December 13, 2024
Things I Learned This Week at Lunch
Lunch!! This week was my 16th Annual Xmas Soiree Luncheon. There are about 50 people on the regular invitation list and about half usually show up. It has moved around, most recently back to a place with one long table, at the request of John Huff, who wanted to be able to throw dinner rolls at people. We have CEOs and other senior executives, current and retired, in both E&P and OFS. We have bankers, private equity guys and insurance. Since there is usually a bottle of wine or two opened, the conversations can be lively, but this was one of our best in some time.
Anyone Care? A central topic was how the OFS companies survive – with consolidation winning that category – and thrive – a goal that no one seemed to have an answer for. The rig companies spend millions of dollars on technologies and capabilities that allow them to work less than half the number of days they did before. A 21-day well is now a 5-day well. That is great if you are the oil company, but the rig operator just lost 75% of his revenues. 3-D seismic changed the world from both technical and economic perspectives, yet virtually all have gone broke. The E&P guys just kind of shuffled their feet and said that they have budgets to meet as well. As long as the job gets done as cheaply as possible. That is the mantra, and if you go under, well, that is your fault.
Fresh Ideas. Everyone acknowledged that the “partnerships” between E&P and Service Companies are tossed out of the window as soon as margins start to move down. Mr. Potter shifted the conversation from what had been discussed ad nauseam for years and asked what fresh ideas anyone had. We were all stumped for a bit, and really still are. When someone brought up a complaint, he asked what the solution would need to be. The answer “I don’t know but something has to change”, was met with “what something?” or “how would you do it?”. It's all about cost and innovation. You have to be at the lowest marginal cost. One suggestion hit the core of the issue, the one move that would work to increase profitability, but no one seems willing to do it. Reduce capacity. Meaningfully.
Back Office Woes. One area that got complete agreement was sourcing. It used to be that the people in the field had most of the input into who, or what company, was hired and what equipment was bought or rented. They knew the crews, the local reputations and who to use to make the business safer and more productive. Over the last several years, corporate headquarters took that responsibility away from the people in the field, and now companies source out of a centralized procurement department where price is the primary criteria. You can’t sell the value proposition very well in a “three bids and a buy” situation, which is where the industry has evolved to. Pushing procurement back out into the field, with strict rules and guidelines, seems to make a great deal of sense, and while it may not seem big, it certainly was as a topic at lunch.
Whose Pocket Does This Come Out Of? Exxon expects to see over $3 billion in annual synergy cost savings following the acquisition and integration of Pioneer, a more than 50% increase over previous guidance.
Wrong Direction. Saudi Arabia is cutting oil prices for buyers in Asia by more than expected after OPEC+ further delayed an output revival, underscoring how the outlook for the market remains weak. The company was expected to lower the premium by less, to $1, according to a survey of traders and refiners. Aramco also cut prices for Northwestern Europe and the Mediterranean. It made no change for North America.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $69.87 per barrel (up ~2.3% week-over-week) and natural gas is $2.79 per MMBtu (down ~9.4% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.6 MM BOPD (up ~4.1% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 1.4 million barrels week-over-week vs. an estimated decrease of ~1.0 million barrels.
Frac Spread Count: There are currently 220 frac spreads operating in the U.S. (an increase of 5 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 572 drilling rigs operating in the U.S. (an increase of 5 rigs week-over-week).
Meritocracy. Another suggestion was an industry-wide move to performance-based contracts. Here is the APE, beat it and I’ll pay more. Strict turnkey models cannot work as no one can afford the risk in the expensive wells of today, but some baseline with upside based on performance could work. It is inherent in the E&P business. If you perform, and find oil, you get economic gain. A dry hole is an expense. Companies that find oil and produce it efficiently make money. Companies that drill too many dry holes or don’t operate efficiently, will go out of business. Helmerich & Payne is pushing performance-based contracts in a big way. Others should follow suit. Just staying in business, hoping that one day the business gets better, is not a great idea in the current world where we continue to do more with less.
