October 6, 2023
Things I Learned This Week While Staying Home
October 6, 2023
It took me a while to remember the address and where the coffee maker was, but after a couple of days it was like I was home again, which I was. The last several months have been a travelogue so being home was nice. And after having to dismantle my wine wall and redo the dining room floor after the AC leaked, everything is put back together. It’s almost like someone lives here!
Energy Capital. Hart Energy, the industry’s leading publication and conference group, held two back-to-back conferences in Dallas this week. Energy Capital and the A&D Strategies & Opportunities Conferences. Both were very well attended. The Energy Capital day took place in the Statler Hotel in Dallas, which was built in 1956 and was the first Hilton hotel. Sessions included:
Free Cash Flow: How to Make the Most of Record Oil & Gas Profits
The Future of Raising Capital in the Oil & Gas Industry
Capital Access: Private Equity
Capitalizing on the Energy Transition
A&D Strategies & Opportunities. The second day was even better attended. Need for capital to operate when you are underspending cash flow means your only debt needs are a revolver to manage cash. Debt is required for A&D/M&A. It seems that the high yield market is again in love with energy, with fewer lenders and in some cases different lenders, but there is no shortage of debt capital. Vital did almost $1 billion and it was 3x-4x over-subscribed, in a deal that doubled the size of the company. In the last 12 months, 92% of all deals under $100 million were in the Permian Basin and 70% gave some value to upside proven undeveloped reserves (“PUDS”). Larger deals crossed the finish line in the first half of the year where transactions greater than $1B represented over 82% of total the transacted value. 75% of the 97 deals done in the last twelve months were for unconventional, with oil at 56% and gas at 19%. Conventional oil was 11%. Public companies in need of more depth to their well inventory continue to be very active buyers providing both private and sponsor-backed teams in premier basins with attractive opportunities to return capital to investors. Thanks David Deckelbaum at Cowan for the charts.
Blow Hard. I have written extensively about the increasing issues for wind, both onshore and offshore, in terms of accelerated costs and NIMBY issues. My good friend Robert Bryce has done a great deal more work on the topic than I have. He made some observations on the offshore side I thought I would share. And remember - at different levels we are competing for services and being hired by the offshore wind companies. A Spanish utility that was building an 804-megawatt offshore wind project outside Connecticut abandoned the project because it was “unfinanceable”. The sector was getting hit with many of the same things impacting our industry including the record level of inflation, extended supply chain disruptions and a sharp, and almost unprecedented hike in interest rates. Sound familiar? But under the contracts that had already been signed, it wasn’t economic and they couldn’t renegotiate the prices, or in this case, the subsidies. In August, Shell and Ocean Winds North America agreed to pay $60 million to cancel contracts to sell power to Massachusetts from the proposed 2,400-megawatt SouthCoast Wind project. In July, Avangrid agreed to pay $48 million to cancel its contract with Massachusetts to sell power from the proposed 1,200-megawatt Commonwealth Wind project. In July, Rhode Island Energy announced it was canceling a power purchase agreement with Ørsted and Eversource on the 884-megawatt Revolution Wind project because the power from the offshore facility was too “too expensive for customers to bear.” Thanks Robert.
Headline!! “OPEC leaders Saudi Arabia and Russia to stick with 1mm BPD oil production cut until end of year.” They can renege at any point, but this is encouraging overall. Of course, oil has dropped from $95 into the $80’s just as the bulls came out and suggested $120 oil. And people wonder why we don’t “drill baby drill”. I’ll take the OPEC+ support but I look forward to a balanced supply/demand world without artificial supply constraints that can be removed by one Saudi prince having a bad dream.
The Bond Market. There are equities that deal in the optionality of optimism. “Buy this stock at $2 and watch it go to $4!” Then there are bonds. Debt. And the lenders want their money back. It’s more like “we are taking the house”. So, this week the bond market saw one of the biggest selloffs in history, a true market meltdown. According to Bloomberg, losses on the 10-year note have hit 46% since March 2020, while the 30-year bond has plunged 53%. Weak jobs data caused yields to drop after hitting a 16-year high this week. Bonds go up, the stock market goes down. We have been in the midst of a “soft landing” for 12 months now. Let’s hope it stays soft.
