Things I Learned This Week in Houston

December 1, 2023

Merry Christmas! We only get about four weeks of that greeting. Turkey is gone and eggnog recipes are being swapped. I decided to hang out at home this week until I realized the workmen had not finished the master bath repair and Chrissy was coming to decorate the house. I got out of Dodge. Houston was a welcome sight, even with the rain.

Follow the Money! Not the Current Narrative. Wind projects are being canceled because cost overruns have made the takeaway contracts signed a couple of years ago completely underwater, leaving companies little choice but to cancel projects. This week, a group of car dealers sent a letter to President Biden asking him to ease up on his EV mandates because no one was buying the cars and inventory was stacking up. These points were made at a Preng & Associates board meeting this week, but the reality was noted that, regardless of the lousy economics (kind of like seven of the last ten years in the oil industry!), money will still be spent. Then, I see a WSJ article titled “Renewable-Energy Growth Explodes.” Solar, wind-power, battery EVs and venture capital funding for carbon and emissions technologies show growth rates moving up sharply through 2030 at least. The cost of energy storage technology shows a continuing drop. As was discussed at the meeting, our goal is to serve our clients, not to judge the economics of an industry. Again, anyone placed within an oil and gas related company in the last seven to eight years could claim the same issue. So, while we can all now tick off a seemingly endless list of failed or cancelled projects in the renewable space, the reality is that a great deal of money will still be spent and who better to help than our industry! We understand! But for investors, the advice is to tread softly in the sector but trod, nevertheless, while our industry helps another energy segment shape up, like ours has over the past few years. And, after having had to make predictions for most of the last few decades, forecasting is easy. Being right is tough.

Right Again. Earlier this year, the head of Toyota said what the other car company executives know but can’t say. The future is hybrids, not battery only powered cars. Some shareholders tried to get him fired for “heresy.” The slowdown in EV sales and the company’s continued focus on hybrids has resulted in the company taking the lead in car sales again. Ford and General Motors are scaling back or slowing down new EV and battery plants over the concern that Toyota’s chairman might be right.

And In Case You Weren’t Sure. This week, a coalition of more than 3,000 auto dealers nationwide sent an open letter to President Biden, calling on him to "tap the brakes" on his administration's aggressive EV push. Dealers from all over the 50 states participated. They are taking specific aim at an EPA Clean Air ruling that would seem to be another over-reach by the bureaucracy, with emissions requirement that is considered to be the most aggressive federal regulation of its kind ever issued. Under the regulations proposed by the EPA, the majority of new vehicle purchases are required to be electric within a decade. "These vehicles are ideal for many people, and we believe their appeal will grow over time," the dealers wrote in their letter to Biden on Tuesday. "The reality, however, is that electric vehicle demand today is not keeping up with the large influx of BEVs (battery electric vehicles) arriving at our dealerships prompted by the current regulations. BEVs are stacking up on our lots.” “Last year, there was a lot of hope and hype about EVs," the letter continued. "Early adopters formed an initial line and were ready to buy these vehicles as soon as we had them to sell. But that enthusiasm has stalled. Today, the supply of unsold BEVs is surging, as they are not selling nearly as fast as they are arriving at our dealerships - even with deep price cuts, manufacturer incentives and generous government incentives." A couple of us grousing about government requirements is one thing, but 3,000 dealers from all 50 states making the case has some gravitas. I’ll take the under on EVs but the environmental progressives, having no idea about the laws of physics or economics, will do their best to sweep the dealer’s concerns under the rug.

