Things I Learned This Week While Getting Blown Away

December 8, 2023

Commodity Prices.

Crude Oil (WTI): $69.34 per BBL - Down 6.39% w/w
Natural Gas (Henry Hub): $2.58 per mmBTU - Down 8.14% w/w

Windmill City. This past weekend was a guy’s trip to Gruver, Texas, which is only about 6 ½ hours from Dallas. The school in Gruver is fabulous, thanks to the turbines spinning on school owned property. With a temperature of 27 degrees, fighting a 25 mile per hour wind and looking through heavy brush for a rooster, everywhere around me were turbines. Literally hundreds. NextGen Energy’s Firewheel Project in Gruver has 347 wind turbines. Childs play compared to the Kern County project outside of Bakersfield with 4,580 turbines. Texas leads the nation in wind power, and Gruver has its fair share. Now if there had just been as many pheasants as last year…

Houston Party. This week, Hart Energy held its 50th anniversary event, honoring 50 industry icons in the newly formed Hall of Fame. John Hartig, CEO of Hart, welcomed everyone, and Dan Pickering moderated a panel consisting of Harold Hamm, Tom Petrie and Chris Wright. It was an incredible event where I got to see and congratulate a number of friends who made the cut. It also honored Agents of Change, the next generation of industry leaders. It was a great evening and I thank John for the kind invitation. Congratulations to Hart on 50 years of service to the industry.

Hall of Fame

Hart Energy’s Honored the Industry ACEs. Agents of Change in Energy. Congratulations to all. Hall of Fame is next!

More Consolidation, and We Helped. It was announced this week that ProPetro is acquiring Par Five Energy Services. Specializing in cementing services in the Delaware Basin, Par Five complements ProPetro's existing cementing business, operating predominantly in the Midland region of the Permian Basin. The acquired business will be integrated within ProPetro’s existing cementing operating team and brand. In the words of Sam Sledge, the CEO, “this acquisition is evidence of our ability to execute on our strategy to pursue accretive growth opportunities that increase our free cash flow generation. The transaction is also highly complementary to our current cementing operations and will allow us to serve both the Midland and Delaware Basin areas of the Permian.” That is just about the textbook definition of “consolidation.” ProPetro management expects this will increase 2024 adjusted EBITDA by about $10 million. Well done. PPHB of Houston, Texas served as the financial advisor to ProPetro.

The Power of Oil in Politics. It’s all about us.

Venezuela is teetering badly. Over 25% of the Venezuelan population in 2013 has emigrated. Left. Completely moved elsewhere. Pressure was building to allow Maria Machoda to run for office, an opposition candidate to the current ‘dictator,’ Maduro. Teetering. Bam! Oil is more important to the U.S. than the internal politics of another country. The administration cuts a deal to lift some oil sanctions that brought billions of dollars in and bails out Venezuela. It’s politics. Some decisions are hard. I don’t think that throwing Maduro a lifeline was an easy thing to do. But you must choose the most necessary option you had. More oil. Granted, they stiffed U.S. producers, but it’s no real surprise since it was motivated by - hold your breath - politics. And the linchpin to both arguments is - hold your breath again - oil. And then the dominos start to fall.
Maduro sees that the need for his oil gives him significant leverage. It has to. If someone turns a blind eye because they really need something, that ‘something’ has value. And while Venezuela has more oil reserves than almost any country in the world, their oil is second grade. Heavy and sour - so it usually sells at a discount to better grades. But, if you have a lot of it, it doesn’t really matter. Then, you look over your shoulder and you see something that is a whole lot better looking, and it’s yours! Maybe. Guyana. Venezuela’s next-door neighbor. With a whole lot of good-looking oil. Better than your oil. And the U.S. just gave you a taste of what controlling oil and our industry can mean. Maduro has now said that he disagrees with an 1899 tribunal decision that established “boundaries” that later lead Guyana to become the independent nation it is now. And then Exxon drilled 17 discoveries in a row, which, outside of shale, is unheard of with historical success rates for offshore at 20%. I’d want it too. He just seems to be exceptionally aggressive by moving troops to the border and holding referendums on who the desired area actually belongs to. Virtually no country, not even the typical allies, think this is a good idea. But he’s gotten a taste, wants more and will do what he has to do to get it. Oil, our business. It matters a great deal it would seem, from these and other situations.
Remember when we politely requested Saudi to increase oil production, since the high gasoline prices in the U.S. at the time were putting political pressure on the administration coming into an election. What could be a more direct mixture of oil and politics. And you shrug, sure, we know that. We’ve known that forever. But the point is that politics and oil are still just as intertwined, if not more so today and particularly on a global scale. Nothing this critical to the world will be phased out anytime soon. Ask the voters their opinion on the validity of an 1899 tribunal hearing. Sure. I would trust what they decided. After all, it’s not like it’s a court with law and judges. (That was sarcasm). It’s like the U.S. asking in a broad vote if Canada really should be under our dominion. Sure. Why not? Except that it isn’t yours. This is a referendum of everyday voters, not a court of law.

