February 28, 2025
Things I Learned This Week in Washington DC
The Best Part of the Trip!!
Amazing Experience. The Energy Workforce and Technology Council held a “fly-in” this week, visiting congressmen, senators and staff. There were over 40 of us, including many CEOs and all senior executives in the industry. And me. The new administration is obviously more positive on our industry than the last one, but there are still many intricacies that need focus. We had three days of meetings, listening to the Washington perspective and continuing their education on our industry. Thanks to Molly, Tim and the staff of the EWTC for their work in setting this up.
Lead Topic by All. The primary issue is permitting reform. It seems to be a bipartisan issue, with many non-fossil fuel states understanding the need for fossil fuels to benefit their constituents. Senator Manchin came close last year to passing a bill that would have streamlined the process, and we are optimistic about it happening now. Some help may come from the reconciliation bill. Judicial reform, NEPA permit limits and time limits for environmental reviews are hot topics as well. It now takes about five years to build a pipeline. At that rate, the ability to supply growing demand, for natural gas especially, will hit the “no service” point before then. This will result in dramatic increases in utility costs, a very regressive tax, as well as overall cost inflation.
Divide and Conquer. The group, broken into smaller groups, saw almost 40 congressmen and their staffs, from both sides of the aisle. My group met with Henry Cuellar (TX), Gable Vasquez (NM), David Valadao (CA), Troy Balderson (OH), Senator Ted Cruz (TX), August Pfluger (TX), Randy Weber, also from Texas, Julie Fedorchak from North Dakota and several more. A CRA was voted on and passed while we were there, punting the punitive methane fee back to the EPA for more clarification, which is kicking the can down the road, with the hope of legislating it away later this year. Judicial reform was one of our key talking points but it didn’t make the top concern list with most of the people we met. But most all saw the benefits our industry provides.
Great Points. “In other words, what has been unfolding is not so much an ‘energy transition’ as an ‘energy addition.’” Rather than replacing conventional energy sources, the growth of renewables is coming in addition to that of conventional sources. And with Donald Trump’s return to the U.S. presidency, priorities will focus again on conventional energy production and what his administration calls “energy dominance.” This was not how the energy transition was expected to proceed. Concerns about climate change had raised expectations for a rapid shift away from carbon-based fuels. But the realities of the global energy system have confounded those expectations, making clear that the transition—from an energy system based largely on oil, gas and coal to one based mostly on wind, solar, batteries, hydrogen and biofuels—will be much more difficult, costly and complicated than was initially expected. What’s more, the history of past energy transitions suggests that this should not come as a surprise: those were also “energy additions,” with each adding to, rather than eliminating, prior sources. Foreign Affairs.
Tired Feet. Cocktails in the Capitol Building opened the trip. That was amazing. The next day was walking 5 miles around a very small area, visiting offices. Walking the halls, one thing became obvious. Washington is run by 26-year-olds. They outnumber the “old folks” 10 to 1. The second is that lots and lots of people visit these people, in groups, one after another. All day. Unless there is a gong for a House vote. It was a very cool and educational experience from that perspective as well.
Insights 1. We met with one staffer from the office of the NM Congressman and Representative, Gabe Vasquez. His district is Southwest New Mexico and he is focused on jobs, and mainly field level jobs. He is a conservative democrat in regard to our industry, saying that we need all forms of energy. He is right. One big issue was water. Southeast New Mexico is not flush when it comes to water for agriculture. We discussed the idea of using cleaner produced water for that as well as data centers, which also need a lot of water. The big water companies in the Permian would hit a home run if their recycled water could be used for agriculture, and it is more of a state function than national issue. That is a connection that needs to be pursued.
Insights 2. At the lunch, with August Pfluger, who was representing the Permian Basin, was obviously positive discussion on our industry and looking forward to the changes in the reconciliation bill. I asked, “what was our industry’s biggest issue?” His answer? Permitting reform. It was obvious and noted that there is less and less resistance to oil and gas today, and it has changed dramatically over the last six years, and it is very constructive today with possibly 16 democrats crossing the line on several energy-related votes. Just “Green” doesn’t get it anymore.
