June 28, 2024
Things I Learned This Week While My Daughter Was Home
No matter how old they are, they are still our little girls! My daughter graduated from Wake Forest last year and is living in DC, working as a credit analyst at PGIM. I am one of the proudest fathers on the planet. She is working remotely this week and chose home for the location. Not her home. She has outgrown us local yokels, but my home. I win. I have gotten to drive her to and from work this week. I know everyone has their own opinion, but I am among the luckiest men in the world. My 21-year-old son is a rising junior at CU Boulder and is interning in Paris this summer and spends every weekend in a different European city. When I retire, I want to be my children. Geez.
Slow Week. Forgive the introduction but pretty much nothing happened in the oil “bidness” this week. Oil prices stay flat, as does the rig count. 615 rigs operating, which makes for the flattest extended rig count in memory. The problem, which we mentioned last week, is that our industry is not geared for “flat.” Lack of momentum hurts us from an investor point of view since they have often liked our industry due to the periods of extreme volatility. Everyone seems to think they can time the market in those periods. Most have been proven wrong, but when there is no volatility, there is very little interest among investors. They will come back, or at least some investors will, but they will not be the same investors as the last several cycles. Those are the guys who love the volatility. A different group of investors will start sticking their toes in the water in part because of the lack of volatility but also as the industry proves that it wants to make a profit and a positive return, rather than just generate cash. If I get $1 million a year, that is great, unless I had to invest $1 billion to make it. If earnings aren’t positive, equity value declines. We have pretty much learned that from scratch over the past several years, but some still don’t seem to understand math. But they will. Boards of directors are working hard to make sure that is the case. If we can operate profitably for a couple of years here, conversions will come, investors will come back, and valuations should rise. It is becoming clear to even our biggest nay-sayers that doing without oil and petroleum related products leads to a very undesirable life. Combine that with a positive and improving ROIC, and they will come back. Now you just have to figure out how to do that in a flat-to-declining market. Therein lies the rub.
Drop “Transition”. There was one very interesting piece I saw this week. It was mostly old news to many of us, but it was nice that it appeared in a broadly read publication and was written by the president of the Copenhagen Consensus, a visiting fellow at Stanford University. Notice how neither API or Exxon appears as the author?! The title was “The ‘Green Energy Transition’ That Wasn’t.” Over $2 trillion spent last year on renewables, as wind and solar energy use hit new record levels. Before the dancing in the streets starts, realize that fossil fuel use grew at a faster clip. But wait. Wind and solar are going to make fossil fuels obsolete!! It seems those just add to energy consumption overall. One statistic I liked was that, for every six units of green energy, less than one unit of fossil fuel energy is displaced. That doesn’t make me think our industry is going anywhere but up from here. When coal came into use a couple hundred years ago, substituting for burning wood, we burned more wood. He makes the statement, “Humans have an unquenchable thirst for affordable energy.” Affordable is my highlight. Solar is only cheaper when the sun shines and wind is only cheaper when the wind blows. Full cycle, a term the oil and gas industry ignored for years, they are not cheaper. And electricity, which solar and wind generate, is only about 20% of all global energy consumption. Steel, fertilizers, heating, agriculture, manufacturing, cement, plastics are all critical to our lives these days, but wind and solar basically don’t play in those areas. He closes with a killer statement. “When politicians say that green transition is here, they are really asking votes to support throwing more good money after bad. We need to be smarter.” I like this guy.
Free Money. Following in San Francisco’s footsteps, Chicago is now considering reparations. If you remember, several people on the San Francisco city council advocated giving $5 million, $100,000 a year and a few houses to African Americans in reparations, even though California never had slavery and the city certainly can’t afford it anyway. Now Chicago. We all know about the weekly shootings, in a town that doesn’t sell or allow guns. And the public school system is considered one of the most under-performing systems in the country. The average teacher makes more than $100,000 for nine months of work and, while school funding has increased by 70% on a per student basis over the last six years, only 11% of black juniors were proficient in reading on the SAT tests. But the mayor is focused on the way Chicago has “perpetuated, condoned, profited and benefited from the system of chattel slavery.” It turns out that industrial pollution is just one of the examples of systemic racism. And the world continues to spin.
