Things I Learned This Week in Norway

May 19, 2023

We will be looking at the European view of the oil and gas and energy markets this week. Thanks for the patience.

Happy Mother’s Day!!!

Cost of Living. In Houston, an employee only needs to gross about $125,000 to achieve the same purchasing power as someone making $312,000 in New York, per Bloomberg.

Deals Continue. I remember all too well my class in Organic Chemistry, taught by a legendary professor, Harold Jeskey. I am convinced that I passed the course by painting his house over Christmas Break. Anyone who thinks “technology” has to have a chip in it never took Mr. Jeskey’s class. Chemistry is one of the key pillars of the oil and gas business, from the geochemistry of oil, drilling mud, completion fluids, friction reducers and more. This is being increasingly understood by investors as well as the non-chemical players in the industry. It can represent growth when the core business doesn’t. With that as the lead in, Foremark Performance Chemicals has acquired NexGen Chemical Technologies. Not just fancy names, Foremark is a technology-driven leader in natural gas sweetening (H2S scavenging) formulations and formalin manufacturing, leveraging its carbon negative production processes to efficiently manufacture and formulate its line of innovative sweeteners, reducing the need for flaring and mitigate the corrosive nature of sour gas, reducing methane emissions. Sounds ideal, right? NexGen is a provider of innovative, alternative natural gas sweetening solutions that improve the efficiency and total cost of operations for E&P and midstream operators, so an exceptionally synergistic deal. The PE firm Black Bay Energy Capital started NexGen in 2018 with Foremark owned by SK Capital, a PE firm managing about $8 billion in assets. NexGen was represented by PPHB.

Energy Transition. When you buy a gallon of gas for your car, part of the money you pay goes for state and federal taxes to maintain the road system we drive on. It works great. But your Tesla gets to avoid that tax, which makes you happy, but you are now driving on the same roads for free. The governments- state, federal, municipal - don’t do “free” very well. Skate by without paying? Heck, they want to single out the oil and gas industry for its depreciation of its asset base, even though it is used in every industry that exists. So, the idea that they will let you drive your Tesla on the roads for free is a loophole that will be closed and quickly. The state of Texas is working on it. It costs me about $80 a year to register my car. But an electric vehicle owner will pay $400 to register their car and $200 a year to maintain it, making you pay at least your state for road maintenance, just all at once instead of every time you fill up. Uncle Sam? He gets a piece at the pump as well. It’s a tightrope. Push EV’s, give rebates when buying and mandate the increase in EV manufacturing, but the billions that come in the door to maintain the federal highway system won’t just go away. EV owners will get hit on the state and federal levels, with Texas leading the way, and will have to build in the cost to the real price for their vehicles. Cash or lay-away. EV sales don’t need any more roadblocks. Falling demand in the face of mandated manufacturing increases is already an issue and another layer of taxation is next.

Government to the Rescue! Kinda. OPEC cut production last fall and again this year. Russia has said it was cutting production, or at least exports, but that hasn’t been fully seen in the market. Altogether, it is 2.2+ million barrels of announced production cuts in 6 months. The U.S. government quits selling out the Strategic Petroleum Reserve (SPR). And oil prices remain weak. The record profits of last year’s oil industry are not being repeated this year, which takes a little wind out of the sails of windfall profits and greed of returning capital to owners. So, with the SPR at its lowest level since the 1980’s, the government steps in. The U.S. plans to buy 3 million barrels of oil for the SPR! Confetti! But wait. That is 60% of one day’s production from the Permian Basin. After dumping 200 million barrels on the market to help bring down gasoline costs for Americans, now they are reversing course but at a snail’s pace. The government only has to do this another 67 or so times to fill the SPR back up. But wait, again. It is for 3 million barrels of sour crude. Shale oil is generally light and sweet. Our refineries are optimized for heavy sour crudes. One possibility? The government and the U.S. refiners compete for oil that is typically imported. What about helping the U.S. oil industry and its shale-dominated production? Any additional buyer at any volume helps, but it sure dilutes the impact of the announcement.

