Things I Learned This Week at SMU

February 17, 2023

Banner Event. This week was the inaugural SMU Energy Outlook 2023 symposium. Two days and some amazing speakers including Daniel Yergin and Vicki Hollub who both were presented with awards, as well as Bob Dudley, Scott Sheffield, Toby Rice, Robert Bryce, Don Evans, Ken Hersh, Allen Schwartz, Tom Leppert, Brad Jones, Jim Burke and many others. Every topic of Energy and Power was addressed by both panels and speakers. Wind, solar, biomass, nuclear, hydrogen, oil, gas, the grid, and electrical reliability are just some of the topics addressed. I first met Dan 40 years ago, when he had first started Cambridge, and the petroleum engineering firm I worked for was his first sponsor. Old home week.

Both Dan and Vicki were asked about what fundamental issues they see in the world today.

Yergin

Acceptance of U.S. LNG
Russia and its new alignment with China and India
·The diminishment of Russia as an economic force

Hollub

Develop technology that can offset carbon by direct carbon capture

Energy security by getting more than 10% of shale oil recovered to 20%+
Convincing people of the need for oil and gas is more than gasoline
The enemy is emissions, not the product

Best Statements

We need more savvy regulators
Europe shows how not to do an energy transition
27% of greenhouse gas is electricity and the rest is broader energy
Get methane under control
Tylenol is an oil product
Biden: “We need oil just a little bit longer”
CO2 should be used to get more out of existing reservoirs with limited new physical infrastructure rather than just sequestering the molecule

Nuke ‘Em. Mark Nelson, Radiant Energy, said Europe moving faster on nuclear will help it move faster here. Estonia and Poland have had a very focused drive for more nuclear. Differing sides agree, these are unifying issues. In the Eastern bloc before the wall fell, it was legal to demonstrate against nuclear. That is moving away. SMR, small modular reactors, while probably mis-named, are seeing greater acceptance. Estonia has 2-3 million people, almost a city state, and has never had nuclear, so the prejudices against it are minimal. As a result, they are aggressively pursuing more cutting-edge technology since it’s new to them. Poland is moving more slowly. He also noted that the current younger generation, even in the U.S., doesn’t have the same ingrained 3-Mile Island/Chernobyl mindset, and nuclear energy is seeing an influx of the best and brightest. LNG, with the EU carbon costs, put it at €120-€140 vs €70-€80 for nuclear, another driver of acceptance. Belgium has a green energy minister who said nuclear would be phased out by 2025. It generates 50% of the country’s electricity now. It has now been extended to 2035. It is generational. The current generation doesn’t know 3-Mile Island and doesn’t immediately see the danger, but the excitement.

Power Rangers. The CEO of Vistra and former CEO of ERCOT were on a panel that discussed Grid Reliability in the Age of Renewables. The most efficient use of wind and solar is electricity. Wind and solar, when producing more than dispatch demand can use, can use their excess power to generate hydrogen, but then the electrolyzer is not fully utilized. Trying to make hydrogen drops utilization to 60% and may not be the most efficient use of hydrogen. There is currently a significant lack of demand for hydrogen. Battery to grid is still a way off. The current grid distribution system is not enough to have one car in every garage. Last mile build out to allow that will take time and cost money. Picture someone digging up your alley and streets as the last mile of the grid is installed. The Texas electrical grid is the largest in the country and greater than the eight contiguous states combined.

Engine No. 1. The firm has three seats on Exxon’s board but insists it isn’t an activist. Their goal is to make money. Sustainability is the key since you make more money and have a higher valuation multiple when you reduce emissions, recycle water, etc. Sustainability is more resilient, more profitable and more stable. It was very difficult to raise money for oil and gas, in part because it had negative returns for years. Private capital has fled the sector right when it was needed the most and has great return potential. They were not an activist for ESG but because there was no outside of oil and gas member of the board, and thought they could bring a different mindset. This panel was very interesting.

Oil.

Oil fell almost 3% on Friday and was on course for a weekly decline, pressured by concerns of more U.S. Federal Reserve interest rate hikes that could weigh on demand, and signs of ample supply.
Saudi Arabia’s pledge that OPEC+ will hold oil supplies steady is setting up global oil markets for a year or two contrasting halves. Supply and demand will be fairly balanced in the first half before swinging to a deficit in the second, the group’s data suggests.
Russia is cutting oil production by 500,000 bpd by March 1st in response to price caps and embargos, but it appears that without Western technology help, production is starting to decline anyway.
About 30%-50% of homes have a garage. So far, only the wealthy can buy EVs and own garages and can charge at home but as ownership spreads, public charging becomes much more critical.