A Saving Grace? Of course, oil prices were part of the discussion. In full disclosure, every year at the Luncheon, everyone writes their oil and gas price expectations for next year’s Luncheon on $20 bills. Maybe it’s just us, but I don’t think so. We are terrible at predicting commodity prices. Terrible. But the argument that the market just doesn’t get it yet, and that as soon as it does, oil prices will go much higher, didn’t seem to gain much traction. The U.S. is expected to contribute to global production growth next year according to sources, but one banker made the observation that U.S. production is flat and will fall without more activity, and while Trump’s election isn’t really expected to change anything, one private equity guy did say that at $80-$85 oil would definitely result in meaningfully increasing activity. But $80-$85 hopes against a sub-$70 reality is a pretty wide gap. In terms of everyone’s favorite sub-sector, Miss Midstream won, Miss E&P came in at an attractive 2nd, and Miss Oilfield Services couldn’t find the door.
We Won?!?! The repressive regime in Syria, backed by Russia and Iran, fell this week. A definite rebuke to the two sponsors, who have problems of their own. The rebel forces, while sounding romantic, are really a collection of tribes and warlords who banded loosely to help each other in the struggle. Yea!! The good guys won. Well, maybe not. The leading warlord has a $10 million bounty on his head. Offered by the U.S. His “tribe” is on the terrorist watch list. 10% of Syria’s population is Christian and the incoming rebels are staunch Islamists. So, who protects the Christians from fundamental Muslims, if it comes to that? Done? Maybe not yet.
It’s Gonna be a Revolution. We have been saying that AI will revolutionize the geoscience industry. The mechanical part of the industry has been pursuing early AI capability to drive significant efficiency in operations. And now we see a product of the technology that crosses over and indicates some trajectories for the future. SLB launched Neuro, an autonomous “geosteering” tool – it is designed to help drill more efficient, higher-performing wells, while reducing the carbon footprint of the drilling operations (the sales pitch). Using AI, Neuro geosteering integrates and interprets complex real-time subsurface information to autonomously guide the drill bit through the most productive layer of the reservoir. In the olden days of yesterday, geoscientists had to interpret drilling information real-time, updating the drilling plan and trajectory, and passing that information to the directional driller to have him steer the bottom hole assembly. Neuro does this with no need for human intervention. Scary, right?
Tale of Two Giants.
Exxon is increasing its capex to $28-$33 billion per year for 2026 through 2030, with the goal of increasing its global oil and gas production 18% by 2030, from 4.7 MMboe/d in 2025 to 5.4 MMboe/d in 2030. That’s up from about $28 billion budgeted for 2025. Around 70% of the spending will be directed into Exxon’s top project. The Permian Basin.
Chevron said it’s cutting spending in favor of free cash flow. Chevron is budgeting $15 billion in 2025 capex, a $2 billion reduction year-over-year. “The 2025 capital budget along with our announced structural cost reductions demonstrate our commitment to cost and capital discipline,” Chevron CEO Mike Wirth said. Upstream spending will be about $13 billion, roughly two-thirds of which will be directed into Chevron’s U.S. portfolio, which includes between $4.5 billion and $5 billion in the Permian next year, and offshore GOM which is expected to produce 300,000 boe/d in 2026, and in Colorado’s Denver-Julesburg Basin.
It's 2024. A powerful warlord had a son who developed a severe illness. The warlord believed this was done through witchcraft. A voodoo priest, as the warlord's soldiers started killing people in the village with knives and machetes, said that elderly people practicing sorcery had caused the fatal illness. So, 180 elderly people, suspected of practicing sorcery, were killed. It's not a medieval tale. It was this week in Haiti.