Not Usual Politics. Last year, the Biden administration was very anxious to bring down gasoline prices but it had struck out with Saudi and U.S. independents on ramping up production. So, he turned to Venezuela. If you will hold free and fair elections, then we will end sanctions and allow Chevron to ramp up production, which is currently about 25% of the country’s output. And, of course, there were no free or fair elections, Venezuela immediately realized the leverage of oil and made a move on Guyana, saying the 125-year treaty and agreement it signed was no longer valid. The country made billions from the easing of the sanctions, but the Biden administration turned a blind eye. Cheap gasoline was more important. Enter President Trump, who called “BS” on Venezuela and has now suspended Chevron’s license. Oil prices moved up a bit, though, that won’t cause any global shakeup. But it will look like we mean business when we strike a deal. If you make promises, and break them, instead of normal political maneuvering, the current administration will act. That alone was encouraging.
Layoffs. The focus has been on government workers, and I feel for anyone who loses their job, but I have watched 10 years of layoffs in our industry with no outcries by anyone and few offers of help. And five questions seem easier than those 360 reviews we were subject to.
ON Semiconductor announced a company-wide layoff affecting approximately 2,400 employees to align spending with business trends. The company expects to save $105M to $115M annually post-layoffs.
Chevron's plan to cut as much as a fifth of its workforce, about 8,000 people, comes after oil prices traded in the $70-$80 per barrel range for most of the past year.
Consolidation Continues. Two big offshore service players, Saipem and Subsea7, are combining to jump to second place in the global offshore service market, now only behind SLB, and they do many things SLB doesn’t. The combined company will focus on offshore drilling, installation and decommissioning. From the release – “The combined Saipem7 will have a broader geographic reach than the two companies separately, with a strong foothold in the vessel segment and vertical integration in offshore engineering and construction, servicing both the oil and gas industry and the renewables industry through its combined fleet of nearly 60 vessels.” It is expected to take three years to realize the $300 million in consolidation savings and the company will return at least 40% of its free cash flow back to shareholders.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $70.53 per barrel (down ~0.1% week-over-week) and natural gas is $3.93 per MMBtu (down ~4.7% 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 decreased by ~2.3 million barrels week-over-week vs. an estimated decrease of ~2.5 million barrels.
Frac Spread Count: There are currently 210 frac spreads operating in the U.S. (an increase of 7 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 576 drilling rigs operating in the U.S. (an increase of 4 rigs week-over-week).
Shape of Things to Come. With ample gas production and surface acreage, Diamondback Energy is working to lure power producers and data center builders into the Permian Basin.
Hydrogen, the Promise of a Future. But it may not be tomorrow. First, hydrogen gets left out of the Power Plan Emissions rule and now the company that was building hydrogen powered big rig trucks has hit a wall, declaring bankruptcy, in what is another blow to hydrogen use. It couldn’t afford to supply help and support for its trucks, appearing to go the way of the electric bus fiasco that has cost many cities tens of millions of dollars for buses that don’t run. And if the U.S. has only built 8 of the planned 500,000 EV fueling stations, the idea of wide hydrogen availability for motor vehicles is farther away. Combine this with the reality that we can’t use existing natural gas or crude oil infrastructure for hydrogen, due to embrittlement and other issues. Pushing the technology envelope is a good thing, but wanting to get there and actually getting there are two very different things. Maybe the day after tomorrow.
Life in the 20’s. The story broke this week about the 28-year-old Wells Fargo investment banker who dealt with the pressure and demands of the job by relying on drugs. Not that drug use on Wall Street is new, but investment bankers usually aren’t the leaders in abuse. Those long hours, the demanding work. Adderall. ADHD medication that helps you focus. This guy got so focused that he hatched a scheme to make a little extra money for himself and he even included his friends. So, after more than $11 million in insider trading profits, he got busted. As a research analyst, I feel slighted. No one ever offered me Adderall!
A Different Shade of Green. A few years ago, both BP and Shell embraced a Net Zero push, more aggressively than many of the world’s major oil companies. Shell is now leaving the Netherlands, where it was co-domiciled in the UK after a very adverse court ruling on the company’s environmental footprint. It has been scaling back its “green” investments and commitments for the last year. BP started to shift a bit back to its higher return / core business as well. This week, BP made it a little more official by announcing a “fundamental strategic reset,” and it will be ramping up its oil and gas investments to $10 billion a year, a 20% increase over previous commitments. Neither of these are U.S. companies. It’s happening everywhere.
