September 13, 2024
Things I Learned This Week About Politics
Best of luck to everyone impacted by Francine. It was a category 2 when it landed, smacking Terrebonne Parish head on. It was the first named storm in over a month, in a hurricane season that was supposed to be abnormally severe. No dice. It turns out that, while the higher storm expectations reflected climate change, the absence of storms also reflects climate change. I guess I would fail “new math” too.
Oil and Natural Gas Sector Summary for Francine.
The Ports of Baton Rouge, New Orleans, and Lake Charles were closed in preparation for Hurricane Francine.
Additionally, the Port of Pascagoula is restricting inbound and outbound traffic, while ports in Texas have reopened for normal operations.
Multiple refineries in Lake Charles, Baton Rouge, and New Orleans areas had preemptively shut down or cut back production in preparation for Hurricane Francine.
U.S. offshore operators shut in 39% of Gulf of Mexico oil production and 49% of natural gas production ahead of Hurricane Francine as of September 11th.
Germany. In 2020, China overtook Germany as the biggest exporter of machinery and equipment. Manufacturing accounts for 20% of Germany’s GDP, about twice the U.S. level, and now they’re losing market and share to China. For the last 15 years, China has been one of its best markets. Now, it’s his biggest competitor and is overtaking Germany.
Greta Thunberg wears a keffiyeh and chains herself to the microphone on a Danish radio show. Performative nonsense from a spoiled rich girl who has been turned into a demigod by insane leftists. She does know that they can just turn off her mic, right? And a photo op for a radio show?
The Market. The S&P Energy Sector Index peaked the first week of April and is now down 14%. The Oilfield Services Index is at a 52-week low. The Oilfield and Equipment index is down 21% this month!! The E&P index is down 21% since April… a slower drop. Why? Let’s see. Oil is below $70. Barely, but below nonetheless and that is in the face of every soul in the market swearing oil would be $100 by now a year ago. We’ve written about the weakness in China before and will mention it this week too. It just continues to get worse. OPEC+ plans to start bleeding oil back on the market at the beginning of next year. The markets are discounting mechanism that typically discounts the highest r-square six months in advance. And the bottom line doesn’t care if this is causal or not. Energy is less than 4% of the S&P and we keep proving our inability to correctly predict commodity prices, long or short-term. Do I think now is a good time to be buying energy stocks? Very probably. But I have been doing this long enough to know better than to try and call a bottom. A top is easier. When stupidity sets in, sell. But the bottom? As Hemingway once said, when he went bankrupt, it was slow at first, and then all of a sudden, he was broke. Down 21% so buy? What if it bottoms down 35%? We all know what can happen with just a few unexpected tweaks. We are growing production with a declining rig count and everyone’s goal is even more efficiency. Can you get paid for it? Tough if you are a service company and increased oil production hurts E&Ps too. Damned if you do and damned if you don’t. It will change. The harder we fall and the farther down we go, the stronger the rebound? Since the peak in 2014, every recovery has fallen short of previous highs in the last three cycles. Proving our ability to generate strong returns, at least somewhat consistently, would help. But its hard in a cyclical business and ours is hyper-cyclical… To say the least.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $65.75 per barrel (down ~5.0% week-over-week) and natural gas is $2.23 per MMBtu (up ~3.7% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.3 MM BOPD (up ~3.1% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories increased by 0.8 million barrels week-over-week vs. an estimated increase of ~0.9 million barrels.
Frac Spread Count: There are currently 220 frac spreads operating in the U.S. (a decrease of 2 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 562 drilling rigs operating in the U.S. (a decrease of 1 rig week-over-week).
What It Takes. ONEOK is hitting the debt markets. It is doing a $7 billion debt raise to fund its two recent purchases, the GP and interests from EnLink and the Medallion Midstream deal. It is encouraging that an energy company can access the credit markets, though, with its structure, midstream is a great deal more attractive than other parts of energy. But what terms are being offered? What works? Who does it? Let me help with some information. Oh, and 23 banks all got together to make it work.
The notes consist of:
$1.25 billion of three-year senior notes at a coupon of 4.25%.
$600 million of five-year senior notes at a coupon of 4.40%.
$1.25 billion of seven-year senior notes at a coupon of 4.75%.
$1.60 billion of 10-year senior notes at a coupon of 5.05%.
$1.50 billion of 30-year senior notes at a coupon of 5.70%.
$800 million of 40-year senior notes at a coupon of 5.85%.
