Things I Learned This Week While Roasting

July 14, 2023

Greetings. With the exception of the Exxon-Denbury deal, all is quiet on the energy front. More commentary about strength in commodity pricing for the second half of the year is appearing. The rig count was down in Q2 so with earnings starting next week, no one is talking about what they did, and few are saying what they expect. It is the dog days of summer. 104° as I write this. All of last week was a high of 49°, six layers and a stiff wind. Now back in 104°, I miss it. But it’s nice to be home.

EIA Weekly Stats.

U.S. crude production: indicated at 12,300 MBPD, down 100 MBPD from previous week, and up 300 MBPD from same period last year.
Refinery runs 16,659 MBPD, up 629 MBPD w/w and up 19 MBPD y/y. Utilization at 93.7%. Most unscheduled refinery outages are resolved.
U.S. crude oil refinery inputs averaged 16.7 million barrels per day during the week, which was 630,000 BOPD more than the previous week’s average.
Refineries operated at 93.7% of their operable capacity last week.
Gasoline production decreased last week, averaging 10.1 million BOPD
Distillate fuel production increased last week, averaging 5.1 million BOPD
U.S. crude oil imports averaged 5.9 million BOPD down 1.2 million.
Commercial oil inventories (excluding the SPR) increased by 5.9 million barrels.

Valued Opinion. “As for oil markets, they won’t tighten as sharply as previously thought in the months ahead as demand growth slows”, said the IEA. The agency cut its forecast for 2023 consumption, citing faltering economies. But the rest of the year will still be marked by supply shortages.

Argument. I have a bone to pick with the media and the climate people. I am being told that this is the hottest summer ever, which is a clear sign of climate change. Yet I remember 42 years ago when my friend and I printed up tee shirts memorializing that summer, with temperatures over 100° for over 80 days and highs of 113°. But wait. How can that be? Because it is weather, not climate, and severe weather events have been happening for millennia. And most studies show it has not been consistent for a long enough period of time to qualify as “climate”.

Puts River Oaks to Shame? The market for mansions in Aspen, Colorado, has contracted from the levels seen during the pandemic, with year-to-date dollar volume down 40% from last year. Sale prices haven’t dropped because inventory is still tight. As of the end of June, the average single-family home averaged $3,150 per square foot, more than three times the figure in 2019.

Surprise! Hundreds of speculative, potentially non-economic projects are being pursued solely due to the existence of billions of debt-funded dollars in energy-related subsidies – due to the Inflation Reduction Act and the 2021 Infrastructure bill about $600 billion worth – designed to spur investment in new, speculative technologies and expand the scaling of more proven ones. An example is a Dutch company making a $1 billion investment in an ammonia manufacturing facility where the CEO widely acknowledged the project would not move forward if it weren’t for subsidies. That is no surprise since virtually every single CCS project being pursued only makes money due to government subsidies, not because the project is economically viable on its own.

Optimism. World fuel consumption will increase by 2.2 million barrels a day — or about 2% — in 2023, a reduction of about 220,000 barrels from last month’s forecast, according to the IEA. Demand nonetheless remains on track to hit record levels later this year, draining inventories substantially in the second half.

Notch Another One. Cathedral Energy Services, a public Canadian company, announced the acquisition of Rime Downhole Technologies for an aggregate price of USD$41 million, comprised of USD$21 million cash and USD$20 million in subordinated exchangeable promissory notes. Rime is a Texas-based engineering company founded in 2012 that specializes in building products for the downhole measurement-while-drilling ("MWD") industry, offering a broad array of proprietary MWD components, including pulsers, pulser drivers, shock isolators and gamma modules. Rime's Slick-HDTM Pulser and AgilisTM Driver are the leading pulser solutions in the U.S. onshore marketplace. PPHB, LP acted as Rime's financial advisor and investment bank with respect to the Acquisition.

LNG. Due to European storage levels near capacity and slowing Asian demand, there are approximately 35 LNG ships sitting on the water for more than 20 or 30 days. Unsustainable, but for how long? Next heating season?

From Bloomberg. LNG sweet spot fades. A record-breaking wave of investments into U.S. liquefied natural gas may be running out of steam. More than 36 million tons a year of new export capacity have been approved for construction so far this year, the highest ever for the country, according to Bloomberg calculations.

Long-Term Use. How long will the world be using fossil fuels? For the rest of our lives is the answer and if you wonder how I can say that…. NextDecade Corp.’s $18.4 billion Rio Grande LNG (RGLNG) export facility is a go. The FID covers the first three trains for the 17.6 million tons per annum (mtpa) Phase 1 of its liquefaction facility in Brownsville, Texas. NextDecade said the planned 27 mtpa RGLNG facility to be built in two phases is the largest greenfield energy project financing in U.S. history and “underscores the critical role that LNG and natural gas will continue to play in the global energy transition.”

