Things I Learned This Week Back in South Texas

January 26, 2024

Sunny South Texas. The weather in South Texas was better this week than last, and the company was fabulous, again. Energy company earnings are coming out, with several OFS companies reporting already. But the outlook for the U.S. this year is flat to slightly down, and international and offshore continue to be the areas of strength. So far, the messages have been fairly consistent, with the U.S. up, but barely, and international up 12%-15%. Pay attention to the OFS outlooks and the E&P discipline. It will matter. Lots. Otherwise, it was a slow week for energy. Just wait.

You Gotta Love It! The Wall Street Journal had an article this week titled, “Pop Goes the DEI Bubble.” We have been discussing the fact that DEI departments of the, normally very aggressive, technology companies have cut a larger percentage of people from DEI departments than any other. This article refers to that as well. Five states have banned DEI. ESG was already encountering some speed bumps, many of which were not deserved but were issues, nevertheless. These speedbumps were largely centered around the 'S' of ESG, where the DEI activists fit. The article opines that ESG peaked last June when BlackRock CEO Larry Fink said he would quit using the term since it had been “weaponized.” Of course, he has also said that BlackRock would use DEI to “force behaviors” of corporations on gender or race. “Diversity meant ideological conformity. Equity meant discrimination. Inclusion meant blurring the sexes.” Tampons in men’s restrooms on Ivy League campuses? Really? The author says it is an effort in “societal design,” with the “utopia” designed by the DEI crowd. My favorite comment at the end of the article stated, “The good news is that economics eventually outlasts the control freaks.” Mine is that “pragmatism beats ideology every single time, just not as quickly as we would like.” Either way, I see it as a theory that was tested and failed. I am a big fan of diversity and inclusion since there is so much diversity in life and because belonging is a good thing. Equitable treatment of all people should be a given in life. But, as an imposed business mandate, that is a social cost with little apparent benefits. It was doomed to fail.

Killin’ It. Hedge funds killed it this year, with gains of $218 billion after fees. Remember, a hedge fund generally charges 2% of assets managed as a management fee and receives 20% of all profits. If the hedge fund loses money, the firm only gets the 2% management fee and must earn back all losses before the 20% profit sharing kicks back in. The top 20 firms, which oversee less than a fifth of the industry’s assets, generated $67 billion or roughly a third of the gains last year. Citadel, Millennium and D.E. Shaw continue to dominate. The biggest bets that paid off were on catastrophe bonds and other insurance-linked securities.

Not Everyone is Peaking. We all look at China as a big box full of manufacturing and money, selling the U.S. and others everything in their big box stores and making billions in the process. And, since it is a communist country, even though public companies in China have shareholders, the government is the true beneficiary. Having driven global growth for years, our idea of a slowdown is just that. A little slower. But the reality appears much worse. The Chinese stocks trading on the Hong Kong exchange have gotten killed, with their discount to mainland peers the deepest in well over a decade, as foreign investors sell all things China. All this as U.S. stocks hit record highs. Investors also expect the yuan and government bonds to underperform this year. The Hang Seng dropped closer to a level last seen almost two decades ago. China’s “slower than expected recovery” may not be a recovery after all, but part of a continuing decline.

Keep Trying. According to China’s National Bureau of Statistics, the nation's total population fell by over 2 million in 2023 to 1.41 billion people. China has been surpassed by India, marking the second straight year of contraction and double that of 2022. So, it is gaining momentum. Remember the one-child policy in China for years? That ended in 2015 and, in 2021, the government started paying incentives to couples for having more children. As deaths outstrip births, China is starting to plan for an older and shrinking population, naming it the “silver” economy. Pretty it up as much as you can.

Open Mind. I flew United Airlines this week with a new understanding of the company. CEO Scott Kirby has come out as a big fan of the DEI movement. "One of the things we do is for every job when we do an interview, we require women and people of color to be involved in the interview process, bringing people in early in their careers as well and giving them those opportunities and creating a stronger bench," said Kirby. Noble, I guess, but exceptionally discriminatory. We aren’t dealing with just any CEO. At least, we don’t think so. What struck us is how into all of this he really is. He doesn’t just espouse it, he lives it as one clip shows. That is Scott Kirby, CEO of UAL, on the left. And, on the right is Scott Kirby, CEO of UAL. He is no hypocrite on diversity.

Headlines.

