February 3, 2023
Things I Learned This Week While Trying Not to Freeze
February 3, 2023
First, as of this week I am flattered and honored to be working with PPHB. Having known the firm since inception and the principals even before, I am excited to be working with some of the finest, smartest, most honest, fair, and ethical investment bankers I have known. Since its formation in 2003, PPHB has advised on more than 180 transactions for an excess of $11 billion in total value. PPHB provides advisory services for mergers & acquisitions (both sell-side and buy-side), raises institutional private equity, and offers debt advisory services. Now my “associates” are true and proven associates. My Things I Learned This Week will be published under their banner and as a Managing Director of the firm, I will be working with them on opportunities and projects. I consider this a very positive move and my lovely wife agrees. I’ve been home too much?!?!?
After a Dry January, let's follow up with a dry-martini February!!
Fire Pit Discussions. Several years ago at a Washington NOIA meeting, a good friend and the next Chairman and I were outside the hotel, smoking cigars and drinking scotch when the suggestion of having an auction to raise money for the organization was made. NOIA member companies were asked to donate a golf trip, fishing trip, hunting trip – whatever – to the auction. My good friend grabbed the crown jewel, a hunting trip to Halliburton’s Mota Bonita camp in south Texas but was generous enough to syndicate a spot to me. We have had some great times, with EnVen, Kosmos, Talos, and Murphy having some “representation”. (I bought the Oceaneering fishing trip!). We had some interesting discussions.
Questions are Posed. One night at dinner, I asked what everyone’s biggest concern was right now. The first answer was a concern over OFS pricing which continues to move higher. I asked if he thought the service companies needed to make positive returns too, like the E&P sector currently enjoys. He said, “I thought you asked me for MY biggest concern”. OFS returns are the OFS companies’ responsibilities, not his. Full collaboration may still be a ways off. Most everyone else’s answer centered on the lack of qualified people. Geoscientists are a more stable part of the workforce but field labor is seeing 100% annual turnover in several different companies and categories. No one mentioned oil prices or lack of drilling prospects or even government intervention. There was mention of continuing supply chain issues, usually revolving around anything that required high-end steel – wellheads, trees, and about anything we put on the ocean floor. People. That was #1, #2 and #3. And the lengths companies are going to retain workers. Take note.
On Stage. Then, after a quick four-hour drive from South Texas to Houston, was the NAPE conference. The North American Prospect Expo celebrated its 30th year and it seemed very well attended even though some people, notably from Dallas (Billy B.) got snowed/iced in and couldn’t make it. I had the privilege to spend an hour on stage with Rick Muncrief, the CEO of Devon. Rick came into Devon in the 2021 combination with WPX. His outlook was positive and the fact that Devon has a diversified portfolio of five different US shale basins was a point made early, but he also noted that the company continues to look for opportunities everywhere, and Devon has been many places over the years but the focus on US shale continues. “Companies seem to get big, get inefficient and it creates opportunities for smaller companies to come in and carve out” and noted that many companies combine and talk about consolidation savings, but that Devon has actually done it, cutting $600 million in six months, ahead of schedule. Culture was a key topic. Coming into the company two years ago to a now 50-year old company, the focus on continuing to develop a strong culture, which reduces turnover in all key positions, has been paramount and by all metrics, he is on track. I of course had to ask his opinion on ESG. “It’s just the right thing to do,” he said. “ESG is foundational; it’s tied to our values.” He is of course dead right and just a continuation of what our industry has been doing for years. “Transition” is not new. https://www.hartenergy.com/exclusives/devon-energy-ceo-rick-muncrief-shares-secrets-successful-ad-203992
A Hot Topic. In today’s market, the topic of LNG and natural gas was front and center. The events of a year ago with the invasion of Ukraine put a focus on it but it has been in continued development now for years. Nick Dell'Osso Jr., the CEO of Chesapeake and Paul Varello, Chairman Commonwealth LNG took the stage to discuss the current market and the future outlook for LNG. We have been selling and delivering LNG to Asia for some years now while Europe relied very heavily on Russian gas, delivered by pipeline. With the interruption of Russian gas, one would think that Europe would be full tilt on alternatives and while there are a number of regasification facilities under construction, the willingness to engage in term contracts has not really happened. LNG liquefaction trains cost billions to build, usually done with some portion of debt to the point the facilities biggest P&L line item is debt service. To get that debt, that project financing, some term commitment is needed, usually 10-to-20 years. European utilities have badly damaged their balance sheets through the energy crisis of the last two years, which started even before the Ukraine war. Governments usually see as far as the next election. And if the Ukraine/Russia war ends, does Russian gas flow West again? Aggregators, middlemen, such as Shell, BP, Vitol and others are helping to bridge the gas and this is positive but needing middle men for a transaction puts one more cog in the supply chain. We had a very lively discussion, for about an hour and I had to cut off the Q&A session afterwards at 30 minutes though there were still questions to be asked. Thanks gentlemen. For more - https://www.hartenergy.com/exclusives/chesapeake-ceo-commonwealth-lng-chair-say-europe-must-prepare-next-winter-204002?mkt_tok=NDMzLU9ESy04ODkAAAGJsugfrRoFP3TMreNhmAd8RYchBGdqBZWzul-6E801FPIYth4WJdAqtJYiTh-Lud0FEh0kiW-XgjiDR_sJJV_JwvJU669c5Hcvi1c9Pf8xGmS3
More Gas. Freeport LNG has asked federal regulators for approval to start up one of its three idled units, a milestone in efforts to restore production after a seven-month outage at the second-largest U.S. LNG liquefaction facility. That would put US export capacity back to about 12 bcf/day of LNG exports.
