May 10, 2024
Things I Learned This Week at St. Hubertus
The International Order of St. Hubertus has its Investiture this weekend. White tie and tails, cape, parties – the whole nine yards. Fabulous.
For now, energy transition fatigue is setting in falling “on the shoulders of the low end and mid income level people in a disproportionate way,” said the chief of the IEA. There are now discussions in European countries about maybe delaying the implementation of net zero by a couple years, maybe as much as five years. Blaming the break-up of the EU, that is the UK leaving, the war in Ukraine and any other excuse that can be used to boost the argument of delay while the economy recovers would probably be a good thing.
The problem is that, according to Wood McKenzie, that would boost the temperatures levels up to three degrees versus the 1.5 degree increase that environmentalists are aiming for. What a conundrum. Laws passed a couple of years ago are just now starting to hit consumers. It takes a while to be implemented and then they start to affect. It’s going to start to hit here next year, since Europe had a one-year head start on a lot of this environmental legislation. California is a preview, already paying the highest electricity rates in the country and the highest gasoline prices in the country while doing nothing to lower global emissions or slow the temperature rise. Sure, all the Californians feel really good about it. Their wallets don’t and the climate doesn’t care how you feel. An example? France passed climate legislation in 2021 that went into effect this year and it barred homes from the rental market if they didn’t pass the energy efficiency inspections. The reality is, if it hasn’t been built in the last year or two, there’s no way will pass the current inspection standards. And again, just starting to hit.
Discover the Joy of Certainty. We have found the answer. After years of uncertainty in oil and gas prices and taking Marshall Atkin’s projections as gospel (he is good), I have found the answer to our problems. California Psychics. “We offered the best psychics… new customers get 20 minutes for just $20 and most of our customers get everything they need within their readings in that period of time. Unique insights into your life situation and if your readings aren’t right, well, they are guaranteed.” For my love life, I have chosen a psychic to help me. Her specialties? Clairvoyant, clairsentient, dream analyst, empath and clairaudient. Granted, I don’t know what all those terms mean but it’s got to be good, right? And money. They see that too. And you guys spend your time talking to analysts!! Geez.
Last Bank Standing? Beal Bank recently provided a $275 million senior secured term loan for Norwegian offshore rig company Eldorado Drilling, backed by several known figures, to finance its acquisition of the 7th generation drillship Zonda. Beal commented that it has a longstanding history of providing creative credit solutions to difficult-to-finance and out-of-favor industries, of which from a capital point of view, is the energy industry and especially large assets such as this rig. Eldorado was formed in the last couple of years and bought two rigs under construction at South Korea’s Samsung Heavy Industries yard, where the rigs had been ordered several years ago and Samsung ended up owning them. Both the newbuild ultra-deepwater drillships West Dorado and Pacific Zonda, now known as Dorado and Zonda, will be delivered this year. Samsung still has four newbuild drillships in inventory, after Saipem contracted one last year on a bareboat charter.
Top of a Small Heap. Goldman Sachs this week put out their best 50 growth stocks for the coming year. They divided these into subcategories. With energy only getting two names out of the 50, those two names were Kinder Morgan and Oneok, midstream utilities. There’s no major oil company or independent company in the list. The market caps of the oil service industry are obviously too small to warrant Goldman Sachs pieces like this. This brings home the idea that we are no longer a growth industry. We have shifted into a mature industry with some declining terminal value over time. Don’t misunderstand – the oil and gas won’t be replaced in my lifetime or yours, no matter who is reading this. But it will become a smaller percentage of the overall global energy mix even if demand moves up. We are no longer the stunning 21-year-old with a future in front of us. We are the 56-year-old father of three with the mortgage and a job. Bring home the bacon. That’s what you’re supposed to do now. Grow as fast as you can by making small acquisitions that will accelerate overtime. Continued effort to increase efficiency is always the baseline effort. And since growth cap is low, free cash flow is high and that free cash flow gets returned to shareholders, primarily in dividends and buybacks. Dividends are like marriage and buybacks are like dating. Most investors would rather see marriage than dating. And the argument of keeping your powder dry in a mature market takes a great sales job with investors. We are transitioning exceptionally well in my humble opinion. But it’s a journey not a destination. I always wanted to write that.
Politics and War. Joe Biden warned he’d halt additional shipments of offensive weapons to Israel if its military proceeds with a ground invasion of Rafah, decrying the potential loss of civilian life as “just wrong” in an interview with CNN. Losing the Jewish vote to gain the Muslim votes. Does Israel have any student loans??