Taiwan Export Orders Plunge on Tumbling Demand from the U.S. and Europe.
At Least 20% of MDs at Lenders, Including Morgan Stanley and UBS, Received No Bonuses Last Year.
Baker Hughes Predicts a Decline in U.S. Oilfield Spending. (Reuters)
White House Mulls Moratorium on New LNG Projects. (Bloomberg)
Q4 Dealmaking Hit $144 billion. What’s Next?
Barnett E&P Waits for Right Window to Launch IPO.
Expro Lands CCUS Contract for Hydrogen Project in Japan.

Gold Star. Bank of America Securities put out a report that screened for long call opportunities where "companies rank higher if they have low implied volatility, high Bank of America EPS estimates and are heavily shorted and/or lightly owned." The companies are ranked by how cheap it is to position with calls for a potential earnings surprise. The only energy stock mentioned was Halliburton.

Killed. Archer Daniels Midland, the huge agricultural company whose lobbyists are much better than those of the oil and gas industry, is getting government mandates and subsidies to turn food into a transportation fuel. But, the CFO abruptly resigned and there might be accounting issues, forcing the stock down 16% on Monday. That is child’s play for some. Spirit Airlines dropped 47% on the news that the government would not allow the buyout by JetBlue. This does not bode well for approvals of mergers and combinations by the Department of Justice.

An Educated Pick. A number of people are talking about which energy stocks to buy, though no wholesale buying has been seen by us. But, talking about it is a start. On that note, a group of us this week, sitting around the fire with adult beverages in hand, asked each other about their next E&P target stock. Since I owned Pioneer, I got cocky. Permian Resources. But what do I know? As it turns out, my friend, Paul Sankey, knows a lot and a lot about E&P. So, when he came out with Permian Resources as a top pick, I was pleased. We love corroboration, especially when they know more about it than we do! “The hottest company in the Permian right now, and our top pick for 2023 in U.S. E&P, is barely known on Wall Street. Nay, barely known outside their home city of Midland. The $10B market capitalization and $14B enterprise value company is producing some 300,000 boe/d, of which just under half is oil. Management has an excellent reputation among those in the know, most of them in Texas, if not Midland. Why so unknown? The company is brand new, not even a toddler, barely one year old and is an amalgam of private and public plays into the newly formed Permian Resources.” He has an $18 price target. I don’t own the stock. Yet.

They Won’t Quit. “Exxon sues ESG investors to keep climate proposals off shareholder ballot.” Remember when Exxon had an activist shareholder a couple of years ago and ended up getting several seats on the board? They weren’t the right kind of activist. They wanted to make money on Exxon. This is different. U.S. and Dutch climate activist investors with an "extreme agenda" are seeking to prevent a climate proposal from going to a vote during the company's shareholder meeting in May. In the suit, Exxon said Arjuna Capital and Follow This became shareholders only to put forward proposals that are calculated to "diminish the company's existing business" and do not serve investors' interests or promote long-term shareholder value. The goal is to "force Exxon Mobil to change the nature of its ordinary business or to go out of business entirely," the lawsuit alleged. The activists want the company to set Scope 3 targets. Scope 1 and 2 are deemed possible and somewhat practical by industry. But Scope 3 is so broad and overly inclusive that it makes it virtually impossible for a company to operate. Exxon has said it plans to become net zero by 2050 for Scope 1 and Scope 2 emissions, but it has rejected all targets associated with pollution caused by the use of its products, which is Scope 3.

Say It Isn’t So. There was an editorial earlier this week talking about how the administration is starting to drag its feet on approvals for new LNG export facilities. Previously, it would take a weekend. But now, it is taking months, 11 months, in some cases. The reason? Environmental activists are still upset over Biden’s approval of the Willows oil project in Alaska. This president was supposed to be shutting down oil and gas, not giving away decades of production approval. So, LNG was next. Then, the story leaked that the Biden administration has paused in its decision to approve Venture Global's planned Calcasieu Pass 2 LNG plant in Louisiana, which would be the largest LNG export terminal in the U.S. The administration says it needs to expand its evaluation of the project to consider its impact on climate change as well as the economy and national security. It was the NSA that Obama went to for evaluation of LNG exports, and they endorsed it immediately. To be able to ship large cargoes of energy to friends, and potential friends, all over the world was much too attractive. And now, after Biden promised to save Europe with increased LNG, projects are getting slow rolled into an election cycle. In terms of improving air quality around the world, there is little question that natural gas will see increased use, displacing coal, wood and other fuels. The U.S. substitution of natural gas for coal is the reason the U.S. is the only country in the world in compliance with the Paris Climate Accord, of which we are not a member. The politics hitting pipelines, LNG facilities and anything else that might get one more activist vote is being pursued. And someone thinks this is a good idea? A delay could stretch past the November election and spell trouble for the Venture Global LNG project and 16 other proposed terminals, including projects led by Energy Transfer, Commonwealth LNG and NextDecade, according to the report. The $10B Calcasieu Pass 2 project would dwarf existing U.S. export terminals, with an export capacity of as much as 20M metric tons/year of natural gas, increasing the current amount of exported U.S. gas by roughly 20%. There is little division within the White House over delaying CP2, in part because it is not seen as a major energy security issue with the U.S. already producing and exporting so much gas.

