Things I Learned This Week Back in the USA

June 2, 2023

Real Intelligence. We have been writing about artificial intelligence (“AI”) and its impact on our sector and the broader markets, but as an industry we have been using machine learning, predictive maintenance and interactive multi-dimensional geoscience work and more for several years. And looking at the AI chat sites; the biggest concern has been forged school papers. So, we aren’t as wowed when more industries begin using it. But these are all first-generation issues. There appears to be a growing group of people that are saying that the leading-edge technology and its usage could become an issue, and some of those people are AI’s developers. Now put that into context with a movie you have seen. They never see it coming, except for those rogue scientists.

An Aside. AI has investors putting a record amount of money into tech stocks according to Bank of America. A “baby bubble” in AI was the dominant market theme in May, with tech funds attracting a high of $8.5 billion through the week of May 31.

Priorities. Out this week - “Mitigating the risk of extinction from AI should be a global priority alongside other societal-scale risks such as pandemics and nuclear war." That statement was in a letter to the Center for AI Safety and published by them. The letter was signed by OpenAI CEO Sam Altman, Steve Wozniak, senior executives of Google and Microsoft and members of academia. OpenAI was founded and funded by Altman, Geoffrey Hinton — the so-called “godfather” of artificial intelligence, Elon Musk, Jessica Livingston, Peter Theil, Microsoft, AWS, Infosys and others.

Stand Corrected. That is clearly an interesting list, but appearances would be wrong. Musk put his money in “not from the standpoint of actually trying to make any investment return… I like to just keep an eye on what's going on with artificial intelligence." He sees it as a potential threat to humanity. “I think we should be very careful about artificial intelligence. If I had to guess at what our biggest existential threat is, it’s probably that. So, we need to be very careful.” They are not alone. A Reuters/Ipsos poll found that almost two-thirds of Americans think AI poses a risk to humanity. These people are asking for a 6-month pause in the development of some AI tools. Pause a leading-edge technology development? By government action? They want new safety standards. So, there is a threat perceived by some of the most distinguished technology leaders that are asking, against their own economic interests, to stall all development of some “tools”, where stalls and delays can be economically punitive, because they are afraid that unregulated AI development and usage could be a threat to humanity. Read that last sentence again. Now go back to that movie context. Isn’t this the lead-up to the movie’s climax?

And the Answer Is…. RBC Capital Markets put out their bi-annual survey results this week. One write-up of it ran the title “Oil ‘mega bulls’ have been tamed in 2023”. More than two-thirds of the bank's latest bi-annual oil market report and corporate survey respondents noted "difficult" or "extremely difficult" conditions for trading and investing so far this year. “Both investor sentiment and risk deployment are off across all investor categories relative to our previous poll conducted last fall. When asked on a scale of 1-10, with 10 being the most bullish, commodity hedge funds, trading houses, macro traders, credit investors, energy equity specialists and generalist equity investors settled on 6.3. Not surprisingly, 44% of respondents suggested that they are either not, or unsure about deploying further risk into the space through the balance of the year. Credit investors were both the least bullish and least likely to allocate further. The number of generalists taking our poll fell by 14 percentage points since our last survey.” We have seldom been impressed with industry’s expectation for commodity pricing, but investor wariness can cause equity values to drop. "Fundamentals are tricky and sentiment is fleeting… Uncertain macro backdrop, limited liquidity and risk deployment, OPEC+ policy, China's reopening, a decade of underinvestment, looming recession.” A number of things to worry about.

Professional Opinion. Last month my good friend David de Roode and I had the opportunity to take a plane ride from Jackson, Mississippi to Midland, Texas with Alex Epstein, a very visible and accomplished writer and philosopher who advocates the use of all practical and economic forms of energy that allow mankind to flourish, and as a result, is a big believer in fossil fuels. He is a dynamo, and we took the opportunity to chat with Alex on the ride. The podcast can be found at https://tr.ee/VDAs_LkjOg. Alex has a website where he answers questions and posts information, data and charts that he encourages people to use in their arguments for our industry. His website is https://energytalkingpoints.com/.

Headlines.

China’s economic recovery weakened in May, raising fresh fears about the growth outlook.
French inflation eased to lowest in a year, while Italy overshot forecasts.
Calls to end rate hikes are mounting in capitols from Nairobi to Bogotá to New Delhi.
Please wear clothes in your digital driver’s license photo – Georgia Department of Driver Services.
Reuters, WSJ, and Bloomberg were banned from the OPEC meeting.
Target, Costco and Dollar General have also said Americans are pulling back on spending.
LETTUCE produces THREE TIMES more greenhouse gas emissions than BACON.
$85 billion dollars of American weapons fell into the hands of the Taliban.
200,000 cows to be culled in Ireland in order to meet climate targets.
BlackRock’s Larry Fink expects between two and four more hikes because inflation is “too strong, too sticky.”

