January 17, 2025
Things I Learned This Week While Freezing Parts Off
Mr. Biden Tightens the Screws. After four years of appeasement, the outgoing President ratcheted up the sanctions on Russia, sending oil prices to four-month highs. The sanctions affect anyone and any company who trades, moves, stores or buys Russian crude oil. Some will still get on the market, and maybe all of it, but China and India can only buy so much, and they have been the ones bailing out Russia for two years now. And with Mr. Trump coming into office, and Iran working hard at getting four nuclear warheads made, sanctions are likely to hit there as well. Iran stored 25 million barrels of oil in China and is now selling it as quickly as it can to both shore up its widespread support of terrorism, but also to monetize it before Mr. Trump clamps down. The higher oil price will be enjoyed by the E&P sector, but since Mr. Trump thinks he can end the Russia/Ukraine conflict, there is no telling how long or effective Russian sanctions will be. Iran is a different issue, but any loss of exports by them could be made up by OPEC countries, itching to increase production. As a result, we are not likely to see a drilling boom or even a “boomlet” from the current oil price just on the idea, or belief, that it won’t stay high long enough to economically work. If the bulls are right and there is less shut-in capacity than thought, and Russia and Iran actually start shutting in wells, then that might lend enough height and duration to the oil price to foster some increased activity. Time will tell.
Fly on the Wall. A couple of months ago I wrote about an intriguing Canadian company. Coming from a technical background, technology fascinates me, so when my friend Eric gave me the pitch on his company, Flyscan, I did some research and was very impressed. Everyone is working on methane detection, and rightly so. It is a critical issue and will continue to be from a monitoring and mandating perspective. The dominant technology has not yet broken out, with many different approaches currently in the market. But none were detecting liquids. Usually liquids detection involves spills, rather than just a gas escaping an oil well. And liquids means pipelines, tank batteries and the like. So, Flyscan developed a technology that offers an alternative to the current market, which is a guy in a small airplane, taking pictures with his Iphone of issues he sees on the ground. Flyscan is great at collecting terabytes of data, digitally, without pilots being distracted or losing focus. And the technology is able to see things that are missed by the naked eye. The Lone Ranger’s transportation versus Batman. The most likely first customers are the pipelines. In addition to liquids detection, it can identify pipeline scouring and exposure better than manual visual capability. Okay, so what? Before, we had noted that Enbridge and Marathon had already made equity investments in Flyscan. When your biggest customers want to own you, that is usually considered a good thing. But Canada? Our 51st state? Kidding. The company has now announced that Kinder Morgan has joined the group of strategic investors. To work for all of those companies, and to have equity investments from each, denotes something where attention should be paid.
Valuation. We are in the wrong business. Intra-Cellular Therapies, which develops drugs for mental illness, was just acquired by Johnson and Johnson for $14.6 billion or 24x trailing twelve-month revenues. It has lost over $1 billion over the last five years. And we thought people in the oil and gas business were the biggest optimists!! Or they are crazy and want a first shot at the meds.
Cajones. Putting a sell rating on a stock or a sector is an exceptionally difficult thing for a research analyst to do. Considering the analysts can’t talk to the investment bankers, there isn’t any benefit to sucking up to management. The point of that separation by Elliott Spitzer years ago was misguided in that research no longer has the ability to say no to bad deals. The reason analysts don't like to put sell ratings on stocks are 1) they are generally optimists and they hope for a better future and 2) it very negatively impacts your ability to communicate with the company and management and stay on top of the stock. It's really the second reason that is the main reason. If you put a sell rating on the stock, many CEOs, CFOs and investor relations people will basically cut you off. Invitations to events and dinners go away. Their willingness to attend your conference evaporates. You end up no longer in the loop. So, you word your writing in such a way that it should be fairly obvious to anyone in the first few sentences what your feeling is on the stock. That might not be the ideal situation to many, but the job is to have access to information, people and stay current. I mention all this because I wanted to congratulate the Bank of America analyst for a recent call he made. First, I hope he's wrong, second, he probably hopes he's wrong too and third because he has the cajones to say what he thinks. Right or wrong, this is someone who has spent hours and hours and days and days and weeks and weeks studying each company and the dynamics that affect them in the overall industry. It isn't a guess. It isn't done on a whim. It's studied, and whether he got the right answers or not, the questions were surely studied, and he has some basis for his opinion.
