July 19, 2024
Things I Learned This Week While Packing, Again
The youngest child, Henry, interned this summer in Paris. I want to come back as my children. So, before he heads back to Boulder for the start of his junior year, I am taking the opportunity to spend some time with him. As you read this, I am headed to Bruges, Belgium to start a seven-day bike ride with Henry, to Amsterdam and then home. Wish me luck and next week’s piece should be very worldly and international!!!
Politics. We have assiduously been avoiding political discussions in our weekly. Last week was difficult for us since ALL of the good cartoons make fun of only one side of the aisle. Can you say debate? Then Trump turns his head at exactly the right time, and the picture of him being escorted off the stage, bloody, arm raised, shouting “fight” compares to the video of President Biden and wife Jill after the debate. No matter what else he does, no one can forget the debate and wonder when his next “performance” will be on a more consequential stage. JD Vance and Kamala Harris in the VP debates should be excellent theater as well. Less than four months….
An Opinion on Oil. ATB Capital – “We raise our WTI forecast for 2024e, 2025e, and 2026e. For 2024e, we estimate $78.25/bbl (Previous: $75.50/bbl) WTI, while our forecast for 2025e and 2026e is $72.50/bbl and $65.00/bbl, a slight positive revision versus prior forecast of $70.00/bbl and $60.00/bbl, respectively. We are not changing our long-term forecast of $60.00/bbl.”
An Opinion on OFS. Morgan Stanley – “We think shale activity finds a floor in 2024 and begins to rebound in 2025+”, with pricing and margins stable. They prefer International to North American exposure and in the US, prefers drillers over pumpers. They are lowering their US activity estimates by 5%-15%. Internationally, they are lowering their land rig count forecast by 5% primarily due to weakness in Latin America but raising activity estimates for the Middle East.
Foreshadowing? Liberty Energy - Reports In-line Q2/24 Results Versus Consensus; But Guidance Weak. Liberty returned $41 million in the quarter, with $11.9 million in dividends and $29.5 million on share buybacks. Over the past 3 months, Liberty is up about 3% and up 22% year to date, outperforming pressure pumping peers. If Liberty is weak, all will be weak.
Foreshadowing? From Bloomberg. “Joe Biden faced intensifying calls to step aside from his re-election bid. ABC News reported Senate Majority Leader Chuck Schumer told him Saturday it’d be best to drop out” and the president told BET he would relinquish power to Kamala Harris if he wins a second term, but his health declined. So, the question is, will the President’s Covid diagnosis form the basis of his stepping down from the election run? Foreshadowing? Turn it over to Kamala now? Nancy Pelosi, Schumer, Clooney, Adam Schiff and others are pushing Biden to stand down but those are the “elites” of the party and Joe isn’t listening. Or maybe wasn’t listening and is now. No matter how many impressive rallies and interviews he holds, no one who saw the debate can forget what they saw. Fun times.
Who Woulda Thought? New York students banned from using phones in schools eventually warmed up to the idea. At KIPP NYC College Prep high school, AP test scores increased and grades bounced back to pre-pandemic averages, with some students even thanking the principal for instituting the ban and making it easier for them to focus. – Bloomberg. The beginning of a trend??
Headlines.
Arizona Lithium Makes Discovery at Williston's Prairie Project
IBAT Cranks Up U.S. Commercial Direct Lithium Extraction Facility
German Leader to Visit Serbia Seeking Lithium For His Country’s Car Industry
As a Nevada Community Fights a Lithium Mine, a Rare Fish and Its Haven Could Be an Ace in the Hole
After Another Boom and Bust, Where Next for Lithium?
Volt Lithium Achieves Significant Operational Milestone with the Scale-Up of its Field Unit to 96,000 Liters Per Day, Paving the Way for Operations to Commence in Q3 2024
Rock Tech Lithium Selects Worley as its EPCM Partner for Guben Lithium Converter
And Not Lithium - Biden Administration Considers Expanding Alaskan Oil and Gas drilling ban
Industry Opinion. Tim Schneider, a well-known analyst and money manager, has been conducting a survey of the energy sector. While the final results aren’t out yet, we hope to report on it but for now, the conclusion? “Investors are generally more *BULLISH* natural gas versus the current forward curve and more *BEARISH* oil versus the current forward curves based on responses we have received so far.”
