February 23, 2024
Things I Learned This Week While Thriving
Kudos. John Daniels and his team at Daniel Energy Partners held their THRIVE conference at Minute Maid Park this week and it was a home run. The parade of CEOs speaking at the conference was impressive with the heads of SLB, HAL, BKR, WFD, OIS, RIG and many others. E&P companies took the stage several times as well giving everyone a very good perspective on the world. Congrats, guys, and thanks for the invitation. It has become the defining conference of the sector. The attitude was positive, as it was at NAPE just two weeks ago. Everyone bemoans the price levels of natural gas but they have been low enough, long enough and with a weak enough outlook that any concerns are swept to the side of the road. For everyone else, if you can’t make money at $75 oil, should you really be in the business?
Now What? The outlook for the year is fairly flat, by all respondents. But since there was no wholesale addition to assets by any companies, there is no crash. Below we have comments made on the outlook for the U.S. land market, which agree with that outlook. International still looks strong, especially in deepwater, but the Middle East appears to be holding up much better than had been expected by the Saudi announcement of restricting production growth. If they would have cut another million barrels, they could not have made it up in price since it isn’t moving on any news lately. But slowing future spending takes a page from U.S. E&P discipline that is now supporting 10%+ free cash flow yields. Saudi sells the same amount of oil and any price increase helps. Smart move.
North America Outlook. This panel included Steve Glanville, the CEO of Canadian OFS company, STEP Energy Services, and Andy Hendricks, the CEO of Patterson. Business is good. The drop in activity last year wasn’t a downturn but a softening, and in the top tier end of the rig business, it didn’t soften much. Public companies didn’t slow down, private companies did, and inside of privates, private equity was active while family-owned privates slowed down. It was clearly not good for second tier players in sub-sectors across the industry. There has been a slight drop in pricing among the top tier but much of that is back. The second tier have held pricing well too but with lower utilization. The Permian is the strongest and steadiest with the Haynesville being the challenge, but the rig count there represents only 7% of national total. The outlook for 2024 was slightly higher by the end of the year but basically flat while another was for the rig count to decline due to 2 to 3 mile laterals and further operating efficiencies.
Observations.
The capital disciple displayed has been impressive.
Canadian frac intensity is increasing with activity in the Monterey.
A record 28,500 foot lateral was drilled in the Permian.
There is lots of cheap Tier 1 acreage in Canada.
Supply chain issues like ESG have died down but still a topic.
A few very high-end products have long wait times but not many.
The labor situation has settled down as we are no longer ramping up but maintaining. Individual rig efficiency gains are in very late innings.
Overall improvement in operating logistics is now the growth driver of value.
Wet sand seems preferred in large simu-frac operations.
There are no electric frac fleets in Canada.
Damn Useful. I have shown slides of the many products made from hydrocarbons that have much greater utility than as a transportation fuel. Patrick Moore is a co-Founder of Greenpeace and now has a better understanding of the world. The below chart is his. Corroboration is a wonderful thing.
Now If They Could Just Vote? San Francisco has appointed a woman to serve on the Elections Commission. But she can’t vote. She isn’t an U.S. citizen. Kelly Wong who came to the U.S. in 2019 from China and while she isn’t legally allowed to vote, she will be overseeing and creating policy for the San Francisco Department of Elections. Wong is an immigrant rights advocate who wants to educate other immigrants who don’t speak English about the voting process.
It Had Already Started. We have written about the very well known phenomenon of capital budgets of combining companies always coming down. Priorities are revised, favorites get played, properties start hitting the market. By the time it hits the media, is isn’t new anymore. So it was announced that Oxy is weighing divestment of non-core Permian Basin assets after its deal with CrownRock LP eventually closes. “By virtue of all the M&A that’s happening, there’s a lot of appetite for companies to try to get into the Permian and we do have properties in the Permian that are not core to us but could be core to others and some of it just where they’re placed in the Permian geographically,” Vicki Hollub, Occidental’s president and CEO, said. While this might be sold in pieces, the Western Midstream Partners part of Oxy might be sold with a rumored $20 billion price tag. And at a conference this week, even an OFS company noted seeing the trend pick up steam. Now, we just need the backs to play, which brings up a different topic.
FLASH! “Exxon Warns Europe Must Cut Climate-Related Regulatory Burden.” Sounds awful and heavy handed. Lots of clicks I’ll bet. The company did say that unless the EU cuts some of the useless red tape, which the company claims is the “deindustrialization of the European economy.” Exxon has allocated $20 billion for decarbonization projects but will allocate more to areas outside the EU. But before you think that this story is just about heavy handed oil companies, buried in the final paragraph was this closing: “The comments came as European leaders, including French President Macron and more than 70 industry executives, meet in Antwerp in an attempt to pressure the EU to rethink industrial policy and support businesses struggling with implementing the bloc's Green Deal climate law that commits to net zero greenhouse gas emissions by 2050.
New and Different Capital. Private equity moved to the forefront in financing a couple of decades ago and many have done very well. Equity was easy to raise and monetization events were common. About 50 banks out there would play on the credit side. Flash forward. Only 25 or so banks are active, the equity markets have been shut for years so we are now seeing the emergence of different capital sources. Family offices have replaced private equity, with more willingness to take risks, and the assets held by family offices have exploded. And from the credit side, while private equity can’t raise capital, private credit can. There is the realization that even with the most aggressive declines in oil demand, we are likely to be producing 85 million barrels a day in 2050; down from 100 million today. That isn’t going away. So the security of those assets, whose DCF value just jumped in a much further out terminal value, seem very well covered. Keep an eye out. The capital markets are changing dramatically.
