May 24, 2024
Things I Learned This Week Sitting at Home for a Minute
Early Doldrums? So, what is going on this week?!?!?!? Nothing. Memorial Day is Monday. Most colleges are out, and other schools are ending. Summer vacations loom on the horizon. The oil business? War in the Middle East, coups, elections, wars and starvation in Africa and the Caledonians want to separate from France, but that doesn’t get headlines. China is threatening Taiwan, the Philippines, us and anyone else they can find. Politics are raging in the UK, and the EU presidency vote is pending. U.S. election junk is in full swing. The oil business?? No one noticed us this week. That is good. We want people to buy what we make, and we make what they need. Keep your head down and do a great job. Your head stands a much lower chance of it getting cut off. Earnings are over, business is stagnant and pricing gradually erodes in a stagnant market, but not by much. This is what is called “slogging.” Oil prices don’t move, the rig count stays flat, nobody wins and no one loses. But we just slog ahead knowing one day we will find appreciation. They are already critically in need of us. They know it. So do we.
What is a Person to Do? Go to France. It doesn’t look like I will miss much here, so a couple of us (20) are going to ride bicycles and drink wine in Southern France. It wasn’t that we wanted to go. We just had to.
This is Not Good. It isn’t just Mr. Biden who is slowing LNG efforts in the U.S., but now simple economic woes. The lead contractor building the Golden Pass LNG facility for Exxon and QatarEnergy filed for bankruptcy this week. Zachry Holdings, a private company with 20,000 employees which claims it is “North America's pacesetter in turnkey engineering, construction, maintenance, turnaround and fabrication services to the energy, chemicals, power, manufacturing and industrial sectors,” and its 20 subsidiaries filed for Chapter 11 protection after cost challenges over a change in billings scheduling. Zachary Holdings is charged with almost $6 billion of project work and the partners are not providing additional funding, so, bankruptcy. There will be three LNG trains eventually at the Golden Pass LNG project. Bankruptcy today just means that all the debt goes away as well as the equity, but the business continues to operate. As a private company, it could make Zachry’s future at least interesting. And we are confident that Exxon will complete the project. Eventually.
Consistency. Ya’ Can’t Trust the Media??
And There are More. “Please take notice of the Chapter 7 Bankruptcy Petition filed by Monforte Exploration LLC.” The company provides oil drilling and exploration services, and its principal assets are offshore oil & gas leases Ship Shoal 277, 290 and 291.
Under Constant Fire. Last week, we wrote about how a Pennsylvania service station worker had sued Exxon saying Exxon was responsible for his cancer when he pumped gas there from 1975 to 1980. He won his verdict and $725 million. Several months ago, two activist groups filed a suit against Exxon on climate related issues, demanding the company do more to cut its greenhouse gas emissions. Exxon disagreed with the points of the suit and counter-sued, saying the activist abused the shareholder proposal process. The activists dropped their suit, and now Exxon is pressing the advantage, continuing their suit against the activists. They travel in packs. The California Public Employees’ Retirement System (“CALPERS”) came out and said it will oppose all Exxon directors since the company is continuing its suit against the activists. CALPERS CIO Michael Cohen said Exxon appeared to be pursuing "an agenda of sending a message of shutting down shareholders' ability to speak their mind." Speaking their mind or nuisance lawsuit?
Honorarium. Bud Brigham has been a top figure in our industry for decades. Using seismic to find the dual porosity fractures in the Austin Chalk to building the world’s longest sand conveyor. He took Atlas Energy Solutions, his sand company, public last year, which was beyond most. To honor the accomplishments of everyone involved in building Atlas, Bud had a statue commissioned by an exceptional sculptor in Guatemala City. Bud, like many of us, is a big fan of Ayn Rand. Her quote - "Throughout the centuries, there are men who took their first steps down new roads, armed with nothing but their vision." That is Bud’s Atlas, too.
A Different Game. So, I’m reading the paper today, and instead of reading the news, I’m reading about golf. Schoeffler won the PGA, but SMU‘s DeChambeau put on quite a show. Bouncing off trees, taking amazing shots. He came up one short. The statement that really got me though was the one where he was only 221 yards from the hole, so he hit his eight iron within 3 feet of the hole. His eight iron, eight iron… OMG I’m lucky if I can get my eight iron to go 150 yards, and he’s smacking it 221. And I thought I played golf.