PPHB – U.S. Energy Markets Update Highlights.
Commodity Prices: WTI crude oil is currently $79.71 per barrel (down ~2.1% week-over-week) and natural gas is $2.21 per MMBtu (down ~6.0% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.3 MM BOPD (up ~8.1% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 4.9 MM BOPD week-over-week vs. an estimated decrease of ~0.9 MM BOPD.
Frac Spread Count: There are currently 238 frac spreads operating in the U.S. (a decrease of 4 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 561 drilling rigs operating in the U.S. (a decrease of 1 rig week-over-week).
Hammerhead. What a great name for an oil field. In this case, a very good one. Exxon has plans to drill 30 wells to develop the field. I hear offshore rig companies drooling. The field is in Guyana, in the Stabroek Block. This brings the number of fields being developed by Exxon to four. 14-30 producers and injection wells, a 1.4-2 million barrel FPSO, bringing the number of discoveries on the block to nine. Partners are Hess, CNOOC and Exxon.
This is Called “Burying the Lead”.
Not Going Away. American Clean Power Association (ACP) stated that offshore wind would fall short of government expectations by about three years. There should be 30 GW (gigawatts) of offshore wind by 2033 and 40 GW by 2035. But there is a wave of momentum coming or at least possible. There are three East Coast offshore wind projects under construction and 37 in “development”. 2023 was a challenging year with rising construction costs, higher interest rates, and inflation, all against the backdrop of locked in take-off agreements signed in 2018 or so with no escalation clauses. Several projects were abandoned. But 2024 has seen a bit of a resurgence. Government, or rather, less government, has contributed to the economics of projects as well. “The momentum and investment are likely to continue with the Bureau of Ocean Energy Management (BOEM) planning to hold four lease sales in the second half of 2024 in the Central Atlantic, Oregon, the Gulf of Maine, and a second Gulf of Mexico lease sale,” ACP said. “These four lease sales will open nearly 1.9 million acres of federal waters to offshore wind development, potentially paving the way to more than 20 GW of future clean power.” There is currently 56 GW under development offshore.
Connect Me Up Scotty. Power is at the forefront of discussions this week, especially in Texas where some residents of Houston are just now getting power back after more than a week. The problem? Getting sources hooked up to the grid. James West at ISI did a very good piece on the topic. Titled “The Interconnection Challenge”, it says that the interconnection queue in the country is 2x the size of the current grid-scale generation fleet, with renewables representing over 90% of that. This has been one of the biggest challenges. I can build wind and solar farms but if I can’t get it hooked up to the grid, it does no one any good. A typical project built in 2023 took nearly 5 years from the interconnection request to commercial operations compared to 3 years in 2015 and less than 2 years in 2008. And now the increased demand for power from datacenters, run by the big tech companies, makes it that much more important to get connected but little movement is being seen. 50 GW of datacenter capacity is expected to be added to the grid by 2028, doubling from today’s levels. There is a lot to do it would seem and little time to do it in.
The Hot and Cold. Average short interest across energy stocks in the S&P 500 index was 2.30% of shares floating at the end of June. The S&P 500 Energy sector is up 9.6% so far this year, compared to the 18% rise in the S&P500. Stocks with the largest and least short positions:
Iran Again. So just after the attempt on Donald Trump’s life, we find out that Iran is out for him too. A 20-year-old climbs to the top of a building, using a ladder and carrying a long gun and no one noticed or acted until shots are fired. No conspiracy theories but the Secret Service is under manned. DEI and Covid-19 mandates and other factors have caused new enrollment into many parts of the government to be down considerably and this is especially true of the Secret Service. Other than the terrible lapses that resulted in the very lucky ear wound, the service has been gutted and there will be a great deal of finger pointing going forward. Just don’t let it happen again.
The Dallas Fed Survey. The vast majority of respondents to the quarterly survey by the Dallas Fed said that US oil production would be slightly lower over the next five years as a result of the continuing industry consolidation. 48% expect production to be slightly lower, 22% said that they see no impact, with the same number expecting oil production to be ‘slightly higher’. A little over 5% said they expect production to be ‘significantly lower’ as a result of the ongoing consolidation in the industry. The findings confirm what we and others have said for some time. The consolidating transactions of the last year, and the sheer scale of many, means that activity that was on the books pre-deal won’t all come to pass in the future reality. We have seen this play out for 50 years and been a part of the process. In no surprise, Rystad Energy agrees that supermajors and large firms, some with internationally diversified operations, will be the main drivers of growth moving forward, but E&P growth will slow as rigs are typically dropped in the public/private consolidations.
