October 18, 2024
Things I Learned This Week Hunting Geese in Quebec
Detection. It was cold, the wind was blowing, we were on an island in the middle of the St. Lawrence River. And I have never seen so many teal and snow geese before. Many thanks to Eric Bergeron of Flyscan for the hospitality. The race to be the winner in emissions detection has yet to be decided, but there are several different companies and technologies vying for the mantle. But what about detecting liquid spills and other pipeline logistical issues outside of CO2 and methane? I have always been fascinated by technology, and this company is the first and most efficient I have seen in linear and location detections. Leading edge in a niche where current technology relies on a human looking out of an airplane for hours looking for things, many of which he can’t even see. A pipeline for Enbridge or leaks at Cushing. Amazing technology. Coming out of geophysics, we collected data manually to wring out the information since that software, computing power and memory didn’t exist. That is why reprocessing older seismic data has been the norm for years now. One pass by Flyscan can collect 3 terabytes of data. The value of the data, and the volume of it, creates a great deal of value. It was a great education for me, a great time with some great guys and a bunch of flying objects. I learned a lot.
Bomb What? Israel announced this week that it would only “attack” Iranian military locations and not oil and gas installations. Oil dropped 5%. Are we an industry that embraces violence and dislocation? No. It does point out the reality, which is a world with a current crude oil surplus. And even if Israel’s retaliation negatively impacted Iran’s oil production, OPEC+ could accelerate the return of 2.2+ million barrels of oil per day, offsetting the losses of Iran’s production. Any spike in oil prices could be very short-lived.
Going Critical. The news hit a few weeks ago about Microsoft reactivating the nuclear reactor that was retired just five years ago at Three Mile Island. We also mentioned that Diamondback Energy was considering a small modular reactor to run their Permian operations. All of this was met with eye rolls. But it seems to be a coming wave. Amazon signed a deal with Dominion Energy to explore building a small modular nuclear reactor near their North Anna station in Virginia. Also, this week, Google announced an agreement to purchase power generated from multiple small modular reactors that are to be built by nuclear energy startup - Kairos Power. Why? All those stories we have been hearing about power demand from AI are now coming true. And the only thing that can slow down the transition to full AI is the availability of reliable power. Urgent. Very high needs. The energy density of nuclear beats everything else. If you need a lot of incremental, reliable power, and you need it now, there is no other good choice.
From a Webinar Pitch. “Are you drowning in data but thirsting for insights? The oil and gas industry is awash with data, from seismic surveys to production reports. But is this abundance a blessing or a curse?”
Here We Go!! Earnings for Q3 are starting to hit, OFS first, followed by E&P. Both the quarter and the murky crystal ball are concerns. Liberty, one of the top pressure pumping companies with a great deal of synergistic integration, missed on both earnings and revenues, with an almost 20% miss on earnings. One analyst noted the Company as having “a challenging demand environment” and said the results for the quarter would have a slightly negative impact on the stock, and it did drop less than 2% in post-hour-trading and fell 8% the next day. It was also the next day when another pressure pumping company, ProFrac, dropped -8.2% after Morgan Stanley downgraded the stock to a sell. Morgan Stanley was the lead in the IPO. That is interesting at least. The analyst said he sees “more downward revision risk for North America completions markets and the most risk in proppant markets where the company has outsized exposure.” No one is immune, it is only a matter of degree. From Liberty’s release – “Frac industry trends have moderated marginally in recent periods, on the heels of slightly softer drilling activity in both oil and gas basins during the first half of 2024.” But later on in the conference call, we heard the - “We now anticipate that total North American completions activity will be modestly softer in the second half of the year, due to budget front-loading by some operators… However, we expect Liberty’s financial performance to be similar in the second half of the year compared to the first half.” So, industry activity is weakening, and you will stay flat. While Liberty is a great company with great management, this is an industry issue. Activity will soften and earnings will stay flat for the best companies? This is a great example of why investors are not yet flocking to OFS names. Even if it is true for one or two companies, the attitude towards the sector would negatively impact all.
Headlines.
Chicago School Scores Drop After Doubling Spending.
MSNBC's Al Sharpton: Can You Imagine If Thomas Jefferson Tried To Overthrow The Government?
Oil investors raced to close short positions anticipating attack on Iran.
Nuclear-War Risks Rise Again, Stoked by Global Conflicts.
As Permian Targets Grow Scarce, 3Q M&A Drops.
Next Up! First, there was offshore Brazil which has put that country into the big leagues. Then, offshore Guyana. Then Suriname. Now Columbia. The reality and promise of oil and gas riches. There is production in onshore Columbia, but the Country is joining the ranks of “good” offshore. A 6 Tcf gas field. Petrobras brought their offshore expertise, owning about 45% of the field with the Colombian government, through Ecopetrol. I guess we haven't found everything quite yet.
Snippets.
It’s been a massive $243 billion wave of E&P M&A since 2023.
Endeavor is up-shifting D&C efficiencies down to $625 per lateral foot.
You Need WHAT?!?! Enverus Intelligence Research has released a new report that quantifies the quality of remaining drilling inventory across key North American plays. At $70, we do great! At $60, we have only five more years of inventory. “The Canadian oil sands and Montney are home to 15 years of drilling inventory that can generate adequate returns below $60 WTI.” So, we need about 7 million barrels of liquids production and about 40 Bcf more natural gas production by 2030. That is the global economy, not an isolated country or region. The report says that North America can supply 30%-40% of that at $70-$80 mid cycle oil prices and $3.50-$4 for natural gas.