Far Out. SpaceX started talks about selling shares at a valuation of over $175 billion, people familiar with the capital raise said. A boost from the summer’s $150 billion. The company has had more than 250 launches, putting people, satellites and supplies into space and even resupplying the space station. It has a contract with NASA to land on the moon in the next ten years. SpaceX also operates the internet-from-space Starlink business, which has been in high demand by Israel and Ukraine throughout their war efforts. SpaceX revenues are on track to hit $9 billion this year across the rocket launch and Starlink services. SpaceX is owned by Elon Musk of Tesla and Twitter. And he is still the richest man in the world.

Citibank. “Oil’s selloff may boost the odds of an emergency OPEC+ meeting within the next few weeks.”

I’m In! Below is the Polestar Synergy concept car. Polestar already makes an interesting EV and the lack of sales in China is causing them to dump EVs into Europe. If the cars look like this, you can dump one in my driveway!

Ouch. The S&P Global Clean Energy Index is down almost 30% this year, compared to an S&P 500 gain of almost 20%. We have written extensively about the under-performance of ESG and green-related funds. Individual investors in BlackRock made it clear this year when they voted for higher returns over climate issues during the spring proxy season. And for good reason it seems.

Politics. Vote for aid to Ukraine now! It is critical. Okay, but only if you do something for me. That is politics. When you have leverage, someone over the barrel, you use that leverage. President Biden admits the border is broken and immigration has been broken for decades. I am reminded of New Orleans during Katrina. The world was amazed that so many people were living on the government dole. U.S. policy had caused an explosion in fatherless families since the mother would receive more money if the father/husband didn’t live there. Something had to be done, but nothing ever was. So, if the border has been broken for decades and one group says it has enough leverage to actually start getting it fixed, why not use it? I listen to the arguments made on one side and realize that this is politics, not humanitarian sciences. Either party will use leverage when they have it and the other side will decry that it is cruel and unfair to do so. Both sides do it. A compromise by both sides would be a great thing to see. We protect Ukraine and start to fix the broken border. Sounds fair to me.

What’s Next. I always got a kick out of seeing the Everett LNG regasification terminal from client’s offices in Boston. The terminal has 3.4 Bcf of LNG storage capacity and has been the “pressure valve” for New England, supplying natural gas when regional systems can’t handle demand. But it is soon not to be. The terminal is slated to close by the end of May 2024. New York won’t allow drilling and Massachusetts won’t allow pipelines. The federal government delays all pipelines. Good luck in the winters of 2024 and 2025.

Observation at COP28. “The big question is whether countries will agree to a phase-out of oil, gas and coal, a phase-down — or neither.”

