March 22, 2024
Things I Learned This Week in Houston and San Antone!
Oil in the Low $80’s. Start the Party. Houston was a fun place to visit this week. Everyone is in a good mood, except for those focusing on natural gas, but 80% of drilling is focused on oil. If you can’t make money at $75 oil, maybe you shouldn’t be in the business. That has been a mantra of ours. Companies are generally making money and the E&P industry set records in the final quarter of 2023 in terms of cash flow and profits. Oilfield service lags a bit but we didn’t go on the usual boom-style building this time. It was the saving grace. The gloom of the recent past has lifted and everyone is doing well. That makes it a fun town in a fun and interesting business.
From the Top. “ESG was popular but I think that return on capital is more popular at the end of the day,” he said and that Shell and BP “found out the hard way.” The shift away from ESG terminology is a recognition that the energy transition will be complex and won’t unfold the same way in every part of the globe, according to Dan Yergin, the Vice Chairman of S&P Global that organizes CERA Week, Cambridge Energy Research, Dan’s original company.
Discipline. Public U.S. tight oil players posted their best quarterly results of the year in the fourth quarter of 2023 but net debt also increased for a sixth consecutive quarter, primarily as a result of financing M&A. Rystad Energy’s analysis includes a peer group of sixteen publicly traded tight oil-focused U.S. E&Ps. Reinvestment rates fell to 50% in the fourth quarter, a sign that operators are spending less of their operating cash flow on capex on a quarterly basis, the 2nd quarter that the reinvestment rate declined after moving higher for the three previous quarters. Cash from operations for these sixteen companies for the quarter hit $17.23 billion, the year’s highest, while capital spending hit its lowest levels since Q3 2022. All of this low capital spending and a declining rig count and U.S. production continues to climb. Capital discipline and the resulting increase in profitability increases equity value. Wow. Go figure.
Top 10 Large Cap Energy Stocks of 2024.
Marathon Petroleum Corporation (MPC) +31.3% YTD.
Valero Energy Corporation (VLO) +28.3% YTD.
Diamondback Energy (FANG) +24.3% YTD.
Targa Resources Corp. (TRGP) +24.2% YTD.
TechnipFMC plc (FTI) +21.8% YTD.
Phillips 66 (PSX) +18.4% YTD.
Imperial Oil Limited (IMO) +17.7% YTD.
Western Midstream Partners, LP (WES) +16.2% YTD.
Ovintiv Inc. (OVV) +15.8% YTD.
Cenovus Energy Inc. +13.8% YTD.
The lack of E&P is telling. Refining cares about spreads, not price.
Who Has What. The table below shows the makeup, source and growth of U.S. energy consumption. Note the growth in Solar and Wind, up dramatically over the last several years. The markets have always loved growth so it is no surprise that business activity in those sectors has attracted capital. Fossil fuels have seen a decline in the percentage of the market it powers, from 80% to 77% over eleven years. Notice also that the total volume consumed has gone up by almost 9% over that same period of time. It all depends on which statistics you want to use but it does show that even with the phenomenal growth in renewables, the volumes of hydrocarbons continues to move up.
Headlines.
Manhattan apartment rents climb to $4,230 in February.
Oil giant Shell moderates its targets for carbon-emissions cuts.
Natural Gas was trading in negative territory at the Waha hub last week while the European gas futures were trading at $10.80/Mcf.
Shell on Thursday scaled back plans for a 20% reduction in net carbon intensity by 2030 and retired a much steeper target for five years later, citing uncertainty around the pace of the transition.
The Business. “Monty Moncrief drilled 29 dry holes before his 30th hit. Wildcatters were delusional optimists - they believed optimism was a personal quality that nurtures luck. An oilman simply cannot afford to be timid. They never felt the need to apologize for big losses because they believed that if you weren’t having big losses you weren’t trying hard enough. They believed in chaos and defiance and they refused to be controlled. They were motivated to found dynasties to which their sons and their son’s sons could succeed”. - Jake Corley
Britain’s Diversity Drive has Backfired. The Business Secretary has warned that inclusion policies must be reconsidered after a report found that the majority of spending on equality, diversity and inclusion was a waste of money. The move comes amid a wider government crackdown on wasteful diversity schemes. - The Telegraph
The CEO of Toyota Was Right. Several months ago we started writing about how the CEO of Toyota said the ugly secret that none of the other car CEOs wanted to admit which was that EVs won’t work but that hybrids will take the lead. At the time, stock activists tried to get the CEO booted by speaking such climate heresy. But he was right. Toyota led the world in automobile sales in 2023 led by hybrids. On the cover page of the Wall Street Journal, the headline read “the sales of hybrid cars accelerate as drivers hesitate to buy EV’s”. With winter ending and everyone in the north getting a lesson on batteries holding a charge in cold weather, combined with the 50% to 100% higher insurance premiums and the 2X cost to repair, people are shying away from owning EVs. The lack of charging stations is of course still an issue and those are being built out in the normal fashion. We will probably overbuild relative to the number of EV’s on the road. They will be around for a long time, but it doesn’t look like they’re going to take over the world like many had expected. And we haven’t gotten into the issues of mining for battery materials, the cost and emissions in making the vehicles or the disposal issues of the batteries after several years. Hybrids have none of those issues. It’s very nice to see him vindicated.
