying to get a commitment of $1.3 billion annually from the rich countries to accomplish their goals. The money is also intended to help poor countries transition to cleaner energy. It’s expected that $10 trillion and extensive infrastructure needs to be built to power data centers in the U.S. alone. The idea that the poor countries of the world will divvy up money equitably and spend it to improve their recovery from weather, strikes us as unlikely. The interesting part is they only got $300 million committed, which they saw as a disaster and the developed countries viewed it with great skepticism. The idea that global weather is changing dramatically due to climate change is still a big question. Weather refers to short term atmospheric conditions, while climate is the weather of a specific region averaged over a long period of time. Climate change refers to long-term changes. That is from the USGS. A specific region. Over long periods of time. So, the worst flood in 100 years, by definition, cannot be attributed to climate change, but severe weather. But then, everyone has their hand out these days.
DEI. From a conservative activist - Walmart will end some of its diversity programs, the latest big company to shift gears under pressure.
Huge. If anyone hasn’t seen the Tesla facility on the east side of Austin, it’s worth a drive-by. Of course, you’ll be driving by for a little while. 10,000,000+ square feet under roof and employs 23,000 people. That is right. I checked twice. It’s one of the largest factories in the world now and is clearly the most modern. But there’s an issue. It turns out that there has been an environmental problem with the facility that has been going on for a while and has not been fixed or reported. Hazardous wastewater containing paint, oil and other chemicals was mentioned, but being in our business, you have no idea as to what a city like Austin would call “hazardous” wastewater. Regardless, there are issues and because of the connection with President-elect Trump, be ready for a great deal of negative coverage. It will be settled, it will cost money, and it will get fixed. One side sees a capitalist Trumpster who is morally compromised which justifies anything they do, versus an employer of 23,000 local voters. It will be interesting, and loud, in the meantime.
The Great Debate. Everyone, and no one, knows what the impacts of Trumps’s tariffs will be. From Mexican-made Chinese EVs to how much oil Iran sells. He was elected on a platform of shaking things up and putting Americans first and he has talked about a range of tariffs from the beginning. Telling your child the stove is too hot to touch, they will only understand after they have touched the hot stove. On both sides, we told people, and the other side, our competing plans. Right or wrong, Mr. Trump won. There has never in my lifetime been such vitriolic hate of an elected official. Maybe in the 1800’s. Before he is sworn in, really? California is hiking the gasoline price by $0.47 per gallon to raise money to fight whatever the Trump administration wants to do. Give it a break. Take a deep breath. On both sides. So, everyone knew Gaetz was a terrible choice and now he is not the choice and the woman who is, is qualified. It hasn’t gone to hell yet and the last two presidents have kept on track enough that the country and system still works. I wrote this last part to myself. Re-affirmation!
Media. MSNBC viewership is down 33% since the election. MSNBC finished fifth with 684,000 total primetime viewers and CNN barely made the top 10, averaging only 464,000 total primetime viewers. Fox News finished with a staggering 72% share of cable news viewers during primetime. CNN has lost almost half of its viewership and set records last week for the lowest number of viewers. 250,000 people cancelled the Washington Post because it didn’t endorse a presidential candidate. The talking heads have spoken.
It Keeps Getting Worse. We’ve been writing for weeks about the problems with the German economy. It’s mentioned in the newsletter elsewhere. So, this kind of comes as piling on. ThyssenKrupp is cutting 40% of its workforce (11,000 people) citing the increase in cheap imports, particularly from Asia, and industry overcapacity in the current market. Imagine the economy in the U.S. if U.S. Steel and the Detroit auto makers were cutting tens of thousands of jobs. Welcome to Germany.
Cheap and Worth It. A research firm, Seeking Alpha, put together a list of companies that were screened as holds, buys or strong buys from SA quant metrics, and have at least doubled year to date (up 100%), and all names have a forward P/E under 30, which, to many, would be classified as reasonably cheap from a valuation stance.
The top 15 energy cheap highflyers are sorted below by year-to-date performance.
No. 15: Flotek Industries (FTK), +115% YTD.
