July 12, 2024
Things I Learned This Week in Far West Texas
We did not publish last week, between the 4th of July and a brutal hurricane. I was in West Texas, Ft. Davis to be precise. It may come as a surprise to some, but Denver is at 5,200 ft and Ft. Davis is 4,900 ft. A friend who lives 15 miles away has a house at 7,100 ft. 8,750 ft is the highest point in the state, in far West Texas near the New Mexico border. Vail, Colorado is only 8,200 ft. The state is NOT flat as a pancake. And the surrounding towns of Marfa, Alpine and Marathon were fun to visit. One highlight? The Alpine Cowboys are playing the Austin Weirdos in Pecos League baseball.
A shout-out to all my friends in Houston. I hope you have power back, and all works out okay.
Everyone got a taste of what Houston was like before the invention of the air conditioner.
Surprised. I will admit that I did not expect one debate to bring down the presidency but that is what has happened. First impressions matter and while the debate was not the first impression per se, it was the first live debate President Biden has done in some time. You cannot put the genie back in the bottle. It is too early to say what exactly will happen, but Mr. Biden lost the presidency the other week.
Yikes. And you think you’ve had a difficult year. Four people have been living in a 1700-square-foot house for 378 days. Two men, two women, doing nothing together. They volunteered to do it. NASA built a Mars simulator in alignment with its plan with SpaceX to land on Mars. The group within NASA doing this mission is Crew Health and Performance Exploration Analog — or CHAPEA. No leaving your house for over a year. No walking outside and nothing seen through the windows? For 378 days. With three other people. All of the time. No one killed another so I guess all went well. Someone had a tough last year.
Power Needs. The ADAM Energy Forum held its monthly luncheon this week and an old friend, Dan Morrison, was the speaker. The topic was Bitcoin mining and AI power needs. When Bitcoin mining was kicked out of China a couple of years ago, they came to the US and set up operations to take advantage of our low, relative to the rest of the world, natural gas prices. At one point, a Bitcoin miner told the city of Denton what its power needs would be in four years, and it was more power than the city generated. Panic set in among those in established areas and areas of stranded gas finally had a market. Then Bitcoin crashed and no one cares anymore. Now though, Bitcoin is back close to $60,000 and mining is very economical. Dan noted that electricity costs are driving users “upstream”, closer to the power supply. Bitcoin doesn’t really care if power is interrupted so they are a favored customer. So, to avoid flaring or building a long distance pipe system, miners can put a natural gas fired engine and a computer station on a remote location for about $1 million and leave it alone to run. The critical points of a mining facility or a data center are 1) power, 2) computers, and 3) a datacenter with cooling and communication (someplace to put the computers). A 1 megawatt (“MW”) mine will consume 260-300 Mcfd. Using off-grid power can double the margins. It was an interesting talk with a number of good questions. Our favorite? The Programmers’ Credo: “We do these things not because they are easy, but because we thought they were going to be easy”.
Who Do You Believe? OPEC came out with its demand forecast this week. It is positive and bullish. They are looking for demand growth of 2.2 million barrels a day this year. That puts global production at 104.5 million barrels. While the forecast for 2025 drops the growth to only 1.8 million, that's still a very big number. The IEA is forecasting 1.5 million barrels this year and 1 million next year. That's a big gap, and, of course, makes it impossible to believe any forecasted price when the two organizations that are almost totally charged with this forecast come to such diverse conclusions. There's a positive to this. It keeps everybody on pins and needles. And their wallets in their pockets. And only willing to pull it out for very, very strategic opportunities instead of the historical push for growth at all costs. There is an issue with this, however. As was mentioned to me last week. Our industry knows how to manage up-cycles and knows how to manage down-cycles, but we don't know how to manage flat. And that we've been for a while now. And being on pins and needles is not a good situation for the industry, but what choice do we have?
Consolidation Stories. Private Equity firms, Post Oak Energy Capital and Genesis Park, sold the Delaware Basin’s Layne Water Midstream to an undisclosed buyer. Layne has an extensive produced water management system in the Delaware Basin that includes nearly 200 miles of pipeline, 15 salt water wells with 400,000+ barrels per day capacity and approved permits for more. It built one of the largest source water systems in the Delaware Basin, with five million barrels of storage, over 500,000 barrels per day of brackish water recharge capacity, significant volumes of produced water on pipelines available for reuse and the Hermosa Pipeline that consists of more than 26 miles of high-capacity water pipeline with 18 delivery points. We have fully expected consolidation in the water business, which has an extended reach in our business. While we don’t know the price details, some investment bankers have now set a price for water assets and other deals should soon follow.
