January 24, 2025
Things I Learned This Week from TV
OMG. What a Week!! We are in a declared national emergency!! Since it isn’t because we are in horribly bad shape, it’s actually pretty cool. We knew we were important! Damn straight! Drill baby drill! How can you not be excited? Unless, of course, you are in the wind, solar, electric vehicle or lithium battery sectors, among a few others. The actions Trump is taking should have beneficial impacts further into the future, but drilling is not likely to spike anytime soon. Capital discipline is pretty sticky now, and incremental economic benefits for increased drilling can’t be enough to maintain and increase returns. So, business as usual, but now with an even bigger smile on your face from what seems to be a brighter future!
The Problem. One of the main reasons Mr. Trump wants drilling to ramp up, is to increase U.S. oil production and bring down prices. A media headline: “Trump might get an early economic win with gas prices expected to drop in 2025.” So, before anyone goes out and buys that new boat or truck, think about this. We will increase drilling activity and get lower prices for our product. I wish technology could move that fast, but it can’t. The most likely result is that oil companies begin allocating geoscience resources to currently open areas to map and / or update their models. It could be years before anything is drilled, but it is now more likely to be drilled than before. A positive bias... But it is a positive bias on volumes, not prices. If my production growth exceeds demand growth, prices come down. It is a conundrum of balance. “Drill baby drill” doesn’t seem to imply balance, and with his hope for lower energy costs, that balance can tip to lower prices quickly.
Thought of the Day. “This isn’t having your rich uncle die, but more like finding out you have a rich uncle.”
The Benefit. Valuations will move higher. Midstream outperformed all energy sectors last year and is on track to see continued throughput growth and increased processing and transportation exposure. This group is valued differently than oil and natural gas producers due primarily to the relative expectation of longevity. Long-term contracts and fixed assets with decades-long economic lives? And they get paid for it. It is different for E&P and Oilfield Services. The actions by Mr. Trump and the increasingly obvious realization that wind and solar won’t displace fossils fuels, but rather complement them, implies a longer-term dependency on them. That extends the duration and terminal value of any DCF valuation, without any changes in performance. So, valuations go up without impacts of commodity prices or current operations. But it’s a one-time revaluation. The need for performance is more important now than ever. It’s a fight to be relevant.
Trumps Quotes:
“We're not going to do the wind thing,” he said. “Big, ugly windmills. They ruin your neighborhood.”
“America will be a manufacturing nation once again, and we have something that no other manufacturing nation will ever have: the largest amount of oil and gas of any country on Earth, and we are going to use it.”
“We will bring prices down, fill our strategic reserves up again, right to the top, and export American energy all over the world.”
“We will be a rich nation again, and it is that liquid gold under our feet that will help to do it.”
Spigot Eased. Another benefit should be access to capital, and more availability implies lower borrowing costs, regardless of commodity prices. There have been a few equity raises and several debt raises by parts of the sector, but acquisition financing and midstream appear to be leading. An OFS/Industrial company’s IPO priced above the range and was up 20%+ its first day. Water companies are trying to change their SIC codes to industrial-related codes to improve their image, but their oil and natural gas exposure might not be a drag on valuation anymore. Diversified credit funds have taken market share from banks and family offices are the new private equity suppliers. That has pretty much been known, but now pockets of capital that avoided oil and gas should at least become more open to investment. E&P continues to spend within cash flow and consolidation will continue, which will need acquisition financing. OFS has been so capital constrained that they couldn’t add capacity, which has been a blessing. Operating lines, I understand, but the optimum amount of debt for an OFS company is zero. Midstream's long-term commitments will encourage financing for both growth and acquisitions and it should remain the darling of capital providers. But having more capital available, from more sources, is always a good thing, coupled of course with capital discipline.
PPHB – U.S. Energy Market Update Highlights:
Commodity Prices: WTI crude oil is currently $74.62 per barrel (down ~3.6% week-over-week) and natural gas is $3.47 per MMBtu (down ~0.3% 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 decreased by ~1.0 million barrels week-over-week vs. an estimated decrease of ~2.1 million barrels.
