November 8, 2024
Things I Learned This Week in Many Different Places
Moving Targets are Harder to Hit. For the last several weeks, I have been blessed by getting to spend time with great old friends and meeting great new ones. And they were from all walks of life, not just energy. There is a camaraderie that exists between people who enjoy the outdoors, narrowed down even more to people who shoot and hunt. I have spent most of the past two weeks in beautiful places, drinking fabulous wine, eating too much fabulous food and learning. The education ranged from details about the “Wagon Wheel Project,” which we wrote about last week, involving nukes for fracking gas reservoirs, to wine tasting with a national wine judge and drinking in the world’s best wine regions. Okay, okay. I learned how to better lead a fast-flying pheasant and got lots of practice. It was multiple bucket trips rolled into one. And now, back to the grindstone!
Trump. Speaking of grindstones, Mr. Trump got re-elected, has his party in the majority in the Senate and may end up with the House as well. Even the more liberal media outlets are acknowledging his win as a “mandate.” It turns out that 4.5% points in an election is a complete blow-out. Now, we get to see what happens, and that is still undergoing great debate.
Drill Baby Drill? Not likely. Trump can ease some rules and regulations, but don’t expect giant changes. We still need to reduce CO2 and methane emissions, regardless of which political party is in power. We can get more confidence on future offshore lease sales, which have been continually delayed by recent administrations. Pipelines and other infrastructure projects could get accelerated as well. But the likelihood of a giant drilling boom is low. Right now, the industry is drilling and driving activity with economic capital discipline in mind. I am hard pressed to see what near-term things Trump can do that could either change the economics enough to increase drilling while maintaining current profitability, or incentivize the industry to produce more. I realize that E&P companies as well as WTI crude saw a pop in the market after the election, but I have trouble getting carried away.
History. For seven years, we borrowed money to accelerate drilling, to pull forward the net present value (“NPV”) and we not only lost billions in net income, but hundreds of billions in market value. The odds that we are going back to that are low and I will take the under on almost any bet. Think about it. If U.S. drilling and production ramp up, what happens to the oil price? It goes down. We are already well oversupplied with oil, and the U.S. increasing that surplus will not raise commodity prices. The reverse actually. Trump can, and probably will, get any number of the infrastructure projects approved in a more reasonable time frame, including pipelines to bring Northeastern gas to end markets. But, if Biden had done that, today’s natural gas prices might be $1. So, all of this is happening on a somewhat predetermined timeline. We all know that a great deal of incremental LNG liquefaction capacity is coming online, it is expected to double current natural gas exports from 12 Bcf/d to 24 Bcf/d. Unfortunately, each project is binary. Yesterday they did not need feedstocks. Today they do. It is turning on a switch and while that sounds very predictable, historic costs and completion timeframes for LNG facilities are not well defined. Eventually, the Haynesville will boom, Corpus Christi and Cheniere will love all the associated gas from the Permian and pipelines will carry incremental gas to new markets from the Marcellus and Utica. Trump can greenlight approvals for new LNG permits and can better activate those currently in legal limbo, but that capacity is already in the above calculations for 2030, so any issues are likely to slow demand growth, not accelerate it.
Basic Economics. In crude oil, the same applies. The world is awash in oil right now. China’s lack of recovery is often given as the reason, but we also point at the 13 million barrels of liquids we produce now, even with a rig count that has been dropping the entire time. If we really ramp up production, we will just add to the current oversupply and prices will come down. And investors now care much more about return on (and of) capital than production growth. People have commented that we have under-spent on global E&P for years and we are reaching a point where that really shows. It is now late 2024 and oil is struggling to hold $70 a barrel. If we had spent all that money, where would oil prices be? Lower than they are now. Storage levels used to be a serious issue, but in the “just-in-time world” we have now, I can use my Bloomberg, identify every oil tanker on the water in the world, and bid enough to get what I need much more quickly than in the past. Remember, today’s Amazon can have a package delivered from a purchase to your house on the same day. 15 years ago, that was two weeks. So, in today’s world, don’t get overly hung up on short-term storage reports.
New York Authorities Announce Peanut The Squirrel Died Of COVID. A headline from Babylon Bee.
