February 9, 2024
Things I Learned This Week at NAPE
Living for Today. The crowd at NAPE and across Houston in general is very positive. All the indicators seem to point to a stronger oil market going forward rather than a weak oil market going forward. Of course, we thought that last year and it didn’t come true so we’re a bit more sanguine about it this time. No one expects a crash and $125 isn’t really desired by anyone. But it’s $75. If you can’t make money at $75 oil, maybe you shouldn’t be in the business. That was a comment I heard a number of times this week in Houston. The NAPE conference, the North American Prospect Expo, is one of the biggest deal trading events in the industry. 9,000 attendees, a two-day business conference and then the floor of the HR Brown convention center covered with companies buying and selling properties, equipment, ideas, and hope. Different this year? There were virtually no banks. Usually, several banks would have booths, manned and chatting with the oil and gas guys wandering the hall, obviously trolling for business. Not this year. But it didn’t seem to matter. Everyone was in a good mood, there was very little grousing, even about little things. Yes, the rig count declined last year but the U.S. rig count has been flat for the last few months and while volatility is likely to come back, the stability has been great.
The Good Life. Sure, the OFS sector is still struggling a bit, but it is much more among the marginal players. Technology has never been so important to our industry and a few game-changers appear to being developed in garages, but rather the big, well-funded shops. There was no huge construction binge leading into the current market, so utilization and pricing have taken little hits, but very little in several areas. NAPE is almost completely U.S. focused so the only impact to the domestic market of Saudi’s plan to scale back growth only gave oil bulls another argument while the fundamental operations in the U.S. don’t change. International is a different animal and there will be some impact, and we discuss that below but for the domestic market, the party is on.
And In That Regard… There were any number of parties and by Thursday morning everyone was a little blurry looking. But the partying done wasn’t trying to escape the reality of a bad oil market, but celebrating a pretty good one. I know if you’re more focused on natural gas you’re not having the same kind of party. Diet Coke and peanuts isn’t much of a party with the volatility of natural gas. Remember it could always be worse. And there were any number of parties.
Top Drawer. One of the fixtures at NAPE is the Raymond James Dinner, featuring my good friend Marshall Adkins. Marshall does something every year that very few analysts have ever done. He goes through his last year’s predictions and shows you where he was wrong. Amazing. As always, he did an excellent job of educating and entertaining the crowd of some 220 people. “Despite Near-term Volatility, Oil & Gas Should Be A Great Place For Investors Over the Next Five Years” was the lead slide. It went uphill from there. There were some very convincing stories and while not exactly spot on, much of the bullish forecasts come from guessing when Saudi will start bleeding oil back onto the market. And that is all we can do. Great dinner. Thanks Marshall. Killer event. One of his slides:
Why Have Oil Prices Become So Volatile?
Commodity Trading Accounts (or CTAs) now drive ~70% of all oil trading.
CTAs use computers programmed to buy/sell based on key trading metrics (momentum, macro, etc.), not fundamentals.
CTAs are MUCH, MUCH bigger than physical players.
Different CTAs have different algorithms or formulas.
Be Very Careful. Data from the UK shows that the typical insurance premium for electric vehicles increased to $1,707), an increase of 50% versus a year earlier, and 2X the cost of insurance for combustion engine cars due to higher cost of repairs for EVs. While insurance premiums for all types of cars went up last year, the increase for EVs was bigger both proportionally and in real terms. The UK has a higher EV ownership percentage than the United States, and therefore its experience may presage that of U.S. owners... The Institute for Energy Research (IER) is a think tank based with a heavy focus on US and international energy policies and their impacts on the economy and business.
I Loved This. “As aid organizations, we are deeply concerned and outraged that some of the largest donors have united to suspend funding for the United Nations Relief and Works Agency (UNRWA), the main aid provider for millions of Palestinians in Gaza and the region.” Outraged that your supporters aren’t supporting what you are doing? Maybe. Just maybe you shouldn’t be doing those things.
Trading. Oxy and Apache are the most shorted S&P 500 energy stocks in mid-January; ConocoPhillips and SLB are the least shorted.
Similar View. I don’t mean anything rude or crude about the following cartoon, but I have been saying that Michelle will be the nominee for some time and for an analyst, corroboration is a great thing.
