November 1, 2024
Things I Learned This Week Disconnected
Hands-Free. It was a brave new world. It seems I left my phone at TSA in Pierre, South Dakota, and by the time it got back to Dallas, I was gone. I have gotten to spend a week without my phone. No shakes. No withdrawals. Didn’t get the DTs. I did notice how much time my travel companions were glued to their phones. I would have been as well. True, I didn’t really keep up with many current events, but that was refreshing. A week without the media. Nirvana. I get it back tomorrow. The party is over. Well, not quite. There is still the pheasant shoot and wine drinking in Burgundy, but I will probably be checking wine notes and everything else on my phone. Maybe if I leave it at CDG….
Move Over, China. Chinese oil demand has disappointed everyone, especially those in the oil and gas industry. But we might have a new best friend. India is now poised to become the biggest driver of oil consumption growth. Increased car ownership, and not in EVs, a young and fast-growing population and more people who should be able to afford “more”.
I too was hunting this week. Will someone please give this man lessons!
And Some Thought Fracking Was Bad. Do any of you remember the “Wagon Wheel Project”? And not the one from “When Harry Met Sally”… El Paso had bought Wyoming acreage from what is now Chevron and wanted to produce natural gas from the Pinedale, but had been frustrated at every turn. The solution? Blow it up!! In 1967, a 29-kiloton atomic bomb was detonated 4,200 feet below the surface. A bomb bigger than the one that destroyed Nagasaki and 2 times that of Hiroshima. And it worked! 200 million cubic feet of natural gas was produced. Two more atomic bombs were detonated in Colorado for the same reason. El Paso then proposed five 100 kiloton bombs near the Pinedale, since it had worked so well before. This time though, residents got cold feet. The next time someone says we don’t think outside the box, give them this! Well done, El Paso, for trying, and thinking well outside of the box.
Schooled. I had “known” for some time that Saudi Arabia uses about 250,000 barrels of oil daily to generate electricity. I made the comment since that use of the hydrocarbon is one of the lowest efficiencies of conversion. It was the reason why Saudi had put such an emphasis on boosting natural gas production over the last several years. I was wrong. About the first part, not the second. I was recently told, by two different sources, that the number was closer to 1 million barrels per day. I pushed back, realizing that my number was dated, but also thinking that some progress away from it had been made. I was wrong. My educators weren’t guessing or quoting. They knew. And it was also mentioned that Saudi gas shale isn’t the same as U.S. gas shale, and not in a good way. I continue to learn. Gentlemen, I appreciate the education.
Where Has the JOY gone????
Exit Stage Right. 16 billion barrels of oil. 308 trillion cubic feet of gas. The 2nd largest shale deposits behind the U.S. And Exxon parts with it for $1.7 billion. It doesn’t matter what oil/gas ratio you want to use, that is some cheap price. Why, you ask? Because it’s in Argentina. And if you can’t get your money out, and the unions wipe out your profits every three years or so, why put up with it when you could drill several more wells in Guyana? The Vaca Muerta shale. It was ten years ago that Exxon said that it had changed its primary corporate objective from growth in production to growth of returns. It looks like this one didn’t make the cut. The buyer is Pluspetrol, a 45-year-old independent oil company headquartered in Argentina, with operations mainly there and Peru. A strategic shift? Probably just a shift to higher and more reliable returns, and the ability to monetize them into a tradable currency.
Now I am Worried!
Still More. Exxon isn’t alone, but for different reasons. Now Conoco looks to be selling $1 billion of acreage in the Delaware Basin. After the purchase of Marathon, the company acknowledged that it needed to reduce debt by about $2 billion. So, this is step one. This is clearly a different motivation than the Exxon sale in Argentina. But, you’re still seeing majors leave some shale behind and look to what else they can pick up ahead. This is also a great example of why service activity slows down after major E&P acquisitions. I would greatly doubt that the company has been aggressively funding the continued development of those billion-dollar properties. Just as I would not expect Exxon to have been shoving more money aggressively into Argentina as of late. Every company needs to clean up its portfolio every so often, especially in an age where we focus on return on invested capital so much (and rightly so!). I congratulate both companies for the moves, even though they are for different motivations. The Conoco sale will likely generate a great deal of interest, considering the size and location.
