September 20, 2024
Things I Learned This Week in Oklahoma City
The Hamm Institute for American Energy with its building, staff and mission, is impressive. “What We Do - Powering the future. The Hamm Institute for American Energy is the nation’s premier institute for security, innovation and growth for all forms of energy.” I was at the OKC chapter of the Energy Workforce & Technology Council (EWTC) lunch. Oklahoma has an exceptionally long history in the oil business. It just didn’t get the best rocks. But it is home to some of the best people and companies in our industry. What they didn’t get in terms of rocks, they got in an overabundance of spirit. After a couple of decades of watching the Texas vs. Oklahoma football game and watching Texas consistently beat SMU, it was pretty easy to figure out where sentiments lie in Oklahoma City. We’ve grown more Texan over the year, so now I have to pull for Texas in the game, but I always hope for a close one!
As an Aside. I asked a Continental employee about how he liked being at a private company. He got a giant grin on his face and said he loved it. No more time spent on quarterly earnings presentations, conferences, investors, analysts – and we can just do our business. Let that be a lesson.
Bomb Dropped. The Fed dropped rates by one-half point, on the larger end of expectations. The pundits reading the tea leaves have come up with commentary on impacts that are all over the map. But there was one mention we liked... The former CEO of NEC said that lower energy costs are the best way to bring down inflation. Continuing to produce oil and natural gas is the most basic remedy for curing inflation, improving our lives and lowering our costs as a country. The Fed chair noted he was “recalibrating our policy” and that the Fed has moved “to a stance that will be more normal.” Inflation is good for oil prices, one more reason why oil is stuck around ~$70. But that is a good thing. Isn’t it??
Spotlight – LNG.
Movement in All Directions. From collecting Haynesville minerals on undrilled leases to the security of Ukraine, LNG is on everyone’s mind. One group says American LNG exports will double by 2030, in about five years. Impressive considering we’re the largest LNG exporter in the world. Another expects an 80% increase in LNG export capacity, reaching over 25 Bcf/d, by 2028, due to the completion of several projects currently under construction. If you look at the construction slate for new LNG capacity, we can get there. So, President Biden decides to appease progressive and environmental activists by pausing the approval of new LNG facilities. And it continues. This week, the U.S. Court of Appeals for the D.C. Circuit overturned the FERC authorizations for two LNG export terminals and a pipeline in Brownsville, TX. The court says that FERC had “erroneously declined” to fully assess the projects’ potential impacts on air quality within nearby marginalized communities. But there is hope. A dozen Democrats sent a letter to President Biden, urging him to accelerate the permitting, construction and operation of LNG projects to ship natural gas to Ukraine and other countries in Eastern Europe, calling for the Energy Department to “prioritize and expedite review of projects” that will supply Eastern Europe with gas. This week, at the first Gastech conference held in the U.S. in five years, COP CEO made “an impassioned plea for permitting reform, infrastructure investments, and an end to what he called a ‘crazy LNG pause’.”
It Matters a Lot. Many had said that the permitting pause wouldn’t really impact the markets but there will be impacts. LNG contracts are based on years and sometimes decades. Terms of 20-30 years are not uncommon. That requires a great deal of certainty for anyone to invest in such projects. Shutting down a project on a political whim does not inspire confidence. Neither does a permitting pause. Remember that the decision to export LNG wasn’t given to the Commerce Department like the oil export decision, but to the NSA, the National Security Agency. They approved it in three weeks because of the strategic importance of trading cargoes of energy to friends and potential friends. A Democratic congressman made the same point, writing “LNG exports promote geopolitical stability and serve our national security interests.” Another issue is the lost opportunity that has already been seen. Canada and Mexico have invested over $60 billion in LNG export facilities… that is market share that the U.S. could have captured. Granted, projects in those countries are going ahead regardless, as both are new entrants into the export world.
“Which Path, Padawan?” So, the economic path would be for the U.S. to significantly increase its LNG export capacity, and ship large cargoes of energy to specific trading partners. This would help ensure our security, increase the global spread of a cleaner energy source, boost U.S. employment, investment and would also displace Russian and Iranian gas. We would marginalize our enemies in terms of energy and currency access, we would displace coal and wood which are still being used around the world, we would cement relationships around the world, and our industry would see an activity trend based on decades long contracts. The political path??? And there lies the $64,000 question. But I have always believed that pragmatism beats ideology every single time, just not as quickly as we would like.
