May 17, 2024
Things I Learned This Week In Houston, the Winstar Casino and Gainesville
Busy Days. It was conference week. Merit Advisors held their annual Barrels & Clays, which benefits the Boys and Girls Club of Gainesville, Texas, home of John Schmitz, who has given back a great deal to his community. The morning consisted of panels and David de Roode and I had a chat with my friend Allen Custard, the president of Pitts Oil, a multi-generational oil company in Texas. It appears to be an exciting time to be a small independent. While the big guys are consolidating, companies are looking for the smaller pieces that fall off the table. It is competitive, but there are a large number of opportunities. Current gas prices don’t help, but that means it is a great time to buy gassy properties. Pitts operates in East Texas and in the Cotton Valley instead of the higher cost, higher pressure wells of the Haynesville. It was a very optimistic presentation.
Busy Nights. Then there was the Super DUG, the unconventional conference held by Hart Energy, and it was super. It was especially well attended by more than a couple thousand people. I hosted a panel of Russel Weinberg, Michael Bodino and Stuart Weinman. The discussion was finance and funding. My question was that if no one is outspending cash flow, what is the need for lending? It was a softball. The answer? Acquisition financing. Working capital to a small degree but if I want to go buy someone, how do I pay for it, especially if I can’t offer an all-cash deal. There are a number of potential IPOs waiting in the wings, including water, compression and E&P. We will see if the market improves. Great guys, great panel. If not private equity and banks? Family offices and diversified lenders. Granted debt was noted at 9%-12%, which is expensive, but relative to what is for sale, maybe not. Expect the consolidation wave to continue in both large and small cap companies, and by everyone’s opinion, it should.
So, Marshall. Marshall spoke at both events. Double barrel. We all love Marshall. He is the eternal bull. Someone commented that they didn’t care if he was right or not, everyone enjoys listening. He said that the ten-year outlook for the oil and gas industry has perhaps seldomly been better. He anticipates inflation will continue, which he argued is good for oil producers. Oil has historically “been the very best inflation hedge out there.” He noted that, for the first time in his career, “you've got arguably one of the best investors in our lifetime buying E&P companies, investing in oil and gas.” Over the next decade, oil will be a “phenomenal” industry to be in, he said. “You're demonizing energy, you're regulating it and that's causing capital starvation. You starve a commodity industry of capital, you have less of that commodity, and everyone in this room knows oil demand is not going to end tomorrow or 18 months from now, as many of the politicians want to happen,” he said. And while many say OPEC has about 5 MMbbl/d of excess capacity (we are at 3.8), he believes, based on tanker export data, that its spare capacity is closer to 1 MMbbl/d. He sees oil strip prices moving to more than $100/bbl at some point this year. The Gas outlook: not so great for now. “On the natural gas side, it's going to suck this year. We’ve got too much gas, but demand is going to really start to kick in next year,” Adkins said.
Got a spare $150,000,000 lying around???? Your next VRBO?
Energy Transition. The following is an advertisement of a Renewable Asset Webcast. I thought the lead-in was interesting. “As some oil & gas companies enter the energy transition to find new opportunities, large numbers of renewable energy developers are already capitalizing on government tax credits and rushing to acquire leaseholds for solar, wind, and geothermal generation projects. Utility-scale renewable energy has created new challenges for project developers. Though similar to managing oil & gas leases and royalties, renewable energy project developers need tailored land management solutions that fit the unique requirements of their complex operations.” And this is from Hart Energy. Notice “Energy”, not oil and gas. We are the Energy and Power industry now.
Just When It Can’t Get Worse. Paul Gill worked at an Exxon gas station from 1975 through 1980. He left 44 years ago. But it seems that Mr. Gill was around gasoline, solvents and oil a lot. Of course, he did work at a gas station. But after 40 years, Mr. Gill contracted cancer, acute myeloid leukemia. So, he did what every good American does when in a pinch – he sued Exxon. It seems that Exxon didn’t fully warn Mr. Gill that working around such things as gasoline could be hazardous to your health. Last week, Exxon was ordered to pay $725 million (yes, you read that right) to Mr. Gill. So, if we multiply all the people who worked in Exxon gas stations for the last 44 years by $725 million, Exxon is a short. The trial was in Pennsylvania, and Exxon will appeal. Amazing it even came to that. $725 million. Come to think of it, I was pumping my own gas back then…
News Release. ADNOC Drilling announced a $1.7 billion contract to provide drilling and associated services for 144 oil and gas targets. In doing so, SLB and Patterson Drilling will become strategic partners with ADNOC Drilling in Turnwell. It will involve 9 drilling rigs with ADNOC Drilling having five already in the partnership. Abu Dhabi today holds an estimated 220 Bbl of unconventional oil and 460 Tcf of unconventional gas in place. According to the release, this 144 well project is in its very early stages and “represents a transformational opportunity for ADNOC Drilling as the UAE’s world class unconventional energy resources will require many thousands more wells and we are in a prime position to deliver them.” It only took Patterson four years of working on it to win this one, but a coup nevertheless.