J.P. Morgan Securities, Goldman Sachs & Co., Barclays Capital, BofA Securities, Wells Fargo Securities, Citigroup Global Markets, Mizuho Securities USA, MUFG Securities Americas, Scotia Capital (USA), TD Securities (USA) and Siebert Williams Shank & Co. are acting as joint book-running managers for the offering. CIBC World Markets, Deutsche Bank Securities, PNC Capital Markets, RBC Capital Markets, Regions Securities, SMBC Nikko Securities America, Truist Securities, U.S. Bancorp Investments, Academy Securities, BOK Financial Securities, Loop Capital Markets LLC and R. Seelaus & Co. are acting as co-managers for the offering.
An Arm. Ole Miss had a heckuva weekend. The quarterback completed 25 of 27 passes and threw for 377 yards. He completed his first 24 in a row, setting school and conference records. Remember, this is Archie Manning's alma mater. Nice percentages.
Everyone is Getting in the Act. “Seadrill is looking to buy more assets or create a larger company by merging with peers”, said Seadrill CEO, Simon Johnson. "We are not going to do anything crazy; we've proven our discipline." Seadrill has over $800 million in cash, "which some consider inefficient, gives us both a defensive buffer and a basis for offense through purchases of distressed assets or players with distressed balance sheets”, he added. Wow. Who is left? It seems most have been gobbled up, but this is one of the biggest players saying there is still room to go. The offshore rig business continues to look strong and who out there is still distressed???
Demographics. 37% of the students at Harvard identify as Asian American. Those identifying as Hispanic to Latino account for around 15%, with African Americans at 17%. That leaves 39% for everyone else.
Mad Max X. I follow the “Just Stop Oil” people on Twitter. The latest was protesting in the lobby of banks that loan to the oil and gas industry. This is the mantra. It is very similar to “defund the police”. It sounds great until crime goes up. So, let’s say we accelerate the transition away from fossil fuels by stopping the banks from lending and the companies from spending. “No new investment in oil” was the mantra shouted at the latest bank protest. Exxon has done some work on the project. And before you say they are biased… sure they are. But it is also a group of the best scientists in the world. Their work shows that the naturally declining rate of oil production is 15% per year, higher because of the prevalence of shale plays and their dramatically steeper decline curves. So, what does that mean? It means if we put zero dollars back into the business, if “Just Stop Oil” got their wish and there was no more reinvestment in oil drilling and production, global oil production would drop by 15,000,000 barrels per day. At that rate, by 2030, global oil production would be down to 30 million barrels per day, from 100 million barrels today. And before “Just Stop Oil” starts celebrating, understand this would so thoroughly destabilize the world that wars would break out around the world. There is no possible way for oil use to drop so fast without causing significant disruption. Your bicycle tires, nylon vest, glasses, and everything else would cost more because oil prices would spike well above any previous peak. We would use less oil because it isn’t available, not because no one wanted it or the products made from it. I have continually asked if the “JSO” protesters have completely eschewed the use of any fossil fuel product since their super glue, orange backpacks and tennis shoes are all made from it. I am told “that’s not the point!”. If you thought Mad Max movies were bleak…
The Only Political Comment. I always chuckled when colleagues would say “I don’t play politics” and I would think that if you don’t play, they will be played against you. High school Student Body President? A popularity contest. Not quite the same as the homecoming queen vote but very much along the same lines. The risk of getting a bad President and seeing dramatic policy changes? Okay, I’ll admit it - I ran for Student Body President and lost in the runoff, came to school our senior year and a new dress code had been instituted. But that is about it. Graduate in a year and move on. But today, elections are for someone to serve four years, not one. And they can have a dramatic impact on billions of lives and preside over the amazingly complex financial world in which we live. We “bought” votes with candy bars. Now we are buying votes with borrowed money. So, the debate. Ms. Harris won. And her campaign, loan relief, housing subsidies, and increased credits are all how she is “buying” votes. On top of that, she’s happy and fun and smiles all the time. Oh, wait. This isn’t Homecoming.
Headlines:
U.S. jet fuel stocks balloon as airline demand undershoots forecasts.
SUVs are setting new sales records each year — and so are their emissions.
If SUVs were a country, they would be the world’s 5th largest emitter of CO2.
Germany just announced they will be closing their borders, introducing border controls to protect their country.
State-owned Ecopetrol has begun shutting down production at oil fields due to road blockages caused by a truckers' strike against the rising price of diesel.
