June 14, 2024
Things I Learned This Week While Repacking
I put out a very short piece last week, between wineries, due to my opinion of the importance of Saudi ending its “petrodollar” agreement with the U.S. Couple that with the emergence of the BRICs, a group that has doubled in size recently and has enough country interest to double again and again. If a country is selling its oil in yuan, do you really think they will pay their servicers and suppliers in dollars? We already pay a lot of local operating costs in local currency, but the scale of crude oil purchases renders that almost moot. Educate yourself and think out of the box. In today’s world, that thinking is required.
Worrisome Work. I am either too smart or not smart enough to predict crude oil prices. I listen to both sides and try and build the most accurate models, but there are so many assumptions. The prediction can be off by two miles due to differences of two inches in a large number of variables. But some do this for a living, and we never give them credit or agree with them, always noting “they were wrong” in a business where most people won’t take a guess. The latest IEA medium-term outlook says we are “comfortably supplied” with oil for the next few to several years. The growth rate is expected to slow, but production continues to go up. The various competing energy sources, economic or not, take some demand growth away from crude oil and that should continue and is still accelerating. Governments around the world have been working for over a year to slow inflation, by slowing economic growth, and with inflation slowing, so is economic growth. And it’s global. And this comes at a time when global oil production is growing, and I have somewhere between 1 and 3.8 million barrels per day off the market. Pick your number. Production is still growing, and demand is slowing. You can argue “well, not by much,” but now we are just determining the magnitude of the issue.
IEA Report – Growth. With growing demand from countries in Asia, the aviation sector and petrochemicals sector are opportunities for growth, but globally, it will be more than offset by rising electric car sales, efficiencies in ICEs and the continued growth in renewables. Saudi is finally freeing up hundreds of thousands of barrels of oil per day that was being used for electricity generation, about the lowest utilization of the product. The report forecasts that global oil demand, which, including biofuels, averaged just over 102 million barrels per day in 2023, will level off near 106 million barrels per day towards the end of this decade. The issue is that U.S. oil production continues to grow, even with a declining rig count.
The Horse’s Mouth. “As the pandemic rebound loses steam, clean energy transitions advance and the structure of China’s economy shifts, growth in global oil demand is slowing down and set to reach its peak by 2030. This year, we expect demand to rise by around 1 million barrels per day,” said IEA Executive Director Fatih Birol. “This report’s projections, based on the latest data, show a major supply surplus emerging this decade, suggesting that oil companies may want to make sure their business strategies and plans are prepared for the changes taking place.”
Are They Back? After a dramatic rise in interest rates a few years ago, SPACs saw a tremendous decline. Many couldn’t find suitable targets/partners in time, and the fuse is 24 months. But we are the Oil Business. There is ALWAYS a way! Right? So, an S-1 for a new SPAC just hit. A $350 million blind pool looking to give current private equity owners of E&P businesses a shot at liquidity. This company, EQV Ventures Acquisition Corp., wants to grow “by acquiring established E&P and related midstream assets within overlooked basins with significant proved developed producing (PDP) asset bases that have limited geologic and operational risks.” And then this teaser – “there is approximately $75 billion of private upstream assets held by aging private-equity funds that may require liquidity over the next five years.” We wish them luck and success!
Shameless Self Promotion (for the firm, not me!). ProPetro, the pressure pumping company with the great symbol of PUMP, just acquired Aqua Prop, a leading provider of wet sand solutions. Wet sand use is growing like a weed in the Permian today, changing the dynamics of the proppant industry. PPHB was the sole financial advisor to ProPetro on the deal.