Headline. “Americans Fall Out of Love with EVs” - WSJ

The Cost of Providing Sanctuary. We have been writing about several sanctuary cities in the U.S. rethinking their stance as the number of immigrants has over loaded availability and is costing billions. Chicago, New York, both city and state, Baltimore and others are howling about the massive influx, which would be less than one day of crossings at the southern Texas border. Now Europe is getting on the bandwagon. Europe is seeing the biggest migrant surge since 2015-2016 which is fostering a political change in several places as more right-leaning leaders are being elected in both Europe and South America. When is it our turn? The Netherlands took in over 220,000 people last year in a country of less than 18 million people. That is only about four million when compared to the U.S. on a percentage of population basis. Europe expects to see over one million asylum applications this year alone. While immigration on the Texas border has been dismissed by many who don’t live here as “people just looking for a better life,” looking for that better life has now hit major progressive cities and states, and now foreign countries are getting on the bandwagon. “Sanctuary” now means spending billions you don’t have rather than some nebulous idea of “helping.” Broader coalitions are always more politically viable. An immigration bill instead of airline junk fees? Wow.

$$$ Ambition. Petrobras said it would invest $102 billion by the end of 2028, aiming to join the ranks of oil superpowers. That is a 30% bump over last year’s statements. Most of that activity will be offshore in deepwater. Someone asked me the other day if the offshore drillers had upside from here. The answer, now, has to be ‘yes.’

Amazing Breadth for Size. I had the opportunity of attending the Preng & Associates board meeting this week, where we celebrated their remarkable 43rd anniversary. Preng has solidified its reputation as a leading energy specialist, showcasing profound expertise and outstanding success in placing top executives within the energy industry. The team in Houston, Chicago and London has conducted over 4,000 engagements for almost 900 management teams in 92 countries, focusing on all aspects of oil and gas, power and utilities, energy transition, industrials, manufacturing and engineering and construction. What struck me during the discussion was the vastness of their active portfolio. While their roots are in North America, a substantial portion of their business emanates from Europe, South America, Asia and, notably, Africa. In addition, beyond searches for oil and gas companies, Preng is actively engaged in recruiting top leadership for “energy transition” businesses in hydrogen, nuclear, battery, carbon capture, clean technologies, industrial services and utilities sectors (with active searches in each of these categories). Preng has played a pivotal role in assisting a surprisingly diverse number of companies in placing top executives across the energy value chain. The breadth of their knowledge across the global energy space is truly noteworthy, reflecting their commitment to staying at the forefront of industry evolution. Not everyone knows the name, but I am flattered to be associated with these people.

Headline. Absurdity of the Week by David Blackmon. “Woke ESG Funds Shed $5 trillion in Just Two Years”.

Gone, But Not Forgotten. Cornelius Dupré is a great friend of mine, and a great guy, but all of his lights pale in comparison to his lovely wife of 35 years. Celia left us to be with angels last week. To say she was an amazing woman is a great understatement. She was talented and beautiful. From singing the National Anthem at Minute Maid Park to the unwavering support of so many causes, she will be sorely missed by a great number of people. And the strength, determination, smile and unwavering optimism she showed over the last several years as she battled cancer may be her most enduring legacy. Except being Mrs. Cornelius Dupre. Our hearts go out to the family. We are all better people for having known her.

Headline (Petty). Harry and Meghan Can’t Stand Their Growing Irrelevance

Common Sense? We get the idea that many people, especially those in politics, want to get rid of oil and gas as soon as possible. Most of these people have no clue of the many daily products we use that are derived from oil and gas. Recently, several utilities have proposed fixing and repairing the current U.S. pipeline system in order to continue supplying energy in a safe manner, even if it’s natural gas generated electricity. Many cities are banning the use of natural gas for cooking (a really bad idea), heating and other uses, so the utilities have to plan for a longer-term drop in throughput capacity, while maintaining safety and integrity of the system today. Since they are regulated utilities, they must get approval for raising the capital for these projects; municipal and state boards make the final decisions. ConEd asked for $500 million and got about $190 million approved. PSEG asked for $2.5 billion to replace a consistently problematic part of the pipeline network but got only $900 million approved. When political ideology puts people at risk, when knowledgeable people see a need, but politicians are looking for votes, things fall apart. And problems with the entire U.S. pipeline infrastructure should be solved by people who understand the issue.

It Made the News. Snoop Dogg recently made the announcement that he quit smoking. Marijuana dispensaries across the country lowered their flags to half-mast. Growers started to consider cutting back production. Martha Stewart, Snoop’s TV partner, was stunned as well. Fear not. He was only making a pitch for a “smokeless” fire pit. Thank goodness. We can all go back to what we were doing.

