February 21, 2025
Things I Learned This Week about 17 Degrees
Walking out barefoot to get the newspaper is not a good idea but thank goodness for short front yards! Bring in wood for the fireplace before it gets really cold, cover the plants and make chili. Those were the best lessons learned! It is what I get for staying home! My smarter, younger brother who lives in KC flew to Phoenix as soon as he saw the forecast. Next time.
What To Do? There was not much happening in the oil business other than the daily grind of producing more than anyone else and hoping they don’t have the same ambitions. Tougher sanctions on Iran versus ending the Russia/Ukraine war? Israel and any neighboring country? Any uncertainty in the world today? Yet, oil is stuck at $70, a bit below the average of last year, resulting in expectations of a slower 2025 for service, drilling and activity levels in general. Now we are seeing volumes of oil artificially being held off the market hitting 5.5 million barrels per day. Artificial? How much more can each producer deliver if they are already cheating on the allowed volumes? Will it take more than 12 months to put more oil out or is it as simple as turning a valve? Just the fact that these questions are being debated is concerning. I don’t believe the 5.5 and I don’t believe the 1.5 either. But whatever it is, putting more oil on the market now would seem to lower prices even further, and sub-$70 doesn’t help anyone. OPEC+ continues to discuss delaying, again, releasing more shut-in oil onto the market. Again, though, just knowing that some level of production can be added quickly to an already fragile $70 market and also knowing that this decision is in the hands of people in places like Russia and Saudi Arabia, doesn’t give an investor much confidence in the sector. And if it is going to be weaker and slower this year, why shouldn’t I wait for another six months or so before it starts to discount 2026? All of these things are not a wild positive for the energy space as a whole. As more people understand that regardless of drill baby drill, the goal of Mr. Trump is to get oil prices lower, investing will be even more challenging. You just have to focus on coming out of this current market situation alive, and optimizing the returns on invested capital at the current price or lower prices. Good but not great, and not over yet.
A Great Career. It was announced this week that professional golfer and part-time CEO and Chairman, Cris Gaut, is retiring from Forum Energy after a nine-year stint as CEO, Chairman and Board Member. I have known Cris for longer than either of us will admit. Ensco, Halliburton, SCF, Forum and he also serves on the boards of EOG Resources and previously Valaris and Key Energy. He has been a pillar of the industry for the last few decades. He isn’t going away, or dead yet, but leaving the Forum board is like moving away from the house you built. I look forward to more fun with Cris and could not pass up the opportunity to laud him for a career, so far, very well done.
We Pray for Chaos. “Sustained Supply Disruptions Key for Oil to Maintain $80+.” Geopolitics rule the oil price near-term. EIA forecasts lower oil prices in 2025 amid significant market uncertainties. On a “fundamental” outlook, oil prices should decline this year. We can argue about the accuracy of EIA predictions, but usually they are off by degrees, not direction. But because of “significant market uncertainties,” those being the increasing level of political chaos around the world, oil prices are moving higher. Perverse in some ways but an economic reality. “Iran’s Proposed Embargo Could Cause Chaos In Oil Markets.” Biden turned a blind eye to the sanctions and Iran’s oil production actually increased, which means there was more chaos than originally expected! And the election of President Trump amplifies that chaos and its potential, more than most can imagine. We talk about the TV show, Landman, showing our industry to be wild and chaotic when we all know that it is just a dramatized TV show and not reality, like the TV show “Dallas.” But we all knew a dozen industry people who could have been JR. And while few Landmen have been tortured by cartels, we all know of accidents and explosions and fires, and over the years we have experienced many. A Piper Alpha picture is on my wall. The Horizon? Like the shark below the water, ignoring the storm that rages above, ignore the chaos and carry on. That should be our charge as an industry.
