Things I Learned This Week While Packing

July 21, 2023

My son and I are joining 16 friends for a biking and boating trip to the Dalmatia Islands of Croatia. That makes the publishing short this week and taking next week off. Wish me luck.

The New Reality? While everyone has been hit by the slowdown in U.S. onshore activity, with rigs and frac crews being sidelined and demand for almost everything else stalling, U.S. production continues to ramp up, with onshore production records expected to be broken by year end. How can that be, with core productivity down? Sure, DUCs have some impact but the record level of those was some time ago and we have been working them down for some time. It is primarily due to technology and doing more with less. The natural gas market saw this in spades, with the rig count dropping from 1,600 before the financial crisis to 78 rigs during Covid, with production up every year. “It can’t happen to oil,” many cried. Oops. Yes, natural gas recoveries are better with us getting over 90% of production from conventional wells and just less than 50% for conventional oil wells. The unconventional share is more like 20% and 10% respectively, and those are rounded up. What to take away? The rig count may not be as robust as previous models have predicted going forward. The momentum of technology is very hard to capture and model. These are just more reasons for the industry to 1) pursue technologies that increase efficiency and production, 2) be very cautious with capex and go leaner rather than heavy, even if it means losing a couple of jobs, and 3) focus on returns, not growth. We will survive but thriving now will be left to financial returns rather than activity growth.

Outlook. The rig count was down in the quarter, results are coming in-line, and it looks like there may be some marginal improvement to current estimates but it’s too early for that. Everyone is focused on returns and cash generation, but we have always cared a lot about cash and now we are increasingly focused on returns. That needs to be in capital letters. RETURNS. Everyone continues to be optimistic about oil prices in the second half of the year and current prices are encouraging but we must remember that there is shut-in production in different places around the world. I hope they are right. We need to remember though that prices haven’t done what we had expected over the last 6-12 months, which surely limits our confidence going forward. But it is the “oil bidness”. Optimism reigns!!!

Earnings 1. Halliburton reported decent numbers with in-line revenues and good margins which is likely to lead to some small boosts to estimates by analysts. The noise was minor, a charge of $104 million in swaps and a $13 million SAP upgrade. Management noted the return of $390 million to shareholders through dividends and buybacks. Free cash flow was an impressive $798 million. Operating income of $1.01 billion hit the highest level in almost 9 years. North America revenue declined 2% due to the declining rig count and frac spreads. In what is a strong and continuing message by Halliburton management, “they will remain focused on maximizing value in the market and turning down completion jobs that do not meet its threshold.” -J.West.

Earnings 2. Baker’s earnings moved to a positive $410 million from a loss of $893 million in Q2 last year. Adjusted EBITDA was $907 million. Oilfield Services & Equipment business was up 8% sequentially and 20% versus last year, with North America up 5% and 8% respectively and International up 10% and 23% respectively, led by strong Completions, I&M and Subsea & Surface Pressure. Industrial Energy & Technology increased 14% sequentially. Total revenues were up 10% sequentially and 25% versus last year. Oilfield S&E orders were up 2% and industrial orders declined by 7% but were still 33% ahead of this quarter last year. Forward guidance was in-line with estimates. "Despite lower oil prices over the first half of the year, we maintain a constructive outlook for global upstream spending in 2023," said CEO Simonelli. "Market softness in North America is expected to be more than offset by strength in international and offshore markets."

Weaker but Confident. Liberty announced earnings, missing slightly and warning of a lower second half than the first. They expect the frac fleet to drop 30 spreads with LBRT dropping 1-3. Pricing is holding steady, and management expects it to continue. Or hopes. Liberty bills itself as a technology solutions business and a great deal of time on the call was dedicated to their achievements. There continues to be capital returned to shareholders with almost a 10% reduction in shares by year end. CEO Wright mentions an adjusted ROIC of 44%. We need to get to the point where “adjusted” is no longer an adjective used.

Same Publication, Same Day.

Oil Sniffs $80 Again, Better Clarity on Supply than Demand Ahead
Oil Market Unlikely to Shake Macro Burdens This Year

Rystad. “The latest well data from the field has revealed that the first quarter of the year has broken the all-time tight oil production record in the U.S. shale patch for the second consecutive quarter. Production from the U.S. lower 48 states, excluding the Gulf of Mexico, in the quarter was 8.81 million barrels per day (bpd), which was a 3.3% rise in volumes from the fourth quarter of 2022. Early indications from April suggest that production is on the way to breaking the nine million bpd mark in the second quarter for the first time.”