Headlines and Snippets
The world’s super-rich club now has 15 members worth over $100 billion, the most on record.
The oil and gas industry makes up 40% of all anthropogenic methane emissions, and 78% of that happens at upstream production sites.
Elliot Management added Transocean, with a 9.75M share.
NOV raises dividend by 50%.
Biden, Trump agree to debates in first TV face-offs since 2020.
Commodity trading accounts (CTA) now drive about 70% of oil trades.
Seen Today. A political ad is asking Biden to roll back his phasing out of ICE, specifically against Collin Allred of Dallas, who is running against Ted Cruz. Hitting from all sides.
Chinks in the Armor. Remember when Chevron bought Hess? Oh. Wait. That hasn’t happened yet and now may not. Institution Shareholder Services (“ISS”). ISS, is a “leading provider of corporate governance and responsible investment solutions, market intelligence, fund services and events and editorial content for institutional investors and corporations, globally.” They have a great influence with institutional investors in voting on different corporate issues. This week, ISS said that Hess shareholders should abstain from voting for its planned $53 billion to sale to Chevron.
A Shadow of Its Former Self. The Offshore Technology Conference (“OTC”) was held this week in Houston. The OTC used to be one of the biggest shows in the industry and started to decline after 2014 when the major oil companies shifted their focus from production growth to growth and returns and realize that over 80% of all projects done when oil was $120 are negative return projects. It was the death note for Deepwater. The jack-up market has improved somewhat. The Gulf of Mexico is a shadow of its former self, and, right now, the hottest market is Saudi Arabia, and even there, rigs are being laid down. "The chart shows"? what the attendance has been the last several years at OTC. It’s interesting. Offshore is now getting better and especially deep water. But it’s early. As you can see, attendance continues to trend up over the last couple of years, but it is a shadow of its former self. As activity continues and the focus increases, that will likely change. It’s hard to see a return to the good old days.
It Just Goes to Show. Over the last of my several years on Wall Street, I tried to convince my associates as they came up through the ranks to look hard at the opportunities on the corporate side of business. Well, it’s not easy to get people from New York to move to Texas, but some did. Most wouldn’t. Many fund managers were in Texas as well. Corporate life generally has better hours, better longevity, more camaraderie and can be a much more fun place to work. Well, I didn’t give him this advice. He figured it out on his own. Blake McCarthy just joined Atlas Energy as the Chief Financial Officer. Seven years ago, Blake was a hedge fund portfolio manager for one of the largest hedge funds in the U.S. He wised up, left that side of the business, and joined NOV. He started in investor relations, but NOV quickly saw that bright people who worked at hedge funds have other skills. He served several operational and financial roles and was President of Grant Prideco when he left. Atlas is building a sand conveyor to change the logistics of the Permian basin and was even able to come public last year in a market where virtually no sub-sector is able, and this was a sand company. Blake will have his challenges, but he always seems to rise to the occasion. Congratulations and well done sir. Several sell-side analysts have made the move to corporate. Well done, Judd, Chase and others. May the migration continue…
Quick Reversal. Tesla is rehiring some of the nearly 500 Supercharger team members Elon Musk fired last month. Super Chargers are back on the table?
Did the EPA Just Gut the Hydrogen Market?? For weeks, the Biden administration has been working on the final rules for its Power Plant emissions effort. Originally, it was proposed that power plants had to either use super-low-emissions hydrogen to fuel their plants or install carbon capture and sequestration (CCS) technology to siphon the CO2 from a plant’s smokestack. The IRA act included $7 billion for hydrogen hubs across the country and CCS activity by the oil industry has taken off. Then, the final regs came out and they did NOT include hydrogen. That requirement that was expected to boost hydrogen demand, was not in the final, only CCS. The concern? Technology may not be advanced enough yet for the phase in of hydrogen with existing technologies. Hydrogen requires special pipelines and logistics due to hydrogen embrittlement and other factors. The plan had been to use hydrogen fuel, extracted from water using zero-emissions energy sources like wind and solar. But concerns increased about whether technology would develop quickly enough to become a significant tool to decarbonize the electricity industry. If not, the risk of lawsuits if the technology doesn’t reach commercial scale soon enough or ever. The final rule dropped hydrogen and championed only CCS. Thanks, Mr. Marchetti, for the heads up. We will be writing more about this going forward, but few have seemed to notice that hydrogen use just got gutted by the Biden administration.