Cut or Not to Cut. Planning has always been a challenge in our industry and really any industry that is commodity based, critical and under one country’s control. We are now hearing that OPEC+ delegates are considering a delay in restoring output, but Russia, the “+” part, objected. The group meets monthly to set quotas, and with oil back to where it started the year, we don’t see how the reasoning has changed. According to OPEC+, they have cut 5.85 million barrels per day, which is about 5.7% of global supply, and in December it was decided to continue the cuts through the first quarter of 2025. It marked the latest delay due to weaker demand and increasing outside supply, but some members are getting antsy, like the United Arab Emirates. It feels that it has done more of the heavy lifting amid a campaign for higher quotas, and any new delays could be met with resistance.
Best Elon Tweets.
“Bruh, if I wanted to rummage through random personal shit, I could have done that at PAYPAL. Hello???”
“Having tens of millions of people marked in Social Security as “ALIVE” when they are definitely dead is a HUGE problem. Obviously.”
Still Kickin’. I had thought that, after Macondo, BP would in some ways, go away. A name change, bought by BHP, something. Well, they are moving their incorporation to the UK, having been jointly operating from both London and the Netherlands for years, due primarily to a number of lawsuits filed against the company. And now there are stories bouncing around about combining Shell and BP. BP has an activist investor that owns 5% (Elliot) and rumors to combine the two have been circulating. It seems to be the strategy de jour. Shell has a market cap of ~$208 billion and BP is at ~$94 billion. Combined, they would have 180,000 employees. Iraq and the Gulf of America are areas in common.
PPHB – U.S. Energy Market Update Highlights:
Commodity Prices: WTI crude oil is currently $72.48 per barrel (up ~2.5% week-over-week) and natural gas is $4.09 per MMBtu (up ~8.5% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.5 MM BOPD (up ~1.5% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories increased by ~4.6 million barrels week-over-week vs. an estimated increase of ~3.2 million barrels.
Frac Spread Count: There are currently 203 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 2 rigs week-over-week).
Bipartisan Humor. “Politics is supposed to be the second oldest profession. I have come to realize that it bears a very close resemblance to the first.” - Ronald Reagan
Pump Baby Pump. “We have more energy than any other country, and now we are unleashing it,” Trump said as he signed an executive order commissioning the panel. “I call it liquid gold under our feet — and we’re going to utilize it.” The new National Energy Dominance Council will be led by Interior Secretary, Doug Burgum, with Energy Secretary, Chris Wright, as its vice-chair. The panel is meant to shape energy policy across the federal government and help mobilize the permitting, production and distribution of oil, gas, electricity and other resources. Sweeping energy policy changes are already underway, and Trump’s top cabinet officials, flanking the president on Friday, announced a series of planned actions to facilitate the flow of U.S. oil and gas.
The Council’s mission is to advance policies that strengthen U.S. energy dominance by:
Improving the processes for permitting, production, generation, distribution, regulation and transportation of all forms of American energy.
Recommending a National Energy Dominance Strategy aimed at reducing bureaucratic hurdles, enhancing private sector investments and promoting innovation.
Facilitating cooperation between federal government entities and domestic energy partners to ensure policy consistency.
This initiative reflects a concerted effort to bolster the U.S. energy sector's competitiveness and self-sufficiency.
Ouch and Gone. Tickets to the March 27th Rangers vs. Red Sox games start at $200 for the nosebleed section and $670 for 1st base tickets. Behind home plate is $2,400. One game. Priced me out of the market.
Important. All of a sudden, I feel very front and center. And while ENERGY has been hot for some time, now oil and gas are taking center stage. Nuclear is in a much better place than just two years ago, and small modular reactors, not the giant Comanche Peak-type projects, will be the path forward. And they are expected to be commercial in about ten years. In the meantime? Natural gas. Natural gas prices are set to be up ~65% this year and we are just getting started.
Government Help.
Transportation Secretary, Sean Duffy, said he would be advancing the GulfLink Deepwater Port project meant to facilitate shipments of U.S. crude oil (more below).
Wright said he’d conditionally approved liquefied natural gas exports from a project in Louisiana.