Top Picks. In a recent report, Goldman Sachs highlighted the companies in its return-on-equity (“ROE”) growth basket, adding some names. The S&P 500 ROE rose by 55 basis points to 20.5% through the third quarter in 2023, benefiting from the expanding EBIT margins during the first three quarters. Consumer discretionary ROE posted the greatest increase since Q4 2022, driven by expanding EBIT margins, while energy ROE contracted the most. The only two energy names on the list?

EQT Corp. (EQT) - ROE growth of 33%
Baker Hughes (BKR) - ROE growth of 20%

ROE. Baker Hughes has averaged 6% ROE through the first three quarters of 2023 and posted an 11% ROE in Q3, showing some acceleration, which makes sense in the Goldman report. The companies getting better more quickly will often see their stocks eclipse those who perform at a much higher level (returns) but can’t grow them rapidly from there. From Q1 of 2018 until Q3 of 2022, EQT generated negative ROE every quarter, bottoming at -33% in Q3 of 2021. But it hit 43% in the first quarter of last year, which was a high going back at least 15 years. It had moderated to 24% by the end of Q3 last year. The performance shows that it is a much different company than just a couple of years ago. By way of reference, Halliburton’s ROE averaged 29% through the first 9 months of the year, up from 26% last year. SLB’s ROE went positive in mid-2021 at 8% and has marched higher in a very steady trend, ending Q3 at 22%. Shareholder equity for SLB was $36 billion in mid-2019. And, by mid-2021, shareholder equity was $12 billion, reflecting write-downs that put the ROE at -113% in one quarter. Weatherford was the most improved. After the bankruptcy in 2019 (five long years), the company was getting its feet under it and was bleeding, with a loss in ROE of 147% at the end of 2020. Then began the grand march up. About every quarter was an improvement, hitting 54.3% in Q3 of last year. A phoenix, rising from the ashes, stronger than before. Q1 of 2021 was the beginning of an improving trend for NOV as well. Posting an 11% ROE loss that quarter, results have steadily improved. It went positive in Q3 2022 and hit 9.3% in the latest reported quarter.

Slow As Molasses. Last week, FERC voted 2-1 in favor of two new gas pipeline projects. One is a gas pipeline to support a new power plant in Tennessee, with the other being a capacity expansion of Williams’ Transcontinental pipeline in Louisiana and Texas. They were approved despite arguments among commissioners over whether the projects followed FERC guidelines regarding the effect on global warming and meeting of a threshold of public convenience and necessity. There are supposed to be five commissioners, but there are currently only three as nominations have been held up in Congress.

Dysfunctional. Dan Naatz, an executive with the Independent Petroleum Association of America spoke at the IPAA Private Capital Conference this week. He said that the levels of dysfunction have been on the rise and that leaders on either side aren’t engaging enough in good-faith debates. He said the current atmosphere in D.C. reflects the fact that a large portion of the public believes that transferring the energy system to non-carbon sources will be painless. “The biggest challenge we have in Washington is that—President Obama was really good at it—just saying ‘Well, we’re just going to flip. No pain, no challenge. Tomorrow we can go to renewables, just like that,’” he said. “We all know if it were that easy, it would have been done by now.”