Power Hungry. Texas' ERCOT Power Needs to Nearly Double Over Next Six Years. That was the headline. Remember when ESG first hit? Then it was a tsunami. A big tsunami. You couldn’t listen, hear or read anything, in print, at a conference or meeting, that didn’t include ESG. If aliens would have landed, they would have thought we worship the god that was ESG, since it was the first words uttered by anyone, for some time. Now? It’s AI. Every marketing campaign for every product has touted how their business, and your satisfaction, is based on them embracing AI. AI is a chip that is significantly more complex than the previous generation of computer chips. The leading maker of AI chips just saw their market cap pass $2 trillion. Just like a computer, while there is a “chip” whose size, speed and capacity may vary, all of the other electronics are critical as well and even the manufacturing location, and then there is the software to run the chip. It is a more complex industry than just making a chip.
So What? All those chips, all that power needed to run it. It is getting embraced rapidly. And, unless the electric utility can expand “rapidly,” two lines cross. We have written about this a good bit and will continue to do so. Like cryptocurrency just a couple of years ago, discussions about stranded gas, remote power and a city’s baseload capacity will all become big topics. There is likely to be a shortage of electricity in Dallas over the next several years.
Electricity is in Growth Mode. While demand for gasoline and diesel is doing fine right now, it is one of the least efficient uses of the resource, but all the derivative products, from lipstick to SuperGlue, are still in growing demand. But natural gas? “The Shape of Things to Come!!!” While drilling for and producing natural gas has fallen out of favor due to price, near term, the power needed, and the source of that power, is going to be met, increasingly by natural gas. Stranded gas? This is why everyone, and I mean everyone, believes natural gas prices will improve by next year’s New Years Eve. That kind of consensus makes me nervous!
Research from Goldman Sachs suggests that data center power demand will increase at a 15% compound annual growth rate (“CAGR”) through 2030, at which point it would reach approximately 8% of total power demand in the U.S. by 2030.
Electricity – Lead With It. We keep leading with oil and gas, or solar, or wind, or coal or nuclear. You will only incite arguments about whatever silo you name. It’s not Power either. Power conference, nuclear power, power forwards. There are too many uses for the word already for us to wear it out even more. The core issue? Enough electricity to power an AI world. Electricity. Decide it’s critical. Done. Decide we need more, and lots more. Done. Now, from this perspective, how do we generate more electricity? Now we can argue endlessly which source of electricity is best, but there is no longer any question as to “if” and the “when” is now. So, after the arguments, what is the lowest full cycle cost to meet that electricity demand? Without low-cost electricity, we lose the competition of finance and economics. Every society that has succeeded best, did so with a cheaper energy source. So, let the arguments begin, but now it is against the backdrop of meeting an identified need rather than internecine fighting among the various sub sectors that produce electricity.
A Portfolio Manager Buying Energy Stocks Now!
Expert Opinion. “Oil prices continue to ease lower within the $82-85 range seen through May, with prices hovering at $82 Brent. Recent market softness has come on the back of weaker data, including rising oil inventories, tepid demand, and refinery margin weakness and the increasing risk of run cuts. Given this backdrop, we continue to expect that OPEC+ holds its production cuts through 3Q, and we actually project the group to hold through the rest of 2024 and into 1H’25 as our base case. Market sentiment looks also to expect a rollover of cuts through 3Q too. Any hint of tapering or even discord among OPEC+ producers ahead of/during the upcoming June meeting could be bearish for prices, near term. A deeper cut would likely be a bullish surprise, but remains a low probability in our view.” – Citi.
Headlines.
MSFT’s AI Data Centers to be 100% Renewables Powered by 2025.
“The Racial Bias Built into Photography.”
Foreclosure. Everyone has been chronicling the China property market and its meltdown that started well over a year ago. The government is being forced to make bad decisions on relaxing mortgage rules, getting local governments to buy unsold homes. If the Chinese real estate market crumbles, a global financial remastering may very well occur. What the government is doing smacks of desperation and, after meeting with management, I understand better now that it’s received.
Close to a Texan’s Heart. There is a cattle shortage, with beef cattle supply at about the lowest in around 80 years. Dairy farmers are breeding more calves for slaughter than replacing milk cows. Of course, last year there was a huge glut of milk that had to be dumped and, now, not enough cows. Organic volatility.
Increment Isn’t Large. The International Energy Agency (“IEA”) lowered its crude oil demand forecast for 2024 by 140,000 barrels per day to an annual growth of 1.06 million barrels per day, compared to OPEC’s 2.25 million barrels per day call for this year, citing poor industrial activity and weaker diesel consumption.
Trimming Back. Mercedes is quitting its large electric vehicle platform manufacturing plans, having apparently been put off by the EQE and EQS' slower than expected sales. Oh dear. It was scheduled to be released for 2028, and this was supposed to be long distance version. The company said it would keep building the shorter distance version, anticipating that the global share of electric cars and plug-in hybrids in Mercedes new car sales will reach up to 50% in the second half of this decade.