Sustainable Investing. It turns out that not all investors prefer lower financial returns to support DEI and other aspects of ESG investing. In Q3, there was more money from ESG investments liquidated by investors than added. Fund flows growth peaked in 2021 and has been declining, but now has gone fully negative. The word “sustainable” is being dropped from funds’ names. We have commented before that the ESG pendulum is now swinging the other way. While there are many positive aspects to ESG, it turns out that using it as a primary investment criterion doesn’t work well. It will be here for a long time but is losing the headline position it has held for several years now.

Small Nukes. SMRs, small modular reactors, are becoming a thing. We see this as very positive. We wrote about the idea that, if a nuclear submarine has a reactor, you can generate power without building Comanche Peak. This week, there was a full-page advertisement specifically on the topic of SMRs. It seems that as many as 30 different countries are “weighing or actively pursuing investments in the technology.” The U.S., Canada, Czech Republic, Sweden, Estonia, Romania and more are looking. For those of us who have been hoping for a nuclear revival, this is welcome news. Thorium reactors can’t go critical. It has been many years since Three Mile Island, where no one died, kept the fear of nuclear power alive. Technology has changed, and so has perception. This is a positive for all consumers and environmental activists alike. That is a good thing. As of 2023, there are more than 80 modular reactor designs under development in 19 countries and the first SMR units are in operation in Russia and China. The floating nuclear power plant, Akademik Lomonosov (operating in Pevek in Russia's Far East), is, as of October 2022, the first operating prototype in the world.

Semantics. With regards to reliable electricity, Sweden has said their electricity policy goal is "changed from 100% renewable to 100% fossil-free." The Swedish government has put out a plan that sees the potential for the construction of new nuclear generating capacity equivalent to at least two large-scale reactors by 2035. Sweden is planning a “massive” expansion of new nuclear generated electricity by 2045. The Swedish agreement also said that necessary regulations should be developed to create the conditions for the construction and operation of small modular reactors (SMRs) to service smaller communities. In addition, the permitting process for nuclear power plants must be shortened. Elsewhere, about 60 nuclear power reactors are currently being constructed in 15 countries, notably China, India and Russia. Together, China and Russia account for 70% of new nuclear plants.

EIA Weekly Report.

Crude Implications: Bearish – build vs. expected draw. WTI backwardation between 1M-12M @ $2.8/bbl, $0.3/bbl narrower w/w. Money managers decreased ICE Brent and NYMEX WTI net long positions by ~12% w/w, 54% off September peak. The market is increasingly worried that the supply side (non-OPEC) threatens to swamp balances in 1H24.
U.S. Crude Production: Indicated at 13.2mm BOPD, flat w/w, and up 1.1mm BOPD y/y.
Refinery Runs: 16.0mm BOPD, up 0.5mm BOPD w/w and down 0.6mm BOPD y/y. Utilization recovered to 89.6% post turnarounds.
Crude Imports (net): 1.1mm BOPD, down 0.7mm BOPD w/w and roughly flat y/y. Brent-WTI spread at $5/bbl, flat w/w.
Gasoline: Bearish – build above expectations. Demand down 3.2% w/w and down 1.3% y/y.
Distillate: Bearish – build vs. expected draw. Demand down 26.7% w/w and down 17.6% y/y.

Latest Rumor? Occidental Petroleum in talks to buy shale driller, CrownRock, for over $10 billion.

Political Rant. My senators are Cruz and Cornyn. My representative is Beth Van Dyne. I have supported all three and have always considered myself to be fiscally conservative and socially liberal. Dated ideas, I’m sure. If any of these three vote to “condition” aid to Israel, I will vote against them and actively support their departures. I hold them no ill will, but this would just be another step of appeasement which I am old enough to say it doesn’t work. Making Israel and Ukraine our next Vietnam and Afghanistan isn’t progress in any way. And, if you believe that President Putin and President Xi care about expanding their power and influence, they are not appreciative of our offers to “settle for peace” other than for the show of weakness, which they will work to exploit. Cynical? Yes. Concerned? Greatly. This isn’t some big decision like “do we invade Taiwan this week?” for them. It is what drives every aspect of two centrally controlled, paranoid and exploited governments. They are contenders in a title fight looking to exploit any weakness the champion might show, so they can hit them again and again, and maybe even knock them down.

