Things I Learned This Week About Casting an 11 Weight Rod

June 9, 2023

Rum Punch. Okay, a pretty cryptic title I will admit, but it is a lead-in to the reason that TILTW will take next week off. Someone has to go to Cuba to catch Tarpon, Permit and Bones and I got picked. Two nights in Havana and then several days of fishing. As one would expect, phone service and the internet are not as sophisticated in Cuba as at home, so I will give a quick travelogue the following week. It’s June and vacation month for many. No one invited me to Aspen or Vail or Monterey for June, so I had to settle for Cuba! But remember, better late than never!

Third Shoe to Drop. The biggest news of the week is that Saudi Arabia will take 1 million barrels of oil production per day offline. That makes just over 3 million barrels per day that OPEC+ has taken off the market since October of last year. Several made the observation that Saudi rarely cuts production in a strengthening market. They wouldn’t. Well, they might one day but this day wasn’t it. So, the next question is – what do they know we don’t? This wasn’t an OPEC decision; it was a Saudi decision to act unilaterally. But before you get too fired up, the deal is for only one month, and some are saying the terms could be amended. OPEC+ also agreed to extend previously announced oil production cuts through the end of 2024. OPEC+ countries produce about 40% of the world's crude oil. This includes Russia and rumors abound of the strained relationship between Saudi and Russia over these cuts. “The Kingdom’s production becomes 9 million barrels per day, and the Kingdom’s total voluntary cut will be 1.5 million barrels per day.”

Where’s the Money? Which leads us to investors and their ideas on the future. Over the last 17 years, the energy sector, on average, has under-performed the broader market by 2.2%, and by 5% over the last five years. Last year of course was epic. The S&P 500 energy index beat the broader market in only eight of the last 18 years. Every five or six years, we have a good year or two, and then back to under-performance. This is weighing on minds.

Competition. And then there is tech. Tech is the safe ‘risk-on’ bet with investors. Oil and technology are both very volatile sectors that take turns being the belle of the ball to investors willing to take a reasonable, and hedge-able, bet. If tech is in the hole, the energy sector steps up to provide liquidity and volatility. Right now, tech is working very well, with stocks hitting highs.

Then There is THE ARGUMENT. Starting 6-8 months ago, every energy pundit worth his salt was saying that the set-up for higher oil prices has never looked better. Supply/demand was such that oil would likely spike into the low $100’s, with the focus on the second half of 2023 seeing a significant increase in oil prices. Everyone was on board. No one could find any reason or argument why we wouldn’t be catching the wave about now. Of course, no one could have thought that more than 3 million BOPD of production would have to be taken off the market just to try and keep the price at $70. The recession still hasn’t developed, and we have had three production cuts since September? If you were an investor, looking at a company that out-performs every five years or so, and last year was an all-time record and second up year in a row, and the rafts of optimism that was rained down on you never really happens?

Do What?? OFS companies trading at 2x cash flow or less. But, the reality says, even if on the margin, that natural gas activity is slowing, tubular/pipe pricing has rolled over, and pricing momentum has faded. Pricing may not be dropping much, and activity is barely down. Sound familiar? Pricing and activity dropping, downward earnings revisions ahead and so far, the experts haven’t been right. This is a compelling reason to buy the stocks? But things are MUCH better than one or two years ago. In the world of “what have you done for me lately”, that relative argument doesn’t mean much. There are signs that China’s imports are back to pre-pandemic levels. There goes that argument of China not coming back as quickly as expected. That “expected” must have really been something special.

End of the Whip. We are a cyclical industry. Hyper-cyclical even. We are going through a slowdown. There is too much oil or too little demand. It will solve itself, but no one knows when. You feel thrilled that you didn’t go on a buying spree back a couple of months ago when oil was expected to head to the moon about now. Smart. Now keep that discipline. Nothing demonstrates the need for discipline as much as the last downturn in the face of adding capacity. But no one went nuts thank goodness. Now let’s keep that up. Yes, the longer-term trends are positive but maybe not a constant trend upward. We continue to get a better education on what we need to do, and not do, as this cycle progresses. “Be disciplined my friend.”

Retirement? Knowing how to do it is key. Reduce your handicap or grow to hate golf. See the world or clean out your closet. Again. One of my best and most favorite friends retired last year and he really did it. Stayed on one board but dropped everything else. But what is a guy to do??? Galen Cobb and his lovely wife Kathy seem to have figured it out. The last picture I posted of Galen was bungee jumping off a bridge in New Zealand. Here we see the two of them floating in the Dead Sea. Sir, you are doing a great job, much better than some. Keep it up and keep the pictures coming!

