Things I Learned This Week About Spring Break

March 17, 2023

Rites Of Spring. So, Monday morning, I leave to go run some errands. When you are “retired”, every day is Saturday. I get that. I knew it was Monday morning, but it felt just like Sunday morning. Was it just Daylight Savings Time? Did I miss a day? The streets were empty. No traffic at all, even on roads and intersections that are always packed. It was surreal. And then I realized – It’s Spring Break! Many people are out with their children, and if their children are too old for Spring Break, their children aren’t and so it is a grandparent’s dream week. I’m in Limbo. My kids are in college and the oldest one hit the beach in the Dominican Republic with 25 of her closest friends. She didn’t have any intention of spending the week with her parents, but nor did she ask the parents for a penny to go! The youngest is just a freshman and at Colorado at Boulder. Lift tickets and ski rental are expensive enough that we are all going skiing so the human ATM can accommodate his break. The beach looked cheaper. But this is a week to be enjoyed. Restaurants have no lines, the malls aren’t empty, but you can now find a parking place. Spring Break is a great week for those who celebrate it and those that celebrate all the people celebrating it somewhere else. Remember Ft. Lauderdale anyone?

What a Week! Banks have started to fail but our fearless leaders are telling us there is nothing to fear. Except of course, fear itself. That isn’t original. We have written in the past about the possibility of pending recessions. Some say the Fed has engineered a soft landing and without going into a recession, but to do that, they had to re-define “recession”, since by historic criteria, we have been in one. But I too was congratulating the Fed for it has truly been a soft landing. So far. An equity recession is painful. Stock prices get cut, retirement funds decline, companies have seen their values decline along with their access and cost of capital along the way. Painful. A credit recession is different. This is “honey, our next egg got cut in half”, to “honey, they are coming tomorrow to take the house”. No problem some say. The consumer will bail us out. So, credit card debt is at an all-time high and the savings rate has dropped dramatically. The line to get into the Louis Vuitton store is gone. Now we are seeing banks fail. The real risk with that is we don’t listen to our fearless leaders and cause a run on the banks, drain all the excess liquidity out of the system in record time, and cause a domino effect.

Risks From Here. There is no question the bank failures were bad. My old shop, Credit Suisse, reported a material weakness, borrowed $50 billion from the government, and will likely be owned by UBS later this year, though both banks say they are opposed to calls for a tie-up. The two banks that failed didn’t hedge into a higher interest rate to protect the value of their longer dated debt. First Republic got bailed out Thursday when other large banks deposited $30 billion into it to keep them afloat. Doesn’t sound like many, but it only takes a few. The problem is that banks will be much more unwilling to lend, whether it is energy, industrial or tech. I am not meaning to be the face of doom, but I remember well in April 2008, when every equity guy was saying the stocks were going to double and the debt guys were warning of missed payroll. Equity investors are optimists. Credit investors want their money back. They would like a return, but they really want their money back. Getting it back, the pain and dislocation that it causes, can be brutal. Sentiment, be it fear or optimism, drives the market, especially in the short term. The Administration is trying to keep sentiment positive, but the underlying reality always wins out. Globally, borrowers are more in the hole than ever before with the total debt owed by households, businesses and governments standing at $290 trillion, up by more than one-third from a decade ago, according to research by the Institute of International Finance. Meta, home of Facebook, announced they are laying off another 10,000 people on top of the 11,000 already gone. Only about 10% of mortgages are floating rate.

Wait, You Mean There Still IS an Oil Business? Other than comments about the breakdown of oil prices, there has not been a great deal of industry buzz, fun rumors, or big strategy announcements. Nothing really. Of course, as we mentioned, it is Spring Break in most of Texas, but the fields are still operating, wells are being drilled and fracked. We are just working away. And that is good. We have done our part for the economy by reducing debt and paying our people well. If we go into a recession, activity could fall but we’ve been there a few times recently. The macro trends, barring getting hit by an asteroid, indicate longer-term demand and higher prices. There is no telling how high. I have seen $250 and $22 forecast in the last four years. Maybe three. If the stock prices go down, it is never good, but you only have a loss if you sell it, again, the trends are positive, and from a company perspective, if you stay cash flow positive, it’s like going on a diet. Granted, a very strict diet, but better than dead.