Oh Canada!! Canadian plays like the oil sands and Montney are home to 15 years of sub-$60/bbl WTI PV-50 breakeven oil resources at current activity levels, nearly triple those of the U.S.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $69.82 per barrel (down ~7.0% week-over-week) and natural gas is $3.12 per MMBtu (up ~16.4% 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 2.2 million barrels week-over-week vs. an estimated increase of ~1.8 million barrels.
Frac Spread Count: There are currently 241 frac spreads operating in the U.S. (an increase of 5 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 567 drilling rigs operating in the U.S. (an increase of 1 rig week-over-week).
Collateral Damage. “Gulf states are lobbying the U.S. to stop Israel from attacking Iran's oil sites because they are concerned an escalating conflict could bring their own oil facilities under fire from Tehran's proxies.” - Reuters.
They Are Getting It. Here is a losing (and stupid) argument from a politician on the left who is trying to please people in the oil and gas industry: “We need to support our oil and gas industry. We need oil and gas in the next 10-15 years until we transition to clean energy!” Why would anyone invest in an industry they have been told is dying, by people who can kill it, and why would they support a politician who is telling them your children cannot go to college because you will be out of your job soon?” - Ana's Alahffi
End of an Era. Mr. Parker, of Parking Drilling, was one of the last people I called “Mr.”. But the respect I had for the man demanded it. Parker pioneered the use of drilling rigs in remote locations. If you could only get there by helicopter, it was Parker. Fortunes of many OFS companies have changed over the years. Projects in Saudi and Alaska strained the company’s financials, and the company restructured in 2018. It had developed other businesses outside of rigs and changed the name to Parker Wellbore. Nabors has now bought them for $370 million. Well done. A couple decades after Nabors’ funding for Parker fell through, it owns what is left. In 2014, Parker was an $850 million company, but many OFS companies’ fortunes have faded since then. In 2008, Nabors was a $12 billion company for just a minute and was just under $800 million at the Parker announcement, which pushed Parker up by 25%. Nabors CEO Tony Petrello said - “With Parker's resilient free cash flow and healthy capital structure, this acquisition also is expected to deliver profitable growth together with improved leverage metrics.” Parker consists of the leading rental provider of high-performance downhole tubulars in the U.S. market, differentiated casing and tubular running services around the world, and a fleet of 17 drilling rigs in the U.S. and international markets. Consolidation continues.
Uh Oh. Britain’s natural gas output is declining faster than expected and leading to greater reliance on imports, according to an industry group seeking government relief to spur investment.
Killer Cool. If you have not seen it, you need to watch a video of the SpaceX booster rocket successfully returning to the same tower it launched from. A 40-story rocket, launched and re-landed, caught by the tower it had taken off from. While no one was looking, space travel is moving forward. SpaceX has made more than 250 trips into space. Impressive.
The Next Big Thing?? We have written a great deal about hydrogen – the pros and cons. So far, it has mostly been “cons”, unless you are just a contractor building facilities or selling equipment, but for the latter, don’t gear up too much. The only issues are the process that makes it, how to safely transport it, and finding some demand for it. I know, I know... There are a raft of other issues. My friend Robert Bryce has put out a note on numerous hydrogen projects around the globe being cancelled or delayed, due to high costs and a lack of a market for the output. It is nice when a smarter guy agrees with you!
Pork Barrel Politics. We recently wrote about the rural internet access initiative in the IRA bill that included $42.5 billion for the effort. We noted that, so far, no one had been connected. Then again, it had only been three years (sarcasm font). The FCC Commissioner, Brendan Carr, argues that the Biden-Kamala administration has used the program to advance a “wish list of political goals” rather than focusing on delivering broadband to underserved rural areas. Okay, a current FCC commissioner. He criticized the revocation of a previous $885 million award to Starlink, leaving rural communities “paying the price.” Starlink is owned by Elon Musk and all the feasibility studies showed Starlink as the most efficient option and now the work is being awarded at twice the Starlink price. The Commissioner, in an opinion piece, urged the administration to remove the program's onerous requirements, like diversity and climate change rules, and instead “unleash private-sector innovation” - rather than the current policies that make it "take too long and cost too much to build broadband."
Gavin Newsome: “Big Oil wants to scare you into voting for @realDonaldTrump. California just passed a bill cracking down on a scheme oil companies use to jack up gas prices before the election. Don't fall for their dirty lies.” This is the same guy who passed a law making it illegal to make political memes that criticized him.
We Need Them All! We have long held the belief that future power generation would be fueled by growth in ALL forces of energy, including wind, solar, biomass, nuclear, hydrogen, coal, natural gas and others. We can’t just turn one off without having major global economic disruptions. Taper. In the U.S., we have been replacing coal-fired generation with natural gas and have made exceptional gains in emissions reduction, making the U.S. the only country hitting the Paris Climate Accord targets. But wind and solar are heavily subsidized, which skews the economics, and they are also not as reliable. The arguments have been raging for years. So, one needs to look at the current reality. We are several years into calling it a period of “transition”, even though it is just the continued evolution of the industry. Regardless, where are we now? Natural gas-fired power generation just hit a new all-time high. Electricity demand grew by about 5% over last year, a big surge in one year. And this is before accounting for all of the data center power needed in the future. 41% of that power came from natural gas, four times more than nuclear and 10x that of coal, our emission lowering success.
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.