Not Oil or Gas. The following charts show the changes in perception in the media.
Where to? As Mr. Trump ascends to the Presidency, there is speculation about what he will do for energy and more specifically, oil and natural gas. Both Trump and his very strong choice for Energy Secretary, Chris Wright, plan to reverse Biden’s decisions on LNG exports, which is a very good thing, especially as it became better understood that this wasn’t a short-term appeasement to environmental activists, but a real interest in shutting down U.S. LNG. He is going to try and wind down the last-minute move by Biden to keep 625,000,000 acres of ocean away from potential oil and gas development. Offshore barrels are the cleanest we produce. The emissions rule that basically forces manufacturers to make EVs will likely go away, and more than 5,000 auto dealerships have already expressed their disagreement with the rule in a series of letters and filings. Overall permitting is likely to speed up, allowing the construction of pipelines out of the Northeast gas basins after years of delay. What would natural gas prices have been this last year if those pipes had gone in 3-4 years ago? All of these actions are positive, but they don’t give near-term drilling and completion activity any real boost. We continue improving efficiencies and do more with less, but there is a key point many investors make. The increasing political and economic clout makes investors realize that we are critical and will be needed for years. In any DCF calculation, you just increased the terminal value considerably, and that appears to be reflected most in the stocks.
Opinions. A good friend, Micheal DeFazio, puts out a daily piece looking at the markets. I liked his commentary this week.
Energy bull case that’s popping up more and more: “if you think we are back in a no landing scenario with yields ripping, geopolitics and a strong economy, you have to buy energy and refiners, not much else you can own.”
“Evercore/ISI downgrades SLB, HP, NBR, NOV, NE, RIG, VAL, TDW, ARIS to “inline”. Think most of those are already underweights / shorts so we think price action should be muted.”
Tombstone. While I have been to the town in Arizona and have pictures of the OK Corral, the tombstone this week is focused on the continuing M&A in the OFS space and the activity that PPHB is helping foster. Warren Equipment Company (“WEC”) provides heavy equipment and services to a variety of industries, including oil and gas, power generation, construction and agriculture. Headquartered in Midland, WEC serves its customers through several world-class subsidiary companies, including Warren CAT, SITECH Texoma and PSP Engines. Lion Equity Partners has acquired Global Compression Services, a former subsidiary of Warren Equipment and global distributor of OEM and aftermarket parts / components for reciprocating natural gas engines and compressors. PPHB acted as Advisor. Very good.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $78.71 per barrel (up ~7.5% week-over-week) and natural gas is $3.57 per MMBtu (up ~10.2% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.5 MM BOPD (up ~1.4% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by ~2.0 million barrels week-over-week vs. an estimated decrease of ~3.5 million barrels.
Frac Spread Count: There are currently 195 frac spreads operating in the U.S. (a decrease of 6 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 568 drilling rigs operating in the U.S. (a decrease of 5 rigs week-over-week).
On One Hand. The U.S. Supreme Court is to consider whether federal law prevents states and cities from suing oil and gas companies over the effects of climate change, clearing the way for the cases to move forward. In Hawaii, Shell and Sunoco had appealed to the Court after losing at the state's highest court on a lawsuit filed by the city of Honolulu. They are suing the companies for their contribution to global warming and Hawaii’s efforts to mitigate the impacts.
And The Other Hand. A Manhattan judge has dismissed New York City’s lawsuit seeking to hold oil and gas companies, Shell, BP and Exxon, among others, accountable for misleading statements about the environmental benefits / effects of their products. In 2019, NY state Attorney General Letitia James’ office lost a case alleging ExxonMobil had misled shareholders about the cost of climate change to its business. In November, James’ office lost another lawsuit that sought to hold PepsiCo liable for litter accumulating on the banks of the Buffalo River. State Supreme Court Justice, Anar Patel, said the city could not claim its climate-conscious residents were sensitive to how fossil fuels cause climate change, only to then be duped by the oil companies' failure to disclose how their fossil fuel products contributed to it.