Frac Spread Count: There are currently 188 frac spreads operating in the U.S. (a decrease of 7 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 564 drilling rigs operating in the U.S. (a decrease of 4 rigs week-over-week).
OFS Earnings Start. Halliburton reported a slight beat to Q4 earnings but flat international and softer U.S. outlooks caused the stock to fade. It’s no surprise. Being exceptionally well positioned for the future with a strong balance sheet and good margins is a great place to be, but until the timing of that “future” is better known, there is no urgency by investors to buy the stock now. It should be a constant refrain through earnings season. SLB bucked the trend when the digital business picked up, beating expectations and guidance, but the rest of the business remains pretty flat, and now there is the increased risk with new sanctions that could force SLB to leave Russia. One headline summed it up well – “Guidance resets the decks for 1H while pricing pressure in NAM frac and Mexico erosion are the headlines.”
Snippet. The more I produce, the lower the price moves. If my costs go down, prices can go down and margins can stay the same. While E&P could even be positively effected, OFS loses out, except for the company that leads the technology.
Stay Tuned. The cheapest source of hydrogen is natural gas, so while it has enough technical issues that it is still not fulfilling its 20 year promise, don’t count it out. Building pipelines and processing plants to move hydrocarbons? Our backyard. The economics just have to work. How long did it take to crack shales? And think of how much capex would be spent to build the systems needed.
Seismic Shift. “Trump's return to the White House has sparked a seismic shift in both energy policy and technological innovation. The administration’s unveiling of 13 executive orders targeting climate and energy, coupled with a groundbreaking $500 billion private-sector investment in AI infrastructure from SoftBank, Oracle and OpenAI, is set to transform America's energy landscape. While the 12 major climate and environmental executive orders are historic, the true magnitude of this shift goes beyond mere rollbacks. The expected moves, such as the rollback of support for wind energy and EVs and the push for oil & gas-friendly changes, are just the surface. The real story lies in the potential scale of the energy transformation.” Novus Energy Advisors, Emily Easley.
What has Trump Done?
Three slides from the current deck:
Declared a “national energy emergency,” giving him authority to suspend some environmental regulations and speed up permits.
He eliminated the EPA’s “electric vehicle mandate.”
Withdrew from the Paris Climate agreement, again.
Rescinded the 2023 plan limiting drilling in ~3 million acres of the Arctic Ocean and recent actions that withdrew significant acreage coastal areas, including the Bering Sea.
Will fill the SPR with the 180 million barrels drained by Mr. Biden.
Immediate Impact:
There won’t be a “Drill Baby Drill!” since none of his actions will change the underlying near-term economics significanty.
Rules, regulations, requirements and permits are more likely to change in directions beneficial to our industry.
Politically, between Biden’s last-minute sanctions against Russia and turning a blind eye to Iran for years, the expected trend in the oil price should have an upward bias, as have the last few.
Natural Gas was going to show significant growth over the next few years regardless of politics, but the delays in approvals to get natural gas to market for the last few years, now changes.
Financial Impacts
Most everything Presiden Trump can do is to improve the long-term prospects and production of the oil and gas industry.
It improves the “investability” of the sector with more capital available from both direct and public markets.
That causes the DCF valuation’s terminal value to be extended which makes the stocks under-valued.
But the winners will be based on PERFORMANCE, with revaluation being an event, not a process.
PERFORMANCE consists of many different variables.
It Wasn't a One Off. The big power provider in South Carolina, Santee Cooper, hired financial advisors to find buyers so they can restart a pair of nuclear reactors that were mothballed years ago. Amazon and Microsoft appear to be in the lead. They need clean energy to run their data centers. Remember, Microsoft is paying $600 million to restart the 3 Mile Island Reactor that was mothballed in 2019. These technology companies had promised to be net zero by 2035, but conventional energy blows that promise out of the water because of the high demand for power associated with AI data centers. The answer? More nukes. Whether they're small modular reactors like those being proposed in Finland for AI data center power, or larger facilities, nuclear looks to be on the comeback.