BP CEO: “Today we have fundamentally reset BP’s strategy.” “We are reducing and reallocating capital expenditure to our highest-returning businesses to drive growth, and relentlessly pursuing performance improvements and cost efficiency. This is all in service of sustainably growing cash flow and returns.”
A Threat to US Natural Gas? Qatar plans to more than double its LNG output from 10 Bcf/d to 20 Bcf/d by 2030. While originally more aligned with China, Qatar’s ties to the U.S. are improving with both the expansion of its North Field natural gas / LNG facilities but also its investment in the Golden Pass terminal in Texas.
And From the East. President Trump announced a joint venture with Japan for the Alaska LNG Project, a $44 billion project that would move gas from the North Slope through an 800-mile pipeline to a liquefaction facility in Nikiski for shipment overseas. “Japan will soon begin importing historic new shipments of clean American liquefied natural gas in record numbers,” he said. “It'll be record numbers.”
Spun Out. US Synthetic is an interesting company that makes more industrial diamonds for the drill bit business than anyone. Ever. With a 70% market share, which we think is conservative, the company has been part of ChampionX and its predecessors for some time. Now that they are being acquired by SLB, that has to change. SLB is a large bit manufacturer and the idea of selling critical materials to competitors is a challenge, and US Synthetic works with a very wide range of people. So, it is being sold to LongRange Capital. When you control such a large part of the market, growing market share is a challenge, but the margins are very good.
AI Education. Concern appeared when the Chinese AI model, DeepSeek, was released and it ran on conventional chips rather than Nvidia’s new generation of processors. Maybe natural gas demand for data centers would disappoint. I’m convinced that it isn’t likely. Most of the AI we have been using so far are “Large Language Models.” A term paper, a marketing brochure, the 10 best places to visit in Chattanooga. All very helpful and all LLMs. But the real and most widespread use of AI will be reasoning models. This is “if a train was going 60 mph east and a car was going 45 mph, and they both wanted to get to Peoria, who would get there first? Multiple intermediate calculations and steps, input provided from previous calculations to get an answer. Imagine how helpful that would be in medicine, manufacturing and personal travel. The possibilities are endless, which is why we will see such complete adoption. But these reasoning models use multiples of power relative to the use in LLMs. So, while we don’t know the slope of the growth angle for AI power needs, the realistic demand is much more likely to outstrip our expectations than to disappoint.
Snippet. Air Liquide sees just two of six U.S. hydrogen hubs moving ahead after Trump ends funding.
Germany’s Slow Roll Down. Mercedes-Benz will cut jobs and shift some production from Germany to lower cost countries, saying it expects earnings to fall significantly this year. We've been writing for some time about the issues in both Germany itself and the German car manufacturers, primarily due to their exposure to both the EU and China. China has kept its car manufacturing at a higher rate through weak demand in an effort to keep the economy going on borrowed money. But the result for Volkswagens and Mercedes is cars are being bought in China at much lower rates and both companies took multi-billion dollar write downs last quarter. We've also written about how Germany is in a recession and is losing some of its higher-end manufacturing to China for the first time, and now this. Remember, Volkswagen was laying off people and closing factories for the first time in history just last month. It is clear that the automotive industry continues to be in some turmoil.
Money Money. Legacy Haynesville costs, drilling costs specifically, averaged $660/ft in Q4; completion costs averaged $863/ft. Western Haynesville drilling costs are 33% lower than they were in 2022, with completion costs down 28% (from $1,396/ft for drilling and $1,315/ft for completion.). The fastest well reached TD in 41 days. Drilling costs averaged $660/ft in Q4; completion costs averaged $863/ft in Legacy HV.
E&P Efficiency. A Sampling:
Devon saw 15% improvement for both drilled and completed feet per day in 2024.
EQT achieved an all-time efficiency high in 2024.
Matador is forecasting D&C costs in 2025 down 3% y/y to $880/ft.
Oxy reduced well costs by 12% across unconventional basins vs. 2023.
SM Energy improved daily footage drilled by 20% from 2022 to 2024 in the Midland Basin and a 27% improvement in South Texas.
Vital Energy has 120 horseshoe well opportunities expected to reduce break even by $15-$20/barrel and several J-shaped wells.