EIA Weekly Petroleum Report.
Crude Implications: Neutral – build above expectations due to refinery turnarounds and higher net crude import.
Money managers increased ICE Brent and NYMEX WTI net long positions by 20% w/w, lifting net position above average levels in a year.
Crude production has fully recovered from freezing Jan temps, but refining utilization rate remains low on heavy turnarounds.
U.S. Crude Production: indicated at 13.3mm BOPD, up 0.3mm BOPD w/w, and up 1mm BOPD y/y.
Refinery Runs: 14.8mm BOPD, flat w/w and down 0.6mm BOPD y/y. Utilization at 82.4%.
Crude Imports (net): 3.3mm BOPD, up 1.6mm BOPD w/w and down 0.8mm BOPD y/y. Brent-WTI spread at $5/bbl, flat w/w.
Gasoline: Bullish – draw above expectations. Demand up 8.1% w/w and up 4.5% y/y.
Distillate: Bullish – draw above expectations. Demand up 1.6% w/w and up 1.5% y/y.
Fossil Free London. Today BP announced they made £11 billion in profits in 2023. That generated a 14% return on invested capital (ROIC) for the company. For the last 6-7 years from 2014 to 2021, the ROIC averaged less than 5%. Google’s ROIC is 25%. Apple is 58%. Microsoft at 28%. But BP is making egregious profits when Microsoft is twice as profitable, and Apple is 4x as profitable? Don’t let common sense get in the way. It was just announced that BP secured one of 12 new licenses for natural gas exploration off the west coast of Israel, offshore from Gaza. The Fossil Free London group’s interpretation of all this?? “BP's profits are covered in Palestinian blood.” How far do you have to reach? Israel’s current offshore fields provide clean natural gas to Israel, Gaza and Egypt.
OOPS. “Over 7,000 yoga students signed a petition calling for @lululemon to end reliance on fossil fuels & convert its supply chain to 100% renewable energy. Who wants to tell these yoga students their expensive stretchy yoga pants are made from fossil fuels?”- X
The Great Dilemma. I really don’t get it. I consider myself a moral, ethical person who understands right from wrong, at least in my understanding of life. And that is where so much that is happening in the world today seems misunderstood. You have a religion, a culture, a common language, and a perception of “heaven” or an afterlife which is a more desirable thing place to go to now, with no reservations. We make jokes about virgins but if your heaven was guaranteed to be wonderful, happy, fulfilled, with family and friends for eternity, - I will even pass on the 47 virgins - sacrificing yourself and heading there is easy. Other religions, cultures and common languages celebrate life on earth, to be lived as long as possible, before achieving their idea of heaven. So, one side of the world is happy to die tomorrow, and the other side wants to live as long as possible. Is there a more fundamental difference between two people? The solution? No clue. No one can compromise their religious beliefs and some cultures are ruled by religion, not secular politics.
Still Sad. The October attack by Hames killed, as a percent of the country’s population, the equivalents of 42,000 Americans being brutally tortured and murdered. Remember our anger at losing 3,000 people on 9-11? It is sad that some 30,000 people have died, most of them Palestinians, since the attack, mostly women and children. Why? Because the men are in the tunnels fighting for Hamas and to them, the more Palestinians who go to “heaven” and the sooner they get there, the happier they will be. Do you notice that even the Egyptians have built large razor wire barriers to keep Palestinians out. Everyone who could leave Gaza did and mostly radicals remain. A refugee camp after 50 years and billions in aid? And very little to show for it.
Snippets.
McKinsey is also under pressure, warning about 3,000 employees that their performance was unsatisfactory. The consulting industry is pulling back after the boom times of the pandemic spurred hiring sprees.
Oil Daddy, LLC filed for Chapter 11 Bankruptcy. The Midland-based company is also known as LubriTech.
A $356,000 grant of government money was spent studying whether or not Japanese quail are more sexually promiscuous on cocaine.
America’s ‘Debt Spiral’ Is Nearing a Critical Threshold - interest payments on US debt will soon be larger than the national defense budget.
Too Good For Us. While Texas and the Feds argue about access to the border and whether or not the razor wire should be taken down, I saw the below story. Imagine – we can’t use razor wire to stop illegal immigrants coming across the border, but around the White House, different story.