All Things China. Everyone talks constantly about how the economic weakness in China has been one of the main reasons for oil prices being where they are. And that's correct. Chinese oil demand is not where it had been expected, or hoped to be, just a year or two ago, but we are always optimistic about China's comeback. Now comes word that fiscal policy in 2025 will be eased to stimulate the economy. The stock market jumped on the news. This issue I have is precedent. Just like we pick apart the language of every fed meeting report, the language used in China's centralized government releases are no different. This time, language was being used that hasn't been seen since the financial crisis in 2008, and on some metrics this verbiage wasn’t used during Covid. That implies some level of worry. The question is, how much is China willing and able to borrow to support the deficit this policy will create? Gone are the days when we all thought governments couldn't go bankrupt. In our business, we know our customers can go broke, leaving us holding the bad debt. When you put all that together, it's very hard to be optimistic about China's economic future, and it’s easier to be less optimistic than you were before. There still has to be demand and that has been a problem for most of the last year. The hope is that typical politics don't play out, like when governments start some other issue in the world to take the spotlight off the original problem. That said, a broke country going to war is really a good idea. Don't get carried away on optimism about demand recovery, keeping all prices up.
A Big Redo. Newpark Resources Announces New Brand Identity, Aligning Strategic Focus on Specialty Rental Solutions for the Global Worksite Access Market. Newpark Resources (NR) rebrands to NPK International, traded on the NYSE as NPKI.
Short Fuse. Permit reform. Something the industry, many industries, would love to see. Delays cause cost overruns and can cause some projects to be cancelled due to the extended wait. I don’t quite see it as a disaster really. Imagine how much lower natural gas prices would be today if we had built all those pipelines out of the Marcellus and Utica. The LNG permit shenanigans didn’t really slow any projects, and they were done to appease a voting block. But, it increased uncertainty, which increases risk, which increases the cost of business. Several energy trade associations, including the EWTC, have been working to get a permitting reform bill agreed to and included in either the National Armed Defense Authorization Act or the budget extension, both of which have to be passed by year end. The Barrasso/Manchin Energy Permitting Reform Act is the most likely vehicle to move before the end of Congress, according to Tim Tarpley at EWTC. It has strong bipartisan support but has lacked the urgency to get it agreed to and attached to a bill this year. We hope the effort is successful.
Even more on EVs. A quote I read struck me as interesting. Ted Brandt is the CEO of a green energy-focused investment bank called Marathon Capital. The discussion was about the fact that many makers and suppliers of EVs are running out of money. His comment was “it’s just a disaster out there with consumer demand going down.” This is someone who banks green energy deals. His view is not one of a manufacturing company CEO saying everything will be just fine. The U.S. government has given Rivian a $6.5 billion loan which comes after a $5+ billion investment by Volkswagen. Rivian stock is still down 50% this year. They’ve narrowed their losses from $139,000 per car last year to somewhere in the $40,000 range this year, and demand is going down, so the idea of getting saved by volume is a challenge. And it may very well be that Mr. Trump both eases the EPA emissions mandate and/or the $7500 per vehicle subsidy. He may do nothing, but demand is still going down. A WSJ analysis of 54 publicly traded EV and battery startups is not good. Seven have already filed bankruptcy, and of the 36 operational companies, three-quarters are losing money and 13 are projected to run out of cash in the next 6-8 months. It has been a wild ride, and it isn’t over yet. When was the last time you heard or read about Cobalt? It seemed to just go away.
Sand Tech. According to Exxon, by leveraging updated spacing patterns, longer laterals and a proprietary lightweight proppant derived from refinery coke, they can improve Permian NPV by an additional 15%. Because of its refinery footprint, the company has a lot of coke. The company is planning to use the proprietary proppant for more than 200 Permian wells in the next year.
