June 23, 2023
Things I Learned This Week Touring Cuba
June 23, 2023
Havana. I really didn’t know what to expect, other than a bunch of old cars. And boy were there some old cars. Fidel put an embargo in place in 1958 so that is the newest Chevy around, and there are a lot of Chevys. The Capitol and some of the buildings were magnificent and could be standing in Washington D.C. The people were exceptionally friendly, and everyone was on the hustle. The government owns all the stores. Think about that. Not just the liquor stores. All the stores. There are some very colorful paintings, usually of old cars, and some exceptional woodwork, but that is it. Counterfeit cigars are more prevalent than real cigars and everyone tries to sell you some. The tourist industry is now the mainstay. Venezuela had supplied Cuba with crude and fuel, delivering fuel oil for power generation, gasoline, diesel, jet fuel and cooking gas. Now Venezuela has reduced oil supplies by over 30% and stocks are dwindling, forcing Cuba to rely more and more on Russia, who, along with Venezuela have been the historical “godfathers” of Cuba, and now has its own issues. We spoke to one gentleman, after accidentally buying him a drink, who said things were better under Fidel. Now there is no work, no food and no medicine. Several others agreed, noting the shortage of food and medicine as the worst issues. There aren’t many stores or department stores for Cubans and only a few for tourists since the government owns all the businesses. We did not see a single grocery store while we were there. The people were exceptionally friendly. Since no one has any money and there are no “nice” parts of town, there is no resentment towards anyone, just concern about shortages that will likely get worse. The number of little bars with Latin bands were too numerous to count and if your beer or drink cost more than $3, you were in one of the few tourist hotels.
Rationed. Food and fuel are rationed. Each car is allocated 5 liters a month and you are only allowed one car. Each Cuban receives a monthly ration of seven pounds of rice, a pound of beans, half a bottle of cooking oil, one bread roll per day, plus small quantities of eggs, chicken or fish, spaghetti, and sugar. There are items for special occasions — cakes for birthdays, rum and beer for weddings—and “vulnerable people” get extra rations. Children get a liter of milk and some yogurt. People with health problems, like diabetics, get extra rations. 60% of the food is imported. We passed one of the very few gas stations to see 25 cars in line, serving two at a time, and two cars being pushed to the station. The average salary in Cuba is $150 per month. We didn’t notice the shortages since we are tourists and tourists are spoiled but there was an awful lot of rum available all week.
One of the best pictures I have ever taken!!
The Rest. Once outside of Havana, it seems most like Balikpapan in Indonesia. Abject poverty. But the people are very friendly and very polite. In Europe, they can spot an American two blocks away, but Cubans haven’t seen many Americans at all, and we look just like the Germans and Canadians who make up most of the meager tourist trade. A 7-hour bus ride from Havana took us to the opposite side of the island and some fabulous fishing. We were on a ship that holds 40 people, half are fishermen and half are scuba divers. The staff works only for tips. The manager said if the government tried to make them government workers, which almost everyone else is, he wouldn’t have a crew tomorrow. They are learning customer service and capitalism. We had lobster every night only to find out it is against the law for Cubans to eat lobster and most beef as well. Those are saved for the tourist trade and the generation of hard currency. We were fishing for bonefish, permit and tarpon. Getting all three in one day is called a “grand slam”. Only one out of 15 people got one all week. Kaari. Of course. The other interesting point – peace and quiet. No cell service or Wi-Fi for six glorious days!!
If you ever wondered what a Barracuda looks like up close.
Blockbuster. To me, the biggest story of last week was the PTEN-NEX combination. In my humble opinion, a great deal. This is true consolidation. Drilling, pressure pumping and several ancillary businesses that all work on the wellsite. While a frac spread and a drilling rig obviously look different and have different contracting and pricing mechanisms, they represent the “D&C”, drilling and completion segments of many companies that just haven’t been put together. To be honest, few could. PTEN was in both camps and combined, they are a powerhouse and a cash flow machine. I realize that business is slowing right now but the bold act when others fear and the time to combine is never the top of the cycle.