Mo Money. Exxon has boosted its share buybacks by 14%, and its budget has been increased to expand activity in the Permian Basin and offshore Guyana. Exxon plans to spend $23 to $25 billion on capital projects next year versus an expected $25 billion budget this year. However, next year’s budget will have more of a focus on those two areas mentioned. Chevron is following suit with plans to spend 14% more in 2024, at $16 billion, up from $14 billion this year. The biggest increase, $6.5 billion, is dedicated to boosting production from U.S. shale, almost half its budget. This year’s $14 billion is a 25% jump from 2022. The merger of Hess may change some things, but it is clear that Chevron sees a great deal of potential still existing in U.S. shale.

EIA Weekly Oil Data from EIA and Evercore.

Crude Implications: Neutral – draw above expectations. WTI backwardation between 1M-12M under significant pressure ($2/bbl narrower w/w). Money managers slightly increased ICE Brent and NYMEX WTI net long positions by 2% w/w, 53% off Sept peak. Market increasingly worried supply side (non-OPEC) threat to balances in 1H24 (inclusive of voluntary OPEC+ actions).
U.S. Crude Production: indicated at 13.1mm BOPD, down 0.1mm BOPD w/w, and up 0.9mm BOPD y/y.
Refinery Runs: 16.2mm BOPD, up 0.2mm BOPD w/w and down 0.4mm BOPD y/y. Utilization recovered to 90.5% post turnarounds.
Crude Imports (net): 3.2mm BOPD, up 2.1mm BOPD w/w and up 0.6mm BOPD y/y. Brent-WTI spread at $5/bbl, flat w/w.
Gasoline: Bearish – build above expectations. Demand up 3.2% w/w (holiday impact) and up 1.3% y/y.
Distillate: Bullish – build below expectations. Demand up 24.6% w/w (holiday impact) and up 5.8% y/y.

From BBerg. “Biden would sooner kneel before dictators for oil than let America produce its own. From a recent low of just 450,000 barrels of oil exports per day just a year ago, Iran was able to export about 2.2mm BOPD in August according to Bloomberg. That increase is the result of the quiet decision by the U.S. to ease off enforcement of its sanctions on Iranian exports starting late last year.” We have written about it and there is little question that it did bolster Iran’s aggression and helped pay for it.

A Holdover. “Their culture is not your costume. DO NOT appropriate ghost, zombie, or vampire culture this Halloween.”

Point of View. Javier Blas is one of the most connected reporters of oil and energy. He made the observation that Chevron’s Hess deal leaves few large acquirers left for the consolidating E&P industry - with TotalEnergies as the only major buyer left. U.S. shale firms face the prospect of combining among themselves.

Not a Good Sign. Moody’s Investors Service cut its outlook for Chinese sovereign bonds to negative, underscoring global concerns about the level of debt in the world’s second-largest economy. Moody’s lowered its outlook to negative from stable, retaining a long-term rating of A1 on the nation’s sovereign bonds. China’s usage of fiscal stimulus to support local governments and its spiraling property downturn is posing risks to the nation’s economy, ratings agency said.

Game Changer. Beta Technologies is an electric aerospace company, building planes that use electricity rather than jet fuel. The company, with Fidelity and Amazon as major investors, is starting to gain some traction. It was announced this week that Air New Zealand had ordered a plane for short cargo flights, to be delivered in 2026. Short-haul flights are 86% of all air mileage. The current configuration allows for vertical takeoffs and landings, has a 50-foot wingspan and can carry up to 5 passengers and a pilot. 747’s shouldn’t be worried, but this is just the beginning.

Cuts Coming? The rally in the market as well as oil prices has been prompted by the increasing conviction that the Fed will begin to lower rates starting next year. Traders confirmed the belief with recent buying, sending market futures higher.

Which Politicians are They Referring to?

