December 20, 2024
Things I Learned This Week Wrapping Presents for Christmas
Happy Holidays, Merry Christmas, Happy Kawanza and Happy Hanukkah!!! May the next couple of weeks be happy, warm and wonderful. Whether you have a religious affiliation or not, it is the end of a difficult year, and we are given a reason to celebrate. Seldom do we get to indulge in our children and ourselves, relive our youth, and have so much fun that is all socially acceptable! 2025 will be a better year. I know, because to be in this business means you have to be a persistent optimist. Read “The Big Rich.” We may have to redefine “better” a couple times during the year but “better” is really just a frame of mind, and we can choose to be positive. Spoken like a persistent optimist. So, enjoy all that the holidays will allow. A couple of weeks, it’s back to the grindstone of working to make it better. I believe in that SO much, that this will be the last missive of the year. I too will be “grindstoning” in a couple of weeks. Thank you all for your support, your time, and your commentary. Happy Holidays!!!
As A Point Of Information. SMU displaced Alabama in the race for the college football championship. I never thought I would write those words, much less publish them! But, in selecting the top 12 schools in the country, SMU will be there to compete in the college championship series. Here we go! SMU beat out Alabama for the last spot. Damn.
The IEA. In 2015, the IEA stated that “The golden age of coal in China seems to be over,” and then predicted global coal demand would fall to 5.5 billion tons by 2020. Two years later, it declared that “China remains a towering presence in coal markets, but our projections suggest that coal use peaked in 2013 and is set to decline by almost 15% over the period to 2040.” Updated in 2020, it was “Looking ahead to 2025, coal demand is expected to flatten.” And “Unless there are unforeseen developments that significantly boost coal demand in emerging Asian economies and China, it is likely that global coal demand peaked in 2013 at just over 8B tons.” 2024 will set a new all-time record for coal consumption at 8.77 billion tons. Thanks Robert Bryce. “Prediction is very difficult, especially if it’s about the Future.” - Niels Bohr, Physicist.
It’s Almost Enough to Get You Bullish. All the surveys for 2025 activity are being done. All the energy publications and statistical groups are coming out with their forecast as well. The futures strip is what it is on any given day, but right now, WTI is expected to average about $68 a barrel in 2025. Most of the results released so far indicate that next year we will see a weaker oil service market than this year, both domestic and international. Deep water and offshore appeared to be the only two winners. And they look to be absolute winners rather than just relative winners. But it’s taken about seven years to get there. The Middle East is still the long-term focus for most of the larger companies. So far, Saudi Arabia has suspended 29 Jackups. The oil production forecasts have been moving around, but only slightly. About the only exception I can filter out of all of this is that some don’t believe the U.S. can hit their share of the production growth without seeing some pick up in activity. I hope that’s right, and the logic makes sense. But it mainly makes sense on a short-term basis, since the long-term evolution of the business has been just that. When you look at the valuation multiples in the sector, you can see that investors don’t have a positive outlook, at least for the next six months, which is in line with the historical discount window of the market. And we can also say the futures strip is never right. But it’s error increases overtime, and its most accurate point is the immediately succeeding year. And again, that is $68. This is where you batten down hatches. This is when you start finding growth technologies that you can expand inside your existing network. This is when you find a partner of some kind, either buying, selling or combining on some basis for consolidation and scale are going to be required. And you don’t have to be SLB to scale, but if you’re too small, you will get left behind. These aren’t harsh realities. They’re just the continuing evolution of the business. I think the entire sector should move to performance-based contracts, so we finally get paid for the technology we’ve developed. That’s been an argument that has been going around for years. But maybe it’s time is coming. One of the better points at my lunch was discussions about what OFS companies can do to improve their lot. The answer of “quit adding capacity” seemed to be the most basic and the most effective and the most correct. Just saying. The goal is efficiency, but efficiency without value doesn’t work, so the industry has to find ways to create value other than hoping for a higher price. We’ve been very good at what we do, and now that’s become part of the problem.
Another Perspective.
“The great drama of American shale production may now be nearing its final act. For years, we have anticipated that the relentless growth in shale output would crest by late 2024 or early 2025, catching many off-guard. In hindsight, even this expectation might have erred on the side of caution. Quietly and without much fanfare, both shale oil and shale gas appear to have passed their zenith several months ago. Recent data from the EIA reveal that shale crude oil production reached its high-water mark in November 2023, only to slide 2%, roughly 200,000 barrels per day, since then.”