The Blurring Line. We have long written about the shift in capital provision for the oil and gas industry over the last several years. Private equity and banks used to be the source of capital to the oil and gas industry. Private equity was so long energy, with no prospects of near-term monetization, that they dramatically pulled back from providing equity capital to the energy sector. The number of banks that were willing to lend the oil and gas industry has been cut in half over the last several years and you had everyone from the head of the UN to the head of the UK telling financial institutions to avoid oil and gas. “Just Stop Oil” protesters took over the lobby of Citibank in London because they loan to the oil and gas industry. What are we to do? That’s easy. Family offices have grown like a weed and instead of being worth a few 10’s or maybe 100’s of millions, there are family assets now in the billions. Most of these family offices’ wealth was generated via investors taking risks, so they are often willing to play risk in the oil and gas industry as long as the rewards are good enough. But who provides the debt? Bloomberg reported that the private credit market today has $1.7 trillion of dry powder, and they look for non-investment grade companies and sectors where traditional banks won’t play. Be paying attention to this, as our industry always needs capital, and this means forging new relationships and explaining things in a little bit different way. These credit funds understand the risk and don’t care nearly as much about the restrictions imposed by some of the “feelings” in the market. They want to make money. Just when one door shuts, another one opens.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $68.61 per barrel (down ~2.3% week-over-week) and natural gas is $2.85 per MMBtu (down ~5.6% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.5 MM BOPD (up ~2.3% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 0.5 million barrels week-over-week vs. an estimated increase of ~1.5 million barrels.
Frac Spread Count: There are currently 239 frac spreads operating in the U.S. (an increase of 1 spread week-over-week).
Onshore Drilling Rig Count: There are currently 568 drilling rigs operating in the U.S. (an increase of 2 rigs week-over-week).
Learned Opinion. James West at Evercore has been awarded the #1 ranking for several years. He wrote a piece this week which I have included below. He is a very smart guy and is always pretty optimistic. And longer-term, he still is. It is that pesky “long-term” that gets in the way. I remember a major OFS CEO who said the current level of activity was not sustainable. Yet it persisted for several years. Those who said we have under-invested in the industry for years are now quiet after all that lack of investing has us looking at $70 oil today, which is up a couple of bucks in a couple of days. His comments are more observations than flat out predictions, but he is willing to throw out some numbers. The underlining is mine.
“Most of the major OFS companies have reported, and the 2025 reset is well underway. Downward estimate revisions, while anticipated, continue. The solid growth years of 2023 and 2024 are over as the cycle resets.”
“The North American land market appears to be flattish next year with some downward bias to the U.S. due to low natural gas prices, continued well efficiencies, and the lingering effects of a major M&A cycle among the customer base.”
“The International land market is likely to rise 3-5% with growth in select international markets (UAE, Kuwait, North Africa) and slower activity in others (Mexico, Colombia).”
“The offshore markets will continue to grow in the upper single to low double digits as deepwater rigs continue to be added to the working fleet, although some mixed activity is anticipated in shallow water.”
“A few events need to clear before the OFS group has upside (or more downside): the Saudi Aramco 2025 budget re-set, the Petrobras 5-year plan shuffle (total plan likely higher CAPEX, but 2025 likely lower due to delays), stabilization of Chinese oil demand and results of recent stimulus actions, and the end of tax-loss selling.”
Deal City. Fortress Downhole Tools was founded in 2018, and is the leading provider of proprietary and recyclable setting tools and services to the U.S. onshore energy industry, with patented setting tool technology, a unique recycling program (that is a superior alternative to conventional field redressable and disposable setting tool offerings) and a strong growth profile due to gaining rapid market adoption across the well completions segment. Fortress is headquartered in Broussard, Louisiana, with operations across every major oil & gas region in the U.S. and employs ~115 personnel. And now they are part of NOV, due to a recent transaction where PPHB, my firm, acted as advisor to Fortress. Well done guys.
Snippets.
Sluggish demand for electric vehicles haunted South Korean battery maker, LG Energy Solution Ltd., dragging its profits down by almost 40% from a year earlier.
Brilliant insights: A Possible Rise In Drilling Activity Could Boost Oil & Gas Equipment Demand (wow! What a brilliant deduction!!).
End of the road for electric cars: Shocking chart reveals how EV sales have SLUMPED around the world - with Volkswagen being the latest car maker forced to close its factories as a result.
Scientists report that shooting 5 million tons of diamond dust into the stratosphere each year could cool the planet by 1.6ºC - enough to stave off the worst consequences of global warming. (I will be around soon to collect your diamonds).
Don’t Fly West. California has the highest gasoline and electricity prices in the nation. That makes driving and air conditioning safe, but expensive. Now, jet fuel. Sustainable Aviation Fuel, known as “SAF”, is made from non-petroleum feedstocks. Now you are wondering what those are - Jatropha, algae, tallows, waste oils, palm oil, babassue, a palm nut and carmelita. And that is what you are going to use flying into and out of California. And elsewhere. First, SAF can be blended with regular jet fuel, with limits between 10% and 50%, depending on the feedstock and how the fuel is produced. What is a 50/50 crash? 200 million gallons of fuel by 2035? And plane tickets prices going up.
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.
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