The Politics of COP28. It would be nice if some of these politicians had ever run a business or worked in an enterprise that produced a product. Failing those educations, our politicians are making political promises based on populism rather than physics or economics. There are too many examples, but:

1) The administration, through the EPA, announced new methane reduction rules, unveiled at the UN Climate Conference in the Middle East. There is some irony there. Some very good friends of mine have voiced very negative opinions about the new rules. The leading OFS trade association, the Energy Workforce & Technology Council, released the following statement:

“While Energy Workforce shares the Administration’s goal of lowering methane emissions, we believe yesterday’s final rule will serve as a new tax on American energy production at a time when this industry could not be more vital. The implementation of a new tax on the oil and gas industry will directly impact the ability of Americans to obtain energy to fulfill daily needs, increasing the cost of oil and natural gas prices and decreasing domestic energy security. As global energy demand continues to skyrocket in the face of instability overseas, overburdensome regulations are not the answer to reducing methane emissions, technology and industry led initiatives are.”

2) I don’t argue at all with the statement about increasing costs. But every Democratic administration increases the rules and regulations of the industry which raises costs. With the way economics work, the price of oil goes up with cost. The industry has its best financial performances under those administrations. No real surprise. A disappointment to be sure, but there is some upside. We were already headed there. Methane leak detection for well sites, pipelines, storage tanks, compressor stations and other sources has been advancing for the last few years.

3) The rule mentions “pursuing leading edge technologies on methane detection.” I have worked on and looked at companies and technologies in this area for the last couple of years. We grumble about it. We would rather not know about leaks because then we have to fix them. But the reality was that you had to do something. But, at the same time, you were thinking of once-a-month detection runs. We all knew it had to go to full time monitoring, and those technologies have been battling for market leadership for the last couple of years. Companies are already forming vertical capabilities of detection and repair. No one system or technology has demonstrated or established leadership in these areas, but lots are trying to.

4) And, we have been working on reducing flaring for years. I am stunned we have gotten away with it for so long. The state of Texas gives waivers like Halloween candy. Some wells flare for years. We knew that was coming to an end. It can be too expensive to capture and gather small amounts of gas, so you need higher natural gas prices. But we have been flaring 1.2Bcf/d in the U.S. and that isn’t responsible by any measure.

So, in summary, I never like the government trying to force economics, but it is no surprise when they do. It would be nice to have the government leave us alone. However, that will never happen. Working closely with the government to educate them is desperately needed. But the other side has to be willing to listen and understand there is more to life than politics. What they are “forcing” on us now was expected, and we have been getting ready for it for several years now. So, we attack it like we do every challenge the industry has faced. Many companies will add a growth business and the consequent profitability to their top line. Considering the government still thinks a complete and immediate shutdown of the oil and gas business is desirable, they also think it’s possible. It’s not. And their ideology will teach a painful lesson to them at some point in the future. In the meantime, we adjust to the new rules of the game, and continue figuring out how to win. We always do.

Hammer Time! As in “more nails in the coffin?” SIXT, one of the five largest car rental companies, is discontinuing the use of Teslas due to their resale value being so low. Hertz is phasing them out of their fleets because they keep getting damaged. And this is after a big push for EVs from these very same companies a year ago. Which brings us to the next “nail.” It turns out EVs are a lot more expensive to repair. It takes 25% longer to get an EV into the body shop. The parts are hard to find, more expensive and more complicated. EVs require roughly twice the number of parts for the same repair on an internal combustion engine car. On average, monthly insurance premiums for an internal combustion engine car are $248 compared to $357 for an EV. You don’t even need to mention the materials required for the battery, the weight and cost to replace the battery, the lack of charging stations, the reduced range for heavier loads, the timing of when you can charge, the $20,000 average higher costs or the fact that 3,000 U.S. car dealerships, from all 50 states, sent a letter to President Biden asking him to ease the emissions mandate that forces manufacturers to build EVs when they are just piling up in storage lots because demand is not there. This is a whole new reason. Enough yet?

