March 8, 2024
Things I Learned This Week About Life
It Spoke Volumes. “Oil prices remained stubbornly rangebound in February as signs of a recovering U.S. economy were countered by weaker economic data in both Europe and China.” Nothing new there. In fact, not much new at all. Commodity prices remain rangebound, as does drilling activity, and frankly, interest in the sector. Investors are wary after being told continually for the last three years that there was going to be a shortage of oil soon and prices would rise. They haven’t and didn’t, so, until there is some clarity that things are getting better, they aren’t likely to come back. Just being “cheap” doesn’t mean as much anymore. And since gasoline prices haven’t spiked, the oil business has stayed well out of the headlines. Earnings announcements are winding down and the general comment was “we are doing the best we can.” The capital discipline in the industry is saving it from itself and, since we are so used to wild swings, we are now dull and boring. Though increasingly profitable. Everyone has their head down, working hard, knowing it will get better. One day. In the meantime, keep plugging away. No one is downbeat or negative, but few new Rolls are being bought at dealerships with cash. We have said that, if you can’t make money at $75 oil, you shouldn’t be in the business. Throw in a little capital discipline and, even in a “weak” market, things look pretty good.
Mineral Outlook. The Annual TIPRO meeting was this week in Ft. Worth. My talk was titled “the Roller Coaster Continues” and I was flattered to be between Lt. Dan Patrick and Mr. Robert Bryce. Some observations on Minerals: Lots of players, active market but where they play shifts. Haynesville isn’t seeing much, with a late 2025 or 2026 recovery, so buying now with that outlook, sellers say no. When gas was $4.50, you could hedge out and afford to pay enough to get sellers to say yes. Not as many people are willing to transact but it should get better later in 2025.
Oklahoma has lots of capital deployed but little new drilling. Piceance Basin has no drilling at all, so lots of buyers but very few sellers. That is true across the market.
Appalachia continues to be challenged with different end markets and lack of infrastructure. Everything is still Permian. Minerals have more value if more rigs are running, and more wells are getting drilled.
E&P consolidation results in them focusing on core and lower priority of non-core, so Tier 1 increases in value for minerals and the fringe less so.
Acquisition underwriting is dependent on the risk of timing in development. Oil prices and production curves don’t matter, and inventory means less since its production is years away, but what is the pace of development is a great deal more important than the other variables.
U.S. Energy Markets Update (From PPHB).
Commodity Prices: WTI crude oil is currently $79.13 per barrel (up ~1.1% week-over-week) and natural gas is $2.07 per MMBtu (up ~11.3% week-over-week)
Crude Oil Production: U.S. crude oil production is currently ~13.2 million barrels per day (up ~8.2% year-over-year)
Crude Oil Inventories: U.S. crude oil inventories increased by 1.4 million barrels week-over-week vs. an estimated increase of ~2.4 million barrels
Frac Spread Count: There are currently 272 frac spreads operating in the U.S. (an increase of 2 spreads week-over-week)
Onshore Drilling Rig Count: There are currently 608 drilling rigs operating in the U.S. (an increase of 2 rigs week-over-week)
This is Too Good. The headline – “New York Attorney General Sues Meatpacker JBS Over Climate Claims.” The same AG who indicted Trump is now going after one of the world’s largest meatpackers for lying about its impact on the environment to win over climate-conscious customers. Don’t laugh. She is serious. She said that JBS misled consumers with its climate goals, including its plan to reach net-zero carbon emissions by 2040, to boost sales. “JBS USA’s environmental greenwashing exploits the pocketbooks of everyday Americans and the promise of a healthy planet for future generations,” said James in a statement. The company’s response - “JBS will continue to partner with farmers, ranchers and our food system partners around the world to help feed a growing population while using fewer resources and reducing agriculture’s environmental impact.” The AG was having none of it. JBS is one of the top meat suppliers in the U.S. with the capacity to process more than 200,000 cattle, 500,000 hogs and 45 million chickens a week. You can’t grow your business because cows emit methane and, if you sell more of your product, there will be more methane so you are not working towards net-zero. Wow. If they are found liable, they could be required to pay back any profit made from past sustainability claims found to be false. Excuse me? So this is where we are now???
Consolidation in All Things. It isn’t just E&P anymore. The Patterson/NexTier deal was the first OFS eye-opener, but the momentum continues. Atlas Energy is buying the proppant and logistics operations from HiCrush for $450 million, putting together two of the largest frac sand providers in the Permian, giving Atlas the largest frac sand company, with capacity of 28 million tons by next year. They basically share the same dune structure and are adjacent to one another. This also puts together the Dune Express conveyor of Atlas with the Oncore and Pronghorn logistics and offers one of the broadest solutions available. This should also make Atlas the industry’s lowest cost producer which, when combined with their market position, is formidable.
A Very Interesting Point. By Bloomberg. “A growing number of small U.S. colleges are under significant pressure, according to a Bloomberg analysis of the latest federal data that shows more higher education institutions facing enrollment declines and other strains. About 200 schools met at least three of the five metrics, or flags, that Bloomberg used to identify rising pressure on non-profit higher-education institutions with less than 5,000 students. Those factors include high acceptance rates, falling enrollment and repeated years of operating losses.” College tuition has grown at a much faster rate than inflation over the last several years since the schools knew that as long as student loans were available, they could charge whatever they wanted. The bloom appears off the rose.