Trump said he’d be meeting with governors in an effort to advance a long-stalled gas pipeline in the Northeast.
Movement. We are talking about peacekeepers already! The UK PM said he had not taken the decision to consider putting British on Ukrainian soil lightly. It is the first time he has explicitly said he is considering putting military, even just as peacekeepers, on the ground in Ukraine.
Pearls of Wisdom – Thanks Bosie.
“My wife wants me to wear a bracelet that belonged to her grandfather. It says ‘Do Not Resuscitate.’”
“It's been months since I bought the book, How To Scam People Online. It still hasn't arrived yet.”
“If you have a red wine stain on your carpet, get some white wine and drink it until you don't care anymore.”
“One good thing about being wrong is the joy it brings to others.”
“My wife and I decided to never go to bed angry. We've been awake since Tuesday.”
“My wife and I started role-playing in the bedroom. Her favorite is The Sexy Librarian, where I have to sit quietly while she reads a book.”
“Being old is when you don't care where your spouse goes, just as long as you don't have to go too.”
“I now know how it will all end for me, one of my grand kids will unplug my life support to charge their phone.”
“I met my wife at a single's night. I was surprised because I thought she was home with the kids.”
“I want someone I can share my entire life with who will leave me alone most of the time.”
And It Continues. Consolidation continues in the Permian, with Diamondback buying Double Eagle IV for $4.1 billion, with 6.9 million common shares and $3 billion in cash. Encap-backed Double Eagle had seen a $5 billion valuation kicked around recently. Diamondback gets 40,000 net acres in the Midland Basin’s core, with production of approximately 27,000 bbl/d (69% oil). The deal includes 407 estimated gross horizontal locations, which is reminiscent of previous consolidations where “depth of inventory” carries the real value. The transaction is valued at approximately 5.2x 2025 EBITDA. This follows on the heels of Diamondback’s $26 billion acquisition of Endeavor. That equates to $102,500 per acre and $151,850 per daily flowing barrel, or a 6-year payback at $70 oil at current production.
Tariffs. The below tables show the tariff rates by different companies. Many people thought this was a brand-new thing until the word “reciprocal” started being used. For reference, prior to the last month, the U.S. was 1.52%. And as for tariffs, the U.S. has had a 25% tariff on any imported pickup truck for the last 50 years. Protectionism at its finest. Until Toyota, and others, built manufacturing here, there were nothing but U.S. pickup trucks on the road. That worked out pretty well.
New Loop. The Louisiana Offshore Oil Port, the LOOP, has been our only deepwater oil port for years. Now, Sentinel Midstream's Texas GulfLink deepwater crude oil export terminal has received its “Record of Decision” from the DoT’s Maritime Administration, approving its deepwater port license application, which was filed in 2019. Located about 30 miles off Brazoria County along the Texas Gulf Coast, the proposed deepwater crude oil export terminal will cater to Very Large Crude Carriers (VLCCs), and promises to substantially reduce costs, improve vessel traffic in crowded channels and reduce air emissions associated with lightering operations. DoT Secretary Duffy said the decision is “a declaration that American energy will fuel not just our own economy, but the global market—on our terms. (It) opens the floodgates for American oil exports, putting our producers in the driver’s seat and ensuring that the world looks to the United States—not foreign adversaries—for energy supply.” Crude oil, collectced in tanks near Jones Creek, Texas, will move via a 42” pipeline to one of two floating Single Point Mooring (“SPM”) buoys in the Gulf, which will allow VLCCs and other crude oil tankers to moor and receive up to two million barrels of crude oil per day. Any new port like this will cause some disruption, as a key part of a supply chain is added, but this is clearly a positive for the domestic industry.