Still Going. Alaska’s Prudhoe Bay is still producing 320,000 barrels of oil per day with about 6 billion barrels left to produce. There originally was an estimated 25 billion barrels in place with the expectation of 13 billion barrels of recoverable oil using current technology. “When production started at the Prudhoe Bay field, the recovery factor for the 25 billion barrels of oil in place was expected to reach 40 percent. Today, using new technologies, we have increased that estimate to more than 60 percent.” – ConocoPhillips. It also has about 25 trillion cubic feet of natural gas, which up until now has been processed and reinjected to boost the recovery rate. There are 800 producing wells in Prudhoe Bay.
“Using Current Technology”. I was reading a comment on potential oil recoveries the other day and it ended with the quote in the title. “X number of barrels are expected to be recovered, using current technology.” We read it and shrug it off like some legal disclaimer, but it shouldn’t be. Several years ago, in a presentation to the Toronto Stock Exchange, I noted that incremental gains in recoveries can be very meaningful. At the time, we recovered about 47% of conventional oil in place. Unconventional oil sees about 7% to 9% recovery rates. Unconventional natural gas led the way and we moved recoveries from ~12% to almost 20% over the years and shale oil development, which followed natural gas by a couple of years, has increased from about 6% recoveries. But think about it. About 60% of U.S. oil production is from shale. We recover about 8% (generous) of shale oil in place. If we could produce 10% of oil in place, it would add 2 million barrels per day of production. The best place to find oil is where you already know where it is and for oil, more recovery from the same number of wells emulates the natural gas effect, meaning it is likely to happen. We talk about efficiencies and technologies that have benefitted the industry, to where we are today, using current technology. Will tomorrow’s technology push those recoveries higher? Of course. So the Holy Grail in the industry today is to get more oil, as easily and efficiently and cheaply as possible. If you don’t believe technology will continue to push us to fewer rigs, fewer people, less equipment, you are fooling yourself. But if you are either providing the technology developed to increase recoveries or the company who implements the technology, you have growth businesses. So far, we are doing very well. Using current technology.
View From the Ground. John Daniel of Daniel Energy Partners puts out a weekly piece that is as “ground level” as one can be. He does an excellent job. This week, one of his topics is on the activity by the private companies. These private companies don’t have the same shareholder issues that public companies have but they are playing, generally, with their own money, or the value of their reputations. Last year, it was private equity backed privates that led the way. This time, while private equity still plays, it is the independent private companies who have picked up the slack. From John – “Our private E&P survey. Thus far, we have received feedback from 31 private companies. They are collectively running about 85 rigs today, but the stated plan for these companies is to increase their activity to the vicinity of 97 to 103 rigs in 2H’24. In eleven cases, companies report zero rigs operating today, but plan to add a rig later this year. In a few cases, the private operators expect to add two rigs. Two of our respondents acknowledge acreage acquisitions and/or farm-out arrangements need to be finalized first, but both agree deals will happen this summer. Very few companies say they will add beyond their current plans even if commodity prices rise.” 85 out of 629 is about 14% of the rig count. The emboldening is mine.
The Slot That Pays. Exxon made another oil and gas discovery in their Stabroek block offshore Guyana bringing the total number of successful wells to 30 in the last eight years, with more than 11 billion barrels of oil recoverable, it’s the first announced discovery in the South American country this year. The Bluefin well encountered 197 ft of hydrocarbon bearing sandstone and was drilled in 4,244 ft of water.