Headline versus Reality. U.S. utilities plan to build 133 new gas-fired power plants, and natural gas power generation is projected to increase 18% between 2024 through 2035.
EIA Weekly Petroleum Report.
Crude Implications: Bearish – build vs expected draw. WTI 1M-12M backwardation at $5/bbl, flat w/w. Money managers cut ICE Brent and NYMEX WTI net long positions by 10% w/w, with net positioning 9% below 12-month average.
U.S. Crude Production: Indicated at 13.1mm BOPD, unchanged w/w, and up 0.8mm BOPD y/y.
Refinery Runs: 16.5mm BOPD, up 0.2mm BOPD w/w and up 0.4mm BOPD y/y. Utilization at 91.7%.
Crude Imports (net): 1.9mm BOPD, down 0.7mm BOPD w/w and up 0.6mm BOPD y/y. Brent-WTI spread at $4.2/bbl, flat w/w.
Gasoline: Bearish – draw below expectations. Demand up 5.0% w/w and down 1.3% y/y.
Distillate: Neutral – build vs expected draw. Demand up 1.4% w/w and down 7.5% y/y.
Snippets – Oil and Energy Insider.
“…we have revised our U.S. natural gas supply-demand model to incorporate the latest data and our updated assumptions on future power demand growth driven by data centers.”
“…which supports our view of higher long-term natural gas prices above $3.50 per MMBtu.”
“Oil prices have remained rangebound this month, but falling inventories and a slowdown in U.S. inflation could provide the spark for a breakout.”
I Was Encouraged. I was reading about the last round of loan forgiveness, which this particular article called bribes. Just in the case of buying votes, which has been a political staple since mankind consisted of only two people. The article mentioned the Supreme Court’s decision to stop President Biden’s $430 billion loan forgiveness program. Chief Justice John Roberts wrote that the administration’s description of the plan as a “modification” was true “only in the same sense that the French Revolution modified the status of the French nobility.” I had always thought of anything said or written by the Supreme Court would be very serious and factual. This was very good to see. And it turns out that there are scholarly papers written on the topic of humor on the Supreme Court. One of the least humorous is one of the ones I respected the most, Ruth Bader Ginsberg. No surprise. Having a sense of humor has seemed to have gone out of style some time ago. Even the late-night talk show opening monologues have been effective. It’s hard to be funny when you can’t poke fun at anything or anyone, rather than risk offending someone. But to see that sometimes it still shows itself, in such august surroundings the Supreme Court, gives me hope that much of this has been a phase that our society has been going through.
DEI Defined. Over 35 different student groups signed a letter to the President of Harvard, arguing that withholding diplomas and suspensions were unfair since students were just voicing their opinions. Of course, most weren’t students and destroying property and bullying other students is not “voicing your opinion.” Besides that, there are student organizations involved. It sure sounds diverse to me, I guess grades are equitable and with so many diverse organizations, inclusion might be a bit of a challenge. Some of the groups signing the letter were:
Harvard Radcliffe Asian American Association
The Bengali Student Association at Harvard
Harvard Arab Alumni Association
Harvard Arab Women’s Collective
Harvard College Pakistani Students Association
Sikhs & Companions of Harvard Undergraduates
Harvard Undergraduate Black Muslims Collective
African American Resistance Organization (AFRO)
Black Students Association
Harvard Caribbean Club Eritrean and Ethiopian Students Association
Dominican Students Association
Black Mens Forum Black Arts Collective
Harvard Society of Arab Students
Harvard Arab Alumni Association
Harvard College Generational African American Students Association
Association of Black Harvard Women
Harvard College Pakistani Students Association
Harvard Arab Women’s Collective
Harvard Islamic Society
Harvard University Muslim Alumni
Harvard College Nigerian Student Association
Harvard Organization for Prison Education and Advocacy (HOPE)
Fuerza Latina
Latinas Unidas de Harvard College
The Cuban-American Undergraduate Student Association
Harvard College Puerto Rican Students Harvard Undergraduate Dominican Student Association
Harvard Undergraduate Brazilian Association
Harvard Caribbean Club
Harvard Radcliffe Chinese Students Association
Take the Below Chart with a Grain of Salt. Remember the Power Plant Emissions Act that became final last month, handing green hydrogen a defeat, not including it in the incentives along side carbon capture. The reason? Fear that the technology might not developed as quickly as needed and to avoid potential lawsuits if that happened.
How Sensitive are Natural Gas Prices? With Freeport LNG operating at a fraction of its full capacity, natural gas futures have fallen following a short rally the week before.
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.