Culture Wars. Adrian Norman is a graduate of Ohio State University with a B.A. in journalism/public relations. He is a volunteer and fundraiser for hunger relief organizations and participated in a humanitarian aid mission to Haiti in 2017. Raised in Cincinnati, Ohio, Adrian is the son of a naval officer. He is African American.

Snippets.

Exxon and Chevron shareholders soundly reject climate-related petitions. Shareholders overwhelmingly rejected calls for stronger measures to mitigate climate change, dismissing more than a dozen climate-related proposals at their annual meetings.
Heard on MSNBC: Boycotting Target is “literally terrorism”. But boycotting Chick-Fil-A is a really good thing??
Democrat Congressman Bowman calls for an end to America's oil and gas industry. “We need to stop drilling for fossil fuels completely.”

Still Plugging. We have written before about the rise of the BRICS and their attempt to form their own organization and work on ending the U.S. dollar as the primary reserve currency. This week, the foreign ministers of the BRIC countries asserted their bloc's ambition to rival Western powers but their talks in South Africa were overshadowed by questions over whether Russia's president would be arrested if he attended a summit in August. The risk is losing South Africa to a Russian involved BRIC.

Loved the Lead In. “In terms of historic, Earth-changing potential, there is only one thing arriving this summer that could one-up the Barbie movie: El Niño.” El Niño is a climate pattern that warms up the water in the Pacific Ocean and plays havoc with weather. El Niño appears every 2-7 years. It can simultaneously lead to excessive rainfall and severe drought in different regions, particularly the tropics. Research published in Science Magazine estimates that the next El Niño, which has a 90% chance of beginning this year, will cost the global economy $3 trillion through 2029. One study linked El Niños to increases in civil wars and domestic violence due to drought, declining food production or just extreme heat, as well as disease from floods. The worst?? Increased mosquitos!!

Go Deep. CNOOC has begun production from one of the largest and deepest offshore oil fields. The Buzios Field is in the Santos Basin offshore Brazil, in water depths up to 7,200 feet. Daily production is currently at about 600,000 bopd. That is a lot. Five producers, five injection wells. That is 150,000 bopd each as well as 210 mcf of natural gas and 220,000 barrels of water. CNOOC is the operator with 7.34% while Petrobras holds 89% and the Brazilian gas company holding the rest.

Junior Crime. Someone put an LGBTQ+ flag in an outside planter at Saticoy Elementary School in LA. It was lit on fire, burned, discovered in the morning before class and is now being investigated by the Los Angeles Police Department as a hate crime. “The investigation is ongoing. It is a vandalism hate crime. The hate crime is still significant, but it is a misdemeanor.” There are no suspects. Recently, parents had been objecting to an upcoming Pride Day assembly where the school plans to teach children about LGBTQ+ identities during a book reading.

Jobs. Why is daycare trying to make my child a landman????

Done! After weeks of debate, threats, and aggravation, a bipartisan agreement was reached on the debt ceiling as well as the budget, a distinction made by President Biden. “The Energy Workforce & Technology Council applauds the bi-partisan agreement to lift the debt ceiling, which includes important reforms to the National Environmental Policy Act to help speed up projects and includes an agreement to finish the Mountain Valley Pipeline," said Tim Tarpley, Energy Workforce & Technology Council President. A number of people and groups tried to scuttle the Mountain Valley Pipeline including the Bronx’s own AOC. But it appears that due to approvals, and the inability of the 4th Circuit Court to review it, the provision was left in place. We can now go on about our time, worrying about other things.

Reassuring. Morgan Stanley showcased PXD and EOG this month. “We hosted investor meetings with PXD and EOG earlier this month. Discussions were primarily focused on operational results, well productivity trends, capital efficiency initiatives, deflation potential, shareholder returns, and M&A appetite. Operationally, EOG and PXD provided reassurance regarding holding or even improving well performance and delivering on the full year production guidance while capital efficiency strategies are expected to further improve the costs.” Saying all the right things.

Whipped. Tubulars are the end of the whip. One of the most volatile items in drilling and completion has been pipe. Dumping by the Chinese through fronts of other countries, lack of visibility on demand, and long supply chains all impact pipe prices but basically, it is the old story of an industry ramping up to meet growing demand about the time demand starts to fall. The chart below shows the end of the last party and now we are looking forward to the start of the next.