Revived. Colossal Biosciences, the Dallas-based biotechnology startup, is looking for funding. The firm has promised to resurrect the woolly mammoth, and is seeking funding to bring back the dodo bird, one of the most famous extinct species. It is being called the first “de-extinction unicorn,” with a valuation said to be over a $1 billion. Can Rover be next?
Thank Goodness. The IMF has raised its growth outlook for the first time in a year, saying it sees a “turning point” for the global economy. The risk of a global recession remains, as well as one in the US, but it’s diminishing, the IMF said, thanks in part to resilient American spending and China’s reopening. “
End of an era. Boeing has built its final 747, the double-decker jumbo jet that made ours a smaller, more accessible planet. The so-called Queen of the Skies, born in a deal with PanAm, was designed and built in less than 2 1/2 years—a feat unimaginable today. The last jet flew out Wednesday, concluding the Queen’s reign after 54 years. – Bloomberg
Snippets.
A second nationwide strike disrupted French electricity production, public transport and schools, in a backlash against the government's plans to make people work longer before retirement.
Even on $100,000-Plus, More Americans Are Living Paycheck to Paycheck. Some 64% of US consumers — equivalent to 166 million people — were living paycheck-to-paycheck at the end of 2022, according to the survey by industry publication Pymnts.com and LendingClub Corp.
Police in Assam India have arrested more than 1,800 men for marrying or arranging marriages to underage girls. Marriage under 18 is illegal in India, but the law is openly flouted.
The Adani crisis has now erased $120 billion in market capitalization
BofA strategists warned that the US stock rally has already gone too far and traders may face brutal losses if economic growth crumbles in the second half.
The transportation sector generated 27% of U.S. greenhouse gas emissions in 2020, putting it just ahead of power generation and industrial production, which together make up more than 75% of all greenhouse gas emissions.
Evolution in Thinking. Some say it’s “flip-flopping”. Others say, “they opened their eyes”. Trying to do something noble, that you think your people want, and you think you can achieve is admirable, and sometimes lead to success. Others put some ideology above all that and plow ahead regardless of results and reality. The people I trust most are those who try, learn, adjust, and try some more. Now put all of that in the context of major international oil companies pursuing a greener strategy. Even financially it was justified. “Our total business is more sustainable, so our terminal value is pushed out and our valuation rises.” Noble. But flawed in terms of a company operating for the economic benefit of shareholders and overall benefit to stakeholders. Recognizing the flaws and adjusting is the mark of a well-run business. An example -
“The Wall Street Journal reported that BP CEO Bernard Looney is now apparently having second thoughts about his company strategy to push heavily into renewable energy while rapidly diminishing its oil production at the same time. Quoting “people familiar with recent discussions,” the WSJ story says Looney is telling his senior management team he plans to pursue a “narrower green-energy strategy,” and place less emphasis on the company’s ESG goals. Mr. Looney has said he is disappointed in the returns from some of the oil giant’s renewable investments and plans to pursue a narrower green-energy strategy, the people said. He has told some people close to the company that BP needs to do more to convince shareholders of its strategy to maximize profits in areas where it has a competitive advantage, including its legacy oil-and-gas operations. Mr. Looney is casting the moves as a modest short-term course correction rather than a major strategic pivot for the 114-year-old company.”