Educational. This is one thing I didn’t know about in the 2021 infrastructure bill. The Biden administration promised 500,000 electric vehicle chargers by 2030, with $7.5 billion set aside for the expense. It was the job of the Department of Transportation to make this promise a reality and make sure the money was spent in the most appropriate ways. As of today, only eight have been installed. You read that right. Eight of the 500,000 chargers have been installed so far, and it’s almost midway through 2024. It was observed that, at this rate, it would only take another 150,000 years for this to be a reality. It seems the federal government isn’t the only government agency that has trouble executing on projects. The high-speed rail in California connecting San Francisco and Los Angeles is an 800-mile stretch of railway. So far, only 1,600 feet have been built, and the cost estimates have ballooned from $33 billion in 2008 to $130 billion today. Only 42,000 years to get that done at this rate.
And It Starts. Virginia passed a law in 2021, mimicking California’s EV mandate standards requiring 35% of new auto maker sales be electric by 2026 and 100% by 2035. The governor later decided that it was not the place of government to tell people what kind of car they should or shouldn’t drive and announced that he was scrapping the rule, which appeared to be possible since the law was fairly vague about willingness to adopt another states rules. That’s one down. Pragmatism rules. Everyone now knows of the 3000 car dealerships from all 50 states who wrote a letter to the administration, asking for relief from the EV mandates set out by the federal government saying that they weren’t selling the cars. The cars weren’t moving off the lot, and manufacturers were being forced to make cars that nobody wanted. They pleaded with the administration to set aside the ruling. It’s becoming more than just a grassroots effort. We always say that pragmatism trumps ideology every single time, just not as quickly as we would like. But it looks like it’s finally starting to happen, and we can only hope it spreads in a very viral way.
Picked On. Remember a couple of weeks ago, we wrote about a gas station employee in Pennsylvania in the mid-1970’s who had sued Exxon for giving him cancer and was awarded $720 million. Now the state of New York is looking to charge fossil fuel companies a total of $3 billion a year to pay for costs associated with climate change. They follow Vermont, which passed a similar law last month. So, they are going to make the companies that produce what people want pay extra, but the people who actually use my product do not have to pay extra? And who exactly quantifies what is climate change and what is weather, since, in my experience, far less than half know the difference. It is a money grab. We continue to be an easy target even though we have cleaned up our industry dramatically over the past decade. Reality is lost on bureaucrats and politicians looking to get elected. Saudi Aramco could have a $600+ million invoice from the state of New York, with no one having any idea of the cost to achieve goals that are completely unrealistic. It’s very frustrating. And now it is economically punitive. Can Aramco quit selling to New York? Can Exxon, Shell and a few others just leave Vermont behind? Or will more federal legislation be passed to limit choices there as well?
Ouch!! I was reading an article that was frankly disturbing. The discussion was about insurance rates. Auto insurance rates are up 46% since the beginning of 2020, with premiums having increased 38% since 2019 and 55% in Texas. New and used vehicle prices have increased 29% and 20% respectively since the beginning of 2020 and vehicle parts have risen by 22% since the pandemic started and repair costs by 48%. Home materials prices and labor cost have climbed roughly 38% over the last five years, the period of which, of course, I was rebuilding a burnt down lake house. Get ready for some insurance premium hikes when you see your bill. Obviously, it’s already started to happen. Homeowners insurance is up almost 6% this year alone. And these kinds of costs never go down. One side of the debate led by Elizabeth Warren says that insurance have “underwritten the financing of fossil fuels, and then they profit from selling protection from the impacts of those fossil fuels on the climate.” The other side argues that inflation, litigation abuse and government dysfunction are the reasons, which has been made worse by a string of bad weather. One can debate the reasons till the cows come home, but the reality is we sure are spending a lot more money on baseline than we had expected. The monthly CPI can capture food, fuel and the rest, but this is the first good encapsulation I’ve seen on the cost of insuring our dated lives.
On the Road Again. The International Association of Drilling Contractors has its Annual World Meeting next week in Madrid. I thought, why not? So, look for a little more international flavor next week. And if you have any questions to be posed or rumors to be investigated or people to say hello to, please let me know. Botín in Madrid is the oldest restaurant in the world, at least according to the Guiness people. Opened in 1725. Not only that, but it was Ernest Hemingway’s favorite restaurant, and he always ordered his favorite – suckling pig. So while we look to the future on drilling, Monday night will be a throwback to a long time ago!