Alberta is Doing It Too. Liquids production in Alberta hit a new record of 2.57 MM BOPD. It has been ticking up steadily for well over a year. This was facilitated in part by the Trans Mountain Expansion pipeline which increased its waterborne export capacity from 300,000 to 890,000 barrels of oil per day. M&A activity in Canada has been picking up recently with increasing interst in the Montney and Duverney.
Back Out. Independence Contract Drilling has emerged from bankruptcy. Congratulations, Anthony. Long hours, hard work. Eliminating $197 million of convertible debt and having a $30 million undrawn and available credit line has to feel good. No one ever wants to see their investors lose their money, or youself lose what could be your life savings. But fresh starts are called just that for a reason. Good luck, guys. Call if you need help.
The Hart-Scott-Rodino Act and filing thresholds were changed. Summarized:
Movin’ on Up. It is obvious that nuclear is a much hotter topic today than just a year or so ago. Everyone knew that, with all those people who died at Three Mile Island, new capacity would not be built. But, of course, no one died at Three Mile Island and one of the original three reactors stayed in service until 2019. Now, Microsoft is spending ~$600 million to reactive the facility. FANG has talked about having a small modular reactor (SMR) to run its Permian power needs. Finland is looking at SMRs for their data centers. If you can put a nuclear reactor on a submarine, surely it could fit in a 2-acre metal building outside of Odessa. The new SMRs use Thorium instead of Uranium, so they cannot go critical and fail. And to all the people who use the bureaucracy argument, there is the little known “ADVANCE Act of 2024”, passed with bipartisan support and signed by President Biden. It requires the Nuclear Regulatory Commission to take a number of actions, particularly in the areas of licensing of new reactors and fuels. From the Senate Committee on Environment and Public Works: “SIGNED: Bipartisan ADVANCE Act to Boost Nuclear Energy Now Law.” Hold on.
Blended Valuation. A New York investment firm has acquired a majority stake in PB Materials, founded in 1947, it is a producer and supplier of concrete and construction aggregates intended to serve the construction, petroleum and other related industries. In late 2023, it opened its first frac sand mines. Today, we are awash with sand so I’m not sure what value is given to that segment, but it is a very well established and reputed construction material provider. They have “ready-mix” locations that can chase the drilling trend like wet sand. No price was released, but anything done in that part of Texas is dependent on the oil and gas industry, and this is a New York-based investment firm putting new money in an oil-related industry.
I See Now… why all these people and companies I know have jumped into batteries. “Diurnal storage (2–12 hours of capacity) also increases across all scenarios, with 120–350 gigawatts deployed by 2035 to ensure demand for electricity is met during all hours of the year.” - Energy Analysis, 100% Clean Electricity by 2035 Study. The current installed base is ~31 gigawatts. 10x growth?
Even More. We have been writing about several U.S. banks that are leaving the global banking sector climate coalition. Six have now left, and this week, four of Canada's biggest banks announced that they are withdrawing as well.
Doing More with Less. I spoke in Midland this week at an EWTC Luncheon. It was 17 degrees when I landed. I’ll share insights gleaned throughout the day. One thing that struck me is the continuing chase of efficiency. One gentleman I spoke to told me that his drilling rig team had 18 rigs drilling 2.6mm feet of hole in 2023. In 2024, they drilled almost 3 million feet with 8 rigs. And therein lies the benefit of E&P and the bane of OFS.
Thorough. Enverus published its “Energy in Focus | 2025 Outlook Report.” It is starting to worry me that we are all in agreement on so many things. LNG, power for AI, nuclear and more. They ranked the most important overall energy concerns for 2025 as follows: 1) reliability, 2) environmental concerns and 3) cost. Some highlights from the report:
“As we head into 2025 the energy sector has never been more prominent, or dynamic.”
“Looking ahead to 2025, power demand growth fueled by the AI race will dominate the energy narrative.”