I Worry Too Much. Credit recession? Have I mentioned the global hostilities that are heating up. It’s like our friend who gains two pounds a month. We see him all the time and never notice. We see a friend not seen in a year, and he is stunned by the weight gain. Facing reality. We have been piling up incidents and they keep getting more serious. Russia knocked down a U.S. aircraft that was in international space and then beat us to the recovery. Now I admit, after watching Maverick, that before an ”enemy” aircraft gets within striking distance of a target, you have to discourage that. But even that says we are considered the ”enemy” such that Russian fighter jets can treat us as such. I am always of the belief that the extremes never happen. The worst-case scenario, or the best-case scenario, are things I have only seen on spreadsheets. And as an optimist, I am sure things will work out. I don’t want to lose my life savings and I don’t want anything but good for my children and shortages of coffee and toilet paper were major sacrifices. But it all worked out. I lost money but not all of it, the kids are surprising me, and I’m well stocked! Be careful.

Stats. This week, the U.S. rig count dropped by 3 to 746 while the international rig count increased by 15 to 915. WTI broke below $70 on Wednesday and technical analysts are called for $64-$65 near term.

EIA This Week.

U.S. crude production: indicated at 12,200 MBPD, no change from previous week, and up 600 MBPD from same period last year.
U.S. natural gas inventories saw a withdrawal of 58 bcf, modestly below the consensus expectation for a withdrawal of 62 bcf and below the five-year average withdrawal of 94 bcf.
Refinery runs 15,398 MBPD, up 431 w/w and down 203 y/y. Utilization at 88.2%. (turnaround season is ending and this number should trend higher).
Crude Imports (net): 1,189 MBPD, down 1,720 w/w and down 2,270 y/y. Brent-WTI spread at ~$6.3/bbl, flat w/w.

An Interesting Piece in My Inbox. I was scanning emails, giving my ‘delete’ key a workout, when I glimpsed at a few words that caught my attention. I have long argued that the technology with which we run our companies is as critical as the technology we supply to our customers. As we have moved through the digital world, there are now many good examples of this and over the past couple of years, supply chain issues have been paramount in effectively running a business and serving customers. There are now master’s and PhD programs about supply chain. Then this statement – “The future of supply chain is all in the relationships.” The relationship between suppliers and customers are termed ‘partnerships’, especially when they work. The hyper-volatility of the oil and gas industry has made it very difficult for ‘partnerships’ to last very long with some cyclical extreme derailing the effort. The fact that the oil industry’s historical suppliers have increasingly turned to less cyclical industries for their own economic well-being. This is the line I liked the best – “One of those changes is a move from thinking about suppliers as partners to thinking about suppliers as a source of strategic advantage. In that shift, planning is not about diversifying risk by diversifying suppliers but about deepening relationships to create a mindset where companies jointly plan their futures together.” What a spectacular idea! And a very noble goal. It’s like net-zero – we may never get there but there is going to be a lot of activity trying. The email was from Rystad, advertising their March edition of Rystad Talks Energy. The date is March 30. https://pages.rystadenergy.com/Session-2-Rystad-Talks-Energy-March-2023?utm_source=Sugar+Market&utm_medium=Email&utm_campaign=Rystad+Talks+Energy+Mar+2023

Bailouts. It is amazing how some words change meaning over time. Everyone, especially the administration – but the financial companies too – are going out of their way to avoid using the word “bailout”. It has a really bad connotation after the financial crisis in 2008 when the government used taxpayer dollars to “bailout” too-big-to-fail banks. No executives’ trials were showcased. There appeared to be little accountability. The people were not happy. And no one wants them unhappy now because that could snowball into lack of trust, and then you have a run on the bank(s). The administration has pushed hard on the idea that the taxpayer won’t foot a penny of the “help” extended to these banks. Directly anyway. Keep the sentiment positive!