Phoenix Without Ashes. The combined company will have a market cap of $5+ billion. Andy Hendricks will serve as President and CEO of the combined company and Robert Drummond will be the Vice Chair. Curtis Huff will serve as Chairman of the Board. The combined board will have 6 PTEN directors and 5 NEX directors. It will operate under the name Patterson-UTI and trade under the ticker symbol PTEN. The well-completion business will operate under the NexTier brand. PTEN shareholders will own 55% of the combined company while NEX holders will own 45%. The company will have 172 super spec drilling rigs, directional drilling services, a leading well-completion business with a deployed capacity of 45 active spreads and 3.3 million horse power of pressure pumping capacity, and NEX’s Power Solutions business. Nearly two thirds of the deployed fleet are dual fuel capable. In pressure pumping, it will be slightly bigger than Halliburton. A 4th quarter close is expected, and the company is targeting at least 50% of FCF distributed to shareholders.
Wall Street’s Opinions on the Deal.
Citi downgraded NexTier to Neutral from Buy, aligning with the bank's Neutral rating on Patterson, citing weakening industry fundamentals and likely negative revisions ahead that already are discounted in the current stock price. They applauded the merger and see longer-term value in the stocks but likely not realized until the industry slowdown ends.
Citi sees a flattish U.S. drilling environment in 2023 while supply should expand modestly as drillers reactivate capacity, which suggests stagnant spot rates at a minimum but with risk of downward pressure and negative revisions if supply growth does not abate.
J.P. Morgan analysts said the deal may be a response to the deteriorating North American fundamentals, with demand for drilling and fracking services fading against a background of lower commodity prices, notably for natural gas.
JPM said frac levered stocks have meaningfully outpaced their U.S. land drilling peers YTD, as frac fundamentals have held on better than the demand for land rigs.
RJ said it looks like a pretty fair deal. The merger is expected to close in 4Q23, and we do not expect any antitrust issues. Moving closer to a $5 billion market cap company should in theory catch the eyes of a wider investor base.
Getting Out of Hand. Carly Tefft, a 2015 graduate of Berklee College of Music, recently relocated to Nashville in pursuit of her music career. While she still considers Massachusetts her home, Tefft has garnered significant recognition, being hailed as a “phenomenon” by the Boston Globe and receiving praise from Matty in the Morning on Kiss 108. However, Tefft’s performances at Harvest Gallery in Dennis, MA were abruptly canceled after she sang the national anthem at an event hosted by a former president, causing her presence to be deemed “threatening” and compared to lewd art. “Still, this was an opportunity to bring people together with the National Anthem by a former president,” she said. “For me, that’s full of positives.”
Blowin’ In the Wind. Much of Scotland and Northern Germany’s power comes from wind, which is why when the wind didn’t blow for several days over the past 18 months, coal, natural gas and overall electricity prices spiked. The Danish company Ørsted is working on a large 3MW offshore wind project that is one of the largest in the world. The CEO will continue to support the project even with rising costs, but warned that the British government “needs to do more to support the sector”. The project off the Yorkshire coast could be “de-railed due to financial pressures”. It seems that the electricity prices the UK government offers to developers are not high enough to absorb surging costs. “If a project which is by far the biggest in the world, with all these opportunities, can only become investable after having worked intensively for a year with everything, it’s hopefully also a stark reminder to the British government that something must change,” he said. This, after the head of the Labor Party promised lower energy prices as part of their plan. The UK has already instituted a maximum that consumers are required to pay, with the government picking up the rest of the tab, which would have bankrupted the UK if Europe had seen a normal winter. Rising interest rates and supply chain costs are adding to the problem. The CEO of RWE’s global offshore wind business told the Global Offshore Wind 2023 conference in London this week that the costs of developing offshore wind have risen 20-40 percent since Russia’s invasion of Ukraine. He added that he did not expect costs to fall anytime soon. Ørsted’s UK head said there was a “real and growing risk” projects could be put on hold or abandoned. Robert Bryce tracks renewable projects that did not get approval to proceed and the list is over 200 lines long.