I’m Not The Only One. Between 2022 and 2023, 25 billionaires on the Forbes wealth list fell off after losing a combined $43 billion in wealth. The world lost 3.5 million millionaires that year as well. Global poverty is now at its lowest level ever recorded at 8.6%, down from 29% in 2000. Okay, this one surprised me. The top 1% now represents only 44% of global income, down from 49% over that period. There is no question that there are a few very rich people and a whole lot of poor people. But studies show that, in percentage terms, the divide has rarely changed. It is aided by the fact that the top ten wealthiest individuals are worth $1.5 trillion, with two each from Google and Microsoft as well as Amazon, Oracle and Facebook. They collectively made almost $20 billion but much of that was just recovery from COVID. What would it be like? With $10 billion in T-bills at 5%, you receive $1.4 million every single day of the year. 365 days. A couple of weeks of that would certainly help my current financial situation.

Times. They are A’Changing. Saudi Arabia is preparing to open its first alcohol store, serving exclusively non-Muslim diplomats, according to a source familiar with the plans. Customers will have to register via an app, get a clearance code from the foreign ministry and respect monthly quotas with their purchases.

Hot EVs? Right now, 80,000 Americans are anxiously awaiting the delivery of their new electric Hummers. Their deposits are in... the paperwork is signed...

But, so far this year, GM has delivered just two Hummers. Two!

Hyperbole. “Crude oil surges to YTD highs on U.S. economic strength, continued global turmoil.” The 26th day of the year? 7% of the year under our belts and oil “surges to YTD highs.” Really?

My Bet Looks Better and Better. RadarOnLine is a gossip rag that had a pretty interesting story this week. This article agrees with me on the possibility of Joe’s potential replacement.

“Insiders snitched that tensions between the two presidents recently exploded after irate Obama rushed to a secret meeting and confronted Biden about his fading chances to fend off surging Republican candidate, Donald Trump, in the upcoming November election." Obama read Joe the riot act and spilled a Beltway insider to the National Enquirer. "He told him to up his game or step aside for a candidate who can win the race. News of the shocking showdown came on the heels of damaging comments from former First Lady Michelle Obama, who politicos say is being pressured to mount a primary challenge to her hubby's aging former Veep. ‘What's going to happen in this next election?’ Michelle fretted. ‘I am terrified about what could possibly happen — because our leaders matter.’ She also clearly questioned whether Biden could win the election. Sources told the outlet that both Barack and Michelle have been deeply troubled by Biden's plummeting approval ratings and seemingly diminished ability to handle the rigors of office.”

Feeling Brilliant? A really easy quiz was sent to me the other day. The goal was to get at least 4 out of 10 correct. I’ll give you the answers at the end, and, if you got four or more right, I’ll think you cheated!

1. How long did the Hundred Years War last?

2. Which country makes Panama hats?

3. From which animal do we get cat gut?

4. In which month do Russians celebrate the October Revolution?

5. What is a camel's hairbrush made of?

6. The Canary Islands in the Pacific are named after what animal?

7. What was King George VI's first name?

8. What color is a purple finch?

9. Where are Chinese gooseberries from?

10. What is the color of the black box in a commercial airplane?

Progression or Posturing? The president of Harvard resigned after a dismal appearance before Congress and an outpouring of observations of possible plagiarism in some of her graduate work, detailed by research and reporting from the school newspaper. One criticism she got was that Jewish students were being bullied at school and little was done to prevent it. As a result of her departure and the surrounding issues, Harvard announced the “Presidential Task Force on Combating Antisemitism” and named a history professor by the name of Derek Penslar as co-chairman. Impressive, right? Of course, he is on record saying that Israel is a “regime of apartheid” that supports “Jewish supremacism.” He participated in the “settler colonialism” protests that harassed Jewish students. This is the guy Harvard is having co-chair a Presidential study on antisemitism? But, then again, Iran did chair a UN Human Rights conference.

EIA Weekly Report.

Crude Implications: Bullish – draw above expectations. WTI 1M-6M backwardation at $1.8/bbl, $1/bbl wider w/w. Money managers cut ICE Brent and NYMEX WTI net long positions modestly w/w. Freezing temperatures have driven lower production from the Northern Tier and impacted utilization rates at USGC refineries.
U.S. Crude Production: Indicated at 12.3mm BOPD, down 1.0mm BOPD w/w and up 0.1mm BOPD y/y.
Refinery Runs: 15.3mm BOPD, down 1.4mm BOPD w/w and up 0.3mm BOPD y/y. Utilization at 85.5% reflecting the impact of recent cold weather.
Crude Imports (net): 1.1mm BOPD, down 1.2mm BOPD w/w and down 0.1mm BOPD y/y. Brent-WTI spread at $5.2/bbl, flat w/w.
Gasoline: Bearish – build above expectations. Demand down 4.7% w/w and down 3.2% y/y.
Distillate: Bullish – draw vs expected build. Demand up 3.8% w/w and down 2.4% y/y.