Pulled the Rug. Talk about having the rug pulled out from underneath you. There’s been much in the press lately about the Biden administration reducing cannabis from a Schedule 1 drug (heroin, meth, ecstasy, cocaine, LSD, etc.), to a Schedule 3 drug and basically making it allowable for medicinal use. Medical marijuana is legal now in 40 states. Hope and expectation of access to the banking industry caused the cannabis stocks to spike ever since this story broke. Right now, marijuana is against federal law and most every bank in the world or at least in the U.S., is supported in some way by the U.S. government, so no cannabis companies – growers, retailers, packagers - can use the banking system, so it’s an all cash business. But, not all cash from avoiding taxes because the taxes are collected at the cash register. But the money from the cash register can’t be deposited in the business bank account because they can’t have one. So, access to the financial services business was obviously seen as a boon to the cannabis industry. From the end of the week, the Biden administration decided to reclassify marijuana as a less dangerous drug, but it is still keeping cannabis businesses out of the banking system! This really means nothing for the cannabis industry. But the cannabis industry doesn’t get made legitimate by access to the banking industry, even if it’s not as legal on a federal basis and not illegal at all on a state basis. All that, and then somebody pulls the rug.
$64,000 Question. Can we generate enough power over the next 20 years to power AI? The answer is yes. Of course we can. We probably won’t, but we could. Solar and wind will contribute and fairly significantly, but they cannot generate enough electricity, on a RELIABLE basis to generate all the electricity needed. AI is obviously taking the world by storm in terms of stories and the media, but now that we see potential, what stops us from reaping the benefits?? Not enough electricity. And notice I am saying electricity, not energy or power, because the bottom line to consumers is electricity. Consumers are showing that benevolence to the Earth is important, but they don’t want to change their standard of living or their consumer lifestyle to make it so. Wind and solar projects continue to be rejected or cancelled. They will still grow but, like oil production in the Permian right now, - growing production significantly shifts to maintaining production - they will grow at some declining rate. So where will all of Jim’s electricity come from? The traditional sources, but cleaner. Gas fired and nuclear will see a resurgence. And while many people hate our industry, their internet going down and they can’t charge their phones? I don’t think they will ultimately care. Sure, they will scream and yell and demand it be more monitored, tracked, watched and regulated, and then they will accept it. Why? They have no choice and if they “restrict” it, they save face and their job.
But Now This is Changing. It isn’t gasoline anymore. It’s energy and power. Ultimately, it is electricity, which forces the consideration of affecting variables such as the grid, regional issues, regulations, permits, all of which makes it a complicated business in all sectors of our industry. Because now, if you install offshore wind towers, build helium storage in South Dakota and use lasers to detect gases, you are in the same industry as all of us. Providing power, energy and electricity to consumers, at the lowest price possible while still generating a return, is the “supply chain” in which we all play. An E&P company thinks about having a small nuclear reactor over its Permian operations. Canada decides to increase its nuclear capacity. Belgium originally said it would shut down its nukes in 2025. Now, it’s 2035 for a “review.” If you can put a nuclear reactor on a submarine, a large shed building outside of Midland might be available. The current design can’t go critical(i.e. blow up), minimizes waste and could take forever to get approved. But pragmatism will win out in the end.
Courses Offered at Columbia University. Houston, we have a problem.
Good Guys. So, it seems obvious that the general public are now paying attention to the broad sector we are in, and we are increasingly the most critical of all the energy and power sources. They may never like us, but they will always need us. And whether they believe it or not, we have been very good to the general public over the years, subsidizing consumers while the industry lost billions.
Next Big Thing? Hydrogen will likely see the same results as EVs have. A flush opening, a surge in sales, a fawning media, Washington providing help and EVs were going to take over the world. Sales are dropping, Tesla stopped its charger buildout and China is dumping unwanted cars on Europe with the U.S. next. There are billions in the IRA for several hydrogen “hubs” across the country to accommodate the boom in hydrogen. It may take a bit. Building them out is good business. They have money. Owning them? Only if I have NO long-term risk and that means backed by the government, and few like working with the government too closely.