Shrimps on the Barbie. Early in my career, I worked as a Geophysicist for Western Geophysical, now part of SLB’s WesternGeco. My first overseas assignment was as party manager for a seismic vessel shooting the first seismic off the Northwest Shelf of Australia, and I had the mixed fortune of living in Darwin for some period of time. At a reception for the Governor of the Northern Territory, the Governor and I were the only two people in long pants. A very interesting post. Then, I moved to Perth and didn’t want to come home. And now, we have an E&P IPO, by a very well-known player, who is making a bet on Australian natural gas. Bryan Sheffield, son of Scott, priced the IPO of Tamboran Resources. The deal was priced within the range, but the size was slightly reduced, raising only $75 million with the stock opening down 6% from the pricing. Still a victory.
Perspective. The Dallas Federal Reserve Bank issued their 2nd quarter review of the oil and gas industry. Production was little changed; costs rose faster for OFS and still rose but more slowly for E&P. OFS utilization improved but margins were still negative, but not as negative as Q1, declining at a slower rate. Employment was little changed, but the slight change was positive, up 14 quarters in a row. There was a positive outlook by E&P and a neutral outlook for OFS. Operating in a flat environment generally leads to some slow price degradation. Expectations on prices had a very broad range, but it is my experience, from 15 years of hosting an annual December luncheon, that, as an industry, we are terrible at forecasting commodity prices, so I see no point in embarrassing anyone by publishing their estimates. In terms of overall price sentiment, many see more risk to oil prices over the next year, but most are much more optimistic five years out, which always seems to be the case. Natural gas looks dead in the water for the next couple of years but, 2-5 years out, optimism rules. One point that was surprising to us was that almost half of respondents said they don’t use AI and have no plans to do so in the near future, with small E&Ps the most resistant to use.
Headlines.
Flatulent cows and pigs will face a carbon tax in Denmark.
Los Angeles voted 12-0 to ban new drilling and to close all 5,000 existing oil and gas wells in the city. This is a historic victory by all citizens over the oil industry, and environmental racism.
Canadian forest fires put more emissions in the atmosphere than all the airplanes in the world for a year. (Mother Nature)
Chevron to boost natural gas production from massive Leviathan field offshore Israel following export expansion.
BirthStrikers: meet the women who refuse to have children until climate change ends. (Midland TX was the bottom of an ocean once. It may take a while.)
The green revolution is in trouble. The rise of the nationalist right in much of the Western world has placed huge question marks over commitments to transition out of fossil fuels to fight climate change.
PPHB - U.S. Energy Markets Update Highlights.
Commodity Prices: WTI crude oil is currently $80.83 per barrel (up ~0.1% week-over-week) and natural gas is $2.84 per MMBtu (down ~4.4% week-over-week)
Crude Oil Production: U.S. crude oil production is currently ~13.2 million barrels per day (up ~8.2% year-over-year)
Crude Oil Inventories: U.S. crude oil inventories increased by 3.6 million barrels week-over-week vs. an estimated decrease of ~2.6 million barrels
Frac Spread Count: There are currently 246 frac spreads operating in the U.S. (a decrease of 4 spreads week-over-week)
Onshore Drilling Rig Count: There are currently 567 drilling rigs operating in the U.S. (a decrease of 2 rigs week-over-week)
My Hometown. Buckley’s Grill, one of the best steak restaurants in Memphis, announced it was closing after over 30 years of operations. The owner posted the following message: “love and appreciate you all and your kind comments. It is simple… Crime killed our business after 30 years. Folks are afraid to risk dining in East Memphis. Can’t blame them. Thank you all for thirty years of love.” To all of my high school classmates, very sorry. If they close the Rendezvous, it’s all over.