Unequal Opportunity. The problem comes from the bifurcation of margin increase across most of energy. If efficiencies increase at a faster rate than demand growth, oil prices will likely decline. But for an E&P company, that isn’t all bad. If I increase my efficiency by 5% and demand grows by 2%, oil prices will decline. But even if oil prices decline, as long as I am improving my efficiency by more, net margins rise. That is a distinct positive for the E&P sector. But the OFS sector is a different story. They provide the efficiencies, but the oil companies reap the benefits. Their clients generally have stronger balance sheets and live in a much more variable world correlated with oil prices. But the OFS companies only see their businesses and margins shrink, as efficiencies reduce their revenue potential while their clients buy champagne. If you don’t develop technology that brings demonstrative evidence to oil company returns, you are a commodity company dying a slow death. Damned if you do and damned if you don’t.
“Damn Good BBQ.” It is Texas. We don’t have poutine, scrapple or spam. We have BBQ. And there are many, many places to eat good BBQ. But this week, Daniel Energy Partners, a Houston based research boutique, hosted a BBQ cook-off in Midland, Texas, and it was nothing short of amazing. 5,000 people. Every Oilfield Services company in the industry and several E&P companies were represented, and due to the election the night before, the tone was decidedly positive. John and his team have put together two of the most remarkable and valuable conferences in the industry. In addition to the Midland BBQ, is the first quarter event at Minute Maid Park in Houston. No other industry even comes close, with bankers, CEOs, roughnecks, engineers, investors and a lot of people who really know BBQ. I came back and aired out my clothes. Fabulous and many thanks to all who made it work.
The Vibe. It was an interesting day. Virtually everyone was in the services business. As we have written in the past, we are in limbo. Business isn’t terrible and it’s not great. And no one knows when it will get better. The outlook posted by the public OFS companies looks to a weaker Q4 than had been expected, and numbers have come down for next year, but don’t be fooled. No one has any idea. As an industry, we are terrible at predicting commodity prices and therefore, service activity. Every company has a couple of products and services it is greatly proud of and are doing very well. But it’s like asking someone about their stock portfolio. All you hear about are the winners, and not the losers. You would think life is fabulous from listening to all the great things companies are doing, yet many are still not turning a profit. We are pretty much past the “keep the lights on” stage and should be looking to optimize profitability, but a number of companies are still trying to get into positive territory. If the latter is the case, a hard look at the strategic future is likely needed. Badly. We are an incredibly optimistic industry, and things are always going to get better soon. And, as an industry, we have done incredible things over the last several years, becoming the world’s largest oil producer, the world’s largest LNG exporter and the leader in the technologies that make all that possible. And while that will most likely continue as our industry will remain one of the most critical to our world, that does not automatically mean that every company will do great. But it is every company’s obligation to try.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $72.18 per barrel (up ~5.2% week-over-week) and natural gas is $2.71 per MMBtu (down ~4.9% 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 increased by 2.2 million barrels week-over-week vs. an estimated increase of ~0.3 million barrels.
Frac Spread Count: There are currently 232 frac spreads operating in the U.S. (a decrease of 7 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 568 drilling rigs operating in the U.S. (no change week-over-week).
The Long Good-bye. The following people said they would leave the country if Trump got elected. So, if they don’t leave, they are hypocrites, but maybe we will have heard the last of their political threats. If they do leave, well, I’m not really sure who will care.
1. Alec Baldwin
2. Whoopi Goldberg
3. John Legend
4. Chrissy Teigen
5. Rob Reiner
6. Barbara Streisand
7. Cher
8. Nancy Pelosi
9. Hillary Clinton
10. Megan Rapinoe
11. Tom Hanks
12. Amy Schumer
13. AOC
14. Lady Gaga
15. Taylor Swift
16. Bill Gates
Take All of Me. The issue with M&A is similar. When an E&P company buys another, the consolidation savings are dramatic and happen fairly soon. Once the price is agreed to, the target fires all their people, closes their facilities and just asks the legal department to send them contract files. In the OFS business, the consolidation potential is high, but not nearly as seamless and easy as E&P. The EBITDA per employee doesn’t drop like a stone, since the combination of workforces is a very different thing to achieve. Service and equipment companies have a much more complicated life than drilling a well and producing hydrocarbons. And while the need to drill and produce a well to get the hydrocarbons will not go away in our lifetime, the amount of equipment needed continues to decline.