Finally. “When it comes to advancing economic prosperity, energy security, and environmental protection, an LNG permitting pause fails on all three,” Chevron CEO said. “The administration should stop the attacks on natural gas and embrace the benefits it’s already delivering around the world.” Displacing coal with natural gas has allowed the U.S. to be the only country currently in accordance with the Paris Climate Accord and we aren’t even members. The government wants to jeopardize a privately funded effort to meaningfully improve air quality and quality of life around the globe. Wow.
All Things Hydrogen. A couple of months ago, the EPA issued their “Power Plant Emissions Rule” which had been drafted to give increased economic benefit for plants using hydrogen or CCS to reduce emissions. Power plants would have been forced to use one or both as their primary reduction strategies. However, there are concerns that power generation technology is not advanced enough to make use of hydrogen fuel. For this reason, they excluded the hydrogen use requirement. That not only takes an entire sector away from hydrogen use, but it also creates questions in the minds of all. Those questions have not stopped the money. Expected demand for hydrogen has increased the amount of capital allocated to projects. $75 billion in the last four years. Remember that there is virtually zero industrial hydrogen demand at present. We are creating a new product and market, which requires new handling and operating equipment to use safely. The Hydrogen Council says another $335 billion is needed by 2030 to hit their net-zero ambitions, hopes and expectations. The Council said there were over 1,000 announced “large-scale” hydrogen projects globally. We aren’t sure what “large scale” means in a market that doesn’t yet exist. Will demand grow? Yes, of course. There are still government incentives. Where first? Likely in industries that require significant power and those that are difficult to decarbonize. Think steel manufacturing and cement plants. I saw one headline that read “Hydrogen is the gasoline of tomorrow.” It was from 2000.
PPHB – U.S. Energy Market Update Highlights.
Commodity Prices: WTI crude oil is currently $69.88 per barrel (up ~2.5% week-over-week) and natural gas is $2.57 per MMBtu (down ~2.6% week-over-week).
Crude Oil Production: U.S. crude oil production is currently ~13.2 MM BOPD (up ~2.3% year-over-year).
Crude Oil Inventories: U.S. crude oil inventories decreased by 1.6 million barrels week-over-week vs. an estimated decrease of ~0.2 million barrels.
Frac Spread Count: There are currently 230 frac spreads operating in the U.S. (an increase of 10 spreads week-over-week).
Onshore Drilling Rig Count: There are currently 568 drilling rigs operating in the U.S. (an increase of 6 rigs week-over-week).
Ouch. Chevron was the most shorted large-cap stock in August. Not the most shorted Oil stock, but the most shorted of all of the large caps. It topped the list as the most crowded security in the large-cap category with a score of 99, moving up from #2 in July. As of August 30th, traders sold short 52.13 million shares of CVX, representing 2.85% of the float. The next most-shorted stock was Tesla, followed by Super Micro Computer and Accenture. Someone doesn’t like us.
The Good Ole Days. In 2008, Raymond James did a survey of industry leaders on expectations of natural gas prices for the coming year. Those surveyed said it would be around $7.63/Mcf, with a high of $10.25 and a low of $6.12. Before you start thinking that RayJay is always bullish, one should notice that the average natural gas price for 2008 was $13.52/MMBtu, with a high of $19.74 in July. Wow. Oil guys under-estimating the price of natural gas?! But they had the wind at their back. It was only 5% higher than in 2007. And that is why we call them “the good ole days,” 16-17 years ago. Oil did hit $147 that year too.
Those Who Came Before. After one BofA employee died of “stress” and another complained about having to fudge his work records, the world has changed for junior bankers, analysts and associates. The banks had limitations, usually 13 hours a day, but for anyone who has ever had those jobs, you know, it went longer on many occasions. That might be over. Both Bank of America and JP Morgan instituted strict rules limiting weekly hours to 80, and while that seems like a hell of a lot (the average American works 34 hours per week), working 100 hours in a week due to a hot deal was not uncommon. And to bankers, almost any deal is hot if they are working on it. JPM and BofA are doing it on “humanitarian” grounds, focused on safety. As one publication put it: “(The banks) are clamping down on their workplace conditions and weekly hours after the companies’ dangerous cultures raised multiple safety and treatment concerns within the industry.” You lucky dogs!!
'I Was Born Into A Middle Class Family,' Explains Wife When Husband Asks Why The Car Fire.
Capital Markets. BKV Corp launched an IPO, the first oil and gas IPO since January 2023, with TXO Energy Partners. TKO’s stock is down 8.5% from the IPO price and yields 12.3%. BKV is the largest producer in the Barnett Shale, the Godfather, and Grandfather, of U.S. shale. BKV is pricing its stock in the same range as TXO - $19-$20, raising $285-$315 million. Think bankers talk to one another? BKV has positioned itself as an LNG supplier near Gulf Coast markets. The company produces an average 718 mmcf/d across ~460,000 Barnett acres. BKV also owns 777 miles of gathering lines for associated gas production, 65 compression units and an amine gas processing unit. Best of luck.