No Sugar-Coating. The Secretary General of the U.N. Antonio Guterres spoke at a conference this week. He is the former head of the Socialist Party in Portugal. The following statements are from the U.N. website.
“We are hurtling towards disaster, eyes wide open”, he said. “It’s time to wake up and step up.”
He said limiting the global temperature rise to 1.5 degrees Celsius is still possible but will require a 45 percent reduction in carbon emissions by 2030.
However, current policies will lead to a 2.8°C temperature rise by the end of the century, which “spells catastrophe”.
“But the fossil fuel industry and its enablers have a special responsibility,” he said, noting the record “$4 trillion windfall” in income last year.
“Yet for every dollar it spends on oil and gas drilling and exploration, only four cents went to clean energy and carbon capture combined. Trading the future for 30 pieces of silver is immoral,” he said.
He called for immediate global action toward net-zero emissions, which “must start with the polluted heart of the climate crisis: the fossil fuel industry.”
Countries must progressively phase out fossil fuels, “moving to leave oil, coal and gas in the ground where they belong”, and massively boost investment in renewable energy, he said.
The Proposals. The UN chief has previously proposed establishing a Climate Solidarity Pact under which rich nations would support emerging economies by cutting emissions. Another proposal for an Acceleration Agenda calls on governments to phase out coal by 2040, end public and private international coal funding, and shift subsidies.
Garbage. But don’t worry. We are staying GREEN! We have written several times about Germany buying tons of America’s forests and wood pellets to import and burn to generate electricity. Burning wood is worse for the environment than coal but since it is considered “sustainable”, it’s okay. Now this. Millions of tons of plastic waste are being burned to generate electricity and has been branded 'green energy'. Ignore the point that they produce more CO2 than gas-fired plants and some emit more than coal fired plants. The UK has 57 plants that incinerate plastic and emitted more than 14 million tons of CO2 last year, half from plastic and the rest from paper, wood and food waste, which are considered “renewable” because trees are planted to replace them. So much for recycling.
Times Suck. Recently while traveling, I booked a rental car and when I arrived at the counter, they asked if I wanted a Tesla or other EV. I have driven a Tesla before and they are very cool and fast, but I passed on the offer since I had no idea where in town I could charge it. I felt vindicated recently by an article titled “Car-Rental Companies Are Ruining EVs - Good luck charging your surprise electric rental car”. An EV was the only car left, the renter took it and then spent an hour finding a charging spot and waiting their turn, and then one hour charging. Of course, in California the utility companies are telling EV owners NOT to charge their vehicles overnight because if the sun doesn’t shine and the wind doesn’t blow they can barely keep the grid operating.
Headlines.
A Church of England school teacher told a pupil she was “despicable” after she refused to accept that her classmate identifies as a cat.
More than 20 people were shot in a deadly mass shooting at a Chicago Juneteenth event to celebrate the emancipation of black American slaves.
Offshore rig contracting activity begins to lag as available assets dwindle but May was a busy month, with 40 new contracts issued.
Russia isn’t playing fair or being truthful on production cuts. – (Wow, what a complete shock!! Russia??)
Scotland’s Push to Secede from UK Won’t Go Away.
True crime podcasts accounted for an astounding 24% of the 451 top-ranked podcasts in the U.S., according to a new report from Pew Research Center.
Oil Pricing Trends. The Covid disaster is obvious. The issue is that in the near-term, the previous trajectory has gone flat, and the market does not like flat.
