Things I Learned This Week About Turkeys

November 22, 2023

First, They Taste Good. Second, if you have a professional cook them, instead of myself, they are even better! This week I’m at home with both kids here. Mayhem again. It is great! As we sit in our homes, and even when we are working, we have a great deal to be thankful for. If you don’t believe it, read the first section of any newspaper you choose. Nothing in life is perfect and there is little question we have issues. Look at the next election cycle. But as a country and as people, we have worked hard for our happiness and place in the world. This week, more than just when sitting down for the carving, remember our blessings and hope that the rest of the world can find our peace.

Very Short Piece This Week. While buying the turkey, all else is on me and the kids. Keep the wine glass filled and I can cook all day! The nights get a little short, though. More cartoons, less oil. We know how critical we are to the world we live in and every day more people come around. So, this week, few rig counts or oil price issues. Just some things to think about and enjoy.

Okay. A Little Oil. From the U.S. Oil & Gas Association - There are roughly 32 million workers in fossil fuels compared to 36 million workers in renewable energy. In 2022 oil, natural gas and coal produced 494.05 exajoules of energy globally. Nuclear, hydro and renewables totaled 109.99 exajoules. A fossil fuel worker produces five times as much energy as their counterpart in the renewable sector. So, when renewable sector job growth numbers are thrown around - remember it takes five workers to create the same amount of energy as just one in the fossil fuel industry. Hats off to the mighty Roughneck!

The Future. Wind? Getting blown away. Solar? Baking in the desert with new technology making equipment obsolete faster than computers 20 years ago. But bio works. Biomass, biogas and biomethane. A friend takes wood pulp and turns it into every gas and fuel derivative known. It is industrial. Carbon capture is the purview of big oil, with chemicals and refining chasing “green”, “renewable” and “subsidized” at every turn. What refinery company has NOT had their business development team examine the economics of expansion away from just crude oil as an input? So, it is no surprise that Danish renewable energy company, Ammongas, is installing a biogas upgrading facility at Allen Farms in New York. The unit is capable of transforming waste from locally sourced agricultural residues into nearly 4 MMcm of biomethane annually. The facility operates by purifying biogas — a mixture of methane and CO2 — sourced from the biogas plant. The process “effectively” removes CO2, ensuring the product is at least 98% pure biomethane. The biomethane is then compressed, dried and analyzed for purity before being supplied to clients. The facility is the first in a series of four planned for development by a joint venture of UGI Energy Services, part of the Pennsylvania based utility. Clean, acceptable bio fossil fuels. Sounds like a future track several horses will try and run.

South Beach? One of the richest men in America is Ken Griffin, CEO of Citadel, an investment/hedge fund that runs billions. Recently, he stated that Florida is going to be the new New York in terms of where America’s financial center exists, and he has placed that bet by moving many of his people to Miami (well done, Jim M.). Others are following suit (well done, Ole). Now, he is again expanding his footprint and putting his money where his mouth is. He is in talks to buy a minority stake in the Miami Dolphins, along with a stake in Hard Rock Stadium and the F1 Miami Grand Prix.

Things Certainly Change. The number of drilling rigs targeting oil is 494 rigs, with 118 aimed at natural gas. Only 17 rigs are working in the GoM. Canada has a whopping 125 rigs targeting oil and 74 chasing natural gas.

From the White House. “Hidden junk fees are taking real money out of the pockets of American families. Surprise banking overdraft fees, excessive credit card late fees, and hidden hotel booking fees add up. My Administration is banning junk fees to lower the cost of everyday living for Americans.” Immigration? Foreign policy?

Headlines.

Despite a Spooky Start, Transocean Walking Out of Graveyard (love that one!)
World Oil: Energy Workforce Champions 'All of the Above' Strategy Post Climate Assessment
Permian Basin Drillers Drive Largest U.S. Shale Rig Surge in Nine Months

Finally, Reason. “We found that the demand for ESG investing, by financial professionals working with retirement-plan participants, was more limited than we anticipated,” Ron Rice, vice president of marketing at Pacific Financial, said.