All This and a Job Too? A phone, a prepaid card, a place to live. And now the state of New York will hire you too. “Governor Kathy Hochul's administration recently agreed to a proposal that could make it easier for migrants to get temporary jobs in state government. Approved earlier this month, the Civil Service Commission is working with agencies to implement the changes, which include dropping typical application requirements, like proof of a high school diploma or proficiency in English.”* This after the mayor of Boston said anyone in the world is welcome to come live in Boston, though Governor Maura Healey announced that Massachusetts will end its guarantee to shelter, once the number of families in need hits 7,500. The system has been overwhelmed by record numbers of people seeking shelter, including a large wave of immigrants. (*Bloomberg)
Collateralized Loan Obligations. CLOs are given as one of the main causes of the 2008 financial crisis and they are back. They are used to finance risky real estate projects. Commercial real estate collateralized loan obligations, or CRE CLOs, are bundles of debt that would normally be too speculative for conventional mortgage-backed securities into bonds of varying risk and return. And now, as borrowers struggle to make loan payments, it doesn’t look good. In the last seven months the share of troubled assets held by these CLOs has surged four-fold. Rising interest rates have stalled and are eroding the value of multi-family infrastructure, demand for office space is still weak, and all of this will impact the regional and community banking communities.
These Things Again. “The CRE CLO market is the first shoe to drop in terms of defaults in the CRE debt markets,” said Mark Neely, director of alternative investments at GenTrust, a money manager. “The loans inside CRE CLOs tend to be for transitional properties, so the borrowers are counting on reselling them before the loan matures. But today many borrowers can’t sell properties for anywhere near where they bought them.” Delinquent loans more than 30 days delinquent moved up to 8.6% in January. Debt issuers have been kicking the can by extending maturities, letting developers pay interest with additional debt, and making other changes to loans to encourage borrowers to keep current. Firms bought back a record $1.3 billion of delinquent loans last year, according to JPMorgan Chase & Co. estimates.
Boats. Venture Global announced a fleet of state-of-the-art LNG vessels. The first vessels are expected to be delivered this year. The ships will be powered by LNG. The field of vessels will be 6 smaller LNG tankers and 3 larger vessels, all under construction in South Korea. They will be as energy efficient and modern as technology allows. Additional capacity means that the market expects higher volumes over time. Considering the Biden Administration’s pause on LNG, it is a positive sign though the pause is strictly political, penalizing Texas for its border stance and gratifying President Biden’s environmental activists.
Spent Plenty. When people tell me that we have under-invested in the U.S. oil business for years, I push back. From 2010 to 2020, the 21 largest E&P companies lost $30 billion. If we had invested more, we would likely have lost more. And if we had invested more in the past, the current price would be lower and that has never been the goal of the oil and gas business. On that note, the EIA reported that the U.S. had set another world oil production record, for the sixth consecutive year. U.S. crude oil and condensate production averaged 12.9 MMbpd in 2023, breaking the previous U.S. and global record of 12.3 MMbpd set in 2019. Average monthly U.S. oil production established a monthly record high in December 2023 at over 13.3 MMbpd. People had expected the November 2023 13.1 MMbpd to be the record but rigs continued to drop and frac spreads continued to idle and U.S. oil production still goes up. We essentially subsidized the world by losing billions for ten years. Now we are focusing on profitability and we are now setting records. It was never about how much money was invested, but where and what will technology do. We now have that answer.
Rigs. The spate of E&P consolidations over the last few quarters typically has the effect of lowering combined capex. The Xon/PXD combination will be huge, and its primary rig company is Helmrich and Payne, holding a 70% share between the two companies. Nabors is at 14%, ESI of Canada has 11% and PTEN, one of the industry’s largest, with only 5%. Since there are so few companies with real Tier 1 rigs, just a few companies participate and benefit. Chevron is a big PTEN supporter, with 13 of their 16 rigs supplied. So far this year, the rig count has risen a bit with all three big drillers – HP, NBR and PTEN all reporting higher counts. Activity looks to be improving but by very small percentages. But up is up.
Oilfield 360 Podcast. In this episode of The Oilfield 360 Podcast, hosts David de Roode and Jim Wicklund engage with Loren Singletary, a notable figure in the oil and gas industry, who shares his journey from his beginnings in Dallas to achieving strategic executive positions. Loren discusses the ups and downs of the oil market, his critical role in investor relations at National Oilwell Varco, and the insights gained through decades of industry experience. Loren also talks about his passion for golf, highlighting how it has influenced his life and career, including his work with various golf associations. This episode offers listeners a candid look at the personal and professional growth of someone deeply embedded in the oil and gas sector, while also touching on the broader industry evolution.
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.