After All, We Are in Texas. So, it appears that on the list of things that Texans take the front-end risk on, we now have the Texas stock exchange. And no, Houston, you didn’t get it. Dallas did. It’s going to be an electronic exchange, and companies can list shares. It’s been backed by BlackRock and Citadel Securities, who both trade billions in securities every year. It’s been done before. This isn’t going to be your typical exchange in many ways in that it is purely electronic. No traders and no salesman. But trading algorithms are now taking up much of the market, not using specialists or research. This isn’t a surprise or a real negative. So far, $120 million has been raised for its funding. There could be different board compensation and requirements that would offer an attractive alternative to existing exchanges as well as being in a tax-friendly state. The geographic appeal has been mentioned more than once, noting the large number of smaller public energy related companies that would rather be local than rely exclusively on a New York stock exchange. It will be an interesting experience whether it succeeds or not. An automated product with significant financial backing and demonstrated need don’t always succeed, but they often do. Considering the number of oil and gas and energy related companies in our state, the change would obviously be weighted in some way towards Energy.
Europe’s Politics are Swinging Right. Antisemitism is not swinging at all. Opinions on oil prices, scratch that the E.S.G. and DEI wave have clearly hit their acceleration peak and are decelerating as we speak. The NRA is being forced to name a more moderate leader after going through restructuring. Our industry has swung from cash flow to earnings. All prices now move for reasons and in directions few understand, at least at the time. But this strikes me as the way of all things. Pendulums swing and normalize back to a center. Wild hard swings are devastating on both ends of its circuit. But over time, momentum dies and the arcs are shorter. The speed is less, and it starts to normalize around the center.
Over time, the entire mechanism can be moved, it’s very heavy, but there can be movements of the center over time, influenced by the swings of the pendulum. The more extreme the swing, the more likely the center is to move. Physics. And our markets. And in fact, most things in life. And some think we are at an extreme such as those who claim the climate is going to destroy us all within a few years, but failed to mention that deaths due to extreme weather are down 97% in the last century. Wildfires raged in the U.S. and Canada this year, and based on historical norms, it was only slightly above the average year. Global politics are made up of a room full of pendulums all swinging in different arcs with different speeds. Normalization gets incredibly difficult. While there are a multitude of factors that affect the prices for oil and gas, it is somewhat finite to that entire room full of pendulums. So corporate governance’s interaction with investors allocations of capital focused on returns all push things in a direction they probably need to go. We are more likely to find that norm before the world finds it.
Headlines.
Anti-Woke Activists Pressure Corporate Boards. (about time!)
Rising Copper Prices Pose Budgeting Challenges for India's Renewable Energy Projects.
Aramco’s Share Sale Priced in the Bottom Half of its Proposed Range, Raising About $11.2 Billion for Saudi Arabia.
Іn а Rеcеnt Assаult, Ukraіnіan Fоrces Tаrgeted thе Tоp Fіve Oіl Refіnerіes.
Private Credit Talent Search Heats Up as Sector Surges. (and it is to our benefit!)
19 Countries Express Interest in Joining BRICS group.
Britain’s ‘Quiet Quitters’ Are Costing the Economy £257 Billion.
Viva Mexico! In addition to the elections last week in the EU, Mexico held their election, and it was won by a woman, Claudia Sheinbaum. She is the handpicked successor to outgoing President Obrador and will likely continue his policies. And since their Morena party is so dominant, it has already gotten a supermajority in the lower house and could get two-thirds of the senate seats, which would give the administration the ability to change the constitution. The government has been undoing some of the liberalized incentives previously in place and has caused a rift between private investors and any government energy projects. And Mexico needs more energy as more international businesses are relocating to Mexico due to proximity to the U.S. supply chain and favorable terms. Her new economic plans are focused on tourism, technological innovation and renewable energy. It just needs to be powered so it may end up with a more pragmatic approach to energy than the previous president, but as protégé, it won’t be dramatic.