Nuke ‘Em. Private equity group, Pelican Energy Partners, started a fund a couple of years ago to work on consolidating the services industry around nuclear facilities. This week, it announced the acquisition of Lancs Industries (“Lancs”), based in Albuquerque, New Mexico. Lancs is a provider of radiation containment and shielding solutions to the U.S. Department of Energy’s nuclear waste remediation program, commercial nuclear power companies, the U.S. Navy, a National Laboratory and the pharmaceutical sector. The nuclear industry is in a MUCH better place today than 1-2 years ago, indicating the Pelican guys were well ahead of the curve. Sam Veselka, an MD at Pelican, stated, “Pelican is excited to partner with Lancs in the next stage of their journey. The Company is a highly regarded supplier of radiation containment and shielding solutions to critical customers in the nuclear supply chain. We aim to drive growth and create new jobs in Albuquerque, reinforcing the area's long legacy in nuclear energy.” Well done guys.
It Isn’t Climate Change. I have no idea how the LA fires got started. I do know that the Santa Ana winds hit 100 miles per hour, fanning the flames. But it was not climate change. Two years of significant rain followed by one year of drought. Climate change refers to long-term shifts in temperatures and weather patterns. Three years do not qualify as “long-term” in any sense. The Santa Ana winds have been blowing forever. I feel for the people of LA, but we need to drop that argument completely. CNN conducted a poll and asked whether climate change or poor leadership caused the fires. We are now putting science to a popular vote with a binary choice. It is no wonder why such things are so misunderstood.
Another Point. A great deal has been made about California’s high debt level. One story said that over the past year, the markets have driven capital gains higher, basically wiping out the deficit. Not true. The state has $158 billion in debt, compared to $146.3 billion in 2020. And after having a $100 million surplus in 2022, California has run significant deficits over the past two years. The deficit for 2022-23 was $27 billion with 2024-25 expected at $55 billion.
Emissions are Global. Reducing emissions in one country can be impressive, but on a global scale it can still be insignificant. A University of Oregon study showed that green energy doesn’t replace fossil fuels, but enables more energy consumption. 89% of new car sales in Norway are EVs, but total emissions have continued to increase. The Science Journal said 98% of policies supporting worldwide “reducing” emissions failed to do so. The chart below shows coal emissions and remember that China has been adding coal-fired power at the rate of 1-2 per week for well over a year.
Snippet. The U.S. Energy Industry has defied past norms that suggest declines in drilling and completion activity would quickly result in lower production. Technology has turned that paradigm on its head in recent years.
It Can Happen in Other Industries. This below shows the consolidation of the defense industry over the last several years. It needs to happen to us.
Flat Line. We have written extensively over the past several months about the economic weakness in Germany, the UK and several other European countries. On an inflation-adjusted basis, including dividends, European stocks are up 2% in the last 17 years.
Home Run. We wrote last week about the Flowco IPO that was pending. An industrial company with roots in the oil and gas industry, the deal was 15x over-subscribed and has a market cap exceeding $2 billion. Congratulations to Mr. Edwards and his management team. Job well done! Foreshadowing???
Power. Constellation Energy, the nation’s largest nuclear power company, up 70% since September, is buying Calpine for $15 billion and is assuming about $10 billion in debt. That is a huge bet on natural gas, since Calpine is the largest natural gas-fired power producer in the country. Power. Not oil and gas. Power.
Speaking of Nukes. New York governor, Governor Hochul calls for a master plan for responsible advanced nuclear development in New York at the State of the State address. No drilling, but nuclear reactors. Our business is riskier than we thought.
Go Big or…. China approves the world’s most expensive infrastructure project, at $137 billion. The state-run news agency reported that China had approved plans to build the world’s largest hydroelectric dam on the lower reaches of the Yarlung Tsangpo, which flows from Tibet into India and Bangladesh. And they still start up a new coal-fired generation every week.
In case you ever wondered what a Frac Spread looks like when deployed and working:
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.
