Things I Learned This Week in Florida

October 20, 2023

Offshore Rocks!! The National Offshore Industry Association held its fall meeting at Amelia Island this week. I have been honored to serve on the executive board in the past and I am on the board again now. It is a great organization, furthering the needs of everything related to offshore energy. There were several excellent speakers and presentations, but one of the most important industry segments is the Safety of the Seas award. Our industry is exceptionally focused on safety and its people, and companies that excel in those areas are noted. This year the award went to Halliburton and Oil States International.

Summer Condarco. The VP and Chief HSE Officer at Halliburton gave a fabulous presentation on Halliburton’s new program, Vision of Zero:

Zero safety incidents.
Zero environmental incidents.
Zero non-productive time.

5 Checks to Go: Pre-Job Conversation:

Review the plan.
Verify readiness.
What is different?
Validate controls.
Final check.

Starting work is not step #1.

Gary Childress. A VP at Oil States International did an excellent job of explaining the size, scale and nuance of Oil States’ procedures and capabilities. It is an exceptionally well-run company, so it comes as no surprise that the safety culture and record are both excellent. Halliburton’s market cap is approximately $38 billion with 45,000 employees versus Oil States’ at approximately $505 million with 2,373 employees. Just an observation. Halliburton has implemented very focused, productive, digital, and managerial systems with simplicity and sophistication that few companies are able to develop, with its Vision of Zero program already almost fully implemented.

Next to Fall? I bought DVN and PXD a while back on the basis of the variable dividend yield potential and because I viewed them as REITs since they had such a deep backlog of production opportunities. Another way of saying that is ‘depth of inventory’, which we have written about as being the most sought-after characteristic in E&P M&A today. No surprise, but among the greatest depth were those two. And now Bloomberg reported that DVN has held preliminary talks with MRO regarding a potential merger. Wait a minute. What happened to Chevron or one of the international majors looking in the U.S.? A merger of almost equals? That isn’t buyout, that is consolidation, and that is what is needed most. It would be an approximately $50 billion company and pushing into major territory. The article stated that DVN has looked at other targets as well and thus, a deal may not occur or may not be imminent.

Unloved For Now? I have been asked several times in the past week why oil prices are going down when inventories at Cushing are low and there is turmoil in the Middle East. I told them I didn’t know why they were doing it, but investors dumped oil at the fastest rates in the last decade over the past week. Then comes the Reuters story – “Portfolio investors have dumped positions in petroleum at some of the fastest rates in the last decade as the bullish sentiment that built up after OPEC+ production cuts evaporated.” More production cuts were expected? By whom? Investors reacted negatively to the end of the squeeze on inventories around Cushing. Cushing sets the NYMEX prices, but the actual volumes are so low at Cushing, it has become an easy high volatility trade with little impact on actual fundamentals. Hedge funds and other money managers sold the equivalent of 140 million barrels in the six most important petroleum futures and options contracts over the seven days ending on October 10th. Funds slashed their total positions by 197 million barrels over the most recent three weeks, reversing about half of the 398 million barrels purchased over the previous 12 weeks since the end of June.

Get Gassy. Investors continue to be bullish on natural gas. Long-term, it is a no-brainer that natural gas demand will grow for decades whether as a baseline or a bridge fuel. It is just a matter of timing. 14 months ago, natural gas was almost $10/Bcf with the current month at ~$3.20. And after a hard correction, it looks to be getting popular again, with investors much more bullish about the outlook for U.S. gas, buying the most natural gas in a single week since March 2020. Hedge funds and other money managers purchased the equivalent of 766 Bcf in the two principal futures and options contracts over the seven days ending on October 10th. Europe dodged a bullet last winter with warmer than normal weather. The most recent long-range government weather forecasts show average temperatures lower than last winter even if they remain significantly above the long-term average.

Snippets.

Reality just keeps intruding on our #greenenergy fantasies – A Chevy Volt replacement battery costs $29,000.
At Clemson, they took the tampons out of the men's room and the students were outraged.
According to SLB, more than $500 billion in global offshore investments are expected through 2025.
Aramco bought a stake in independent Chinese refiner Rongsheng Petrochemical exchange for supplying it with 480,000 barrels a day of crude for 20 years.

EIA Weekly Oil Report.

