March 21, 2025
Things I Learned This Week in SoCal
Gotta Be Cool. All of us cool people call it SoCal. For the rest of you, that is Southern California. San Diego. It’s not Beverly Hills and I try not to look like a hillbilly. Works occasionally. Thanks to my good friend John, I have been introduced to the world of Chi-Chi. I have spent a great deal of time in San Diego and once rode my bike from LA to Ensenada and stayed in SD for days coming back. It cemented a place in my heart. But this isn’t beach, it is rolling hills and mountains. No oil rigs in sight. It is California after all.
There isn’t much to get away from. Oil prices around $67 keeps most in business and everyone on their toes. Harold Hamm said that for “Drill, Baby, Drill” oil needs to be $80. “Be” not “hit.” There are still a number of oil bulls around and they may eventually be right, but it doesn’t look like it will happen this week. Or next. We feel the equilibrium is closer to $75. E&P makes money and attractive returns. OFS stays challenged but does better. There are still a number of companies that have negative earnings but positive EBITDA. But that is supposed to be a short-term event with shareholder equity on the balance sheet getting larger, not smaller over time. I understand that EBITDA is a better operational valuation methodology, but if you are still losing money, having negative net income, there are other problems than just operational. Midstream has almost guaranteed volume growth over the next several years and consolidation should continue in that sector.
Tightening Screws. President Trump is making a move, putting the fourth round of sanctions on Iran as well as several people and companies, primarily those that buy Iranian products, including one Chinese company. It helped oil prices by $1 on the news but it is the 4th round of sanctions, and everyone knew it was coming after his criticism of Biden for letting Iran cheat. OPEC+ can always accelerate their returning of oil to the market, and we see little reason for any real change in our oil price outlook through next year.
Uncertainty. The word of the day. Okay, week. Okay, now months. What did you expect? Politics, both domestic and abroad, have impacted economic growth. The Fed held steady. Tariffs aren’t likely to make things cheaper in the short run, but we have been getting taken advantage of on trade for some time. The tariff Canada charges for imported dairy products from the United States? 250%. We have had to consider having to drink American wine, American beer, and we had to miss guacamole for a bit and that seems to be some of the biggest complaints. Something about breaking eggs to make an omelet??? But the uncertainty is causing delayed capital spending in many different industries, and it will take a bit of time to redo supply chains. Now there is talk of recession, which is a very real possibility. Many have been calling for a recession for the last four years and it hasn’t happened yet. But the future is uncertain. Regulations, court rulings, executive orders, wars in Ukraine and Gaza all impact our industry and it is uncertain at the best of times. Just keep moving forward.
We are Embracing Technology. It really isn’t fair to say. Our industry has embraced and led the development of technology more than most any other sector. Not just having a very accurate picture of what the earth looks like miles below the surface, but we can drill to within feet of a target at that depth. And then imagine a string of steel pipes, all screwed together going down, then sideways, then making a u-turn and coming back. All within feet of plan. And I can’t find the right golf cart sometimes. But it is really the embracing of all the technologies that make a company run more efficiently, regardless of what it makes or does. And then on top of that, developing the tools and technologies to make the above noted effort possible. And we haven’t even begun to see AI and the geosciences work together to improve economics overall. So, without technology, you can’t run your business optimally and without technology, your product or service is yesterday’s news. We all think that where we are is an endpoint. That has never been true, yet.
Why Should Natural Gas Demand Stay Strong?
“Solid-state batteries have long been hailed as the ‘Holy Grail’ of energy storage, promising higher energy density, greater safety and faster charging than traditional lithium-ion technology. But investor sentiment has been lukewarm as public companies struggle to generate revenue.” - Pitchbook.
“NuScale’s commercial revenues for its Small Modular Reactors should start in 9-10 years.” - Management.
The field is wide open for natural gas for years.