Notable. Al Pacino, Michael Corleone, the Godfather is 83 years old. But just as he surprised us with his amazing acting skills, other skills took over this time. He and his 29-year-old girlfriend will welcome another child into the world soon. A 54-year age gap. It stirs many feelings, both positive and negative but in the world of men, it is at least encouraging for the rest of us.

Take Responsibility. NOIA had the following comments about the recent FRA. The debt ceiling deal – dubbed the Fiscal Responsibility Act or “FRA” -- also includes permitting reforms, which has been a priority for NOIA. The agreement codifies, in NEPA, reforms aimed at boosting the coordination, predictability, and certainty associated with federal agency decision-making. This includes:

Tightens NEPA considerations to "reasonably foreseeable" environmental impacts or adverse environmental effects;
Allows a project sponsor (under agency supervision) to prepare an EA/EIS;
Imposes a two-year deadline for an EIS, and a one-year deadline for EA;
Allows for project sponsors to obtain court reviews if an agency misses the deadline, with a court order to comply not to exceed 90 days;
Imposes page limits for EA/EIS;
Includes a streamlined process to facilitate agencies adopting categorical exclusions; and
Requires an "E-NEPA" study to review digital means of expediting the process.

The FRA contains the following additional energy permitting provisions:

Adds energy storage as covered projects under the FAST Act; and
Approves the Mountain Valley Pipeline and moves judicial review to the DC Circuit.

The agreement does not include any changes to the Inflation Reduction Act's climate and energy provisions.

SHOCK. The Capitol Police refused to allow students to sing the National Anthem in the U.S. Capitol explaining that, "it might offend someone/cause issues." The students were allowed to sing other less controversial songs.

Issues. There are any number of issues with the aggressive push for Electric Vehicles (“EVs”). A few popped up this week. A couple of months ago, we wrote about comments made by the CEO of Toyota, the world’s largest auto company in terms of vehicles sold. He had the audacity to question the religion. He said “the silent majority in the auto industry is wondering whether EVs are really okay to have as the only option” but can’t speak out. As a result, a number of progressive investment funds, including the California Public Employees Retirement System, are trying to get the CEO ousted for his heretical comments. Then Toyota has the audacity to post facts and figures on their website.

“Most public chargers take 8-30 hours to charge and to meet federal emissions standards, 1.2 million chargers are needed by 2030.”
“More than 300 new lithium, cobalt, nickel, and graphite mines are needed to meet expected battery demand by 2035.”
“The amount of raw materials in one long-range battery electric vehicle could instead be used to make 90 hybrid electric vehicles.”
“The overall carbon reduction of those 90 hybrids over their lifetime is 37 times as much as a single battery electric vehicle.”

Now one can take this with some grain of salt thinking that they are pleasing their own case but that doesn’t make the data itself any less important, and this is a big public company’s published data, which gets peer reviewed by millions. And so far, the only response has been, “Yeah. So what?” Reality wins in the end and we hope Toyota’s CEO gets to see it.

But That’s Not All. Transformers. No, not the movie. The pieces of equipment that step electrical energy up or down. Large scale ones in regional distribution that are required to tap renewable sources not previously on the grid and local ones that step power down for home use are both out of stock. But the wait for one is only 20-39 months. That isn’t a typo. So, how to make sure the electric grid is reliable with enough transformer capacity to make it so? Wait 2-4 years. For more local transformers, needed for real estate development, replacement and to meet the government’s increased efficiency requirements, the wait is only 1 and 1/2 years. It’s those multi-year transitions that make immediate gratification so difficult. And this doesn’t even include the issues with electrical steel, where we have only one domestic manufacturer. The main source of supply? China of course. Practicality versus politics.

Nickels and Dimes. A ‘nickel pickle’? It turns out that among the many different metals and materials needed to make EV batteries, one has a cool name for its supply issues! Now nickel isn’t as rare as cobalt, lithium, and a few others but it is still critical. And according to the head of Toyota, we need 300 new mines producing all the different EV battery needs. But the mining of nickel requires clearing rain forests for access, and refining it is a highly energy and emissions intensive process of extreme heat, high pressure, and producing a very toxic waste or “sludge”. Where is the most nickel? Indonesia. It is shallow, not deep so it is inexpensive to mine. Just clear large areas of rainforest and surface mine the nickel. But hey, it’s in Indonesia, not my backyard and most people don’t know where it is anyway. Kind of hypocritical but hey, don’t mess with the narrative.