Well Service Observations: Auction activity continues. This week, Superior Energy Auctioneers will host an auction which includes six well service rigs – they sold a few rigs as well the week of Feb 12-13. Earlier this month, the well service fleet of Joe Mills Well Service was auctioned. This included 15 rigs. According to field contacts, the best rig went for over $400,000 while two rigs fetched prices in the $200k vicinity, while the others, we believe, sold for a lower price. Joe Mills had been in business for 70 years. Industry sources report that another two businesses who collectively have about 25 rigs purportedly sold to a private buyer. We don’t know the terms, but we are under the impression from field contacts that the businesses which sold were struggling. Additionally, one vendor to the well service space reports that a number of the smaller well service customers are now on COD. The big picture is that this business is a tough place to operate and likely gets tougher as larger E&P’s get larger and consolidate their vendors to the larger well service companies. That, of course, should benefit the larger well service players, all else being equal. Also, we had a field contact share with us pricing for rig services. Back in 2008, the company’s rate sheet priced a 500hp well service rig at $335/hour. The company shared a recent price sheet which has a rig now priced at $340/hour. Yet, between 2008 to 2024, costs, like labor and insurance, have all risen.
Scale? EQT said we need a mid-50’s rig count in the Marcellus to meet demand versus the ~30 rigs running today. So, 20 or so rigs is all we need??
Should Someone Tell Her?? “As in the case of the transition to clean energy in the electricity sector, the decarbonization of the natural gas industry may result in higher costs being imposed on ratepayers. Given the urgency of addressing the climate crisis, however, we are reluctant to slow the pace at which the transition must occur due to concerns about affordability for low and moderate-income utility customers. Rather, the Department will address these issues in a separate proceeding, to be commenced later this year, dedicated toward examining innovative solutions to address the energy burden and affordability, such as capping energy bills by percentage of income, or offering varying levels of low-income discounts, that have been implemented in other jurisdictions. We are confident that we can develop a solution – which likely will require a change in our statutory authority – that will allow us to address affordability issues in an effective manner and still enable us to achieve the necessary progress toward the Commonweath’s (Massachusetts) GHG emissions reduction limits.”
Directionally? Most see U.S. activity down around 5%-6%, but that was before natural gas prices spiked. If 85% of drilling is for oil and it will be down 5% and the 15% of rigs drilling for natural gas goes up as much as the gas price futures show for the year, overall spending would actually be up 5.2%. That second part is a challenge, but if you are looking for optimism, look here. And maybe the chart below will help.
Iraq?? We haven’t had much information or data in terms of Iraq’s oil production, but it looks like that might change. Iraq’s oil minister said he’s hoping crude oil exports, from the country’s northern Kurdistan region, will restart in two days after a halt of almost two years following a payments dispute.
Several Points. It was about four years ago that energy left the growth portfolios at financial investment institutions and moved to value. Return on invested capital has rained over since then rather than cash flow or production growth. We see it everywhere today. It’s also true that the gas market investors are very interested in the Haynesville because of the LNG plans along the Gulf Coast and a likely delay in getting pipes to bring gas down from the Northeast. That pushed the Haynesville to the forefront several years ago, and because of delays in infrastructure, it’s still there. We have long said that gas production growth is inevitable, even if gas price growth isn’t. Because of that, we have been long natural gas, and long Haynesville, and as a result, Comstock should perform well, don’t take that as a recommendation. I’ve been wrong too many times. But a comment by an analyst made several points and analysts always love corroboration in their opinion. “Comstock reported a 4Q FCF beat on lower spending and in-line FY25 guidance as the company returned to its pre-pullback activity levels. The combination of incremental western Haynesville details and ramping activity was well received by the Street given the more growth-focused investor base versus the more conservative holders of other gas-focused E&Ps in our coverage.” And another large natural gas producer, EQT, reported earnings, it’s more conservative, long-term value approach was shown as investors look to understand how the larger producers in the basin will react to sustained higher gas prices. “EQT, to most investors' relief, was adamant it did not intend to accelerate in the near-term, with additional activity unlikely in '25 and the need for a demand-driven signal from the commodity markets before any drastic changes were made.” Growth versus value. Good luck to you both.
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.