LNG. Remember when the LNG boom was going on and everyone was going to make money because we have structurally lower natural gas prices and have aggressively built capacity? And then with Russia cutting off natural gas pipelines, the optimism for LNG soared. Prices mid-last year were $37+. Last week’s spot price hit $9.21, and demonstrating how volatile it has been, that is only a 12-month low. China had been the top importer of LNG but conceded that position to Japan during Covid. There has been talk about China implementing some plan to support aggregate demand, but China’s rebounded demand is still below 2019 levels. In response to high LNG prices, Japan and South Korea are working to increase the contribution of nuclear energy. Pakistan can’t afford LNG at recent prices and is moving back to coal. Longer term, the demand for natural gas will continue to grow, displacing coal for years to come as well as meeting organic demand growth. But in the near–term, natural gas has the same problem as oil – right now there is plenty to go around. “If we don’t start increasing capex spending now, the under-investment of the last several years will cause prices to spike.” I started hearing this about 7-8 years ago most loudly but have heard it for many years. Something always stops the extremes from happening. But, longer-term, the statement is right. When that happens is anyone’s guess as history shows. What I like most is the inevitability of it.
Headlines. On one day. In one publication.
As Iran Emerges from Isolation, Israel Is Feeling Cornered.
Iran and Saudi Plot Path to End Rivalry That Drove Regional Wars.
Iran Steps Up IAEA Cooperation Even as Uranium Stockpile Surges.
Painful Education. JP Morgan did a deep dive to better answer the $64,000 question – what is the durability of U.S. shale inventory and implications for shale breakevens along with producer capital efficiency? The report estimates that well productivity in the Delaware Basin declined by 9%-10% and 6%-7% in the Midland Basin, both driven by more Tier 2 and 3 drilling and parent/child impacts. The study indicates that among top operators, there is 11 years of undrilled inventory in the Midland Basin with economic breakevens below $55 per BBL including ~4.5 years of below $50 per BBL inventory, and they estimate ~12 years of undrilled inventory among top operators with economic breakevens below $55 per BBL including ~4 years of below $50 per BBL inventory for the Delaware. According to the report OXY, COP and FANG have more than 20 years of inventory and CTRA, CVX, MRO, DVN and CPE all with 12-13 years of inventory depth. It is interesting to see the haves and have-nots. It reminds me of another piece in today’s issue of inventory depth. Many see it as the reason the private equity backed E&P entities keep getting sold. They were the most active drillers in 2021 and 2022 so they would naturally have less gas in the tank going forward. We will see.
Tough Nut to Crack. Woodside, the Australian oil company (60%) and partner PEMEX (40%) have made the final investment decision to develop the Trion Oilfield, with first production expected in 2028. The development is expected to cost $7.2 billion with a target of 480 million barrels equivalent. With six successful wells drilled so far and being developed by an FPSO, production is expected at 100,000 BOPD. “Trion has an expected carbon intensity of 11.8 kgCO2-e/BOE average over the life of the field, which is lower than the global deepwater oil average, and will be subject to Woodside’s corporate net equity Scope 1 and 2 emissions reduction targets.” Several things – we are going to have to start talking about emissions reductions as noted by the company’s comments and increasing pressure, by investors and the SEC, to figure out “fair”.
The Pendulum Swings. Two years ago, every conference and every conference call focused on ESG. Webinars, research, conferences were all almost solely ESG focused. I found this chart particularly interesting. LNG. Remember when the LNG boom was going on and everyone was going to make money because we have structurally lower natural gas prices and have aggressively built capacity? And then with Russia cutting off natural gas pipelines, the optimism for LNG soared. Prices mid-last year were $37+. Last week’s spot price hit $9.21, and demonstrating how volatile it has been, that is only a 12-month low. China had been the top importer of LNG but conceded that position to Japan during Covid. There has been talk about China implementing some plan to support aggregate demand, but China’s rebounded demand is still below 2019 levels. In response to high LNG prices, Japan and South Korea are working to increase the contribution of nuclear energy. Pakistan can’t afford LNG at recent prices and is moving back to coal. Longer term, the demand for natural gas will continue to grow, displacing coal for years to come as well as meeting organic demand growth. But in the near–term, natural gas has the same problem as oil – right now there is plenty to go around. “If we don’t start increasing capex spending now, the under-investment of the last several years will cause prices to spike.” I started hearing this about 7-8 years ago most loudly but have heard it for many years. Something always stops the extremes from happening. But, longer-term, the statement is right. When that happens is anyone’s guess as history shows. What I like most is the inevitability of it.
