November 15, 2024
Things I Learned This Week While Staying at Home
Wow. I remember where home is. My only trip this week was to Houston for a dinner. A family office group, Autumn Lane, had a one-day conference this week, that, while small, was amazing. And I got to catch up with many good friends like Ole, Vikus, Chase and others. Thank you, Mr. Mooney. The industry is still getting over the BBQ hangover from the Daniel conference in Midland last week, and it has continued to be a topic of conversation. The President-elect has gotten the industry in a good mood, even though most understand that his support is more emotional than actionable. But it is still good to have friends in high places. Otherwise, it was a very quiet week, with analysts reviewing recent earnings reports and looking to the next wave of energy earnings for hints of the future. But this week was slow… Unless Mr. Trump named you to something. Then it was busy, dodging all the rocks and bottles thrown your way.
Waiting in the Wings. We are in the corner, minding our own business, hoping to get noticed, but not by everyone, waiting. Waiting. The pulse of the industry is beating slowly. The second half of 2024 will be slightly weaker than the first half, and 2025 should be slightly lower than 2024. But it’s not bad!! Maybe not, but to most, it is “call me when it starts to get better.” No one wants to be early in energy right now. It has not paid off yet, and the outlook is less than stunning. The futures market has WTI averaging about $72 as far out as it goes. And it may very well be right. We are awash in oil, and we keep getting more and more out of the places we have already found it. U.S. liquids production has continued to climb even with the rig count and frac spread counts down. The question being asked is “why can’t oil stay at $70 forever?” It is a darn good question, and right now the answer appears to be “well, it can!” Q3 earnings are over. Everyone likes us. No one loves us. They will. Or might. But not this far in advance, and as we sit here today, other sectors get the look first. Industrial is sexy and it works. Infrastructure is almost a magic word. Anything that demonstrably exhibits improvement in returns will continue to be popular. Applied technology is hot. Talking to a friend this week, we observed that data centers, AI chips and crypto mining didn’t exist in our world until just a short couple of years ago. And over the next few years?? Hang on.
To my friends who are alumni of the above universities – SMU isn’t mentioned even once.
Impressive. A 21-well pad. Imagine. 21 wells targeting six different zones, all drilled from the same pad. Talk about consolidated logistics! Devon operated this pad in Loving County while bringing on a total of 55 new wells in the 3rd quarter. “The 30-day rates from this 21-well package averaged 3,300 boe/d per well, and estimated recoveries exceed 2 million barrels per well” according to the COO, Clay Gaspar. Four-mile laterals, 21-well pads. Do you think the technology has peaked yet? I certainly don’t.
Going Down. OPEC cut its oil demand growth forecasts for the rest of this year and for next year, for the fourth month in a row. That is called momentum, and it’s going the wrong direction. China is having very serious problems. That meets with a shrug. Sure, China is always having a problem, but their demand growth makes up for anything. Maybe not now. The real estate crisis could take down the financial system and allowing smaller banks to issue public debt - to essentially put the off-balance sheet debt back on - does not solve the problem. There is a reason why Chinese demand hasn’t lived up to expectations, and whatever it is, it seems to still be happening. The result? OPEC says oil consumption will grow by 2% this year, which is just a little less than expected last month, and the month before, and the month before. That is an almost 20% drop in demand growth expectations since July. And they are the bullish ones. $XOM says it’s a supply thing, not a demand thing. I disagree. It’s both.
Go Figure. A single 1,000 MW nuclear plant requires just 640 acres and powers over 776,000 homes. To match this output, solar needs 6,000 acres and still powers fewer homes due to its low-capacity factor - producing power only 23% of the time and providing zero at night without monstrous battery storage. Onshore wind is worse still, demanding 32,000 acres with even less efficiency. Commentary from the Baker Institute at Rice University.
Consolidation Continues. You thought I was going to comment on the continuing consolidation (that is still very much needed) in the oil and gas space. But no. This is in the world of electric vehicles. Due to slower sales, companies are not reaching the scale needed to make money, and that doesn’t look like it’s going to change. Remind you of anything? Hint: OFS. So, Rivian, the maker of a really cool electric truck, was losing over a billion dollars per quarter and had dropped their loss per truck sold from $139,000 last year to only in the $40,000’s now. And now, they can’t make it up in volume. Or at least with their current volume outlook. Enter Volkswagen, who is basically getting kicked out of the Chinese EV market. VW agreed to invest up to $5.8 billion in the American E-truck maker. Their new joint venture will be called “Rivian and Volkswagen Group Technologies.”
Why Oh Why? “Exxon CEO says Trump should keep U.S. in Paris climate agreement.” We rejoined the group in 2021 under President Biden. I was asked if this was a good thing and why would Exxon want it. We are the only country that is in compliance with the targets of the accord. There are no real commitments and requirements as part of membership, but it is participation in the discussion, and you would always rather be on the inside than the outside. And on the inside, we stand as the lone winner. That is leverage. Cheniere agreed and supported staying in as well. With over $45 billion spent on its LNG capability, Cheniere wants a place at the table to champion natural gas as a baseload fuel source. So, while some people may be confused as to why, we think it makes great sense to join a club where you win the club championship from the start.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $68.26 per barrel (down ~5.7% week-over-week) and natural gas is $3.20 per MMBtu (up ~8.5% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.4 MM BOPD (up ~1.5% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories increased by 2.1 million barrels week-over-week vs. an estimated increase of ~0.4 million barrels.