Qatar Gas. The North Field, or the “A Field”, is one of the biggest natural gas fields ever found. The country of Qatar now has a population of about 2.7 million, almost 3 times higher than it was 8 years ago. All of that growth is due to increased migrant labor. Qatar only has about 325,000 citizens of its own. It is one of the two highest per capita income countries in the world, alongside none other than Luxembourg. The U.S. displaced Qatar as the world’s largest LNG exporter in the last year or so. Now, Qatar is taking steps to increase its production even more. One beneficiary of that increase is Saipem. Not the first company Americans usually think of for LNG and field development. But Saipem just got a $4 billion EPC contract for the field expansion, with work encompassing the engineering, procurement, fabrication and installation of six platforms, approximately 100 km of corrosion resistance alloy rigid subsea pipelines, 100 km of subsea composite cables, 150 km of fiber optic cables and several other subsea facilities. Notice – platform installation and almost 100 miles of fiber optic cable. That is multi-tasking at its finest. Congrats.
More Nails. As we have previously mentioned, there are so many negative stories about EV companies and their problems, they are too numerous to write about. It is the governments that cause problems, noted by the over 5,000 letters that have been sent by car dealerships to Washington. The dealers are trying to get the administration to ease its mandate on the production of electric vehicles. It may not do any good but sometimes governments might listen. They did in the UK. The Labour party, now in power, is backing away from the 2030 total ban on gasoline and diesel-powered cars. From the Telegraph – “The government plans to soften a total ban on the sale of new petrol-powered cars from 2030 amid growing reluctance among drivers to buy electric vehicles and concerns about range, resale value and the availability of charging points. It is now expected to make clear that hybrids will still be sold for an extra five years to 2035 after “pure” petrol and diesel cars.” The people have spoken. Keep speaking.
Float Like a Butterfly. Floating Production, Storage and Offload or “FPSO”. The technology is used to develop oil and gas fields in more remote locations without adequate subsea pipelines. The bemouths are often 1,000 feet long and 150 feet wide, and some can store over 2.3 million barrels. But since deepwater offshore started to decline after 2014, contracts and projects became increasingly sparse and there has not been a significant FPSO order in the last year. But it is picking up. Three units were awarded in Q2 alone. Seatrium got two Petrobras orders, totaling almost $8.5 billion and Saipem (again) got one in Angola with a $3.7 billion price tag. That is $12 billion on only three units. These units can process 200,000 barrels of oil per day. They are massive. And since deepwater activity started to pick up a couple of years ago, the order cycle is now picking up as well. Energy Maritime Associates (EMA) has identified twenty-nine projects that are likely to be awarded within the next 12 months. These include 16 FPSOs, seven floating storage facilities, 3 floating LNG units, 2 semis, and 1 MOPU. These will be for multiple units, up to five, in Brazil, and more in new frontier regions such as Namibia and the Falklands. Do not forget the re-emergence of mature areas like Angola, Indonesia, Ivory Coast and Malaysia.
Brand New. Solaris Energy Infrastructure completed its acquisition of Mobile Energy Rentals, a $200 million deal that adds critical distributed power infrastructure solutions to multiple end markets, including production, midstream and downstream activities to Solaris’ portfolio. The deal effectively doubles the size of the company. When the deal was announced, Solaris stock ran up 37%, with the deal giving the company opportunities outside of oil and gas. We took them public as “Oilfield” and now they are “Energy”. This is the transition the entire industry needs to pursue. The stock has a new symbol, “SEI” as well.
Remember Cabot Oil and Gas? Cabot – One of the best E&P companies that operated in the Marcellus. In 2021, Cabot merged with Cimarex to form Coterra. It has lost about one third of its value over the last two years as natural gas prices tanked. The latest announcement says that they will drop their last operating rig in the Marcellus and may halt completions as well. Not a good sign for them or the service companies, and not just their service companies. This puts pressure on ALL the service companies. And it isn’t new, just the latest wave. It is probably a prudent move. When no one likes you, it doesn’t increase the pain much to be liked a little less. Save those molecules for a time when they will be more valuable. About a year is what I see. LNG facility demand is binary - from zero to needing another 2.65Bcf. But until those buttons are pushed, not much happens. So as the industry lies in wait, curtailing cash outflow seems like a really clever idea.
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.