Gold Rush. I have never been a gold bug but did buy some last year after hearing stories of accumulation by central banks around the world. U.S. debt levels are high enough to scare anyone away from the dollar at this point, and there's groups like BRICS who are trying to shift currency transactions away from the U.S. dollar and more toward local currencies. There is no other currency out there that can be the reserve currency at this point. The U.S.’ position and being the global reserve currency seems to be ebbing. Then come the reports that a number of countries are having their central banks sell U.S. bonds. One report shows over 1000 metric tons of gold annually is being acquired by the central banks as they dump dollar denominated bonds. It's still listening enough to make me a gold bug, but I do understand why people would have it in their portfolio with this backdrop. Over the next years, the U.S. debt levels will become more and more critical if they keep rising, and both parties seem intent on making that happen. It will continue to devalue the U.S. dollar, which of course is backed only by the good faith of the U.S. government. That good faith will come in the question if those levels continue to rise. We're still the strongest currency in the world because our economy, right now, is the strongest in the world and that speaks to the U.S. and the economic potential of the rest of the world at this point. Remember, every central bank has been fighting inflation for almost 2 years now, and "fighting inflation" means that economic growth has been tried to be slowed by the same central bank. Currency issues will continue to be at the top of the news for some time.
Gassy. And in what might be a positive for U.S. LNG exports, the EU imposed new sanctions on Russia targeting LNG shipments for the first time. This is, of course, due to the war in Ukraine. The pipelines have basically quit flowing, but Russian LNG, in a roundabout way, has still been coming into the EU. Those cargoes will have to find a new home so global supply demand balances won't particularly change much, but it gives the LNG industry up and growing share in the EU.
Modern Technology. I was looking at a lithium battery company the other day for a friend. Doing research, I found a large number of lithium battery manufacturers around the world. China still accounts for over 40% of those batteries, but recent tariffs will at least redirect some of those batteries into places other than China. Lithium battery start-ups at this point seem to be a bit late to the party, but you never know. There are other concerns, however, that don't make the press but have a real impact. At least 22 people died in a fire at a lithium battery factory in South Korea recently. I know that's not the only one and the incident of batteries catching fire always seem to make the front page even if they are few and far between. But 22 people dying in a battery manufacturing plant shows how dangerous this can be. It's not like they're going away but look for safety measures to start racking up the cost.
Top 10. Black Mountain Oil and Gas named the top 10 podcasts for all oil and gas professionals. These thought leaders are driving conversations that matter, providing valuable insights and sharing innovative ideas that propel our industry forward. I would like to congratulate David de Roode and Josh Lowery for the #1 position and thank them for my inclusion in their effort.
Top 10 Oil & Gas Podcasters
1. Oilfield 360 Podcast from Upright Digital
2. Oil and Gas Industry Leaders Hosted by Paige Wilson from Oil and Gas Global Network
3. The Crude Truth Hosted by Rey Treviño III
4. Energy News Beat Hosted by Michael Tanner and Stuart Turley
5. PetroNerds Hosted by Trisha Curtis
6. Oil & Gas Startups Podcast from Digital Wildcatters
7. Chuck Yates Needs A Job Hosted by Chuck Yates (he, him, his)
8. What the Funk? from Digital Wildcatters
9. Exec Crüe Podcast Hosted by JP Warren
10. The Energy Question Hosted by David Blackmon
Largesse. I am not really a fan of government giveaways but, if they are going to hand it out… The Biden administration is making $850 million available for funding reductions in methane. Tranche 1. is for small E&P companies to cut methane from wells and infrastructure, 2. to minimize equipment leaks from engines and compressors and 3. methane detection in populated areas. Okay, every company in our industry is working on all or parts of that list. And, if availability of capital is an issue, the government just gave you a boost. It will be in the form of grants and low interest loans. “Gassy Jim” will be incorporated very soon, and we will do all we can to reduce methane, or at least get as much money as possible from promising it.
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.