Gas Too? In the desert of Eastern Saudi Arabia sits, what many believe to be, the world’s largest shale gas field outside of the U.S. Endowed with an estimated 200 trillion cubic feet of wet gas, the Al-Jafurah field “is one of the most ambitious projects in [Saudi] Aramco's history.” Over the coming years, Saudi plans to invest more than $100 billion to bring Jafurah’s huge energy resources to market as part of the country’s overall objective to increase its natural gas production by more than 50% by 2030. Once fully operational, Aramco expects Jafurah to produce 2.2 bcf/d of natural gas, 0.6mm BOPD of natural gas liquids (“NGL”) and condensates and 0.42 bcf/d of ethane. It is anticipated that such production levels will be maintained for several decades and the potential for further investment has not been ruled out. This is from Doomberg, a recommended read for knowledge and entertainment. This article noted how more and more things are likely to be run on natural gas.

Snippets.

More vessel owners are looking to hydrogen fuel to reduce emissions. A growing number of vessel owners and ship designers are looking to build or convert their ships to run on hydrogen fuel cells as a means of lowering the environmental footprint of offshore operations.
Among unconventional oil resource plays in the U.S., the Permian stands well atop the heap for remaining resources, offering the most remaining high-quality drilling opportunities and the greatest potential for resource expansion.
Lathrop Survey: Oil Execs Favor Diversifying. Fewer companies expect to increase oil and gas production this year as many turn to renewables for growth opportunities.
The U.S. is in a “terrible place” with the federal deficit and needs tax increases to fix it, said former Treasury chief Robert Rubin. “The risks are enormous.”
The Justice Department and Consumer Financial Protection Bureau issued a joint statement cautioning that financial institutions may not use immigration status to illegally discriminate against credit applicants.
“The outlook for oil field services demand remains strong,” said Halliburton CEO Jeff Miller. “We will deepen and strengthen our value proposition and generate significant free cash flow.” Halliburton increased their dividend by 6% and SLB hiked theirs by 10%.
Capital spending by operators in the U.S. is expected to increase 2% this year, far less than last year’s 19% expansion, according to Evercore ISI.

Things We Don’t Always Think Of. The largest brokerage in China is said to have suspended short selling for some clients in mainland markets following the rout in Chinese stocks at the start of the year. State-owned Citic Securities made the move after so-called window guidance from regulators. A Hong Kong gauge of Chinese stocks has notched up its worst week since March, while global passive funds are adding to the pressure by joining in with the selloff. And this is all wreaking havoc in the country’s asset management sector, with mutual fund closures hitting a five-year high in another sign of deteriorating investor confidence.

Upcoming Events.

The 2024 North American Frac Sand Conference & Exhibition is being held February 12-13 at the Marriott West Loop by the Galleria.

The THRIVE Energy Conference, held by Daniel Energy Partners, is a huge event on February 20th to the 21st at Minute Maid Park. Everybody. Everybody.

March 20th is the Petroleum Club of Houston’s Distinguished Speaker Lunch. They host many, but I am the speaker this time. Distinguished is just old.

As an early reminder, the annual meeting of the Energy Workforce and Technology Council is being held on April 24th to the 25th at the JW Marriott Camelback Inn Resort & Spa in Scottsdale, Arizona. The organization is a combination of the former PESA and Association of Energy Service Companies (AESC) of Canada. It is Oilfield Services. The largest conference of its kind in the industry.

Quiz Answers.

1. How long did the Hundred Years War last? 116 years from 1337 – 1453

2. Which country makes Panama hats? Ecuador

3. From which animal do we get cat gut? Sheep and Horses

4. In which month do Russians celebrate the October Revolution? November

5. What is a camel's hairbrush made of? Squirrel fur

6. The Canary Islands in the Pacific are named after what animal? Dogs

7. What was King George VI's first name? Albert

8. What color is a purple finch? Crimson

9. Where are Chinese gooseberries from? New Zealand

10. What is the color of the black box in a commercial airplane? Orange

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.