EIA Weekly Petroleum Update.
Crude Implications: Bullish – draw above expectations. WTI 1M-12M backwardation at $5/bbl, flat w/w. Money managers cut ICE Brent and NYMEX WTI net long positions by 23% w/w, with net positioning falling back to mid-range.
U.S. Crude Production: Indicated at 131mm BOPD, unchanged w/w, and up 0.9mm BOPD y/y.
Refinery Runs: 16.3mm BOPD, up 0.3mm BOPD w/w and up 0.3mm BOPD y/y. Utilization at 90.4%.
Crude Imports (net): 2.6mm BOPD, up 0.1mm BOPD w/w and up 0.1mm BOPD y/y. Brent-WTI spread at $4.4/bbl, lower by $0.5/bbl w/w.
Gasoline: Bullish – draw vs expected build. Demand up 0.9% w/w and down 0.4% y/y.
Distillate: Bullish – draw vs expected build. Demand up 9.8% w/w and up 2.5% y/y.
Locked In? Recently ProPetro (PUMP) announced a three-year contract to supply its FORCESM electric frac fleet and other services to Exxon, who has been a big customer of PUMP’s for a decade. The company will provide two of its FORCESM electric-powered hydraulic fracturing fleets this year and a third next year, its Silvertip wireline and pump-down services and others. A three-year commitment by any oil company in the current market is impressive, but, without some term, few companies can afford to build E-fleets on spec. And that commitment has implications. As a result, PUMP has appointed Alex Volkov to its board of directors, a designee of Exxon’s. Volkov is currently the transition executive tasked with planning the integration of Pioneer Natural Resources and Exxon. Remember that in 2019, PUMP put Mark Berg on the board at the behest of Pioneer, and he will remain on the board. Nothing like starting at the top, and with the integration of boards, equipment and term contracts, the company is in a good place.
They Don’t Like Us. Average short interest across energy sectors in the S&P rose 8 basis points to 2.65% of shares floating at the end of the month from March. The S&P Energy sector is up 11.4% YTD versus the broader index, up 9.5% from the start of the year.
Stocks with the largest and least short positions:
Ranked by short interest as a percentage of shares float. SeekingAlpha.
$64,000 Question. I am continually getting asked why the valuations of the energy stocks are so low. It seems really simple to me. Since we’re gonna quit using oil in 2030, we cut off my DCF after six years and have no terminal value. Now you can claim that that’s going to happen, that we’re going quit using oil by 2030. But there are still a number of portfolio managers at financial institutions in the northeast who either believe it, or their masters believe it and prohibited investment. Reality and practicality always beat ideology though, and the likelihood that we will no longer be using oil by 2030 is zero. Between the EPA standards on hydrogen and its impact on natural gas, the AI chips that will need 4 to 5 times that of ordinary chips, the increase in population worldwide, all of whom want a better life, and even the IEA says that oil demand and production will continue to grow for the next few years. But it only matters if people listen. And they rarely listen till forced. The first blushes are that it provides a great opportunity in energy. But if that was the case, why are so many smart people shorting the stocks? It’s a matter of timing. Outlook for natural gas is continuing up as new LNG facilities come online. Global demand for natural gas is going to grow for a very long time. And now it looks like the EV industry won’t take away gasoline demand nearly as quickly as expected, but I can sit here and site reasons for things to get better but until large investors begin to understand, my money won’t move the market. It’s a matter of timing. When do you want them and for how long? I don’t see a great deal of downside from here on commodity prices. And all prices can drop and spending will still stay exceptionally flat . So, to me right now, you’re buying stocks for the second half of 2025. That’s only about 12 months away now, but the discount window of the market is typically six months, and this is a very volatile sector and many things can happen. My advice is to find four or five stocks that you think are significantly undervalued and have a very good reason why they probably won’t be in several years and tuck them away. That’s also a hope since that’s what I’ve done.
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.