Crude Implications: Bullish – draw above expectations. WTI backwardation between 1M-12M @ $8.5/bbl, $1/bbl wider w/w. SPR unchanged. Money managers cut ICE Brent and NYMEX WTI net long positions by 20% w/w. Geopolitics vs. fundamentals / seasonality remains a push-pull.
U.S. Crude Production: indicated at 13.2mm BOPD, flat w/w, and up 1.2mm BOPD y/y.
Refinery Runs: 15.4mm BOPD, up 0.2mm BOPD w/w and down 0.2mm BOPD y/y. Utilization at 86.1% as turnarounds have commenced.
Crude Imports (net): 0.6mm BOPD, down 2.6mm BOPD w/w and down 1.1mm BOPD y/y. Brent-WTI spread at $3/bbl, $1/bbl lower w/w.
Gasoline: Bullish – draw above expectations. Demand up 4.2% w/w and up 3.1% y/y.
Distillate: Bullish – draw above expectations. Demand up 20.3% w/w and up 8.4% y/y.

Made the Big Time. Three years ago, I spoke at the Energy Intelligence Conference in London. As I checked into the InterContinental, there was a throng of protesters in front of the hotel. I was in travel clothes, so I checked in, went out the back, came around the front and joined the crowd. They couldn’t tell me why they hated the oil companies. It was just considered a given that I would know. But when I asked them why they were against fracking, they said it was because it made gas too cheap. I asked what was wrong with that? They responded that “the more expensive it gets, the less we will use.” What was interesting is that the entire first day of the conference was dedicated to shifting away from oil and gas and towards renewables. The crowd outside neither knew nor cared. I moderated a panel with the CEOs of ENI, Repsol and BP, and they all promised to put 15% of their businesses into more sustainable areas than traditional oil and gas. This week, the conference was again held in London, titled Energy in a Divided World. Hundreds of protestors gathered and even Greta Thunberg got arrested! The crowd was more aggressive than ever before, barring the Shell CEO from entering with Greta yelling at the CEO of EIG. Aramco president and CEO Amin Nasser campaigned for a more realistic energy transition. He repeated the point of the need for upstream investment, saying that energy transition advocates who are bent on defunding oil and gas production risk creating an energy affordability crisis that will lead to increased coal consumption. He said Aramco is working on clean energy projects as part of the energy transition, including renewables and hydrogen. Despite global renewable investments the IEA projected at $1.38 trillion last year, Nasser noted that from 2010 to 2023, oil demand grew by 17%, gas by 22% and coal by 13%. “These are realities. This is what we have today,” he said.

Nasser Snippets.

Nasser noted stark differences between the “global south” and its energy transition priorities, with the average per-capita income in the global south at $7,000, compared to $50,000 in the Northern Hemisphere.
Nasser said continued investment is needed just to keep pace with annual declines in oil volumes, which average 5% to 7% per year.
Nasser said that without accommodating the needs of affordability and security for countries in the southern hemisphere, “you cannot achieve sustainability.”
“So that's why we are seeing more coal, the highest coal usage right now in terms of demand, 8.3 billion tons,” he said.
“We need to do things in parallel, invest in conventional energy while decarbonizing conventional energy by building carbon capture and storage and making it more efficient.”
“Differences between the global north and the south—where 2.3 billion people cook with polluted fuel and up to 800 million don’t have access to electricity—illustrates an unmet need.”

Expert Opinion? PIMCO, the well-known bond investment fund, has also been raising money for a new commercial real estate debt fund that plans to take advantage of market opportunities as $2 trillion of existing commercial real estate loans are set to mature within five years. $1.25 trillion by the end of 2025, and most of it is with regional and community banks. Raising money in advance indicates they think opportunities will come. And opportunities to a distressed bond fund do not bode well for the rest of us.

And the Example. PIMCO, as mentioned above, is in a joint venture fund that invested in real estate, and it just surrendered a portfolio of 20 hotels with a $240 million mortgage. The PIMCO deal, valued at $326 million when the debt was originated in 2017, was cut 16% to $272.8 million in a December appraisal. Underwater. Who better to know that distressed properties are coming on the market than someone who has a history of putting new distressed properties onto the market. Blackstone and Brookfield Asset Management have defaulted on money-losing properties rather than continue to pay the debt on them. Ashford Hospitality Trust Inc. said in July that it would likely return 19 hotels to lenders, while Park Hotels & Resorts Inc. stopped making payments on two San Francisco properties. PIMCO defaulted on a portfolio of office buildings with $1.7 billion of debt earlier this year. The real estate crisis continues to get real.