Who’s Rich?? The infamous NYC representative AOC is at it again. This time, she wants to fund resources for all New Yorkers by raising taxes on the top 5% of New Yorkers, up from the 1% that are usually picked on. The problem is, as usual, they have little idea what numbers mean. 5% is such an easy target, right? Except that if you are married and you each make $127,000, you are now “rich” by AOC’s schedule and you need to pay more taxes. 45 NYC school districts pay their teachers and administrators that much and 70% of fire and police are above that level. So, if you are a schoolteacher and your spouse is a fireman, your taxes should go up because you are rich and you have an obligation to support those beneath you on the income ladder. Most people in that bracket do not consider themselves rich and many have railed against the rich and how they don’t pay their fair share. Well, now AOC wants to put them in that bracket. The top 1% already pay 46% of state tax revenue with the top 5% accounting for 64% of revenues. That is just not enough according to AOC, who is now the owner of a new Tesla. Let them eat cake.
Dubai. In the first nine months of this year, Dubai has set a new record with 277 homes being sold for $10 million or more, with the average at $17.5 million, putting the emirate firmly ahead of cities such as New York and Hong Kong.
Call to Arms. SLB, the company formerly known as Schlumberger, announced its new methane tool/system this week. “SLB’s End-to-end Emissions Solutions (SEES) business introduced its next generation methane point instrument, a self-installed continuous methane monitoring system that uses IoT-enabled sensors to detect, locate and quantify emissions across oil and gas operations quickly and cost-effectively. Effective monitoring is essential to reduce emissions of methane, a greenhouse gas (GHG), which has a climate change impact up to 84 times greater than carbon dioxide over a 20-year timescale and represents about half of the oil and gas sector’s operational emissions.” I print this because there are several technologies and companies trying to solve the issues of monitoring and repairing anything that leaks, especially if it leaks methane. I hope to evoke a response from some of you telling me about what the REAL best solution for methane monitoring, detection, and repair is so I can continue my education.
Foreshadowing??? Dallas Mayor Eric Johnson: America’s Cities Need Republicans, and I’m Becoming One. In a surprise move, Dallas Mayor Johnson, after getting elected in a non-contested election, is changing political parties. “The future of America’s great urban centers depends on the willingness of the nation’s mayors to champion law and order and practice fiscal conservatism. Our cities desperately need the genuine commitment to these principles (as opposed to the inconsistent, poll-driven commitment of many Democrats) that has long been a defining characteristic of the GOP.” “Unfortunately, many of our cities are in disarray. Mayors and other local elected officials have failed to make public safety a priority or to exercise fiscal restraint. Most of these local leaders are proud Democrats who view cities as laboratories for liberalism rather than as havens for opportunity and free enterprise.” “Too often, local tax dollars are spent on policies that exacerbate homelessness, coddle criminals and make it harder for ordinary people to make a living. And too many local Democrats insist on virtue signaling—proposing half-baked government programs that aim to solve every single societal ill—and on finding new ways to thumb their noses at Republicans at the state or federal level.” I could not help all the quotes since they are coming from a Black mayor commenting on issues with the Democratic party to the point that he left to become a Republican. A trend????
Headlines.
Stocks are “overvalued’ and bond yields must fall “significantly” to justify current valuations, investor Bill Gross said.
Private equity firm Carlyle Group plans to pull back from investing in U.S.-based consumer, media and retail companies as it looks to focus on other key sectors such as technology and financial services.
As long as a priest doesn’t imply that a same sex union is equivalent to a heterosexual marriage, the Pope has softened the Vatican’s ban on blessing same sex couples. Now if they could only marry.