Sweet Goodbye. In what is both a sad and joyous announcement, the Energy Workforce and Technology Council’s (formerly PESA) CEO Leslie Beyer is leaving after almost 10 years. In that time, she dramatically improved the reach, membership, educational opportunities, and the organization overall in ways that are nothing short of amazing. What was a sleepy trade association is now an industry powerhouse of education, news, advocacy and management teams that have transitioned the industry. An amazing woman, she is leaving to spend more time with her teenage sons before they leave home. I can certainly understand that. COO Molly Determan and Senior Vice President and Counsel Tim Tarpley have been named co-presidents, each with equal responsibility in the role, and will do a great job of continuing the association’s success. And for those who might be interested, Leslie is open to a board seat, having public company experience in the area. Enjoy girl.

Crypto. XRP, the cryptocurrency of Ripple Labs, soared over 70% from $0.47 to $0.81 after a judge ruled that the cryptocurrency isn't a security in terms of sales to the general public. Coinbase, a crypto exchange platform soared as well, putting its market cap at $26 billion. Geez.

Crypto 2. Celsius’ ex-CEO Alex Mashinsky was arrested and charged with fraud this week. His firm was banned from trading and fined $4.7 billion. Celsius was lying about both how safe and profitable its loans were, Matt Levine writes. The stock doubled over the past year, with the market cap at $11 billion before they filed for bankruptcy this week. More accolades, testimonials and awards by any number of famous and well-known people cover the website along with a misspelling on the first page. To be fair, they warned it was “under construction”. Fraud? “1.7 million people call Celsius their home for crypto. Because we put our community first. Join us for military-grade security, next-level transparency, and a do-it-all app designed to help you reach your financial goals – whether you’re HODLing long-term or swapping daily,” says the opening page of their website. https://celsius.network/ All this makes investing in crypto less than appealing.

EVs. Nikola was up 62% after announcing BayoTech will purchase up to 50 Nikola Class 8 fuel cell EVs over the next five years, with the first twelve trucks being delivered in 2023 and 2024. In the quid pro quo side, Nikola will buy up to 10 BayoTech HyFill transports under a strategic supply agreement to advance zero-emission hydrogen delivery.

AI Touches More. Hollywood’s actors are expected to join the strike already underway since early May by the film and television writers. The actors alone account for 160,000 workers. They haven’t both gone on strike simultaneously in 63 years. The issues? Streaming and AI, two new technologies that change the way movies are made and who gets paid. The Screen Actors Guild says it is battling the studios for control over the digital replicas of performers that could be used "for the rest of eternity", as both unions look for protection of their jobs as AI could replace many members, and streaming lowers their pay. The studios counter that they have offered groundbreaking protections from the misuse of images. If you wondered what AI would do to change our lives, this is an interesting microcosm of its impact. Do we really need all those people? The automotive industry faced similar issues when robots were brought in to replace people. While I feel for those displaced, times and technologies change and not everyone can be insulated.

Snippets.

Demand for power in Texas hit a record high for a second day in a row as homes and businesses kept air conditioners cranked up during a lingering heat wave.
The Kremlin says Wagner private mercenary group was never a legal entity (revisionist history).
OMG. Travel experts say more men are wearing Speedo’s at the beach and while on tropical vacations.
First look: Harsh environment semi market sells out 100%; day rates approach $500K - Day rates are forecasted to continue increasing over the next five years, with rates at or above $500,000 for contracts beginning in late 2024 and early 2025.
Electric planes won't fly. To supply the same amount of energy as 20 tons of jet fuel would require 500 tons of lithium-ion batteries.
Remote work risks wiping $800 billion from the value of office buildings in major cities by 2030, McKinsey said.

Write Your Congressman. The U.S. military confirmed that American cluster bombs have arrived in Ukraine, after President Biden surprised many last week when he said he made the "difficult decision" to approve their transfer, despite being banned in more than 100 nations. Cluster munitions are canisters that disperse bomblets over a wide area and can fail to explode on impact, posing a risk to civilians. This is a shame and embarrassment to many, including me.

Headlines.