Two Crazes Collide. We all know about Microsoft reopening the reactor, shut down in 2019, to power its data centers. That is the resurgence of nuclear and the new industry of AI data centers. Sweden is considering a Small Modular Reactor (“SMR”) for data center use there. But now, the government is setting limits. Talen Energy was in an agreement with Amazon to boost the output of its nuclear plant in order to serve Amazon’s co-located data center. That was a bridge too far. FERC said “no dice.” It drove home the idea that the agency should “continue to prioritize grid realizability and existing stakeholders over rapid load growth, and new power market entrants.” So, we don’t have enough confidence in our current grid reliability to allow current providers to serve new markets, such as AI data centers. We have been fans of the idea of a nuclear resurgence. If you can put one on a submarine, a 2-acre building in West Texas might seem viable. New construction of co-located power generation and data centers might see more headway, but so far, hopes to co-locate a data center to an existing nuclear plant have declined, since FERC is saying any additional power you generate has to go into the grid or they won’t approve it. This could be another thing that makes natural gas more attractive over time, but the development of nuclear power continues to be a necessity in my mind.
Celebration. Who knows what the future holds, but for now, SMU is ranked #13 in NCAA football. That puts us ahead of LSU, Texas A&M and Ole Miss. Amazing. And we have a bye this week, so we get to enjoy it for at least one more week. To all my SEC and ACC friends, eat my dust!!! In Equestrian, of which 24 Division 1 schools have a team, SMU won the national championship in 2023 and 2024. We are #10 in Women's volleyball and #20 in men's soccer. As expected, golf, tennis and swimming do very well too.
Travel. Dallas – Philadelphia - Quebec City – Philadelphia – Dallas – Pierre – Dallas – Houston – Denmark – Copenhagen – Paris – Burgundy – Paris – NYC – Kansas City – Dallas – Midland – Dallas. One month. The joy of travel.
Uh Oh. It has been in the press lately about how Saudi Arabia is running out of cash. On the face of it, it is hard for many of us to imagine having cash flow woes when you just reported a quarterly net profit of $27.5 billion, but that is down from $32 billion this time last year. Again, sympathy is tough. And to twist the knife further, the downstream business lost money while the E&P segment made $53 billion… For the quarter. The problem is the $30 billion in quarterly dividends paid to shareholders, with the government holding a 82% stake. So, earnings are down due to oil prices and narrowing differentials from weak product demand. So is every other major’s earnings. Now, they are borrowing money or dipping into cash reserves to pay the dividend. Some parts of the budget have already been reduced or delayed, including the model resort city, Neom, that is being built. But with E&P being such a large generator of cash flow, we would expect it to stay relatively busy, generating the highest return of cash in the company.
It’s Not Just SUVs or Is Your Minivan Next?? Because Valencia, Spain has seen recent flooding, climate activists in Scotland, known as “The Tyre Extinguishers,” are defacing SUVs in Scotland, stenciling “these cars kill Valencians” on them. Solidarity. They are acting in solidarity with the people in Spain who experienced flooding. I am only writing that twice to see if it made any sense the second time. Spray painting “these cars kill children” would seem a little extreme but they say they will continue until climate action is taken to end flooding in Spain. That is another one I had to read twice. The message? If you own an SUV in Scotland, beware. Idiots are out with spray paint.
Pre-Election Oil. OPEC+ said it would wait to start putting additional oil on the market, unwinding previous cuts, through December. It is the ultimate knee-jerk. It isn’t a matter of whether OPEC+ puts more oil onto the market, but when. Do the longer-term futures change? No. This is merely a short-term delay of something that is inevitable. But to show how minor the issue is, OPEC+ was scheduled to increase output by 180,000 barrels per day, 0.18% of daily global production. The total amount currently curtailed is estimated to be about 2.5 million barrels daily. The contradiction, of course, is that OPEC+ says that the oil market is deeply undersupplied, but it continues to delay the scheduled production increases to prop up prices. A year ago, every human being in the energy business had their 47 reasons why oil HAD TO GO UP. We have a long list now. But many may wait until it actually starts to happen before placing any really big bets.
Real Capital Discipline. Suriname will not consider loan offers against its estimated $26 billion oil holdings. Wow. Not borrowing money. “Suriname does not want to ‘pre-sell oil that we still have to lift’ and use it as collateral for loans that will burden future generations.” Everyone take note. If they can, we can. Or shouldn’t.
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.