Prolific. My good friend Robert Bryce was recently asked to give the keynote speech at the winter meeting of the National Association of Regulatory Utility Commissioners. He blew them away with 10 different charts. This is one of my favorites. There are a few places that reported on his talk but this was my favorite.
Them Too? How many of you knew that Apple, the phone and watch people, were making an electric car. They have had 2,000 people working on this project for a decade. When you look at all Apple has done, this is technology right? Well, Apple is throwing in the towel. It was planned to generate billions in revenue for the company. Virtual reality headsets and AI are still in the works but this try at EV’s is done.
The Decision is Finally Made. I’ll start with the good news. Scope 3 emissions were not included in the SEC reporting requirements. That’s actually a pretty big deal, and they’ve been the biggest sticking point not just for the oil industry but every industry. Basically, Scope 3 says that you have to track and determine the emissions of everybody who uses your product all the way down stream, as opposed to the emissions you make, and you control. We’ve waited for the last year for this. The fear had been that Scope 3 would be included. The bad news is Scope 1 and 2 additional reporting requirements, estimated at over $1 million a year cost for medium size public companies. That’s a SEC idea so it will probably end up costing much more, but it was expected. "The SEC is merit neutral. We're agnostic to climate risk itself, but we have a role to play in disclosures made by companies... and that they have proper controls around those disclosures," Chairman Gary Gensler declared. "It's about investors making investment decisions and what risks it poses to investors. It's grounded in materiality, a multi-decade old concept, that companies disclose that which a reasonable investor would consider amongst the total mix of information."
Scope 1 emissions – direct emissions from sources owned or controlled by a company
Scope 2 emissions – indirect emissions from purchased electricity, steam, heat, and cooling
Scope 3 emissions – all other emissions associated with a company’s activities
Burn, Buy, Beyond. Scope 1 is what you burn; Scope 2 is energy you buy; and Scope 3 is everything beyond that.
A Rose by Any Other Name. So, BlackRock came out in favor of everything ESG and DEI and was going to single-handedly save the world while making their clients’ money. It was a nice fantasy, as many fantasies were. But reality hit. “Anti-woke” hit, states pulling money hit, the ESG funds under-performed – a mortal sin in investing. You knew the climate had changed when, last year, they put the CEO of Aramco, the Saudi national oil company, on the BlackRock board. But the crusade continues. It is now “climate investing” and, instead of pushing for changes in corporate behavior, which it had influenced greatly over the last several years with Vanguard and State Street, they are now focused on “transitional infrastructure.” If you can’t beat ‘em, join ‘em. Infrastructure projects that, according to one pundit, “will help speed the transition from fossil fuels.” That is pretty wide open and could include scrubbers for coal stacks. “Transition investing is specific and concrete. Clients know what we’re talking about,” said the head of the global client business at BlackRock. “ESG as a category is a vague grab bag for many clients.” Welcome to the new world.
It Won’t Happen, But… Charlie Angus proposed to the Canadian Parliament to pass the Bill C-372, otherwise known as the Fossil Fuels Advertising Act. The Bill C-372 stands virtually no chance of becoming law, but clicks and headlines matter a lot to politicians. “Today, I am proud to rise and introduce a bill that would make illegal false advertising by the oil and gas industry,” and that the oil and gas sector was trafficking in ‘disinformation’ and ‘killing people.’ The Bill, as written, doesn’t just ban advertising by oil and gas companies. It would technically apply to any Canadian who is found to be speaking well of the oil industry, or of oil generally. “It is prohibited for a person to promote a fossil fuel, a fossil fuel-related brand element or the production of a fossil fuel,” reads the act. Violate this as a regular citizen, and the act prescribes summary conviction and a fine of up to $500,000. Violate it as an oil company, and the punishment could be as strict as two years in jail or a fine of $1,000,000.” Woke is not yet dead.
Give Us an Incentive. The chart below shows LNG flows into Europe. Notice the U.S. growth.
Well Put. “Offshore Momentum Continues. The 4Q earnings season has wrapped up for offshore drillers and companies levered to offshore, further highlighting the robust momentum and broad-based offshore growth. Discussions with offshore drillers were mostly positive, with incremental activities in both the shallow and deepwater and tight rig supply continuing to drive utilization and dayrates higher. We expect 2024 to be another solid growth year for offshore, particularly led by 1) Africa, 2) Latin America, 3) Asia Pacific and 4) the Middle East. Growth in North America and Europe will be more modest compared to other major regions in 2024, and is expected to be much stronger in 2025 as demand picks back up due to increased activity from sanctioned projects in the development pipeline.” James West at Evercore and his view of earnings and potential in the offshore sector. We agree completely and corroboration is a great thing for an analyst.