We have been vilified for decades because the only retail outlet for all the things that we do - drilling in water three miles deep, then drilling through rock for another couple of miles, hitting within about 6 feet of your target, operating giant offshore production facilities that will house a contingent of up to 300 or more and operating with such concern, a wrench dropped overboard will be retrieved, a VLCC crude carriers (redundant!), three football fields long that can carry 650 million pounds of cargo, oil, refineries that turn sludge into jet fuel and gasoline, who after this long chain of amazing feats and technology, is bought by the general public. Not industry-informed people, but people who believe what their local paper says. They only see us when they have to pay more for gasoline than last time. Or when the airline slaps a fuel surcharge to your ticket. All that work, all that technology, all those people, from 3 miles below the deep water’s surface to Buc-ee’s, they only see the dials spin and curse when the numbers go higher. But when you look at gasoline prices, adjusted for inflation, they have been trending lower since the 1980s, with this chart starting in 1978. So, you are actually paying less for gas at the pump relative to most everything else you can name. This is not gouging, this isn’t manipulating the market, this isn’t windfall profits. This is an industry’s drive. The goal is to produce a quality product at the lowest possible price, while generating positive returns on capital. That, of course, applies to any business or industry. The next time at the grocery store, whip out a copy of this chart, and smile. In real terms, gasoline prices dropped from 2002 to 2020 and only the recovery from COVID could reverse the trend, but can’t hold it.
Headline. Men are happier at work than women, survey shows. No comment. I’m not stupid.
No Good Deed. In 2022, after Russia invaded Ukraine, Elon Musk, through his SpaceX company, activated StarLink’s Internet capability, giving them a significant advantage in terms of communication and an access relative to the Russians. It has been a huge boom by any measure to the Ukraine effort. Now after a couple of years, there have been some StarLink terminals moved into different places, and so now the satellites, in some cases, could be used and are being used by Russian forces. After two years, parts of the system have been compromised, but all that has done is allow the Russians to communicate a bit better themselves, still not at the scale of the Ukrainians. Rather than getting kudos for such a strong effort. Elon Musk is not loved at all by the U.S. Senator from Massachusetts. She has had a long-standing feud against him. So I guess it should be no surprise when this week, she pressed the Pentagon to address the Russian’s use of Starlink and Musk for giving “communication” capabilities to the Russians after two years of exclusive years. No good deed goes unpunished.
Snippet. Elon Musk and David Sacks recently held a secret billionaire dinner party in Hollywood, because of a purported major political realignment as Silicon Valley money turns against Biden and begins flowing to Donald Trump, Puck reported.
$79 WTI and $83 Brent. Complain? We all want to make more money, but these prices look very good compared to many weeks over the last several years. We never make as much in an upcycle as we had hoped, and we always lose more money than we expected to. But the reality is that, if you are aren’t profitable today, you need to do something. A growing market has allowed all sorts of get rich quick opportunities, whether you were an oil man, a boat company or ran a hedge fund. The volatility of price and activity isn’t around to save you this time. If your net income line is negative, you are eating equity value in a market that isn’t going to change much. For a while. We now all know that, if oil spikes, the companies won’t go “drill baby drill.” So, if you are an OFS company director and the company is still losing money, are you fulfilling your obligations as a fiduciary or violating the “G” in ESG? There is a reason the recent consolidation boom is taking place. The realization that the U.S. oil and gas industry is a mature, slow-to-no growth market, consolidation always makes sense. For most of my career, we have been a growth market, because we could grow production all we wanted, and it never was enough to affect the global oil price. Then, shale came along which changed our world but the drive, the contest to grow production was still there. We set all-time world records for oil production growth! We lost billions doing that and we drove the oil price down dramatically, since we had been supporting the market price with our losses. It is different this time. Schlumberger buys ChampionX, Patterson-UTI buys NexTier. Why? Because the market isn’t growing as fast as it has in the past, and developing ancillary businesses becomes the only path to growth, but organically takes much too long in a flat market. So, you consolidate. Who is next? We are slower growing, dull and boring to many, erroneously vilified by many, but actually critical to the world’s way of life and the primary reason that standards of living around the world have improved over the last many decades.
Who Says You Can’t Raise Money. The EnCap Energy Transition Fund II closed with about $1.5 billion. The energy transition fund was created to invest in solutions to decarbonize the power industry, while also opportunistically investing in low carbon fuels and carbon management. It will “continue to invest in the opportunity created by the shift to a lower-carbon energy system.” Fund I was about $1.2 billion. “We continue to believe all sources of energy are needed to support the world’s growing energy needs…” Mentioning a very large opportunity set in renewables, energy storage, clean fuels and carbon solutions, five of the expected eight to ten portfolio companies have been identified, and it demonstrates the reach not only of the EnCap Fund but the scale of opportunities to new and existing energy industry players. These targets include Linea Energy, Parliament Solar, PowerTransitions, Arbor Renewable Gas and Bildmore Renewables. Portfolio realizations from Fund I include Broad Reach Power, Jupiter Power, Triple Oak and Paloma Solar & Wind. Again, I mention the companies to demonstrate not only what energy private equity is buying, but what they are selling as well. And these are not household names to me. That means there is a brave new world of opportunities for companies already in the energy development and power industry. Us.