Natural Gas. Ouch. Since mid-December, natural gas prices have dropped and so has the futures strip. For 2023 and 2024, prices are now $3.01 and $3.61, down almost 50% for this year and 25% for next. European prices have dropped as well, now trading at $16/mmBtu, a 12-month low. Due to an abnormally warm winter, both here and in Europe, storage levels are high and Chinese buyers have yet to return to the LNG spot market in any meaningful way.

Chasing It. In the U.S., gas drilling activity has shifted as well. From the mid-2020 bottom in rig count, private companies took off and represented about half of all rigs drilling, with public independents and majors taking a much more cautious approach. In October of last year, the drilling activity of private companies peaked and has dropped by almost 80 rigs since then, while public independents and majors have added rigs and are now more than half of all drilling activity. Privates accelerated activity in part to try and take advantage of the strong M&A market in 2020 and early 2021. M&A activity has slowed and so has the effort by privates to groom themselves into a more attractive target.

Snippets.

Magnolia, the home and lifestyle brand founded by Fixer Upper stars Chip and Joanna Gaines, is exploring a stake sale. Look out Waco.
The Biden administration allowed a Chinese spy balloon to traverse the entire country, but it won’t let border patrol agents use surveillance balloons anymore to track illegal immigrants who got away.

No Solar for Scranton Joe. Last Wednesday, President Biden’s hometown zoning board rejected a 4-megawatt solar project. ECA Solar was trying to get zoning approval for a large-scale solar array with 12,000 panels on a 73-acre tract on West Mountain. The board voted 4-1 against it. It’s the sixth solar rejection this year with a total of 114 since 2017. Solar energy is politically popular, but local communities across the country are rejecting projects. Robert Bryce, podcaster and filmmaker extraordinaire, has put together a Renewable Rejection Database. His chart is below. We have seen lithium mines get approved, but not wind and solar projects, and last week we wrote about how there have been virtually no wind towers ordered yet this year from the major manufacturers. It isn’t as easy as some thought. And if you are in Colorado and don’t like fracking, wait until open pit copper mining comes back.

Energy SPACs Start to Work.

Drilling Tools International (DTI), which builds and rents out drilling equipment has agreed to combine with SPAC ROC Energy Acquisition Corp. The merger values DTI at $319 million. ROC went public in December 2021. DTI is majority owned by Hicks Equity Partners of Dallas.
SPAC Stratim Cloud Acquisition Corp. announced the signing of a binding LOI for a business combination with Force Pressure Control. “A profitable, growing company in the attractive energy services market. Force provides pressure control related rental tools and services required during frac and flowback well operations.”
ast Solar, a Sydney based company developing proprietary technology in concentrated solar power (CSP), has agreed to combine with a SPAC backed by Nabors Industries in a deal which will take the Australian company public at a valuation of up to $586 million.

BP Adds Retail. TravelCenters of America Inc. entered into a merger agreement with BP at an 84% premium to the trailing 30-day price, valuing the deal at $1.3 billion. A shareholder vote by TravelCenters is required, and the break-up fee is $44 million. TravelCenters is the nation's largest publicly traded full-service travel center network, founded in 1972, and has over 18,000 employees with 281 locations in 44 states.

Can You Spell Divisive? The Christian group He Gets Us reportedly spent $20 million on two Super Bowl advertisements that showed Jesus as someone with empathy for immigrants and the poor, who was also tired of the division of politics. "Something tells me Jesus would *not* spend millions of dollars on Super Bowl ads to make fascism look benign," - Ocasio-Cortez

And Again. The shootings at Michigan State are a tragedy and many believe that something must be done to reduce such incidents. In an example of leading by example, Ranjeev Puri, the house majority whip of the Michigan house of representatives, penned a letter, a statement on the MSU shooting. While sentence two was extending deepest condolences to the community, she opened her written letter with the statement “F**k your thoughts and prayers”.

Banking. My good friend and former co-workers, Tim Perry and Rob Santangelo, the two most senior energy bankers at Credit Suisse, had an excellent presentation on the financial aspects of energy today. Of note – while energy was the best performing sector in 2021 and 2022, it has only equaled the market over the last 20 years. How do we bring capital into the business? If we generate returns equal to or ahead of the market, capital will return. Oil is over 10% of the total market returns but is still only 5% of the market weight, trading at a significant discount. U.S. and European majors were in lockstep until 2020 and then the U.S. runs ahead since Europeans have had more green focus and for longer, but with lower returns. Debt markets are in line with the rest of the market, but equity values aren’t. The difference is DCF values in debt vs equity. The terminal values for oil and gas truncate at some point in the future and right now it is telling you that non-energy players are dominating the market.