Major Outlook. What the majors do matters, more to the U.S. today than any time in the last 30+ years. Arguably, Chevron, along with Exxon, have been the two most dominant oil companies for some time. Shell and BP are coming back to their roots. The big two never left their roots, even after investments in green energy. Chevron owns wind towers and Exxon uses mainly renewable power in its Permian operations. Recently, the head of Chevron made some very interesting comments:
“The second one (key drivers) comes from Permian. Permian has been growing at double-digit levels over the last five years. As we look forward, Permian will still grow, but we will moderate that growth, and Permian will become more of a free cash flow generation machine for us in the company. And so, we anticipate another $2 billion of incremental free cash flow from Permian.”
“The story in the Permian is kind of an incredible story of innovation and efficiency across the entire factory. So, if we break it down into drilling, completion and production, we've seen efficiencies over the last few years in all of those areas. For example, when we look back at our plan five years ago and the rig count that we had in our plan then to support million barrels a day business. We're delivering that today with 40% less rigs than we thought five years ago. So, the drilling efficiency has been significant. And then we move to completion of the wells. From a completion perspective, we've been able to use different technology to frac wells simultaneously.”
“(We) feel confident that with the growth plans that we have with Permian going forward, which has moderated relative to the last few years, we feel that we can do that with reduced capital and that's why you see our capital is going down this year and we intend to reduce that further into 2026.”
“(Our) plan was always to get to a million barrels a day and hold for a long period of time and position Permian to be a core asset within the portfolio that generated cash.”
“And how long do you think you can hold the Permian at around 10 million barrels a day? And we intend to hold that flat right through to 2040.”
Maybe Not. We wrote recently about Blackrock, the money management behemoth, buying a part of the port business from CK Hutchinson, including two ports, one at either end of the Panama Canal. That was hailed as a positive, especially after all the discussion of taking back the canal as it was being run by the Chinese. There was no evidence that the Chinese were doing anything other than having two large ports on the canal and the leverage any company would gain from such a position. But it didn’t matter, since a U.S. company was buying them. But maybe not. China didn’t like the deal and publicly called it a betrayal of the Chinese people and “spineless groveling.” Li Ka-Shing, the owner of the port company, is getting increasingly pushed by the government to cancel the deal, and in China, it is much more dangerous to say no than here or most other places. So now you have a U.S. and China fight brewing. The U.S. military has been ordered to draw up options to increase U.S. troop presence in Panama. The sale also includes several ports on the Suez Canal and a total of 43 ports in 23 countries. It would be a strategic coup to be owned by Americans, but to me, it is looking increasingly unlikely. You rarely defy the Chinese government and win.
PPHB U.S. Energy Market Update Highlights:
Commodity Prices: WTI crude oil is currently $68.07 per barrel (up ~2.7% week-over-week) and natural gas is $4.04 per MMBtu (down ~3.5% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.6 million barrels per day (up ~3.6% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories increased by ~1.7 million barrels week-over-week vs. an estimated increase of ~0.8 million barrels.
Frac Spread Count: There are currently 212 frac spreads operating in the U.S. (an increase of 2 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 276 drilling rigs operating in the U.S. (no change week-over-week).
We are Getting Popular. First, there is the Texas Stock Exchange that set up a venture between several very large companies to take advantage of the number of small volatile companies that exist in Texas, setting up a regional exchange. Then the New York Stock Exchange announced they are relocating the Chicago Stock Exchange, which they bought in 2018 and has been in Chicago for 143 years, to Dallas. Not to be left out, now the NASDAQ is said it would open a regional headquarters in Dallas to serve Texas and the southeast, as well as move its technology and financial crime management businesses to Texas as well. So, we're a hot bed for stocking changes and wear a magnet for other businesses. Not a bad place to be. Popular at last!