No. 5: Aris Water Solutions (ARIS), +220% YTD.
No. 4: Talen Energy Corporation (TLN), +227.8% YTD.
No. 1: Power Solutions International (OTCPK:PSIX), +1,451.2% YTD.
Sand Gets in Everything. “Permian frac sand demand is on track to reach an all-time high of 71 million tons in ’24 and remain around that level in ’25. However, total nameplate supply is projected to reach a record high of 101 million tons by year-end '24, with sustainable utilization likely 75% - 85%. Given the oversupply, Permian sand prices below $20/ton are regularly reported on the contract market, with limited spot volumes currently being moved. At this price, we expect some higher-cost mines to be mothballed, with some mines already cutting shifts. Moreover, the Dune Express is expected to drive total delivered costs in the Delaware down significantly next year. Rystad estimates true breakeven costs for most traditional in-basin sand suppliers, including SG&A and depreciation, are ~$16/ton, which will likely represent a medium-term floor.” Capital One, the incredibly well-trained Doug Becker. Conspiracy Theories?
We have written about Germany’s economic woes. Then this shows up.
Priorities. Exxon has withdrawn from a Suriname offshore block. That is next door to Guyana, where Exxon has had success that no geoscientist could even dream about. Why? Even though the block had a discovery in 2020, it’s mainly gas. Too complex, especially when simple is paying off so well.
2nd Shoe. In no surprise at all, ONEOK announced that it was acquiring the rest of EnLink Midstream company. ONEOK originally bought a 43% position in August. The total consideration was $3.4 billion. The balance goes for $4.3 billion, with the stock up 10% since the initial transaction. EnLink has been a fabulous local Dallas company and I’m sad to see it go, but this is the kind of consolidation that the industry sorely needs. Congratulations to all involved. Barry, you and your guys built a great company.
Jack-up Pain. Saudi has suspended its 29th Jackup rig and Pemex is suspending one, for now. Natural gas prices, and even oil prices in some areas, are causing a pull-back in spending and activity. When the Saudi suspensions started, some said it wouldn’t really impact them. Will 29? The contracts are suspended, so they will work their term someday, but in the meantime, they sit on a much-reduced contract with few economic opportunities to move them.
Trump Announces Plan To Deport 5,000 Illegal Immigrants In One Pre-Owned Honda Civic Hatchback
Fair Share. I read on twitter, and from listening to Bernie Sanders, that the rich don’t pay their fair share and if they would just pay their taxes, all would be fine. But I’m a numbers guy more than a story guy. And the numbers tell a very different story. According to the IRS, the top 1%, that is 1 out of every 100 people, pay 40.4% of all taxes paid. They made 22.4% of total earning and paid over 40% of taxes. Fair share? But the top 10% of income earners pay 72% of all taxes paid. Think about this. 10% = 72%. Interesting. Paying 2x your share of taxes relative to income isn’t fair enough? The top 1% had a tax rate of 26%. Those in the 1%-5% range pay an average tax rate of 18.8%. Those who are in the top 5%-10% pay an average of 14.3%. It continues down. The bottom 50%, 77 million returns, have earnings less than $50,000 per year and pay 3.7%. So, to get 51% of Americans to agree to further “soak” the rich sounds pretty easy, even if it isn’t even close to fair.
Snippet. Earlier this month, the European Commission reduced its forecast slightly for EU economic growth in 2025 from 1.4% to 1.3% and projected that the EU will grow by only 0.8% in 2024.
Novel Idea. A new midstream joint venture between EQT and Blackstone Credit & Insurance has been announced that will include the Mountain Valley Pipeline LLC (MVP) series A (49%), FERC regulated transmission and storage assets, and the 1.6-bcfd Hammerhead pipeline. Blackstone will have a non-controlling common equity interest in the new JV in exchange for $3.5 billion. Spin off assets for cash while keeping control. Classic. As long as the partners behave, it can work great. Back in March, EQT acquired Equitrans for $9 billion and has now over-delivered on its $3-$5 million divestiture promise. EQT will use the cash to pay down its term loan, revolving credit facility and tender for notes. The deal is expected to close by year-end.
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.
