February 7, 2025
Things I Learned This Week at NAPE
What a Week! NAPE, the North American Prospect Expo, held its 30th meeting this week in Houston, drawing well over 6,000 attendees from every part of the domestic energy business. Fun, controlled mayhem. There was a business occupying every space in the George R. Brown Convention Center. The floor was covered in booths with companies showing prospects and every support segment to the industry was also represented. You should come next year.
The Start. After a warm-up chat at the Petroleum Club on Monday, the party started Wednesday. Dr. Ann Bluntzer, Executive Director at the Hamm Institute, and I ran a very interesting discussion with a CEO group over breakfast. There were a number of great takeaways, with one focusing on uncertainty. The uncertainty of what the current administration will do next, what world events might cause chaos, what a later administration might reverse, all of which cause the expenditure of capital to be very cautious. We view this as a good thing.
My Suggestion.
Another Focused on Duration. Natural gas is doing well, with the 2025 futures strip showing a 65% increase in price over last year. So, when does the party start? Unless there is more confidence in the duration of these prices, few want to commit capital. I can get to first oil / gas in six months, and I will produce the majority of the net present value in the first couple of years, so I need a longer and more liquid futures strip, but then there is the risk of lower-than-expected production. There was no doubt by anyone that natural gas demand will grow. Between LNG and data centers, we are only arguing about the angle of the slope, not if there will be growth.
Will $3.60 Gas Do It? It doesn’t seem so. The marginal producers need to be economic, even if marginally so, and $3.60 doesn’t do that. $7 was considered too high for a host of reasons, with the likelihood of a drilling boom followed by years of oversupply being at the top of the list.
Dinner. Raymond James held their annual NAPE dinner, hosted by Marshall Atkins, the head of their energy investment banking group. Thanks, Marshall. Dinner with 300 of your closest friends. It was excellent. So was the discussion. Natural gas was a hot topic, with the questions like: Where will the needed natural gas come from if the drivers of demand require another 20-30 Bcf/d? The consensus is the pipeline capacity out of the Marcellus/Utica will not come for several more years, even with a cooperative administration. The legal and permitting issues can be overcome, but only after years of getting permissions and fighting lawsuits. The Haynesville is widely recognized as the first supplier of natural gas to the LNG facilities on the Gulf Coast, but it would have a difficult time supplying more than an additional 4-6 Bcf/d of production. One bright spot? Increased transport of associated gas out of the Permian. There is not a pipe that can deliver natural gas to the east side of Houston, and all the LNG facilities to the east. Currently, export capacity out of the basin is limited, but recently, Enbridge announced it will be leading a joint venture to move 1.7 Bcf/d to the LNG facilities on the Gulf Coast, east of Houston. This won’t solve the problem alone, but it is a good start. In the end, the question really wasn’t answered… other than noting that natural gas prices have to move higher for all of this to happen. The consensus price? Around $5/Mcf.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $71.03 per barrel (down ~2.3% week-over-week) and natural gas is $3.36 per MMBtu (up ~10.2% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.5 MM BOPD (up ~1.3% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories increased by ~8.7 million barrels week-over-week vs. an estimated increase of ~2.4 million barrels.
Frac Spread Count: There are currently 190 frac spreads operating in the U.S. (an increase of 7 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 567 drilling rigs operating in the U.S. (an increase of 7 rigs week-over-week).
Solve the Equation. We look at it from a different perspective. There are a large number of variables that constantly change and change the outlook. We are confident that the need for energy will be met. The LNG ships will sail, and the data centers will be built, and between natural gas, nuclear and other energy sources, this demand will be met. If that takes $5 gas, so be it. But we live in a “just-in-time” world, and we don’t expect long lead time projects to be developed long in advance.