Productivity. Rystad is putting together its third quarter review of production efficiency in the Permian Basin. Their initial take, based on the last six months of production, is that oil well productivity, as measured by the initial production (IP) metric, has increased on an absolute basis in the Midland portion of the basin by 3%, while remaining flat on a normalized basis. In the Delaware region, results so far this year point to a 5% decrease on an absolute basis and a 10% fall on a normalized basis. Another method of calculating the metric – by summing up the first six months of production recovery – shows that Midland exhibits a decline on both an absolute and normalized basis in 2023, decreasing about 5% and 6%, respectively. The Delaware basin shows a decrease of about 3% and 6% on an absolute and normalized basis.

No Sympathy. The New York Times reports that NYC Mayor Eric Adams has announced that, due to the financial impact of ongoing migrant arrivals, the city will have to make budget cuts that will reduce NYPD officers to below 30,000 and slash the education department by $1 billion, among other cuts. He warns more cuts will be necessary unless the city receives more federal money to help with migrant arrivals.

An Updated Update. The news stories about Israel and Hamas are on every page, digital or print. There isn’t enough happening constantly to completely fill the news cycle, but it comes closer than most. While doing some recent reading, there was a commentary that I thought was a bit different. First and foremost, it broke the news that Hamas has/had plans to repeat and continue the October 7th attacks across Israel. The other observations were notable to me as well.

The Washington Post reported that Hamas terrorists had planned a "second phase" of terrorist attacks in Israel in the hopes of provoking a widespread conflict in the Middle East. The report, citing intelligence and security officials from Western and Middle Eastern countries, stated that the terrorists had prepared enough provisions and ammunition to last for several days. They also carried documents detailing plans to attack deeper inside Israel, including major cities and the West Bank.
The goal of Hamas, according to public statements by its officials and assessments by analysts and intelligence officials, was to provoke Israeli incursions into Gaza. They believed that the scale of the attack would derail talks to normalize relations between Israel and Arab nations and incite a new wave of anti-Israeli resistance. We wrote recently that Iran picked the timing of the October 7th attack because the U.S./Saudi/Israel agreements were getting close with pressure to hurry up. The U.S. would sign a mutual defense pact with Saudi, clearly stumping Iran’s plan of being the top regional power player. And Saudi would recognize the sovereignty of Israel.
The report highlighted that Hamas terrorists were aware of the consequences their actions would have on the people of Gaza. The terrorists wanted to make their mark in the history of jihad at the expense of innocent lives.
The actions and intentions of Hamas have raised alarms among analysts and officials, who fear that a wider conflict could be provoked. The ongoing tensions and the involvement of regional and international actors highlight the complexity and volatility of the situation in the Middle East. - The Press Rundown

Continuing Issues. Evercore publishes a weekly Global Energy Technologies & Services piece. This week’s title is “Interconnection Delays Are the Biggest Headache for Renewables, No Line of Sight for Interconnection Improvements”. A great read. “Clean energy stocks enjoyed short-lived excitement over the approval of the IRA last year. While we remain bullish on the long-term outlook for clean energy, with strong conviction for the buildout of the clean energy ecosystem, near-term headwinds, particularly a combination of interconnection delays and high interest rates, continue to pressure capacity expansion across all clean energy verticals. The complex process of connecting new electricity generators to the grid is creating a backlog in the interconnection queue, with the review process resulting in years-long delays and risking clean energy utilization. The interconnection process involves new generation projects proposing grid connection points, followed by utility-conducted reliability studies to ensure safe integration. These studies can vary widely in complexity, from simple rooftop solar setups to intricate models for large facilities. The current process, designed for conventional energy projects, is inadequate for accommodating the influx of clean energy investments.”