Striking Out. Ukraine has claimed it killed Viktor Sokolov, the commander of Russia’s Black Sea fleet, along with 33 other officers, in one of Kyiv’s boldest attacks yet on the occupied peninsula of Crimea. The Ukrainian military said Friday’s attack on the headquarters of Russia’s Black Sea fleet in Sevastopol was timed to coincide with a meeting of naval officials. “After the strike on the headquarters of the Russian Black Sea fleet, 34 officers died, including the commander of the Russian Black Sea fleet. Another 105 occupiers were wounded. The headquarters building cannot be restored,” the special forces said on the Telegram messaging app. The Russian defense ministry has not yet commented on Ukraine’s claim but is moving its Black Sea naval vessels out to sea to avoid any future attacks. Moscow has previously confirmed Ukraine’s attack but said that only one serviceman was missing as a result of the strike.
French Toast. French President Emmanuel Macron said he will push the country’s oil sector to sell gasoline and diesel at cost. At cost. There is no other product or commodity that is sold at cost and stays on the market. Billion-dollar companies forced to forgo any margin at all, which means the stocks are worthless and French pensioners lose billions. Someone thinks this is a good thing?
Reverting Back. Pakistan is a country on the move. Initially, it had the exceptionally weak LNG contracts such that if cargoes were going to be diverted to Europe for a premium, it often came at the expense of Pakistan. So, what did the country do? Switched to embracing coal again. Now, they are cracking down on migrants, or as they say in their country, illegal migrants. They are going to start expelling foreigners that are in the country illegally with the government planning to confiscate the property and assets of illegal migrants, including 1.7 million Afghans. So, the idea of open borders loses another participant, though to be honest, we are the only country with a truly open border.
Attractive. SK Capital is acquiring Milestone Environmental Services, which is run by my good friend Gabriel Rio and based in Houston. The opening line is “(SK) intends to push for decarbonization.” And SK’s mission statement is Sustainably Transforming Companies. Milestone has announced several CCS projects and the deal is intended to ‘expand carbon capture and sequestration (CCS) strategies to address global climate change’ by developing permanent injection sites. “Our offerings enable companies to reduce their carbon footprint and enhance their ability to meet sustainability goals,” Gabriel said. Congratulations sir!
Retread. We have written in the past about the need for 300 new mines globally to produce enough minerals and materials to make the world electric. Not in my backyard continues to be a key issue as a lithium mine that was providing material to an EV battery company recently got shut down by environmentalists. Lithium and cobalt are required, but you can’t mine for it, especially in the U.S. Now billions are being spent on the energy transition which involves these 300 new mines but there are issues. There were 127 new mines opened globally between 2002 and 2023 and it took an average of 15.7 years after initial discovery to reach full production, with the range being 6 to 32 years. So, we are reopening old mines hoping to avoid some of the issues and pitfalls. Brownfield mining. Much like oil, the best place to find it is where you already know it is. But some of these mines have been closed for over 25 years and are very capital-intensive projects that are difficult to operate.
Workable? Direct air capture (DAC) is a technology that is suddenly all the rage, directly removing CO2 from the atmosphere and permanently storing it underground. It is being championed by Oxy in a big way with the company receiving over $300 million to help fund its projects. First, efficiency is a big question since these facilities use a great deal of energy to power compressors and other equipment to pull CO2 from the atmosphere, where it makes up about 0.04%. Next, is the concern of environmentalists. “The speed with which Occidental and DAC has captivated the Biden administration is alarming for environmentalists and some scientists. DAC remains by far the most expensive way to capture carbon, and the technology is largely unproven outside one small plant in Iceland. There are serious questions about whether the large quantities of power the process needs will offset the climate benefits. The loudest critics insist DAC should never be used to justify fossil-fuel extraction.”
Buy In. Subsea 7 announced the final closing of the previously announced joint venture with SLB and Aker Solutions. The new business, which will adopt the OneSubsea name, “will drive innovation and efficiency in subsea production by helping customers unlock reserves and reduce cycle time.” OneSubsea now comprises SLB’s and Aker Solutions’ subsea businesses, which include an “extensive complementary subsea production and processing technology portfolio, world-class manufacturing scale and capacity, access to industry-leading reservoir and digital domain expertise, unique pore-to-process integration and strengthened R&D capabilities”. OneSubsea will be headquartered in Oslo, Norway, and Houston, Texas, with 11,000 people working in all key operating regions around the world. SLB holds a 70% equity stake in the JV, with Aker Solutions at 20% and Subsea7 at 10%, in exchange for a cash consideration of $306.5 million paid in two equal installments in 2023 and 2024. This is a long overdue consolidation.