Seeking Sanctuary. NYC mayor Adams famously declared in 2019, as he was running for the position - “To anyone in the world fleeing hatred and oppression, the ultimate city of immigrants wants you to remember: you’re ALWAYS welcome here.” Oops. Easy to say when you don’t have very many. Now, the city is expected to pay $12 billion over the next three years looking after the migrants. Under the deal, a family of four could receive nearly $1,000 a month, which works out to almost $35-per-day. If the pilot program is successful, the city has plans to expand it to the 15,000 migrant families sheltering in its hotels. “Not only will this provide families with the ability to purchase fresh food for their culturally relevant diets and the baby supplies of their choosing, but the pilot program is expected to save New York City more than $600,000 per month, or more than $7.2 million annually,” said the mayor’s spokeswoman. The illegal immigrants will be required to sign an affidavit swearing to only spend the money on food and baby supplies. Wow, that is harsh! After years of insisting New York City would remain a “sanctuary city” for immigrants under his control, Adams warned in September that the city could be “destroyed” by an influx of migrants. “Let me tell you something, New Yorkers. Never in my life have I had a problem that I did not see an ending to. I don’t see an ending to this. I don’t see an ending to this. This issue will destroy New York City. Destroy New York City,” he said. “It’s going to come to your neighborhoods. All of us are going to be impacted by this. I said it last year when we had 15,000,” Adams added. “I’m telling you now with 110,000. The city we knew we were about to lose. And we’re all in this together.”
The World Isn't Flat, But for 2024 the U.S. Land Market Is. Flat is the new up. Stability has been a key word so far on earnings calls. The U.S. Land rig count has been stable around the 600 mark for the past 19 weeks. The industry did not experience an increase in the rig count in Q4 but instead declined about 5% sequentially. Thus far in 2024 the rig count has stayed flat. The pressure pumping industry lost about 50 spreads in the last 12-15 months, in line with the rig count and the steady depletion of DUCS. This time, they didn’t build themselves out of business. This time, capacity shrunk due to the combination of attrition and the pressure pumpers proactively idling capacity to help support pricing. The demand for ESG-friendly equipment continues to increase as the industry continues to work on cleaning up everything it does. Diesel goes away and dual fuel and electric fill in, effectively making the older equipment less likely to enter the U.S. market and instead be shipped to less demanding work (not unconventional) elsewhere in the world.
Walker. You have to be a Texan to appreciate this one.
Derivative Impact. It seems the world is on the Ozempic drug, Wegovy, or one similar. Why do I think so? Grocery stores and restaurants are looking to revamp menus and inventories as a result of how effective and widespread the drug has become. Ozempic maker NOVO’s CEO said “scared” food bosses want to know how the drugs work and how fast they’ll roll out. Companies from Walmart to Chipotle are grappling with how a less hungry, potentially healthier customer will affect business. Amazing.
It’s Not How Much You Make. It is how long you have been making it. An old boss told me that when he recruited me. I took the job. According to a report by the NY Fed, younger Americans have grown their wealth at a faster rate than us older generations ever since the pandemic. But fear not. The report said that the collective wealth of U.S. adults under 40 is still a fraction of what older people are able to accumulate over the decades.
Headlines.
BP surges to two-month high as new CEO accelerates share buybacks.
Danos secures a planning and scheduling contract from Shell to support upstream operations.
The current 2024-25 WTI oil strip stands at $71.81 and $68.12 per bbl, while the 2024-25 NYMEX gas strips are at $2.56 and $3.44 per MMBtu.
Chevron and Exxon raise their dividends by 8% and 20% respectively.
Fed swaps almost wiped out the odds of a March rate move, and the chances of a May cut have also been reduced.
Ford Lost $4.7B On EVs Last Year, Or About $64,731 For Every EV It Sold.
I Didn’t Know. Taylor Swift has a stalker. Kinda. There is this college student who tracks the movements of celebrities using public FAA data. He tracks their CO2 emissions. She is suing to make him stop but word is, there is no real problem. Supposedly she bought more than twice the number of carbon credits needed to offset her Eras tour.