Headlines. On one day. In one publication.
As Iran Emerges from Isolation, Israel Is Feeling Cornered.
Iran and Saudi Plot Path to End Rivalry That Drove Regional Wars.
Iran Steps Up IAEA Cooperation Even as Uranium Stockpile Surges.
Painful Education. JP Morgan did a deep dive to better answer the $64,000 question – what is the durability of U.S. shale inventory and implications for shale breakevens along with producer capital efficiency? The report estimates that well productivity in the Delaware Basin declined by 9%-10% and 6%-7% in the Midland Basin, both driven by more Tier 2 and 3 drilling and parent/child impacts. The study indicates that among top operators, there is 11 years of undrilled inventory in the Midland Basin with economic breakevens below $55 per BBL including ~4.5 years of below $50 per BBL inventory, and they estimate ~12 years of undrilled inventory among top operators with economic breakevens below $55 per BBL including ~4 years of below $50 per BBL inventory for the Delaware. According to the report OXY, COP and FANG have more than 20 years of inventory and CTRA, CVX, MRO, DVN and CPE all with 12-13 years of inventory depth. It is interesting to see the haves and have-nots. It reminds me of another piece in today’s issue of inventory depth. Many see it as the reason the private equity backed E&P entities keep getting sold. They were the most active drillers in 2021 and 2022 so they would naturally have less gas in the tank going forward. We will see.
Tough Nut to Crack. Woodside, the Australian oil company (60%) and partner PEMEX (40%) have made the final investment decision to develop the Trion Oilfield, with first production expected in 2028. The development is expected to cost $7.2 billion with a target of 480 million barrels equivalent. With six successful wells drilled so far and being developed by an FPSO, production is expected at 100,000 BOPD. “Trion has an expected carbon intensity of 11.8 kgCO2-e/BOE average over the life of the field, which is lower than the global deepwater oil average, and will be subject to Woodside’s corporate net equity Scope 1 and 2 emissions reduction targets.” Several things – we are going to have to start talking about emissions reductions as noted by the company’s comments and increasing pressure, by investors and the SEC, to figure out “fair”.
The Pendulum Swings. Two years ago, every conference and every conference call focused on ESG. Webinars, research, conferences were all almost solely ESG focused. I found this chart particularly interesting.
Cracked Open. Kodiak Gas Services, the industry’s 3rd largest gas compression company, announced an IPO valuing the company at $1.65 billion. The company will issue 16,000,000 shares of its common stock (plus the green shoe) anticipated between $19.00 and $22.00 according to the S-1. The shares will trade under the symbol “KGS”. And they are bringing big guns and many of them. Goldman Sachs & Co. LLC, J.P. Morgan and Barclays are serving as lead book-running managers, BofA Securities, Raymond James, RBC Capital Markets, Stifel, Truist Securities and TPH&Co. are serving as book-running managers. Comerica Securities, Fifth Third Securities, Inc., Regions Securities LLC, Texas Capital Securities, AmeriVet Securities, Guzman & Company, R. Seelaus & Co., LLC and Siebert Williams Shank are serving as co-managers for the offering. Aris, a water solutions company, was the first IPO this cycle followed by ACDC ProFrac, a pressure pumping company. And now gas compression. We have followed the sector for decades. Kodiak does a good job in a very tough sub-sector. Proceeds from the $325 million offering will be used for debt reduction and not asset expansion, and according to one comment – “will establish Kodiak’s public market value, focusing any company sale negotiations”. It is being discussed as a dividend play rather than a growth play with little asset additions and ~40% discretionary cash flow yield.