Wind is Blowin’. NOAA forecasters with the Climate Prediction Center, a division of the National Weather Service, predict near-normal hurricane activity in the Atlantic this year. NOAA’s outlook for the 2023 Atlantic hurricane season, which goes from June 1 to November 30, predicts a 40% chance of a near-normal season, a 30% chance of an above-normal season and a 30% chance of a below-normal season. Wow. It turns out that all weather forecasting seems to be a coin toss. NOAA is forecasting a range of 12 to 17 total named storms (winds of 39 mph or higher). Of those, 5 to 9 could become hurricanes (winds of 74 mph or higher), including 1 to 4 major hurricanes (category 3, 4 or 5; with winds of 111 mph or higher). NOAA has a 70% confidence in these ranges.

Below are summary infographics showing hurricane season probability and numbers of named storms predicted from NOAA's 2023 Atlantic Hurricane Season Outlook.

Going Backwards. Uganda has introduced laws that take aim at the LGBTQ+ that are way over the top to us here in the U.S. and it shows the level of advancement of other societies. The bill includes the death penalty for “aggravated homosexuality” which includes sex with a minor, having sex while HIV positive and incest. It criminalizes sex education for the gay community and makes it illegal not to expose what it calls perpetrators of aggravated homosexuality to the police. It calls for “rehabilitation” for gay offenders. The speaker of the parliament Anita Annet Among celebrated the bill’s signing, saying parliament had “answered the cries of our people.” “I thank his excellency, the president, for his steadfast action in the interest of Uganda. With a lot of humility, I thank my colleagues - the Members of Parliament for withstanding all the pressure from bullies and doomsday conspiracy theorists in the interest of the country.” We are obviously a more developed country than some Progressives would have you believe.

It’s All Free!!! “Republicans are pushing to not only block (President Biden’s) student debt relief plan, but they also want to force 40 million borrowers to immediately pay back paused student loans and interest and claw back debt relief from public servants. It's a slap in the face to working people.” - Elizabeth Warren. So, the 40 million borrowers have not had to pay anything on their student debt for three years and now they have to resume paying back the principal and interest that they signed up for. Abby Shafroth, a senior attorney with the National Consumer Law Center said, “It would not only break a promise the government has already made to constituents to provide them life-changing debt relief, but also increase their student loan balances right now by undoing past months of 0% interest and retroactively charging interest for that time.” So, since President Biden said he will forgive student debt, when he really didn’t have the legal ability to do so, no one should have yet assumed it would be forgiven. And if you don’t have to pay your debt for three years, you got a zero percent interest rate, and now you have to resume paying and you have to pay interest. If I buy a house but don’t like it, can if get the debt forgiven too since that would be some life-saving debt relief? If the government started forgiving everyone’s debts, every citizen and worker assumes that debt, so nothing changes other than the transfer of wealth for the people in charge.

The Benefit of Being Old and Deaf???

Different. It's no longer Gay Pride Month. Just Pride Month. And the world appears to have gone crazy again. But it is different this time. First, any issue with being gay is passe. Everyone knows someone who is gay or whose child is gay, and no one really cares much anymore. I don’t want someone’s sexuality jammed in my face, regardless of what sexuality that is, but again, I thought we had gotten by that. The issue is different with transgender. There is no issue with a gay man or a lesbian using the men’s or women’s restroom but having grown men in girl’s locker rooms and bathrooms because they “identify” at that point in time as a female just doesn’t seem right. Especially if you are the father of girls. I haven’t seen any stories of women identifying as men and visiting the men’s locker room or restroom, but I assume it has happened, just very rarely. Then there are sports. If you are a gay man or a lesbian, no one cares about that, but when a biological male, who has been through puberty is competing with biological women, it seems inherently unfair. And that has proven to be the case. Finally, there is the medical treatment, including surgery. When we see biological females who identify as a male and are below the age of 18 have surgery to remove her breast buds, it just doesn’t seem right to many. So is there consternation about the “acceptance” of trans people in a number of situations. This has not been about being gay. Very few people care anymore what your sexual orientation might be. But when situations arise that don’t seem right, it is much harder to be accepting. I see this as two very separate issues – gay vs trans. Everything works out over time.

Blow Me Down. Gerd Ganteför is a German professor of experimental physics who taught at the University of Konstanz and Johns Hopkins University Baltimore (USA), among others. He has authored some 150 technical articles on renewable energies or climate change. He compared the results of his study versus a NASA study done in 2012. The NASA study shows that wind turbines cause local warming and less precipitation. Ganteför sees a different reason in his study but comes to the same conclusion. “Large wind turbines logically slow down the wind by sapping the energy out of it. Less wind means less evaporation and thus less precipitation. And if it gets drier, it could just happen that it gets warmer.” He said that more study was needed before installing even more turbines. Germany has over 30,000 wind towers, one every eleven square kilometers, with ambitions to double or triple that. That would be the ultimate poetic justice. The biggest detriment to climate change is now windmills??

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.