Offshore Wind. The Floating Wind Solutions 2023 meeting was this week in Houston, focusing on Commercialization – The Era at GW Scale. Attendance at ~800 people was double last year’s attendance but what was most interesting to us was that more than 95% of the attendees were from the oil and gas industry versus less than 5% from renewables. Offshore oil & gas companies were well represented in the exhibit hall and at the speaker podium where they showcased the many capabilities of the industry in establishing the floating offshore wind supply chain.
Sums It Up Well. Companies X and Y “will work together to accelerate the deployment of EV charging and battery storage solutions for highway corridor DC fast charging, fleet charging, and other EV charging applications. The goal is to lower operating costs and increase energy resiliency by combining EV charging with battery storage and AI driven energy management. This agreement is well timed given the increasing federal support through the infrastructure bill and NEVI program directed at accelerating the buildout of charging infrastructure along highway corridors.”
Headlines #1.
Big investors are dipping their toes into crypto waters again after a bumper month for bitcoin.
California Has More Than 100 Gun Laws. Why Don’t They Stop More Mass Shootings?
Direct-Drive Turbine Technology Powers Eco-Conscious Hydraulic Fracturing
Republicans oust Ilhan Omar from a high-profile House committee.
Experts say jeans and pajamas are the types of clothes that are fine to wear repeatedly without washing.
Californians are stunned by a 385% jump in gas bills.
Smokin’ 31 million American adults still smoke. It continues to be the leading cause of preventable disease and according to a recent CDC survey, and most Americans favor a complete ban on all tobacco products. A prime offender? Menthol, the only flavor still allowed in cigarettes. They make smoking easier, and addiction more likely. I am a cigar man myself.
An Oil & Gas IPO!!! TXO Energy Partners, L.P. priced its IPO last week at $20.00 – the mid-point of its $19.00-to-$21.00 range to raise $100 million. The company was formerly knowns as Morningstar Partners and features the return of Bob Simpson, CEO, who sold the first XTO (Crosstimbers) to Exxon for $41 billion in 2010. The operations are focused primarily on “enhancing the development and operation of producing properties through our concentration on efficiency and optimizing exploitation of current wells”. Current acreage positions are concentrated in the Permian Basin of West Texas and New Mexico and the San Juan Basin of New Mexico and Colorado. Raymond James was the lead banker and according to one source, it could have been placed all in retail hands or institutional hands. That is notable. Foreshadowing?
And Again. Atlas Energy Solutions filed for its IPO. Reuters was the first to report last year that the Austin, Texas-based firm was preparing for a public listing which could value it between $2 billion and $3 billion including debt. In regulatory filings, Atlas describes itself as a "leading provider of proppant and logistics services to the oil and natural gas industry within the Permian Basin of West Texas and New Mexico." Bud Brigham, Atlas' executive chairman and CEO, founded the company in 2017.
Politics. This one is tough. None of us like paying fees for overdrafts, football tickets, and that early termination of my phone contract is a pain. But a bill passed by congress to get rid of “junk fees”?? Any time for immigration reform?? Anyway, the White House says there is nothing wrong with charging “reasonable add-on fees” but “junk fees” are defined by the administration as “fees designed either to confuse or deceive consumers or to take advantage of lock-in or other forms of situational market power”. So now the US government gets to decide what is “reasonable”. Is that a camel’s nose under the tent? Welcome to the Junk Fee Protection Act. Where do these exist, you ask.
excessive online concert, sporting event and entertainment ticket fees
airline fees for families sitting together on flights.
exorbitant early termination fees for TV, phone and internet services
surprise resort and destination fees
credit card late fees
We shouldn’t be surprised. There are hearings being held on whether Ticketmaster is a monopoly thanks to Taylor Swift. I don’t like Ticketmaster or their fees, but I am not sure an act of Congress is needed. I would be willing to pay a late fee to see what was really on Hunter’s laptop, but that’s just me.
And Again. Tyre Nichols was killed after a traffic stop by five black Memphis policemen. His funeral was attended by Philonise Floyd, the younger brother of George Floyd, as well as Vice President Kamala Harris, joining other senior level Biden administration officials.