Shallow Water Struggled. We first heard that Cox Operating was having issues when companies were asking me if I knew them, because they were looking for any help possible to collect well overdue bills. Cox was a smaller private operator working the shallow Gulf and bought a package of assets in the Gulf from Chevron Corp. in 2016, and acquired troubled Energy XXI for approximately $322 million in 2018. In the argument that “cash is king”, Cox ran out. It had been trying to renegotiate with creditors and BP, who is owed $250 million for front-end volumetric payment. None of them worked so Cox has filed for bankruptcy, listing both assets and liabilities of $100 - $500 million. Shallow water drilling activity has plunged versus 10 years ago, and has almost been deserted, so Cox being the consolidator of the segment was seen as very positive. Now it falls to someone else.

More Consolidation, Midstream Style. ONEOK, the Oklahoma based utility, is spending almost $19 billion to acquire pipes - Magellan Midstream Partners. This will make ONEOK a $60 billion, 25,000 mile, 900-pound midstream gorilla. Magellan is mainly a fee-based transporter of refined products and crude oil whereas ONEOK has a significant NGL infrastructure system. Now we have E&P continuing to meaningfully consolidate regionally and midstream looking for nationwide systems. And we all know it isn’t over.

Three R’s?? The Colorado Teachers Association recently passed a resolution expressing its belief that "Capitalism inherently exploits children, public schools, land, labor and resources," and opposes "fully addressing systemic racism... climate change, patriarchy (gender and LGBTQ disparities), education inequality and income inequality." We have written about how the consumer might not be the economy’s saving grace, in contradiction of the conventional wisdom. Credit card debt was increasing and the lines at Louis Vuitton at the mall were gone. News this week shows U.S. households are displaying signs of “increasing financial distress”. Typically, credit cards start getting paid down post holidays, but this isn’t happening this time.

Going Broke? Delinquencies are rising on most types of consumer loans, and this doesn’t fully address the amount of floating rate debt on houses and cars. Credit card debt is already at record levels and that debt can have an 18% rate or even higher. So, if you are expecting the consumer to pull the economy up from here, you might need to adjust those expectations.

Financial Terms

Financial Snippets.

Investors are actually the most bearish they’ve been all year, according to BofA’s latest fund manager survey, which showed them flocking to cash on recession and credit concerns.
Home Depot cut its outlook after sales fell more than expected. The retailer now sees comparable sales declining as much as 5% this year.
Container Store plans layoffs, sales are expected to decline further despite Bed Bath & Beyond closures.
BlackRock is calling workers back to the office four days a week, and AT&T is requiring managers to show up at least three times a week.

Headline. U.S. officials said there will be "tougher consequences" for migrants illegally crossing the Mexico border as President Joe Biden transitions away from COVID restrictions known as Title 42. iPhone 10’s instead of 14’s? A hearing in three years instead of two years? Tougher consequences? What is that for the 2+ million migrants crossing the border? Or just those not claiming “Asilo”?

Personal Opinion. “Texas passed a bill banning transgender Mexican care for minors.” Even the headline is prejudicial. The bill bans hormone and puberty blocking treatments, as well as surgeries for transgender children. From the NYT - “The legislation was one of several proposals aimed at regulating the lives of transgender people being considered this year by the Republican-dominated Legislature.” Regulating. And then there was another piece from the same paper noting that just a few transitioning children end up regretting their decision, noting that a minority of cases were dominating the decisions to ban medical treatment before age 18. Aren’t a number of laws and rules being passed on the many as a result of concern for the few? The words that ring through are “children” and “minors”. You can’t drink until 21, can’t vote until 18 and can’t drive until 16 but having surgery at 12 because that is what they want is okay? You can dress anyway you like, be called by any name you choose, have your pronouns announced but the idea of deciding your sexual preferences and orientations for the rest of your life while still a child? Turn 18, come of age and make your own decision. Fine. Governor Abbott surprised many of us with his abortion law and Governor Santos setting the timeframe at 6 weeks is nuts, but this legislation seems to be fair and right in terms of serving the long-term benefit for Texans.

Headline. Global temperatures are likely to hit record highs in the next four years, leading forecasters said. (for the 20th year in a row)

Hot News! It’s BAAAACK. AOC – “Today we reintroduced the Green New Deal (GND) in the House. DELIVERING A GREEN-NEW DEAL. How the Inflation Reduction Act and Bipartisan Infrastructure Law Help Bring the Green New Deal to Life. We’re also rolling out a new tool: an implementation guide to show communities and organizers how to get federal $$ for GND investments in your business. The passage of the Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) provide an historic opportunity to deliver on the most significant climate and clean energy investments in our nation’s history, putting us on a path to take on the climate crisis, repair historic harms to low-income and disadvantaged communities and create good, union jobs.”