Observation. U.S. deepwater decommissioning market is estimated at about $24.3 billion.

Wow! What a Shock! Federal data shows, again, that the “Electrify Everything” push means higher energy costs. The EIA’s Winter Fuels Report says heating with electricity will cost 77% more than heating with natural gas.

Myth Busting. I recently came across a piece by Chevron that tries to debunk the myths about oil and gas. I have long advocated that we need to be advertising our industry in the National Inquirer rather than the WSJ.

Myth #1: The World No Longer Needs Oil and Gas

Demand for oil and gas is rising as the world’s population and production of goods expands. Energy security depends on reliable and secure sources that should include renewables as well as oil and gas.

The International Energy Agency predicts that oil demand will continue to rise until at least 2026.

The International Renewable Energy Agency forecasts that most of the world’s energy can come from renewable sources by 2050

Myth #2: Oil and Gas Companies Aren’t Really Reducing Their Emissions

At Chevron, we believe the future of energy is in lower carbon. We're building on our strengths as we aim to lead in lower carbon intensity oil, products and natural gas. Chevron is also advancing new products and solutions that reduce the carbon emissions of major industries. For example, we are:

Developing and producing renewable fuels and reducing methane emissions and the carbon intensity of our operations.

Collaborating with Japan's Mitsui Oil Exploration Company to explore the feasibility of advanced geothermal energy in Japan.

Working with Algonquin Power & Utilities Corp. to build a solar energy project intended to generate renewable energy for our West Texas and New Mexico operations.

Myth #3: Companies Don’t Need Permits to Drill

Energy companies such as Chevron are required to obtain permits to drill. Permits play a critical role in our ability to produce. Mike Wirth, our chairman and chief executive officer, called for an improved process to facilitate increased domestic operations.

“In the short term, permitting reform is the single thing that could enable not only the oil and gas industry, but the renewable industry, to continue to grow supplies in this country,” Wirth said during a recent CNN interview.

Myth #4: All U.S. Oil Comes from Texas

While it’s true that Texas is considered the energy capital of the world, the Lone Star State is not the lone provider.

Chevron produces oil and gas around the world. Within the U.S., our operations span Texas, New Mexico, Colorado, California and the Gulf of Mexico.

Myth #5: The Industry Only Hires Engineers

Petroleum engineers represent just a portion of the industry’s diverse workforce. Geologists, doctors, marine scientists and environmentalists are part of a diverse spectrum of specialists who have found their calling in the energy industry.

We also employ nutritionists, helicopter pilots and even a general manager of health and medical.

Why Are Oil and Gas Stocks and Commodity Prices Weak? Portfolio managers are being forced to sell their energy investments as they face unprecedented net mutual fund redemptions - a record at $12.1 billion in October 2023 (dating back 2010).

The Hits (Cuts) Keep Coming! Eight weeks ago, oil was in the mid-$90’s headed north but, instead, took a dive. So, OPEC+, which is really just the OPEC we all know and love and Russia, is cutting production by almost a million more barrels. Oil moved to $78. Very small wow. The oil ministers came out of an online meeting with more than 2 million barrels per day in voluntary cuts through the first three months of next year and declared that Brazil would join the bloc in January, bringing one of the world’s fastest-growing oil producers into an alliance that is trying to rein in global supply.

Data Point. Cost of Illegal Immigration Greater Than Annual Gross Domestic Product of 15 States.

Just Say No to Oil? I don’t think so. America continues its pursuit of reducing crude oil usage, in favor of wind and solar generated electricity. In addition, the “American renewables dream“ would mean sacrificing an estimated 6,000 useful products that rely on by-products manufactured from crude oil – products that range from asphalt for highways to fertilizers, cosmetics, synthetic rubber, medicines and medical devices, cleaning products, plastics and so many more.

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.