The Shoe Drops. So, the Fed raises rates by only 25 basis points this week, after several 75 basis point hikes. The Bank of England and European Central Bank both raised rates by 50 basis points each on Thursday. While the former indicated that a pause could be coming, the latter said it expects to increase rates again in March. Bank officials and policymakers have also indicated that the fight against inflation is not yet over, and it's "too soon to declare victory,"
Hedge Funds are Back! Citadel made a record $16 billion in profit for clients last year, outperforming the rest of the industry and one of history’s most successful financial plays. The top 20 hedge fund firms collectively generated $22.4 billion in profits. So, the top 19, excluding Citadel, made $6.2 billion. And outside of that august group, hedge funds overall lost $208 billion last year. They must not have been in energy.
Headlines. #2
Traders Turn Bullish On Oil As Majors Report Earnings
House approved bill to restrict reserve withdrawals.
Israel refills the Sea of Galilee
Two emperor tamarin monkeys were abducted from the Dallas zoo
Technip Energies, ExxonMobil to develop world’s largest low-carbon hydrogen facility.
In January 2023, announced buybacks more than tripled to $132 billion from a year ago.
Spirit Energy to convert depleted North Sea gas fields into “world-leading” carbon capture and storage project
Subsea Services Market Expected to Top $7 Billion in 2023
Sound Like Something We Can Do? ABS approves Bassoe Technology’s floating wind foundation design for world’s largest turbines. The D-Floater is a three-column, semi-submersible unit with a Delta-shaped pontoon configuration that allows the stacking of foundations inside each other, facilitating the transport of at least five completed foundations on a single, heavy lift transport vessel.
Reap What You Sow.
January 29, 2021 - Norway’s trillion-dollar sovereign wealth fund has sold the last of its portfolio of oil and gas companies in a major step away from the country’s reliance on its petroleum industry.
January 30, 2023 – Norway's wealth fund posted a record loss of 164.4 billion for 2022,
Norway's wealth fund, one of the world's largest investors, posted a record loss of $164.4 billion for 2022, bringing to an end a three-year run of soaring profits as stocks and bonds were hit by the Ukraine war and inflation. The fund owns on average 1.3% of all listed stocks. The single biggest stock market loss came from the fund's stake in Amazon, which declined in value by $5.6 billion, followed by a loss in shares of Facebook owner Meta Platforms of $5.2 billion and in Tesla with $4.7 billion. It also invests in bonds, unlisted real estate and renewable energy projects. The fund's return on investment in 2022 stood at minus 14.1% for the year, which was 0.88 percentage point better than the return on the fund's benchmark index. It had divested its oil and gas investments.
What a Surprise!! “Even as developers plan an unprecedented number of grid-scale wind and solar installations, project construction is plummeting across the U.S. Despite billions of dollars in federal tax credits up for grabs and investors eager to fund clean energy projects, the pace of development has ground to a crawl and many renewables plans face an uncertain path to completion.” New wind installations plunged 77.5% in the third quarter of 2022 versus the same period the year before, according to S&P Global Market Intelligence. New utility-scale solar installations likely fell 40% in 2022 compared with 2021, according to a report from the Solar Energy Industries Association and research firm Wood Mackenzie. The Inflation Reduction Act extended and increased tax credits for wind and solar projects and introduced new incentives for green hydrogen and battery storage. More than $40 billion in wind, solar and battery projects were announced late last year—as much as the total clean-energy investment for all of 2021, according to the industry group American Clean Power Association. Large corporations with climate targets are among the most eager buyers of green power. “Ten years from now there’s going to be a huge shift in the landscape where there is going to be a significant amount of electricity coming from renewables,” said Matt Birchby, president of renewable-project developer and owner Swift Current Energy LLC. “But getting from A to B is inherently going to be messy.”
Five Things You Should Know About Oil & Gas Prices – by ChatGPT
Oil prices are determined by supply and demand. When the demand for oil is high, prices tend to increase due to the limited resources available.
Oil prices are heavily influenced by political and economic events, such as elections, military conflicts, and natural disasters, which can cause supply and demand changes.
Global oil production and transportation are determined by the Organization of the Petroleum Exporting Countries (OPEC) and other major oil producing countries, which can have a major impact on oil prices.
Oil prices are also set by futures traders, who buy and sell contracts representing 1,000 barrels of crude oil in advance.
Futures contracts are based on benchmark prices, such as the Brent Crude and West Texas Intermediate, which are publicly available and can be useful in predicting oil price movements.
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.