“Likewise, shale dry gas production peaked that same month and has since slipped by 1% or 1 billion cubic feet per day. The trajectory from here, according to our models, looks steeper still.”
“The depletion paradox had firmly taken hold. The industry’s assumption, that higher prices alone could counteract geological realities, proved tragically flawed. Today, as we observe the shale sector grappling with similar dynamics, it seems history may once again be repeating itself.”
“We believe the U.S. shale sector now stands at a crossroads eerily similar to that faced by conventional oil production in 1973. While shale’s achievements have been extraordinary, they remain subject to the inexorable forces of depletion. Yet, the industry, Wall Street, and the President-elect appear poised to repeat the missteps of half a century ago.”
“The lessons of history are clear: enthusiasm for growth, however well-intentioned, cannot override the fundamental constraints of geology. And if we fail to heed these lessons, we risk not just disappointment, but the stark realization that higher prices and bold policy initiatives are no match for depletion’s steady advance.”
This is from Goehring and Rozencwajg, from Natural Resource Investors. I have known Leigh for longer than I will admit, and his firm puts out good and interesting research. And I generally don’t disagree with the findings. 3 million barrels of additional liquids production? Not sure who actually thought that would happen. We have long been in the camp that the goal in U.S. oilfield operations going forward is a Herculean effort to maintain production, not to grow it. Production-related businesses will fare better than drilling-related businesses, even though drilling will never go away and would actually have to increase to hold production flat. They make some very good points.
[click here to access the report]
Let’s Dance. The “musical chairs” for analysts isn’t what it used to be, but it still happens. This week, Piper Sandler’s new Oilfield Services analyst, Derek Podhaizer, whose initiation report has overweight ratings on BKR, FTI, HAL and TS, and neutral rating on NOV, SLB and WFRD. Derek joins Piper from Barclays, which indicates the team left behind by long-time top rate analyst James West’s departure, is breaking up. Luke Lemoine, the former Piper OFS analyst, left the firm for a great corporate job with Weatherford. And of course, earlier this year, BofA OFS analyst, Chase Mulvehill, left to do IR and other things at Baker Hughes. Musical chairs and corporate seem to be beating out Wall Street.
ROIC Over DEI. BP has been scaling back its commitment to different types of renewable energy that were all in vogue 3 or so years ago when both BP and Shell committed to more Green than other majors. Towards the end of last year, both companies began backpedaling on their commitments as their core oil and gas business generated significantly higher returns than renewables, and that was the focus investors wanted. But not all forms of renewable energy have gone away for BP. BP entered into a JV that will invest $5.8 billion in offshore wind power with JERA, Japan's largest power generation company, in a 50/50 venture that would now become the 5th largest wind power generator on the planet. The $5.8 billion assumes 13 gigawatts of wind power, .14% of global electricity generation, and it assumes replacement of about $4.5 trillion. Wind isn’t going away, but when companies this big are just now committing, the takeover of all power by wind is not going to happen anytime soon.
Alma Mater. I am honored to be on the Advisory Board of SMU’s Maguire Energy Institute at the Cox School of Business. The school has a fabulous energy program, one of the most popular in the school, and we have been producing amazing energy graduates for some time. Former BP Chairman and CEO, Bob Dudley, was in SMU’s first energy specialty class. So, I considered it important this week when the school announced a Master’s in Energy and Sustainability Management. Before anyone groans, remember that sustainability is part of our lives now, and wouldn’t you rather have well-educated business graduates than Greenpeace? Unlike many graduate-level or masters energy programs, this degree combines traditional energy business foundations with emerging sustainable business practices. We are already looking for corporate partners and capstone projects for the first cohort of students in Spring 2026.