Economies. UK inflation slowed to the weakest level in more than a year, with currency traders placing their bets on the expected 50 basis point hike next month at the Bank of England. The opposite is happening in the Euro Zone, where core prices picked up more than expected.

Headlines.

Big corporate bankruptcies are piling up at the second-fastest pace since 2008, eclipsed only by the early days of the pandemic.
Blackrock Appoints Aramco’s CEO to its Board of Directors.
Shell considers selling stake in renewable power unit as CEO turns focus back to fossil fuels.
Global oil demand to reach record high in 2023.
Ford is dropping prices on its EV F-150 by as much as 17% due to increased competition and weak demand.
Exxon planning to build giant lithium plant in Arkansas. Does that make it official?

Competition. The Bureau of Land Management has proposed a Conservation Rule. Right now, only 2% of federal lands are leased for oil and gas and that appears to be too much. The Federal Land Policy Act of 1976 has been dramatically amended to allow for conservation leases on federal land. The draft rule has three primary priorities: “promoting restoration, providing for balanced development, and protecting the healthy intact landscape.” It has some very generous terms and conditions for these conservation leases and are on the same priority as oil and gas.

Capitulate. SLB, the company formerly known as Schlumberger, said it is halting all shipments of products and technology into Russia "in response to the continued expansion of international sanctions." The company has been resistant to cutting too far back in Russia since it is the largest service provider in the country. The company has recently caught grief for not being more proactive and decisive about cutting ties with Russia. There are 98,000 SLB employees with Russian customers generating 5% of the company’s revenues. It is never too late to do the right thing.

I Love This. So, the Inflation Reduction Act had scads of money for EVs and the batteries they use. General Motors and Ford are each building battery factories that will employ 4,200 people and these people are costing a lot. And the lack of efficiency is stunning. Each new “green” job at the GM plant (which the company is developing with Korea’s LG) will cost taxpayers $7.7 million. Each job at the Ford plant will cost some $3.4 million. Another plant being built, LG and Honda, will create 2,200 jobs, each of which will cost taxpayers some $4.3 million. The average wage at the factories will be about $46,000 per year or about $22 per hour. That’s far less than the wages paid to top union members who work at GM’s engine and transmission plants, who earn about $31 per hour. So where does the money go??? Those “green” jobs you’ve been hearing about don’t come cheap.

Payback Time. Elon Musk and other Tesla directors agreed to return over $735 million in stock awards to settle an investor suit accusing board members of improperly giving themselves massive compensation packages. The directors include Larry Ellison, James Murdoch and Musk’s brother, Kimbal Musk.

Snippets.

The primary driver of jackup demand remains the Middle East, which accounts for 6 out of 8 term jackup contracts announced in June and July and a notable 23 out of 41 term contracts YTD.

Money Money. A pair of stories published this week help document a rising phenomenon in the U.S. energy landscape: Hundreds of speculative, potentially non-economic projects being pursued solely due to the existence of billions of debt-funded dollars in energy-related subsidies. In all, last year’s Inflation Reduction Act (IRA) and 2021’s infrastructure law contained over $600 billion in such subsidies designed to spur investment in new, speculative technologies and expand the scaling of more proven ones. Reuters reported on one such project Monday, a new low-carbon ammonia manufacturing facility being built in Texas by Dutch company OCI with an initial investment of $1 billion. OCI bills the plant as the first in the world that will capture and store 95% of the emissions created from the making of the ammonia, which is mostly used to make nitrogen-based fertilizers that help feed the world, a noble goal. Company CEO Ahmed El-Hoshi also freely admits that this plant would not move forward were it not for the allure of the IRA subsidies.

SPAC City. Vast Solar Pty Ltd, a renewable energy company specializing in concentrated solar power (CSP) energy systems that generate zero-carbon, utility-scale electricity and industrial heat, and Nabors Energy Transition Corp. announced a definitive agreement to merge and trade under the symbol VSTE. This is the Nabors SPAC that has been looking for a target. It found one that is definitely a “Transition”. “Vast has the potential to deliver low-cost, clean, renewable and dispatchable power and heat, a combination that no other technology has yet been able to achieve,” said Tony Petrello, President and CEO of NETC and Chairman, President and CEO of Nabors. “With our global footprint, technology and operations expertise, Nabors looks forward to supporting Vast and helping to extend the leadership role Vast has established in the CSP space. We believe the transaction will accelerate the deployment of Vast’s technology, while furthering Nabors’ commitment to 'Energy Without Compromise' and support of companies on the cutting edge of advanced energy technology.” Outside the Box.

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.