Spreading Wings. It is looking to be a very good business. Mobile natural gas-fueled power generators for use across various oilfield and industrial applications. Electricity demand is expected to grow significantly in all businesses, and in the oil and gas industry as well. Power. Energy. Electricity. The oil and gas industry is a subset of those items. Reliable power is now the hottest requirement in the sector. Batteries supply backup that can last for a couple of hours, but you can’t run the world on batteries. So, what? Well, it is a pressure pumping company doing this, and investors seem to really like it, pushing the stock up 17% on the day of the segment’s unveiling. ProPetro’s first order is for 110 megawatts of equipment. The company cited the increasing need for electricity as well as powering its own electric frac fleets. ProPWR is funding the expected growth engine with $122 million of capital. We have been recommending OFS companies to think outside the box on how to best take advantage of the “transition” going on in the energy, power and electricity industries. It doesn’t mean you have to polish wind blades, but the internal industry is “transitioning” or as we like to call it, innovating. Well done, Sam.
Snippets.
Apache is replacing all of Callon’s ESP locations with Gas Lift.
Global oil supply growth will continue to be dominated by non-OPEC+ countries, with the U.S., Brazil, Canada, Guyana and Argentina adding more than 1.1 mb/d of crude oil and NGLs.
Didn’t Occur to Me. Kuwait is in recession. We don’t really think of OPEC countries from a normal economic perspective. At least I don’t seem to. I do look at them for the oil production. And we always assume that no matter how much they produce or what prices are, as a general rule, their economies do alright. But they aren’t. A 4.5% drop in oil production performed in order to comply with the OPEC+ decisions has resulted in the contraction of the overall economy. We have been reading lately about how some of the OPEC countries are arguing against keeping production off the market, even if all prices were to drop. They believe the net revenue would still increase and it seems they need the money more than most had thought. Angola has already left OPEC, so they are no longer under their agreements. Does that continue? So far, Saudi Arabia and Russia have been in charge, and as the largest producers, that’s not likely to change, but countries on the margin dropping out reduces the group’s power, and the two largest players definitely don’t want to see that happen. So, France is struggling, Germany is in recession, Kuwait is in recession and China is making strong moves, not seen since the financial crisis. Scary thought.
All Things Oil #1.
OPEC lowered projections for demand growth this year, 2024, by 210,000 barrels a day to 1.6 million barrels a day. It has cut estimates by 27% since July.
Global oil production is forecast to increase by 1.6 million b/d in 2025, and almost 90% of that growth will come from non-OPEC+ countries according to the EIA.
Total jobs in the Oil Service sector reported at 655,630 in November 2024.
Weekly performance update: Despite higher oil prices, the Energy Select Sector SPDR Fund (XLE) was down another -2.0% over the last week compared to a flat S&P 500. However, midstream equities are still outperforming much of the energy sector YTD. This from Capital One.
All Things Oil #2. From the IEA Oil Market Report December 2024.
World oil demand growth is set to accelerate from 840 kb/d in 2024 to 1.1 mb/d next year, lifting consumption to 103.9 mb/d in 2025. Increases in both years will be dominated by petrochemical feedstocks, while demand for transport fuels will continue to be constrained by behavioral and technological progress. While non-OECD demand growth, notably in China, has slowed markedly, emerging Asia will continue to lead gains in 2024 and 2025.
Global oil supply rose by 130 kb/d month-over-month to 103.4 mb/d in November, up 230 kb/d year-over-year, on a continued recovery in Libyan and Kazakhstan output. Total oil supply is on track to increase by 630 kb/d this year and 1.9 mb/d in 2025, to 104.8 mb/d, even in the absence of unwinding of OPEC+ cuts. Non-OPEC+ supply rises by about 1.5 mb/d in both years, led by the United States, Brazil, Guyana, Canada and Argentina.
Benchmark crude oil futures were largely unchanged in November, at around $73/bbl for ICE Brent. Prices traded in a relatively narrow $5/bbl range, as concerns oscillated between oil supply security and faltering oil demand growth. Volatility slumped to six-month lows, with the front-month Brent futures moving by a daily $0.87/bbl on average during November.
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.