Damn Fast. Aramco plans to install the first quantum computer in Saudi Arabia next year, a 200 -qubit machine. Long the realm of science fiction, quantum computers are now a real thing. Now imagine combining quantum with AI?!?!?
A quantum computer with a capacity of just 100 qubits is more powerful than all the computational systems of the planet together.
In November 2022, America's IBM launched its 433-qubit “Osprey” processor, the world's fastest quantum computer at the time.
In October last year, Californian start-up Atom Computing left the Osprey behind with the debut of its first quantum computer with more than 1,000 qubits.
Google has built a quantum computer that is about 158 million times faster than the world's fastest supercomputer.
Snippets.
The number of internally displaced people in Sudan has reached more than ten million people while more than two million others have been driven abroad to mostly neighboring South Sudan, Chad and Egypt.
The secretary general of the UN, Antonio Gutierrez, last week said countries should ban advertising for fossil fuels and urge news media and tech companies to stop taking fossil fuel advertising.
Almost 10 years after the 2015 Paris Climate accord aimed at reducing global emissions and slowing climate change, “emissions actually grew to an all-time high in 2023 with consumption of coal, oil and natural gas, each near record levels in large part by the energy needs of the developing world.” (NYT)
More regional bank failures are on the horizon, Pimco warned. It thinks “the real wave of distress is just starting” because of the concentration of troubled commercial real estate loans on some banks’ books.
One More Down. The crypto company Terraform (the name which reminds me of my sci-fi reading as a child) has been fined $4.5 billion in penalties and told to wind down its operations to seal a civil securities fraud lawsuit.
Taken Out of Context. I know it’s election season and so advertisements and articles were expected to be a bit outrageous. There are different forms of advertisements and arguments, but, to me, the worst is when the actual words spoken are never printed, only the interpretation of those words by media pits. I remember when Trump made the comment after meeting with the CIA about how he hoped it wasn’t recorded. There was media outrage about his comments, so I decided to actually look up to see what he said. As a research analyst, I’m pretty good at this, yet it took me 40 minutes to come up with the verbatim two tweets, and there were only two tweets that Trump issued that caused the stir. I published the two quotes verbatim and had several people tell me I was wrong and was lying about it. This week, I’m looking at the stories of Justice Alito and I listen to one radio broadcast comment about the lack of confidence Americans now have for the Supreme Court as it launched into a cruel and incorrect diatribe based on comments the justice made, and of course, it was taken out of context. Even the woman who recorded him said that, initially, it wasn’t newsworthy until it was misquoted and went viral. Byron Donnell, the congressman from Florida, has now run into the same issue. He’s being incredibly misquoted making a statement that’s been confirmed by the Institute of family studies and anyone’s good sense. My only point here is don’t listen to what other people said was said. Go back and read the actual words and make the decision of what they mean for yourself. It may sound easy, but finding actual quotes in today’s media that don’t support the current ideas will be tough to do. But try.
More Shamelessness. SMU Cox Business School ranks No. 12 this year – up from No. 32 last year – in Fortune’s Best Online MBA Programs for 2024. Ranking methodology factors included where leaders of America’s 1,000 biggest companies pursued their MBAs (20%), online search volume (20%), a school’s previous ranking (5%) and other school-provided data points. The Fortune OMBA rankings release comes just weeks after the publication’s 2024 PMBA ranking of 50 business school part-time MBA programs. The SMU Cox PMBA rose one point to No. 16 this year from No. 17 last year. Also in April, U.S. News & World Report released its ranking of the nation’s top full-time MBA programs, in which Cox ranks 34 out of some 135 ranked business schools.
Sister Martha’s Ruler. Teacher’s unions have no inherent interest in the education of children and young adults. They exist to get their members the most they possibly can, be it money, benefits, time off, etc. Whether kids can read is no concern for unions. They don’t represent students. Dedication appears to be waning.
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.