Who Produces What and Where.
The Government Steps In. ConocoPhillips received a second information request from the U.S. Federal Trade Commission regarding its proposed $22.5 billion acquisition of Marathon Oil. The merger will potentially be delayed. The administration is questioning all corporate combinations right now, but this is an odd one of where to pick the fight.
Powell’s Foreshadowing. The bets on an interest rate drop increased significantly last week after comments made by the head of the Fed. Market participants responded by increasing their bets for a 25-basis-point interest rate cut in September to nearly 90%. The week also saw a rotation out of mega-cap technology stocks into defensive and value sectors such as real estate and utilities.
Slowing Down. According to Baker Hughes, the U.S. rig count declined slightly to 584 with unconventional natural gas rigs drilling dropped to 88. It was 1,600 in 2008. We have already been transitioning to a cleaner industry. Unconventional oil rigs remained flat at 428, with the Permian accounting for 68% of oil rig activity. Development wells fall to 189 (-55 w/w, -99 YTD), driven mainly by oil and development gas wells declined to 40 (-12 w/w). Total wells spudded dropped to 227 (-76 w/w, -54 YTD). Unconventional gas wells spud decreased over the week to 43 (-15 w/w). This does not bode well for OFS activity in the second half of the year. Thanks J West and ISI.
Data Center Needs. The chart below is the expected power requirements in the state of Ohio for data centers in that state. Most states look the same. The reality is that it will take all of the wind, solar, nuclear and fossil fuels to meet the expanding need for power, electricity. We aren’t going anywhere.
Monopoly. We have written extensively about the Chinese and US property markets. There is $2+ billion of US real estate that must be refinanced by the end of next year and the defaults on existing deals are picking up steam. The news this week was that the commercial real estate “meltdown” is now spilling over into the bond markets. And you thought you were affected!! One tranche, single-asset, single-borrower bonds, SASB bonds, were considered very safe investments, getting triple A ratings, higher than US treasury bonds. There is $260 billion of this paper held by banks, insurers, pension funds and others that considered the investments rock solid when made. Not so now. The default rate has tripled in two years. Vulture funds are already being formed and office and retail are taking the brunt of the pain. Too many “work from homes”? This isn’t even close to over.
Up North. Canada has been setting a very ambitious goal for emissions reductions and has caused President Trudeau headaches. When he was first elected in 2015, he promised to phase out the country’s oil industry and slash emissions. Oops. Canada today is the only G7 country with higher emissions now than 35 years ago!! Trudeau had a political reversal a couple of years ago, spending $25 billion to build a pipeline to ship oil to the West Coast, helping oil production last year to hit a record 4.9 million barrels per day. That kind of revenue realization can change any politician’s mind, saying the country wants to make hay while the sun shines and maximize the value of the oil before the world starts really restricting its use. Make sense. Oil is 20% of Alberta’s revenues and employs 140,000 people. Phase it out? No hurry at all.
Hello Texas! The Michelin Guide is coming to town. Well, actually, the state. No restaurants have been directly reviewed by Michelin. They just never got around to it. That is changing now so be on the lookout for their rating and make a reservation quickly. As much as I hate to admit it as a Dallasite, Houston should win.
Another Dead End. We have written about the cities and states that are suing the oil and gas industry for the climate changes they have seen. Basically, they want someone else to pay for their weather damage, having no way to quantify “climate” or any potential damage. The latest was Baltimore, suing for “causing a public nuisance with their emissions and misleading investors as to the impact of climate change”. This week, the courts ended the effort, as has the Delaware state court and the US Second Circuit court. We win again.
Wanna Go Out? Match, the dating site, currently has a valuation of $8 billion. That is a lot of dating. Though to be fair, the market cap was $28 billion just four years ago. But it turns out that the engine of the company is Tinder, the more “aggressive” of the dating sites. Three different activists have taken positions in the stock. I have done some due diligence on the topic lately. Meeting online is now by far the most dominant way people meet. I have finished my due diligence but it was a time consuming and only moderately successful. I am going back to “old school”.
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.
