June 7, 2024
Things I Learned This Week in Provence
There are 17 of us discovering the gems of Provence. Roman aqueducts, 10,000 person Roman arenas that are still used, Camarge ponies, all white horses, and some small bit of wine, all while riding bicycles through the region. I was going to take the week off but a significant event occurred and I wanted to mention it. A very short week but, if you leave the glass of Rose’ too long, it gets warm.
That is me on the left! Aurevoir!!
Okay, This Could Be Huge. In 1974, King Faisal of Saudi Arabia and the U.S. entered into a mutual agreement to support each other, at a time when Communism was threatening the world and oil prices were spiking. The U.S. needed an ally in the region and a sure supply of oil. Saudi needed military equipment and defense promises from the U.S. The term ‘Petrodollar’ was coined and virtually all oil transactions anywhere in the world were denominated in U.S. dollars. That appears to be changing.
Anniversary. On the 50th anniversary of this agreement, Saudi Arabia has chosen not to extend the agreement and, as of June 9th, will be able to trade in yuan, pesos, rubles or any other currency. The world will follow suit. And this is compounded by the steady political and economic gains of the BRICCS, several countries who formed an alliance in 2006 and has gained significant economic power. Between 2003 and 2007, these countries made up 65% of global GDP expansion. Brazil, Russia, India, China and South Africa. Not all considered our good friends. Today, the group represents 32% of global GDP, 18% of global trade and 25% of foreign direct investment. At the beginning of this year, the group was joined by Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates. In the last couple of years due to global events, more than 20% of oil today is sold at discount prices, due to Russia and Iran, who can’t use dollars for their transactions. And now Saudi joins the parade.
What Does This Mean? The value of the dollar will fall since dollars will come flooding back to the U.S. as transactions occur in different currencies. Oil prices are likely to fall, or at least stall, since the central pricing mechanism fails. Gold should get a boost as the dollar loses value. We aren’t really at risk of losing our status as the world’s reserve currency but it will obviously be eroded. Since Oilfield Services have had their revenues and costs typically denominated in dollars, this too is likely to change with different countries balancing currency arbitrages by paying service companies in the same currency in which their oil is sold.
And None of This is Really Speculation. It is the continuation of a trend started several years ago and exacerbated by the economic and oil sanctions put on Russia and Iran. How quickly it expands is more of a question than will it matter. There are any number of impacts to all parts of our industry. And June 9th is next week. Hold on to your hats.
PPHB U.S. Energy Markets Update.
Commodity Prices: WTI crude oil is currently $73.25 per barrel (down ~7.5% week-over-week) and natural gas is $2.59 per MMBtu (down ~3.0% week-over-week)
Crude Oil Production: U.S. crude oil production is currently ~13.1 million barrels per day (up ~5.6% year-over-year)
Crude Oil Inventories: U.S. crude oil inventories increased by 1.2 million barrels week-over-week vs. an estimated decrease of ~2.1 million barrels
Frac Spread Count: There are currently 253 frac spreads operating in the U.S. (a decrease of 4 spreads week-over-week)
Onshore Drilling Rig Count: There are currently 578 drilling rigs operating in the U.S. (a decrease of 1 rig week-over-week)
NVIDIA vs. OFS Sector. Below are several charts comparing our entire public OFS Sector globally (242 companies) to NVIDIA. Our industry produces four times the revenue of NVIDA, but only 25% more EBITDA. But when it comes to value, the market cap of NVIDIA is eight times greater than the entire OFS Sector. Makes it difficult to feel for Apple getting passed by NVIDIA. The OFS Sector has been lapped 8 times by one computer graphic chip company.
Oil Prices. If OPEC+ is going to extend its production cuts, why is oil weak? Because “extending cuts” is not quite correct. OPEC+ said it would extend its 1.65 million cut, started in April 2023, until the end of 2025. Wow. Great. But the 2.2 million barrels per day put in place last November will be “gradually phased out on a monthly basis” by September of next year. Individual countries can start putting oil back on the market very shortly. Saudi appears to have abandoned their idea of $100/barrel oil. Remember a few years ago when an Iranian attack took 5 million barrels of Saudi oil off the market and oil only traded above $60 for a day or two. Many people still believe that Saudi “needs” $100 oil. I “need” several million dollars. It doesn’t always translate. The use of AI in the oil world is likely to put more pressure on oil prices and, while some may debate how much production is “off-line,” 3.85 million barrels is the noted cut by OPEC+. If you need a higher oil price than we have today to succeed, you might be in the wrong business or you might have to wait a while.
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.