And Again. The former assets of Oxy, Shell and Exxon have been combined in a merger, valued at $1.1 billion, with California Resources Corp. (“CRC”) combining with Aera Energy, who produces about 25% of all oil in California. Of course, California is trying to shut down all current and future drilling in the state. But there is too much at economic stake if the companies don’t consolidate, especially at a time when the state of California is trying to shut down any oil production at all.
And In Service. Solaris Oilfield Infrastructure is buying Mobile Energy Rentals, a provider of distributed power solutions, for $200 million, which will make up about half of the company’s business. “As we evaluate the ‘electrification of everything’ and computing power growth needs, we believe reliable power access will become a growing challenge that larger scale, distributed power generation assets are well-positioned to address,” said Solaris Chairman and CEO, Bill Zartler. The merger is financed with $60 million in cash and the rest with 16.5 million shares of stock. The company name is changing from Solaris Oilfield Infrastructure to Solaris Energy Infrastructure, in keeping with our industry’s shift from oil and gas to more broadly energy, as an additional $300+ million of turbine capacity is being ordered for delivery over the next year or so. Power. Energy. Oilfield. Interchangeable. The market liked the deal pushing $SOI up 35% in two days.
And E&P. Devon is spending $5.0 billion to buy a private oil company, Grayson Mill Energy, with production in the Bakken. Devon has been a rumored buyer of several companies that have been bought by others and now it makes a move, following Oxy for CrownRock ($12.0 billion), Conoco for Marathon ($22.5 billion), Exxon buying Pioneer ($62.5 billion), Chord Energy buying Enerplus in the Bakken ($3.9 billion), Diamondback for Endeavor ($26.0 billion), and possibly Chevron buying Hess. Several of these were focused on a single basin exposure, except for Chevron/Hess ($53.0 billion). Devon too has a diverse property ownership position that has made them a better expected buyer rather than a seller. Grayson Mill has been an Encap-backed E&P company since 2016 and has been available but the price has been considered too high. But one company seeing potential that another company has missed is the heart and soul of our industry. The challenge will be Devon’s, paying $3.25 billion in cash and $1.75 billion in stock.
About Time?! The announcement - “SLB has announced a contract award from Equinor for the front-end engineering design (“FEED”) of a 12-well, all-electric Subsea Production Systems (“SPS”) project in the Fram Sør field in offshore Norway. The project will fast-track wide-scale global adoption of electric subsea technology, setting new standards for increased operator control, subsea operational efficiency, and reduced offshore emissions.” First, congratulations to SLB and OneSubsea. I remember ten years or so ago, Shel Erikson, the CEO of Cameron International before they were acquired by SLB, telling me about the technology. It seems we have been able to electrify the subsea for several years now, but so few deepwater subsea completion systems have been bought and installed in the last few years, there weren’t many chances. Single well tiebacks have been the bread and butter of the deepwater industry for the last several years. It is nice to see us getting back on track. And some technologies take a while to develop. IntelliServe? Wired pipe? The hottest new thing! My IntelliServe hat is 12 years old.
Sure, It’s An Ad, But… A Chevron field development and portfolio optimization specialist said recently:
“The right technologies can be game changers in the realm of offshore energy development.”
“In fact, one approach—using field development optimization tools—is cutting down certain timelines from days to hours. These tools are used to create automated workflows that help drive faster, more informed decisions.”
“This workflow uses complex digital models of reservoirs to estimate a range of potential hydrocarbon production.”
We are at a point in our industry where production optimization is the most critical aspect of our business. AI is likely to revolutionize geoscience work. Complex models managed by AI could improve all aspects of business. Few would think a workflow product would be used to revolutionize our industry, but it does appear headed in that direction.
The Gift That Keeps Giving. Saudi Arabia announces discovery of seven new oil and gas deposits. Resources in the Jafurah field are estimated at around 229 trillion cubic feet of gas and 75 billion barrels of condensate.