A Quiet Exit. If you’ve never been to Nigeria, well, that’s not all bad. Exxon has only been operating offshore for a few years and Shell has had the biggest problems. Its onshore pipelines are constantly being tapped by locals, causing pollution and explosions that are blamed on Shell. If you don’t have to work there, why do it? If you can generate better returns elsewhere, shouldn’t you? “Cut your losses and walk away” has been recommended and considered smart forever. So, in October, Exxon sold all of its onshore operations for $1.28 billion to a local company that represents a consortium of investors. This week, Shell did the same thing. A $1.3 billion sale to Renaissance, again a consortium of local Nigerian companies, ended Shell’s onshore operations in the country. Part of the reason for the exits, other than the very high cost and risk factors, is because the major oil companies are more focused today on growing financial returns rather than the previous focus on production growth. To all of you who have visited or lived, which would you choose? Lagos, London or Midland. Exactly.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $70.02 per barrel (up ~0.5% week-over-week) and natural gas is $2.73 per MMBtu (down ~2.2% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.6 MM BOPD (up ~2.3% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 0.9 million barrels week-over-week vs. an estimated decrease of ~1.6 million barrels.
Frac Spread Count: There are currently 217 frac spreads operating in the U.S. (a decrease of 3 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 573 drilling rigs operating in the U.S. (an increase of 1 rig week-over-week).
Therein Lies the Problem. We did a study on 21 public E&P companies continuously from 2010 to 2020. Over those ten years, the group in aggregate lost $30 billion in negative net income, it lost hundreds of millions in value, and all of this was after outspending cash flow for 7 of those 10 years. In 2020, investors revolted. The “G” in ESG is obviously not being observed if management and the board erode shareholder equity for years! Governance? So, now capital discipline is built into many companies’ compensation policies, to force a return on, and of, capital. We have gotten better. But not everyone is there yet. According to a report, cash flow from operations for natural gas-focused E&P companies increased by 34% from Q2 to Q3! But they were still in the red, for the third straight quarter, losing $540 million in Q3 alone. I understand that natural gas prices are low, though they increased from $2.06 to $2.12 from Q2 to Q3 and everyone expects prices to rise. We always do. Imagine where natural gas prices would be today if all those pipelines out of the Marcellus and Utica had been built three years ago. A $1 gas price today? And yes, LNG is coming on. And that is great. The 12 Bcf/d now could go to 24 Bcf/d by the end of the decade. But remember, we have lots and lots of natural gas. Everyone’s biggest issue has been infrastructure, not supply. If an oily E&P company, or OFS company for that matter, can’t make money at $75 oil, they need to rethink their business model. I’m not sure what that the number is for natural gas, but operating efficiencies, AI geoscience and leading-edge technology, will all serve to moderate upside pricing potential. Just because oil hit $147 once, doesn’t mean it’s going to happen again. Same for natural gas, but at what price?
Ready for a Bounce?? The following stocks were singled out this week as particularly weak performers this year and noted the selloff was likely overdone and might be ready for a bounce. Their lips to God’s ears. The below represents their YTD stock price performance.
Guest Editorial. “Why All Americans Should Support Repurposing and Plugging of Hydrocarbon Wells.” That was the title of an excellent paper by Phil Cruver. It eventually has to happen. “The U.S. faces significant environmental, economic and energy challenges in the 21st century. Among these is the pressing issue of idle hydrocarbon wells, millions of which lie abandoned or underutilized, emitting harmful gases and contributing to ecological degradation. However, these wells also present a tremendous opportunity. By repurposing and plugging them, we can mitigate pollution, fulfill financial obligations and strengthen America’s energy future.”
The Benefits of This Effort.
Reducing Methane Emissions to Combat Climate Change.
Helping Owners Meet Their Asset Retirement Obligations (ARO).
Providing a Solution for Future “Drill Baby Drill” ARO.
Supporting Economic Growth Through More Electricity.
Stabilizing the Grid.
Snippet. “China’s biggest outflow on record last month as domestic banks wired a net $45.7b of funds overseas. Must be buying bitcoin, because its sure not U.S. energy stocks” this from Michael DeFazio.
Boysie Bollinger Puts Out The Best Humor & Fun Facts.
Alfred Hitchcock’s “Psycho” features the first shot of a flushing toilet in mainstream American cinema.
Heartbreak can literally kill you. Damage from a breakup or loss of a loved one can lead to a heart attack.
In most of the world’s languages, the word for mother begins with the letter “m.”
In Japan, Christmas Eve is a time to eat strawberry shortcake and KFC fried chicken.