Gluttony. It’s that time of year again. The Texas-OU football game and the Texas State Fair!! Dallas gets even more fun. But this isn’t just about football or games or scary rides. This is about the food. I know you’re thinking about corndogs and turkey legs. How passe’. It’s Texas. Go big or go home. The winner of the new food contest won’t be announced until later this month but I wanted to give everyone a sneak peek as to the semifinalists in the contest. Just keep saying to yourself “moderation in all things”.
Candied Pork Belly Bacon Bites.
Caramel Macchiato Fritters.
Cookie Butter Nachos.
Dickel’s Triple Meat Big Back Snack.
Fat Bacon Pickle Fries.
Texas Fried Burnt End Bombs.
Jeeps Got Dear. It seems that Stellantis, the company that owns Jeep, Chrysler, Ram and Dodge, is going through a bit of an upheaval. One headline read “top Jeep dealers blame Stellantis CEO for “disastrous choices”. My first thought was that the article was going to be about the high cost of switching from ICEs to EVs and that was the disastrous choice. I was wrong. It turns out the disastrous choice was raising the prices of vehicles, which prices much of the historical buyers out of the market. The dealer said that the high prices were driving away price conscious customers and leading to lackluster sales as rivals offer more discounts. And they are right. A year ago, their market share was 10.4% and today it is 8.5%. That is a big drop one year. That’s nothing short of a disaster. Now, I have always been a Jeep fan, and I’ve got two brothers who own Ram pickups, and they love them. I’m hard pressed to think of a Chrysler but I’m not in the minivan market. Volkswagen is having issues and sales issues in China. China was one of VW’s best markets and generated over $5 billion in annual profits just a couple of years ago. But today, China controls over 60% of their auto market and is forcing companies like Volkswagen, Honda, Hyundai and Ford to reduce their exposure and Mitsubishi left China altogether. This is called “compounding the error”. Maybe they thought that, since electric vehicles were so expensive, no one would notice if they raised prices a bit across the board. Bad move and didn’t work.
Scaling the Market. Qatar contracted the Chinese State Shipbuilding Company to build six additional QC-Max vessels, bringing the total number of LNG vessels on order under its fleet expansion program to 128. The QC-Max vessels are the largest LNG vessels ever built, with a capacity of 271,000 cubic meters each. They are scheduled to be delivered between 2028 and 2031. That puts 24 new LNG tankers on order for Qatar alone. Now the fun part. They cost about $330 million each. That is commitment.
Wow. Not a headline you see every day. It used to be that $950 million was notable. “APA sells Permian basin oil and gas properties to mystery buyer for $950 million.”
A Really Big Deal. I have frankly been surprised by how few people are aware of a recent court filing and its potential impact. When I mentioned it to some people, it was shrugged off as something that will never happen. Considering the current political climate, I wish I could be so sanguine. Federal Judge Deborah Boardman, an appointee of President Joe Biden, vacated a 2020 Gulf of Mexico Biological Opinion (BiOp) in an opinion filed on Aug. 19 in the U.S. District Court for the District of Maryland. The Boardman’s decision cited violations of the “Endangered Species Act” and the “Administrative Procedure Act” due to the failure to fully analyze the jeopardy of certain species’ populations and the impact of oil spills. The ruling says that the National Marine Fisheries Services have to fix their flawed analysis to take into account “the effects of offshore fossil fuel development on endangered whales, rare turtles and vital Gulf of Mexico ecosystems upon which these species’ survival depends”. With the BiOp vacated, offshore oil and gas activities in the GoM will be shut down on December 20th, unless a regulatory or legislative solution comes through to prevent a gap before new rules are created. That is 2 million barrels a day of oil production. “This would include those with past leases at the time the 2020 opinion was issued, regardless of when the lease was awarded, in addition to actions associated with new leases through approximately 2030.” Jason McFarland, President of the International Association of Drilling Contractors, said the December deadline was “woefully inadequate” for finding a solution. This week, the API, EnerGeo Alliance, the National Ocean Industries Association (NOIA), and Chevron filed an appeal. Would a climate-focused U.S. President curry gain favor from environmentalists if she shut down 2 million barrels a day of nasty crude oil production? Yikes.
Independents are Alive and Well. And this one in deeper water, ~650 feet of water. Well done guys!!! Walter Oil & Gas Corp. discovered commercial quantities of oil and natural gas in the Ewing Bank 953 well in the U.S. Gulf of Mexico. The well encountered about 127 feet of net pay in the target sand at about 19,000-ft TVD. Preliminary data indicate an estimated gross recoverable resource potential of 15-25 MMboe from a single subsea well with an initial gross production rate of 8,000-10,000 boe/d.