Frac Spread Count: There are currently 227 frac spreads operating in the U.S. (a decrease of 5 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 569 drilling rigs operating in the U.S. (an increase of 1 rig week-over-week).
Who’s on First? Citi’s research team updated its “Thematic 30” list. It is interesting because they increased exposure to infrastructure and fossil fuel themes and reduced exposure to internet-driven sectors. We are a theme!!! As a result of this shuffle, Baker Hughes and Flowserve were both added to the list, noting their “strong potential within the energy and infrastructure S&P sectors.” “Both companies screen positively in our ROE decomposition work as Citi analysts model expanding margins through 2026. Additionally, both companies could benefit from deregulation and Trump’s pro-drilling policy tailwinds,” according to the report. The downside? NOV and Q2 Holdings, a banking software company, were trimmed from the list. But we are encouraged for the group. Themes get attention, and the right attention can aid in the valuation of stocks.
Biography 101. “As part of the transition, gas has really a key role to play and basically that’s really a very important part of the strategy going forward.” François Hubert Marie Perodo is a renaissance man. Born in Singapore to French parents, a degree in Physics from Oxford, captain of the polo team, an engineering degree from the French Institute of Petroleum and an MBA in Singapore. He is 47 years old and runs the family oil company, Perenco, that specializes in buying and operating mature oil fields with operations in 16 countries. I mention the pedigree because 1) jealousy, and 2) this is a smart and young guy with every opportunity in the world, and he is now putting $2 billion into four countries in central Africa. Now, the family is worth somewhere around $10 billion, so this is a real investment. As development in the African countries progresses, access to previously too remote areas is becoming available for oil exploration, and many parts of the continent are well endowed with oil and gas. Investing family money, rather than other people’s money, makes for much more thoughtful capital. I have long been intrigued by the rich and interesting history of our industry and by the figures that changed the industry. Now I am better understanding how amazing that is. So, I see something like this, and I think of the Hunts in Libya and Yemen. Heck, I’ve got the hat J.R. Ewing gave me in my office! Makes you want to give parts of Africa a second look.
Same Old Song. “We are lowering our 2024 EPS estimate to $xx from $yy to reflect third-quarter results, which fell short of our quarterly estimate by $xx per share. Our estimate also takes into consideration moderating North American land drilling activities.” This was the summary of a large number of OFS companies when giving guidance for the balance of the year and into next year. It is perverse. The greater the efficiencies in finding and producing oil and gas, the more we find and produce with less equipment and less time. If our rate of efficiency gains is greater than demand growth, oil prices will go down. E&P companies will make the same or more money, since the efficiencies have lowered their costs. Everyone does well. Except oilfield services. While providing the technology that fosters these efficiencies, their returns are the lowest in the industry. And if we continue to do more with less, those with more will see lower utilization and rates. Critical in every way, but rarely paid for it.
Octoberfest is Over. We have written about Germany, the fact that it is in a recession and is losing business to China and others. This time on higher specification, high-end equipment, not just commodity parts. Now, it has had to reopen coal fired plants just to keep the lights on. Volkswagen announced it would shutter three factories, cut tens of thousands of jobs and slash the pay for its remaining workers, due to high costs and plummeting profits. A Volkswagen official said the closures are needed because the company is not making “enough money from our cars, while our costs for energy, materials and personnel have continued to rise.” A recent poll of 3,300 German companies found that “37% were considering cutting production or moving abroad, up from 31% last year.” Germany has been the strength and core of the EU. The U.S. is now clearly the best major economy in the world today, even with all our issues.
Bitcoin Hits Record. Thanks to expectations of Mr. Trump’s presidency, Bitcoin has reached new records at $90,000 per coin. Over the last couple of years, when Bitcoin was in the dumps, we quit hearing so much about the power needs for mining Bitcoin. Remember, China threw them out 3+ years ago because they used too much energy. Now, at $90,000, expect mining to stage a comeback. Data centers are front and center and are also looking for stranded and more economic power sources. It will be an interesting race to see who wins and consumes the most power. But the U.S. natural gas industry will be one of the first and biggest beneficiaries of the two trends. We kinda forgot about crypto mining, but it is now coming back with a vengeance.
Mo’ Money. The UK government, out of money, decided to increase the Energy Profits Levy, increasing taxes on North Sea production. The tax rate went from 75% to 78%. Yes, you read that right. Production in the North Sea is expected to decline by 10% this year and this chills the reinvestment attractiveness, meaning that the decline in production may continue. Offshore drillers are still optimistic, with one saying their backlog is solid and full. That may be, but an increase in taxing has rarely boosted investment, and while I don’t think we have dramatically under-invested in the industry over the last several years, without investment, production drops, as do tax revenues. It can be a rough sea.
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.