It Used To be Lobster. The UK, in its consideration to protect its woodlands and limit the country’s climate impact, is now calling for squirrels to be castrated and deer served to prison inmates. I don’t have a big problem with the latter. I like venison. But I picture the business card where your job is listed as Squirrel Castrator Specialist. These efforts would keep the animal population more in check and healthy. The squirrels are estimated to cause $45 million of economic damage. Interesting study in itself. We don’t have a monopoly on crazies.
Admitting Defeat? We have written about the dealerships that begged Biden to ease mandates as inventories piled up and buyers evaporated, then half the major car dealerships declined to sell EVs because of the conversion costs and lack of interest. It turns out that such efforts can provide results. "Instead of essentially requiring automakers to rapidly ramp up sales of electric vehicles over the next few years, the administration would give car manufacturers more time, with a sharp increase in sales not required until after 2030, these people said. They asked to remain anonymous because the regulation has not been finalized." This after the headline of “the Biden Administration is Said to Slow Early Stage of Shift to Electric Cars.” The change to planned rules was an election-year concession to labor unions and auto executives, according to people familiar with the plan. - NYT
This is Serious! Chocolate prices are about to rise — and bars and boxes will shrink too — after wholesale cocoa prices jumped beyond their 46-year old peak, setting a record high.
Snippets.
Xi Jinping’s need to deal with a sprawling corruption scandal in China’s military will likely put the brakes on any attempt for now to forcibly unify with Taiwan.
South Korea’s parliament passed a bill to do away with the consumption of dog meat through a rare unanimous vote on the legislation that President Yoon Suk Yeol has pledged to enact as law.
California bill would force homeowners and renters to report the number of guns they own to insurance companies and the government.
Venezuela threatens “forceful” response to ExxonMobil’s Guyanese drilling plans.
Kay Bailey Hutchison: Biden must reverse LNG moratorium.
Open Borders. Boston Mayor Michelle Wu Klux Klan is saying everyone has the right to illegally immigrate to the United States and receive temporary housing from the city of Boston. "Every human being has the legal right to come to the United States and seek asylum or shelter. We're working very closely with the state to create temporary housing so that families can get settled." There are about 4.2 billion people on the planet that would love to take her up on her offer.
Detection 346.0. Google gets a head start? Google will track our methane emissions from space. In partnership with the nonprofit Environmental Defense Fund, Google will use its AI and computing capabilities to create a map of the planet’s big methane emitters based on data from the satellite MethaneSAT, which launches next month. Google will cross-reference the satellite’s methane detection with the locations of oil and gas infrastructure to determine the types of equipment that leak the greenhouse gas. The data will be available later this year on the Google Earth Engine platform, which is free to researchers, nonprofits, and news media. When Biden dropped the methane restrictions at the Climate Summit last year, no one blinked. There are about 40 different methane detection businesses out there with different technologies and different stages of development. Google, being Google, gets a good start handicap. But the winners! We shall see.
Management Quotes.
“Responsible spending by the E&P industry is very positive for the long term health of the industry.”
“Opportunity for consolidation in OFS. It’s needed. We are seeing better, higher technology solutions will carry the day.”
“Efficiencies, better completions, and ever-longer laterals drove part of the ~900,000 barrel growth in the U.S. last year. One large E&P believes that U.S. oil growth will be much lower in 2024, but it needs to be, given volume gains elsewhere. Bottlenecks remain, with notable mentions for compression, water handling, gas gathering and electrification.”
Canadian Shrinkage. Cousins are disappearing in Canada as the size of families shrinks, a new study showed. In 2095, the average Canadian 15-year-old girl will have 3.6 living cousins, down from 15.3 in 1950. Researchers fear kids will miss out on important developmental stages without those relatives, “like learning to make fart sounds during funerals.”
Energy Snippets.
An EU commission is pressuring France to raise its renewable energy target to at least 44%. ~70% of France's electricity is produced by nuclear power.
A shift to solar & wind would increase emissions. Large solar power plants emit 4X more lifecycle CO2 emissions than a nuclear plant on average.
Solar panels made in China can emit up to 25X more lifecycle CO2 emissions than a nuclear plant. ~75% of solar panels are made in China.
U.S. operating battery storage capacity = 19,079 MW. Battery storage equals 1% of that amount.
As of February 2023, America has nearly 1.3 million megawatts of generation capacity, with the largest fuel source being natural gas (43.9%), followed by coal (17%).
Loyalty? Rep. Ihan Omar says she is a Somalian patriot who uses her political power to benefit her home country. “For as long as I am in Congress and in my position, I feel a responsibility to help my country.”
Political? New York’s Democrat governor assures real estate developers that they won’t be targeted for real estate valuations like Trump. Everyone does it. The bank’s obligation is to do their own due diligence and even his banks said they lost nothing and would loan to him again. Look for another exodus from New York.
Say It Ain’t So. Canadian MP. Charlie Angus introduced a bill Monday that would invoke criminal penalties that reads, in part, “it is prohibited for a person to promote a fossil fuel, a fossil fuel-related brand element or the production of a fossil fuel.” So, Angus says the bill is about “stopping the spread of falsehoods by the oil industry,” but the bill actually says it is about making it a crime to “promote a fossil fuel, a fossil fuel-related brand element or the production of a fossil fuel.” The actual language in the law would make it a crime to advertise the price of gasoline or for Chevron to run TV ads bragging about the additive it calls “Techron.” The actual language, in other words, has nothing to do with objective truth. It has to do with banning speech this Canadian MP doesn’t like.
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.