Headlines.

EU Lawmakers Back Deal to Ban New Combustion-Engine Cars by 2035
Breaking News: U.S. on track to add $19 trillion in new debt over 10 years
Russian Moms-to-Be Flock to Argentina Seeking Safety, Passports
A year of sub-$3 gas could wipe out all 2023 free cash flow for shale gas players
Fetterman Checks in to Hospital for Treatment of Clinical Depression

No Credit for Trying. Since 2009, ExxonMobil and Synthetic Genomics have been working together to turn algae into low-emission transportation fuel. After spending billions, the company realized that the science was not economically feasible. For 14 years, the company worked to develop the technology. Now, environmental activists are saying it's Greenwashing-101: Spending hundreds of millions of dollars marketing an unproven techno-fix as a "low-emission" fuel to green your public image for a decade-plus, then quietly drop the project without ever having cut carbon at all. Very cynical. Exxon confirmed that it’s pulling back on funding for algae in favor of other technologies now being worked on by its Low Carbon Solutions division. “At this point we have other programs that are ready for deployment,” said Vijay Swarup, Exxon’s senior director of technology who ran algae research. “We need to get on the deployment curve for carbon capture, for hydrogen, for biofuels. Algae still needs some more work.” Algae biofuel research had an early surge in the 1970s-90s. Then, during a brief window of time, from roughly 2009 to around 2017, this alternative fuel technology became the darling of the renewable alternative energy industry. It was hailed as a solution to many of the world’s climate woes due to algae’s ability to capture carbon without significantly raising food prices, as was potentially the case with other biomass fuels sourced from corn, soy and sugarcane. There is a saying about the best of intentions but some will always find reasons to criticize. We congratulate Exxon for trying so dedicatedly.

Presidential Push. “Big Oil has used their record profits to buy back their own stock – rewarding their CEOs and shareholders instead of producing new oil to lower prices at the pump. Let’s quadruple the tax on stock buybacks and encourage long term investments instead.” So you want us to increase production now, but completely stop producing shortly, so returning capital to owners before the company goes out of business is wrong? It is the same with the windfall profit taxes in the UK. We lost money for a decade and received no subsidies to help and now, when we try and make up for a decade of losses, we are vilified, and asked to go back to losing money by growing production at any cost. I thought he said he was a capitalist but doesn’t seem to understand the most basic economics. Does anyone remember from 2020 - “No more drilling on federal lands. No more drilling, including offshore. No ability for the oil industry to continue to drill. Period.” - Joe Biden.

Revisionist. BlackRock Inc. Chief Executive Officer Larry Fink said the prevalence of private companies in supply chains has created a “structural problem.” That means it’s not feasible to have corporations report all their ESG risks. “Companies are very willing to report one and two,” Fink said of Scopes 1 and 2, which reflect a firm’s own emissions. “But to report Scope 3, then you were reporting on your supply chains and most of your supply chains are private companies on the supply side,” he said during a pre-recorded interview at the Oslo Energy Forum on Tuesday. “And so, this is the structural problem we’re facing in society today,” he said.

BlackRock Tells Texas It Supports Investments in Oil and Gas

Firm says in letter that it doesn’t boycott energy companies.
It oversees about $310 billion of investments in energy firms.

It’s Everywhere. First, it was Just Say No to Oil who were blocking traffic in London and vandalizing businesses and buildings. Next? Animal Rebellion. From their site: “brave Animal Rebellion supporters have been arrested after this morning’s peaceful and loving #ValentinesDay action on Westminster Bridge.” “Peaceful and loving”? It reminds me of the “peaceful” protests in Seattle and Portland. The group is vegan and wants everyone to love plants while eating them and not eat meat. From Their Website: “Take action with Animals. Every action is non-violent, every action is taken with love in our hearts and the desperate need to do something about this unjust system we live in. Together, we can build a kinder future.” #PlantBasedFuture. Yes, Virginia. The world has gone nuts.

The Old Guard. Just Stop Oil. “It is an act of genocide, for which you will be held accountable.” “The government has until the 10th of April to issue a statement assuring the immediate halt of all new fossil fuel licensing and consents. Without such assurance we will be forced to escalate our campaign.” Orange paint against the police? We will take the under.

One More. “No more excuses. No more greenwashing. No more bottomless greed of the fossil fuel industry and its enablers. 2023 must be a year of game-changing #ClimateAction.”