TXSE Group announced that it has closed its initial capital raise at $161 million, making TXSE the most well-capitalized exchange to ever file a Form 1. Its founding investors represent all major sectors in the markets, liquidity providers, retail and institutional investors and business leaders from across the country. They include BlackRock, Citadel Securities, Charles Schwab, Dell Family Office Management, Fortress, Jump Trading, Squarepoint, Susquehanna Private Equity Investments, Tower Research and other market leaders.
Where's Elon? Siemens said it would cut more than 6,000 jobs in its automation and electric vehicle charging businesses to boost competitiveness. Chevron is cutting 8,000 people from their payroll in order to be more efficient. Nobody likes to see someone lose their job, but I've worked in an industry where we've been laying off people for 10 straight years. And I've seen no one outside of the industry cry for us. I know there's some very fine people who work for the government. And I have to believe over the last couple of years, with so many working from home, that the level of efficiency has most definitely dropped. Notice, you don't hear much more about working in the office five days a week. That was bad news, but not dramatic. But you start firing people and problems leak out. In the brokerage business, every trader has to take a two-week vacation and isn't allowed to access the system so that any bad trades they've been perpetuating will unravel. I think you're seeing the same thing now with government. You're starting to see the funding to NGO's and other groups being uncovered, and those trades are now starting to unravel. The goal of any operation should be to be as efficient as possible and to serve whatever the customers or clients need. This is normal to businesses, but it appears to be novel to government.
You Gotta Love It. SLB, Halliburton and Baker Hughes have all been around for decades and decades. They each have tens of thousands of employees working in more than 60 different countries. These companies, and our industry, make the world run since today the world does run on hydrocarbons. It is an exceptionally dangerous job, and it keeps employees away from home for long periods of time. But it's important and critical. And then I read where Google is buying a startup cyber security company with a market cap greater than virtually any company in the OFS area, $30 billion. I understand the importance of cyber security. I also know the meaning of “startup.” That probably doesn't mean workers in 60+ countries keeping the world running. But those are valuations these days.
Drugs. Fentanyl is obviously a scourge today, and there's been a great deal of ink spent on arguments with Canada. Last year, 0.2% of the total amount seized at borders came through Canada. A very small amount. It's been compared to the size of a can of soup. Of course that can kill a couple hundred thousand people. But what hasn't gotten any mention, and it surprises me, is that nearly 50,000 Canadians have died of opioid overdoses in the last several years. Vancouver has some of the highest overdose rates in North America. So, while we're concerned with fentanyl coming across the Canadian border into the U.S., it appears the Canadians should be concerned about fentanyl coming into their country from whatever sources there are, but at least they are recognizing there is an issue.
Said Who? IEA: Global oil demand to accelerate in 2025 despite economic uncertainty. Global oil demand is expected to grow by over 1 million b/d in 2025, up from 830,000 b/d in 2024, reaching a total of 103.9 million b/d, according to IEA data.
Why Globalization Should Worry You. The World Economic Forum (WEF) is demanding governments everywhere stop people from growing their own food. The reason given, of course, is that it would lower “emissions.” It turns out that the WEF says that growing your own food contributes to climate change. OMG. The organization said that ending personal growing of food will help governments hit their 2030 “Net Zero” targets. Can you say “nanny state?” The WEF study researchers apparently discovered that the “carbon footprint” of homegrown food is “destroying the planet.” That lettuce? Gone. Those tomatoes? Gone. Really?
Who Bought What. When I was in the hedge fund business, we invested in oil and gas companies. Some were private, where we knew the operator and trusted his judgement. And some were pubic, where we would “control” the company to some extent, due to our position in their equity or debt. But this is stepping out. Citadel is spending $1.2 billion to buy an oil company. Well, really a natural gas company with operations in the Haynesville. Citadel is buying acreage, producing assets and approximately 60 undeveloped Haynesville locations, and the target produced nearly 140 Bcf of natural gas in 2024, or about 382.25 MMcf/d, according to Louisiana state data. Paloma (dove in Spanish) was owned by private equity player, Encap. So much for a toe in the water. Someone is a believer.
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.