Now a Bigger Nail. The “emissions mandate” mentioned above isn’t really a mandate, but the Biden administration boasted that it would be a key part of its efforts to push greater EV adoption. If the EPA rule is finalized, the White House projected that a staggering 67% of new sedan, crossover, SUV and light truck purchases could be electric by 2032, with up to 50% of bus and garbage truck purchases being electric as well. This is the problem noted above. The EPA forces cars on people that they didn’t want. So, a group of legislators decided to address the problem directly and proposed the Choice in Automobile Retail Sales (CARS) Act which would specifically block the regulations proposed in April by the EPA and prohibit any rule mandating the use of a specific technology or regulations that limit the availability of new vehicles based on engine type. It passed with 216 Republicans and five Democrats voting in favor. It is expected to have bi-partisan support in the Senate, and the President has promised to veto. Even if he does, the point is getting made.

Men’s Grand Dilemma.

Organized Retail Theft. I guess I’ve heard of it recently but hadn’t thought much about it. As we all know, shoplifting has been taken to a brand-new level due to changes in different laws. The state of Washington is one of the worst, with theft of up to $750 only a misdemeanor. And, as a result, no one ever gets prosecuted. A local union has now staged a walkout at three Macy’s stores in the Seattle area to protest - get this - shoplifting and risks to employee safety. So, the “smash and grab’s” we have seen on the news, assumed to be isolated to very small areas, is now seen across a major city area. Think about that. Do unions now become more focused on law and order and less liberal? There was a very interesting quote in an editorial in the Wall Street Journal and it struck a note. “Where crime is tolerated, it proliferates.” Now it comes to light that these retail theft rings are nationwide and well organized. People steal vehicles and loot high-end stores for very specific items. And, at the other end of the spectrum, others pay $10 for each pair of stolen Nikes. You take the whole range. It is no longer a “smash and grab” of the Korean grocery store in the neighborhood. We all think of it as just something we must live with these days. What we’re finding out is what everyone knew all along. You really can’t just live with it. So, there has been backlash from businesses as ESG makes way for the politics of law-enforcement. If you suggested defunding the police today, every politician would run in the opposite direction. City councilmen getting carjacked. State senators subject to home invasion. The stories are no longer just articles in the newspaper, but happening in real life to the people who make the rules. It’s starting to impact all of us at this level. Maybe now things will change and issues as simple as shoplifting will see the pendulum swing.

Weather Reparations? Scientists have confirmed that the British and U.S. empires are the world’s biggest historical CO2 emitters as mass extinction accelerates during the final stages of global industrial capitalism. The baseline extinction rate is about one species per every one million species per year. No one else has reported any “acceleration.” Data shows that including CO2 from countries once under colonial rule makes Britain one of world’s biggest historical emitters. The UK is responsible for almost twice as much global heating as previously thought when its colonial history is considered, according to the study. The top issues? The destruction of forests in colonized countries, with the biggest contributors coming from India, Myanmar and Nigeria before their independence. The UK’s domestic emissions account for 3% of total world emissions dating back to 1850. But, when given responsibility for emissions in countries once under the British empire’s rule is given to the UK, the figure rises to more than 5%. Poorer countries with less developed infrastructure seem to fare worse than developed countries during weather problems. That is completely logical. Now if we were just to give them all our money so they can do better, what do we do? We become the under-developed third world country. It sounds more like revenge for things that happened 175 years ago. Does that mean we give everything back to the Indians and the Egyptians give Israel the pyramids, since they did all the labor?

2024 Oil Outlook: “Supply Concerns Abate and Transition Pressures to Slowly Appear, Adjusting Normalized Price Outlook Range to $75-$85” - Energy Intelligence. I spoke to a well-respected analyst this week who hopes for $80 next year but admits to being optimistic on his projection. The futures strip says $72. Our longer-term normalized price still comes out to about $84. Next week, we have our 15th Annual Xmas Soiree Luncheon where 25 industry execs make their bets for the oil and natural gas prices this time next year. Our record is abysmal.

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.