Moderation. NAPE continued with its Energy Business Conference track with panels of leading industry people discussing every aspect of our industry. I moderated a panel on the Future of Energy Demand, with Ron Gusek, the new CEO and Chair of Liberty, Josh Viets, EVP & COO, Expand Energy and Tara Righetti, the Occidental Chair of Energy & Environmental Policy at the University of Wyoming. An all-encompassing topic. The answer? All forms of energy will be required, not just oil and gas or nuclear or wind or solar or thermal or hydrogen. All. But it is clear natural gas is the one commodity that is expected to see the greatest growth in demand. The slope of the angle of demand growth is a question. We all know the stats on AI chip power needs and the increasingly broad range of AI applications. Whether DeepSeek, with its ability to run on lower-powered conventional chips, becomes widely mainstream or not was not seen as having any real impact on future power needs and there is no question that the need for power is growing. One director of Aramco noted that Saudi’s spare capacity potential is real, Iranian sanctions, Russian politics and demand from emerging countries in Asia and Africa were all discussed topics. We didn’t solve all of the problems, but we got to discuss them in a room full of industry professionals and we hope we have some fodder for future consideration of the issue.
On Us. It becomes increasingly obvious every day that our industry is not going away, rather, it is being recognized as being even more critical. Reliable power is the requirement and renewable sources most definitely have their place in meeting energy demand, but we have been building out renewable power very aggressively. Now, the future requires us to have reliable power generation, and this idea is taking the forefront of growth, bringing nuclear more into the picture but primarily focused on natural gas-fired power. And while nuclear has definitely come back and permitting may be eased, in discussions with the CFO of a public nuclear SMR company, he noted that commercial revenues should start in about 10 years. Until then, it’s all of us.
Quiz of the Week: What OFS company reported an Adjusted EBITDA margin of 25.1% for 2024, the highest in 15 years with a 2024 ROIC of 26.2% and returned $135 million to shareholders, generating over half a billion dollars in free cash flow?
Answer: Weatherford International. While few were looking! EBITDA does matter as a valuation metric, but ROIC is the true test. Making a positive return is key. Making a return over your cost of capital is the goal. And net losses, even with positive EBITDA, erodes shareholder equity. This company gets it. Well done.
A Win! Ron Gusek’s old boss was confirmed as the new U.S. Secretary of Energy. “Chris Wright’s leadership embodies the innovation and resilience principles defining America’s energy workforce,” said the Energy Workforce and Technology Council leadership. “Wright’s emphasis on streamlining federal policies and championing technological advancements will strengthen the nation’s energy landscape. Chris Wright’s entrepreneurial vision and advocacy for energy positions the U.S. as a leader in global energy markets. His approach to expanding domestic production, investing in next-generation technologies and fostering partnerships will not only secure affordable and reliable energy, but also open new pathways for American companies to thrive in competitive markets worldwide.” One of his first comments was about the lack of knowledge by politicians and administrators on what climate change actually is and means. Straightforward. This should be fun. Congrats, Chris.
Plan 101. Trump wants to move Palestinians out of Gaza to neighboring countries since Gaza is so destroyed. He talked about the international community rebuilding Gaza with the former inhabitants safely tucked away in Jordan, Saudi, Egypt and others. The problem is that none of those countries want them and have not wanted them all along. Basically, he floated the trial balloon of the U.S. taking over Gaza and redeveloping it. Clearly, the Palestinians said no. Saudi Arabia’s UK ambassador, Prince Khalid bin Bandar, has made it abundantly clear that his government expects Palestinians to stay put. They want the Palestinians to have their own state if they are going to participate in the rebuilding. “Saudi Arabia does not speak publicly often,” he said. “But when it does, we say what we mean and we mean what we say.” The fallout? Houston’s own Al Green (not the singer) said he would file articles of impeachment against Donald Trump. Green called the suggestion “ethnic cleansing,” “especially when it emanates from the President of the United States, the most powerful person in the world.”
LNG. Plaquemines LNG (2.6 Bcf/d) and Corpus Christi Stage 3 (1.3 Bcf/d) in the U.S. and LNG Canada (1.8 Bcf/d) on Canada's West Coast are all slated for opening over the next couple of years, adding 5.7 Bcf/d of North American natural gas demand. This is just the next wave of what is expected to result in the U.S. exporting about one quarter of current production, or about 25 Bcf/day, within the next 5-7 years, and current natural gas demand is not expected to shrink but grow as well.
