October 25, 2024
Things I Learned This Week in Pierre
College Days. I went to my first University of Texas game in decades. It was a great game, even though my hosts (thanks Mike and Debbie!) saw their team lose. I was born in Georgia but tried to control myself. Excellent time. It was truly an amazing experience. 100,000 people dressed in burnt orange. Wow. The F1 race was in Austin at the same time. Good mayhem!!
Oh Brother. My older brother relocated to San Antonio last year from Denver and I do get to see him a little bit more. As a matter of fact, this week I get to see him, but rather than in central Texas, he invited me on his long-standing pheasant hunt in South Dakota. How can you turn down an invitation from your brother? I don’t know. I didn’t. Gorgeous weather, not really cold, lots of birds and some great new friends. I will be going on the road. This is so much fun!! I think I will try to shoot pheasant in some other locations. But you will hear about that next week.
Funk. The oil and gas business continues in a funk, with oil prices around $70, the world fairly awash in oil and the hopes for demand growth not yet materializing. The sector has held the line on capex and spending, holding on to the people and assets they already have and being very cautious about adding. And with the latest oil price move and a number of issues discussed below, we would not be surprised to see another round of reductions soon. The 2nd half of the year is expected to be below the activity levels of the first half and 2025 is a big unknown. Doing more with less continues to move ahead even as oil and gas prices stall. Hang on. Combine. Merge. Consolidate. Find new businesses. While I would not want to own a hydrogen plant or a wind farm or a solar field, lots of money will be spent and I like getting in the way of money being spent even if I don’t like the long-term business I am building for. “Thinking outside of the box is” a saying made for times like this.
Trivia Question. No Cheating! What is the mascot of the University of Mississippi, also known as Ole Miss? See below.
Germany Goes Green, Kinda. “In the third quarter of 2024, only 3.9% of private car buyers chose an electric vehicle.” “Since the beginning of the year, the number of those who bought a new vehicle and replaced an electric car with an internal combustion engine vehicle increased to 34%.” Registrations of EVs have dropped 69% since last year with overall sales down 28%. Sales are also down 37% year-over-year for July. In the EU, EV sales were up 9.4% in the first half of this year while Germany saw a 16.4% drop. In December of last year, Germany ended its subsidy program for EVs. Without significant incentives, sales drop. My Uber driver has a 2023 Tesla that he leases and can buy it for just over $20,000. Who wants the looming cost of battery replacement in a used car? It is not nirvana for EVs.
Quail. I want to congratulate everyone who has a quail lease in South Texas. You have waited several seasons for a year that looks like the one shaping up in South Texas. One lament? We don’t have enough ranch for this many quail. Wow. That is a high-class problem! If anyone would like to have a market review and outlook talk around the fire after a hunt, I have lowered my speaking fees to zero (the current going price!). I’m not cheap, but I can be had!
StubHub. I am no fan. It seems if you buy from StubHub, you are really buying from the monopoly of Ticketmaster. I spent three hours last week trying to get my tickets to the Washington Capitals opening game. Nightmare. Avoid if possible.
THE Offshore Consolidation. It seems that Norwegian driller, Seadrill, is in discussions with Transocean to combine the two companies. They are two of the longest-standing and largest deepwater drilling contractors. Seadrill has a market cap of $2.8 billion and Transocean is $3.6 billion. Seadrill’s current market cap is the same as in 2014, when its Enterprise Value hit $25 billion, whereas Transocean’s peaked at $50 billion in 2008. Seadrill restructured in 2018. The rest of the OFS industry should take note. The offshore drilling world has collapsed into just a few players over the last several years in an amazing subsector consolidation.
Pearls from Nutstuff. An old friend of mine in London writes a stock-oriented piece, and this week, there were some real pearls of knowledge: Thanks, Will Nutting.
UK Stat: 43% of working-age adults statistically do not earn enough to pay income tax (<£12,570) yet it costs £28,000 per working age adult in the UK to run the government machine.
BRICS in Numbers: (+ 30 new requests for membership). 45% of world's population (3.5 billion people), 33% of the globe’s land mass and 28% of the world’s economy ($28.5 trillion). BRICS still averages 3.6% growth vs 1% for the G7. There are 10 current members: India, Russia, China and Brazil joined in 2009, South Africa joined in 2010, and Egypt, Ethiopia, Iran, UAE and Saudi Arabia joined in 2023.
Russia has overtaken Japan and become the fourth largest economy in the world: The country’s share in global GDP at purchasing power parity is 3.55% according to the latest IMF report.
Unbelievable. This would normally be a comment in my Snippets section, but… “Jeep recalls 154,000 hybrid SUVs, urges owners to park outdoors due to fire risk.” Excuse me??
Conflicted. And now the International Energy Agency (IEA) has stoked the flames further by predicting that global demand for all fossil fuels will stop growing this decade at a time when supplies of oil and LNG are poised to continue growing. Obviously, this is highly bearish for oil and gas prices. On a brighter note, the world’s leading energy watchdog says this development will come as a major boon for consumers because electricity prices will start declining as renewables play a bigger role in our generation mix.