Pod-Casting About. As some of you may know, I have been lucky enough to have co-hosted several podcasts with my good friend David de Roode and the group at Oilfield 360. Jeff Miller, Cindy Taylor, Alex Epstein, Ryan Ezell and others. In this episode of the Oilfield 360 Podcast, Wayne Cutrer, CEO of Downhole Chemical Solutions, shares his journey from growing up in Louisiana with deep family ties in oil and gas to founding and leading a pioneering chemical solutions company in the industry. Recorded at the Thrive Energy Conference in Houston, Texas, Wayne discusses the inception of Downhole Chemical Solutions during the challenging oil price crash of 2015 alongside his business partner, Chase Copeland. He highlights their innovative approach to slick water fluid systems and the development of proprietary dry friction reducer technology. Wayne also delves into the company's strategic decision to become employee-owned through an Employee Stock Ownership Plan (ESOP), fostering a transformative corporate culture of shared success and resilience. The episode illuminates Wayne's belief in the importance of people, teamwork, and the potential for future growth and consolidation in the oilfield chemical sector.
Keep Trying? Chevron announced this week that it is shutting down two Midwest biodiesel plants, citing poor market conditions, and will indefinitely idle the two facilities in Wisconsin and Iowa, amid weakening economics for renewable fuels. The company spent over $3 billion in 2022 to buy 10 biodiesel plants and one renewable diesel facility but the value of renewable credits are at a 3-year low and lower demand has lowered pricing across the board. At least they tried?? Seriously, one by one, the major oil companies are confronting the realities of the market rather than the orations of politicians and activists.
Headlines.
After a “going concern” warning and restating three years of financials, could SunPower be the domino that triggers a solar shakeout?
Queen Victoria bust smeared with jam and porridge by climate protesters.
Fed Action – “If people have jobs, businesses are doing well, inflation is coming back down, why do anything?”
A 2,000% surge of UFO sightings in the New Mexico desert. Whistleblowers expose the truth. The government has a next-generation weapon.
ADNOC generated $500 million in 2023 by deploying artificial intelligence across its value chain.
BAE Systems launches methane satellite on SpaceX rocket to monitor oil and gas emissions. (Wow)
iPhone sales in China fell by a whopping 24% over the first six weeks of the year.
The Oscars. A recent study showed that it cost about $25 million to win an Academy Award. The marketing and wooing costs money. There is speculation that this year might reverse the decline of the last few years in terms of viewership, thanks in part to the raving success of movies like Barbie, while the megahits of the last several years failed to make the grade at the award ceremony. But, thanks to Barbie, that might be set to change. It’s 2024. If I told you in 2020 that the movie about Ken and Barbie would change how the Oscars are picked and awarded, you might not have believed me. I wouldn’t.
For All My Banking Buddies. Deutsche Bank announced that it would cut the bonus pool in its investment banking division by more than 10% after a slump in deals and a slowdown in trading last year. Bankers advising on M&A deals were said to see some of the deepest reductions.
For My Investment Buddies. For others in finance, there are worse things than just getting your bonus cut. Fidelity International is cutting around 1,000 employees globally this year. The firm will fire about 9% of its staff across all business lines and regions as it “adjusts to a more challenging economic environment.” Higher interest rates, lousy equity and debt returns in 2022 have not been good to the money management business, as evidenced not only by Fido’s move but other big money managers, including Blackrock, Wellington Management and T. Rowe Price Group have already started reductions.
Say It Isn’t So!! The Dartmouth College men’s basketball team voted to unionize with the Service Employees International Union, becoming the nation’s first group of student athletes to organize. They voted 13-2 to be represented by SEIU Local 560 in an election overseen by the National Labor Relations Board. There are 15 players on a college basketball team. Are the two scrubs or super-stars who don’t need help anymore after NIL money?
And More Podcasting. Matt Litwin of Marketscale and the Voice of B2B had a recent podcast titled “Experts Talk: Extending the Life of Critical Energy.” Actually, it was me and two real experts, but it was a very interesting discussion with a couple of very smart people. Thanks, Matt.
Snippets.
State ‘insurers of last resort’ are absorbing trillions of dollars in risk—more than doubling their market share since 2018—as private firms pare business in key regions (that can’t be good).
Peru’s Prime Minister, Alberto Otarola, resigned following allegations that he had a romantic relationship with a woman who obtained government contracts (this is wrong?? damn).
Oscar Mayer, through a partnership between parent Kraft Heinz and a NotCo, is set to launch meatless “NotHotDogs” and sausages later this year, even as sales of meat substitutes are falling.
Chevron invests in quantum computing development for the oil and gas market, with quantum computing in the oil and gas market expected to grow at a CAGR of 37.9%, owing to the increasing demand for efficient optimization and simulation.
It’s Impressive. But the rule of small number still applies and you notice the two really big spikes are yet to come. All this is being made possible by the Inflation Reduction Act that provides billions in subsidies for companies involved in the “transition”, whether it makes sense or not. We are big fans of batteries. In my car, my watch, my phone, my computer. But for the city of Dallas? The best of these battery facilities have little more than one hour of power time and for many, it is measured in minutes. But if there is money to be made…
An API Poll. It seems that the people are speaking, and they are saying they don’t want internal combustion engines banned. Will Washington listen to the people??
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.