Our Very Own. Leslie Beyer, the human dynamo who transformed the OFS Industry Trade Association into the powerhouse it is today, has been nominated as Assistant Secretary of the Department of the Interior. She will oversee four departmental agencies: the Bureau of Land Management, Bureau of Ocean Energy Management, the Bureau of Safety and Environmental Enforcement and the Office of Surface Mining Reclamation and Enforcement. Leslie came to us from Washington DC and is now going back (congrats!) but she is going back with knowledge, education and experience that few, if any, of those in government do. We will miss her, but we know she will do her job with integrity and honesty and that is all we need to thrive. Congrats.
Expanding Our Scope. PPHB announced that Omar Diaz has joined the firm as Managing Director, leading its Industrials Group. Mr. Diaz resides in Chicago, Illinois, and will open a PPHB office in the region to expand the firm’s presence and reach in the middle market industrial sector. Omar brings over 30 years of investment banking, management consulting and project engineering experience, from leadership posts as Head of Chemicals at Seaport Global, Head of Industrials at Dresner Partners, Managing Director focused on Industrials at Allegiance Capital, Head of Chemicals at Houlihan Lokey, and most recently, Managing Director at Balmoral Advisors covering building products, chemicals and materials within the broader industrial middle market. Omar earned a BS in Mechanical Engineering from Cornell University and an MBA in Finance from the Kelley School of Business at Indiana University. Welcome, sir.
I’ll Take KC.
Blow Hard. When Mr. Trump was elected, one of his first actions was to pause offshore wind development permits, and it might be hard for companies involved to complain, though he did make his feelings known. “We're not going to do the wind thing,” he said. “Big, ugly windmills. They ruin your neighborhood.” Well, the neighborhood offshore Virginia is one. Dominion Energy’s huge 2.6-gigawatt Coastal Virginia Offshore Wind Project is about halfway done, planned for an end of 2026 completion, but the costs are getting out of control, with the latest estimate now almost 10% higher than the last revision at $10.7 billion. Advanced nuclear reactors are estimated to cost $5,366 for every kilowatt of capacity, which means that a large 1-gigawatt reactor would cost around $5.4 billion to build. To put it in perspective, it would cost about $15 billion for those 2.6 gigawatts to come from a new nuclear plant. The rise in network upgrade cost estimates reflects significant demand growth that requires more systemwide generation and transmission resources. Again, the issue is that the grid isn’t developed to the point of being able to move the power we generate. Chicken and egg.
UK Pain. The governor of the Bank of England slashed the bank’s growth forecasts for 2025 from 1.5% to 0.75%. Dire public sector productivity is dragging down the economy with an increase of half a million workers in the public sector since the COVID lockdowns have not been matched by a rise in productivity. The bank cut interest rates to 4.5% from 4.75% and warned that the economy would narrowly avoid a recession at the turn of the year. The pound is at a 14-month low.
Send Trump. A gynecologist in France has been suspended from working for 6 months because he refused to treat a man who claimed to be a woman. The doctor also apologized to the man for the hurt he caused by insisting that he is only qualified to treat female reproductive issues.
Snippets.
German wind output falls to the lowest level in four years, with another bout of low wind speeds that threaten profits at renewable power operations expected over the weekend.
PG&E’s (California) average power rates have climbed 56% in three years and 118% over the last decade. The California Public Utilities Commission has approved four rate increases for the utility this year alone.
Nuclear is 50% of the DoE budget.
USAID provided $45 million for DEI scholarships in Burma. No comment.
Liberty Energy: Weak Frac Demand Offset By Shrinking Fleet Supply. (a good relative situation)
Setting the Pace. Atlas Energy has made its first commercial deliveries from its 42-mile Dune Express conveyor system, and it has now taken ownership of two driverless trucks for sand delivery and bought a power business, Moser. Moving quickly.
Correction. Some have made the claim that U.S. refineries need and want Canadian heavy crude, as well as crude from Mexico and Venezuela because our refineries are more complex, with a higher Nelson rating since the industry ten years ago expected the marginal barrel to be heavy and sour. U.S. unconventional oil is light and sweet. But U.S. refiners can refine light sweet. They just aren’t optimized for it, and the economics have to work, but the refineries can process other crudes.
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.