Old Joe. Sleepy Joe. We had one republican speaker that called him mentally incompetent and Donna Brazile, the former head of the Democratic party, swore that he is not. Old maybe. I fully understand when there are times he seems befuddled. I notice I am slowing down and becoming more deliberate with age. It’s his politics and ethics that bother me much more than arguing about his competency. But the following clip was taken just before Air Force 1 departed back to the U.S. Biden came out to talk to reporters. Was he slow and deliberate? Yes, no question. But you listen to what he says, and think about what he has been doing, from flying to cramming to meeting. He looks beat and I’m sure he is. I thought he was impressive.

President Biden Speaks to Reporters Aboard Air Force One

Who Would’ve Thought. Donna Brazile, former head of the Democratic Party and college professor, was the dinner speaker at the National Offshore Energy Association’s fall meeting. Many attendees were a little surprised. I didn’t realize that she represented Louisiana and attended LSU, so she had immediate buy-in. She proceeded to give one of the most informative and entertaining talks I’ve heard. She blamed both parties for the intractability of the current Congress. She was as bipartisan as any politician could be. And representing Louisiana, she understands our industry. I was very impressed, and a little surprised.

Hard at Work. PPHB has advised Cordyne in securing a new line of credit. Cordyne is a leader in electrical solutions, specializing in power generation, distribution, automation and motor control solutions. Founded over 35 years ago, Cordyne solves complex electrical challenges through its in-house research and development, design, engineering, production, manufacturing and distribution capabilities all the while serving a blue-chip customer base across the energy, aerospace, industrial, marine, construction, municipal wastewater and Department of Defense industries. The Company is headquartered in Houston, Texas and has approximately 80 employees.

Giving In Again. Venezuela promised fair elections. I can just imagine them saying to the U.S. envoys, “We will hold fair elections” and everyone looking at each other to see who believes it. The Biden administration appears to believe. They have agreed to a deal in which the U.S. would ease sanctions on Venezuela's oil industry in exchange for allowing an open, internationally monitored presidential election next year. The Maduro government and Venezuela's U.S.-backed opposition will sign a deal to include commitments for a free vote in 2024. Can I also promise something I probably won’t deliver in exchange for a couple billion in sanctions relief? But all is not shiny. Venezuela also stands to lose its most important foreign asset as the sale of state-owned Citgo Petroleum’s parent company is scheduled to start next week, with more than 20 creditors seeking to satisfy around $23 billion of claims against the country.

A Well-Thought-Out Review. “Q3 2023 experienced a greater-than-expected decline in NAM activity, with rigs, frac fleets, completions/stages, and frac sand demand all down by their largest sequential moves since this cycle began, leading to year-over-year declines. Meanwhile, the international rig count slipped just slightly, while maintaining its double-digit year-over-year growth trajectory. Offshore outperformed land again this quarter thanks to recovering spend not seen in several years. Estimates generally reflected a decline in NAM activity, although we’d surmise the magnitude of the decline may be a tad larger than expected which could lead to some mixed results. Customer mix has and will likely continue to be important to results as well. While the international market was more modest this quarter, the annualized growth rate embedded in most annual guidance appears to be intact. We’d expect positive commentary around the international and offshore markets and guidance of a bottom in NAM land activity looking forward.” – Raymond James

Killer Point. “Power a small city with nothing more than wind, solar, and whatever storage solution is available in the market today—like batteries, ammonia, or hydrogen—and evaluate how reliably and cost-efficiently the lights are kept on. Central planners have instead committed to spending trillions pursuing this utopian outcome without first piloting the scenario on any reasonable scale—a shortsightedness that will eventually be viewed as a catastrophic blunder of historic proportions.”

EIA Data. The agency warned that a drop in onshore production is accelerating into November and a decline in oil output is now expected to gain speed every month from September through November, when combined production from the seven biggest shale fields will fall to 9.6mm BOPD, according to Monday’s report. The Permian Basin continues to lead the contraction. The U.S. hit an all-time production record last quarter at 13.13mm BOPD but with well efficiency and rig counts down, production appeared to have only one way to go which is down and is not likely to be reversed by a robust DUC effort since that inventory is down as well. U.S. GOM oil production was almost 2.0mm BOPD in July, up 4% from the previous month and marked an 11.7% jump from the same period a year earlier.