Whoa! Is the bloom off the rose? Climate technology investments by private equity have been a hot play for the last several years and climate technology is a very wide encompassing term, and the investments were pretty widespread spread as well. Recently investments and climate technology startups are down 20% in the first half of this year from last year and down over 40% from the second half of last year. One factor cited is that a huge amount of the positive economics have been a result of money from the Inflation Reduction Act. It has been one of the biggest climate boondoggles so far. And with the election looking the way that it is, there is the concern that this might be an area that slows down in some way by a future administration. Without government subsidies, none of the stuff looks very good. That's no big surprise. The number of deals dropped 13% compared to last year and the funding for growth deals has dropped by a third in the first half of this year. It's going to be interesting to watch. Investors and industry players may finally realize that some of the best and most effective climate technology is already owned and operated by the industry.
Headlines.
Planned FIDs on new offshore gas projects in Southeast Asia could lead to $100 billion of investment, according to Rystad Energy.
New reports show that up to 35% of UK energy use will still be met by fossil fuels in 2050.
ADNOC awarded South Korean shipyards Samsung Heavy Industries and Hanwha Ocean up to $2.5 billion in shipbuilding contracts for the construction of new LNG carriers.
Chevron Renewable Energy Group is shuttering two of its U.S. biodiesel production plants amid market challenges stemming from the EPA’s Renewable Fuel Standard program.
The U.S. heads into 2024 producing more oil than any country in history, leading strong non-OPEC+ supply growth that exceeds the rising global demand.
Oil & gas companies are already involved in half of all planned CCS projects.
Saudi Aramco has awarded contracts worth more than $25 billion to support projects aimed at growing sales of gas production.
LNG Ban Gone. A federal court sided with 16 states who filed suit to lift the administration's pause on new permit approvals for LNG exports. It was a looming air pocket in the quest to grow U.S. LNG export capacity, something Obama’s administration approved years ago in only a few weeks because it was considered highly strategic. Judge James Cain of the Western District of Louisiana ruled that the DOE has failed to justify why it needed to pause approvals to review the process by which it permits projects. You can’t keep us down.
Blow Hard. The American Clean Power Association (ACP) has released the 2024 Offshore Wind Market Report. Clean power financiers are expected to invest $65 billion in offshore wind projects by 2030, which will support 56,000 jobs in the US. There are currently 12 gigawatts (“GW”) of projects with active offtake agreements. Across 37 leases in the U.S., there is now 56 GW (56,363 MW) of capacity under development, enough electricity to power the equivalent of 22 million homes. Market analysts from OffshoreSource forecast that there will be 7.6 GW by the end of 2027, 14 GW of offshore wind deployed by 2030, 30 GW by 2033, and 40 GW online by 2035. That is a great deal of money and a great deal of infrastructure additions. Best of luck.
Except for the Election. Remember when President Biden decided it was time to refill the Strategic Petroleum Reserve (“SPR”)? That was before election season and politicians came out of the woodwork to buy votes when needed. It’s been done before. The draining of the SPR was originally done to keep oil, and push U.S. gasoline prices low to keep voters happy and beholden to the administration. Election season ends, and there is some discussion and a little movement in refilling it. But with another election looming, it is time to raid the piggy bank once more. President Biden is ordering the release of 1 million barrels per day on average for the next six months, with the presidential elections four months away and the price of gasoline always an issue. Forget the fact that a gallon of Coke costs less than a gallon of gasoline or that, when adjusted for inflation, gasoline prices have been stable or down for over a decade. Bread and circuses.
Bad Forecast. Rystad Energy has its monthly look at frac activity, and it does not bode well for pressure pumping over the intermediate term. It is expected that the number of frac fleets in unconventional basins will be between 200 and 210 over the next 12 to 18 months. That is not considered good. They also say that the market will likely witness a more pronounced seasonality in oil plays due to budget exhaustion and that “all pumpers are hungry for work to fill their calendars for 4Q 2024.” Rystad expects smaller pumpers to declare bankruptcy and exit the industry over the next year, forced to dissolve and put their equipment up for auction. Don’t shoot the messenger. With the continuing consolidation slowing down current market activity, it is also forcing the smaller players out, regardless of price cuts, based on scale and level of modern equipment. A further shakeout in the pressure pumping business??