OMG!!! A senior U.N. environmental official says entire nations could be wiped off the face of the Earth by rising sea levels if the global warming trend is not reversed by the year 2000. Coastal flooding and crop failures would create an exodus of ″eco- refugees,” threatening political chaos, said Noel Brown, director of the New York office of the U.N. Environment Program, or UNEP. He said governments have a 10-year window of opportunity to solve the greenhouse effect before it goes beyond human control.

As the polar ice caps melt, ocean levels will rise 3 feet, one sixth of Bangladesh will be flooded, one-fifth of Egypt and eco-refugees will be in the tens of millions. UNEP estimates it would cost the United States at least $100 billion to protect its east coast alone. Excess carbon dioxide is pouring into the atmosphere because of humanity’s use of fossil fuels and burning of rain forests, the study says. The most conservative scientists estimate that the Earth’s temperature will rise 1 to 7 degrees in the next 30 years, said Brown. He said there is time to act, but there is no time to waste. UNEP is working toward forming a scientific plan of action by the end of 1990, and the adoption of a global climate treaty by 1992. The year?? 1989.

Skull & Crossbones. How about “poison in every puff”?? or “tobacco smoke harms children”. Or my favorite – “cigarettes cause impotence”. How about the old saying, "cigarettes cause cancer," or a different take on "cigarettes damage your organs". These are only some of the messages that must be printed on each individual cigarette sold in Canada starting August 1st, which will be in French and English. This was announced on #WorldNoTobaccoDay. Unlike the U.S., tobacco advertising, promotion and sponsorship are banned in Canada, and warnings on cigarette packs have existed since 1972. Now that we know the word “font”, now we can see what Arial #2 looks like.

Gone But Not Forgotten. I loved visiting San Fran. I was there for a conference during 9/11 and everyone pulled together to get through it and back to our lives. Gateway to wine country, fabulous restaurants and hotels. Not anymore. We thought the stories of homeless defecating in the streets were a short-term aberration. Not everyone thinks so now. Not only is Nordstrom closing its two downtown stores, which were the flagships of the brand, CVS and Walgreens are fleeing due to rampant crime but now lodging is being hit. The investment firm that owns the Hilton at Union Square and Parc 55 hotels is walking away. "The Company intends to work in good faith with the loan's servicers to determine the most effective path forward, which is expected to result in ultimate removal of these hotels from its portfolio." They are walking away, for good, from their ownership of two significant hotels in the city. Walking away from the debt, $750 million, and surrendering the properties completely. Union Square will be a ghost town in the middle of the city.

Expert Opinion Facts. Robert Bryce just finished updating his Renewable Rejection Database to include a spate of restrictions or rejections that have been enacted in Iowa, Illinois and Ohio. The new totals: “Since 2015, there have been 389 rejections or restrictions of wind energy projects and 134 rejections or restrictions of solar projects, bringing the total number of rejections to 523. So far in 2023, there’ve been 23 rejections of wind and 24 rejections of solar.” Similar to the large investment funds who had been driving a climate agenda through proxy votes until individual investors decided they were more interested in financial returns, so communities who might otherwise embrace renewable energy benefits, are not doing so, at least in their back yards. Robert speaks of this a lot, and he is an expert on the topic, which is why I am pleased to include his comments. Thanks Robert.

Arbitrage. The following slide caught my attention. It is the key metrics of the proposed Chevron/PDC Energy combination. Look at the relative valuations. Anyone who thinks the majors are NOT going to take advantage of this disparity and bulk up their U.S. onshore holdings, I respectfully disagree.

Headlines.

Equinor delays Canadian offshore oil field for three years due to escalating costs.
U.S. hotel developers run out of cash as construction lending dries up.

Leading Indicators. There are any number of indicators of economic events and some correlate well and some only correlate after a myriad of adjustments. But cardboard? How complicated can this be?

Do, Not Say. Canadian Prime Minister Trudeau has not been the biggest fan or supporter of fossils fuels, but he may be getting a little pragmatic here. His government, which has pledged to reduce the country’s emissions, has approved a $12 billion offshore oil project. Bay du Nord includes five discoveries that could produce 200,000 BOPD. It has been five years since Canada has approved a major oil project such as this one and it was a Suncor oil-sands mine. First Trudeau promises Europe LNG it doesn’t have and is now approving a multi-million-dollar oil project expected to last 20+ years. This follows on the heels of the U.S. approving the Alaskan Willow oil project, that won’t even go into production for several more years. It appears that cracks of pragmatism are appearing in both administrations as reality becomes better understood.