Recommended Reading. From the President of the University of Chicago, an obviously reasonable man, a PhD in Chemistry from Berkeley, who specialized in Nanotechnology, Nanocrystals, Biomedicine, Renewable Energy and Quantum Information Systems. Now, the 14th President of the University. There is hope.
Past the Headline. The country of Georgia is introducing legislation that would ban civil-society groups from getting more than 20% of their funding from foreign sources. It seems there is a great deal of civil and political unrest in the country, pitting pro-west and pro-Russia against each other, and this is seen as a way to stop the influence of their politics and elections. So, first, what is a civil-society group? Civil Society Organizations (CSOs) are organized voluntary non-state institutions which mostly operate on non-profit basis. They are formed and led by the citizens to champion their collective or common interests and concerns of the members, specific target groups or the general public. So, they are activists. Foreign funding? It seems that the U.S. Agency for International development has given Georgia almost $2 billion over the last few years, most all of it for “humanitarian” programs. Okay, so what was the “Humanitarian” aid used for? From the USAID website:
Specifically, USAID assistance helps Georgia to:
Strengthen its resilience to external malign influence.
Consolidate fragile democratic gains through enhanced citizen responsive governance.
Provide inclusive, high-value employment opportunities through increased economic growth.
Or, to put it another way:
Resist Russian influence.
Recruit for the favored cause.
Grow the economy.
I think #3 should be #1, but this is their rating.
So, the U.S. is providing funding in Eastern bloc countries for activist groups of favored causes, providing direct influence. I don’t argue that many countries, including Georgia, suffer from terrible leadership, policies and political directions. We all know that the U.S. has been trying to influence global politics for decades. But it was okay because we were right and in the right. Funnel money to Russian dissent groups during the Cold War? Of course. And now, we have foreign countries, including Russia, China and others funding U.S. activist groups that are intentionally disrupting our lives. Kind of like what we want to happen in countries we influence through funding activists, by the USAID, listed as Humanitarian aid. No big secret or mystery, but I just thought I would translate the story into what it really meant and thought I’d share.
News Flash!! Upstream energy jobs grow by most in 13 years.
EIA Weekly Petroleum Report
Crude Implications: Bearish – draw in-line with expectations. WTI 1M-12M backwardation at $5/bbl, down $2/bbl w/w. Money managers increase ICE Brent and NYMEX WTI net long positions by 4% w/w, with net positioning 12% below the recent peak of Sept/23.
U.S. Crude Production: Indicated at 13.1mm BOPD, unchanged w/w, and up 0.8mm BOPD y/y.
Refinery Runs: 15.9mm BOPD, up 0.3mm BOPD w/w and up 0.2mm BOPD y/y. Utilization at 88.5%.
Crude Imports (net): 2.5mm BOPD, down 0.4mm BOPD w/w and down 0.2mm BOPD y/y. Brent-WTI spread at $4.8/bbl, higher by $0.3/bbl w/w.
Gasoline: Bearish – build vs expected draw. Demand up 2.1% w/w and down 5.4% y/y.
Distillate: Bearish – build vs expected draw. Demand down 5.1% w/w and down 13.5% y/y. Note BP discussed sluggishness in diesel demand across network (exposure to mid-sized truckers).
Other U.S. Energy Market Updates (From PPHB).
Frac Spread Count: There are currently 252 frac spreads operating in the U.S. (a decrease of 5 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 587 drilling rigs operating in the U.S. (a decrease of 9 rigs week-over-week).
So That is It! Robert Bryce has tracked down one of the earliest uses of the over-hyped phrase “Energy Transition.” It occurred in the Christian Science Monitor in 1981, in a report from Nairobi, a man named Richard Critchfield, a reporter, said that some “4,000 delegates from 154 countries” were gathering in the Kenyan capital for a two-week UN conference on new and renewable sources of energy (ahead of his time!). “The purpose of the conference,” Critchfield explained, was to “promote better understanding of the global energy transition from oil to such new sources as geothermal, solar, wind, ocean and hydropower or energy from biomass, fuelwood, charcoal, peat, draught animals, oil shale and tar sands.” Remember, this was 1981 and shale oil and tar sands were a popular hope. Thanks, Robert.
Crimson Tide. The official mascot of the University of Alabama are the Red Elephants. Just so you know.
Headlines.
Electricity prices in Texas soared as a high number of power-plant outages raised concerns of a potential shortfall.
Brazil cut its key rate by 25 bps to 10.5% in a split vote where four members called for a 50 bp reduction.
Elon Musk’s xAI is set to close its funding round at a valuation of about $18 billion.