Headlines.

Protests erupt as France forces higher retirement age to 64.
While Yellen Assures, Banks Run.
Offshore spending looks to surpass pre-pandemic highs within the next two years.

Just So You Know. We have now all heard the story of the three Russian planes honing in on a U.S. Reaper drone with one plane clipping the wings of the Reaper, causing it to become unstable so the U.S. brought it down harmlessly in the Black Sea. Clip the wing? Just so you know, a Reaper drone is 36 feet long, 12 feet high and has a 66 foot wingspan and has a takeoff weight of 5 tons. We hear about the Iranian drones being used in Ukraine and everyone thinks of the drones Amazon has dropping packages in your back yard. Not even close. It is the size of a school bus with wings.

Little Guys Go First. According to a study done mid-last year, 27 companies submitted data that showed they had significant increases in debt costs over the past year or so and that two-thirds have debt costs over 10%. Ukraine leads, with their borrowing cost going from 10.2% to 46% since the beginning of last year. Ethiopia and Zambia have both seen their debt service costs increase by 25%. Of the 27 lower-income governments with public information available on their foreign currency bonds, Debt Justice found nine had yields over 20%: El Salvador, Ethiopia, Ghana, Maldives, Pakistan, Sri Lanka, Tunisia, Ukraine and Zambia. A further 10 had yields between 10% and 20%: Angola, Cameroon, Egypt, Honduras, Kenya, Mongolia, Nigeria, Papua New Guinea, Rwanda and Tajikistan. And you might just shrug it off with the idea that these are all small countries, who have other issues as well. But remember the domino effect we discussed this week. While these countries are small, not so are the banks and financial institutions that own the debt. Combine this with a very strong dollar over the last year which compounds the issue since most debt is dollar denominated.

A Big Win, For Several Reasons. In a significant win for our industry, the U.S. government green-lighted the Conoco Willow project in Alaska. Finally. But one can only imagine the turmoil. President Biden has been a much farther left president than the moderate he seemed to be during the election campaign and even though the project passed, every single review and environmental impact statement required, the government still cut the project from five well pads to three, which makes the project still profitable but more marginally so with the fewer pads. You have to believe that the environment lobby didn’t think that was quite enough. The fact that it will provide 180,000 barrels per day of secure energy production, that will be needed well into the future, probably had very limited impact. Five pads vs no oil. Now three pads and oil. Compromise. But to many environmentalists, the extremists, was oil production stopped today and Stop Oil in the UK has been pushing that country to not approve any further licenses or activity. I asked for world peace. None of us are getting what we want. But the $8 billion project, that will employ 2,500 workers, widely supported by the State of Alaska sounds like it would have a chance. But that did not stop an environmental group from filing a 63-page federal lawsuit to stop the approval of the process. The suit asserts that the Interior Department and its agencies violated an array of laws when authorizing the project. They can delay but not likely persevere. Net Zero is a great goal and there is a lot pushing the world to get there. We would bet on the reality being delayed while people choose their standard of living over uncertain math.

Power Play. In what was a stunning political move, China has brokered the return of diplomatic relations between Saudi Arabia and Iran. Amazing. Right after that, Iran announced it would no longer support the Houthis in Yemen, who have been fighting Saudi in the south for years, backed by Iran. It even adds to the importance of the move. And brokered by China. Not us. We don’t talk to one and we don’t know how to talk to the other. China buys much more of the oil that flows through the Strait of Hormuz than we do but it is our navy protecting the region, but it appears our infuence, and need, is declining. Now is it being suggested that President Xi, in his visit to Russia next week, will speak to President Zelensky by phone, and will try to go two-for-two and broker some agreement between Russia and Ukraine. That might be wildly optimstic but anyone who can broker peace between the two will be recognized as a global power leader. A man who had lived in virtual global isolation until the Covid epidemic hit, he has started to improve his profile in the region at various meetings and summits, one where Xi referred to himself as a “statesman” who should “think about and know how to get along with other countries and the wider world.” We are being challenged. It was inevitable. And looming.