Absurdity. David Blackmon comes up with great stuff that is very interesting. This week he published a piece that can only be called an exposé. In California, there is a charging station with 98 Tesla super-fast chargers that can get you to 80% of capacity in 20 minutes. Shell, the forward thinking new “gas” company, has the chargers co-located with a normal Shell petrol station. At the intersection of two big LA freeways, it is a prime location. California is on the move!!!! Except that, behind that Shell station, hidden from view, was a series of diesel generators that power the Tesla chargers. Yes, you read that right. The largest EV charging station in the state of California used diesel to power its chargers. So, what is my net clean level??? I won’t even mention any hypocrisy.
Political Bets. I have been telling friends for weeks now that I think Michelle Obama will run for president on the democratic ticket. Biden’s too old, Kamala is not well liked, and Michelle is one person she would step back for. Now comes Gavin Newsom. David Blackmon makes the observation that Newsom has started to be everywhere in the media and that would only happen if the leaders of the party wanted it to. “Nothing the Democratic Party does at a national level happens organically.” So, the sounding boards come out, and so do the knives. Newsom brings you California, but you already have California, and just because it’s California, some people will vote against him or not vote. Who pulls the party together? The wife of the man who has been greatly influencing U.S. policy for years now. Biden’s gaffe rate keeps going up and the election is still over a year away. You heard it here first. Or second. Well, at least early.
NOIA Speaks Out. “New Federal Offshore Oil and Gas Leasing Program Utter Failure for the Country.” NOIA President Erik Milito issued the following statement after the U.S. Department of the Interior issued the next federal offshore oil and gas leasing program:
“The release of this U.S. offshore leasing program, mandated by law and long overdue, is an utter failure for the country. President Biden’s approach to severely limit leasing significantly curtails access to a critical national asset at a time when energy inflation is rampant, the likelihood of a national recession looms, and global efforts are intensifying to curb greenhouse gas emissions. The White House simply ignores our energy realities, once again limiting U.S. energy production opportunities. With global demand at record levels and continuing to rise, regressive policies like this serve to harm Americans of all walks of life by putting upward pressure on prices at the pump, destroying good-paying jobs that form the fabric of Gulf Coast communities, and relinquishing geopolitical advantages of energy production to countries like Russia, Iran, and China.”
“Furthermore, the decision to postpone environmental analyses for individual lease sales needlessly compounds the erosion of long-term confidence and certainty in the Gulf of Mexico region. Environmental assessments for lease sales typically take one to two years to complete, which is precisely why they are conventionally carried out in tandem with leasing program development. Every prior administration, irrespective of party, followed this process in a way that enabled uninterrupted leasing activities. The choice to slow walk lease sales while the Interior Department embarks on environmental work is just setting the table for potential future delays, including from litigation by activist groups, and an offshore energy leasing cliff.” “Policies that limit domestic offshore development force us to rely more on energy imports, often from countries with higher emissions. This jeopardizes our energy security and economic prosperity, and undermines our efforts to reduce emissions and combat climate change—goals purportedly championed by the current administration."
Changing Climates. It is less than two months before the UN Climate Summit, COP28, being held this year in Abu Dhabi. In advance of that, the country just held a very well attended International Petroleum Exhibition and Conference that is held every year, but more critical this year considering the looming COP28 in the same location. The point is that oil producers want a bigger say in the climate talks that will take place. Our industry is constantly hailed as being central to reducing the world’s emissions and we need to show that leadership in organizations such as COP28. Contrary to some reports, we as an industry are not blocking climate issues but driving them. The issues confronting net zero emissions by 2050 will not the solved by shutting down all financing or production of oil and gas but the oil and gas industry leading the way into a cleaner and more climate friendly industry, supporting standards of living around the world as new technologies and renewable efforts find their way into the economic mainstream, which appears to be hitting snags in certain places. But the point here is that an oil producing country is hosting COP28 this year and the industry that is leading the way in the energy transformation, the oil and gas industry, will get a seat at the table.