The Average Swing Voter or a Very Confused Man??
The Rig Count. US oil and natural gas production continues to rise. Activity continues to decline. Reversal? Or are our improvements and efficiencies that great? The $64,000 question.
More LNG. Abu Dhabi has been a very progressive oil company for the last several years. We wrote the other week about the rig and technology agreements that ADNOC signed with Patterson and SLB. I was very surprised to learn that ADNOC Drilling operated 137 rigs, all on 20-year contracts. Think about that if you're a rig operator. I think that's considered heaven. But ADNOC continues to expand its capabilities. While still looking to augment its services business, it's also looking to double its LNG business. As a result, Shell, BP and Total have taken a 10% interest in the project with ADNOC holding the balance. This is a $22-$25 billion project. Just to put it in perspective. The U.S. is expanding its capacity to meet the needs of Europe and Asia. Now the Middle East in Saudi, Abu Dhabi or Qatar are all pushing to expand their LNG capacity. In a drilling and production market that looks to be pretty flat for a while, it's clear that one of the better growth engines still out there in our business is LNG and that means everything in the supply and delivery chain of LNG. Smell opportunity.
Interesting Combination. Honeywell is buying the LNG business of Air Products for $1.8 billion in cash. Honeywell is not the first name we think of when we think of the LNG business. It might not even have been on my list. Another interesting point is that while Honeywell has some small businesses that are synergistic with LNG, the company has been on an acquisition spree for the last couple of years spending $5 billion buying a security business, an aerospace technology company, and now this. The business specializes in designing and manufacturing heat exchangers and related equipment. It's a very good business. We’ve recently been looking for synergistic combinations in a traditional sense. I don't think many expected companies outside of our industry to start playing, but it just goes to show the broad understanding of the LNG business, even if the general consumer has no clue how the oil & gas business actually works. Honeywell paid 13x 2024 EBITDA for the business. Just sayin’.
They are Finally Figuring It Out. Granholm calls for tripling of U.S. nuclear fleet.
PPHB – U.S. Energy Markets Update Highlights.
Commodity Prices: WTI crude oil is currently $81.38 per barrel (down ~2.1% week-over-week) and natural gas is $2.28 per MMBtu (down ~3.0% week-over-week)
Crude Oil Production: U.S. crude oil production is currently ~13.3 million barrels per day (up ~8.1% year-over-year)
Crude Oil Inventories: U.S. crude oil inventories decreased by 3.4 million barrels week-over-week vs. an estimated increase of ~0.7 million barrels
Frac Spread Count: There are currently 242 frac spreads operating in the U.S. (an increase of 5 spreads week-over-week)
Onshore Drilling Rig Count: There are currently 562 drilling rigs operating in the U.S. (an increase of 2 rigs week-over-week)
Out of Sight, Out of Mind. I never hear about it, so I didn't think about it. On October 7, in Israel, more than 30 Americans were killed and as many as a dozen taken hostage. Of those, at least two have been murdered, and five are considered still alive. Crickets. All I see in the media are pro-Palestinian arguments and demonstrations, but if I had been asked how many Americans died October 7, I wouldn't have been able to give you the correct number. That's a shame. I lived through the Iranian hostage crisis. Support was the point of nationalistic pride. The 52 people there were completely innocent of any crime. Anyone could imagine, regardless of what you may think of U.S. political ambitions, they were just Americans. 30 were killed on October 7 and I don't know anything about any of them and I never read or see any commentary about it at all. That strikes me as shameful. I'm not sure for whom. But there's no question that the media feeds us what it wants to feed us and doesn't give us access to what they don't want us to see. That's not a conspiracy theory, just an economic comment on how media companies today increase their value, revenue and income. It's what works, and it works politically as well. If we are only told one thing and sworn it to be true enough times, we begin to believe without ever questioning. So, 30 Americans dead and possibly five still hostages in the tunnels or in houses in Gaza. These people are holding our fellow Americans hostage, and we see no demonstrations of support for them. No yellow ribbons on trees. No push to bring them home. But if it's not published, we don't know it, unless some dweeb digs something up. And publishes it. Everybody should take just a second to google this and support your fellow Americans.
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.