Snippets.
EIA: Construction Costs for Gas-fired Power Stays Well Below Solar, Wind.
Combined-cycle generation takes a lead as U.S. electricity demand is expected to rise.
Delhi's air quality deteriorates to “very poor” category on Thursday.
The U.S. is bringing back into service World War II era airfields in the Pacific as part of a sweeping shift and how the military would respond to a possible conflict in Asia.
Warning from the Top. Weatherford reported $2.06 in earnings, beating the consensus by $0.41. From the release - “We have observed a gradual softening in activity, particularly in short cycle oil projects and onshore programs. E&P operators are taking a measured, cautious approach, and we expect this trend to continue in the near-term. In the third quarter of 2024, despite the revenue headwinds, adjusted EBITDA margins came in as expected at 25.2%.” The company’s debt burden received virtually no mention other than the CEO saying debt reduction is still a priority. Net leverage is currently at 0.5x.
Changing Hands. Dominion Energy is selling its 50% interest of an offshore wind farm in offshore Virginia for $2.6 billion, which represents a reimbursement of about 50% of project-to-date capital investment. The 2.6 gigawatt project is the largest offshore wind farm currently under construction in the country and can power up to 660,000 homes when completed in late 2026. Dominion is trying to reduce debt by $21 billion, which is a staggering amount. The project is expected to cost a total of $10 billion. Stonepeak is the buyer, a very large buyer and owner of large-scale infrastructure projects.
Slowing Fervor. The headline read - “public opposition to climate emissions goals growing.” It seems the European Union, while sticking to their guns on carbon neutrality by 2050, now opens the door to discussions with industry on how to overhaul the system to put the needs “of the citizens first.” Brussels voted to delay, by a couple of years, the enforcement of restrictions on older vehicles. Poland is baulking, at the steps it already agreed to, with the EU. The point of this is the cost of energy and the cost to compete. The “climate crisis” is a questionable term that is being so actively discussed and politicians are trying to implement plans that are now showing the negative sides of the strategy. The old joke was we can all go back to living in caves and lower emissions, or we can continue improving our lifestyle while making it more efficient. A sane person would choose the latter but there are a number of believers in the former. But you're now starting to see regular people start to push back.
Cuba Power Failed. The country is getting hit by massive blackouts as one or more of its power plants went down. It's an old thermal electric plant that hasn't been properly maintained and there's a lack of fuel to operate some facilities. As a result, half of the power generation in the country dropped offline this week. In an effort to reduce demand, the country closed everything down – schools, businesses, everything. Just saying this is not sustainable is, of course, an understatement. Call Bernie.
Earnings.
Nabors: non-GAAP EPS of -$6.86 misses by $4.9.
Baker Hughes: non-GAAP EPS of $0.67 beats by $0.06.
TechnipFMC: non-GAAP EPS of $0.64 beats by $0.24, announces $1B stock buyback.
Patterson-UTI Energy: non-GAAP EPS of $0.00 misses by $0.01.
Core Laboratories: non-GAAP EPS of $0.25 beats by $0.02.
NOV: GAAP EPS of $0.33 misses by $0.04.
Opinion. “As we had previously expected, pressure pumping activity in U.S. land is slowing into year-end. This is due to strong efficiency gains in the first half of the year driven by longer lateral wells and a concentration of activity in high graded acreage. We anticipated customer budget exhaustion in the fourth quarter and a lack of urgency by operators. The debate will now center around the start of 2025. This softening market is coming right in time for the annual price discussions. It is going to be a challenge for operators to maintain flat production next year at the current levels of rigs and frac spreads.” James West, Evercore. Onshore Oracle.
OMG. The election is looming. Vote. One reason? “New York officials call for big oil to be prosecuted for fueling climate disasters.” Prosecuted for all the weather we have seen this year. Excuse me?!?!? “Oil majors’ conduct can constitute reckless endangerment due to fossil fuels’ effect on global heating.” “New York state prosecutors could press criminal charges against big oil for its role in fueling hurricanes and other climate disasters” - lawyers wrote in a new prosecution memorandum that has been endorsed by elected officials across the state. “These disasters are fueled by the climate crisis, which is primarily caused by the burning of fossil fuels. And a growing body of evidence shows that big oil knew about the climate dangers of its products but promoted them to the public anyway.” Vote.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $70.77 per barrel (up ~1.0% week-over-week) and natural gas is $2.90 per MMBtu (down ~6.8% 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 5.5 million barrels week-over-week vs. an estimated increase of ~0.8 million barrels.
Frac Spread Count: There are currently 238 frac spreads operating in the U.S. (a decrease of 3 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 566 drilling rigs operating in the U.S. (a decrease of 1 rig week-over-week).
It's Called Momentum. WoodMackenzie estimated that the number of new data centers announced in the first half of 2024 totaled a capacity of nearly 24 gigawatts, more than the entire amount announced in 2023. No surprise and expect it to continue.
Trivia Answer. While having been known as the Rebels, and the Rebel Black Bear, the current official mascot of Ole Miss is……. Tony the Landshark. Seriously.
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.