Politics. I apologize in advance. I try to pick out numerous cartoons that are appropriate for a topic being discussed. The art was just too good in this one.

Timeline of Volatility. Tellurian has a very experienced team in Charif Souki, Martin Houston, and Octavio Simoes. Their model differs from traditional liquefaction financings since Tellurian seeks to capitalize on the spread between cheap U.S. natural gas and expensive international natural gas. Analyst: “If Tellurian executes on its financing, Tellurian looks to be a home run”.

In April of 2022 a Limited Notice to Proceed (LNTP) was issued to Bechtel to initiate on-site demolition and civil site preparation activities. Driftwood LNG will create approximately ~6,500 construction jobs, and ~400 operational jobs. Driftwood is a $30 billion LNG export terminal project in Louisiana.

Tellurian has 20,000 of acreage in the Haynesville. The deal fits with Tellurian's integrated business model and the expanded drilling program planned for 2023.

Tellurian's production unit agreed July 13 to buy Haynesville Shale natural gas producing assets from EnSight IV Energy Partners and EnSight Haynesville Partners for $125 million, growing its upstream footprint in support of its proposed Driftwood LNG export terminal.

Tellurian's management decided to withdraw a massive financing attempt that would have hit it with incredibly onerous terms.

The company announced the canceled deals with Shell and Vitol a few days after withdrawing a $1 billion high-yield bond sale that would have funded the initial construction of its proposed multi-billion-dollar Driftwood LNG plants in Louisiana.

Tellurian's shares, halted multiple times after the disclosure on Friday, were last down about 20%.
Tellurian Inc (TELL.A) lost two of its biggest potential customers after the U.S. liquefied natural gas developer disclosed scrapped LNG supply deals with Shell Plc (SHEL.L) and Vitol SA on Friday.
As a result, Shares of Tellurian (TELL.A) plummeted 40.3% in September.
Tellurian woos Indian investors for its Driftwood LNG project.
ellurian Seeks $3.2 Billion from Equity Partners for Driftwood LNG.

Will Driftwood LNG be built?

Egg Prices. Anyone bought eggs lately? The number of cartoons last week about being rich because you had a dozen eggs abounded. Why?

Just This Week. We have been saying that while many don’t see positive returns from many of the renewable projects being done around the world, positive economics are not really needed for billions and trillions of dollars being spent in pursuit. I would rather be in the parade than standing on the steps of the poorhouse watching. Many decry the lack of returns while obviously ignoring the years of negative returns in the oil and gas business. Political will, popular public support, and huge subsidies will continue for years, regardless of sharp pencils questioning near-term returns, and long-term returns haven’t mattered to many of us for years. Hart publications tracks renewable projects. This week, they made some observations:

Nova Scotia authorities have given EverWind Fuels Co. environmental approval to proceed with the company’s planned $6 billion green hydrogen and green ammonia project.
Industrial gases company Linde said it plans to invest $1.8 billion to supply clean hydrogen to Dutch fertilizer giant OCI NV, after developing one of the largest blue ammonia facilities in Texas.
Dominion Energy has their $9.8 billion Virginia Offshore Wind Farm. The company said the project is on track and on budget.
Renewable energy developer and fund manager Copenhagen Infrastructure Partners will invest $8.6 billion in a large offshore wind power park in Portugal.

Equity or Practicality. Africa produces just 4% of global greenhouse gas emissions but is, like much of the Global South, suffering some of the worst consequences of a changing climate. Yet investment in renewable energy in Africa fell to an 11-year low in 2021. An electricity shortage in South Africa has been declared a disaster, allowing the government there to impose measures to support businesses and food production—and roll out solar panels.

Fantasy. With 5% of all new car sales now comprised of EVs, experts are saying that the U.S. has just passed the EV tipping point. That means we could be on the verge of an explosion in EV adoption over the coming months! This is an emerging megatrend Bloomberg projects will grow into a massive $46 trillion industry, and this time around, it isn’t just legacy automakers jumping in. Tech companies like Google, Amazon and Sony all have their own EV projects in the works. But the company some are most excited about is Apple. Yes, even Apple is making an EV. And according to Barron’s, it could “Disrupt the Auto Industry as Much as the iPhone Upended Tech.” The Wall Street Journal says it could help bring about the “End of the Car as We Know It...” One tech writer who’s been watching Apple closely since 1999 even says that “Apple Car will be as disruptive to transport as combustion...”

Reality. There are 15 million cars sold in the U.S. every year with 2 million of them actually made here. There are 325 million cars in the U.S. At this rate, all cars on U.S. roads will be electric in only 433 years.

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 service 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

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.