Milestone. BP has awarded Transocean a 365-day contract for the ultra-deepwater drillship, “Deepwater Atlas”, in the Gulf of Mexico. It is a stretch, but the contract is not due to start until Q2 2028. That is a long wait, and everyone wants to be paid to wait, right? So, if you do the simple math of the duration and total value, ex-mob, you get a $635,000 dayrate. Now, that sets a 10-year record, but we have all known that deepwater is on the comeback. The willingness of a major oil company to commit to a contract with a start date four years away signifies a great deal of confidence in the duration of the current offshore cycle, and the expectations of either inflation, rig scarcity or both. Congrats Jeremy.
The Groundswell Grows. “Italy demands EU rethink 2035 combustion engine ban.” An official called the EU decision on the ban “absurd” and dictated by an “ideological vision” along with “a state-controlled approach to policy making”. Germany’s government will not agree to the EU ban either.
Buying Votes Again. China’s President, Xi Jinping, pledged to step up China's support across Africa with funding of nearly $51 billion over three years. The funding will be used for more infrastructure projects that are expected to create at least 1 million jobs.
Nails in Coffins? Toyota has slashed its EV production plans going forward by 33%. That is a big cut. EV sales momentum is slowing down. But those were plans. Instead of producing 1.5 million EVs in 2026, it would only produce 1 million. But before you think they are throwing in the towel, remember that the company only sold 104,000 EVs last year.
Economics. We are so used to sound bites that we read a headline, register just a little, and move on. Below are a couple of pieces I thought had depth and illustrated much more than just the topic.
“Volkswagens tepid sales, competition and costly electric vehicle strategy have left its stock trading around 14-year lows. Mirroring Germany’s broader economic woes”.
“Many global businesses are pushing China down on their list of investment destinations and consolidating operations in the country, citing slower growth and diminishing profits”.
“Costly electric vehicle strategy”? That explains the issues plaguing GM, Ford, Rivian and all the other car manufacturers. They’ve all lost a fortune on electric vehicle sales. EV sales are past the end of their “robust” stage. 14-year lows. The heralded VW, right back where it was in 2010. That’s an analyst’s nightmare. Bankers too. And “broader economic woes”? That doesn’t sound good. Remember, Germany went through an official recession last year. And while it appears to have bottomed, it’s so close to the bottom that it’s too early to tell. “The anticipated turnaround in the German economy by mid-year seems to be absent – key indicators point to a continuing weakness in the current economic climate… persistent stagflation.” Roland Berger. Two somewhat innocuous comments and economic states of several countries are better understood.
Point of Information. At the risk of being called a climate denier - a science paper "reviewed 1500 climate policies around the world and found only 63 have delivered significant benefits". No one in the oil business can be a climate denier. Midland, Texas was once the bottom of an ocean.
Headlines. The U.S. government is relocating some 100,000 Haitians into spots around the country. One place was Springfield, Ohio. 15,000 migrants in a town of 58,000. Remember what we charged BP for daily compressor rental for the Macondo cleanup? Gravy. 3x the pre-Macondo rate was not unusual. Now we are seeing it in places like Springfield where current renters are leaving due to made up excuses by the landlord who can charge the government 3x the previous renter’s cost to house migrants. Now, I am not a conspiracy theorist, but I remember what happened in Minnesota when African groups were relocated in a concentrated area. It dramatically changed the politics. Springfield has voted Republican in the last five presidential elections.
Nice Gig. Research from the Marcellus Shale Coalition found that fracking supported ~123,000 jobs in Pennsylvania, with oilfield workers seeing an average salary of $97,000. Gas production contributed $41 billion to the state’s economy and gave the state $4.3 billion in revenues.
The Best Political Advice Ever. “Be skeptical of political advertisements. Unlike ads for commercial products, political ads are not required to be truthful. Their content is protected by the first amendment no matter how inaccurate, outrageous, or misleading it is”.
The federal communications commission requires mainstream news networks such as ABC, NBC and CVS to accept ads from all candidates. They cannot be edited. Cable networks, such as Fox News and MSNBC can choose which ads they accept and may edit them.
Voters should be aware of the propaganda techniques political ads used to influence opinions. Negative impressions of candidates are fostered by name-calling, false accusations and quotes taken out of context. Distorted facts and statistics are used to spread misinformation.
Add the production of emotional reactions, fear, anger, or moral outrage. Constant repetition follows the theory that lie told often enough eventually sounds true.
Political ads are not all lies. It is up to voters to determine what is true. Statements can be verified through fact checking sites. Candidate information can be found in voter guides from reputable sources. As the last resort, the TV mute button works great wonders.
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.