“This guide lays out the goal of the Green New Deal and compiles resources from the White House and federal agencies to give cities, states, tribes, nonprofits, and individuals the tools they need to take full advantage of these new programs and create on-the-ground progress toward a Green New Deal.”

Power Ranger. We often mention that the U.S. is the only country currently in compliance with the Paris climate plan due to our substitution of natural gas for coal. Now we read that South Africa deserves kudos too. Kinda. The power grid in South Africa has been intermittent at best as renewables have taken the political forefront. Now that country has seen a significant lowering of emissions. If power plants don’t run and blackouts persist, there are less emissions. At what cost is compliance?!?

Going Nuclear. A number of people are fans of the zero operating emissions of nuclear, including me, but permitting for needed renewable infrastructure takes years so the assumption has been that nuclear would take decades. We have written about Small Nuclear Reactors, and that if they are good (and small) enough to power submarines or aircraft carriers, why not a region? The latest Westinghouse design is being sold and installed around the world, though small in number so far. Now comes the news that X-energy and Dow Chemical are proposing putting a four-unit 320-megawatt equivalent SMR in Calhoun County, Texas (of course) at the Seadrift Union Carbide facility. It turns out the DOE has an Advanced Reactor Demonstration Program, and the facility will be installed under its auspices to provide energy intensive manufacturing with carbon-free energy. It is expected to begin construction by 2026 and be finished within 3-4 years at most. There is still an approval process to go through and we would likely not consider it to be quick but with government sponsorship and its emissions profile, we could be surprised. We hope so.

Wind Power. Where do we play? We don’t do wind. We do oil and gas. You know, build big steel structures, tow them out to sea, and have them either moored or floating, depending on the water depth. Operating out of a big yard at the harbor, which is ideally located for the purpose – with calm seas behind a federal breakwater, one of the deepest and widest channels in the U.S., direct access to the open ocean and no air height restrictions. Managing the flow of equipment for the construction, yards to assemble, welders and fitters working. Boats taking specialists out to offshore platforms. We can do all of that, right? That is a major part of our industry today. Except all of that verbiage refers to an offshore wind project in California. Our industry’s capabilities are often broader than we usually imagine.

Wanna Bet? About nine months ago, I had a discussion with a good, and generally smart, guy who said the Fed would be cutting rates by late 2023. And this was three hikes ago. He was laughed at by some of us, but his argument made a great deal of sense. Now JP Morgan’s head of global rates in London this week said the market is right to be pricing in rate cuts by the Federal Reserve, seeing a U.S. recession as a virtual certainty, saying that recent banking woes have heightened the risk of a recession, and that the Fed may lower its key rate as soon as the third quarter. Of course, it is too early to know if these guys are right, but the conversation and the consensus seems to be coming around, with the market starting to price it in.

Carbon Capture. Oil and gas producers are stepping up global plans to deploy carbon capture projects, both to curb their own climate impact and to develop businesses that will handle emissions generated by third parties. The Global Status of CCS 2022 report reveals a record high of 196 commercial CCS facilities in the project pipeline, including 30 projects in operation, 11 under construction, and 153 in development. With 61 new facilities added to the project pipeline, the CO2 capture capacity of all CCS facilities under development has grown to 244 million tons per annum (Mtpa) – an impressive growth of 44 percent over the past 12 months.

WFA Era. We have written about the $1.5 trillion in real estate debt that needs to be refinanced by the end of 2025, with the current debt held primarily by regional and community banks. No problem?! The overall market is holding up okay. Then you see statistics like this - there is enough empty office space in New York City to more than fill 26 Empire State Buildings. So, have we heard of the WFA era?? It was new to me. I had to look it up. “Work From Anywhere.” Home, the beach, anywhere except your old office space in town. It isn’t just New York City though. Along with banning the use of masks in the city (!), there is a big push to get the big banks to force employees back to the office. The city figures the WFA era is costing them more than $12 billion a year in taxes. San Francisco is worse. We are becoming regionalized away from downtowns to places where people can live, work and play. The winners and losers over the next five years will be interesting to watch.