Noble Corp.: First offshore driller quarterly dividend since 2015 signals confidence in the outlook.
Liberty Energy 2Q23 Preview: Expecting In-line Print But Increasing White Space in 2H23. JPM.
“Massive” explosion on Pemex production platform leaves two dead, cuts output by 700,000 BPD.
Oil States’ Taylor sees pick-up in OFS business in deepwater and international sectors.
Trans-Identifying Male Gives Talk On ‘Women’s Empowerment’ at New Jersey Prison: Report.
Karine Jean-Pierre claims race-based college admissions is one of Americans’ “important constitutional rights”??
Hydrogen Is Getting Hot.

Turned Tide?? “From environmental, social and governance (ESG) to insurance alliances to recent elections in Europe, the tide seems to be turning against the destructive outcomes of policies pushing net-zero and “energy transition” goals. With recent elections in Europe having resulted in the institution of more conservative governments in Sweden, Greece and Italy, and public attitudes in other EU nations trending in that direction, a developing backlash is not at all surprising.” David Blackmon.

The Pipe. The Mountain Valley Pipeline is one of the very few capital projects singled out politically. Senator Manchin gave the deciding vote for the Inflation Reduction Act with the promise that his bill clearing the way for the pipeline would be approved. He was jilted. Biden and Schumer backtracked on previous promises. This time, he waded into the debt ceiling debate, putting very explicit language in the bill specifically approving the pipeline. That wasn’t enough for some. The long-awaited approval of the natural gas takeaway project in Appalachia was derailed again this week as the U.S. Fourth Circuit Court of Appeals has once again halted work on the project, setting the stage for a fight at the Supreme Court. Does it ever end?!?!.

Blow-Hard. So, the top two bidders for Germany’s first Offshore Wind Auction were energy giants BP and Total Energies that helped bring in $14 billion in bids. The winning bids mark both companies’ entry to the German offshore wind market amid a push toward the development of lower-carbon energy resources. Four sites were in the auction —three in the North Sea and one in Baltic Sea—with a total combined volume of 7 gigawatts (GW), according to German energy regulator Bundesnetzagentur. Germany targets 30 GW of offshore wind capacity by 2030.

It’s Not Pioneer. Following weeks of rumors about Exxon buying an independent operator, with PXD being the rumored target, it turned out to be Denbury instead. The almost $5 billion acquisition is a small bite for Exxon but moves them up the CCS rankings significantly. Denbury has long been an enigma in the industry, one of the very few companies focused solely on CO2 flood Enhanced Oil Recovery (EOR) of oil. Denbury, who went through a restructuring a couple years back, gives Exxon the largest owned and operated CO2 pipeline network in the U.S. at 1,300 miles, including nearly 925 miles of CO2 pipelines in Louisiana, Texas and Mississippi, as well as 10 onshore sequestration sites along with Gulf Coast and Rocky Mountain oil and natural gas operations, consisting of more than 200 million barrels of oil equivalent and 47,000 per day of oil production. A very smart move considering the valuations of businesses with nowhere near the asset base of Denbury. Well done.

Get Ready. The likelihood of the Fed raising rates this month after the last pass seems almost certain. Yes, inflation came down to only 3% but you don’t just knock it down, you keep it down. And for that, you have to raise rates. The betting is now that there will be another raise after this one in the 4th quarter. We shall see. “Though positive, the CPI report isn't expected to change the outcome at the Federal Reserve's July 25-26 meeting," said SA analyst Justin Purohit.

Man on the Moon. China unveiled plans for a manned lunar mission expected to take place before 2030. The astronauts intend to land on the moon's surface, collect samples and carry out scientific exploration. To prepare for the mission, Chinese researchers are busy developing all the necessary equipment, including moon suits, lunar rovers, manned spaceships and moon landers, according to state-run media. This marks the latest development in China's push to advance its space program, which has seen several breakthrough moments in recent years.

Can’t Be. I swear I’m not making this up. Here’s an excerpt from the Free Beacon Story: “A new Biden administration rule aimed at reducing carbon emissions would give approval authority over large U.S. defense contracts to a little-known British environmentalist group that just incorporated two weeks ago. Under the White House’s proposed rule change, a London-based group called the Science Based Targets Initiative that is funded by the Democratic Party’s main dark money network would be responsible for approving the carbon emissions reduction plans of large federal contractors. The Science Based Targets Initiative (SBTI) is a fee-based service that helps companies set emissions reduction targets in line with the Paris Climate Agreement and verifies their progress. But its foreign status and murky financial background raise questions about the Biden administration’s decision to outsource its vetting process to the group. Critics say the proposal would give SBTI enormous veto power over American defense contractors and access to potentially sensitive data about U.S. military suppliers.” I am not one to push conspiracy theories, but the proposed rules do confirm this.

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.