Obsolencence. The 2012 delivery of the last of 7 of the Ensco 8500 series, now knows as DPS-6, was at a cost of $560 million. It went to work after Macondo, and is now retired, barely a decade old. Three semis: the DPS-3, DPS-5 and DPS-6, are coming out of the Valaris fleet. The DP-5 had been idle since Q3 2024, while the other two have been stacked for several years. They came out in 2010, 2011 and 2012, built by Keppel Fels in Singapore and equipped primarily with NOV gear. Rated for 8,500 foot water depth and a 2 million-pound hookload that can drill to 37,500 feet (six miles), Valaris (the combination of Ensco and Rowan) announced that they are being repurposed for other use or scrapped. $560 million dollar assets that are scrapped at 12 years of age, though, the older two have been idle for years. In addition, a 25 year old jackup that hadn’t worked in five years was sold for $25 million. And we wonder why investors are leery of committing capital, especially in a hyper-cyclical and volatile sector.
Headlines:
Foreign aid freeze results in mass layoffs that could “crash” the industry.
Democrat polling finds Elon Musk is unpopular.
Trump’s foreign aid freeze throws journalism around the world into chaos.
So the people who made us rename everything from military bases to football teams to pancake syrup are very upset with this Gulf of America thing aren’t they.
Trump rules out deporting Prince Harry: “He’s got enough problems with his wife.”
California professor refuses to use “chief” in her CEO title saying it offends “Indigenous colleagues.”
It’s The Nose Ring Every Time.
Cynical. You start reading this article about a big staff loss at a government clean energy program. 60 employees, including dozens of probationary employees, hired in past years have resigned or been fired at the Energy Department’s Loan Programs Office. The office provides cheap funds to clean energy projects. And you think, “well that probably is a good thing.” And then you continue reading. This is a staff of about 250 people and they have $400 billion at their disposal from the Inflation Reduction Act. Then you start to think, excuse me? What were they doing? The people who left or got fired represent 1/4 of the workforce, which is probably one of the highest percentages I've seen so far. Those departures, along with those who refuse to come back to work, are estimated to be about 50% of the staff. In an article it said “some of the people said they feared the Trump administration would additionally take aim at the loan offices’ independent contractors, a move that would likely limit its ability to dole out cheap energy.” Oh, that makes me feel better. I'm all in favor of clean energy projects and in everything we do. We should strive to have a cleaner world. It will become more difficult and more important over time. But I'm also a fan of efficiency and fair markets. Might some of the cuts here be too deep? How many times in our industry have we had to cut and cut and cut, each time it hurts more and more. I feel for the people getting let go. I felt sorry for the people who got laid off in our industry, though, less so for the first people laid off. That can just be efficiency trimming. But over the years, we've had to cut into the meat of our industry. So to watch another industry be subsidized and pushed by political decree rather than consumer market demand? I don't see any of that as efficient. I have a friend who is on Senator Manchin’s natural resource committee staff. I don't think he's the biggest fan of President Trump or Elon Musk, but I did ask him his opinion of Chris Wright and he said that he hears he's a pretty good guy. At least that's good to hear. It’s a start.
Wisdom. You can't beat an argument by marginalizing or silencing it, and when you do try, you only make the weakness of your own argument all the more apparent.
Europe – Economics 101. There has been a lot of press lately comparing the EU to the U.S. in many ways. One is economic growth. From 1983 to 2023, the U.S. GDP growth has averaged around 2.5% to 3% annually, with notable growth spurred by technological advancements in the 1990s. The EU has averaged about 1.5% to 2% annually. But it is really business formation that drives our economy. According to the SBA, about 600,000 new businesses are started each year and this caused an increase to a record of over 4.4 million new applications in 2020. The EU averages about 1.5 million. The difference is in technology and available capital. Restrictive EU technology regulations has allowed the U.S. to sprint ahead in this area. In 2021, the total value of new businesses in the U.S. was over $330 billion invested, versus about $47 billion in the EU. This is why Germany is in a continuing recession and the UK is having a financial crisis as well as a cultural one. We are a more entrepreneurial society and it shows in many different ways, all positive.
Tolerance? A man regarded as the first openly gay Muslim Iman was shot and killed while sitting in a car in what they are calling an “assassination because of his teachings.” This was in South Africa.
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.