It’s Everywhere!! The M&A craze isn’t just limited to big oil companies buying smaller oil companies. Part of my former employer, Sun Oil, it was announced that Sunoco, one of the oldest US gas-station owners, is buying NuStar Energy for about $6.5 billion in stock, giving it control of a large network of pipelines, terminals, and other infrastructure crucial to its own supply chain.
One View. Citi hosted a dinner this week with SLB senior managements. With the recent announcement in Saudi Arabia about Aramco scaling back growth, investors have been concerned about the impact to the larger, more international service companies, especially since the Middle East, led by Saudi, was expected to be the growth engine this year. From the analyst about the dinner - “Overall, management remains confident in a multi-year spending upcycle by customers outside the U.S. given growth offshore and in the Middle East. SLB noted that the Saudi project deferrals shouldn't materially impact spending in 2024/25, and expressed confidence in growth continuing across the region. Margins should continue to expand on pricing, mix (offshore) and digital growth (profitability improves along the adoption curve) which in turn is reducing capital intensity and should facilitate steady improvement in FCF margin over time.” Someone will lose out on what is estimated to be a $1-$3 billion drop in spending versus previous plans.
More Saudi. What Saudi is doing in cutting back on growth production is smart in our opinion. Rather than cutting more production, they can just create worries about the future. The last time Saudi cut production, the resulting higher pricing brought in an additional hundreds of millions of dollars. This time they do it with just an announcement. JP Morgan has done some good work in the impact of the Saudi plan to temporarily shelve growth efforts. They estimate that Aramco had planned to deploy $25-28bn of capex to achieve the 1mmboe/d expansion by 2025-27. While this will negatively impact spending trends in the region, it is estimated to have less than a 2% impact on global capex. Within the Big 3 Oilfield Services companies, they estimate Saudi represent ~10% of SLB’s top-line and about ~7%-9% of BKR and HAL revenue. Amongst capital equipment providers, Saudi represented ~7% of NOV’s revenue, ~5% of TS, about 1/3rd of Nabors international rig revenues and 14% of its total. Someone will feel it.
Shout Out. Ever since Dr. Harold Jeskey’s Organic Chemistry class in college, I knew that chemistry was technology, even if it didn’t have a chip. As a result, I have always had a soft spot for the sector, so I have to give a shout out to ChampionX for their quarter. EBITDA beat, they doubled the buyback to $1.5 billion, they raised the dividend by 12%. Well done!!!
Paradise Lost. I spent some time helping to write petroleum legislation in West Africa as part of a World Bank program 150 years ago. One of my favorite countries was Senegal. A former French colony with a fun Club Med resort, it was great. They had no oil, so they had focused their economy on other things and it was a very stable country. Then a couple of years ago, natural gas was found offshore. The Oil Curse. It happened to the Ivory Coast with the discovery of the Seme oilfield. Then this - “Lawmakers in Senegal agreed to delay presidential elections in one of Africa’s strongest democracies, raising tensions that risk destabilizing the emerging natural gas producer in a region prone to military coups.” Can “one of Africa’s strongest democracies” withstand the temptation of corruption and grabs for power? I certainly hope so.
From the Babylon Bee, a Satire Site. Frightening features of late-stage capitalism:
Readily available food: And you don't even have to stand in lines all day for it. Disgusting.
Air conditioning that freezes your wife to death: Late-stage capitalism is especially hard on women.
People running for fun: You see that guy running in your neighborhood? Nothing is chasing him. It's unnatural.
Cruises: Thousands of middle-class people squished on a boat having a great time? Might as well be a concentration camp.
Tom Cruises: We must stop capitalism before they multiply!
Stanley tumblers: Nobody needs to drink that much water.
Banned books being available at every bookstore: Only unadulterated opulence makes things that are banned so widely available.
Plenty of free time: You might end up getting roped into a nice board game with your family. Ugh.
So many entertainment options that you spend all night on the couch trying to decide what to watch: And then your wife falls asleep as soon as you find something. Curse you, capitalism!
Chick-fil-A: Capitalist fat cats love the luxury of having delicious chicken and waffle fries handed to them in their cars. Obscene.
Long lines at amusement parks when it's hot outside: Hell on Earth.
So few actual problems that we have to invent some: Like being born the wrong gender.
Donald Trump: AAAAGGGGHHHH!
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.