Practice While Preaching. Michael Bloomberg is giving hundreds of millions of dollars to groups that want to ban gas stoves. Last year, his private jets burned 328,000 gallons of jet fuel. The average American vehicle owner burns about 489 gallons of gasoline per year. And we are now worried about gas stove fumes effecting people with asthma.

Caught My Eye. As an information and data freak, I always like looking at different uses and applications of information. So a friend told me about a “wellhead transparency engine”. I am an engineer and I get the first and third word but “transparency”? And all of them together? All fancy words. The transparency is on price. He can pull up the price paid, at the wellhead, for just about every well, operator, lease, buyer – you name it. Really cool. So? It seems that not everyone gets the same price for their oil. Not news. But if you know what XYZ was paying you for your oil and that he was paying Bubba, your brother in law, 30 cents a barrel more?? Bubba isn’t talking. I am a big believer in finding an edge, in life and business. Knowing what other people are getting paid, so I can either shut up or complain, is an edge. BarrelHub. https://bblhub.com/ .

Getting Closer. Core inflation, as measured by the CPI, rose 0.5% last month, coming in stronger than expected. Remember that this metric excludes food and fuel, but both of those are seeing declines right now. Food and energy prices are exempt from the calculation because their prices can be too volatile or fluctuate wildly. Food and energy are staples, meaning demand for them doesn't change much even as prices rise. It is important and watched by many investors to try and determine what the Fed will do with interest rates. The market had been expecting a 50 basis point increase after the employment numbers and other watched indicators were surprisingly strong, or at least stronger than had been expected. Now with banks failing, even if it stops at three banks, that will likley soften the Fed’s raise to only 25 basis points. The Fed meeting is next week.

Snippets.

Canadian private equity firm Ethical Capital Partners said it had acquired Pornhub owner MindGeek.
Premium gasoline is going up as U.S. and European refiners scramble to get enough octane to make high-quality fuel.
Tiger Global marked down the value of its private company values in its venture capital fund by 33% in 2022.
It is 15 years to the day since Bear Stearns went under.
Venture Global reached FID for the second phase of Plaquemines LNG, which will have ~1.4 Bcf/d of feed gas demand.

How Common. First Republic is a San Francisco based bank, that caters to wealthy clients (as opposed to tech startups) in major cities across the country, two-thirds of their deposits are uninsured and now it looks like the $70 billion other banks were “asked” to deposit won’t be enough. Ouch. Only 15% of the banks $212 billion in assets are in investment securities, mostly somewhat illiquid municipal bonds. The rest is mainly single-family mortgages, including adjustable rate and jumbo loans. Even I see the problem with this. Mortgage delinquencies are rising, and home values are not. What is very worrisome to me is that in the recent weeks, banks have borrowed $165 billion from two Federal backstop facilities. It isn’t endless and this isn’t over.

Another Nail. Plans to burn hydrogen instead of natural gas risk being derailed by droughts and water shortages across Britain, the Government's own climate advisors have warned. The Climate Change Committee (CCC) said that producing hydrogen can require “significant” amounts of water, but resources are likely to be stretched because of a lack of rainfall. Its warning represents a significant setback to the plans for net zero, which rely heavily on hydrogen for heavy industry and heating.

It made the comments in a wide-ranging report that also warned the Government does not yet have a coherent strategy to make the electricity market carbon neutral by 2035. Lord Deben, chairman of the CCC, said the government was “asleep at the wheel” on net zero, adding: “We risk losing our early lead at the worst possible time.” The CCC said: “Water consumption for energy production is projected to reduce until 2025, after which it is projected to increase to 2050 as hydrogen production ramps up.” - David Blackman. Note the name of the Committee – Climate Change Committee. Not Oil & Gas, or Energy. Climate Change. And not one person’s agenda. A Committee. We are seeing noble and honorable and even desirable goals being set with no practical idea of how to make it so.

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 service 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.