No Sense of Reality. In May 2023, New York Senator George Borrello introduced legislation to prohibit use of fossil fuels in manufacturing of renewable energy equipment. “In order to produce and install renewable energy sources at the scale that will be required to power our entire state, the environmental toll from coal-fired power, diesel fuel and the mining of rare earth metals will be extensive and exists at cross-purposes with the stated goals of those advancing the climate agenda,” said Sen. Borrello. “If they truly believe that fossil fuels must be eliminated, then the state (New York) should not be financing the proliferation of structures whose manufacture, transport and installation produces significant emissions… Those who blindly call for New York to rapidly transition to renewable energy are perpetrating a shell game for political purposes, at great cost to our environment. This legislation would halt further damage as we wait for renewable technologies that can be produced sustainably, ethically and in cooperation with the goal of truly protecting our environment,” he concluded.

All You Need is a Little Hard Work. And different Laws of Physics. Germany has spent about one-half of a trillion dollars on wind and solar to reduce the countries dependence on fossils fuels. And it has succeeded, though not at the pace that was hoped for. It isn’t working. Germany’s dependence on fossil fuels has declined from 85% to 79% over the last 20 years. Almost 40% of power in Northern Germany is renewable energy but when the wind doesn’t blow, you need a reliable back-up and enough back-up for the whole input for as long as the issue lasts.

How Do You Feel?? The National Highway Traffic Safety Administration (NHTSA) has forced Ford to recall 176,000 Broncos from model years 2021-2023. Do they catch fire?!? No. Explode? No. It is those pesky seatbelts. The customer may experience some dissatisfaction in buckling their seatbelts. They might be ‘discouraged’. So, we are recalling cars, costing billions, because of how you feel about your car today.

Why the Approval?

“The Congress hereby finds and declares that the timely completion of construction and operation of the Mountain Valley Pipeline is required in the national interest. The Mountain Valley Pipeline will serve demonstrated natural gas demand in the Northeast, Mid-Atlantic, and Southeast regions, will increase the reliability of natural gas supplies and the availability of natural gas at reasonable prices, will allow natural gas producers to access additional markets for their product, and will reduce carbon emissions and facilitate the energy transition.”

Part of the debt ceiling bill was the agreement and approval of the Mountain Valley Pipeline, a project the senator has been fighting for some time and was promised to him contingent on his approval and vote on the Inflation Reduction Act. It was a bitter fight this week over what we kept in the bill and what was removed. The Act restricts the punitive review of the 4th Circuit Court and appears to be able to break ground almost immediately.

Wow. You mean after all of these last several years, as environmentalists have made it their pet project since the Keystone line was defeated, spending millions and tying things up in the courts, now the government sees the light. Or are they just worried Joe Manchin will jump parties if they screw him out of this again? The hope is that this paves the way for approval of several projects that are just as needed and being held up the same way.

It Has Come to This. Haiti has been in shambles for years. It has been so bad for so long, we just quit paying attention. Over the past few years, gangs have taken over much of the country. When you can’t pay policemen, and those few that you can live in constant fear for their lives, primal gangs take over. We have seen it in an earlier phase here, in Portland, Seattle, Minneapolis and others. But the people of Haiti appear to have had enough. A vigilante effort, made up of everyday citizens, started just a couple of weeks ago and the NYT reports that 160 suspected gang members have been killed. A group of 14 suspected gang members, arrested by police, lost them to a vigilante crowd that stormed the police station who doused them with gasoline and burned them to death in front of the station. That will cause people to take notice. There has been a sharp drop in murders and kidnapping by gangs since the effort started. From the Oxford dictionary - a member of a self-appointed group of citizens who undertake law enforcement in their community without legal authority, typically because the legal agencies are thought to be inadequate.

Logic. The following chart makes the argument that our current climate issues are the result of El Niños, not emissions. But in true chicken vs egg fashion, now it is global warming causing El Niños. Exceptionally circular argument.

Podcast. I sat down with David de Roode and Tony Sanchez, the Founder and CEO of OneNexus at the Energy Transition Pavilion at the Offshore Technology Conference. We talked about groundbreaking solutions addressing one of the industry's most pressing challenges: the enormous costs associated with decommissioning oil and gas wells.

You can listen to the podcast at: https://oilfield360.libsyn.com/episode-49-tony-sanchez-onenexus

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.