ExxonMobil’s Liza Unity FPSO offshore Guyana receives “industry first” notation from ABS for remote control functions.
12 women come forward alleging they were sexually assaulted by whoever Trump’s VP pick is. – Babalon Bee
Transocean secures two $500k-plus day rig commitments in the GOM.
OMG!!! "Dear friends, scientifically, this is not a #ClimateCrisis. We are now facing something deeper. Mass extinction. Air pollution. Undermining ecosystem functions. Really putting humanity’s future at risk. This is a #PlanetaryCrisis." - Johan Rockstrom, internationally recognized Earth scientist on Global Sustainability, according to his Twitter bio. I don’t know about extinction. We’ve lived through a lot, but he has mass hysteria down pat. “I think we are headed for major societal disruption within the next 5 years,” said Gretta Pecl. “Authorities will be overwhelmed by extreme event after extreme event, food production will be disrupted. I could not feel greater despair over the future,” said Jane van Dis, an advocate for Climate Justice and Reproductive Rights.
Significance. China and India are still rapidly adding additional coal-fired electric generating capacity. The red and the green below are expected to get bigger and the rest seem dedicated to making all the other colors less. You can push on an elephant but if he doesn’t want to move…
Reminiscing. “When Ronald Reagan was governor of California, he was asked about the student protests at Berkeley. He could’ve been talking about today. All of it began the first time some of you who know better and are old enough to know better let young people think they have the right to choose the laws they would obey as long as they were doing it in the name of social protest,” said an angry Ronald Reagan. - WSJ
The Media Complicit. I was reading a story today in the Wall Street Journal about how voters have listed immigration as their number one issue for the third month in a row. The article notes that Mr. Biden seems to be avoiding the issue, even though it is “the most important problem facing the U.S.,” which was the longest stretch of this particular issue in 24 years, according to a recent news nation survey. Six out of ten voters now say immigration is bad for the country and trust Mr. Trump over Mr. Biden to handle the issue by a 46 to 26 margin. Man with university poll said 53% of Americans want to wall off the southern border. But I noticed something while reading this article and the rest of the paper and began wondering. Have you noticed that everything about the Texas border has dropped out of the news lately? Chicago, New York and Baltimore no longer seem to be complaining about being overgrown with immigrants? Are people no longer coming across the border? Of course, they are, and in the same numbers they were before. It’s just that, since this is a hot button for the election and the current administration seems to at least go far beyond the losing end of the decision of the issue, the media has decided to drop it completely. It doesn’t report it, it must not exist or it must not be important, right? The article goes on about border control issues and the political implications. But the most interesting thing to me was the absence, in any of the rest of the two papers I read this morning, about border control or illegal immigration. Out of sight, out of mind. The crossings at the border haven’t really gone down. President Biden’s proposal, which was rejected by the Republicans, limited the number of illegal crossings at the southern border to only 5,000 a day. That’s right, 5,000 a day was the compromise number offered by the administration, and rightly rejected by anybody who cares. But again, none of that is in the paper or in the media, either. Just a warning; we all worry about issues, but we also forget about issues, when the media decides to ignore their existence. The solution? Read many sources of information, don’t just read the headlines, and read the opposition’s positions regardless of what side you’re on. Be informed. Don’t be fooled.
UCLA Protestors Ask.
Such a Scam. As many now know, the Exxon/Pioneer merger was approved by the FTC on the condition that Pioneer CEO Scott Sheffield is NOT on the board, and no Pioneer exec can be on the board for five years. Really? His crime, or at least what has been alleged in the FTC referral of the issue to the Justice Department? The complaint alleges that “Scott Sheffield attempted to collude with representatives of OPEC to reduce oil and gas output to increase prices at the pump and inflate Pioneer’s profits.” “He is in close contact with top OPEC member state oil, ministers and other high-ranking officials representing the cartel and uses these relationships to encourage OPEC production controls and to discuss U.S. producer’s efforts to maintain capital discipline in order to increase Pioneer’s profits.” “This was not a one-off event but rather part of Mr. Sheffield’s sustained and long-running strategy to coordinate output reductions,” FTC Chair Lina Khan and the other commissioners allege in the complaint. Pioneer’s response? “The FTC complaint reflects the fundamental misunderstanding of the U.S. and global oil markets, and misreads the nature and intent of Mr. Sheffield‘s actions.“ After all these years, it turns out that it wasn’t OPEC or OPEC+ or Saudi Arabia that was fixing the global oil price, something that they have only occasionally been able to do, but it was the CEO of an Irving, Texas based E&P company that was behind it all. Oh, don’t we wish we had that kind of stroke! These guys are idiots and don’t, obviously, understand our industry.
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.