We Mentioned This Last Week. Someone’s PR department is working overtime. “Exxon's Custom Proppant Boosts Permian EURs 15%.”
Hart Energy - Influential Women in Energy 2025. Now in its 9th year, Influential Women in Energy recognizes outstanding female owners, entrepreneurs, engineers, financiers, technologists and more from across the energy sector. Congratulations to our own Laura Preng. I am honored to serve on the Advisory Board of Preng & Associates, and Laura is a driving force across the industry. Also, hats off to two other honorees I have the privilege to know, Patti Melcher and Katy Dickson. Our industry has seen a number of very strong women in the highest ranks. Cindy Taylor, Julie Robertson, Ann Fox, Maryann Mannen, Vicki Holub, Kristin Smith, Laura Schilling and many more. It’s a long list and they will all most definitely influence our futures.
Confirmation. PwC, the accounting firm once known as PricewaterhouseCoopers, says that there are several challenges that energy executives must navigate, including shifts influenced by geopolitics, government initiatives and a focus on energy security and sustainability. That is pretty broad, and with no offense, pretty obvious.
Strategic buyers are streamlining operations and honing core competencies to enhance financial performance, while dominating the consolidation across energy, especially midstream, with strategic buyers outpacing private equity firms.
Geopolitical tensions and uncertainty around OPEC+ production cuts are likely to influence oil prices, with conflicts in Europe and the Middle East adding risks to oil supplies.
The “big takeaway” from the report is that the new Trump administration is expected to continue focusing on “traditional” energy sources, with PwC predicting a surge in oil and gas M&A alongside continued renewable investments as data centers drive up energy demand.
The PwC report can be found here: <https://www.pwc.com/us/en/industries/energy-utilities-resources/library/energy-deals-outlook.html>
Big Numbers? I remember when 1,100 meant something. This week, the Fed cut rates, but also signaled that they may not cut again soon or as much as the market expected. That’s pretty nuanced if you ask my opinion. The market disagreed. The market dropped more than 1,100 points or 2.7% on the day. Heck, I remember when 2.7% meant something. And then I started wondering how far back that record would go. How many times in history has such a thing happened? I found that the last time was last August. A couple of months ago? So, I won’t go screaming with my hair on fire about it since I wasn’t betting the farm on the Feds actions this year anyway. This is one of those times you keep your head down and just keep plugging away and ignore the noise.
1,500 Pages. The Budget extension bill is more than 1,500 pages long and congress only has 24 hours to read it?!?!? Elon steps in and support fades quickly. The reports say he is threatening to primary anyone who votes “yes” on the bill. “X” users flooded the phones. The “people” spoke? But 1,500+ pages? Filled with enough pork to make pigs worried? A $100 billion give-away as a parting gift from the losers? By the time you read this, there will likely have been a resolution, but regardless of what ends up happening, they gave our elected representatives 24 hours to read, study, comment and vote on a 1,500-page bill? As the new head of the DOGE, I am happy to see this happen.
Snippet. While Germany's low wind output causes record power prices, Vice Chancellor Robert Habeck visited Kenya to dissuade them from building a nuclear power plant and build more renewables. Kenya's Energy Minister was “resolute” over the need for reliable nuclear power.
Exceptionalism. As it turns out, Americans are better at literacy and science and worse than average in math. And it is starting to look like a trend. Overall, American students placed 24th in reading, 38th in mathematics and 25th in science. According to data released last week by the OECD, only about 12% of Americans score at the highest levels on internationally administered academic tests, while 34% score at the lowest levels, nearly three low-scorers for every high-scorer. Germany’s figures are about even: 18% score at the highest levels and 20% at the lowest. Yet, America excels relative to Europe despite these enormous differences. While Europe has created 14 companies worth more than $10 billion in the past 50 years, with about $400 billion of market value in total, Americans have created nearly 250 such companies, worth roughly $30 trillion.
Bonafide’s.
Some 690,000 students took the assessment in 2022, representing about 29 million 15-year-olds in the schools of the 81 participating countries and economies.
In the United States, 4552 students, in 154 schools, completed the assessment in mathematics, reading or science, representing about 3,661,300 15-year-old students (an estimated 86% of the total population of 15-year-olds).
Mean performance in mathematics, by international quintiles of socio-economic status.
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.