Private Deals Work. Allied Petrochemical is a leading provider of innovative distillation services and custom chemical contract manufacturing. The distillation business (often called “re-refining”) recycles waste streams and off-spec fuels into fuel-grade products, enabling a circular economy. The contract manufacturing segment provides unique reaction chemistry and tolling services for many industrial markets. Within this segment, Allied has been a leading manufacturer of sulfonic acid for over 15 years. The Company was founded in 2000 and is based in Alvin, Texas. The company is being acquired by Black Bay Energy Capital, a very well-known Private Equity shop. PPHB is an independent investment banking firm providing financial advisory services to middle market companies, who advised Allied in the transaction.
Aging Well. “Activity on Tier 1 acreage in some mature U.S. shale basins has slumped to an all-time low, with areas such as the Bakken and Eagle Ford seeing a shift of activity away from the core of the basin, whereas operators continue to concentrate on core positions in the Permian play. We also note that in the Permian, Tier 2 positions are similar to top tier positions in terms of returns, while even Tier 3 locations remain attractive in the current oil price environment.” - Rystad.
Deals Everywhere. Civitas, better known in Denver than in Houston and a market cap of ~$5 billion, has focused on the DJ Basin in Colorado and operates over 500,000 acres with 160,000 BOE per day. So, when it was announced that Civitas was spending almost $5 billion for its entry into the Permian, buying two portfolio companies of NGP Energy Capital, Tap Rock Resources and affiliates of the Hibernia Energy III partnership. Basically, doubling its size. It will add about 68,000 net acres in the Midland and Permian Basins, with proven reserves of 335 million BOE and will add almost another 100,000 BOE per day. And in the era of “depth of inventory” being a fast-growing issue, the combined companies will add about 800 gross locations with two-thirds having an IRR of more than 40% at $70/WTI and $3.50 Henry Hub. Reserves will be basically 50/50 crude oil and natural gas giving the combined company a very balanced production mix at an advantageous time. Prices are low, activity is slowing. This is when aggressive strategic deals are done. $300 million in non-core assets went on the block and the Civitas share buyback was cut in half from $1 billion. All the best.
Science Fiction. The following headline caught my attention - Uber rival Bolt will launch thousands of AI-powered robots with partner Starship to deliver food orders starting this year. Bolt co-founder Ahti Heinla expects them to “take over the urban logistics market”. An AI partner called Starship?? But think about it. Very smart and able to learn, robots are going to be driving to deliver your pizza to your house before the big game. Okay, so first, delivering pizza isn’t rocket science. But think of how many food delivery people there are. Think of all your food delivery options – GrubHub, UberEats, Door Dash, Caviar, Good Eggs, Gopuff, Imperfect Foods, Instacart, Postmates, Shipt – in call, we found 34 food delivery companies, and this doesn’t count any restaurants that deliver for themselves. No loitering, no getting lost, no getting sick, no demanding more pay. Robots certainly have their attraction. But it isn’t science fiction anymore. Robots are delivering food to your house. What else can they do??
A Little Warm. Dallas and much of the country has been experiencing very hot weather but is it Houston hot or Phoenix hot? Dallas appears to be challenging Houston on this one. Note in the chart below how Dallas is tying records! It must be climate change!! Which makes the 1977 event a little tough to understand. Unless this isn’t being caused by climate change.
News Flash!!!! Hunter Biden will plead guilty to two misdemeanor tax crimes after a five-year probe into his business dealings. He failed to pay more than $100,000 in taxes on at least $1.5 million in income in 2017 and 2018, prosecutors claimed.
Snippet. China and Cuba are negotiating to establish a new joint military training facility on the island, sparking alarm in Washington that it could lead to the stationing of Chinese troops and other security and intelligence operations just 100 miles off Florida’s coast, according to current and former U.S. officials. Venezuela gave Cuba free oil and Russia propped up the economy. They have now lost most of that support. When you are hungry, you will take help from anyone.