One of the BEST Headlines. “Shell rises to a record in London as higher energy prices and the company’s new CEO pivots towards greater oil and gas investment, boosting investor optimism.”

EVs Again!! Okay, front page of The Wall Street Journal, top left. The first content words in the newspaper today. “The auto industry’s push to boost sales of electric vehicles is running into the hard reality that buyer interest in these models is proving shallower than expected.” It says that some companies such as Ford and Toyota are tempering their expectations for EV sales and are shifting more towards hybrids. We have said for some time, in agreement with the Toyota CEO, that hybrids have a much greater future than electric vehicles. Hybrids provide a dramatic reduction in gasoline usage, are much cheaper to manufacture and do not place nearly as much drain on the total grid. It was obviously the “transition vehicle” in our opinion and it’s proving to be such. The article says that EV sales were at 51% last year but slowing. Inventories are starting to grow, and that is usually the double whammy that kills the oil business - increasing supply and declining demand run into each other. And we all know the results aren’t pretty, or at least the last seven or eight cycles haven’t been. It looks like electric vehicles are seeing their first down cycle coming as well. The most important thing about this is going to be the shift in perception by consumers. They’re going to have to start understanding that the terminal value of oil and gas is going to extend well past the next two to four years. The difficulty in mining and processing all of the metals and minerals required to completely build out transportation as electric has proven to be so prohibitively difficult, expensive and time consuming that all of a sudden producing a little oil or gas is a really good thing. We don’t want to gloat. Many of my friends have EVs and they love them. They all realize that they’re not doing it to help the environment but because they like a car that accelerates like crazy, and I don’t blame them. But there’s only so many people who want to go really fast. And the people who want to save the planet are starting to understand that electric vehicles are not the correct path or at least not the immediate path, and that we are going to be critical to the future for longer than they expected. We knew the truth all along.

And This Is The $64,000 Question. The share of the retail market held by electric vehicles leveled out around 9% for the past several months, raising broader questions about whether the industry is confronting a short-term blip, or a more protracted challenge.

Gas Is Misunderstood. While oil will have much longer future than might have been expected by people outside the industry just a year or so ago, it’s been much more obvious to most that natural gas has a longer and brighter future. Part of the reason is the expansion of LNG capacity in the U.S. and the initiation of export capacity in Western Canada. And this is after the last year and a half where Russian gas supplies to Europe were cut off, causing the construction of more than 20 LNG re-gasification plants across Europe. In the U.S. it is still considered by many to be a fossil fuel, which it is. The resistance to the Mountain Valley natural gas pipeline caused the Inflation Reduction Act to pass and the last budget extension to be approved. Even though it was in the bill, it still took a decision by the Supreme Court to get the pipeline approved. This kind of resistance to natural gas is stunning. The production potential in the Marcellus and the Utica is dramatic, but the infrastructure of pipelines to deliver the gas is lacking and approvals are hard to come by. But not in Texas! Or at least maybe not Texas. November 7th is the state election where Texas voters will vote on providing $7 billion in low interest loans to build natural gas power plants across the state.

Consolidation. While it is critical for the large companies to consolidate, it is much more critical for the small companies to get big enough to garner investor attention, which means they should be consolidating at a more rapid rate. While it certainly isn’t feverish yet, there are still deals getting done. Eastern Energy Services will acquire Conquest Completion Services. Conquest is a provider of large diameter coiled tubing units and oilfield chemicals used to advance reservoir performance. Eastern has completion, intervention and production services in several basins, including the Haynesville Shale, Austin Chalk, Tuscaloosa Marine Shale, Louisiana and conventional fields in Mississippi, Alabama and Florida.

Daniel Energy on the XOM/PXD deal. For most of our readers, a key concern with the deal is the go-forward activity for the combined company. To this point, activity is not expected to decrease on PXD assets according to comments on the call: “We’re bringing on low-cost barrels into a market that desperately needs them… it’s not about cutting back, it’s about building up. We’re not looking at cutting either rig operations or people or headcount.”

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.