Breaking Records. “U.S. oil production approaches record as Permian output reaches 'all-time' high.” U.S. crude oil production reached the second-highest level on record in July as output from Texas's Permian basin soared to an all-time high. The nation's production rose to 12.991mm BOPD, the highest since a peak of 13mm BOPD in November 2019, according to data from the Energy Information Administration. Output has remained more resilient than had been expected with a falling drilling rig count and lower well productivity.
Crude Oil. The Lower 48, excluding Federal waters, increased to a record 10.7mm BOPD, which puts offshore at about 2.3mm BOPD. Lower 48 increased by 10% year-over-year, by 1mm BOPD, though as the chart above shows, momentum has slowed lately with a growth rate of only 7%, but still strong especially in light of a rig count that has fallen all year, from 623 rigs drilling for oil at the end of last year to 510 rigs today. It was observed that U.S. crude output is now more likely to stabilize than decline through the end of 2023 and the first half of 2024 as a result of OPEC+ restraint.
Natural Gas. Natural gas production has also been increasing but the severe price slump in natural gas has caused its growth to slow. Dry production amounted to 3,222 billion cubic feet in July 2023, an increase of less than 4% compared with the same month a year earlier. Growth has decelerated from almost 7% a year ago as the industry adapts to some of the lowest futures prices in decades in real terms. Remember, natural gas averaged $9.16 in August last year, and is now around $2.20. The number of rigs drilling for natural gas averaged just 116 in September 2023 down from a cyclical peak of 162 in September 2022, and up from a low of 78 during Covid. Prices are being kept very low by forecasts for warmer-than-normal weather and lower gas consumption through the first part of winter 2023/24.
EIA Weekly Petroleum Report.
Crude Implications: Neutral – draw above expectations. A Cushing build is the first in eight weeks. WTI backwardation between 1M-12M @ $11/bbl, unchanged w/w. SPR higher by 0.3 MMBBLs. Money managers’ net long positions in ICE Brent and NYMEX WTI largely flat w/w, remaining elevated.
U.S. Crude Production: indicated at 12.9mm BOPD, flat w/w, and up 0.9mm BOPD y/y.
Refinery Runs: 15.6mm BOPD, down 0.5mm BOPD w/w and down 0.4mm BOPD y/y. Utilization at 87.3%. Gasoline demand is sharply lower post summer driving season, but turnaround season is here, reducing runs. Gasoline margin drops to $13/bbl from $30/bbl a month ago.
Crude Imports (net): 1.3mm BOPD, down 2.0mm BOPD w/w and down 0.1mm BOPD y/y. Brent-WTI spread at $1.8/bbl, down $1/bbl w/w.
Gasoline: Bearish – build above expectations. Demand down 7.0% w/w and down 15.3% y/y.
Distillate: Neutral – draw above expectations. Demand down 4.0% w/w and down 7.1% y/y.
We Aren’t Just Talking About It. Before you drill a well, you have to know what you are aiming at and what you are hoping for. One of the first sets of data collected in any exploration project is seismic. Seismic surveys, interpreted by geophysicists, form the geometric representation of the potential reservoir. Geologists try to decide what is in the contents of the rock and reservoir engineers tell you what you have after you drill. So, the first step is identifying a suitable potential reservoir with seismic data. It was announced this week that the French geophysical company CGG, had completed the eastern phase of its GeoVerse Carbon Storage Gulf of Mexico Study, financed by a consortium of industry players. The next phase is already underway. This is the oil industry finding reservoirs, describing it and drilling wells to get to them, with the only real difference being that we are putting gas in instead of taking it out. While the economics of CCS are based solely on government largess, the actual execution of these projects is not at all in doubt. This is what we do, and we do it well. Look at us transition!!! (Sarcasm).
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.