The Shape of Things to Come? Norway Turns to Wind-Powered Drilling. Electrifying oil rigs is a taste of what the future could hold if fossil fuel companies get to lead the way toward net zero. This was the lead-in to an article by Kari Lundgren and discusses how a production platform in Norway has now hooked up to an offshore wind farm for its power. First, the U.S. does high-line drilling and fracking and now wind! The world is changing. Now, I will grant you that the offshore floating wind farm costs over $660 million and five years to build. Each wind turbine weighs as much as the Statue of Liberty and is linked to the seabed using powerful suction anchors. Equinor built them as part of a bigger plan to use electricity to slash the carbon footprint of its product. Also, remember that Norway has about 200 hydroelectric plants and the full cycle cost of building and placing those wind turbines will take a very long time to amortize. But, those issues only matter if you move away from half-cycle economics and look at the true cost, which of course very few people do. But a great headline and the future?

How Much? I remember when Mercedes, Toyota and other foreign auto manufacturers started opening manufacturing and assembly facilities here in the U.S. We all knew there was some underlying economic reason, but, since many of these plants were out of the grasp of Detroit labor unions, the thought was that their cost might be lower and that would be the advantage of moving to the States. Well, that may have been some of it. There’s also the fact that there’s a 2.5% import tariff on all foreign made cars brought into the U.S. Now, that isn’t particularly egregious since most of the EU has a 10% import tariff, and that’s for all the people who want to bring a U.S. vehicle in. But the real surprise was that the tariff on light duty and pick-up trucks is 25%, ten times greater than that of a passenger automobile. This is called protectionism. As a result, these companies all assemble cars in the U.S., and now Toyota assembles its Tundra and other vehicles here. But the U.S. pick-up truck market continues to be dominated by domestic manufacturers, completely inversely from that of passenger cars. I don’t argue that the U.S. pick-up truck manufacturers do as good or a better job. They have owned that market for decades and decades, while losing the market for passenger cars. The concern would always be that the Tundra, instead of being a small light duty foreign truck, could actually compete with a Ford F150. That’s when the concern started. As a result, in 1964, President Lyndon Johnson passed the “chicken tax”, which levied a 25% tariff on imported pick-up trucks that still exists today. Toyota says it raises the cost of a pick-up truck by almost $3,000. This is all in the light of the new UAW contract that was just signed with a couple more auto manufacturers in Detroit. Under the new contract, those union auto workers will make 60% more than their non-union and their foreign competitors. And, while that may sound like a great opportunity for those non-union and foreign workers, it isn’t so good as the demand for people overall continues to fall. The real point of this was the surprise at the 25% tariff on pick-up trucks. The other surprise was that it goes back so far. It was no surprise when after doing a little research, I realized that all the profits made by the Ford and GMs of the world come from their pick-up trucks. Protectionism at its best.

Buried on Page 3. Living in Dallas, we have been following the issue of Justice Clarence Thomas and his benefactor, Harlan Crowe, with great interest. Harlan is a local guy who everyone knows through one or two degrees of separation, and he is universally well liked. But the entire issue of vacationing with the supreme court judges became a political football. Congress is trying to decide what rules, regulations, and stipulations it would put, or could put, on the court. The court has come back with a list of realities. And the document is signed by all nine justices. Basically, a unanimous decision. That is an accomplishment in and of itself. The new code of conduct says the Supreme Court isn’t merely a part of the judiciary. It is its head. The decision to recuse oneself from a case is an inherently judicial function and, as such, is the core of the court’s constitutional function which can’t be regulated in any manner by the political branches. The justices have a duty to sit. That means it’s improper for a justice to recuse himself from the case, strictly for convenience sake. The rule of necessity requires the justices to decide a case if most, or all of them, would ordinarily be disqualified under the code. The code makes plain that the justices recognize the importance of ethical constraints, but it also maintains the court’s independence, including the independence of its individual members from attempts by Congress to dictate rules at the courts expense. These things should be more on the front page than buried on the back.

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.