Hiring Spree. We all know about Scope 1 and Scope 2 emissions reporting. Last year, the SEC proposed rules for reporting Scopes 1, 2 & 3 and got more comments during the comment period than any other rule ever proposed. Most of the push to have Scope 3 emissions was kicked down the road for a bit, considering how onerous it can be for a company. And why worry now? Because about half the year is gone and the SEC said they would make a ruling decision this year. So, what are Scope 3 emissions? The EPA says Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts within its value chain. Specifically, Scope 3 includes the indirect greenhouse gas (GHG) emissions of a company from all sources, with the exception of direct emissions from an organization’s operations (Scope 1) and indirect emissions from purchased energy (Scope 2). Scope 3 emissions fall into 15 categories that are divided into two groups: one, referred to as ‘upstream’, focuses on the goods and services a company and its employees consume while doing business; and the other involves the ‘downstream’ GHG emissions of the goods and services that a business produces. Common Scope 3 emissions are the goods and services a company purchases, the distribution and use of its own products by customers, the disposal of its discharges and waste, and employee commuting or business travel. For our industry and many others, it entails calculating the emissions of the car in Indonesia that uses gasoline made from the oil you produced and the emissions from the LNG you shipped to Japan as it is used for power generation. It is so far reaching that entire new departments of companies will be required to track, quantify and collect all the data required. Scope 3 emissions may be responsible for as much as 88 percent of the overall emissions from the oil and gas industry, due largely to distributing the end product, the emissions created in their use and disposing of the waste according to the WSJ.
Oh, Right. And much like ESG, which had its beginnings in Europe, the EU’s Sustainable Finance Disclosure Regulation requires financial entities to start measuring companies’ Scope 3 emissions as of Jan. 1, 2023, and the Directive will require most companies, estimated at 50,000 by 2024, to report Scope 3 emissions, rolling it out from 2024 to 2026. That won’t make anyone feel any better. Buckle up.
Perspective. A Senior Analyst - “We expected the U.S. rig count to moderate this year, but clearly miscalculated the impact of a weak near-term natural gas environment, private operator slowdown due to inventory challenges, and softer relative oil prices so far this year. We’re updating our rig count for 2023 to an average of 693 rigs from 750 rigs and in 2024 to an average of 671 rigs from 755 rigs. We’re also publishing a 2025 rig count estimate of 737 rigs.” They think the rig count will continue to drop well into next year and with current commodity prices, who can argue. One notable comment is the “inventory challenge” one. We have written about the lack of inventory depth in Tier 1 shale acreage. It is like growing old- we know it will happen and we are surprised when we do. When the shale oil boom took off, many companies noted that they had 15 years of Tier 1 acreage, which was unheard of in the conventional oil world pre-shale. Success rates went to 100% since no dry holes were drilled. Production per anything – per well, per foot, per acre – were all headed up and did so for years. We go from a full head of hair to a thinning scalp and suddenly one day you are faced with a comb-over. No bueno. Without depth of inventory, your attractiveness changes. The rig count projections? Miscalculated once? It is impossible, especially when we just went through a period of slam-dunk optimism only to be disappointed and surprised. If U.S. oil production doesn’t grow?? OPEC+ has 3+ million barrels taken off the market, Iran has another million or so if sanctions are relieved, Brazil production is growing again. And we haven’t even talked about demand yet. Yes, we will be around, critical and profitable going forward but it has never been a straight line.
I Don’t Need No Stinking Sanctions! So, the EU put a price cap on Russian oil and the U.S. has quit buying its previous and small amount. The idea was to starve Moscow by restraining crude oil prices, but in addition to selling spot supplies to China and India, now the Russian oil company Rosneft, has issued an open tender for oil and refined products. It is basically an auction and while U.S. based and most EU companies cannot openly participate, oil and commodity trading houses consider this their core expertise. And it is a way around the sanctions. So, the markets stay more fully supplied and prices decline slightly, right? And Russia continues to generate cash for continuing the Ukrainian war. It is Rosneft’s biggest committed forward sale in years but it’s a smart way to evade the sanctions. This was tried soon after the war started but there were no real takers. This time, it is said that there was ample bidding demand.
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.