Pariah. CNN Chairman Chris Licht defended his decision to broadcast a town hall with former President Trump last week. It is interesting to see other news organizations blast CNN for hosting the leading Republican candidate for President of the United States. It ruins the narrative. He was supposed to lose his temper, get angry and bombastic and provide great political theater but in a way negative to him. It didn’t happen. I hope Mr. Trump does not run for President but the Democrats and CNN seem bound and determined to help him. It was interesting watching the numerous talking heads explode over the fact he was cheered rather than booed during the town hall, with the audience, CNN and even its ownership blasted over their “bias”. “The wrong bias is wrong. Only mine is valid.” Makes for great discussion and compromise. That last part was sarcasm.

Speaking of Bias. From a recent Biden speech - “We should be honoring our veterans’ service and sacrifice. Instead, MAGA Republicans want to make the largest cut to VA benefits in history so the super-wealthy can cheat on their taxes.” MAGA Republicans should win the award this year for the most over-used phrase. A MAGA Republican is every Republican who isn’t, well, a Democrat. An amazingly broad brush. And yanking at those heartstrings. “How heartless!!” Except of course, it isn’t true.

Not Just Stoves. So, the Biden administration had to come out and explicitly say that it has not banned gas stoves. And then it did. But it isn’t just stoves. The head of the Consumer Protection Agency, knowing what is best for us, is significantly increasing restrictions on all appliances, from clothes washers to dishwashers to refrigerators, to, well, gas stoves. A 30% reduction in the amount of water allowed for a washing cycle and more energy efficiency requirements. Not quite cleans clothes and dishes. And of course, all of this will add hundreds of dollars to the price of the appliances. And this is all good for consumers?? It is so nice that we have a government so interested in looking after us that we get no say in what we might want. That too was sarcasm.

Let Them Eat Cake. “Three billion individuals use less electricity per year than a typical American refrigerator. Most of them must use wood and animal dung to heat their homes and cook their food. To flourish, these people need far more energy.” Alex Epstein. It is obvious that Africa, Asia and South America aren’t going to solar and wind power anytime soon, at least from the perspective of any real contribution. And at home, we are paying more for less energy. The Biden administration’s new power-plant proposal, announced Thursday by the EPA, would very negatively impact the natural-gas industry. The proposed rule would require most existing gas- and coal-fired power plants to cut their carbon-dioxide emissions by 90% or more over the next 10 to 15 years—up to 96% for the largest and most heavily used plants. Newly constructed gas plants, as soon as they start up, would immediately have to meet standards based on the most efficient—and most expensive—generating equipment, reaching the same 90%-or-higher reduction over time. These massive cuts assume that carbon capture and other measures would be developed to make this reasonable but that is an assumption based on hope, not reality though. The reality will be higher energy prices, more blackouts and a less reliable grid. Any administration that uses agency force to determine capital allocation in energy is not a free-market system and it penalizes everyone with higher costs and less reliability in order to create a society of their choosing based on technology that doesn’t currently exist. That was a long sentence with a number of issues, none of which involve consumer choice. The proposal is based mainly on assumptions that plants will employ carbon capture and hydrogen co-firing which impose exorbitant costs on electricity producers and haven’t yet been used at scale. It tries to compel an energy transition in a way and timeframe that current technology cannot provide. Last year, the Supreme Court struck down the EPA’s Clean Power Plan because it asserted power reserved for Congress and not agencies of the government and it will be interesting to see if this attempt passes muster.

Sustainable. We thought the world had tilted when it was revealed that Europe buys huge amounts of wood pellets from the U.S., our trees cut down to provide it, so they can burn the wood to berate electricity. While this is right up there with burning dung, it is considered “sustainable”. But by that measure, we should be selling them our livestock dung since it too is sustainable. Now imagine tires. Old used car tires. If there is a nastier burn, we don’t know it. Yet the Georgia Service Commission has stretched the idea of “alternative energy” to approve burning tires to generate electricity. It will take an omen for that to fit in. In this day and age, a U.S. state has decided that burning tires for power is a good thing. Now Europeans burning our forests doesn’t sound like the dumbest thing we’ve heard.

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 service 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.