“We forecast relatively flat gas demand in the power sector out to 2030, which is bullish relative to the EIA’s forecast of a 9 Bcf/d decline.”
“The next phase of growth in North American LNG exports will finally kick off with the ramp of 5.7 Bcf/d from four new facilities.”
“LNG Export Growth Will Push Henry Hub to $4.00/MMBTU.”
“Brent to Average $80/BBL, With Help of OPEC+.”
“Battery Storage Will Increasingly Disrupt Power Markets.”
“2025 Will Be the Year of DAC, EVS and Advanced Nuclear Reactors.”
Words to Live By.
Breaking News! It must be climate change!! There is no other explanation. Oh. Wait. “Damage near Los Angeles, Malibu Beach Threatened. Two thousand men fought desperately to bring under control two forest fires that threatened further destruction in Southern California after burning over 50,000 acres and destroying 600-700 homes.” - Lincoln Journal Star on November 24, 1938.
Observation. There was $300 billion in E&P M&A last year. Few big companies are left to be acquired. But the same thing is being sought by all – depth of inventory. 15 years ago, the industry was stunned with a 15-year prospected inventory, the likes of which had never been seen. Roll forward 15 years. Yikes. The quality of the rock declines as do recoverable volumes. And according to one report, the quality of acquired inventory has already declined, averaging a $50/bbl breakeven in 2024 versus $45/bbl in 2022-23. When quality ebbs, quantity can help, but costs always seem to just rise.
Getting Closer. Kinder Morgan is going to build a pipeline from Katy, basically a suburb of Houston, 216 miles to Louisiana, and other locations in the east. We have not had many pipelines that went from West of Houston to Louisiana. The $1.7 billion project should go live in 2026, and the price demonstrates the level of scale in the project.
Soapbox. Direct Air Capture is growing, though I am not a fan or believer. The fully loaded cost versus the benefit doesn’t make real sense to me, other than on a highly subsidized basis. And when subsidies can change, or even go away, with a change in politics, any economic projections become worthless. By volume, the air that we breathe is 0.04% CO2. You have to suck in a lot of air, fans and compressors aren’t free. (Unless they too are subsidized!) The world’s largest DAC right now is 36,000 tons per year. A 37-acre bog in South Wales stores the equivalent of 32,000 tons of CO2. Microsoft, which has committed to becoming carbon negative by 2030, signed a deal with a Carbon Capture and Sequestration (CCUS) company, 1PointFive, and bought a record number of carbon dioxide removal (CDR) credits, agreeing to capture and sequester 500,000 tons of CO2 over the next six years. So, Microsoft buys its way to purity, and the industry builds uneconomic (without subsidies) assets. Who wins?
Commentary on OFS. By Enverus: “After a ~10% decline in per-foot well costs in 2024, we forecast well costs will hold flat in 2025. We expect rigs and completion crews will continue making efficiency gains in 2025, placing downward pressure on overall equipment utilization. Lower-tier rigs and crews will be especially exposed to price reductions. Most activity, however, is weighted to public companies that prefer top-spec rigs and electric frac equipment. Steel prices had already bottomed and affected OCTG and tie-in costs even before the U.S. increased tariff risk from the presidential election.”
Not Everything Floats. Last week, The Flowco IPO was amazing, rumored to be 15x-20x over-subscribed, pricing above the range and trading up over 20% on the first day. So, all energy can make it to the market, right? Er, no. Venture Global cut the offering price range of its IPO by 40%. And this is a big company. Granted, this implies a market cap of only $65 billion versus the $110 billion the owners were hoping for. At that shrunk size, it is twice the size of Halliburton, with four GoM LNG export facilities, it is the second largest U.S. LNG exporter behind the French energy company, Total. Nothing seems broken except the valuation, with investors skeptical about the company’s projections. Venture Global had net income of $756 million through Q3 with $3.4 billion of revenues.
Snippet. Just six energy IPOs priced on U.S. exchanges in 2024. The proceeds of $667 million, were the lowest in 21 years.
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.
